03/25/2011 10:56 am ET | Updated May 25, 2011

Economic Policy Makers Need to Get Real

I wonder if other economic observers were shaken to the extent I was by recent comments by seemingly disparate actors, William Dudley, president of the New York Fed, and President Obama. The former sought to downplay the extent of price inflation by explaining that as is true with iPad devices and other consumer electronics, we are often receiving more for our money today than in the past.

"Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful," he said referring to Apple Inc's (AAPL.O) latest handheld tablet computer hitting stories on Friday.
"You have to look at the prices of all things," he said.

The latter, referred to cars getting eight or ten MPG as having poor fuel economy.

When our policy-makers are out of touch with economic reality to this extent and not even embarrassed about it, it's hard to be confident about our economic future. Mr. Dudley shows an appalling insensitivity toward and ignorance of economic reality when he invokes the iPad as an indication of anything having to do with the broader economy. While the device evokes a great deal of attention among the glitterati, one sees relatively few actual devices being used in public settings and virtually none in the business environment. One questions the significance to the information technology environment of this development and wonders whether Dudley has any familiarity with the day-to-day affairs of this function in Corporate America. More importantly, while advances in information technology are genuinely relevant to our price levels and individual productivity, which often drives wage levels, they are relevant much more in the long term than in the short term.

It is in the short term where people and companies are feeling the effects of substantial price increases for things like food and energy, which they buy every day, and ever-rising state and local taxes, which are constantly in evidence in some form, such as the recent drastic increase in the Illinois income tax. No one updates their computer capability every day or every week, month or year, so that even to the extent that IT advances do moderate inflation, their benefits are not readily apparent. It's perfectly understandable that someone in the audience for Dudley's speech would note that "I can't eat an iPad."

In that the New York Fed has a, if not the, central role in development and implementation of our monetary policy, it's quite disconcerting when its leader appears to be so far removed from the day-to-day experience of so many economic actors and gets caught up in economic theory as opposed to observation of actual prices.

When our President sought to demonstrate his empathy for the common man bedeviled by rising gas prices, he famously declared:

"You may want to buy a fuel-efficient car," quoth Obama, "but you may not be able to afford it. And so you're stuck with the old clunker that's getting 8 or 10 miles a gallon."

As anyone who drives or has purchased a vehicle in the past ten years knows, it is virtually impossible to obtain any vehicle, new or used, which gets only 8-10 mpg. Even today's 'gas guzzlers' do far better. No such vehicles have been mass produced for 20-30 years. Even if one wished to waste their money on gas, they would have to buy either an antique or very limited production current vehicle to do what the President has in mind. While there is certainly good reason to seek to improve fuel economy from today's levels -- has anyone heard about the situation in Libya, Yemen and elsewhere in the MidEast? -- the credibility of this message is substantially undermined when its lead messenger has so little grasp of reality.

In today's interconnected economy, with the U.S. being the world's biggest debtor, credibility of leadership is invaluable. No one can rely upon natural resources or military force to shore up their economy when private and governmental counterparties lose confidence. Even the values of intellectual property and technical innovation are increasingly nullified when leadership is called into question. We must have far better from those in positions such as Messrs. Dudley and Obama.