Tomorrow’s weather forecast for the Northeast:

Does anyone else find it appalling that President Obama has committed U.S. military resources to an ill-defined, open-ended mission in Libya without any formal authority from Congress? This is hardly the first time a U.S. president has undertaken such actions, but I am always horrified when it happens.

Two days left to apply! Interested in the role of government, free-markets and liberty? Send your High School or College student to a week long seminar with the nation’s oldest free market organization, the Foundation for Economic Education. Scholarships available but the deadline is March 31st! http://www.fee.org/seminars/

Faced with a surging methamphetamine problem, a number of states are weighing contentious bills this spring that would require a doctor’s prescription for popular decongestants like Sudafed.

Really? It’s not annoying enough that, to buy Sudafed under existing regulation, one has to make a special request at the prescription counter of a pharmacy, sign a form, show an ID, and get treated like a criminal? Now we’re going to have to pay a doctor to write a prescription?  Give me a break. Meth dealers will find a way around the new rules, so the proposed rule just punishes law abiding citizens.

At HuffingtonPost.com.

So say 10 ex-chairpersons - Republican and Democratic – of the President’s Council of Economic Advisers:

At IHS video:

That is the question posed by my brother-in-law in response to yesterday’s post.  Here are my answers:

1. The Fed wants a higher rate of GDP growth, and it believes this requires higher inflation. Without getting too wonky, the idea is that increased expectations of inflation will make consumers and firms spend more, and this boost to the demand for goods and services will expand the economy.

2. The Fed wants to live in a world where interest rates are sufficiently above zero that it has room to cut interest rates, should need arise.

3. The Fed believes that when the measured inflation rate is X%, the true inflation rate is actually (X-2)% due to something known as CPI bias.  The notion here is that conventional measures of inflation overstate true inflation by failing to account for new goods and quality improvements.

4. The Fed believes that the economy works just about as well – perhaps even better – with a steady inflation rate of 2-4% as with a steady inflation rate of 0%; that is, the key objective should be a stable rate, not necessarily the lowest possible rate.

Two responses.

The Fed’s views on all these points are utterly within the mainstream of economic thought. That does not prove them correct, and many smart, famous economists disagree with some aspects of the Fed view. But the Fed is not doing anything radical or bizzare, given existing economic teachings.

I fully agree with points 3 and 4.  I think point 1 is probably correct, but I am more nervous than the Fed appears to be about that inflation will becomes not just high but also volatile.  If that happens, and the Fed then feels a need to step on the brakes, we might be in for a bumpy ride.   I am not a big fan of active stabilization policy, so I do not put much weight on point 2.

At the height of the housing bubble, hedge-fund manager Paul Singer was shorting subprime mortgages. By the spring of 2007, he was warning regulators on both sides of the Atlantic that the world was facing a major financial crisis.

They ignored him. Now the founder of Elliott Management says the biggest banks are headed for another credit meltdown. Among the likely triggers for the next crisis, Mr. Singer sees one leading candidate: Monetary policy “is extremely risky,” he says, “the risk being massive inflation.”

A few comments:

1. The Fed wants more inflation. It does not want “massive inflation,” but it would be delighted if inflation rose to 2% or even 3-4%. So, the view that current monetary policy – QE2 – is risking higher inflation is something the Fed not only accepts but desperately hopes will kick in sooner rather than later.

2. The crucial issue is not whether inflation will go higher; it is whether the Fed can control when and how much.  As Singer notes,

Fed officials … “really seem to think that inflation is something they can deal with very easily and very quickly.”

That is the crux of the matter. The Fed almost certainly has the tools to slow the economy and lower inflation, if it has the political will do do so. 

But if inflation ramps up before the economy is humming along, any attempt to slow inflation – which likely means slowing the real economy – will meet stiff political resistant.  It is an open question whether the Fed can hang tough in that situation.

This is from Peggy Noonan, at the Wall Street Journal.  It explicitly addresses Iraq and Afghanistan, but the implications for our intervention in Libya are clear:

The biggest takeaway, the biggest foreign-policy fact, of the past decade is this: America has to be very careful where it goes in the world, because the minute it’s there—the minute there are boots on the ground, the minute we leave a footprint—there will spring up, immediately, 15 reasons America cannot leave. The next day there will be 30 reasons, and the day after that 45. They are often serious and legitimate reasons.

So we wind up in long, drawn-out struggles when we didn’t mean to, when it wasn’t the plan, or the hope, or the expectation.