Saturday, September 24, 2011

Brad DeLong on what Friedman and Viner would say today

Brad DeLong, on how he would advise Obama:

"What to do? If Milton Friedman were here to advise you, he would give the same advice he gave Japan in the 1990s: Have the Federal Reserve buy bonds for cash. Have it keep buying bonds for cash until total nominal spending in the economy is on a satisfactory trajectory. Announce that it is going to keep buying bonds for cash until total nominal spending is on a satisfactory trajectory.

Milton Friedman's teacher, the ur-monetarist Jacob Viner, had a somewhat different take. Viner worried that when--as now--interest rates are very low, people have no incentive to spend their cash. And when you take bonds out of circulation you reduce the supply and further lower interest rates further. Viner sought a way to boost the money stock without pushing interest rates down further. He recommended coordinated monetary and fiscal expansion: the Federal Reserve buys bonds for cash, and the Treasury than issues bonds and spends, in order to (a) expand the money supply, (b) directly put people to work and (c) keep falling interest rates from further depressing monetary velocity and so crowding out the beneficial effects of monetary expansion.


  1. What Would Friedman Do or WWFD is a bad approach to analysis.

    Not just because of the whole hero worship element or appeal to a person who is from a different times and had to apply different analysis then.

    But because you have to take Friedman as a person in a marathon relay race. Once today's economists pick up the baton from Friedman and run forward, they can't look at the next leg of the race and say, "What would Friedman do?" They are supposed to advance further and beyond Friedman, and not just remain limited to an existing stock of knowledge and analysis.

  2. IIRC, Jacob Viner wasn't pleased at being labelled a prototypical monetarist by his former student. I think I read this from the New School's history of economic thought database, but my memory could be fuzzy...

    And I agree with Prateek Sanjay. We can't just be restricted by our old knowledge. However, sometimes, looking at old knowledge for new insight does help. Lord Keynes's "A Treatise on Probability" is a good example of an excellent mathematical treatise that continues to remain notable in that field. The logician Theodore Hailperin can attest to Keynes being correct on George Boole's "Laws of Thought", for instance.

    But going back on topic, the developed nations of the Western world need a strategy for growth, pronto!

  3. If Jacob Viner meant large-scale fiscal policy by monetising deficits by those words, then he was speaking a great deal of sense.

    Some of those 1930s Chicago school economists were ahead of their time, and I have always thought that. In fact, on one level, they were head and shoulders above the hapless Austrians of that era, urging their insane liquidationism.

    I doubt whether Milton Friedman's advice would do anything, however. Most bonds are held by the super rich, rich, financial institutions, pension funds, and foreign central banks. They won't spend their money on commodities at all: they will just hold it idle or keep using it to speculate on commodity and asset prices.

    Friedman's policy would be a total waste of time. It would just produce more supply-side inflation if basic factor input commodity prices are bid up by speculators. That's essentially what QE2 was done.

  4. I think Patreek hits the nail on the head. I've seen Prof. Delong do this Friedman appeal a lot, but it seems to be more as a comparison (I.E. comparing two groups thought of as arch-conservatives in their respective time frames) than as explicit hero worship.

    Maybe that's not quite the right take on Delong, but I'm an infrequent reader beyond his coverage of the history of economic thought.

  5. This is kind of an odd conversation. DeLong, I think, was siding with Viner over Friedman. I'm not sure he was asking "WWFD?" (although I'm sure he would answer that question with "something better than what's going on now"). So this whole idea of hero worship that Prateek raised is odd.

    Nevertheless, there's nothing wrong with asking "how would a really smart guy that advanced our knowledge about the economy think about this problem?". That need not be an appeal to authority. It's only an appeal to authority if you accept Friedman's view simply because Friedman said it. I don't see any evidence of that from anyone - even someone like Scott Sumner who is a huge Friedman fan. With all due respect, I think the "hero worship" worries here on this thread are a red herring.

    I posted it because - like LK - I was impressed with Viner's position.

  6. I agree with Prateek.

    Two reasons why.

    Contemplate writing a screenplay by pondering what Shakespeare would do. That makes about as much sense.

    Also, this sort of stuff is always overly prone to cherry picking to forward pre-established positions.

  7. Meh... I'm pretty sure that DeLong isn't hero worshipping Friedman or Viner. He's bringing them up by way of contrast with present Chicago/ Austrian/ Freshwater Economists.


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