03-17-2015 Book Discussion: Less Than Zero: The Case for a Falling Price Level in a Growing Economy

Tuesday, March 17, 2015

Chair: Don Brown, CFA

A Book Club Committee Sponsored Event

Published in 1997 but with recent events in the global oil markets ‘Less Than Zero’ is a practical discussion on the economics of prices changes and potential monetary policy responses.

Excerpts: Most economists now accept that monetary policy should not aim at ‘full employment’: central banks should aim instead at limiting movements in the general price level.

Zero inflation is often viewed as an ideal.  But there is a case for allowing the price level to vary so as to reflect changes in unit production costs.

Under such a ‘productivity norm’, monetary policy would allow ‘permanent improvements in productivity….to lower prices permanently’ and adverse supply shocks (such as wars and failed harvests) to bring about temporary price increases.  The overall result would be ‘…secular deflation interrupted by occasional negative supply shocks’.

United States consumer prices would have halved in the 30 years after the Second World War (instead of almost tripling), had a productivity norm policy been in operation.

In an economy with rising productivity a constant price level cannot be relied upon to avoid ‘…“unnatural” fluctuations in output and employment’.

A productivity norm should involve lower ‘menu’ costs of price adjustment, minimize ‘monetary misperception’ effects, achieve more efficient outcomes using fixed money contracts and keep the real money stock closer to its ‘optimum’.

The theory supporting the productivity norm runs counter to conventional macro-economic wisdom.  For example, it suggests that a falling price level is not synonymous with depression.  The ‘Great Depression’ of 1873-1896 was actually a period of ‘…unprecedented advances in factor productivity’.

In practice, implementing a productivity norm would mean choosing between a labor productivity and a total factor productivity norm.  Using the latter might be preferable and would involve setting the growth rate of nominal income equal to a weighted average of labor and capital input growth rates.

Many countries now have inflation rates not too far from zero.  But zero inflation should be recognized not as the ideal but  ‘….as the stepping stone towards something even better.

George Selgin Background

George Selgin is a Professor of Economics at the University of Georgia's Terry College of Business. He is a senior fellow at the Cato Institute. His research covers a broad range of topics within the field of monetary economics, including monetary history, macroeconomic theory, and the history of monetary thought. He is the author of The Theory of Free Banking (Rowman & Littlefield, 1988), Bank Deregulation and Monetary Order (Routledge, 1996), Less Than Zero: The Case for a Falling Price Level in a Growing Economy (The Institute of Economic Affairs, 1997), and, most recently, Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage (University of Michigan Press, 2008). Professor Selgin is also, a co-editor of Econ Journal Watch, an electronic journal devoted to exposing “inappropriate assumptions, weak chains of argument, phony claims of relevance, and omissions of pertinent truths” in the writings of professional economists. He holds a B.A. in economics and zoology from Drew University, and a Ph.D. in economics from New York University.

CFA Society of Los Angeles has determined that this program qualifies
for 1 credit hours. If you are a CFA Institute member, CE credit for
your participation in this program will be automatically recorded in your CE Diary

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*If you would like to conference call into the book discussion, please contact info@cfala.org for information.

Time: 5:30pm: check-in and reception with wine and pizza
           6:00pm - 7:00pm: book discussion

Location: Biltmore Court  
                520 S. Grand Ave., Suite 370
                Los Angeles, CA 90071

Parking:  Self-Parking at Pershing Square (located directly across the street on Olive St.): $10.00. For other parking options in the area, please click here

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