Thinking About Martin Feldstein Again

A Benjamin Cole post

Market Monetarists have already done a superb job explaining why NGDPLT is the best tool for a central bank, especially if measuring real GDP is guesswork—the latter point Martin Feldstein made recently in The Wall Street Journal.

Feldstein’s extraordinarily oblique point was that the CPI or other indexes overstate inflation, something he could not say out loud, so un-PC is such a sentiment. But his conclusion is much more palatable to certain classes, and that is that middle-class America is better off than ever, even if they don’t know it, as wage stagnation is a mirage.

University of Chicago scholar John Cochrane leaped on the Feldstein bandwagon to posit that maybe the CPI overstates inflation by 3%, essentially meaning Fat City for Mr. and Mrs. America. This is a reprise of Bush-era sentiments of economist and right-winger Don Boudreaux of George Mason University.

Is The Fed Suffocating The Economy?

That Cochrane likes the Fed now is not much of a surprise; he has argued that deflation is the economic cure-all, notwithstanding the 20-year long debacle with falling prices that is Japan.

Cochrane says that Feldstein’s premise today means in the United States “we really have 0% nominal interest rates, 1.5% deflation rather than 1.5% inflation; +1.5% real rates rather than -1.5% real rates. That is about the ideal monetary policy.”

Cochrane then exults, “We live the (Milton) Friedman optimal quantity of money.”

But others may wish to ponder if the Fed, by accomplishing less than 2.0% inflation as measured on the PCE, is actually obtaining minor deflation, and thus Japan-like results.

As widely noted, economic growth in the United States since the Fed ostensibly set its 2% PCE IT (which many suspect works out to 1.5% in practice) has been…well, Japan-like.

In 2015, the first half GDP may exhibit some real economic growth, but may not with any bad luck. Industrial production has been falling through most of the year. And the previous seven years have been anemic. If this is the Friedman optimum….*

Conclusion

If after seven years in the United States, and 20 years in Japan, the Friedman optimum does not work in real life, then we can dispense with deflation as reasonable monetary goal. It just does not work in the here and now.

On the contrary, I wonder how long the United States could be in boom times before we saw old-fashioned demand-pull inflation. The 1990s was pretty boomy, and inflation remained moderate. Maybe there is another lesson there, too.

As I always say, the Fed should print more money.

 

*Friedman may have opined about a theoretical optimum. But in practice he advised Japan to pursue QE hard and heavy, and three times criticized the Fed for being too tight; in the Great Depression; in 1957; and in 1992. Did Friedman ever advocate a real-world policy of deflation?

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