"First, go back to the early 1960s. The Keynesian school was coming to Washington led more than anyone else by Paul Samuelson who advised John F. Kennedy during the 1960 election campaign and recruited people like Walter Heller and James Tobin to serve on Kennedy’s Council of Economic Advisers. In fact, the Keynesian approach to macro policy received its official Washington introduction when Heller, Tobin, and their colleagues wrote the Kennedy Administration’s first Economic Report of the President, published in 1962.
The Report made an explicit case for discretion rather than rules: “Discretionary budget policy, e.g. changes in tax rates or expenditure programs, is indispensable…. In order to promote economic stability, the government should be able to change quickly tax rates or expenditure programs, and equally able to reverse its actions as circumstances change.” As for monetary policy a “discretionary policy is essential, sometimes to reinforce, sometimes to mitigate or overcome, the monetary consequences of short-run fluctuations of economic activity.”"
There is a lot to unpack in the phrase "rules vs. discretion". As Steve Horwitz has pointed out, you could have policy rules or you could have constitutional rules (or, he adds - you could have legislated rules which are somewhere in between but he seems to suggest maybe closer to constitutional in this particular case). Rules could be internally or externally imposed. That usually lines up with the policy/constitutional distinction, although I suppose it doesn't have to.
But this passage raises a new dimension to the term.
The 1962 report refers to discretion as being "able to change quickly tax rates or expenditure programs, and equally able to reverse its actions as circumstances change".
DISCRETION! cries Taylor.
And that is indeed what the report calls it. But that sentence sounds an awful lot like what a Taylor Rule does! The Taylor Rule, after all, calls for quickly changing interest rates and open market operations and reversing it as circumstances change.
It is definitely different from what Friedman advocated, a k-percent monetary growth rate come hell or high water. And it's also different from the "rule" that comes out of a standard Barro-Gordon model. This is what Bob Murphy seems to be refering to when he says: "Let me put it this way: During a really bad economic crisis, following the rule is supposed to suck. That’s the whole point."
He's right in the sense that the good "rule" Barro-Gordon came up with was not accomodative. Does it follow that rules must be non-accomodative to really be "rules"? Is that "the whole point"?
If that's true I don't know what the argument for it is. John Taylor - certainly a proponent of monetary rules - thinks that rules can be accomodative and still be rules. Even tighter k-percent rules are going to end up creating more money in a crisis than outside of one, because a broad monetary aggregate like M2 is going to naturally shrink or at least slow in a crisis.
So we have yet another layer to this mess, which I guess I'm just pointing out to stress that this is not something that we should try to discuss with ound-bites. So in thinking about rules we have to mull over:
- Accomodative vs. "suposed to suck"
- Internally vs. externally imposed
- Constitutional vs. policy
- Implicit vs. explicit (I raised this before - knowing how mechanical Keynesianism was back then, I'm guessing the Report above, while it didn't state an explicit rule, had an implicit one in mind)
FWIW I was playing around with a Barro-Gordon model this morning after reading Bob's comment on his blog, which did raise questions for me. It's been shown that the result is invariant to different objective functions. I was a little curious if it was also invariant to the way you specify the determination of inflation. If anything interesting comes up I'll let you know - I plan on picking it up again tonight. It may come to nothing.