The genius that was Milton Friedman

Going back over old posts, I found one from 6 years ago that covered Milton Friedman. That was in Portuguese, and here I have more.

This is taken from the Q&A following Friedman´s Keynote Address at a Bank of Canada Conference in 2000. Here´s Friedman, on the hot topics of today: The Euro, Inflation Targeting operated primarily through interest rates, and Japan

Michael Bordo: Do you think the recent introduction of the euro will lead to the formation of other common-currency areas?

Milton Friedman: That’s an extremely interesting question. I think that the euro is one of the few really new things we’ve had in the world in recent years. Never in history, to my knowledge, has there been a similar case in which you have a single central bank controlling politically independent countries.

The gold standard was one in which individual countries adhered to a particular commodity—gold—and they were always free to break or to leave it, or to change the rate. Under the euro, that possibility is not there. For a country to break, it really has to break. It has to introduce a brand new currency of its own.

I think the euro is in its honeymoon phase. I hope it succeeds, but I have very low expectations for it. I think that differences are going to accumulate among the various countries and that non-synchronous shocks are going to affect them.

Right now, Ireland is a very different state; it needs a very different monetary policy from that of Spain or Italy. On purely theoretical grounds, it’s hard to believe that it’s going to be a stable system for a long time. On the other hand, new things happen and new developments arise.

The one additional factor that has come out that leads me to raise a question about this is the evidence that a single currency—currency unification— tends to very sharply increase the trade among the various political units. If international trade goes up enough, it may reduce some of the harm that comes from the inability of individual countries to adjust to asynchronous shocks. But that’s just a potential scenario.

You know, the various countries in the euro are not a natural currency trading group. They are not a currency area. There is very little mobility of people among the countries. They have extensive controls and regulations and rules, and so they need some kind of an adjustment mechanism to adjust to asynchronous shocks—and the floating exchange rate gave them one. They have no mechanism now. If we look back at recent history, they’ve tried in the past to have rigid exchange rates, and each time it has broken down. 1992, 1993, you had the crises. Before that, Europe had the snake, and then it broke down into something else. So the verdict isn’t in on the euro. It’s only a year old. Give it time to develop its troubles.

(Note: and the troubles developed)

Malcolm Knight: Countries with a flexible exchange rate need a nominal target for monetary policy to anchor expectations. Do you feel that inflation targeting provides a useful nominal target?

Milton Friedman: As I mentioned earlier, I think it’s a good thing to have a nominal target, to say that you’re not going to try to fine-tune, and to indicate what you aren’t going to do.

The problem I have is this: the current mechanism for all of the central banks who are inflation targeting is a short-term interest rate—as in the United States—in all of the central banks.

We know from the past that interest rates can be a very deceptive indicator of the state of affairs. A low interest rate may be a sign of an expansive monetary policy or of an earlier restrictive policy. And similarly, a high rate may be a sign of restriction, of trying to hold things down; or it may be a sign of past inflation.

The 1970s offer the classical illustration in which there were high interest rates that were reflecting the Fisher effect of inflation expectations. So I’m a little leery of operating primarily, or almost primarily, via interest rates. But, I think that having a given inflation target is a good objective. The question is, how long will you be able to keep it?

David Laidler: Many commentators are claiming that, in Japan, with short interest rates essentially at zero, monetary policy is as expansionary as it can get, but has had no stimulative effect on the economy. Do you have a view on this issue?

Milton Friedman: Yes, indeed. As far as Japan is concerned, the situation is very clear. And it’s a good example. I’m glad you brought it up, because it shows how unreliable interest rates can be as an indicator of appropriate monetary policy.

The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy. Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity.

50 years on and the role of monetary policy is still debated

The latest attempt comes from Neel Kashkari (the new “NK” at the Minnesota Fed, the previous one being Narayana Kocherlakota).

In 1967, Friedman´s “centerfold” for the role of monetary policy was:

“Provide a stable background for the economy”

NK´s “top of the list” role:

“Creating and maintaining a stable monetary environment”

In perfect agreement.

To Friedman, that meant:

keep the machine well oiled, to continue Mill’s analogy. Accomplishing the first task [avoid monetary disorder] will contribute to this objective, but there is more to it than that.

Our economic system will work best when producers and consumers, employers and employees, can proceed with full confidence that the average level of prices will behave in a known way in the future-preferably that it will be highly stable.

Under any conceivable institutional arrangements, and certainly under those that now prevail in the United States, there is only a limited amount of flexibility in prices and wages. We need to conserve this flexibility to achieve changes in relative prices and wages that are required to adjust to dynamic changes in tastes and technology. We should not dissipate it simply to achieve changes in the absolute level of prices that serve no economic function.

To NK, that meant:

Ensuring that inflation remains low and stable allows households and businesses to plan ahead and keeps borrowing costs low.

Thus, by doing its inflation-stabilization job well over the long run, a central bank helps create the environment that allows an economy to flourish. We saw the damage caused to Main Street in the 1970s when the Fed failed to control inflation. It took bold action by the Volcker Fed to regain control and put the economy back on a stable course.

“Feels the same”, but it´s different. Maybe the preliminary conclusion of George Selgin´s “A Monetary Policy Primer, Part 3: The Price Level” helps enlighten:

If, as I’ve claimed, changes in the general level of prices are an economy’s way of coping, however imperfectly, with monetary shortages and surpluses, then surely an economy in which the price level remains constant, or roughly so, must be one in which such surpluses and shortages aren’t occurring.  Right?

No, actually.  Despite everything I’ve said here, monetary order, instead of going hand-in-hand with a stable level of prices or rate of inflation, is sometimes best achieved by tolerating price level or inflation rate changes.  A paradox?  Not really.  But as this post is already too long, I must put off explaining why until next time.

Anyway, market monetarists eschew associating “stable monetary background/environment” with “stable average level of prices or inflation” preferring to associate it with the more encompassing “nominal stability”, by which we mean stable NGDP growth (along a defined level path).

The charts below, I believe, provide compelling evidence for requiring the central bank to provide nominal stability. As the Great Moderation shows, a period of nominal stability goes hand in hand with stable (and close to potential) real growth, low and stable inflation and “low” rate of unemployment.

Role of MP_1

Role of MP_2

Role of MP_3

Role of MP_4

The inflation panel is clear. Having low and stable inflation, as is true now as it was in 1994-05, does not equate with nominal stability!

Andy Haldane makes a very basic (and conventional) mistake

A James Alexander post

The Chief Economist and Executive Director, Monetary Analysis and Statistics, at the Bank of England and Head of the Economics Department gave a long speech at the Trades Union Conference last week. It was certainly long on statistics but, as usual, with Andy Haldane largely empty of any monetary analysis.

There was a lot of very interesting “on the one hand this/on the other hand that” chat about the relationship between technology and labour, with lots of colourful charts using his statistics department to the utmost. That said, as with most macro-economists he had zero to say about how to meet the enormous challenge of measuring productivity in the huge variety of services sector sub-sectors.

Towards the end of the speech he switched to a more substantive topic:

The UK inflation picture is relatively easy to explain, at least in an accounting sense. The lion’s share of inflation’s weakness is accounted for by external factors – weak world prices and a strong exchange rate. These factors are themselves in part a reflection of weak world demand, pushing down the prices of oil and other commodities. The impact of external disinflationary pressures on UK inflation is thus likely to be persistent. Nonetheless, in time these external pressures should wane. What will then determine UK inflation is the evolution of domestic costs, specifically labour costs.

Inflation is not determined by the evolution of domestic costs. Inflation is not a cost-push phenomenon It seems like that if you are a bottom-up, statistics-obssessed, nerd, but monetary economists know better. It is a monetary phenomenon, driven by changes in nominal demand expectations, in that sense it is “demand-pull”. And those expectations are led by the central bank’s monetary policy stance. This is a pretty basic and worrying schoolboy error for the Chief Economist to make. This might help when Milton Friedman responds to a student’s question (about 7.40 minutes in).

As a result, he and the Bank of England end up lost:

The UK labour market has been hard to read over the past few years. In common with other forecasters, the MPC has consistently been surprised by the weakness of wages, given the strong cyclical bounce in job creation. It has over-predicted the path of wages in recent years. There are a number of possible explanations for this wage weakness.

Chart 30 accompanied this section, and shows just how much ground has been lost through the forecasting errors of the MPC and their fear of incipient wage inflation leading to over-cautious monetary policy targets.

Ja Andy Haldene

Haldane then ran through the usual worn-out excuses of why the MPC has been so consistently wrong (and other forecasters, don’t forget, they are all wrong together so it’s kind of okay to be wrong): more slack than thought; the Philips curve has flattened, maybe due to more technology, maybe due to labour losing bargaining power. He even speculates that labour’s share of the economic pie is not going to mean revert.

He runs with this last notion and actually decides inflation may also not mean revert, if labour’s bargaining power never picks up and just flatlines. He actually thus comes to a sensible conclusion, even if his theory is wrong:

That would put the balance of risks squarely towards a more protracted undershoot of the inflation target, even without any downdraught from external prices and demand.

Uncertainty about demand is, once more, on the rise. Given its source – the third in a triplet of crises, this time afflicting the emerging market economies – I do not expect that rise in uncertainty to be temporary. I expect its impact to be greater in today’s world of post-crisis traumatic stress and could more than offset the cost of capital accelerator, as we have already seen repeatedly since the crisis.

 Against that backdrop, my view is that the case for raising interest rates is still some way from being made. Whatever the reason, the economic aircraft appears to be losing speed on the runway. That is an awkward, indeed risky, time to be contemplating take-off. Meanwhile, inflationary trends do not at present given me sufficient confidence that inflation will be back at target, even two years hence.

For those reasons, I have continued to vote to leave rates unchanged, with a neutral stance on the future direction of monetary policy. Now more than ever in the UK, policy needs to be poised to move off either foot depending on which way the data break.

 This mysterious thing “demand” keeps getting derailed. This time by some sort of EM  shock. It doesn’t seem very clear how an EM downturn can cause a demand shock in the UK, but Haldane is worried. And that’s a good thing because NGDP growth is weakening and NGDP expectations are weak too, so the BoE might do the right thing yet.

Even if he can’t understand the power of a central bank to sustain domestic demand, Haldane is sensitive enough to sniff a problem. But he will remain a lost soul, adrift on a boat tossed about by the breaking data, sorry, by breaking waves. He should turn on the engine and steer the ship to a better target than the 2% inflation ceiling.

“Don´t reason from an employment change”


Federal Reserve Bank of Boston President Eric Rosengren said Saturday that his confidence that the U.S. central bank can raise rates soon has diminished in the wake of underwhelming employment data.

“The jobs report was disappointing; it seems to validate the decision” of Fed officials to hold off on lifting interest rates off near zero levels at their meeting last month, Mr. Rosengren said in an interview with The Wall Street Journal. The performance of the September jobs data, released Friday, “highlights that we need to continue to monitor how the data is coming in to determine when it is appropriate” to boost the cost of borrowing, he said.

That´s in clear violation of how Milton Friedman said monetary policy should be conducted:

The first requirement is that the monetary authority should guide itself by magnitudes that it can control, not by ones that it cannot control. If, as the authority has often done, it takes interest rates or the current unemployment percentage as the immediate criterion of policy, it will be like a space vehicle that has taken a fix on the wrong star. No matter how sensitive and sophisticated its guiding apparatus, the space vehicle will go astrayAnd so will the monetary authority.

What many of those highly paid policymakers do not realize is that by harping on the employment cord they are in fact tightening monetary policy, thus obtaining the ‘fantastic’ result of tight monetary policy at ‘zero’ interest rate!

The Fed cannot bury something that never existed

Anatole Kaletsky, of Gavekal Dragonomics has written an ignorant, even libelous, piece at Project Syndicate called “Why the Fed Buried Monetarism”. (Friedman must be having a fit in his grave):

What really shocked the markets was not the Fed’s decision to maintain zero interest rates for a few more months, but the statement that accompanied it. The Fed revealed that it was entirely unconcerned about the risks of higher inflation and was eager to push unemployment below what most economists regard as its “natural” rate of around 5%.

It is this relationship – between inflation and unemployment – that lies at the heart of all controversies about monetary policy and central banking. And almost all modern economic models, including those used by the Fed, are based on the monetarist theory of interest rates(!) pioneered by Milton Friedman in his 1967 presidential address to the American Economic Association.

Friedman’s theory asserted that inflation would automatically(!) accelerate without limit once unemployment fell below a minimum safe level, which he described as the “natural” unemployment rate. In Friedman’s original work, the natural unemployment rate was a purely theoretical conjecture, founded on an assumption described as “rational expectations,” even though it ran counter to any normal definition of rational behavior(!)

The monetarist theory that justified narrowing central banks’ responsibilities to inflation targeting had very little empirical backing when Friedman proposed it(!). Since then, it has been refuted(!) both by political experience and statistical testing. Monetary policy, far from being dissipated in rising prices, as the theory predicted, turned out to have a much greater impact on unemployment than on inflation, especially in the past 20 years.

But, despite empirical refutation, the ideological attractiveness of monetarism, supported by the supposed authority of “rational” expectations, proved overwhelming. As a result, the purely inflation-oriented approach to monetary policy gained total dominance in both central banking and academic economics.

But there may be a deeper reason for the Fed’s forbearance. To judge by Yellen’s recent speeches, the Fed may no longer believe in any version of the “natural” unemployment rate. Friedman’s assumptions of ever-accelerating inflation and irrationally “rational” expectations that lead to single-minded targeting of price stability remain embedded in official economic models like some Biblical creation myth. But the Fed, along with almost all other central banks, appears to have lost faith in that story.

Instead, central bankers now seem to be implicitly (and perhaps even unconsciously) returning to pre-monetarist views: tradeoffs between inflation and unemployment are real and can last for many years. Monetary policy should gradually recalibrate the balance between these two economic indicators as the business cycle proceeds. When inflation is low, the top priority should be to reduce unemployment to the lowest possible level; and there is no compelling reason for monetary policy to restrain job creation or GDP growth until excessive inflation becomes an imminent danger.The bad news is that the vast majority of market analysts, still clinging to the old monetarist framework, will accuse the Fed of “falling behind the curve” by letting US unemployment decline too far and failing to anticipate the threat of rising inflation. The Fed should simply ignore such atavistic protests, as it rightly did last week.

Now, look at the main points from Friedman´s 1967 AEA Presidential Address – The Role of Monetary Policy:

What MP Cannot do:

The monetary authority controls nominal quantities-directly, the quantity of its own liabilities. In principle, it can use this control to peg a nominal quantity-an exchange rate, the price level, the nominal level of national income, the quantity of money by one or another definition-or to peg the rate of change in a nominal quantity-the rate of inflation or deflation, the rate of growth or decline in nominal national income, the rate of growth of the quantity of money.

It cannot use its control over nominal quantities to peg a real quantity-the real rate of interest, the rate of unemployment, the level of real national income, the real quantity of money, the rate of growth of real national income, or the rate of growth of the real quantity of money.

And (interest rates a bad indicator of the stance of MP)

As an empirical matter, low interest rates are a sign that monetary policy has been tight-in the sense that the quantity of money has grown slowly; high interest rates are a sign that monetary policy has been easy-in the sense that the quantity of money has grown rapidly. The broadest facts of experience run in precisely the opposite direction from that which the financial community and academic economists have all generally taken for granted.

What MP can do

Monetary policy cannot peg these real magnitudes at predetermined levels. But monetary policy can and does have important effects on these real magnitudes. The one is in no way inconsistent with the other.

The first and most important lesson that history teaches about what monetary policy can do-and it is a lesson of the most profound importance-is that monetary policy can prevent money itself from being a major source of economic disturbance.

A second thing monetary policy can do is provide a stable background for the economy [i.e.provide nominal stability]

How MP should be conducted

The first requirement is that the monetary authority should guide itself by magnitudes that it can control, not by ones that it cannot control. If, as the authority has often done, it takes interest rates or the current unemployment percentage as the immediate criterion of policy, it will be like a space vehicle that has taken a fix on the wrong star. No matter how sensitive and sophisticated its guiding apparatus, the space vehicle will go astray. And so will the monetary authority.

When Milton Friedman Called For 7% Nominal GDP Growth

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?

The Bank for International Settlements Proposes Sadomonetarism To Promote Recovery, Higher Inflation What Greek Crisis?

A Benjamin Cole post

The central banker’s club known as the Bank of International Settlements (BIS), suitably HQ’ed in Basel, Switzerland, this past weekend released its annual report, and advocated the globe’s major central banks raise interest rates to combat the chronic lack of aggregate demand and low inflation-deflation dogging the world’s developed economies.

Greece may be melting down under relentless tight-money policies of the European Central Bank (ECB), but no worries.

“Rather than promoting sustainable and balanced global growth, the system risks undermining it,” Mr. Claudio Borio, head of the monetary and economic department said. “It has spread exceptionally easy monetary and financial conditions to countries that did not need them, exacerbating vulnerabilities there.”

That must explain the global double-digit inflation we see emerging. So much easy money!

Seriously, the Cleveland Federal Reserve Bank says inflation expectations are below 2% for the next 10 years—this is “easy money”? Greece is scant mentioned in the BIS annual report, except to be damned for pushing the ECB to an “easier” stance.  I wish I was making this up.

Democracy And Central Banks

The old saw is that democracy is a lousy way to run a country, until you try any other way. One can certainly rue the economic structural impediments that become permanent fixtures in democracies, what with voting blocs and accommodating office holders.

But the incredible arrogance, ineptitude and theo-monetaristic certitude of central bankers certainly tops any stupidity foisted by voters upon themselves. Voters can and have voted in tax and regulatory platforms that slow down economic growth—but the tight-money lunatics at BIS and the ECB have devised schemes that obtain actual, sustained contractions of economies.

Western central bankers, unmoored from reality or any connection to actual economies—they get their salaries no matter what is the real economic growth rate—have become economic ISIS-men, genuflecting to and implementing an ascetic ideology even as it wreaks destruction.

Remembering Milton Friedman

It is difficult to believe that less than 23 years ago, in Oct. 1992, Milton Friedman bashed the U.S. Federal Reserve in The Wall Street Journal op-ed pages for being too tight—and that, when the Fed had just cut the federal funds rate from 10% to 3%, and CPI-inflation was 3.2%! In 1992 Q4 real growth clocked in north of 4.0%.

Friedman rebuked those who erroneously connected low rates to “easy money”—just the opposite is true, he pointed out. Years of “easy money” do not result in ZLB and deflation. Except perhaps, to demented BIS gnomes.

The slavish zeal for microscopic inflation rates or even deflation at any cost is a new and dangerous affectation among the money-obsessed, especially central bankers. And tight money has not worked! Look at Japan, Europe, or the U.S. in 2008.

Indeed, when did monetary suffocation end up in the nirvana of rapid real growth and but zero inflation?

Never and nowhere.

Bad News

I see no optimistic economic outlook for Europe.

The annual report from the BIS suggests a depth of monetary-policy depravity to rival the Mariana Trench. Europe has an un-democratic central bank that will suffocate parts of Europe for decades, and pompously pettifog the whole time.

The Federal Reserve may be a bit better. One can at least hope the GOP will win in 2016, and like President Nixon, or the Reaganauts, the installed GOP go after the Fed to print more money. Remember, hounded by Reagan’s minions, Fed Chairman Paul Volcker in 1981 declared victory on rising prices—when inflation was at 4%. Today 4% inflation would be presented economic bubonic plague. Funny thing, America prospered in the 1980s with moderate rates of inflation, and then again in the 1990s.

The Bank of Japan and the People’s Bank of China may be the best of the central banking lot today.

Invest accordingly.

The Fed Can Suffocate The Economy Under NGDPLT Too

A Benjamin Cole post

Recently there has been a hubbub in Market Monetarist circles that prominent Democratic economist Larry Summers, generally a Keynesian type, tipped his hat to nominal GDP level targeting, or NGDPLT.

Well, at least in preference to inflation targeting or IT.

Said Summers at latest report, “I didn’t quite endorse NGDP targeting. I said that I would prefer a shift to NGDP targeting to a shift up in inflation targets.”

Why The Summerian Reservation?

That Summers endorsement of NGDPLT was hesitant and oblique may not be surprising. He is, after all, a Keynesian, and believes in federal deficit-spending.

But Summers may also have entirely human and sensible reason for his backhanded support of NDGPLT—that is, a central bank can just as well suffocate an economy under NGDPLT as under IT.

Indeed, the U.S. Federal Reserve has kept the U.S. economy growing at a fairly steady nominal rate since 2008. The problem is, the economy is blue in the face from monetary asphyxiation.

Remembering Milton

Forgotten today is the Milton Friedman of October 1992, when CPI inflation was 3.2%, and real GDP was expanding at about 4.0%.

Yet the title of Friedman’s October 1992 op-ed in The Wall Street Journal, after the Fed had dropped interest rates from 10% to 3%? It was: Too Tight For A Strong Recovery

That 1992 Friedman op-ed speaks worlds about the inflation-obsessed state of modern economists.

Market Monetarists of 2015

Yet some Market Monetarists recommend straitjacket nominal growth rates, succumbing to the present-day peevish fixation that inflation—even moderate inflation—cannot be endured.

We can hope someone will further flesh-out Summers’ sentiments regarding NGDPLT. But whatever Summers’ take, I hope Market Monetarists  do not mimic the inflation-nutters.

It doesn’t really matter if inflation is 1% or 4%.

What matters is robust real growth.

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….*


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?

Surprise! Martin Feldstein, unwittingly, makes the case for nominal stability

In the WSJ, MF writes “The U.S. Underestimates Growth”:

…This is why we shouldn’t place much weight on the official measures of real GDP growth. It is relatively easy to add up the total dollars that are spent in the economy—the amount labeled nominal GDP. Calculating the growth of real GDP requires comparing the increase of nominal GDP to the increase in the price level. That is impossibly difficult.

But John Cochrane gives a “convenient” interpretation of MF in “Feldstein on Inflation“:

The basic idea is that inflation may be overstated, because it doesn’t do a good job of handling new products. As a result, real output growth may be a bit stronger than measured.  Marty runs through a lot of sensible conclusions.

He doesn’t talk about monetary policy, but that’s interesting too. So what if inflation really is (say) 3% lower than we think it is, and therefore real output growth is 3% larger than it really is?
That would mean we are a lot closer to “normal” of course.

It´s not Friedman´s Chicago any longer!

Note: Nominal Stability a.k.a. NGDP Level Targeting