Archive for the Category Monetarism


Krugman and DeLong mount a chivalrous defense of IS-LM

I’ve posted a bunch of critiques of IS-LM, but naturally Tyler Cowen’s criticism (which I agree with) got more attention.  Brad DeLong had this to say:

The right thing for Tyler to have said, from my perspective at least, would have been that IS-LM does not provide us with enough insights to satisfy us, and here is a slightly more complicated model–a four-good or a three-good two-period model–that actually helps us think coherently about (some of) the issues of nominal versus real interest rates, short-term versus long-term interest rates, safe versus risky interest rates, moral hazard and adverse selection in the bond market, non-interest bearing and interest bearing assets, liquidity and means of payment, flows and stocks, expectations, government reaction functions, and so forth.

Both DeLong and Krugman insist that macro needs to start with simple models.  I agree.  And that those models must at a minimum include money, bonds and output.  Here I don’t entirely agree.  I think a model with money and goods, plus sticky prices, can get at many of the key features of the business cycle.  BTW, I am not envisioning a model with constant velocity; I agree that would be almost entirely useless.  But I’m willing to provisionally go along with the three market minimum for reasons that DeLong lays out here:

But the mechanical quantity theory is simply wrong for us today: the Fed has tripled the monetary base since 2007, and yet the flow of nominal spending has not tripled: not at all. IS-LM at least starts you thinking about the issues around the concept that has been called the “liquidity trap” which the mechanical quantity theory does not.

A quantity theoretic monetary model need not be the mechanical quantity theory.  So I see DeLong making a pragmatic argument here.  He’s saying that thinking in quantity theoretic terms is likely to lead us astray.  We know that V might change, but we are likely to forget that problem when thinking about policy options at the zero bound.  Fair enough.  But this criticism applies equally to IS-LM, which is also likely to lead one astray, especially at the zero bound.

The IS-LM model led economic historians to argue money was easy in 1929-30, because rates fell sharply.  It led modern Keynesians to assume that money was easy in 2008, because rates fell sharply.  And IS-LM proponents underestimated the importance of monetary stimulus in late 2008, because they thought the IS-LM model told them that monetary policy is ineffective at the zero bound.  Brad DeLong himself was one of those IS-LM proponents who underestimated the importance of monetary stimulus in late 2008.  Now he’s bashing the Fed almost every day.

Some IS-LM defenders argue that there is nothing wrong with the IS-LM approach; it’s just that the model is misused by its supporters.  After all, there has to be some sort of general equilibrium in the goods, money, and bond markets.  The markets all interact with each other.  And the IS and LM lines merely depict that general equilibrium.  Yes, but a model that general would be pretty useless.  IS-LM proponents also tend to argue that the IS curve is downward sloping.  Nick Rowe recently argued that it is upward sloping.  I think Nick’s right, at least if we use the yield on T-securities as “the interest rate,” and use a time frame that is relevant for business cycle analysis (a few months or years.)  The problem is that most Keynesians identify changes in monetary policy by changes in interest rates, and hence misidentify monetary shocks.

So has Nick “fixed” the problem with IS-LM?  Not really, because it’s a mistake to think of their being a “true” IS-LM model, untainted by the misuse of its adherents.  Models aren’t out there in some Platonic realm, they are tools created by humans.  The value of any model is instrumental, not intrinsic.  If IS-LM is misused by almost everyone, then ipso facto, it’s not a good model.

Paul Krugman makes an anti-elitist argument in favor of IS-LM:

Here’s the problem: Macro I (that’s 14.451 in MIT lingo) is a quarter course, which is supposed to cover the “workhorse” models of the field – the standard approaches that everyone is supposed to know, the models that underlie discussion at, say, the Fed, Treasury, and the IMF. In particular, it is supposed to provide an overview of such items as the IS-LM model of monetary and fiscal policy, the AS-AD approach to short-run versus long-run analysis, and so on. By the standards of modern macro theory, this is crude and simplistic stuff, so you might think that any trained macroeconomist could teach it. But it turns out that that isn’t true.

.   .   .

Now you might say, if this stuff is so out of fashion, shouldn’t it be dropped from the curriculum? But the funny thing is that while old-fashioned macro has increasingly been pushed out of graduate programs– it takes up only a few pages in either the Blanchard-Fischer or Romer textbooks that I am assigning, and none at all in many other tracts – out there in the real world it continues to be the main basis for serious discussion. After 25 years of rational expectations, equilibrium business cycles, growth and new growth, and so on, when the talk turns to Greenspan’s next move, or the prospects for EMU, or the risks to the Brazilian rescue plan, it is always informed – explicitly or implicitly – by something not too different from the old-fashioned macro that I am supposed to teach in February.

I think Krugman’s right that real world policymakers use IS-LM to frame the issues.  And to me that’s precisely the problem.  The policymakers understand the basic IS-LM model, but not its weaknesses.  They think there is “a” fiscal multiplier, ignoring monetary policy feedback.  They think that low rates mean easy money.  That’s why when I started arguing that money became ultra-contractionary in late 2008 I was regarded as something of a kook.  Policymakers also tend to assume the Fed is out of ammo at zero rates.  Where does this crazy idea come from?  Krugman constantly like to praise Hick’s 1937 model, but in that paper Hicks said that the liquidity trap was the only revolutionary idea in the entire General Theory.  The rest was putting already understood concepts (i.e. money demand depends on interest rates, or wages and prices are sticky) into a different language.  There’s no question that the liquidity trap view comes from IS-LM, even its supporters admit that.  And the liquidity trap view that is out there in the real world is the main reason we are letting central banks off the hook, the reason Obama thinks the Fed has “shot its wad.”

We don’t need policymakers that rely on IS-LM; we need policymakers that rely on cutting edge macro.  Who rely on arguments for why level targeting is an extremely powerful tool at the zero bound.  Those should be the standard model, if we insist on teaching our policymakers a standard model.  We need useful models, not models that fulfill our urge map out a 3 market general equilibrium framework.

Here Krugman trashes Tyler Cowen:

Brad DeLong comes down hard on Tyler Cowen over his attempt to critique the IS-LM model “” but not hard enough.

.  .  .

In macro “” or at least macro that tries to get at monetary and fiscal issues “” what you need, at minimum, is to understand an economy in which there are three goods: money, bonds, and economic output.

.  .  .

There’s something about macro that seems to invite this sort of thing: more even than the rest of economics, macro seems afflicted with people who mistake confusion for insight, who think their own failure to understand basic ideas reflects a failure of those ideas rather than their own limitations.

Tyler shouldn’t feel too bad about this.  After all, Krugman doesn’t identify a single flaw in Tyler’s critique.  The post is just a string of personal insults.  And recall that Michael Woodford creates models without money, so he’s also “confused.”  And of course Milton Friedman was no fan of IS-LM—so he’s another guy who just doesn’t get it.

I favor an ad hoc approach to models–use the simplest model that gets at the issues you are interested in.  Start with a simple economy with money and goods, no bonds.  The supply and demand for money determines the price level and/or NGDP.  That’s most of human history.  Add wage price stickiness and you get demand-side business cycles.  Add interest rates and you get . . . well it’s not clear what you get.  Interest rates almost certainly have an influence on the demand for money.  Do they play a major role in the transmission mechanism between money and aggregate demand?  Hard to say.  Short term Treasury yields probably don’t have much impact.  Other asset prices might, but then there is generally no zero bound for other asset prices.  On the other hand monetary policy often operates through purchase of short term T-securities.  Bottom line, it’s complicated.

Now let’s add another asset, NGDP futures contracts.  Now the modeling process gets much easier.  We model monetary policy as changes in the price of NGDP futures contracts (accomplished through central bank purchases of financial assets in order of safety and liquidity, as much as it takes.)  Then we have a Philips Curve or SRAS curve to translate NGDP shocks in fluctuations in real output.  Since NGDP futures prices are monetary policy, fiscal policy is 100% classical.

Some will object that we don’t have NGDP futures contracts, so we are currently forced to stop at the money/bonds/goods stage of human progress.  Not so, we can construct a pseudo-NGDP futures price by modeling expected NGDP as a function of lots of variables (past NGDP, current asset prices, TIPS spreads, consensus forecast of economists, etc.)  That pseudo-NGDP futures price is available to Fed officials in real time.  They can peg it if they want to.  The policy has flaws related to the circularity problem (which NGDP index futures convertibility does not have), but it’s workable.

Of course you’ve probably noticed that this is also my model.  I think it’s also in the tradition of Milton Friedman, although obviously it differs in certain respects.  Friedman thought it was more useful to take a partial equilibrium approach to macro.  By doing so he was able to avoid the mistakes of those who looked at the Depression from an IS-LM perspective.  He was interested in how monetary policy determined NGDP, and then used a separate Phillips Curve approach with a natural rate to explain output fluctuations, to partition NGDP into RGDP and P.  He viewed interest rate movements as a sort of epiphenomenon.  Monetary policy affected rates in a complex way, which made interest rates an unreliable indicator of the stance of monetary policy.

Of course the indicator Friedman choose, M2, also turned out to be somewhat unreliable, which is why I replaced it with NGDP futures.  Expected NGDP (or something similar that incorporates the Fed’s dual mandate–like the Taylor Rule) is the goal of monetary policy.  There’s quite a bit of slack between changes in M2 and changes in expected NGDP.  In contrast, changes in the price of NGDP futures contracts ought to track changes in expected NGDP (the policy goal) pretty closely.  I find the NGDP perspective to be much more useful than the interest rate perspective.

BTW, I think this might have been what Tyler Cowen had in mind here (first Tyler, then Brad):

“The most important points… one can derive from a… nominal gdp perspective…”

What is this “nominal GDP perspective”? The Google reports that as of this writing the phrase “nominal GDP perspective” appears only once on the internet–in Tyler’s post.

I want all 5000 of my readers to Google “Scott Sumner nominal GDP perspective” 100 times.  Each time, please link to my blog if it appears on the list.

I think DeLong and Krugman need to lighten up a bit.  They are defending the IS-LM model like it’s some sort of bride whose virginity has been challenged.  Models are only valuable if they are useful.  We critics are convinced that other approaches are much more useful.  Contrary to DeLong, there is nothing “tribal” about all this.  I’ve discarded the old monetarist preference for M2 targeting, and accepted the Krugman argument that temporary monetary injections are ineffective at the zero bound.  I’m not tribal, I’m eclectic.  When we see people use models in ways that we think are wrong, indeed that we think helped cause the Great Recession, we are naturally going to be critical of those models.  Especially if we find alternative approaches that seem more fruitful—like viewing monetary policy through the lens of changes in NGDP expectations, and viewing fiscal policy in essentially classical terms (except where a bizarrely perverse central bank allows fiscal decisions to alter its inflation or NGDP target.)

PS.  Yes, I do understand that the strongest criticism of my approach is that we do live in a world with bizarrely perverse central banks.  We’ll fight that issue another day.

Market monetarism?

In a recent post I complained that ‘quasi-monetarism’ was a horrible label and that we needed to change it.  I have considered ideas like ‘new monetarism’ and ‘post monetarism,’ but none of the alternatives seems satisfactory.  Now frequent commenter Lars Christensen has suggested ‘market monetarism.’  But he’s also done much more, he’s written an entire article on the quasi-, er market monetarist movement in the blogosphere.  It’s well worth reading for those who want an overview of the movement.  Marcus Nunes allowed Lars to do a guest post explaining his idea.

An economic school’s name naturally should represent the key views of the school. The Monetarist part is obvious as there is a very significant overlap with traditional monetarism. The difference between Market Monetarism and traditional monetarism, however, is the rejection of money supply targeting and the assumption about the stability of velocity is at the core of Market Monetarists’ reformulation of monetarism.

Instead of monetary aggregates and stability of velocity, Market Monetarists advocate the use of markets as an indicator of monetary disequilibrium. Furthermore, Market Monetarists advocate using market instruments such as NGDP futures – and in the case of William Woolsey Free Banking – as a tool to stabilise the policy objective (nominal GDP).

I am intrigued by this label, although I want to see what the other quasi-monetarists think before switching over.  As far as I can tell there are some subtle differences between the various quasi-monetarists in the blogosphere:

1.  David Beckworth, Nick Rowe, Bill Woolsey and Josh Hendrickson seem to focus a bit more on Yeager-style monetary disequilibrium models.

2.  Woolsey, David Glasner, Marcus Nunes and I focus on the need for NGDP future contracts (or perhaps wage contract in Glasner’s case.)  Beckworth recently mentioned the idea.

3.  Some of the quasi-monetarists may be a bit closer to old style monetarism than I am, whereas Glasner is probably a bit further way.  I’m not too sure exactly where Kantoos fits in.  I’ve been so busy I haven’t always kept up with the various blogs.

It’s not clear what the essence of quasi-monetarism actually is.  Nick Rowe doesn’t focus on US monetary policy quite as much as the rest of us (he’s in Canada), so I don’t know his precise policy views.  I think it’s fair to say the rest of us are all opposed to the Fed’s decision to allow NGDP to plunge sharply in 2009, and there seems to be general consensus that level targeting is the way to go.  We are all skeptical of interest rate targeting.  As far as using NGDP futures contracts, there seems to be varying degrees of enthusiasm.  It seems to me that the term ‘market’ is an implied critique of old-style monetarists like Anna Schwartz and Allan Meltzer, who have warned of the threat of inflation, even as both past movements in NGDP, and market forecasts of future gains, suggest money is too tight.  Indeed even though I am a big fan of Milton Friedman, I think one weakness of his approach was that he’d sometimes predict high inflation based on past money supply growth, even when market participants saw low inflation ahead.  Late in his life he endorsed Robert Hetzel’s proposal to have the Fed target TIPS spreads.

BTW, I’ve left out non-blogging quasi-monetarists, as it’s unclear where to draw the line.  I should add that even within the blogsphere it’s not obvious where to place various figures.  People like George Selgin share some of the perspectives of the quasi-monetarists.  In this respect quasi-monetarism is no different from the other “isms,” there are almost as many varieties as there are members.  And that’s good; we should never try to enforce ideological uniformity.

I’d like to see what other quasi-monetarists think before making any sort of name change.  But we can’t let Krugman label us any longer!

PS.  Josh Hendrickson has a new article in National Review.

Update:  I keep forgetting to include Niklas Blanchard, who is also a quasi (market?) monetarist.  Perhaps I forget because Karl Smith tends to dominate that blog.  It’s interesting how many of us there are—surely a sizeable fraction of all monetary economics bloggers.

Memo to Krugman: Quasi-monetarism isn’t monetarism

Here’s Paul Krugman criticizing what he calls “quasi-monetarism”:

Now, in principle you can get traction by making money a less attractive store of value. In particular, if you can credibly promise future inflation, that will make the real return on money negative. But getting that kind of credibility is tricky, especially given the normal prejudices of central bankers. And in any case it’s very different from the kind of thinking we normally associate with monetarism, which focuses on the current money supply.

That’s a good description of the problem with old-style monetarism, but has no bearing on the quasi-monetarist model.  Quasi-monetarists are generally in favor of level targeting, having the monetary authority make up for shortfalls or overshoots.  That means we don’t focus on the current money supply, we focus on the future expected path of policy as a way of controlling NGDP.  The expectations traps that appear in Krugman’s models result from a memory-less inflation rate targeting regime.  Even Michael Woodford argues that level targeting is a good way of addressing expectations traps.  It’s infuriating to see Krugman treating us like a bunch of dummies, especially as at least one of us described why temporary currency injections had little or no effect long before Krugman himself did.

Krugman is surely right about the “prejudices of central bankers” being an impediment to appropriate policy, just as the prejudices of Congressmen are an impediment to appropriate fiscal policy.  That’s the whole point of the quasi-monetarist movement—we are trying to change those prejudices.  But from a purely technical perspective there is nothing in quasi-monetarism that conflicts with Krugman’s basic expectations trap model.  A credible regime of level targeting is far more politically acceptable than suddenly raising the inflation target to 4% during recessions, and just as effective.

HT:  Dilip

The sad end of monetarism

Two years ago Allan Meltzer warned that the Fed’s policies would lead to high inflation.  Paul Krugman and I told him he was wrong.  In a new article in the WSJ he repeats this warning.  But today I’d like to focus on something more disturbing, the end of monetarism as a powerful intellectual movement that addresses our problems.  Here’s how Allan Meltzer begins:

Day traders and their acolytes tried to pressure the Federal Reserve to open the money spigots wider this week. They called for QE3, a third round of unprecedented quantitative easing. Fortunately, the Fed said no to QE3, at least for now. But it did vote to continue its super-easy, zero-interest-rate policy until mid-2013, well after the next presidential election.

Alarm bells are already ringing.  This isn’t monetarism at all.  Milton Friedman reminded us that ultra-low rates meant money had been tight.  And it wasn’t just Friedman.  In this (undated) paper, Allan Meltzer argued that Japan needed easier money at a time when interest rates were near zero and banks had plenty of reserves.  The argument that money is easy due to low rates is a Keynesian and Austrian argument.  Meltzer continues:

How can the Fed know now that a zero-rate policy will be required two years from now? It can’t. Yes, economic growth has slowed, and forecasts of future growth decline daily. But the United States does not have the kind of problems that printing more money will cure.

So what kind of problem do we have?

Banks currently hold more than $1.6 trillion of idle reserves at the Fed. Banks can use those idle reserves to create enormous amounts of money. Interest rates on federal funds remain near zero. Longer-term interest rates on Treasurys are at record lows. What reason can there be for adding more excess reserves?

This is odd for two reasons.  It doesn’t tell us what sort of problem we have (demand or supply-side.)  Given that NGDP has grown 4% over three years, whereas the trend rate would be about 15%, I would think a monetarist would see the problem as demand side.  Friedman often pointed to the slowdown in NGDP growth in Japan during the 1990s.  I’m also confused by the point of this paragraph.  It seems to imply that the US is in a liquidity trap.  But monetarists like Friedman and Meltzer denied Japan was in a liquidity trap, despite large levels of bank reserves.  This sounds more like Keynesianism.  Meltzer continues:

The main effect would be a further devaluation of the dollar against competing currencies and gold, followed by a rise in the price of oil and other imports. Inflation is now at the edge of the Fed’s comfort range, which is below 2%. Money growth (M2) reached 10% for the past six months, presaging more inflation ahead.

Now I’m totally confused.  If the US were in a liquidity trap, then adding more reserves would not devalue the dollar.  In the monetarist model there is no mechanism where monetary stimulus depreciates the dollar but fails to boost NGDP.  None.  This is the sort of argument made by Joe Stiglitz.  I’m very surprised to see Allan Meltzer make this argument.

I’m even more shocked by the prediction of more inflation ahead.  Oil prices have fallen sharply.  Tips spreads are low.  Stocks are falling.  We have 9.1% unemployment.  Where exactly is this high inflation going to come from?  Gasoline prices?  Rapid growth in wages?  I just don’t see it.  M2 growth was even higher in late 2008, leading to the previous false prediction by Meltzer (of high inflation ahead.)  But at least I can’t deny that using M2 is an application of old-style monetarism.  It’s also why us quasi-monetarists now focus on other indicators.  Skipping ahead a bit:

A large part of our current unemployment problem reflects the unsold stock of housing left from mistaken past housing policies. We cannot quickly convert most carpenters and bricklayers into computer operators. Short-term policy actions will not solve that problem. But population growth, falling housing prices and rising rents will eventually help by stimulating enough new construction to put many in the housing industry back to work.

This is the sort of quasi-Austrian argument that Friedman and Schwartz severely criticized in their Monetary History.  It’s also completely false, for many reasons.  First, the job losses in housing construction were far too small to significantly impact unemployment.  Roughly 70% of the decline occurred between January 2006 and April 2008, and yet unemployment merely edged up from 4.7% to 4.9%.  The big job losses occurred in late 2008 and 2009, as the sharpest fall in NGDP since 1938 (something monetarists should be very worried about) led to a decline in commercial construction, manufacturing and services.  Eventually even state and local government jobs were hit.  Housing construction over the past 10 years is far below previous decades, the empty homes are due to poverty and unemployment caused by falling NGDP, not excess construction.  Many young adults are jobless and still living at home.  Meltzer continues:

The U.S. also has to make a major transition from a consumption economy to one that exports more and grows consumer spending more slowly. That transition has started, but it will not occur quickly. Those who look to consumption spending to recover its old path are hoping for a past that should not return.

That might be true, but wouldn’t monetarists argue that any transitions would be easier if NGDP hadn’t fallen at the sharpest rate since 1938?  Meltzer told us that monetary stimulus would merely depreciate the dollar.  That’s not a monetarist argument, but let’s say it’s true.  Why would that be bad if we need to transition from consumption to exports?  And why did Meltzer argue that Japan should engage in additional monetary stimulus to depreciate its currency at a time when rates were near zero and banks had lots of reserves?  Why was currency depreciation a useful tool for Japan, but not the US?

Meltzer goes on to make lots of sensible arguments for structural reforms to boost productivity growth.  I certainly agree we have structural problems—indeed I’m increasingly sympathetic to Tyler Cowen’s Great Stagnation hypothesis.  But we also have a demand problem, which seems obvious to me when you look at data such as NGDP growth since mid-2008.  In an earlier post Kevin Donoghue made a very astute comment:

You might ask yourself why two people who differ as much in their politics as Krugman and Sumner end up sounding so similar. Could it be that empirical evidence played a part?

I think that’s right.  We both look at lots of empirical data, including forward-looking market forecasts.  These indicators have been consistently warning of too little AD since mid-2008.

It pains me to write this because monetarism has greatly informed my worldview.  Meltzer is probably one of the three most distinguished post-war monetarists (along with Brunner and Friedman.)  But it seems to me that this type of monetarism has reached a dead end.  It needs to be reformulated to incorporate the insights of the rational expectations and EMH revolutions.  It needs to focus on targeting the forecast, using market forecasts, not searching for an aggregate with a stable velocity.  And it must be symmetrical, with just as much concern for excessively low NGDP growth as excessive high NGDP growth.  It needs to offer answers for high unemployment, and advocate them just as passionately as Friedman and Schwartz argued that monetary stimulus could have greatly reduced suffering in the Great Depression.  Just as passionately as Friedman and Meltzer argued for monetary stimulus in Japan once rates hit zero.  Unemployment is the great tragedy of our time.  History will judge the current schools of thought on how seriously they addressed this issue.

HT:  Big thanks to Lars Christensen, who supplied both articles, and some ideas.

Update:  I slightly regret the post title.  Just to be clear, I meant that it’s sad that this once proud school of thought seems to be reaching the end of the road.  Not as a sort of insult to Mr. Meltzer.  I disagree, but there is nothing “sad” about his editorial.  I just think he’s wrong.

The vacuum on the right

A year ago I did a post called “Two untimely deaths.”  Here’s an excerpt:

Milton Friedman died on November 16, 2006, one year before the sub-prime crisis.  I’d like to suggest that his death was the closest equivalent to the death of Strong in 1928.  In 1998 Friedman pointed out that the ultra low interest rates were a sign that Japanese monetary policy was very contractionary, at a time when most people characterized the policy as highly expansionary.

There is little doubt that Friedman would have recognized the low interest rates of late 2008 were a sign of economic weakness, not easy money.  But what about the big increase in the monetary base?  First of all, the base also rose by a lot in Japan, and in the US during the Great Contraction.  Second, Friedman would have clearly understood the importance of the interest on reserves policy, which was very similar in impact to the Fed’s decision to double reserve requirements in 1936-37.  And in his later years he became more open to non-traditional policy approaches, for instance he endorsed Hetzel’s 1989 proposal to target inflation expectations via the TIPS spreads.  Note that the TIPS markets showed inflation expectations actually turning negative in late 2008.

Why was Friedman so important?  I see him as having played the same role among right-wing economists that Ronald Reagan did among conservatives.  Reagan was really the only conservative that all sides respected; social conservatives, economic conservatives, and foreign policy (or neo-) conservatives.  After he left the scene, the conservative movement cracked-up.

Friedman was respected by libertarians, monetarists, new classicals, etc.  Last year I criticized Anna Schwartzfor adopting the sort of neo-Austrian view that she and Friedman had strongly criticized in their Monetary History.  If Friedman was still alive, and strongly insisting that money was actually far too tight, then I doubt very much that Schwartz would have gone off in another direction.  It would be like Brad DeLongdisagreeing with Paul Krugman on macroeconomic policy.  Once in a blue moon.

Today there is no real leadership among right wing economists.

[BTW, I kind of regret the shot at DeLong—I’m increasingly impressed by his brilliance, despite the fact that we often disagree.]

Now this issue is resurfacing.  Here’s Will Wilkinson:

TIM LEE asks an important question: why are conservatives and libertarians so uniformly hawkish about inflation? Mr Lee (a friend and former colleague) notes that this regularity is far from inevitable. Milton Friedman, a revered figure in right-of-centre circles, famously pinned the severity of the Great Depression on contractionary monetary policy. Scott Sumner, a professor of economics at Bentley University who identifies himself as a “neo-monetarist”, has argued that Friedman would have supported monetary stimulus. And he has argued, on neo-Friedmanite grounds, that tight monetary policy both precipitated and exacerbated our recent recession. I happen to think Mr Sumner is correct, but his expansionary prescription remains anathema on the right. Why?

.   .   .

Milton Friedman was one of the 20th century’s great economists as well as one its most formidable debaters. This made him a powerful check on the influence of anarcho-capitalist Austrians, obviously much to the chagrin of Rothbard. “As in many other spheres,” Rothbard wrote, “[Friedman] has functioned not as an opponent of statism and advocate of the free market, but as a technician advising the State on how to be more efficient in going about its evil work.” Rothbard’s fulminations notwithstanding, Mr Friedman died a beloved figure of the free-market right. Yet it does seem that his influence on the subject of his greatest technical competence, monetary theory, immediately and significantly waned after his death. This suggests to me that Friedman’s monetary views were more tolerated than embraced by the free-market rank and file, and that his departure from the scene gave the longstanding suspicion that central banking is an essentially illegitimate criminal enterprise freer rein.

I’d add a couple points here.  During his period of greatest influence he was known as somewhat of an inflation hawk, as high inflation was the big problem and the old Keynesian model didn’t have good answers.  The right was happy with that monetarist critique of Keynesianism.  And second, the most important section of Friedman and Schwartz’s Monetary History of the United States was the chapter on the Depression, where they were highly critical of the Fed’s deflationary policies.  Even inflation hawks don’t think rapid deflation is a good idea.  But the subtext of their monetary history was even more important.  The Great Depression had discredited capitalism in the eyes of most intellectuals.  By showing that the problem was tight money, not laissez-faire policy, Friedman and Schwartz opened the door to the neoliberalrevolution.  The New Keynesian technocrats who ran the world economy from 1983 to 2007 are much more comfortable with laissez-faire than their old Keynesian predecessors.

And here’s Tim Lee:

This has gotten me thinking about the broader connection between peoples’ views on monetary policy and their broader ideological worldviews. With the lonely exception of Scott Sumner, virtually every libertarian or conservative who has expressed a strong opinion about monetary policy has come down on the side of the inflation hawks. Over the last three years, a wide variety of fiscally conservative Republican politicians have attacked the Federal Reserve for its unduly expansionary monetary policy. I can’t think of a single Republican on the other side.

Yet it’s not obvious why this should be. There’s a coherent ideological argument for abandoning central banking altogether in favor of a gold standard or free banking. In a nutshell, the argument is that no single institution will have the knowledge necessary to “steer” monetary policy, and so we should prefer a monetary system that decentralizes control over the supply of money.

But whether you like it or not, we do have a central bank and it’s important that it function effectively. Logically, it seems like libertarians should be equally worried about both the threat of too much inflation and the threat of too little. After all, one of Milton Friedman’s most famous books argued that the Depression was worsened by the Federal Reserve’s unduly contractionary monetary policy. Yet (again, aside from Sumner) no free-market thinkers or politicians made this argument even in the depths of the 2009 contraction.

So why is right-of-center opinion so lopsided? I can think of two possible explanations. One is that we’re still having the monetary policy debates of the 1970s, when right-of-center thinkers, following Milton Friedman, argued that the era’s persistently high inflation was the fault of unduly expansionary monetary policy. They were right about this, and a whole generation of free-market intellectuals has been on guard against the threat of inflation ever since. And this is obviously reinforced by the reciprocal trend on the left: because most of the inflation doves are on the left, people who are in the habit of disagreeing with left-wingers are discouraged from adopting their arguments on this issue.

Those are good points, but I’ll add a few more:

1. I t makes me uncomfortable to level this charge (as there is nothing I hate more than others questioning my motives) but it’s a bit awkward when you have conservative bastions like the Wall Street Journal bashing the Fed’s tight money policies in 1984, when inflation was 4% (and Reagan was in office) and making the opposite change when inflation is even lower, and Obama is in office.  I actually have a fairly positive view of the motives of most intellectuals on both the left and the right.  I assume they are well-intentioned.  But if a person strongly opposes a set of policies and hopes a new government will soon reverse them, it may at least subconsciously affect that person’s enthusiasm for monetary stimulus that would make the economy look much better, almost assuring the incumbents re-election.

2.  However I don’t believe even subconscious bias is the main issue.  The current policy stance looks much more expansionary than it really is (due to low rates and the hugely bloated monetary base.)  So there are certainly worrisome indicators that even the best macroeconomists could point to, especially given the (overrated) worry about “long and variable lags.”  It’s not all populism.  I was at a conference last year full of conservatives who knew just as much monetary economics as I do and they were almost all were opposed to QE2.  And conservatives weren’t criticizing the Fed in September 2008, when easier money might have helped McCain.

3.  I have very mixed feelings about seeing my name mentioned in both pieces.  Naturally I’m happy that people are paying attention to my ideas.  But I also worry about a world where I’m the name people mention when looking for someone who will carry on the tradition of Milton Friedman.  And this isn’t just false modesty.  No matter how highly I regard my own views, or those of similar bloggers like David Beckworth (who also could have been cited), the hard reality is that we don’t have the sort of credentials that carry a lot of weight among the elites.  (BTW, this doesn’t apply to Nick Rowe, who is probably has a much higher profile in Canada than we quasi-monetarists have in America.)

Cryptic prediction:  Before 12 moons have passed, a star will arise in the East to lead Milton’s scattered tribe into the promised land of respectability.

PS.  Thus far we’ve been called “quasi-monetarists.”  I would have preferred “new monetarists,” but Stephen Williamson’s already grabbed that name.  Will calls us neo-monetarists.  I’m growing increasing fond of ‘post-monetarist’—particularly for the futures targeting idea.  Weren’t post-modernists like Foucault skeptical of central authority?  And is it just me, or does “quasi” have a slightly negative connotation?