A Milton Friedman Revival
Bloomberg columnist Caroline Baum laments that monetarists have “followed Milton Friedman to the grave.” Monetarist, of course, is a term used to identify those who agree with the ideas of the great free-market economist who died in 2006. But I see neither those ideas nor their adherents going to the grave. Indeed, the experience of the economic crisis is proving that Milton Friedman’s ideas were right all along, and they are gaining favor.
Two of Friedman’s most famous ideas in the macroeconomic sphere were (1) that monetary policy should follow a simple policy rule and (2) that discretionary fiscal policy is not useful for combating recessions, and indeed could make things worse. Both ideas have been reinforced by the facts during the recent crisis.
The first idea is reinforced by the evidence that the crisis was brought on by the failure of the Fed to follow the rules-based monetary policy that had worked well for 20 years before the crisis. Instead, it deviated from such a policy by keeping interest rates too low for too long from 2002 to 2005. But Caroline Baum wonders whether the Fed should now just print a lot more money and buy more mortgages or other securities. Though that might sound like a monetarist solution, Friedman did not believe in big discretionary changes in the money supply. Rather, he advocated a constant growth rate rule for the money supply. I doubt that he would have approved of the rapid increase in the money supply last year, in part because he would have known that it would be followed by a decline in money growth this year. Friedman always worried about monetary policy going from one extreme to the other and thereby harming the economy. That is why the Fed should be clear and cautious as it brings back down the size of its balance sheet, which exploded during the crisis.
Friedman’s idea about the ineffectiveness of fiscal policy is reinforced by the growing recognition that the discretionary fiscal stimulus packages did little good. Forty years ago, in a famous debate with Keynesian economist Walter Heller, Friedman said “The fascinating thing to me is that the widespread faith in the potency of fiscal policy… rests on no evidence whatsoever. It’s based on pure assumption. It’s based on a priori reasoning.” It is bad news that Washington policy makers did not heed these words in the past few years as they embarked on massive fiscal stimulus packages. But the good news is that many are heeding those words now.
- Comment (22)
- · Quote
- · UnfollowFollow (3)
- Pages:
- 1
- 2
- Pages:
- 1
- 2
Comments :
May '10
Re: A Milton Friedman Revival
John Taylor: Replying to Aaron Miller’s question, Friedman favored rules over discretion in part because rules bring greater predictability and less uncertainty which is good for investment and job-creation. But he also found that attempts by the Fed to “fine tune” usually made things worse, causing booms and busts.
Duane Oyen wonders whether monetary policy was too tight in 2008. I would say that monetary policy was too erratic in this period, especially starting in August 2007 when the crisis flared up, and that this helped bring on the panic in the fall of 2008. The Fed introduced new many lending facilities and opened its balance sheet to bail out the creditors of Bear Stearns, but then closed it to Lehman, then opened it again to AIG and then closed it again without any clear strategy. · Sep 4 at 10:00am
Edited on Sep 04 at 10:01 am
You see, Aaron, Dr. Taylor agrees that it is largely about predictability.
Jun '10
Re: A Milton Friedman Revival
Andrew Alain
by lighting the economic equivalent of fire, the so called stimulus, you risk changing how people make economic decisions resulting in unintended consequences. ·
I love it - you "risk" it. That is charitably put Sir Andrew.
There is a saying that the difference between a ball and a dog is that when you kick a dog, you cannot predict where it will end up.
I find it hilarious that the same people who believe that tampering with the ecology of a marshland or forest is far too dangerous for mere humans to manage, tend to believe we can tamper with the ecology of a global financial system willy nilly and expect brilliant results.
Solution: let's put control of this most fundamental ecological system in the hands of a relatively small number of politicians who have (at best) completely inadequate and distorted data, whose incentives are based almost entirely on political power and fundraising - that is so much safer than allowing billions of individuals to make their own choices based on massive amounts of local knowledge according to their own values.
Anyone who disagrees with the sanity/advisability of this choice must be a close-minded idiotic conservative hack.