Milton Friedman, Ben Bernanke and me

My extremely annoying victory lap continues.  David Beckworth recently had this to say about the debate over what Friedman would have thought about QE:

So the debate over what Milton Friedman would say continues to be debated  by policymakers and other monetary luminaries. This debate started with an Op-Ed I coauthored with Will Ruger in the Investor’s Business Daily, received more attention from a similar article by David Wessel in the Wall Street Journal, and was further promoted by Terence Corcoran in the Financial Post.  These articles upset the old school monetarists and apparently were discussed at a recent  Karl Brunner conference where they were gathered. 

BTW, I wasn’t the leak.  David’s right that his article touched off the debate, but not the analysis.  Here are four earlier posts I did suggesting Friedman would have favored monetary stimulus:

July 31, 2009

August 2, 2009

August 24, 2010

Sept. 16, 2010

For the past several years I’ve been using this argument to criticize the Fed.  Now Bernanke has made the same argument to defend the Fed:

In an essay in The Wall Street Journal on Thursday, Allan H. Meltzer, an economist at Carnegie Mellon University and the pre-eminent historian of the Fed, said that the Fed was stoking inflation to stimulate the economy, and that Mr. Friedman would never have supported such an effort.

That drew an emotional retort from Ben S. Bernanke, the Fed chairman and a scholar of the Depression.

“I grasp the mantle of Milton Friedman,” Mr. Bernanke told his colleagues on Saturday. “I think we are doing everything Milton Friedman would have us do.”

Mr. Bernanke said Mr. Friedman would have agreed that the Fed had a mandate to promote price stability and that “you don’t want inflation to be too high, but you also don’t want inflation to be too low.”

Because inflation, at just more than 1 percent, is too low, and because the economy and the money supply are growing very slowly, “even from a strict monetarist perspective, we need to do more,” Mr. Bernanke said.

Of course I can’t be sure that Friedman would favor monetary stimulus.  But there is one thing I am confident of; he would not have opposed monetary stimulus in late 2008 and 2009, and supported it in 2010.  He was a very logical thinker, and the case for monetary stimulus was clearly much stronger when prices and NGDP were falling in late 2008, than it is today.  And Bernanke thinks we need more stimulus right now.

In 2009 I was using Friedman’s quotations to show why the Fed needed to ease.  In 2009 those posts were used to bash the Fed.  Now those same posts are seen as supporting the Fed.  And I haven’t moved one bit.  So what’s changed?

PS.  The term ‘victory lap’ was ill-chosen; we are a long way from having adequate NGDP growth expectations.



20 Responses to “Milton Friedman, Ben Bernanke and me”

  1. Gravatar of Morgan Warstler Morgan Warstler
    10. November 2010 at 13:47

    “Of course I can’t be sure that Friedman would favor monetary stimulus.”

    The real question Scott is this:

    Give that MF would have cheered efforts to shrink government and unstick wages in public employees, would he have considered whether these efforts were being sought actively when he rendered his opinion on QE?

  2. Gravatar of Policy Wank Policy Wank
    10. November 2010 at 14:41

    I would be very curious to read your response to this post, which details 4 ways in which QE2 might go awry. Are any of these concerns legitimate? If so are they outweighed by the upside to further easing?

  3. Gravatar of Contemplationist Contemplationist
    10. November 2010 at 15:04

    I gotta say I’ve come around to Morgan’s plan. Its kinda brilliant actually. If Bernanke pimps for austerity HARD like he did for the most hated policies he did (TARP and stimulus), he will earn goodwill on the right, and as we know monetary policy is sufficient to offset any deflationary pressures from austerity. Under the cover of austerity, he can target NGDP growth expectations, the economy booms, and everyone (except the Left) is happy.

  4. Gravatar of Benjamin Cole Benjamin Cole
    10. November 2010 at 16:47

    I also saw Beckworth’s blog, but was a bit nettled he did not tip his hat to Scott Sumner. Anyway, you can’t pick your friends in a war; your friends are those wearing the same uniform. So by that credo I will not say ill about Beckworth.

    I think Bernanke is on the right path, just needs to amp it up somewhat.

    No, I am not worried about inflation with the core inflation rate at 0.8 percent, and that rate probably measures about one percent too high (see Boskin). The commodities blah-blah is tiring.

    Why not wring out hands about deflation, with unit labor costs down 1.8 percent y-o-y, and real estate rents sinking? My guess is that with labor and rents, about 80 percent of business expenses are down, not up, while AD is weak. That is not a recipe for inflation.

    Morgan: I would love to whack some public employees, especially considering that federal military employees get a lifelong pension after just 20 years service, and free lifelong health care to boot.

    However, holding the economy hostage just to whack the public sector strikes me as bad policy. Let’s fix the eocnomy and those military pensions.

  5. Gravatar of JimP JimP
    10. November 2010 at 17:02

    Maybe Sarah Palin is a good thing – she sure does embody convention thinking……..

  6. Gravatar of Jeff Jeff
    10. November 2010 at 17:16


    Bernanke, like any and all central bankers, should keep his mouth firmly shut about fiscal policy. It’s not his job. Fed chairmen who forget this and try to do elected officials’ jobs damage the institution.

    Usually the Fed’s job is pretty easy. But there are times when the central bank has to stand up to a lot of criticism, and that’s when it needs a reputation for integrity, probity and non-partisanship. Volcker understood that in his bones. His successors don’t seem to.

  7. Gravatar of scott sumner scott sumner
    10. November 2010 at 19:55

    Morgan, That’s your question, not Friedman’s or my question.

    Policy Wank, I don’t worry about those issues. If the Chinese stop buying our debt, then someone else will. If no one else will, then they will have to buy our stocks. If they don’t buy any of our assets, then they will have to stop running trade surpluses, and our exports will soar. So what precisely is the problem?

    Contemplationist—Fine, but I just don’t see that happening. If I’m wrong, I’ll be happy. But there are too many ifs. I’m not sure he could get the rest of the Fed to go along.

    Benjamin, I have no problems with David Beckworth at all. He’s a great guy, and has mentioned me many times (including on the Friedman issue.) Indeed it’s probably more often when I fail to mention that he said something first.

    JimP, That’s an interesting take.

    Jeff, Yes, he should probably stick to monetary policy—there is plenty more to do in that arena.

  8. Gravatar of JimP JimP
    10. November 2010 at 20:04

    This guy, on the other hand, thinks it won’t work because there is no firm guidance for future policy.

  9. Gravatar of Morgan Warstler Morgan Warstler
    10. November 2010 at 20:09

    Scott, that’s what troubles me about you….

    Milton Friedman was a monetarist, like Willard Scott is fat. Sure, it’s TRUE, but it’s not his main thing. Willard Scott was a TV weather man, and Milton Friedman was a Free Market devotee.

    So you screaming that Willard Scott agrees with you that pie is good, kind of misses that the point if you aren’t dedicated LOUDLY to the essence of his being.

    It’s WRONG for you to say MF didn’t reach his conclusions to achieve less government… if you walked him into a blind situation, where there was a chance his “theory” would support a socialist gaining power… he’d change his “theory.”

    If he had to choose, Willard Scoot would never choose pie over a 100 year old lady on a 81 degree day.

  10. Gravatar of C C
    10. November 2010 at 21:15

    Morgan says: “where there was a chance his “theory” would support a socialist gaining power… he’d change his “theory.” ”

    Actually, Morgan, Milton Friedman built his theory in relation to facts and data about human economic behavior, not around an ideology. Thus, you do the great man a great disservice to suggest that he would “change his theory” to support an ideology. His ideology was simply a by-product of the facts as he saw them, rather than the initial position. If his analysis led him to believe that socialism was a viable and better alternative, by all means he would have supported it wholeheartedly.

  11. Gravatar of Ted Ted
    10. November 2010 at 22:11

    Better question.

    Why should we care what Milton Friedman might have thought?

    He was a very intelligent man – but I think there are intelligent people who are actually alive that we could ask instead.

  12. Gravatar of Morgan Warstler Morgan Warstler
    11. November 2010 at 01:07

    Actually C, you do a great free market thinker serious damage when you pretend he lived his life standing next to a printing press. His first principles we seen in every short, curt reply he ever made about government being THE problem.

    Are you are a radical free market proponent? If so, I sincerely apologize, if not, go find your own monetarist to bastardize.

    And Ted, boy do I agree, watching Ben act hurt that anyone would question his love of MF makes me feel like I’m listening to Jimmy Swaggart praising god.

    But if we’re going to play “what would Milton do?” I intend to win.

  13. Gravatar of Charles R. Williams Charles R. Williams
    11. November 2010 at 04:00

    It is important to separate MF’s fundamental insights from what is contingent and empirical. MF opposed discretionary macroeconomic policy and looked for a rule that would prevent the fed from destabilizing the economy. He did not believe that a constant growth rate in money would eliminate the business cycle, just that it would remove the fed from the picture as a cause of problems. He would not have a theoretical problem with QE – as a technique.

    Now in our present situation, I do not think he would be concerned, as Bernanke is, about a 1% inflation rate vs a 2% inflation rate. I do not think he would interpret our situation through the lens of the Japanese experience. He would say – correctly – that the fed is not crushing the economy as it did in the 30s.

    Is there a rule, like targeting NGDP, that would work the way MF would like? That is an empirical question. There is no consensus on this and no way to know what MF would propose in our present circumstances.

    I suspect he would propose letting the economy heal and focusing on fiscal and regulatory policy issues. MF was a big enough thinker – unlike Bernanke – to know when his economics specialty was irrelevant and when his policy prescriptions were obsolete. His fundamental insight remains correct.

  14. Gravatar of Contemplationist Contemplationist
    11. November 2010 at 07:13


    I agree with you of course. Or rather, I would’ve agreed with you had Bernanke not pimped for Big Government bailouts like TARP, auto-industry, and the massive fiscal stimulus. Some of us then were wondering why he was doing that? He should’ve been invisible in the background targeting the growth path of money expenditures (or NGDP). If he can pimp for fiscal stimulus, he can do so for austerity.

  15. Gravatar of Morgan Warstler Morgan Warstler
    11. November 2010 at 07:48

    “If he can pimp for fiscal stimulus, he can do so for austerity.”

    It isn’t a “can” – I keep warning folks here… he “has to” – in fact, we’ll be able to judge his real belief system based on how willing he is to go to the mat.

    He’s all in, if he isn’t 100% committed, the man is dangerous. Monetary policy, is not, cannot be formed without a fully formed governing philosophy on Fiscal policy.

  16. Gravatar of Philo Philo
    11. November 2010 at 08:52

    “My extremely annoying victory lap continues.” Take another; you’ve earned it!

    “PS. The term ‘victory lap’ was ill-chosen . . . .” Well, even little victories–partial victories–are victories.

  17. Gravatar of Jeff Jeff
    11. November 2010 at 15:41


    I’m afraid we’re in violent agreement. And where’s the fun in that?

  18. Gravatar of scott sumner scott sumner
    11. November 2010 at 19:02

    JimP, Yes, that’s definitely a weakness.

    Morgan, Friedman knew that tight money discredited capitalism and aided the communists and Nazis during the 1930s. I’m guessing he would not go for arguments that austerity can promote free market reforms.

    C, That’s right.

    Ted, I suppose it’s because it’s fun to debate the topic. And because it’s like wrapping yourself in the flag–it makes your arguments seem more persuasive.

    Charles, I disagree, for all the reasons listed in those 4 posts above.

    Thanks Philo.

  19. Gravatar of Morgan Warstler Morgan Warstler
    12. November 2010 at 08:31

    “Morgan, Friedman knew that tight money discredited capitalism and aided the communists and Nazis during the 1930s. I’m guessing he would not go for arguments that austerity can promote free market reforms.”

    Scott, forgive me, your Freudian slip is showing…

    Milton would ALWAYS support fiscal austerity, please admit it now.

    My point is not about tight money, my point is that MF’s first concern was less government, and he’d modify his analysis based on what the government intended to do with fiscal.

    YOU HAVE ADMITTED SUCH about Ben, the Fed did less QE when Obama was doing fiscal.

    Why is it so hard for you to go the other way, and say “do austerity” so you can have more QE?

    I’d like a real answer.

  20. Gravatar of scott sumner scott sumner
    13. November 2010 at 10:05

    Morgan, I focus on monetary policy–if we get that right then fiscal policy can be austere. I’ve even argued that easy money makes fiscal austerity more likely. That would be MF’s argument.

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