Milton Friedman

7 thoughts on “Milton Friedman”

1. Milton Friedman is certainly the economist that I respect the most.

   I wish he would have spent more time on Monetary policy than he did in the interview though, since that is the primary subject of his life’s work. The fact that he thinks Greenspan has been doing a great job is interesting. I’d love to see a detailed analysis (in the same form as “The Monetary History of the United States”) of Greenspan’s tenure done by Friedman or one of his “disciples”. I understand that he is getting up in age and doesn’t do that kind of serious work anymore, but I’d love to see it.

   A long time ago, Friedman advocated a constant money supply growth in the range of 3%-4% (the hsitoric growth rate of the economy at that time) without the seasonal adjustments or the throttling up and down of the money supply that central banks have historically followed, mostly with bad reults. The lastest book I read of his (1994’s “Money Mischief”) doesn’t directly address this issue. I’m curious on his thoughts, since Greenspan has done so many of the things he recommends against, like targetting interest rates (which the Fed doesn’t control) vs. targetting the money supply (which it does control).

   I am still very torn on Greenspan myself. On the one hand the past 17 years have been very stable from an economic and price level standpoint. But I also think that he’s made so many of the classic mistakes of central bankers as far as monkeying with the money supply too much to try to account for short term fluctuations, causing additional short term fluctuations down the road. The good news is that these mistakes have not been compounded by additional mistakes as has so often happened in the past. He has generally corrected his mistakes before they have become serious blunders.

   1) Both of the recessions during his tenure have resulted from too loose then too tight monetary policy. The too loose conditions were the result of external conditions he was trying to accomodate (the ’87 stock market crash and the currency crises in ’97 & ’98, and Y2K), but I wonder if the results would have been better if he had left the market to correct these situations. In my view, the tightening required after these events pushed us into recession both times.
   2) I think that Greenspan has been watching the wrong things of late. He is focused of the Phillips curve trade-off between employment and inflation, when none really exists. Compounding this, he has focused on the payroll survey, which is notoriously re-adjusted for months and years afterward, while ignoring the household survey which told a very different story. AT very least he should have come to the conclusion that neither were reliable enough to base monetary policy on, especially when the final payroll survey number won’t be in for at least 2 years.
   3) He has also been ignoring or at least disregarding the significant run-up in commodity prices. Food, raw materials, oil, not to mention housing, all have dramatically increased in price lately. These are classic signs of excess monetary growth.
   4) Worst of all, I get the impression that Greenspan now thinks his job is to provide the mythical “full employment” that has been the undoing of Arthur Burns and so many others. I’m not sure he learned the right lessons from 3.9% unemployment, i.e., that it was an un-sustainable bubble condition, mostly of his doing, with the inevitable result (recession).

   I don’t pretend to know what the answers are here, I would like to hear from Friedman, who I think does.

2. Certainly Greenspan has made mistakes. Don Luskin, for example, has long made criticisms of Greenspan that are similar to yours. My sense is that Greenspan has done as well as anyone could be expected to do given his long tenure and the inherent difficulties of the job. Who is good enough to avoid occasional blunders in the course of a nearly-twenty-year high-wire act?

   IMO a better way to frame the issue is in terms of discretionary vs. nondiscretionary monetary policy. Friedman’s original proposal for automating monetary growth at the rate of productivity growth plus a constant is flawed because the statistics it would rely on are inherently delayed and inaccurate. There are alternatives. I’d prefer a currency-board-type system that bought or sold gold to keep its dollar price within a specified range. But that’s just my naive preference; there are probably many conceivable nondiscretionary monetary systems that would work better than our current system, which is based on the Greenspan standard.

   The main thing is to get away from arguments about Greenspan, so that we can evaluate alternative systems that might work better.

3. There is a nice commentary on Dismal.com trying to numerically rank the fed chairmen since WWII (no 30’s turkey shoot). It’s “The Maestros Performance” by Geoff Somes, dated 6 July 2004. This is a pay subscription site, so i can’t link the article. I can email a copy or three, so drop me an email if you are not a member and want to see it.

   Geoff makes the point that by statute the Fed is supposed to minimize both unemployment and inflation.

   The measures they used include:

   Misery index, both average and reduction during the term.

   Moderate long term interest rates.

   Strong equities market (real average annual growth).

   Low and stable inflation.

   GDP close to potential. (Too rapid growth is also bad.)

   With a 5-4-3-2-1-0 rating, normalized to 100 is top ranked in everything, Greenspan got enough 2nd and 3rd place ratings to finish on top with 73 points. Volcker inherited a terrible position, which drops him to 3th, but Burns and Miller were so terrible he still had a plus rating about 57. Geoff Somes has a nice summary sentence:

   Using his somewhat controversial but obviously highly effective “risk management” approach to monetary policy without precisely defined policy targets or goals, Greenspan has been able to foster a period with one of the best performing economies in U.S. history.

   While of course acknowledging that a lot of “luck” and other peoples’ work went into the result.

   But i too would like to read an elaboration of Friedman’s views.

   Matya no baka

4. Phooey, the Preview dropped my email off the generated “Posted on” line. Guess i should have gone back and posted from the original page.

   Matya no baka

5. Beautiful interview, one that has an intelligent reporter as opposed to a nice set of T+A.

6. Jonathan,

   You allude to my biggest (although certainly not only) problem with the Fed and central banks in general: they are based on a mythical super-bureaucrat with total omnipotence to make the right adjustments at the right time. Unlike the Rothbardians, I do believe that in theory it is possible to fine tune monetary policy to maximize eocnomic growth, but that nobody does or can have the relevant information in a timely manner to do so.

   As a Laissez fair, free-market libertarian I would be open to any completely free-market system of money if a resonable one existed. I haven’t seen one yet although I know that America was close to it after Andrew Jackson destroyed the 2nd Bank of the US. But that didn’t ensure a non-inflationary environment or economci and monetary stability either. I suppose I would be willing to put up with less stability in a truely free-market system, but I don’t suppose the vast majority of the public would. We trade a degree of growth potential for stability and predictability, which doesn’t make me particularly angry.

   What we have now is flawed, and would be much more seriously flawed if somebody with REALLY bad ideas gets the Chairmanship. The Fed, and central banks in general, have the potential to be downright dangerous and have shown in the past that under the wrong leadership can wreck an economy. It’s happened a couple of times in the U.S. but happens almost on a daily basis in Latin America, if anybody believes that the problems inherent in central banking are a thing of the past.

   By the way, if I sound like I’m parotting Don Luskin, it’s because I am. I try to read everything he writes, if possible. I wish he would write a textbook, like his buddy Krugman.

   Matya no baka,

   I’m sending you an email, I’d love to read the article if you’re willing to send it. ALthough I have been following what the Fed does in some form or another for mor ethan 10 years, I’ve never heard of his so-called “risk management” approach to monetary policy. Interesting.

7. On the same subject, I just read an article in the latest Fortune about Martin Feldstein being Bush’s most likely candidate to take over the Fed Chairmanship (assuming he wins re-election of course, abig if in my mind).

   I’ve heard the name before but all I know about him at this point is what I read in the article (in what I consider a slightly left of center publication). Apparently he’s a lifelong Harvard professor with the exception being 2 bad years in the Reagan administration when he almost got fired. The article talks a lot about this episode in which he made a lot of public criticisms about the deficit and made some very dour predictions about economic growth that turned out to be quite wrong. He also suggested hiking taxes to reduce the deficit, not an idea the Reagan administration embraced (rightly so).

   Now putting 2 and 2 together, I beleive this is the same period that Paul Krugman and Larry Summers (students of Feldsteins and I presume members of Reagan’s economic advisors because of him) made their now infamous (at least to any Donald Luskin fans) inflation prediction, which also turned out to be extremely wrong.

   Now, how did people so against supply-side economics get into the Reagan administration in the first place: George Bush Sr., not the most economically astute of our presidents. And I’m assuming that’s how he ended up on Bush Jr’s team as well.

   But that was twenty years ago, and since he was considered to be the “architect” of Bush’s tax cuts in 2001 and 2003, he obviously has modified his theories (which smart people do on occassion). He does claim that now is different, and budget deficts aren’t a big deal because of low inflation and interest rates, but this begs the question, does he believe that deficits have a big effect on interest rates and inflation? I don’t subscribe to that theory, and the history of deficits and interest rates bears that out.

   So that leaves me at “I don’t know”. What I do know is that a president Kerry would likely nominate Robert Rubin for the job. Maybe I will vote in November after all.

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