A Benjamin Cole post
On October 23, 1992, Milton Friedman penned an op-ed for The Wall Street Journal in which he bashed the U.S. Federal Reserve for being too tight.
Although the Fed had cut the federal fund rates from 10% to 3%, Friedman wrote, “It is hard to escape the conclusion that the restrictive monetary policy of the Federal Reserve deserves much of the blame for the slow, and interrupted, recovery from the 1990 recession.”
In 1992, the record shows, core inflation was 3.3%. The GDP grew at 3.4%.
But Friedman thought the Fed should try to bump up one, or both, of those figures.
Thus, Friedman was calling for a 7% NGDPLT, maybe more.
In the years since Friedman in 1992 bashed the Fed for being too tight—which he also did in 1957, and also in his study of the Great Depression—the economics profession became demented, and developed a peevish fixation on inflation, and even a perverted obsession with zero inflation or deflation.
Deflation has not worked in any large modern economy; see Japan. The island growth rate through their deflationary years was 0.5%, below that of statist France, or any place that was not a backwater basket case.
Yet today we see Fed Chair Janet Yellen solemnly administering a monetary policy far tighter than anything Friedman ever proposed. Yellen is evidently targeting inflation below 2%, and appears tolerant of sub-2% real growth. Recent departees from the FOMC wanted the screws even tighter.
Thus, the Fed has a 4% NGDPLT, and maybe not even.
I am sad to say some in the Market Monetarist movement seem to abide by such cramped, microscopic levels of growth and inflation. I do not know why. We are talking about nominal indices of prices, of dubious accuracy. And the U.S. economy is surely capable of many years of at least 3% real growth.
I have proposed a 7% NGDPLT for now. Just like Milton Friedman did.
But then, I think the purpose of macroeconomics is prosperity, not a slavish devotion to a nominal and arbitrary price index. Or a craven appeasement of dogmatic, partisan fantasies of what is macroeconomics.
Can we get back to robust growth and moderate inflation? What was wrong with that outcome?