What would Milton Friedman have thought of market monetarism?

I am working on an article with the preceding title.  I have some ideas, but am also looking for help on a few points.  I’ve come up with 2 arguments suggesting that Friedman would have opposed market monetarism, and 10 arguments suggesting he would have favored it.  I need more “against” arguments as I’m obviously biased.  This is going to be a “scholarly” paper, and hence there cannot be any bias in my analysis.  That’s not allowed in scholarly papers.  It’s why there is no lumping of t-stats at around 2.0 in published papers. Oh wait . . .

But seriously, I’d like arguments either way.  Also I’d appreciate a quotation of Friedman opposing NGDP targeting.  Here are two arguments suggesting Friedman would have opposed MM:

1.  He once said he opposed NGDP targeting.

2.  Other aging monetarists seemed to drift slightly more in the neo-Austrian direction during 2008-09. I’m thinking of Anna Schwartz, and to a lesser extent Allan Meltzer.  Friedman might have had the same visceral response to the crisis.

Here are 10 arguments suggesting Friedman might have been receptive to MM:

1.  His analysis of Japan circa 1997 bears an uncanny resemblance to the MM analysis of the Great Recession.  He diagnoses an excessively tight monetary policy based on the following Japanese data:

Golden period 1982:2 to 1987:2   Troubled Times 1992:2 to 1997:2

M2 + CDs             8.2%                                          2.1%

NGDP                   5.0%   (5.4%)                          1.3%   (2.2%)

Prices                1.7%   (2.2%)                      0.2%   (1.5%)

RGDP                   3.3%   (3.1%)                          1.0%   (0.7%)

 

The figures in parentheses represent US data for our Great Moderation (1990:4 to 2007:4) and the subsequent 5 years (2007:4 to 2012:4).  They are obviously similar, except I couldn’t find US data for M2 plus CDs.  But the data I did find suggests that US money growth did not slow sharply, which is a significant difference from Japan.  However note how he establishes monetary disequilibrium with the NGDP data, and then breaks it down into the two components, prices and RGDP.  A very market monetarist way of analyzing the past 5 years.

2.  Friedman’s view of the Great Depression was part of a broader strategy to rescue capitalism from the disrepute it fell into during the 1930s.  He wanted to show that the Depression was a failure of monetary policy, partly so that it would no longer be seen as a failure of capitalism.  We all know that 2008-09 was initially seen as another failure of capitalism, particularly a deregulated financial system run amuck.  How would Friedman have countered that view?  One option was the Austrian critique of easy money during the “bubble” years.  But AFAIK, Friedman (who died in 2006) did not criticize the Fed during this period.  On the contrary, he praised the job Greenspan was doing.  (I know this is true in 1999, can anyone confirm he continued to praise Greenspan in the 21st century?)  So he would not have been able to play the Austrian card in 2008, it was too late.  Arguably Anna Schwartz was guilty of the same inconsistency, but people pay less attention to her earlier remarks–Friedman is a huge target for those on the left.  Market monetarism (the view that tight money in 2008-09 caused the deep recession) was his only option for defending capitalism.  If that seems far-fetched, recall he blamed tight money at the BOJ for bad times in Japan, and they had near-zero interest rates plus QE.

3.  Even late in his life he continued to be a fierce critic of the Austrian position.  This is from a 1999 interview:

EPSTEIN You were acquainted with the Austrian economist Friedrich Hayek and also are familiar with the work of Ludwig von Mises and his American disciple, Murray Rothbard. When you were talking about bad investments, you were alluding to Austrian business-cycle theory. A certain concept that has pretty much gone into our parlance and understanding fits in with what you said about what happened in Asia. There can be times and conditions in which the stage can be set for malinvestment that leads to recession.

FRIEDMAN That is a very general statement that has very little content. I think the Austrian business-cycle theory has done the world a great deal of harm. If you go back to the 1930s, which is a key point, here you had the Austrians sitting in London, Hayek and Lionel Robbins, and saying you just have to let the bottom drop out of the world. You’ve just got to let it cure itself. You can’t do anything about it. You will only make it worse. You have Rothbard saying it was a great mistake not to let the whole banking system collapse. I think by encouraging that kind of do-nothing policy both in Britain and in the United States, they did harm.

4.  Other conservatives like John Cochrane adopted a sort of “liquidity trap” monetary impotence view. But Friedman was totally contemptuous of that view over his entire life.

5.  Late in his life he began moving away from strict adherence to money supply targeting.  From the same interview:

EPSTEIN It seems you are giving Alan Greenspan qualified praise because you are suggesting that, even if you did believe in the institution, then the best way to run the Fed is to target a monetary aggregate rather than a fed funds rate.
FRIEDMAN No, I think circumstances do make a difference. I think there is no doubt that, from 1992 to 1995, around there, there was a very sharp uptick in the velocity of M2 and that targeting money supply at that time in a rigid fashion would not have been a good thing to do.

EPSTEIN You are saying, in effect, that the relationship between the money supply and nominal gross domestic product broke down. The old rules no longer held.
FRIEDMAN It has always been a very loose relationship.

EPSTEIN But it became much looser.
FRIEDMAN Right.

EPSTEIN To the point that you would have abandoned””
FRIEDMAN I don’t know what I would have done. I am not going to speculate on that. I only say in retrospect that Greenspan did the right thing in abandoning primary reliance on M2 during that period. Whether I would have had the sense to do that or not, I don’t know.

Wow!  That’s sounds like a really flexible, open-minded guy.  Is that how Paul Krugman describes him?

6.  In a book written in 1992 (Money Mischief) he endorsed Robert Hetzel’s proposal for an inflation targeting regime based on stabilizing TIPS spreads.  That’s certainly consistent with the “market” part of market monetarism.

7.  He came close to endorsing the view that fiscal stimulus was ineffective due to “monetary offset.”  From the same interview:

EPSTEIN You don’t see any role for fiscal policy that would take the form of running budget deficits?
FRIEDMAN I see a role for fiscal policy from a supply-side point of view; that is, cutting high marginal tax rates will increase incentives on the supply side. But I don’t see any role for it from the demand side. Indeed, it is not easy to find any case in which fiscal policy has worked in the absence of monetary policy.

8.  He strongly disagreed with the view that low interest rates or a bloated monetary base indicated easy money.  Other monetarists like Anna Schwartz and Alan Meltzer did seem to take one or both of those views in recent years.  On the other hand MMs have been equally vehement in rejecting either interest rates or the base as appropriate indicators of monetary policy.  Unlike others on the right, we said high inflation was not on the way, and indeed that inflation was likely to fall below target.

9.  He differed strongly from the modern view of conservatives, which is that “printing money doesn’t create goods and services.”  (Plosser.)  He argued on many occasions that money was too tight.  Not just the Great Depression and the Japanese deflation, but other recessions as well.  Look at his (prescient) warning that the euro was a risky project:

EPSTEIN Do you think the European Monetary Union will be a success?
FRIEDMAN I hope so, but I am very dubious.

EPSTEIN Why so?
FRIEDMAN Because the European Union is not an appropriate area for a single currency. There are some cases where a single currency is desirable and some where it is not. It is most desirable where you have countries that speak the same language, that have movement of people among them, and that have some system of adjusting asymmetric effects on the different parts of the country. The United States is a good area for a common currency, for all those reasons.

But Europe is the opposite in all these respects. Its inhabitants speak different languages, have different customs. And there is limited mobility between countries. The exchange rate between different currencies was a mechanism by which they could adjust to shocks that hit them asymmetrically””that hit one area differently from another. The Europeans have, in effect, entered into a gamble in which they have thrown away that adjustment mechanism. It may work out all right. But on the whole, I think the odds are that it will be a source of great trouble.

EPSTEIN What kind of trouble?
FRIEDMAN The trouble will not be for all of them. Some among them will be affected by developments that would have called in the past for a depreciation of their currency. But given that they are locked into a single currency, the alternative will be a recession.

He could have said it will lead to excessively high inflation in places like Germany, which won’t be able to revalue.  But he didn’t.  He says (by implication) it will lead to excessively low inflation in countries that need to devalue, but won’t be able to.  He didn’t believe that recessions were always and everywhere a tight money phenomenon, but he came pretty close.  Certainly far closer than most modern conservatives.

10.  Thought experiment.  Milton Friedman is in heaven, debating James Tobin. Tobin throws him a curve ball.  “But Milton, suppose your policy of a steady 4% growth in the money supply led to an absolutely stable velocity.  A velocity that never changed.  Wouldn’t that be bad?”  Friedman looks perplexed.  He wonders if he is walking into a trap.  Friedman responds; “No, usually people complain V is unstable, I’d be happy with stable velocity.  Indeed I believe that stable growth in M would make V much more stable.” Tobin replies; “But you are on record saying NGDP targeting would be a bad thing, and money supply targeting combined with a stable V is NGDP targeting.

That’s the moment it hits Milton.  “Yes, I see now that the market monetarists are right.  I was a market monetarist all along, I just didn’t realize it.  NGDP futures targeting is the way to go.”


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62 Responses to “What would Milton Friedman have thought of market monetarism?”

  1. Gravatar of D D
    9. September 2013 at 18:26

    In #10, I know it’s a thought experiment, but I don’t understand why Friedman didn’t see that as obvious.

  2. Gravatar of Nick Rowe Nick Rowe
    9. September 2013 at 18:32

    #10 is the clincher.

  3. Gravatar of Geoff Geoff
    9. September 2013 at 18:38

    Milton Friedman in his later life had this to say:

    https://www.youtube.com/watch?v=DUDaev3gKW8#t=0m14s

    I think Friedman would have rejected market monetarism because if he wanted to abolish the Fed, there can’t be market monetarism.

  4. Gravatar of Dan S Dan S
    9. September 2013 at 18:43

    Scott, to answer your Greenspan question, check this interview from 2005 out: http://www.youtube.com/watch?v=7b3KtXzlFbA

    Starting around 1:50 he attributes the strength of the US economy to Greenspan.

  5. Gravatar of TGGP TGGP
    9. September 2013 at 19:17

    Geoff, Scott has said he views NGDP targetting (particularly when done through prediction markets) to be a step toward abolishing the Fed.

    But really, I think the close thing to a final word on the subject has already been said. Kind of surprised Nick Rowe didn’t link to it.

  6. Gravatar of benjamin cole benjamin cole
    9. September 2013 at 19:24

    Friedman certainly advocated the open-ended, aggressive, sustained and transparent use of QE in Japan. For me, that is good enough.

    If we could get the Fed to even get that far…MM would be icing on the cake…

  7. Gravatar of Ryan Murphy Ryan Murphy
    9. September 2013 at 19:55

    Didn’t Friedman more or less endorse MM here? http://online.wsj.com/article/0,,SB106125694925954100,00.html

  8. Gravatar of Scott Wentland Scott Wentland
    9. September 2013 at 20:03

    Scott, near the end of his life, in 2006, Friedman was interviewed by Russ Roberts on Econtalk. The transcript is at the following link: http://www.econlib.org/library/Columns/y2006/Friedmantranscript.html

    The talk was on the topic of money. While it is not technically a “scholarly” source, it is probably one of the last talks on money he had. I think you can pull a number of good quotes from this source.

  9. Gravatar of Don Geddis Don Geddis
    9. September 2013 at 20:22

    Geoff: I know you don’t care about the truth, but you aren’t even bothering to understand the words in the very evidence you link to. Friedman recites a litany of Fed errors over the last century, and concludes that, on the whole, the Fed “has done far more harm than good”. And that abolishing the Fed would have been better than allowing it to act as it did, in the past.

    What you don’t seem to realize is that most commenters here (and probably Sumner) essentially agree with all of Friedman’s analysis of the Fed.

    The part you miss, is that Market Monetarism would be better than either alternative (either no Fed, or the mismanaged Fed we had). And Friedman would have thought so too. He is not an ally of yours.

  10. Gravatar of Don Geddis Don Geddis
    9. September 2013 at 20:25

    Scott: You inspire a lot of curiosity with #1 (“He once said he opposed NGDP targeting.“) Can you provide an exact quote? A reference? Some more context? What was the reasoning behind his rejection?

  11. Gravatar of tomh tomh
    9. September 2013 at 20:58

    Don and Geoff: I know we all care about the truth, but how can we possibly understand the very evidence in the interview that Scott links to, when Friedman is taking such a wishy-washy, ambivalent position, full of weasel-words and contradictions:

    EPSTEIN If you were in charge, what would you do that’s different?
    FRIEDMAN My ideal is to eliminate the Federal Reserve. So I don’t like to speculate what I would do if I were running it.

  12. Gravatar of TravisV TravisV
    9. September 2013 at 21:02

    Geddis asks a great question.

    Also, who was “Epstein” who interviewed Friedman above in 1999?

  13. Gravatar of Jim Glass Jim Glass
    9. September 2013 at 22:11

    Also, who was “Epstein” who interviewed Friedman above in 1999?

    Gene Epstein, who was senior economist of the NYSE and is the long-time economics editor and columnist of Barron’s. The original interview was in Barron’s.

    Epstein also interviewed Krugman back then and started quite an amusing little brouhaha in the econo-webs when, in what was really a very positive if not fawning presentation of PK, he asked PK (as he had Friedman) a question about the Austrian slant on things — and reported that PK candidly responded: I don’t know anything about Austrian economics.

    Well! Krugman really doesn’t like seeing it reported that he doesn’t know anything about *anything* in econ, so in Slate he promptly replied with one of his stinging pieces starting off with how a mere “journalist” — ironic that, in retrospect — had even deigned to write such a thing, and then moving on to (1) there is nothing in Austrian economics worth bothering to know about, Hayek in particular contributed nothing to econ…

    “If one asks what substantive contributions [F. A. Hayek] made to our understanding of how the world works, one is left at something of a loss. Were it not for his politics, he would be virtually forgotten.”

    … and (2) of course he *did* know all about Austrian economics, because he knew that!

    Well, you can imagine the response in the Austrian community, as well as among a good many non-Austrians who believed Hayek got his Nobel for *something*, and that all those other Austrians going back in time had among them contributed at least a little something worth knowing too. You can still Google up a good number of web pages and blogs of the day covering and contributing to this little furor.

    I was a growing admirer of Krugman via his Slate column back in those days, but this was the first time I saw that side of the man. Hardly the last! 🙂

  14. Gravatar of Kevin Frei Kevin Frei
    9. September 2013 at 22:43

    Love love love this post! Though I’m disappointed that the interviewer was evidently not the Epstein (Richard) I hoped he was.

  15. Gravatar of Vivian Darkbloom Vivian Darkbloom
    9. September 2013 at 23:46

    I’m puzzled as to why economists have this morbid obsession. Economists more than any other field of academic endeavor seem to try to line up dead economists to their causes. I wonder what Copernicus would think of the Big Bang Theory?

    Why does the development of sound economic theory and/or current economic policy prescriptions depend on what a dead man or woman (Keynes, Friedman, Schwartz,etc) *might* think if brought brought back from the dead or consulted in a “scholarly” seance? Shouldn’t the merits of market monetarism stand on their own? Is this an (attempted) appeal to authority?

  16. Gravatar of DesolationJones DesolationJones
    9. September 2013 at 23:47

    Here’s a good one for your against list. In a letter to Greg Mankiw in 2006, Friedman starts off sounding like an inflation targeter, but weirdly ends it like this.

    “Nothing that I have observed in recent decades has led me to change my mind about the desirability of a monetary rule which simply increased the quantity of money at a fixed rate month after month, year after year. That rule would get rid of the mistakes and that is probably about all you could expect to get from a monetary system.

    Even better would be to abolish the Fed and mandate the Treasury to keep highpowered money at a constant numerical level.”

  17. Gravatar of DesolationJones DesolationJones
    9. September 2013 at 23:47

    Forgot the link

    http://gregmankiw.blogspot.com/2006/08/letter-from-milton.html

  18. Gravatar of regular regular
    10. September 2013 at 00:21

    >”2.・・・But AFAIK, Friedman (who died in 2006) did not criticize the Fed during this period. On the contrary, he praised the job Greenspan was doing. (I know this is true in 1999, can anyone confirm he continued to praise Greenspan in the 21st century?) “

    Yes, Friedman continued to praise Greenspan in the 21st century. For example, see this Reason’s 2006 article.(I think you may learn something else form this article about Friedman’s views. )

    http://reason.com/archives/2006/11/02/can-we-bank-on-the-federal-res

  19. Gravatar of tom s. tom s.
    10. September 2013 at 00:56

    http://prospect.org/article/interview-milton-friedman
    MF: You have to offset velocity””the stock market will affect velocity. And that is to say, when a stock market crashes, there is associated a demand for real balances, and that is equivalent to a decline in velocity. So you have to increase the money supply to offset that decline in velocity. If all you want is stability of the general price level, apparently it’s an easy job to do. I really must say I am surprised at how well all of these different countries have been able to keep to their inflation targets.

  20. Gravatar of Michael Michael
    10. September 2013 at 02:54

    Don Geddis,

    Here’s an old blog entry from Scott that touches on this topic (recapping an EconTalk episode with Michael Belongia):

    http://www.themoneyillusion.com/?p=3710

    The story is that in the early 90s someone made a presentation arguing for a 6% NGDP target. Milton Friedman was in the audience, and after the talk he said something like… that’s all well and good but what would you do if infalation hits 7%? The implication, I suppose, being that under an NGDP target, high inflation would somehow crowd out real growth. Lots of people seem to subscribe to this view today, although it does not seem like a very “monetarist” view to me.

  21. Gravatar of Brian Donohue Brian Donohue
    10. September 2013 at 04:26

    Someone linked to the 1968 paper recently- he ticks off a handful of good targets, including NGDP.

    Elsewhere, he throws out ‘autopilot’ or ‘abolish’ notions, but it’s hard to read the 1968 essay and not see these other things as a kind of political mischief, to which he was occasionally prone.

    BTW, Scott, I love it. It’s YOUR mantle- take it.

  22. Gravatar of ssumner ssumner
    10. September 2013 at 04:29

    Thanks Nick.

    TGGF, I agree and was going to mention that there are actually two questions:

    1. What would MF say if he were alive today?
    2. What are the implications of MF’s publicly stated views for MM?

    The answers differ for Meltzer (in terms of early and late career), and might differ from Friedman.

    And you are correct in your answer to Geoff, both Friedman and I favor “ending the Fed” as we know it and turning policy over to a computer. He wants a quantity of money peg and I want a NGDP futures peg.

    Dan, Thanks, That’s very helpful.

    Ryan, You’ve really whetted my appetite, but I can’t get the link to work. Is there another link?

    Thanks Scott.

    Don, Michael has the link.

    Jim Glass, Great story.

    Vivian, Agreed, but in my defense I was told to do this topic for a chapter in an upcoming book on Milton Friedman to be published by Oxford U.P.

    Jones, I favor abolishing the Fed in exactly the same sense as Friedman. Regarding money targeting I think it’s fair to say he always thought it was a good idea, but late in his life also thought inflation targeting could do well, and even better in a few cases when V was unstable.

    Thanks regular and tom s.

    Thanks Michael.

  23. Gravatar of ssumner ssumner
    10. September 2013 at 04:34

    Ryan, Nevermind, I found it.

    Brian, do you have a link for the 1968 paper? Is it “The Role of Monetary Policy”

  24. Gravatar of Morgan Warstler Morgan Warstler
    10. September 2013 at 04:41

    This is who Uncle Milty was:

    http://www.brainyquote.com/quotes/authors/m/milton_friedman.html

    The man put the meat in the window.

    IN HEAVEN THEY ONLY SEE THE LONG RUN. And there is one defining question that would determine if Milton Friedman supported NGDPLT.

    Does it, in the long, run shrink or grow government effectively than the alternatives?

    Does anyone disagree, this is Friedman’s long run question?

    Scott? Anyone?

    If in the long run NGDPLT allows the government to grow, rather than forcing it to shrink, to be less efficient, and more wasteful….

    Does ANYONE think Friedman would support NGDPLT?

    The sad fact is that Scott will write this article without actually making the one defining test WE ALL KNOW Friedman would demand.

    WHY did Uncle Milty PRAISE Greenspan in 1999?

    Because Greenspan policy delivered us this line from a Dem president on Jan 27th, 1996:

    “The era of big government is over”

    And ALL OF MM should admit that Friedman would have come back from grave and attacked Greenspan for 2004-2006 for PRECISELY THE SAME REASON, bc failing to cut the spigot off starting in 2004, put capitalism in crisis.

    Scott even admits it in his #2:

    “Other aging monetarists seemed to drift slightly more in the neo-Austrian direction during 2008-09. I’m thinking of Anna Schwartz, and to a lesser extent Allan Meltzer. Friedman might have had the same visceral response to the crisis.”

    ——

    Milton didn’t have to become an Austrian in 2008-09.

    He could far more easily say fixing 2004-2006, could have kept this from happening.

    And since that could have kept this from happening, NOW IN 2008-2009, we should trust monetary policy, we should trust NGDPLT.

    NGDPLT is the rule that lets Friedman most effectively not become an Austrian in 2008-2009.

    And more to the point it is MOST ABLE to deliver a smaller government over the long term.

    AND SCOTT KNOWS IT.

    But he won’t put the meat in the window.

    If Scott is going to truly lead for the next 30 years, if he’s truly gong to achieve what he is capable of achieving…

    Scott’s going to need a vast supply of quotes like the ones above.

  25. Gravatar of Friedman | Rättvist och balanserat Friedman | Rättvist och balanserat
    10. September 2013 at 04:44

    […] läsvärda “What would Milton Friedman have thought about market monetarism” (The Money Illusion). Milton, i en intervju frÃ¥n […]

  26. Gravatar of Brian Donohue Brian Donohue
    10. September 2013 at 05:07

    Yes, Scott. Here’s a link:

    http://www.aeaweb.org/aer/top20/58.1.1-17.pdf

    Excerpt:

    “To state the general conclusion still differently, the monetary authority controls nominal quantities-directly, the quantity of its own liabilities. In principle, it can use this control to peg a nominal quantity-an exchange rate, the price level, the nominal level of national income, the
    quantity of money by one or another definition-or to peg the rate of change in a nominal quantity-the rate of inflation or deflation, the rate of growth or decline in nominal national income, the rate of growth of the quantity of money.”

  27. Gravatar of Roger Sparks Roger Sparks
    10. September 2013 at 05:32

    In years past, I greatly admired Milton Friedman for his work and his ability to articulate ideas that I found accurate and worthy of expansion. That was in the past.

    Today, I still admire his work BUT it is work from the past, based on data extracted from economies much different from today’s. I would expect that his views would have been continually updated as newer data expanded the detail of the observed systems.

    Economics has a task akin to predicting the world’s ocean wave pattern using pictures taken by a swimmer.

  28. Gravatar of LK Beland LK Beland
    10. September 2013 at 05:50

    Great post.
    Point #9 is spot on.

  29. Gravatar of thanos thanos
    10. September 2013 at 06:01

    Milton friedman supported the policies of Alan Greenspan in the 21st century:

    http://0055d26.netsolhost.com/friedman/pdfs/wsj/WSJ.04.07.2005.pdf

  30. Gravatar of thanos thanos
    10. September 2013 at 06:06

    You can find many journal articles, academic articles, interviews etc of Friedman in this website:

    http://hoohila.stanford.edu/friedman/index.php

  31. Gravatar of Morgan Warstler Morgan Warstler
    10. September 2013 at 06:25

    Awesome Thanos:

    Note by 2007, Milton had gone back to mentioning 3-5% of M2 growth:

    “Do you still think it would be a good idea to have a computer run monetary policy?

    FRIEDMAN: Yes. Of course it depends very much on how the computer is programmed. I am not saying that any computer program would do. In speaking of that, I have had in mind the idea that a computer would produce, for example, a constant rate of growth in the quantity of money as defined, let us say, by M2, something like 3% to 5% per year. There are certainly occasions in which discretionary changes in policy guided by a wise and talented manager of monetary policy would do better than the fixed rate, but they would be rare.”

    But back in 2005, he was excusing Greenspan for 4-6%:

    “On the contrary, since 2000, the rate of growth in the quantity of money has been trending downward and in the past year has consistently been in the range of 4% to 6%, just about the rate required for a rapidly growing non-inflationary economy.”

    And in Jan 2006 he explained WHY:

    Over the course of a long friendship, Alan Greenspan and I have generally found ourselves in accord on monetary theory and policy, with one major exception. I have long favored the use of strict rules to control the amount of money created. Alan says I am wrong and that discretion is preferable, indeed essential. Now that his 18-year stint as chairman of the Fed is finished, I must confess that his performance has persuaded me that he is right – in his own case.

    But by Jan 2007, he’s back to saying 3-5%… why?

    Nerves.

    —–

    So we hit 2008-2009, Milton knows he shaded his prescription, he has said out loud WHY he did so in 2006.

    The most obvious thing would be to take back the “in his own case” and not even let Greenspan deviate from the rule.

    Why?

    Because that’s the quickest way to salvage Greenspan’s reputation.

  32. Gravatar of David Beckworth David Beckworth
    10. September 2013 at 08:13

    Scott,

    You probably already have seen it, but I like to point to Milton Friedman’s 2003 WSJ piece where he discusses the Fed’s thermostat. The reasoning he lays out there is very much in line with your imaginary Tobin-Friedman conversation in heaven.

    Here is the link: http://online.wsj.com/article/0,,SB106125694925954100,00.html

  33. Gravatar of David Beckworth David Beckworth
    10. September 2013 at 08:14

    This link may work better:
    http://online.wsj.com/article/0,,SB106125694925954100,00.html

  34. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    10. September 2013 at 08:20

    What an amazing guy Friedman was; he dies in 2006 and Morgan has him speaking to us in 2007.

    Anyway, for a third anti-MM point from Friedman, how about what he said to Russ Roberts about favoring inflation targeting;

    ———–quote————-
    Milton Friedman: Oh, yes. And Don Brash was appointed as the first governor of the Central Bank of New Zealand. He’s now the leader of the opposition in the New Zealand Parliament. But at the time, he came from business. He was a businessman and he is an extraordinarily able and effective fellow and he took this job on at the time when New Zealand had a very high inflation rate and he succeeded in living up to his contract.

    And that really set the pattern. It was the New Zealand experience, I’m sure, that had more to do with other central banks around the world adopting inflation targeting than the United States experience.

    Russ Roberts: Because it was so dramatically effective in New Zealand?

    Milton Friedman: It was the first time that anybody had explicitly adopted an inflation target. So that was something that everybody observed. And, secondly, it was so dramatically effective.

    Russ Roberts: So are you optimistic about the role the central bank will continue to play in that inflation and price level story? You said we’ve had a golden era of 20, 25 years of stable prices, steady growth with only minor””by historical standards””minor recessions. Are you optimistic about the next 25 years?

    Milton Friedman: I have great difficulty not being optimistic about it. All the evidence would seem to be optimistic. On the other hand, I can’t hold back a doubt. Governments want to spend money and sooner or later, governments are going to want to spend money without taxing it and the only way to do that is to print money””to create inflation.

    Inflation is a form of taxation. How long will governments be able to resist the temptation? And particularly as people become adjusted to being in a world of stable inflation. They will be bigger suckers as it were. It will be easier to get a lot out of it. If everybody anticipated inflation, you couldn’t get anywhere by inflating.
    ————endquote———-

  35. Gravatar of Ryan Murphy Ryan Murphy
    10. September 2013 at 08:29

    Scott – that’s Friedman’s WSJ op-ed, “The Fed’s Thermostat.” I think WSJ Online makes it difficult to link to by design. Here’s another attempt: http://tinyurl.com/n9omzrt

  36. Gravatar of srw srw
    10. September 2013 at 09:11

    Woodford explicitly favors ngdp targeting? Is this new?:

    from: http://www.bloomberg.com/news/2013-09-09/woodford-s-theories-rooted-in-japan-slump-embraced-by-bernanke.html

    it says:
    While saying that the Fed’s current guidance on interest rates is a “significant improvement,” Woodford sees problems with tying the policy to progress on reducing joblessness. As unemployment falls toward 6.5 percent, the Fed will be forced to explain what it will do, especially if, as Woodford suspects, it doesn’t want to raise rates at that time.
    He says the Fed should adopt a broader goal: returning total economic output — nominal gross domestic product, in economist parlance — back to the trend it would have been on if the recession hadn’t occurred.

  37. Gravatar of ssumner ssumner
    10. September 2013 at 09:17

    Thanks Brian, David and Ryan, But the problem there is that Friedman clearly suppports inflation targeting (or price level targeting) not NGDP targeting. He wants to offset velocity shocks and output shocks.

    Thanks Patrick.

  38. Gravatar of thanos thanos
    10. September 2013 at 09:47

    “The Fed’s Thermostat.”

    http://0055d26.netsolhost.com/friedman/pdfs/wsj/WSJ.08.19.2003.pdf

  39. Gravatar of ssumner ssumner
    10. September 2013 at 09:52

    srw, he’s afvored it for some time now.

    Thanks Thanos

  40. Gravatar of Morgan Warstler Morgan Warstler
    10. September 2013 at 10:23

    Dammit Tunku!

    Patrick, the dates all work out the same late july 2006.

    —–

    People who give the same basic speech over and over, have the thing down pat.

    That’s why I hooted and hollered back when Scott when from 5% to 4.5%, that’s just .5%

    But for Scott’s to deviate from his language of the past, it takes a real mental effort.

    It’s in changes like 4-6% to 3-5%, that we indications of real personal editing.

  41. Gravatar of Philippe Philippe
    10. September 2013 at 10:39

    A 2012 report by the Bank of England concluded that QE had primarily benefitted the very wealthy, whilst doing little in comparison for the rest of the population. It also found that many households were likely to have been adversely affected by the Bank’s monetary policy.

    The BoE found that 40% of the gains from higher asset prices as the result of QE went to the richest 5% of households.

    Estimates based on the BoE’s research show the average boost to the financial wealth of the richest 10% of households, thanks to QE, was around £350,000 on average per household. During this time unemployment remained stubbornly high, poverty increased, and the incomes of many pensioners fell substantially.

    Given this, do you think it might be accurate to describe QE, and perhaps also similar policies advocated by Market Monetarists, as a highly regressive and unfair form of ‘trickle-down economics’?

  42. Gravatar of jj jj
    10. September 2013 at 11:54

    Finally! I’ve been searching for a pithy response to the claim that “printing money doesn’t create goods and services.” (Plosser.)

    and it is:
    “… but NOT printing money sure can destroy goods and services!”

  43. Gravatar of Greg Ransom Greg Ransom
    10. September 2013 at 12:02

    Of course, this is *not* what Hayek said.

    Friedman — famously — is among the most unreliable of top-tier economists when it comes to the history of economic thought.

    Got the history of the “Chicago” oral history wrong, and he repeatedly gets almost every aspect of Hayek’s economics wrong — in enormous ways and small.

    Friedman says,

    “If you go back to the 1930s, which is a key point, here you had the Austrians sitting in London, Hayek and Lionel Robbins, and saying you just have to let the bottom drop out of the world. You’ve just got to let it cure itself. You can’t do anything about it.”

  44. Gravatar of Lars Christensen Lars Christensen
    10. September 2013 at 12:04

    Scott, take a look at what what uncle Milty said about Bob Hetzel’s idea to target TIPS breakeven inflation in “Money Mischief”. There is no doubt that Bob convinced Milton that futures targeting was preferable to money supply targeting.

  45. Gravatar of Greg Ransom Greg Ransom
    10. September 2013 at 12:09

    Hayek was crystal clear in the early 1930s — there was a real danger of a pathological deflation in the United States in the 1930s, and the moment it was recognized it should be countered by all means available.

    That is what Hayek said in the early 1930s, after having already endorsed Keynes’ new ideas for countering pathological secondary post-bust deflations in his review of Keynes’ Treatise.

    Friedman simply is very bad at the history of economics thought — as many Nobel Prize winning economists have noted.

    But thanks, Scott, for spreading bad history of economic thought — a false history of their science is vital for the health of modern economics. I understand.

  46. Gravatar of Lars Christensen Lars Christensen
    10. September 2013 at 12:10

    By the way I think that you are overestimating to what extent the old school monetarist have become quasi-Austrian. That I think is only the case for Meltzer. I think Anna Schwartz comments early in the crisis was quite influenced by John Taylor, but at that time she was not really following day-to-day macroeconomic and financial developments in the US.

    Furthermore, David Laidler again and again have stressed that monetary policy has been too tight both in the US and the euro zone. As have Bob Hetzel. And so has the Divisia Money crowd such as William Barnett and Mike Belongia.

  47. Gravatar of Greg Ransom Greg Ransom
    10. September 2013 at 12:13

    Anyone who knows anything about Hayekian macroeconomics knows that Hayek’s views of pathological deflation are different than those of Murray Rothbard.

    But Friedman really didn’t know much of anything of Hayek’s macroeconomics nor of Hayek’s understanding of pathological post-bust deflation as a source of a secondary depression, which must be countered by standard Bagehot rules central bank action.

  48. Gravatar of Lars Christensen Lars Christensen
    10. September 2013 at 12:15

    Ooosp missed your point 6. You knew about Bob in Money Mischief.

    By the way Meltzer is Allan and not Alan.

  49. Gravatar of Greg Ransom Greg Ransom
    10. September 2013 at 12:18

    A number of “Austrians” advocated Bagehot-rules central bank action to stop a pathological deflation and financial crisis in this period — is that what you are talking about here, Scott?

    Scott writes,

    “Other aging monetarists seemed to drift slightly more in the neo-Austrian direction during 2008-09.”

  50. Gravatar of Tom Brown Tom Brown
    10. September 2013 at 12:42

    Candidate for the “opposed MM” list? I don’t even know if this qualifies (may not rise to that level), but it’s a recent case of Rowe disagreeing w/ Friedman:

    “I don’t like that paragraph in Friedman either. He muffed it.”

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/09/old-and-new-keynesians-and-self-equilibration.html?cid=6a00d83451688169e2019aff4e04db970d#comment-6a00d83451688169e2019aff4e04db970d

  51. Gravatar of Greg Ransom Greg Ransom
    10. September 2013 at 13:01

    But #10 is true.

    We’ve run that experiment and we din’t know how to produce steady 4% money growth (how to measure it) and steady targetting of M1 or M2 or .. has generated wild swings in V.

    We been there, done that, and Tobin’s scenario doesn’t happen.

  52. Gravatar of Vsa Vsa
    10. September 2013 at 13:26

    Here’s Friedman praising Greenspan in WSJ in 2006:

    http://online.wsj.com/article/SB113867954176960734.html

    But who knows, maybe he went all Austrian during the last ten months of his life.

  53. Gravatar of Greg Ransom Greg Ransom
    10. September 2013 at 14:22

    Number 10 is *not* true.

    Foiied by Apple spell check again.

  54. Gravatar of ssumner ssumner
    10. September 2013 at 17:52

    Philippe, It seems to me that question should be directed at Krugman. But in any case, I know of no macro model where QE raises asset prices but not NGDP. If you find such a model please let me know.

    jj. Here’s a less pithy response. “Printing money creates goods and services during the 49% of the time when money is too tight, and doesn’t create goods and services during the 49% of the time when money is too easy, or the 2% of the time when it is just right.”

    Lars, I mentioned Meltzer and Schwartz, and I agree that Hetzel, Laidler, etc did not move in that direction. Schwartz wrote a very Austrian piece in 2009.

    Greg, You said;

    “But thanks, Scott, for spreading bad history of economic thought”

    You really are bad at reading, it was Friedman who said that, not me.

    As for #10 not being true, (assuming you are right, you present no evidence at all) it really makes no difference, as nothing in my thought experiment hinges on it being true.

  55. Gravatar of Mark A. Sadowski Mark A. Sadowski
    10. September 2013 at 18:07

    Phillipe,
    “A 2012 report by the Bank of England concluded that QE had primarily benefitted the very wealthy, whilst doing little in comparison for the rest of the population. It also found that many households were likely to have been adversely affected by the Bank’s monetary policy.”

    You mean the same 2012 BOE Report that said the following?

    http://www.bankofengland.co.uk/publications/Documents/news/2012/nr073.pdf

    Page 1:
    “Without the Bank’s asset purchases, most people in the United Kingdom would have been worse off. Economic growth would have been lower. Unemployment would have been higher. Many more companies would have gone out of business. This would have had a significant detrimental impact on savers and pensioners along with every other group in our society.”

    Page 5:
    “According to the reported estimates of the peak impact, the £200 billion of QE between March 2009 and January 2010 is likely to have raised the level of real GDP by 1½ to 2% relative to what might otherwise have happened, and increased annual CPI inflation by ¾ to 1½ percentage points. Assuming that the additional £125 billion of purchases made between October 2011 and May 2012 had the same proportionate impact, this would translate into an impact from the £325 billion of completed purchases to date of roughly £500-£800 per person in aggregate.”

  56. Gravatar of Negation of Ideology Negation of Ideology
    10. September 2013 at 19:09

    I don’t have the quote handy, but I seem to recall Friedman said that the data is key. I also believe the reason he favored targeting M2 was that he thought monetary policy works with long and variable lags, so attempting to offset velocity would be very difficult.

    You have argued that monetary works with long and variable leads. If that can be shown with the data, then if Friedman were alive, he would then have reason to believe you could offset velocity (or maybe expected velocity). So therefore I believe he would support market monetarism.

  57. Gravatar of Friedman: "I think the Austrian business-cycle theory has done the world a great deal of harm. You have Rothbard saying it was a great mistake not to let the whole banking system collapse. I think by encouraging that kind of do-nothing policy both in Friedman: "I think the Austrian business-cycle theory has done the world a great deal of harm. You have Rothbard saying it was a great mistake not to let the whole banking system collapse. I think by encouraging that kind of do-nothing policy both in
    11. September 2013 at 06:00

    […] Source […]

  58. Gravatar of ssumner ssumner
    11. September 2013 at 10:48

    Mark, I should just turn the blog over to you—as you have much better rebuttals

  59. Gravatar of Greg Ransom Greg Ransom
    11. September 2013 at 16:00

    It’s the *facts* which are Austrian.

    Economists are just noticing and reporting what happened.

    Likewise, it’s the *facts* which are Darwinian.

    Biologists are just noticing and reporting what happened.

  60. Gravatar of How Can We Be Sure Scott Sumner Opposes the Gold Standard? How Can We Be Sure Scott Sumner Opposes the Gold Standard?
    11. September 2013 at 17:10

    […] Am I the only one who finds this hilarious? Check out the opening lines from a recent Sumner post: […]

  61. Gravatar of Bob Murphy Bob Murphy
    11. September 2013 at 17:12

    What evidence do we have that James Tobin accepted Jesus Christ as his personal Lord and Savior?

  62. Gravatar of Geoff Geoff
    11. September 2013 at 17:40

    Don Geddis:

    “Geoff: I know you don’t care about the truth, but you aren’t even bothering to understand the words in the very evidence you link to. Friedman recites a litany of Fed errors over the last century, and concludes that, on the whole, the Fed “has done far more harm than good”. And that abolishing the Fed would have been better than allowing it to act as it did, in the past.”

    Don, I know you’re a true believer, that nothing short of a nuclear bomb from a Fed chief would dissuade you of the workability of a central bank.

    But it is you who isn’t interested in the truth. Friedman did not say that he is in favor of reforming the Fed, of continuing the Fed and just having it act according to different rules than they happened to have acted in accordance with in the past.

    He said “I have long been in favor of abolishing it.” This is absolute and isn’t consistent with what you described.

    “What you don’t seem to realize is that most commenters here (and probably Sumner) essentially agree with all of Friedman’s analysis of the Fed.”

    What you don’t seem to realize is that I am the only one here on this blog who ever brings up the fact that Friedman in his later life wanted the Fed to be abolished.

    Your usage of the term “essentially” is a weasel word and uncommitted. You want to have it both ways.

    “The part you miss, is that Market Monetarism would be better than either alternative (either no Fed, or the mismanaged Fed we had). And Friedman would have thought so too. He is not an ally of yours.”

    That is just your uninformed opinion. It is NOT true that having a Fed is better than having no Fed. It is better to have no Fed, because peace is better than coercion, and the Fed is based on coercion.

    Friedman would not have thought that NGDPLT is better than no Fed. He said very clearly that he is in favor of abolishing it.

    Ally? Friedman is not an ally of yours, or Sumners’. He is not an ally of mine either. Unlike you, I’m not whoring him out for my own political purposes, despite his own statements.

    Don, your posts are an absolute joke. You always make egregious errors in basic logic.

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