The chart shows the results of an Atlanta Fed business survey question: “Projecting ahead, to the best of your ability, please assign a percent likelihood to the following changes to unit costs per year over the next five to 10 years.” Mr Altig notes, “The obvious pattern in these survey responses is their asymmetry to the upside.” It’s very interesting to me that that is what Mr Altig sees in this chart. I’ll tell you what I see. Despite the fact that the Fed chairman is famous for his research on the dangers of deflation and despite the fact that the Fed has repeatedly intervened to fend off deflation, most respondents expect unit costs to rise at 3% or less per year, on average, over the next five to ten years, with a meaningful probability of a rate of increase of 1% or below per year. I don’t take a great deal of comfort from this image. Especially since 0% inflation seems to be much more costly than 4% inflation and since the Fed seems to much less comfortable raising the inflation rate than lowering it. A chart that suggests to me a Fed that’s dangerously complacent about deflation risks looks to a central banker like evidence of upside asymmetry. (And of course, market expectations of inflation reinforce the notion that inflation is likely to be at or below historical levels for the foreseeable future.)

Then yesterday, Mr Altig addressed an argument made by economist Simon Wren-Lewis:

In another recent blog item (also with a pointer from Mark Thoma), Simon Wren-Lewis offers the opinion that acknowledging uncertainty about size of the output gap actually argues in favor of being “less cautious” about taking an aggressive policy course. The basic idea is familiar. It is a simple matter to raise rates should the Fed overestimate the magnitude of the output gap. But with the short-term policy rates already at zero, it is not so easy to go in the opposite direction should we underestimate the gap.

Mr Altig says he has no argument with this. But he appears to have an argument with this:

On the opposite side of the ledger, we know little about the conditions that would cause the Fed to lose credibility with respect to its commitment to its inflation goals, and very little about the triggers that would cause inflation expectations to become unanchored. Thus, I think it not difficult to construct a plausible argument about the risks of being wrong about the output gap that is exact opposite of the Wren-Lewis conclusion.

This sort of language is quite similar to that used by Ben Bernanke in defending his choice (or the Fed’s choice) not to aim for a short period of above-target inflation. Unfortunately, Mr Altig puts no new meat on the bones of what strikes me as a very dubious position. Mr Wren-Lewis is right; we have an overwhelming body of evidence from recent decades and from across the rich world indicating that central banks can quite easily establish expectations of low and stable (with a downward bias) inflation. We have, to my knowledge, no recent examples of a major, rich-world central bank that wanted to keep expectations anchored at low levels and failed to do so. Central bankers like to say that low inflation expectations were “hard won”. That seems like an iffy claim to me. Yes, the 1981-2 recession was a deep one, but the ensuing recovery was extremely rapid; if you asked them, I imagine most Americans would clearly trade this business cycle for that one if given the choice. And the Fed would almost certainly not have to work as hard now to bring inflation down given 1) the previous example of the 1980s disinflation and 2) the fact that inflation in the two decades prior to that was extraordinarily high while inflation over the past two decades has been extraordinarily low.

All of recent history, in other words, suggests that Mr Wren-Lewis is exactly right: it’s much easier for central banks to go in one direction than in the other. Now one could, as Mr Altig says, come up with a “plausible argument” in which things don’t work like that. Given the very large and ongoing costs of labour-market weakness, I would certainly expect America’s central bankers to do better than that. I would like to see some very clear evidence that a year or two of 4% inflation poses more of a threat than at least a year or two more of unemployment well above the natural rate. What we’re getting instead is little more than hand-waving.

Mr Altig is giving us a glimpse inside the mind of those making monetary policy. Unfortunately, the view is pretty disappointing.

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Note also that this is an external report — that is, you are not part of the firm but are an outside consultant who has been called in to help.

MOUNTAINSIDE INDUSTRIES

Mrs. R. K. Hill, owner of Mountainside Industries, has called you in as a consultant. Believing that tighter coordination among the divisions of her company was necessary, she created the post of general manager a year ago and hired Don Henson, an experienced accountant, to fill it. Things have not worked out well, however, and she is now seeking your advice.

After studying the situation, you have come up with the following information. Write her a report — accompanied by a letter of transmittal — advising her about what to do now.

When Don Henson came to Mountainside Industries a year ago, he understood that his assignment was to bring about tighter coordination among its four divisions. The company had earlier experienced great success, but in recent years competition has become much more serious, and now Mrs. Hill, the owner, recognizes that the company must make its operations more efficient if it is to survive.

Presently in its 37th year, Mountainside Industries is the result of mergers among four originally separate small cottage industries — candy, toys, crafts, and furniture — in four widely dispersed Appalachian mountain locations. Using the philosophy of a “benevolent owner,” Mrs. Hill originally allowed each of them to continue to operate pretty much as it did before the merger. Within the last few years, however, she has found that two of the divisions (crafts and furniture) have repeatedly placed large orders with the same supplier without each other’s knowledge and thereby failed to take advantage of quantity discounts, and that the candy and toy divisions have been duplicating their marketing efforts and failing to use some obvious opportunities for combining their products. Mr. Henson’s job was to correct these and similar problems.

Mrs. Hill notified the divisions about Mr. Henson’s appointment but then left the work to him, without interference. After making initial visits to each of the divisions, he communicated thereafter by letter and telephone. Since he noticed, as Mrs. Hill had told him he would, that major purchases were being made without central coordination, he quickly instituted a policy requiring each divisional purchasing office to submit all purchase orders for $1,000 or more to him for approval before sending them to vendors. His letter to the divisions explained the reasons for the new procedure.

At the end of the first year, however, his office had not received any purchase orders at all. Investigation showed that many in excess of $1,000 had in fact been issued all along during the year.

This is the point at which Mr. Henson came back to Mrs. Hill for advice about how to get cooperation from his subordinates.

Builder confidence has risen sharply in recent months and, as Calculated Risk points out, that typically presages a surge in construction:

A construction-oriented phase of recovery would be most welcome now given the shaky state of export markets. But any rebound in residential investment will be bounded by the Fed’s tolerance for inflation. Indeed, as Joshua Aizenman and Menzie Chinn argue, housing might have ended its long swoon earlier had the Fed been willing to generate—or at least tolerate—a bit more inflation.

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At Artamon Public School on Sydney’s North Shore, where about half the children are of Asian origin, Vegemite is losing the battle for the young taste buds of increasingly worldly pupils. Kids in the school’s cafeteria shun Vegemite sandwiches for new delicacies like “Want Want” rice crackers, Singapore noodles and honey-soy chicken, said mother-of-three Margaret Heppell and volunteer school cafeteria manager, who served 20,000 meals to kids last year. “If you didn’t have Vegemite as a child yourself, I can’t imagine you would feed it to your own children.”

To combat lagging sales Vegemite first tried tinkering with the product to appeal to a larger audience. But like many well-loved brands who altered their original formula, that wasn’t so successful. Now Vegemite is embracing globalisation by marketing to Australians abroad. It may also want to follow Marmite’s lead—playing up the nostalgia factor on social media.

Or, the by-product of beer brewing with a disturbingly long shelf-life might try to appeal to an up-market global audience (go long on the idea that foodies will eat anything declared trendy):

For some people, Vegemite’s strong flavor offers a uniquely Australian gastronomic opportunity. Chase Kojima, the San Francisco-born chef at Sydney’s Sokyo Restaurant, pairs Moreton Bay bugs—a type of flathead lobster—with burnt butter mayonnaise, passion fruit jelly and Vegemite croutons.

“Being from the U.S., I didn’t understand Vegemite at first. After experimenting with it in my cooking, I can now appreciate the flavor,” said the 29-year-old chef. “It has similarities with umami flavors, very much like miso in Japanese cooking.”

This may be the make or break moment for Vegemite. Globalisation often means that local products fade into obscurity, if they’re inferior, or go big abroad, if there’s a market.

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