The Federal Reserve has taken a large step towards a formal inflation target after chairman Ben Bernanke said that most of its officials think the rate of price rises should be “2 per cent or a bit below”.

For all my carping, I've thought this is a good idea for some time now, but I'm selfish enough to be most excited about what we will learn.  As I wrote:

Professor Sumner’s proposals may not be public policy now. But if there is one thing economists should know, it is that we should not underestimate the power of an idea.

It should be noted that Sumner's first choice is a nominal gdp target and the targeting of a price level, not an inflation rate.

In Ricardo's basic model there are diminishing rather than linear returns.  Surplus accrues to the fixed factor, which is land.  Labor earns some version of subsistence and the going rate of profit is piled on top of that.  The productive difference between a piece of land, and the least valuable piece of land, accrues to each specific landlord as rent.

What if ideas rather than land are the fixed factor?  Wages and profits stagnate.  Some "idea landlords" receive enormous pecuniary returns, while others do not.  The rate of invention is slowing down and indeed "patents per researcher" has been falling for a long time.

Which features of our evolving income distribution does that scenario not fit?

Addendum: Arnold Kling comments.

The first puzzle about unemployment when thought about from within the search-matching framework is that unemployment rates are highest among the least skilled and most homogeneous skills, i.e. among those worker/jobs with the easiest matches.  It's hard to believe that it takes a year to match a construction worker to a job.  

Closely related is the issue of how much uncertainty is holding back employment. The case for uncertainty is that hiring a worker is like exercising an option–once you hire, there are sunk costs of hiring (and potentially firing) that go beyond the wage such as administrative and training costs.

Note that you may not need a lot of uncertainty (i.e. you may not need regime uncertainty) to reduce hiring because you don't have to explain why firms aren't hiring only why they aren't hiring this day.  Even if we assume, for example, that hiring would be profitable, all else equal, it doesn't take much uncertainty to make it worthwhile to delay hiring a little bit, to wait and see.  It's precisely when sales are low and unemployment is high that firms don't mind waiting because uncertainty may resolve in due course and the workers aren't going away.

Ok, that's the positive case for uncertainty but the second puzzle is that uncertainty should matter most when hiring and firing costs are high and once again these costs are lowest for those workers with the greatest unemployment rates.  It's one thing not to hire when you can't fire but when firing is easy what's the risk? Moreover, unemployment has increased more in the United States than in Europe even though hiring and firing costs are higher in Europe.

Search-matching models of unemployment have a lot to add but don't necessarily overthrow the importance of AD shocks, sticky wages and prices and other sources of unemployment.

David Leonhardt has a very interesting column, here is one excerpt:

…history shows that government-directed research can work. The Defense Department created the Internet, as part of a project to build a communications system safe from nuclear attack. The military helped make possible radar, microchips and modern aviation, too. The National Institutes of Health spawned the biotechnology industry. All those investments have turned into engines of job creation, even without any new tax on the technologies they replaced.

“We didn’t tax typewriters to get the computer. We didn’t tax telegraphs to get telephones,” says Michael Shellenberger, president of the Breakthrough Institute in Oakland, Calif., which is a sponsor of the proposal with A.E.I. and Brookings. “When you look at the history of technological innovation, you find that state investment is everywhere.”

Here's the good news, sort of: we often hear, especially from left of center economists, that ideas are a public good which require subsidy, especially at the level of pure science.  This argument has a strong pedigree, most of all from Kenneth Arrow.  In that framework, if the relevant idea is a public good, a higher price of fossil fuels may not encourage its creation very much.  If oil and coal are more expensive, it's still not worth it for a single firm or institution to produce this public good.  If you think that technologically, we are fairly far from solving the problem (my view), you will be less crushed by the absence of a price incentive for something which is a public good anyway.

If you think we are fairly close to solving the technological problem — maybe souped up wind, nuclear, and hybrids can do it — then you should be quite disappointed by our inability to raise the price of fossil fuels.  The switch to the already-available technologies is at least partially a private good and a higher price for fossil fuels would help a lot.

There is a kind of "utility diversification" at work here.  If you are happy on "technological closeness," you are very unhappy on "policy implementation."  If you are unhappy on technological closeness, you are less unhappy about failures at the policy level.

I believe we are far at the technological level because of institutional constraints.  Wind and nuclear, whatever you think of them, run into fierce local opposition and they are not allowed to reach their potential.  It seems we're only going to adopt a solution which is quite easy and cheap in any case, and doesn't crash into NIMBY; maybe that's a much-improved form of solar.  And with that constraint in place, our inability to raise the price of fossil fuels may matter less than is sometimes suggested.  Maybe only really cheap solutions will be adopted in any case and the rate of their discovery may depend more on research subsidies than on prices at the user level.

In the meantime, it still makes sense to clean up dirty coal, limit cow farts by taxing meat, and spread better indoor heating and cooking technologies in the poorer countries.

Addendum: Here is more from Leonhardt.