First of all you can see from an article just posted on this thread, that indeed economists count 'externalities' plenty when talking about inflation:
David,
I don't care what other practitioners of the dismal science believe about oil prices and inflation, I care what AG believes.
Yes, higher oil prices area an externality, but is it a public or a private externality? Is the reason that we permit our economy to be subjected to wild swings on energy prices a failure of public market protecting the private market? We prosecute or sue monopolists for unfair business practices in the US, but we provide tacit support, or at least acceptance to foreign monopolies. That amounts to a failure of both the private and public market, although the private market will catch up and restore balance.
As for foreign nations matching US interest rates, they are more worried about devaluation of their currency in a floating exchange FOREX market where they understand that oil is denominated in the global default currency, the US dollar, and that combination of higher energy prices and a stronger dollar creates two-fold pressure on their currencies and economies.
But in neither case do we see prices rising solely because their economies are growing so fast that they are outstripping economic capacity, or the ability of the marketplace to provide the necessary resources (not the unwillingness).
In sum, the results may be the same, but the causes are completely different. One is manipulation by monopolists, whereas the other is demand outpacing the ability to produce due to overly stimulative monetary policy.
Btw, the US has the unique ability to willingly accept and utilize foreigners, permitting them to join the US workforce and become citizens. There are very few nations that have the same acceptance for the melting pot cultural diversity, if not inherent reliance upon foreign labor resouces. So if labor markets are stretched, the public policy solution is to permit more workers to enter and obtain employment.
As for oil, interest rate hikes should not be dictated by someone hiking up our costs of production by 25%. In fact, rates should naturally decline in order to compensate the economy for the extra cost of production caused by such a non-inflationary externality.
Regards,
Ron |
