Further to Glenn Hubbard:

In his FT article the Chairman of the US Presidents Council of Economic advisers says:

"Private forecasters expect the overall rate of consumer inflation to rise to about 2.4 per cent in 2003 as the recovery takes hold"

Don't the US government have their own forecasters any more? This, of course, is a silly quibble, but still the argument is a bit unpresentable. Which private forecasters, those who thought the economy would be booming come last March? He also asserts:

"Moreover, the inflation rate for consumer services has stabilised at little more than 3 per cent a year."

This is the really dodgy part of his argument, since this increase in costs comes from a lack of productivity, not from an excess of it. In particular, once we take out housing (which is a case apart in many ways), the majority of this inflation probably comes from education and health (incidentally these belong to Griliches poorly measured sectors - deriving a price index for health when you control for quality has to be a nightmare, what you can clearly say is that the costs per employed worker of providing health for the entire US population is going to rise significantly), ie the immediate consumers are not salary-earners, the consequences of this for GDP per capita, and hence growth, remain unclear. I wish we had a model here.

Stephen Roach tackles this from another angle in this morning's FT, suggesting that global forces will drive down prices in this sector. In part he has a point, but if he's wrong and they don't, then, as I say, these sectors should be a drag on growth, not a plus point. It's all very complicated, and obviously a bit too complicated for poor Glenn Hubbard. He'll be telling US next that strong speeches by George W are good for the economy since they drive up petrol prices and prevent deflation.

I'm trying to work through a model somehow. It started off something like, consider an economy with three sectors. Sector one trades in the international arena, and is subjected to globally falling prices. Sector two produces high tech products and has just had a technology revolution that is producing a continuous fall in prices and systematic excess capacity. Sector three is home directed, inefficient and with low productivity growth, it thus suffers from upward cost push. (This is meant to be fairly serious, but I can't help going back to the begining and starting with imagine an economy with FOUR sectors: the fourth one would manufacture pieces of paper, with I promise to pay written on them, and would be directed to the international market, but this is stealing from Stephen Roach).

OK, this takes care of the supply side. On the demand side the savings ratio has a lot to say, and that's were the demography comes in, Modigliani life-cycle or Ricardian equivalence, or whatever.