Wednesday, August 14, 2013
The cruel trick played by history on Milton Friedman
Author: Noah Smith
Well, everyone is talking about this, so...
Paul Krugman wrote a blog post saying that Milton Friedman's influence has been largely forgotten in macro policy debates. Steve Williamson lists a number of ways in which Friedman's influence is central to modern macro. Williamson has the right of it; Friedman's ideas are deeply embedded in the macro theories we use to think about stabilization policy. Furthermore - and Williamson doesn't say this - almost all of our macro policy discussions these days center around Quantitative Easing, a tool popularized, and arguably invented, by Friedman.
Three later posts by Krugman (post 1, post 2, post 3) get it right, I think. Friedman hasn't disappeared from policy discourse; he's disappeared from right-wing policy discourse.
Friedman's ideas are pretty close to the mainstream New Keynesian idea of the macroeconomy - the kind of thing promoted by Mike Woodford, Smets and Wouters, Greg Mankiw, and Miles Kimball. New Keynesian models use consumption smoothing, monetary policy rules, and a NAIRU with a downward-sloping short-run Phillips curve - all Friedman ideas. And in New Keynesian models, monetary policy reigns supreme; only at the zero lower bound is monetary policy possibly ineffective. That's a very Friedman idea too. Furthermore, as mentioned above, the policy of Quantitative Easing - which takes us beyond the New Keynesian framework - was what Friedman explicitly suggested for Japan.
Now notice that Quantitative Easing, and the Fed in general, are reviled by the American right. Rick Perry famously threatened to do physical harm to Ben Bernanke for "printing more money". Ron and Rand Paul are famous for decrying QE and Bernanke, as are right-wing darlings like Peter Schiff. Bernanke is as devoted a Friedman disciple as exists.
Meanwhile, more sober conservative economist types, like Martin Feldstein and Allan Meltzer, are also extremely dubious of QE. And of course the Wall Street Journal is forever warning about the dangers of inflation from the policy.
So the American right, whether of the populist fire-breathing type or the staid, WSJ type, despises the ideas of Milton Friedman. What they support looks a lot closer to "Austrian" economics, which Friedman explicitly denigrated.
But the right frequently uses and abuses the name of Milton Friedman. People like Rand Paul seem to identify Friedman with the concept of hard money. This is probably because Friedman was known for opposing inflationary policy in the 70s. The right remembers that policy position, but has no concept of the theory that underlie it. (They also probably remember Friedman's libertarian-conservative political leanings, and his debates with Old Keynesians like Tobin.)
Actually, a funny true story of the Friedman (Tom, not Milton) variety: I was taking a taxi back from the 2013 AEA Meeting, and the taxi driver told me that we needed to "stop all this government money printing" and "go back to the policies of Milton Friedman". including "going back on the gold standard". I told him that Friedman invented Quantitative Easing, and said the Depression could have been prevented by printing money and going off the gold standard. He refused to believe me.
So essentially, the right thinks Friedman was an Austrian! This is pretty much confirmed by the fact that Rand Paul's first choice for Fed chair would be Friedrich Hayek, and his second choice would be Friedman.
I can only imagine how Friedman must be turning in his grave. His academic legacy is probably what he would have wanted...but his political legacy has been to be conflated with some of his most bitter intellectual opponents, to have their ideas ascribed to him, and to have his own ideas reviled by the people on his own side of the political spectrum. It's as if Ronald Reagan were to be remembered mainly as a proponent of tax increases and Soviet appeasement, simply because he raised taxes in 1982 and signed arms control treaties with the USSR.
The moral of this story should be clear to all economists: If you choose to get involved in politics and public policy debates, your position in those debates will determine your popular legacy, and your academic ideas will be remembered only in academia. That is the price you will inevitably pay.
Posted at 3:35 AM