Monday, November 8, 2010

Last Word on What Milton Friedman Would Say

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.  Next, Allan Meltzer published this Op-Ed in the Wall Street Journal where he argued Friedman would not support QE2.  John Taylor chimed in that he agreed with Allan Meltzer's assessment.  I replied that even by Allan Meltzer's criteria of what Milton Friedman stood for one could make the case that he would still support some form of QE2.   And now the issue gets discussed by Ben Bernanke at the Jekyll Island conference. 

Now I really don't want to spend any more time on this debate, but given that it has not died down let me add these few final remarks.

(1) I agree with Paul Krugman that ultimately we should make our decisions about monetary policy without appealing to authority.  My original intent in publishing the Op-Ed was as a way to reach out to inflation hawks who claimed to be followers of Milton Friedman. I was hoping they would see Friedman's views were nuanced and that this would encourage them to take a more nuanced view.  Ultimately, though, economic analysis should be based on facts and good macroeconomic theory, not an appeal to authority. 

(2) With that said, the data do not lend themselves to the view that Friedman would necessarily be against QE2.  As I show in this post, all measures of broad money growth are far from stable and are low.  A properly executed QE2 could actually work to stabilizes these measures.  Moreover, Friedman actually said a monetary policy that targeted the expected inflation rate was better than a money supply target.  By that criteria there is no question he would support some kind of QE2.

(3) The only reason why Milton Friedman would be critical of QE2 is its ad-hoc nature.  While Friedman would be for restoring monetary equilibrium, he would want it to be done in a predictable, rule-like manner.  So far that has not happened.  It is likely he would have argued the Fed should adopt an explicit nominal target and commit to doing whatever is necessary to maintain it rather than the make-it-up-as-we-go-along approach behind the QEs so far. The economy needs more certainty now and  an explicit nominal target would help immensely on this front. 

Update: I failed to mention that Scott Sumner talked about what Milton Friedman would do long before I did.  In fact, my Op-Ed was motivated in part by his work on this topic.  


  1. Well, David, thanks for fighting the good fight. Too bad trying to make inflation hawks see the light is like igniting a candle in a cave full of bats. Even when the guano flares up, they won't see it.

    Lo siento,

  2. I like your commentary, but Scott Sumner has aired elements of this debate about Friedman for years.

    Congrats on the your op-ed in IBD, but this baby had a few fathers....

  3. Benjamin:

    You are right and I have added an update to acknowledge Sumner's role. By the way, I did acknowledge Sumner's role back in the first post I did on this debate in October:

  4. Friedman would likely be against Quantitative Easing for the same reason that he and Hayek were against the Fed suddenly drawing down the money supply in 1930:

    Because the economy is not a static thing. Years of "too much money" in the twenties or not enough money in recent years both caused gradual adjustments in the economy, and suddenly "fixing" the difference by changing supply in some extreme way does more harm than good.

    Friedman wasn't confused by collectivist inability to recognize the economy as a dynamic, self-correcting system. He would have advocated something more subtle.

    He also understood wider economic theory well enough to see that the problem is not just money theory in's also government's ongoing intrusion.

    For example, the "stimulus" had a depressing effect on the economy, exactly as any free marketer (Chicago or Austrian, or otherwise) would expect. Keynes failed to recognize that government spending competes with the private sector...and the private sector creates wealth, while the public sector consumes it.

    WHEN creating ten thousand jobs building roads destroys (by tax burden, competing, and chilling effect) ten thousand private sector jobs like Wal Mart employee and construction worker, the net result is a loss of ten thousand jobs...because those makework public jobs eventually end.

    This happened through 2010, as bad job reports were repeatedly blamed on government projects and census ending.

    A Wal Mart or construction job pays for itself, creating wealth (reflected in profit) that sustains that job indefinitely...while the public works job remains a burden until it finally ends.