June 23, 2003

Is Uncle Milton Really Naive?

Paul Krugman points out that--no matter what Ben Stein may say--Milton Friedman now agrees with Paul that targeting the growth rate of the money stock has not been a smashing success:

FROM THE HORSE'S MOUTH (6/10/03)

Readers of the  Unofficial Site may recall that Ben Stein launched a frantic  attack  on me after my quite innocuous column   Missing James Tobin . Among the things that drove him wild was my statement that Milton Friedman's monetarism was a rather "naive" doctrine that has not stood the test of time.

But guess who now   concedes   the point?

By the way: Friedman did two great things: the permanent income theory of consumption, and the natural rate hypothesis. These do not make him a figure on a level with Keynes, who transformed the way we see the world, and may have saved the market economy. But they're pretty important.

Monetarism, on the other hand, was a misguided doctrine. Friedman was looking for a magic way to exclude judgement and discretion from economic policy; he didn't find it. And my own work on the liquidity trap has convinced me that his biggest case for monetarism - the attribution of the Great Depression to monetary contraction - was a huge misinterpretation. Yes, M2 contracted - but it's far from clear that the Fed was in control of M2.

I agree with Paul that Ben Stein's social marginal product is higher when he is judging the PetStar contest for Animal Planet than when he is writing about economic issues for the American Enterprise Institute.*

But I also with to register my disagreement on a couple of points with Brother Paul's assessment of Uncle Milton. Targeting the money stock has been unsuccessful, but I would not call it "naive." Friedman's project was to (i) point out that the correlation between the money stock and total spending was close, (ii) reform and regulate the banking system in such a way as to make the relationship closer (see Friedman's A Program for Monetary Stability), and (iii) use the requirement that the central bank set and meet its money stock targets to (a) take monetary policy "outside politics," (b) remove the threat of political manipulation to goose the economy just before elections, and (c) gain the central bank additional credibility.

This is not a naive project. This is not even necessarily a right-wing project. As long as you think that economic policy made by the likes of Karl Rove (in the interest of maximizing the short-run fortunes of some politician no matter what the long run cost to society at large) is greatly to be feared, the straightjacket provided by a k% annual money growth rate rule seems very attractive.

As things have worked out, the coming of the modern central bank has removed the ability of Karl Rove and company to make monetary policy (they make fiscal policy instead) without requiring a k% growth rule, the correlation between money stock measures and spending in recent decades has been less than Friedman (and I!) expected, and the financial-market regulatory measures of A Program for Monetary Stability have never been tried, but in my (mature) judgment would probably have failed to work, and if they did work would have made our financial system much more costly and cumbersome. So (at least at present) Friedman's policy proposals appear to be a solution to something that is not a problem.

(One of the things that has always puzzled me has been the extraordinary stringency of the financial straightjacket proposed in A Program for Monetary Stability. Friedman believes that markets can be trusted and government intervention always creates a worse disease in every industry except one. In the banking industry the market failures are so enormous and so damaging that the government must intervene with extraordinarily ruthless and constricting regulations, and furthermore must take active steps to set and fix the total quantity of liquid assets in the economy. Yet it is never explained why the market failures in the banking industry are so dire as to require the complete reversal of the normal presumption of economic liberty.)

I have never been able to figure out whether Milton Friedman is better viewed as the Arch-Keynesian or as the Anti-Keynesian. John Maynard Keynes believed that human psychology made investment spending inherently unstable, and that this imposed devastating costs on modern economies, but that if only you could find a way of stabilizing autonomous spending--I + G, the sum of investment spending and government purchases--then you could step back, let the market work, and things would be fine. Monetary policy could help stabilize I by giving businesses incentives to invest or not to invest at each moment, but you would have to have clever people working for the government adjusting the level of government purchases G as well in order to get the economy to and keep the economy near full employment. Keynes strongly believed that clever people working for the government could make things better.

Friedman is the Arch-Keynesian in that he thinks (or thought) that the task of stabilization is easier than Keynes thought: just stabilize M (not I + G) and then the market would work fine. According to Friedman, you didn't need good forecasts of I and clever people to set up countervailing shifts in G, all you needed to do was to keep the economy's stock of liquid readily-spendable assets growing smoothly. From this perspective, Friedman is Keynes-Squared.

Friedman is the Anti-Keynesian in that he never trusted clever people working for the government. He never trusted them to do anything other than mess up the economy as part of a destructive strategy to advance the fortunes of some politician. Hence even if stabilizing I+G was marginally superior to stabilizing M, Friedman would still have pushed for stabilizing M because you can see whether the government is keeping the money growth rate stable and thus you can understand whether the government is fulfilling its commitments, acting in the public interest, or not. By contrast, it's very hard to figure out whether the assessments about the proper level of G offered by the clever people working for the government are the straight dope or just plausible verbal garbage to mask the fact that Karl Rove is making the substantive decisions about policy.

Thus Friedman's policy proposals were--at least, they were if we did happen to live in the world in which Friedman thought we happened to live in the 1960s and 1970s--much better than Keynes's. They had the same (or superior) value in compensating for the market failures that produced high unemployment and severe depressions that Keynes's policy proposals did. And they guarded against the possible government failures that Keynes's rationale for large-scale government intervention had opened up.

Wrong? Probably. But naive? I don't think so.


Aside: And the fight over whether the Federal Reserve caused the Great Depression? Purely a dispute over definitions. Did the Federal Reserve walk into the middle of a well-functioning market economy and wreck it? No. Should the Federal Reserve have taken the decline in the money stock as a signal that there was a real problem and that it needed to shovel liquidity into the banking system as fast as possible? Yes. Did the Federal Reserve do so? No.

If the Federal Reserve had not existed, would the big New York bankers have formed themselves into a scratch pick-up central bank and taken collective action to stabilize the money supply, in the same way that Pierpont Morgan led the New York Clearinghouse into adding liquidity to the economy via Clearing House Loan Certificates during the Panic of 1907? I do need to write something serious about the Panic of 1907 someday (for there are very interesting points to be made about the intermediary forms of social organization between "market" and "government" and the "bankers' cartel" as it worked in 1907 is a very interesteing example). But my belief is that there would not have been an effective scratch pick-up bankers' cartel-organized central bank if the Federal Reserve had simply not existed: Jack Morgan was not Pierpont, the problems were bigger, and Wall Street at the start of the 1930s couldn't even organize effective pools to influence the level of the stock market.

The way I put the bottom line is that the Federal Reserve did not cause the Great Depression, but that it bears responsibility for the Great Depression because it allowed the money stock to decline and so did not block the vicious cycle of deflation at the beginning. But the serious mainstream disputes** over the "cause" of the Great Depression are semantic and definitional only.


*A thing that is also true of an alarmingly large number of others associated with the American Enterprise Institute. Consider John "Let Me Pretend to Be One of My Students So I Can Tell You What a Great Teacher I Am" Lott, or Charles "Multicolinearity? What's Multicolinearity?" Murray. Whatever internal mechanisms are supposed to guarantee think-tank quality appear to have broken down pretty thoroughly.

**Serious mainstream disputes: there are (a few) people who believe that the Great Depression was caused by the fact that the Federal Reserve did not deflate the American price level back to its pre-WWI level in the 1920s, or who blame the Great Depression on the Smoot-Hawley Tariff or the New Deal. The tariff certainly didn't help, but it was a minor factor. Some elements of the New Deal retarded recovery (and others accelerated recovery), but the Great Contraction was completely over when Roosevelt's 100 Days began.

Posted by DeLong at June 23, 2003 10:52 AM | TrackBack

Comments

Now, if I got my high school US History right, the New Deal was mostly in *response* to the depression, right? How could it have caused it?

Posted by: verbal on June 23, 2003 02:19 PM

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Is it possible that Hoover's tax increase taking liquidity out of the economy together with the Smoot Hawley tarriffs shutting down of international trade exasperated by the Fed's reduction of the money supply with all this happening after a great bubble burst drove the economy into the Great Depression?

In other words bad Government policy turned a burst bubble into a disaster? And That Reagan's refusal to do anything after the bubble burst of October 198? was in fact the correct policy allowing the market to correct itself?... which it did in a year?

Adrian

Posted by: Adrian Spidle on June 23, 2003 02:23 PM

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Is it possible that Hoover's tax increase taking liquidity out of the economy together with the Smoot Hawley tarriffs shutting down of international trade exasperated by the Fed's reduction of the money supply with all this happening after a great bubble burst drove the economy into the Great Depression?

In other words bad Government policy turned a burst bubble into a disaster? And That Reagan's refusal to do anything after the bubble burst of October 198? was in fact the correct policy allowing the market to correct itself?... which it did in a year?

Adrian

Posted by: Adrian Spidle on June 23, 2003 02:23 PM

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Adrian, Nordhaus says, in class notes that are alas now offline, that in the short run tariffs are expansionary for aggregate demand since they shift the real exchange rate (y-axis) net export (x-axis) schedule outwards and hence shift IS outwards (Mankiw P. 320). In the long run they contract aggregate supply but the Depression was due to not enough aggregate demand, and there was likely a lot of slack in the economy that adverse supply shocks could take up without affecting output. And Smoot Hawley was a very tiny supply shock.

Posted by: Bobby on June 23, 2003 03:22 PM

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verbal, the argument is basically that the New Deal mucked up the market recovery that would otherwise have happened more quickly: we would have had a short-lived Panic of 1930 rather than a Great Depression.

Posted by: Jonathan Korman on June 23, 2003 03:43 PM

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Great stuff, but this is a little strong, is it not?:

"Yet it is never explained why the market failures in the banking industry are so dire as to require the complete reversal of the normal presumption of economic liberty."

One reason the money stock collapsed during the great deflation/depression is that so many banks failed - and without deposit insurance the collapses wiped out the liquid wealth and savings of all the depositors. Not to mention but that bank runs can be self-fulfilling and once sparked, the contagion of fear spreads at a SARS like pace.

So the complete reversal of the normal presumption of economic liberty is an overreaction to the last giant debacle . . . . there are clever regulatory ways to free the banking industry while keeping it safe (creating a free market for mandated deposit insurance might be a good start!) but there are so many economic interests at odds that revolutionary change in banking is every bit as difficult to achieve as, say, revolutionary change in healthcare.

Posted by: Anarchus on June 23, 2003 04:17 PM

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How-Weird Dean
The dean of Democratic dementia is officially running for president. In a Burlington, Vt., speech today, former governor Howard Dean shouted at supporters: "You have the power to take our country back! You have the power! You have the power! You have the power!" This came a day after a highly entertaining appearance on NBC's "Meet the Press," in which the wannabe commander in chief was unable to answer when host Tim Russert asked him how many military personnel are on active duty in the U.S. military. It's a "silly" question, Dean answered, "like asking me who the ambassador to Rwanda is."

Dean also claimed that "there's only one person who's contending for the Democratic nominee for president who did serve in the military." Presumably he's referring to Dick Gephardt's service in the Missouri Air National Guard (1965-71). Dean apparently is unaware that another Democratic candidate, John Kerry, also served in the military. He was in the Navy from 1966 through 1970 and the Naval Reserves from 1972 through 1978. He even served in Vietnam. Granted, Kerry doesn't exactly advertise his military service, but you'd think Dean could be troubled to do a little research before he makes statements like this about his opponents.

Another Dean blooper came in the course of outlining a Krugmanic conspiracy theory about the motives behind the Republicans' economic policies:

These tax cuts are incredibly bad for the economy. I believe their purpose is essentially to defund the federal government so that Medicare and Social Security, the icons of the New Deal, will be undone. Karl Rove and others have talked about going back to the McKinley era before there was any kind of social safety net in this country. Really that's what the campaign's about. It's to undo what I consider radical Republicanism.

Dean must be taking history lessons from Wesley Clark. In fact, Medicare was not part of the New Deal at all. It was enacted in 1965, two decades after Franklin Roosevelt's death.

As for Dean's theory about the Republican agenda, it simply makes no sense. It's true that Karl Rove looks to McKinley as an example, but that's because McKinley ushered in a several-decade period of Republican dominance. The GOP held the White House for 28 of the 36 years starting with McKinley's inauguration in 1897. A party can't win that many elections without being popular, and destroying popular programs like Social Security is no way to become popular. What's more, the Bush administration is now proposing to expand Medicare by establishing a prescription-drug benefit. Dean doesn't like the president's proposal, but he says if he were in Congress he might vote for it anyway:

It's clearly an election-year sop, but what Senator [Ted] Kennedy says, and he has probably the most extraordinary record on health care of any United States senator, what he says is this is the opportunity to get this in the door. We know it may not work. But let's do the best we can. And we'll try to fix it later once the entitlement is established.

So Dean accuses Republicans of having a hidden agenda of eliminating entitlements, while openly admitting Democrats have an agenda of expanding them.

Dean also tells Russert that the death penalty isn't a deterrent, except when it is:

I think there may be one instance where just possibly it could be and that's the shooting of a police officer. If you're about to pull a trigger on a guy who's in uniform and you know that you're going to get the death penalty and if you don't pull the trigger something different will happen, maybe that might save the police officer's life.

He adds that "we don't know whether in the long run the Iraqi people are better off" without Saddam Hussein, and says he favors a constitutional amendment to balance the budget even though "it's not very good public policy."

Will the Dems be crazy enough to nominate this guy? If so, it should make for a colorful campaign next year.

Posted by: oo on June 23, 2003 04:36 PM

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Uh oo, what does Dean have to do with the causes of the Great Depression?

Posted by: Mobius Klein on June 23, 2003 04:52 PM

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Jonathan -- you write that the argument is that without the New Deal, "we would have had a short-lived Panic of 1930 rather than a Great Depression".

Umm, FDR didn't take office until 1933, and nothing he did would have had much effect until 1934 at the earliest. As the Prof points out, the contraction was essentially over by then. He has some good charts at:

http://econ161.berkeley.edu/TCEH/Slouch_Crash14.html

We get into alternate-universe territory in arguing about what FDR's approach should have been, because we really don't have many similar data points for comparison. Some do argue that other countries recovered more quickly, and that the fallback in 1937 could be blamed on him. But it would be the Fed and possibly the Hoover Administration that might be blamed for turning a panic/recession into the Great Depression.

As to Brad's comment that "Ben Stein's social marginal product is higher" in his show-biz pursuits, I wholeheartedly agree. I took $5000 from him on his game show a few years back!

Posted by: Curt Wilson on June 23, 2003 04:55 PM

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I take it back, GT and achilles, you CAN call Prof. DeLong, "my boy", after all. And Don Luskin tells me he's pretty impressed with him too since I pointed him to this today:

http://econ161.berkeley.edu/Econ_Articles/monetarism.html

But I'm really surprised...okay, no I'm not...that Krugman fell for Simon London's story. For one thing, this isn't news, Friedman has made this "concession" before. And for another, who could take seriously someone telling us:

"In the early 1980s, both the US and the UK set interest rates according to Friedman-style targets for money-supply growth. The common aim was to bring down inflation without the pain of recession."

Two howlers in two sentences. I'm sure even the usual suspects see that right away.

Posted by: Patrick R. Sullivan on June 23, 2003 06:01 PM

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"Targeting the money stock has been unsuccessful, but I would not call it 'naive.' "

No, 'naive' is not a description often given of M. Friedman.

But look -- Krugman makes the great leap from Friedman's saying "targeting the money stock" hasn't been very successful to concluding that *monetarism* itself was naive: "Monetarism, on the other hand, was a misguided doctrine."

That's some jump! Monetarism goes back to Irving Fisher and David Hume. Targeting the money stock was an experiment tried, or semi-tried, for a few years in the 1980s.

And I have it on good authority that monetarist concepts -- and the work of Milton Friedman in particular -- run throughout the modern Keynesian agenda. In fact here's an excellent essay on the subject:
http://econ161.berkeley.edu/Econ_Articles/monetarism.html

From which...

"All five of the planks of the New Keynesian research program listed above had much of their development inside the twentieth-century monetarist tradition, and all are associated with the name of Milton Friedman. It is hard to find prominent Keynesian analysts in the 1950s, 1960s, or early 1970s who gave these five planks as much prominence in their work as Milton Friedman did in his."

Gosh, that was so misguided of him! ;-)

One of the unattractive things about Krugman even back in his best days was his eagerness to gratuitously denigrate others and their work -- including his own allies. E.g. there were his slangs at Laura D'A. Tyson (which even a friend and admirer of Prof K called "vicious, unprovoked, and unfair"), Stephen Jay Gould (!), need I mention Fraga, and the list goes on and on.

Now he is on the written record saying Hayek contributed nothing at all to economics while Friedman's work was naive and misguided -- both statements made while drawing contrast with Keynes. Though as chance would have it I recently came upon Keynes' biographer naming his picks for the three greatest economists of the 20th Century...

~~
LORD ROBERT SKIDELSKY: Hayek ... is the other great economist... Well, he's the second great economist of the 20th century. Milton Friedman, of course, is the third.

INTERVIEWER: And the first is Keynes?

LORD ROBERT SKIDELSKY: I would say so, yes. Well, I think the three great economists of this century were Keynes, Hayek, and Friedman. I'm not sure exactly how I'd rank them ...

http://www.pbs.org/wgbh/commandingheights/shared/minitextlo/int_robertskidelsky.html
~~

So go figure. But OTOH maybe I'm being too harsh on Prof K., and confusing "targeting the money stock" with "monetarism" is just one of those naive mistakes one makes when writing in a rush to get an "I told you so" in at Ben Stein.


Posted by: Jim Glass on June 23, 2003 07:18 PM

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If these basic ideas of economics are still in dispute, then perhaps the subject deserves to be called the ďdismal science.Ē Imagine if physicists were still arguing over the quantum mechanics, or if we still took Machís attacks on atomic theory seriously. Is there anything in economics as deep as Bellís theorem in physics? However, I completely agree that Keynes was brilliant. Bertrand Russell (in his autobiography) called Keynes the most brilliant person he ever met, and thatís saying something coming from Russell. But who has inherited his mantle?

Posted by: A. Zarkov on June 23, 2003 07:41 PM

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It's a shame that Krugman feels compelled to wear out his arm patting himself on the back every time he thinks that he has the better of an opponent.

If you go back and read Krugman's eulogy to Tobin, the slap at Friedman seems entirely gratuitous. Krugman could simply have praised Tobin's theories of asset markets, and left it at that. Krugman carefully worded his insult to be limited to Friedman's monetarism, saying vaguely that "his reputation now rests on other work." However, a lay reader would have no way of knowing that Friedman's other work included important contributions to macro.

I think that most New York Times readers would be quite shocked to find out how much Krugman relies on Friedman's macroeconomic framework. A more appropriate time to mention Friedman in his column would have been when Krugman made his argument that the Bush tax cuts would only increase employment until temporarily.

Posted by: Arnold Kling on June 23, 2003 08:17 PM

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Krugman is shrill. BTW ""oo" published the identical off-topic anti-Dean blurb on Yglesias.

Remaining off-topic, but on Keynes at least, did Keynes coin the phrase psychological depression? I believe that this is from the General Theory; it's definitely by keynes in the 30's:

"In short, economic depression brings about psychological depression. While a drop in the interest rate may make investment projects technically profitable, it will not, on its own, make investors more optimistic. Money kept in banks need not be invested." (Source:
http://www.worldandi.com/public/1988/may/mt7.cfm )

All Keynes was saying was that a depression discourages investors and makes them cautious, thus lengthening the depression. But I've read that "depression" was not a psychological diagnosis before the depression. (Or is this an urban legend?"

Posted by: zizka on June 23, 2003 08:42 PM

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Regarding the causes of the Depression, there were really were two legs to it with different causes -- the initial plunge, which was not unprecedented; and the delayed, slow recovery, which was. Moreover, the "plunge" period presents two different issues too -- what caused the recession of '29 to begin with, and what caused the terrible collapse of '31.

By modern standards the Fed can be damned for both parts of the plunge, for raising rates at times which to us look, well, crazy. E.g.

".. in 1928, in a situation in which the inflation rate was actually slightly negative and the economy was only barely emerging from a mild recession, the Fed began to raise interest rates. The New York Fed's discount rate, at 3.5 percent in January 1928, reached 6 percent by August 1929,..."
http://www.federalreserve.gov/boarddocs/speeches/2002/20021015/default.htm
(Scroll down to "An Historical Example: Federal Reserve Policy in the 1920s".)

Then, in September of 1931, in the midst of the then serious recession and serious deflation, the Fed raised interest rates 2 full points, from 1.5% to 3.5%. (Can you imagine Alan Greenspan doing *that*?) The result was immediately calamitous. M1 fell at a 25% annual rate over the next three months, and M2 at over a 35% rate. M1 and M2 have never before or since collapsed at this rate. The Great Crash was on.

All really, really bad. But in the Fed's defense, sort of, it didn't really know what it was doing and didn't even think its real job was to stabilize the economy. It had only been set up in 1913 and neither its institutional structure nor its policy analysis were set up for the job of economic stabilization the Fed performs today. It was also following the rules of the gold standard when making the fateful rate hike in 1931. There's an interesting paper on all this at http://www.rich.frb.org/pubs/eq/search.cfm/article%3D107

Now FDR and the New Deal obviously had nothing to do with any of that. But as to why the recovery from the Depression was so slow, that's another story -- the consensus these days is that the New Deal did slow down the recovery. FDR's people had no theory of the Depression, they just associated it with "lower prices" -- so they tried to raise prices by setting up (often previously illegal) monopolies, cartels, price supports, bans on competition, and so on. This was all very good for the people who already had jobs, but it stunted growth and kept unemployment high. Monopolies and artificially high prices weren't any better for growth then than now.

See _Lessons from the Great Depression: The Lionel Robbins Lectures for 1989_, by Peter Temin of MIT, a paperback in bookstores, for a Keynesian (liberal Democrat's) analysis of all this.

There's also an interesting Federal Reserve analysis of just how much different factors like tariffs, fiscal policy, monetary policy, bank failures, the New Deal, etc. may have separately contributed to the Depression in the US at http://minneapolisfed.org/research/qr/qr2311.html

Posted by: Jim Glass on June 23, 2003 08:42 PM

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"Friedman is the Anti-Keynesian in that he never trusted clever people working for the government ... Friedman's policy proposals were--at least, they were if we did happen to live in the world in which Friedman thought we happened to live in the 1960s and 1970s--much better than Keynes's. They had the same (or superior) value in compensating for the market failures... And they guarded against the possible government failures that Keynes's rationale for large-scale government intervention had opened up."

Some time back I downloaded an article by Skidelsky on the defects of Keynesianism. At the top of the list he put that early Keynesianism was "politically naive". There was nothing in it that accounted for the self interest and incentives of politicians, which Friedman always pointed to and Public Choice analyzes explicitly.
He had illustrative stories of well-meaning Keynesians coming into government thinking of themselves as enlightened skilled technicians about to do good who were eaten alive by the politicians, with their programs co-opted and perverted.

He thought this failing rather ironic because Keynes himself was anything but politically naive. But the early program required such political sophistication to be in the person of the economist, as it was with JMK, since there was none in the analysis, and the persons often were ivory tower academics with little worldly experience.

I'd quote the thing if I could find it, but it was four computers ago and the file is misfiled.

"Wrong? Probably."

I dunno, how far one can trust clever people in government -- even if they have good intentions -- is still hotly debated.

As for Friedman not trusting the Fed, he like the rest of us got his data from history, not the future, and at the time the Fed's management record was quite arguably rather poor. But the Fed has been riding its own learning curve and its performance seems to have gotten rather better over the last 30 years or so. I don't know if that should have been foreseen in the 1960s.

Posted by: Jim Glass on June 23, 2003 11:01 PM

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"I have never been able to figure out whether Milton Friedman is better viewed as the Arch-Keynesian or as the Anti-Keynesian. John Maynard Keynes believed that human psychology made investment spending inherently unstable, and that this imposed devastating costs on modern economies, but that if only you could find a way of stabilizing autonomous spending--I + G, the sum of investment spending and government purchases--then you could step back, let the market work, and things would be fine. Monetary policy could help stabilize I by giving businesses incentives to invest or not to invest at each moment, but you would have to have clever people working for the government adjusting the level of government purchases G as well in order to get the economy to and keep the economy near full employment. Keynes strongly believed that clever people working for the government could make things better"

The reason is relatively simple. The banking system is an integral part of the system that creates the total money supply. The "multiplier effect" requires a bank to lend money based on fractional reserves, and the borrowers to place it in another bank, who lends money based on fractional reserves.

When the money supply starts contracting and banks start failing because of bad loan, then this will accelerate the contraction of the money supply. It creates a reverse multiplier effect. it is also outside the control of the Federal reserve. So if you want control of the money supply at all, then you MUST control the risk behavior of the banks.

This is even more true since the government is providing insurance to cover the bank accounts. This permits banks to use risk-free money for their loans, so they don't pay any risk premium for the accounts. Also, depositers don't care how risky the bank loans are and don't inquire since the government is guaranteeing their account. Banks are then free to make loans which are as risky as they wish - unless they are regulated.

In short, control of the money supply will require bank regulation. Always. The converse, lack of control of the money supply, puts the entire economy at risk of much greater boom-bust cycles. If you do not like the Depression, then you will regulate banks.

Posted by: Rick Brewer on June 24, 2003 12:13 AM

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"I have never been able to figure out whether Milton Friedman is better viewed as the Arch-Keynesian or as the Anti-Keynesian. John Maynard Keynes believed that human psychology made investment spending inherently unstable, and that this imposed devastating costs on modern economies, but that if only you could find a way of stabilizing autonomous spending--I + G, the sum of investment spending and government purchases--then you could step back, let the market work, and things would be fine. Monetary policy could help stabilize I by giving businesses incentives to invest or not to invest at each moment, but you would have to have clever people working for the government adjusting the level of government purchases G as well in order to get the economy to and keep the economy near full employment. Keynes strongly believed that clever people working for the government could make things better"

The reason is relatively simple. The banking system is an integral part of the system that creates the total money supply. The "multiplier effect" requires a bank to lend money based on fractional reserves, and the borrowers to place it in another bank, who lends money based on fractional reserves.

When the money supply starts contracting and banks start failing because of bad loan, then this will accelerate the contraction of the money supply. It creates a reverse multiplier effect. it is also outside the control of the Federal reserve. So if you want control of the money supply at all, then you MUST control the risk behavior of the banks.

This is even more true since the government is providing insurance to cover the bank accounts. This permits banks to use risk-free money for their loans, so they don't pay any risk premium for the accounts. Also, depositers don't care how risky the bank loans are and don't inquire since the government is guaranteeing their account. Banks are then free to make loans which are as risky as they wish - unless they are regulated.

In short, control of the money supply will require bank regulation. Always. The converse, lack of control of the money supply, puts the entire economy at risk of much greater boom-bust cycles. If you do not like the Depression, then you will regulate banks.

Posted by: Rick Brewer on June 24, 2003 12:13 AM

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I don't know much about Friedman, so I have no new knowledge to contribute concerning what Friedman actually said. But isn't it a little bit ridiculous to argue about what pretty much boils down to whether Krugman's use of the word "naive" is appropriate? This is a debate over semantics, and, within the context of DeLong's arguments, I think that a reasonable person is just as likely to agree with the pro-naive side as he is with the anti-naive side. The question of whether Friedman is (1) both wrong *and naive*, or (2) just wrong, is not resolvable, and its answer is inconsequential. That is, it is inconsequential unless your name is Donald Luskin (or a few of the posters on this board -- you know who you are) and your objective is to try to embarrass Krugman with any little tendentious argument you can get your hands on.

Just to engage in some of this semantic triviality myself, DeLong's discussion of Friedman's thought was fine, but he should have built it around a different thesis, instead of saying that Friedman was (probably) wrong but not "naive." I think that the word "naive" could actually describe Friedman's thoughts, as told by DeLong, just as easily as DeLong calls them probably "wrong" but not "naive."

Despite the fact that DeLong says, in the end of his post, that Friedman was wrong but not naive, DeLong did not actually prove this, and I am not even sure whether you can prove that someone, who is wrong, is not naive. An even if you can, I don't think that DeLong did it here.

A few comments on Delong's specific passages:

"Targeting the money stock has been unsuccessful, but I would not call it "naive." Friedman's project was to (i) point out that the correlation between the money stock and total spending was close, (ii) reform and regulate the banking system in such a way as to make the relationship closer (see Friedman's A Program for Monetary Stability), and (iii) use the requirement that the central bank set and meet its money stock targets to (a) take monetary policy "outside politics," (b) remove the threat of political manipulation to goose the economy just before elections, and (c) gain the central bank additional credibility."

Much of this passage (except for (ii)) is irrelevant to Krugman's claim that Friedman was naive. Here's why:

Remember that Krugman was criticizing Friedman's policy proposal of targetting of monetary aggregates. However, Friedman's policy of targetting a monetary aggregate is NOT a necessary condition for (i) and (ii) since:

(1) Concerning (i), you can call the targetting of monetary aggregates "naive", while still acknowledging that "the correlation between the money stock and total spending is close."

(2) Concerning (iii), you do not need to target a monetary aggregate in order to remove political manipulation from monetary policy and gain central bank credibility. You can achieve these goals either by targetting the inflation rate or the interest rate too and likely some more methods that I don't know about.

Targetting of monetary aggregates is just a really poor and yes "naive" way of achknowledging (i) and achieving (iii) compared to alternative policies. Therefore we can consider Friedman's research on (i) and (iii) as divorced from the question of whether the policy of targetting monetary aggregates is naive -- monetary aggregate targetting not only a lousy idea in general, but also a lousy way of acknowledging (i) and achieving (iii).

"As things have worked out, the coming of the modern central bank has removed the ability of Karl Rove and company to make monetary policy (they make fiscal policy instead) without requiring a k% growth rule, the correlation between money stock measures and spending in recent decades has been less than Friedman (and I!) expected, and the financial-market regulatory measures of A Program for Monetary Stability have never been tried, but in my (mature) judgment would probably have failed to work, and if they did work would have made our financial system much more costly and cumbersome. So (at least at present) Friedman's policy proposals appear to be a solution to something that is not a problem."

"Yet it is never explained why the market failures in the banking industry are so dire as to require the complete reversal of the normal presumption of economic liberty.)"

From these two passages, a reasonable person could describe Friedman as "naive" (as well as wrong), just as easily as a reasonable person, like DeLong, could disagree about naivete.

"Friedman is the Arch-Keynesian in that he thinks (or thought) that the task of stabilization is easier than Keynes thought: just stabilize M (not I + G) and then the market would work fine. According to Friedman, you didn't need good forecasts of I and clever people to set up countervailing shifts in G, all you needed to do was to keep the economy's stock of liquid readily-spendable assets growing smoothly. From this perspective, Friedman is Keynes-Squared."

If you assume that Friedman believed this to be true without his proposed financial market reforms, it seems to me that Friedman is essentially assuming away shifts of the IS curve and its importance of determining output. I would call this very naive. Of course if you assume Friedman believed that this was true only with his finacial market reforms, then I guess its fine except for DeLong's aforementioned caveats to the reforms.

"Thus Friedman's policy proposals were--at least, they were if we did happen to live in the world in which Friedman thought we happened to live in the 1960s and 1970s--much better than Keynes's."

Reasonable people can also disagree as to whether this statement qualifies Friedman as "naive" as well.

By the way, I think this would be a better defense of Friedman if DeLong had said which monetary aggregate (M1 or M2 or M3, etc.?) Friedman wanted to target. I don't know which monetary aggregate DeLong is talking about when he refers to M, and this is very important. Maybe confusion by Friedman over which monetary aggregate to use also contributes to an argument that he was "naive", but I don't know -- maybe Friedman knew exactly which monetary aggregate to target.

Posted by: Bobby on June 24, 2003 02:02 AM

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"Is there anything in economics as deep as Bellís theorem in physics?"

Plenty of economics is solid, particularly microeconomics; it just isn't taught in the sorts of introductory classes that most university graduates are exposed to.

Pick up a copy of Mas-Colell, Whinston and Green's "Microeconomic Theory" sometime, and read the section on General Equilibrium - in particular, look at Chapter 16, which discusses the First and Second Theorems of Welfare Economics (I assume you have a solid understanding of multivariable calculus, linear algebra and elementary point-set topology, which you ought to, if you know what Bell's Theorem is).

Posted by: Abiola Lapite on June 24, 2003 02:03 AM

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"a monetary aggregate is NOT a necessary condition for (i) and (ii) since"

it should say

"a monetary aggregate is NOT a necessary condition for (i) and (iii) since"

Also maybe Brad did say which monetary aggregate he was talking about, but in words that I did not recognize as such. If so, someone please point it out

Posted by: Bobby on June 24, 2003 02:14 AM

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If macroeconomics were a "hard science", no nation would ever decline economically unless it wanted to. If microeconomics were a "hard science", no business would ever go broke unless it wanted to.

You do not have one physicist calling another physicist "naive" because of the theories he espouses (unless there's some or other personal/political motive). Which doesn't say whether Friedman was naive or not, but does say that economics is not a science along the lines of physics. It seems to me it's partly an art, partly a soft science like sociology which is often dressed up in ridiculous amounts of mathematics, and partly political spin-doctoring.

Which means, incidentally, that an economist's conclusions will be determined very largely by their political opinions. (You rarely get righty traditionalist Keynesians or lefty monetarists, do you?) Which also means that as politics shifts, an economist's positions might also shift; what you said was good behaviour under Clinton (or even Reagan) suddenly becomes bad behaviour under Bush -- and am I wrong in saying the theory can always be found (somewhere) to back it up?

But what do I know, I'm a liberal arts graduate . . .

Posted by: MFB on June 24, 2003 03:20 AM

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Not really. The equivalent to 'no business going bankrupt' would be competition between physics labs. Either to demonstrate some cutting-edge results before the other did, or to do some 'fill in more decimal places' research, but cheaper than the other did. Combined with funding agencies which aren't always sure what they want or need, and a real world which can suddenly make the results of research irrelevant (still true, but not needed).

At the country level, those who take a country into bankruptcy could be those who stood to gain from it. If a small but powerful set of individuals stood to gain a large portion of short-term gains, and pay a small portion of long-term losses, then it'd pay for them to pursue negative-sum games (negative-sum for the country, overall). Finding such a group is left as an exercise in reading the newspaper.

Posted by: Barry on June 24, 2003 04:09 AM

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On the limits of "economic science", try the excellent discussion in John Sutton: Marshall's Tendencies - What can economists know?; MIT Press (2000)

Was this the official obituary for Monetarism?

"...instability of monetary demand, especially in the context of supply shocks and declines in potential output growth, complicated the task of monetary authorities. As a result, during the 1980s most central banks, with some notable exceptions, either abandoned or downplayed the role of monetary targets." - from: IMF World Economic Outlook, October 1996, page 106.

Posted by: Bob Briant on June 24, 2003 04:12 AM

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Uh, Bobby, a good rule of thumb is that Pauldolators who live in glass houses shouldn't throw stones. At least not at others who DON'T operate 24-7 shrines.

But, I agree that you don't know much about Friedman.

Posted by: Patrick R. Sullivan on June 24, 2003 07:22 AM

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"Which means, incidentally, that an economist's conclusions will be determined very largely by their political opinions. (You rarely get righty traditionalist Keynesians or lefty monetarists, do you?) Which also means that as politics shifts, an economist's positions might also shift; what you said was good behaviour under Clinton (or even Reagan) suddenly becomes bad behaviour under Bush -- and am I wrong in saying the theory can always be found (somewhere) to back it up?

But what do I know, I'm a liberal arts graduate . . .

Posted by MFB at June 24, 2003 03:20 AM "

Way to go, MFB. All I can add is AMEN, AMEN. As far as I can tell, you pick your inputs, variables, constants and relationships pretty objectively, but when your outputs don't match your expectations, you just tweek them 'till they do. I have never seen anyone effectively map their theories to the real world.

I think all you economists should be working on a STANDARD ECONOMETRIC MODEL that BOTH SIDES agree to before you pretend to be an expert.

Adrian

Posted by: Adrian Spidle on June 24, 2003 07:38 AM

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With all due respect for Bobby (and I don't mean this facetiously, I genuinely respect his thoughtful posts), I think the argument about Friedman's "naivety" or lack thereof is more than a semantic exercise.

In particular, Krugman is arguing, essentially that plenty of evidence existed for Friedman to know better. And, in fact, as he has grown older and less a warrior for the right and more concerned with truth, he has begun to acknowledge the point. This is not mere semantics. This is a substantive critique of being blinded by political ideology.

Now, some could (and some do) make the same argument about Krugman. And to the extent that it applies to his NY-Times column, I'm sure evidence of this can be found. However, his academic work seems, to me at least, to be untouched by his displeasure with the Bush administration.

sz

Posted by: SZ on June 24, 2003 07:42 AM

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I am inclined to say that Krugman has a point,for the following reasons:

1) It was not Krugman, Skidelsky or anyone else except Milton Friedman who decided to tie Friedman's reputation to monetary base targeting. He certainly did make other major contributions, but he also went out into the world, like Keynes, and said to governments "here, do it this way", like Keynes, and it didn't work, unlike Keynes. A certain amount of censure is appropriate here; people have very certainly died by their own hands because of the Friedmanite experiments in the UK and New Zealand.

2) Friedman was a colleague and contemporary of Modigliani, and therefore ought to have been aware of Modigliani's work on near-money and substitutability of money-like assets. It was therefore naive of him to believe that the velocity of circulation of money was a constant, or that something like Goodhart's Law would not apply. Particularly, someone who had read Hayek and Menger had no business in putting forward a theory in which state-sanctioned money had a very special role indeed, along the lines of Silvio Gesell. He ought to have anticipated that monetary aggregates which were controlled would not be of interest.

3) It was also naive, and in my opinion unforgivably so, to assume that the world would be made a better place by taking the money supply "out of politics". The question of whether we are to have easy or hard money is an important one effecting everybody and is thus an entirely proper subject for democratic decision-making. I never understood why Friedman thought that people were incapable of making their own minds up about inflation, and I think it stemmed from an ugly contempt for "little people". It was naive in the extreme to assume that freedom would be better served by a technocracy than democracy, and Friedman quite definitely deserves to be hung for a while on some of the statements he made with regard to Chile.

Zizka's remarks on Keynes and psychological depression above are entirely *on-topic* and underline the final way in which monetary base targeting was naive. Keynes correctly noted that investment demand (the I half of I+G) was dependent on a variety of complicated social factors which made up the subjective assessments of indivdual businessmen. Friedman implicitly assumed a representative agent with a known, smooth production function in order to jump from a correlation between money and spending in normal conditions to the proposition that "money in the bank would be invested" in recessionary conditions. That's the epitome of what Coase called "blackboard economics" and it's naive.

In two related points,

a) the idea that "goosing the economy immediately before elections" can be carried out successfully is both a highly controversial statement of political sociology and premised on a degree of fine control of the economy which would render the rest of Friedman's program pointless.

b) to give Friedman the credit for time-consistency and "credibility" is pushing it a bit and unfairly diminishes Prescott's original contribution.

Posted by: dsquared on June 24, 2003 08:24 AM

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SZ. I was not talking about the entire discussion about Friedman -- I guess this came out wrong due to my own bad writing. My comment was about the only point of disagreement that DeLong had with Krugman, about which I had anything to say, namely on the question of whether the word "naive" is inappropriate. Since I don't know much more about Friedman than what I've read from Krugman and DeLong (as well as some friedman video tapes), I can't say anything about this deeper point over whether Friedman was blinded by ideology and intellectually dishonest in the past.

Posted by: Bobby on June 24, 2003 08:30 AM

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Patrick: must you be a jerk? Is it something under your conscious control, or is it an involuntary reflex, like your heartbeat?

Posted by: Walt Pohl on June 24, 2003 08:37 AM

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I'll play a small role here, escorting a particular strawman invited by Jim Glass to the door: Krugman doesn't call Friedman naive, at least not in the Tobin piece. He does call monetarism naive, and then immediately follows with his description of Friedman, which is something significantly other than "naive" (I'll let you check it if you're interested). So Krugman is adding to the infrequency with which you hear Friedman called naive.

Posted by: Ben Vollmayr-Lee on June 24, 2003 08:47 AM

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Left in the dust of all the focus on monetary and fiscal policy and the length of the Great Depression is that the 1930s was a time of great dislocation in the labor force. The mechanization of agriculture led to a large pool of workers trained as agricultural laborers that were ill suited to expand the economy in other areas. Government employment programs provided some training but many of the projects utlilized labor skills but provided little training.

It was not until WWII that the US recovered. During WWII, the US government was forced to spend massive amounts of money on training workers in aviation and aviation support, electronics (radios and radar) repair and maintaining transportation equipment, a new pharmaceutical industry complete with new wonder drugs, advances in food service and food science, a whole new chemical industry including synthetic rubber, a new insect control industry based on DDT and synthetic chemicals for mosquito control, etc. etc. etc.

WWII was in part driven by new technology and ended by the ultimate in new technology. After the war, the soldiers were not returned to an agricultural economy where jobs no longer existed. Many soldiers used their military training to take jobs in the emerging electronics industry, maintaining factory equipment, etc. The GI Bill provided training for soldiers to prepare for jobs outside the agricultural economy. Look at the expansion of the US economy post WWII. Look at those sectors responsible for the expansion. Look at government investment in those sectors during WWII. Not only is fiscal policy far more important that Friedman would credit, but technology and education policy is also important.

All the investment capital available will not move the economy forward if there is not a trained workforce that can use the capital productively. What changed during WWII was the willingness of the government to spend money on the basic research that would drive the economy throughout the rest of the century. As Kevin Phillips writes in his book Wealth and Democracy, technological advantages are fleeting and a failure of countries to maintain their technological advantages are associated with shifts in economic power among countries.

Where Friedman is naive is in his lack of respect for the importance of infrastructure and failure to recognize the role of government investment in years long past that have provided the basis for emerging technology today. There is a reason why Silicon Valley is the location of so many tech/computer companies. There is a reason why the Netherlands leads the world in wind power technology. There is a reason why the biotech industry is not centered in Central America for instance. Much of it has to do with infrastructure that only the government can provide (at least initially).

It is easy to forget that economic viability is dependent on innovation and change. If that is not supported, then economists are stuck with optimizing an economic decline instead of managing an expansion. One could argue that the present state of the US economy is in part a failure of the government to adequately fund its infrastructure and research for the future. In an effort to cut spending and give tax cuts now, we are consuming our economic seed corn.

Posted by: bakho on June 24, 2003 08:51 AM

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Krugman bad, grrr. Sullivan, good, yeaaa, gets religiion by way of Rush Limberger, soon to be tenured at Princeton.

Posted by: aron on June 24, 2003 08:54 AM

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Oh my. Not only is Krugman shrill, but he denigrates others. Oh my. Oh my. Bring the smelling salts.

Posted by: zizka on June 24, 2003 09:09 AM

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>>Where Friedman is naive is in his lack of respect for the importance of infrastructure and failure to recognize the role of government investment in years long past that have provided the basis for emerging technology today

You can't hang Friedman on that one, I think. Monetary targeting was precisely meant to ensure that dislocations of this kind were cleared up promptly rather than being drawn out for ages by pumping up the economy with interest rates. An argument I don't believe, but Friedman was clearly aware of the issue.

I seem to be in the mood for ad hominem snipes, by the way, so I'll note that apparently it's only "unattractive" to denigrate the work of other economists if you're Paul Krugman talking about a theory which had disastrous real-world consequences. If you're nitpicking footnotes about lighthouses in Paul Samuelson's work, of course, it's fantastic. I guess my ears must be suffering from the effects of following Def Leppard in the 80s, because I apparently can't distinguish degrees of shrillness as well as Jim can.

Posted by: dsquared on June 24, 2003 09:29 AM

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>>Where Friedman is naive is in his lack of respect for the importance of infrastructure and failure to recognize the role of government investment in years long past that have provided the basis for emerging technology today

You can't hang Friedman on that one, I think. Monetary targeting was precisely meant to ensure that dislocations of this kind were cleared up promptly rather than being drawn out for ages by pumping up the economy with interest rates. An argument I don't believe, but Friedman was clearly aware of the issue.

I seem to be in the mood for ad hominem snipes, by the way, so I'll note that apparently it's only "unattractive" to denigrate the work of other economists if you're Paul Krugman talking about a theory which had disastrous real-world consequences. If you're nitpicking footnotes about lighthouses in Paul Samuelson's work, of course, it's fantastic. I guess my ears must be suffering from the effects of following Def Leppard in the 80s, because I apparently can't distinguish degrees of shrillness as well as Jim can.

Posted by: dsquared on June 24, 2003 09:47 AM

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>>Where Friedman is naive is in his lack of respect for the importance of infrastructure and failure to recognize the role of government investment in years long past that have provided the basis for emerging technology today

You can't hang Friedman on that one, I think. Monetary targeting was precisely meant to ensure that dislocations of this kind were cleared up promptly rather than being drawn out for ages by pumping up the economy with interest rates. An argument I don't believe, but Friedman was clearly aware of the issue.

I seem to be in the mood for ad hominem snipes, by the way, so I'll note that apparently it's only "unattractive" to denigrate the work of other economists if you're Paul Krugman talking about a theory which had disastrous real-world consequences. If you're nitpicking footnotes about lighthouses in Paul Samuelson's work, of course, it's fantastic. I guess my ears must be suffering from the effects of following Def Leppard in the 80s, because I apparently can't distinguish degrees of shrillness as well as Jim can.

Posted by: dsquared on June 24, 2003 09:53 AM

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"Now FDR and the New Deal obviously had nothing to do with any of that. But as to why the recovery from the Depression was so slow, that's another story -- the consensus these days is that the New Deal did slow down the recovery. "

Umm, we are talking about >8% average GDP growth from 1934-1941 here, aren't we? Real GDP reached the 1929 level in 1936 (nominal GDP took longer to recover, because of the severe deflation 1929-1932). [Unemployment did remain high, though, throughout the 1930s]

Posted by: Tom on June 24, 2003 10:47 AM

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"The consensus these days is that the New Deal did slow down the recovery."

The consensus only among looney radical-righties who are forever set on destroying Social Security, Medicare and Medicaid. Looney righties is too too much. I is so afeared.

Posted by: lise on June 24, 2003 10:54 AM

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Did Friedman say to Chile, "Use the period of high unemployment to build and repair needed infrastructure and retrain your workforce and position them for the economic recovery?" Or did Friedman believe that the government should leave this aspect to the private sector and attack the economic problems with only monetary policy? Thus, I believe that Friedman undervalued the importance of workforce training and infrastructure.

This is a huge problem with the ideology behind our current fiscal policy.

Posted by: bakho on June 24, 2003 12:08 PM

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I was surprised to hear that there are no great disputes over the causes of the Great Depression. The whole Austrian ideology beginning with Rothbard's "America's Great Depression" seems to contradict this. Rothbard blamed excessive intervention by the Fed during the 20's particulary its intervention on the behalf of Great Britain to protect the Sterling and to goose the U.S. stock market. He also argues that based on the part of m1 they could control, the Fed staged a massive series of open-market intervention soon after the stock market crash, one that was simply outweighed by the contraction of lending in the banking system.

If you give credence to the Austrian view, it does matter very much in the present day whether Fed policy caused the Depression. Alan Greenspan is trying version 2.0 right now. I'd be interested to hear Brad's take on this.

Posted by: ts on June 24, 2003 12:14 PM

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Rothbard is a loon is a loon is loon. Austrian ideology? Please....

Posted by: bill on June 24, 2003 12:26 PM

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~~
"The consensus these days is that the New Deal did slow down the recovery."

The consensus only among looney radical-righties who are forever set on destroying Social Security...
~~~

Plus liberal Democratic Keynesian MIT economic historians like Temin ... plus Federal Reserve economists such as the authors of the paper for which the link was provided.

Gee, could you explain why policies creating monopolies and cartels and artificial price supports and restricting competition were good in the 1930s but are bad today? Do the laws of economics change with the decades -- or was it just that it was Democrats doing it back then?

"Umm, we are talking about >8% average GDP growth from 1934-1941 here, aren't we? Real GDP reached the 1929 level in 1936..."

Which left it still at least 20% below trend, with the Depression still very much "on". See, e.g., the linked to paper for details and analysis.

Posted by: Jim Glass on June 24, 2003 12:32 PM

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The Austrian view is "no Depression without a previous big bubble," and that if you can stop the bubble then you won't have a Depression.

I've always found it impossible to square the (large) size of the Great Depression with the (much smaller) size of the previous bubble. The effect is just so much bigger than the cause--the amount of excess and mis-investment during the last two years of the 1920s boom is much, much, much smaller than the investment shortfall during the Great Depression itself.

The Austrian view is an interesting theoretical point, but I've never been able to make the numbers work out at all, so I put very little faith in it.


Brad DeLong

Posted by: Brad DeLong on June 24, 2003 01:17 PM

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"...apparently it's only "unattractive" to denigrate the work of other economists if you're Paul Krugman talking about a theory which had disastrous real-world consequences."

Which would be just what, ending the stagflation that preceded it? The last three decades have been comparative economic bliss.

Posted by: Patrick R. Sullivan on June 24, 2003 03:12 PM

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" I'll play a small role here, escorting a particular strawman invited by Jim Glass to the door: Krugman doesn't call Friedman naive...."

I suggest Mr. Vollmayr-Lee take a gander at the title of this thread: "Is Uncle Milton Really Naive?"

Posted by: Patrick R. Sullivan on June 24, 2003 03:15 PM

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"Charles 'Multicolinearity? What's Multicolinearity?' Murray"

You just gave me back a significant portion of an otherwise dismal week with that line. Thanks!

Posted by: Watchful Babbler on June 25, 2003 05:11 PM

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The apparent dissonance of Friedman has bothered me for some time too. He was a free market absolutist except when it came to monetarism where he wanted strict government control. I remember seeing a interview with him in the 90's where he was quizzed about the exploding deficits of the 80's. His response essentially was : well it helped bring down the Soviet Union therefore it was worth it.

My question to economists as an amateur is as follows:
The growth of the 90's and 80's seem different. The 80's period produced exploding deficits and a gradual breakdown of Social fabric. Whereas the 90's produced growth with the deficts shrinking and the Social indicators also going up (things like crime rate and homelessness etc). Are my impressions wrong? If my impressions are quasi-right, what was the difference? I have a strong feeling that a Republican congress in 94 helped a lot.

Posted by: victor on June 25, 2003 06:52 PM

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Victor, the positives of the 90s boom were the result of the telecommunications revolution. As in the transportation revolution, the Republicans deserve no more credit than the Democrats. In both, technology delivered increasing productivity.

Posted by: Stan on June 26, 2003 12:34 PM

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A. Zarkov, to the degree that human irrationality enters the equation, all social sciences will likely be less "hard". Irrationality however does not preclude the social sciences from effectively modeling major actions in their fields any more than our inability to see dark matter necessarily precludes us from modeling it.
As Abiola points out, economics has developed very effective predictive models.

Much of what drives these economic debates however has to do with the political implications of the models. Due to the political implications, many of the models are being subjected to preposterous assumptions, misdirected critiques, or even false critiques to prevent or confuse debate. The same thing happens in the "hard" sciences. For instance, what is the evidence for global warming? How about evolution?

Posted by: Stan on June 26, 2003 01:14 PM

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Concerning the original article (slightly). On the Motley Fool radio show Ben Stein complained that after his father's death (in 1999), the estate was taxed at over 50%, and they had to pay penalties (no details) on the IRA's and etc..

He has a 1999 article about the unfair taxation of his father's estate here http://slate.msn.com/id/37576/
with no mention of the IRAs and there is a 55% tax rate that steps down to 40%.

I don't think the bright economist Ben Stein should make such a big deal of paying penalties on an IRA after the death of the owner without explaining how the hell there are any penalties in such a situation. Isn't that hard to do? What happened to the cost basis?

Posted by: J Edgar on June 26, 2003 02:30 PM

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Is Uncle Milton naive?

I really don't think so. On the PBS series, "Commanding Heights," he was shown saying that 1) he's an elitist, and 2) doesn't care about fairness.

Those two off-hand remarks filmed while he was chatting with his students, are really key to his thinking. It would lead one to suspect that secretly, covertly, deep down inside the bowels of his mind, he's not really concerned about economic growth as much as he's concerned about the concentration of wealth, which is the key to the power of the elite, which he admitted he supports. After all, many elitists don't really care about making more money (they already have all they can spend, in many cases), but they do care, and care very much, about aggregating more power to themeselves, even if that means beggaring everyone else.

It should be obvious to anyone that you can't sell something to someone with no money, and if you can't sell it, you won't produce it - i.e., there's no economic growth to be seen in an economy whose wealth has become concentrated beyond a certain point. Where that point is reached, is not well understood, but it's clear that in most third world economies, economic growth is stifled, not by a lack of money as much by the fact that it is so maldistributed that there is no liquidity in the market.

This does not seem to be of concern to Uncle Milton, as he seems to continue to advocate policies that favor ever greater concentration of wealth - in other words, ever greater resemblance to economic structure of third world nations.

Another factor that Uncle Milton seems to conveniently ignore (I believe deliberately) and is completely absent in his public discussions of his theories is the social ramifications of the concentration of wealth. Money equals power. And the unbridled concentration of wealth brings with it the unbridled concentration of power - and as we all know, the concentration of power brings with it the concentration of corruption. So what does the elite, with its concentrated wealth, do with its power? It changes the rules to favor itself - and breed more concentration of money and power. In other words, the concentration of wealth feeds on itself, and unchecked, leads ultimately to the disliquidation of the markets.

Surely Uncle Milton, bright as he is, can't be so naive as to not understand that simple reality. Yet the fact that he ignores it so completely in his public theorizing is evidence to me that he was being frank about what he admitted to on "Commanding Heights" - that he's an elitist and doesn't care about fairness.

And if you do not care about either egalitarianism or justice, then Milton's policies are for you. They'll suit your priorites just fine. They probably won't lead to an increase in median income (as they haven't in Chile). They may not even lead to economic growth. But what they will lead to, is the concentration of power, and in the end, that's what seems to really matter to Milton and friends.

Posted by: Scott Bidstrup on July 6, 2003 11:19 AM

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Is Uncle Milton naive?

I really don't think so. On the PBS series, "Commanding Heights," he was shown saying that 1) he's an elitist, and 2) doesn't care about fairness.

Those two off-hand remarks filmed while he was chatting with his students, are really key to his thinking. It would lead one to suspect that secretly, covertly, deep down inside the bowels of his mind, he's not really concerned about economic growth as much as he's concerned about the concentration of wealth, which is the key to the power of the elite, which he admitted he supports. After all, many elitists don't really care about making more money (they already have all they can spend, in many cases), but they do care, and care very much, about aggregating more power to themeselves, even if that means beggaring everyone else.

It should be obvious to anyone that you can't sell something to someone with no money, and if you can't sell it, you won't produce it - i.e., there's no economic growth to be seen in an economy whose wealth has become concentrated beyond a certain point. Where that point is reached, is not well understood, but it's clear that in most third world economies, economic growth is stifled, not by a lack of money as much by the fact that it is so maldistributed that there is no liquidity in the market.

This does not seem to be of concern to Uncle Milton, as he seems to continue to advocate policies that favor ever greater concentration of wealth - in other words, ever greater resemblance to economic structure of third world nations.

Another factor that Uncle Milton seems to conveniently ignore (I believe deliberately) and is completely absent in his public discussions of his theories is the social ramifications of the concentration of wealth. Money equals power. And the unbridled concentration of wealth brings with it the unbridled concentration of power - and as we all know, the concentration of power brings with it the concentration of corruption. So what does the elite, with its concentrated wealth, do with its power? It changes the rules to favor itself - and breed more concentration of money and power. In other words, the concentration of wealth feeds on itself, and unchecked, leads ultimately to the disliquidation of the markets.

Surely Uncle Milton, bright as he is, can't be so naive as to not understand that simple reality. Yet the fact that he ignores it so completely in his public theorizing is evidence to me that he was being frank about what he admitted to on "Commanding Heights" - that he's an elitist and doesn't care about fairness.

And if you do not care about either egalitarianism or justice, then Milton's policies are for you. They'll suit your priorites just fine. They probably won't lead to an increase in median income (as they haven't in Chile). They may not even lead to economic growth. But what they will lead to, is the concentration of power, and in the end, that's what seems to really matter to Milton and friends.

Posted by: Scott Bidstrup on July 6, 2003 11:21 AM

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Even a philosopher gets upset with a toothache.

Posted by: Sorel Katherine on December 10, 2003 04:40 PM

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