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.

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