Wednesday, August 14, 2013

The cruel trick played by history on Milton Friedman

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.


  1. Noah, this is a well-written post but I'm not convinced. As dsquared argued years ago, one shouldn't assume Friedman would have wanted his corpse to serve the interests of Truth if it could better serve the interests of Reaction:

  2. I find it hard to believe that anyone with normal intelligence would truly believe that widespread wealth and prosperity can be brought about by creating more currency units and using them to buy assets. It is no different than believing that money grows on trees or that there is such a thing as a free lunch. Looked at honestly, isn't QE and a rock bottom Fed funds rate just the means by which the national financial reckoning is delayed? Didn't Mises speak to exactly this point when he talked about the crack-up boom, and how it comes about as a result of persistent credit expansion used to avoid systemic corporate failures and bankruptcies? Didn't he explicitly say that the currency failure that results from persistent credit expansion comes later in the process? In other words, hyperinflation is the ultimate end to can kicking, to a policy of continually expanding credit in order to sustain a financial system which would have otherwise collapsed. When the stock market is close to all-time highs and the Fed still sees the need for QE and a rock bottom funds rate there is no other reasonable explanation for it except that such constant credit expansion is required to keep everything held together.

    1. I find it hard to believe that anyone with normal intelligence would truly believe that widespread wealth and prosperity can be brought about by creating more currency units and using them to buy assets.

      I find it hard to believe that anyone with normal intelligence would truly believe that touching two watermelon-sized chunks of cold metal together could cause an explosion big enough to destroy a city.

      It's amazing the things some people believe.

    2. This kind of "I find it hard to believe" sentiment about the benefits of monetary expansion is very common, but I don't really see why. Do you agree that using money at all is a real gain over barter? So if going from zero money to some money is a free lunch, why can't going from less money to more money be more free lunches? Of course it would be absurd to think that infinite money would bring infinite free lunches, so there must be a point when you should stop. But you can't prove that we are past that point just by saying "no free lunch"

    3. Except in this case, Professor Smith, it is a chunk of low funds rate combined with a chunk of continuous QE that will cause the destruction. And it won't just be a city. It'll likely be the entire Western world.

    4. Except in this case, Professor Smith, it is a chunk of low funds rate combined with a chunk of continuous QE that will cause the destruction. And it won't just be a city. It'll likely be the entire Western world.

      I guess we'll find out! ;-)

    5. I find it hard to believe that someone of normal intelligence thinks that Mises was always right.

    6. Kaboom!

      Just wait for it.


    7. @Danyzn I disagree with your premise that going from zero money to some money is a free lunch. If the money that is introduced as an alternative to barter is digits on a screen or stamped pieces of paper, then the price of goods will adjust to reflect the quantity of that money.

    8. @reason I'm not saying he was always right, only that his theory makes sense to me, and that if he in fact was right, then we are headed down the road to hyperinflation. But hey, if you think they can print tens of billions of new currency units each and every month without causing inflation in consumer goods, then that is what makes sense to you. But it doesn't make sense to me.

    9. Steve J10:27 AM

      Neil, sounds like you dislike fiat currency. Are you saying you prefer something like the gold standard? In the case of gold most of its value comes from its use in jewelry. So now your currency value is somewhat dependent on the whims of fashion. You will need to convince me why tying your currency to a physical object is preferred.

    10. I'm not saying I like or dislike the gold standard. I just think that currency should be, or be backed by, something that cannot be produced on a whim, ad infinitum, at little to no cost.

    11. Neil, what if we gradually have more stuff to buy? Don't we then want to create more money "ad infinitum, at little or no cost"?

    12. Only if you want to pay more money for that stuff than you would otherwise. I personally like it when prices drop. But hey, I'm not rich.

    13. Ah, economics as a morality play. Love it.

      Doing economics based on what feels right/wrong makes as much sense as doing science based on what feels right/wrong.

      Morally, saying that humans are descended from hairy branch-swinging primates feels wrong. That doesn't mean evolution is wrong and creationism is right.

    14. Thank you, Reverend Dohsan.

    15. Actually, Neil, if you are not rich but working, you'd want more inflation than deflation, because while the costs of things would go up, so would wages, and since holding depreciating money makes no sense, people would spend more, increasing demand, leading to more jobs, higher wages, etc.

      So what happens when there is deflation (prices drop?). If people expect deflation, people would spend less, leading to less demand, leading to layoffs, leading to even less demand, and you have a spiral downward.

      Of course, this all depends on whether you are working or not. To someone living on their savings with no chance (or need) of being employed, deflation is great, since everything becomes cheaper. For everyone else, it sucks.

    16. Also, Neil, are you familiar with the concept of velocity of currency? You say that printing money would lead to inflation, but you must be assuming a constant velocity of money for that to occur.

      For instance, say that the government gave 10 banks each $1T. However, each bank just sat on that money and did nothing with it. Would there be inflation?

    17. Neil, at what point does evidence come into what "feels right" and how long are you comfortable saying, "just wait, it's coming" in the face of a serious lack of even moderate inflation, much less hyperinflation?

    18. I think wages are mainly influenced by the demand for employees v. the demand for employment. If inflation is high but demand for employees remains low, wages will not rise nearly as fast as inflation. I am familiar with velocity as well, but I'm not an expert on it.

    19. @Adam I feel comfortable saying it for as long as it remains clear that the financial system depends on credit expansion for survival. If the Fed can stop QE, begin to execute an exit strategy, and raise the funds rate even to 0.5 percent without a collapse in the stock and housing markets, and without inflation already clearly evident in consumer goods, then I would consider that perhaps my theory is incorrect. My guess is that such measures won't be taken until it becomes clear that inflation in consumer goods is taking hold, and maybe not even then due to the fact that such measures are the lifeblood of financial system.

    20. "If inflation is high but demand for employees remains low, wages will not rise nearly as fast as inflation."

      Of course, but what probability do you put on that scenario, and what framework/theory do you have to justify the probability that demand for employees would remain low when inflation (due to QE, not due to resource-price shocks) becomes higher is something worth worrying about?

    21. Maybe demand for employees will rise and maybe it won't along with inflation, but past episodes of hyperinflation, such as Germany in the early 20th century, show that such inflation isn't good for employees at all. Nobody likes hyperinflation even if wages do rise. It is very destructive.

    22. Do you notice that the velocity of money is down and the excess reserves at depository institutions is way up? Do you suppose that this is due to the fact that in 2008, the Fed began paying interest to those institutions on excess reserves, in effect rewarding those banks for letting cash sit in their vaults? Where do you suppose the Fed is getting the money to pay this interest? Could this be even more money that the Fed has to print in order to meet its obligations.

    23. Man, you keep recycling old and uninformed ideas!

      First, banks can get a much higher interest rate by lending their reserves out than the 0.25% they get by the Fed. For example, fixed 30-year mortgage rates are now about 4.5%. The idea that banks are not lending at 4.5% because they get 0.25% on reserves but would pour their excess reserves out if only the IROR was 0% does not make any sense! Especially given that mortgage rates have gone up by a percentage point in the past few months (so the difference between the lending rate and the IROR has increased further), yet you don't see much of a drop in excess reserves.

      Second, the Fed does not print money to cover its expenses, including the interest rate it pays on reserves. Its revenue come from the even higher interest rate it charges commercial banks when it extends loans to them, and most importantly from the interest it receives from the assets that it holds (including Treasury bonds, mortgage-backed securities, etc.). In essence, the Fed is borrowing reserves from banks at 0.25%, and uses them to buy assets that pay an even higher interest rate. This is precisely what banks used to do before the crisis, and how they made a profit. The question is why they are not doing it any more! The idea that they are not doing it because of the IROR is ridiculous.

    24. Anonymous1:37 PM

      Your problem, Noah, is that you're just not much of a people person.

    25. Also, it does not follow that if inflation gets up to, say, 4%, that hyperinflation will follow. Were you screaming "hyperinflation!" in 1990 when inflation got to over 5%?

      Can you think up a single instance of hyperinflation that occured in an economy that was not wracked by war, under financial stress (like having to pay massive war reparations), or run by a tin pot dictatorship?

      If anything, deflation is the bigger threat facing the US. We have seen a normal first-world economy in a democracy get wracked by deflation (Japan). There has not yet been a single normal first-world economy in a democracy yet that has experienced hyperinflation.

    26. First of all CA, if you look at the excess reserves chart here: you'll notice that they skyrocketed immediately after the Fed started paying interest on them. Before that, excess reserves were practically non-existent. The banks are clearly increasing their excess reserves due to their ability to earn interest on them. To say that is uninformed is to ignore the obvious.

    27. CA, all of the interest that the Fed earns from treasuries and MBS are reinvested into those same instruments, not used to pay interest to banks or anyone else. The last FOMC statement says : "The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction."

    28. You know if hyperinflation really is impossible in the United States, then congress should simply pay off everyone's mortgage and give all of those underwater homeowners, like myself, a fresh start. Even if prices rose a little bit, the money I would save by not having to pay my mortgage would more than make up for the price increases.

    29. Neil,

      First, look at the spreadsheet (as opposed to the graph). Excess reserves started increasing rapidly in September, a month before the Fed's decision.

      Second, your punishment is to write down 100 times: "correlation does not imply causation". To claim causation you need a theory that at least seems reasonable. Someone sympathetic to Austrian views should be aware of that!

      Finally, re-read the statement: "reinvesting PRINCIPAL payments..." not interest payments!!!!
      I assume you know the difference between the two.
      Besides, MBS are only a fraction of the Fed's portfolio. I already named two other assets the Fed receives interest from, Treasuries and to a lesser extent loans to banks.

    30. OK, maybe you're right and I'm wrong about the interest that the Fed earns on those instruments. I'm not an economist, though I read a lot of economic news and information. It just doesn't seem normal to think that everything is OK now that the Fed is printing money and holding rates near zero. Like I said, I might feel more comfortable with it once the Fed exits (if they exit). Something tells me they're trapped though. And I think we'll begin to find out soon enough. We'll see how the taper goes: if they taper.

    31. Neil:

      Democracies with normal economies do not hit hyperinflation because they're responsible.

      In any case, if you own an underwater house, why are you against QE? Have you considered that QE was what was responsible for raising the value of your house from the depths & that if Austrian policy had been followed, your house value would have fallen even more?

    32. Falsifiable hypotheses FTW!

    33. Anonymous5:20 PM

      Neil, consider Japan the example of how you can print money (trillions of yen) without hyperinflation. it's the liquidity trap. sometimes the world does not operate like your beloved common sense. in fact, the physical world has a concrete example in quantum mechanics.

    34. BTW, Krugman has a great point about that theory of the .25% interest keeping inflation down, which is namely, if such a tiny bit of interest on reserves is enough to keep inflation down despite massive QE, it's inconsistent to then think that hyperinflation is just around the corner. If you truly believe that such small interest on reserves has such a huge effect on inflation, then any sort of inflation can be easily controlled just by the Fed paying higher interest on reserves.

    35. Nathanael10:57 PM

      "I'm not saying I like or dislike the gold standard. I just think that currency should be, or be backed by, something that cannot be produced on a whim, ad infinitum, at little to no cost."

      Neil, the currency is backed by *TRUST*. As, in fact, are all currencies: money has value to the extent that you trust that other people will accept it.

      Trust cannot be produced on a whim and it cannot be produced infinitely. It's actually very hard to produce. Once you lose it, it's very hard to get back.

      I actually believe that Bush lying the country into war, the Supreme Court stealing the Presidential election, Obama lying about the NSA spying, etc., are more dangerous to the future of the US Dollar than anything conventionally "economic". They are violations of trust.

    36. So Neil's posts are pretty incoherent to me...

      First of all, if hyperinflation was coming just from low interest rates and QE, it probably would have come from the Fed quadrupling the size of its balance sheet in the last 5 years. The Fed's "exit" (raising interest rates) would have the opposite effect of raising inflation; higher interest rates generally lead to lower inflation. Second, as Krugman pointed out, if the only thing keeping hyperinflation from coming is the 0.25% the Fed is paying in interest on reserves, well, then we have no reason to fear hyperinflation at all... imagine how little inflation we could get if the Fed paid, say, 0.5% on reserves! If it got to 1%, we'd get to hyperdeflation (TM).

    37. Hi Alex. The interest paid on excess reserves and how that affects inflation, velocity of money, etc. is not something I'm an expert on so it wasn't my intention to make any definitive statements about that. It's just a curiosity to me.

      And how do you know that the Fed's quadrupling of its balance sheet isn't going to result in hyperinflation? These things take many years to play out. When you turn the rudder on a ocean liner, it doesn't turn on a dime like a Ferarri, it keeps going straight for quite some time afterwards. And so it is with the Fed's hypothetical exit. Just because they raise interest rates doesn't mean that the inflation will stop all of a sudden. Remember that Volcker stopped the inflation of the 1970's after having to raise the Fed funds rate to a whopping 19%. I'm not saying I know everything. I'm a layman. Put after a preponderance of the evidence, it appears that we are in trouble that will likely result in heavy inflation if not hyperinflation. If recession + printing money = recovery, then we live in a world much different than the one I thought.

    38. Hi Anonymous. The difference that I see between Japan and the U.S. is that Japan never inflated enough to bring their equity prices back up after the Nikkei crashed. The Nikkei hit an all time high in '89. It has never recovered and is still well off its highs over two decades later. Before the crash of '08 the S&P 500 hit an all time high in '07. It then reclaimed that all time high this year, just six years later. That tells me that the U.S. is being aggressive enough with rates and QE to actually affect the price of stocks whereas the Japanese weren't. This probably has something to do with the different natures of the two economies. But who knows. Economics is not a science like physics. There are just too many factors involved.

    39. Hi Nathanael. Yes, currencies have value as a matter of trust for the most part. But it is much easier to lose trust in something that can be produced on a whim, ad infinitum, at little to no cost.

      For instance: Some things that can be produced this way - Paper notes of varying denominations, digits on a screen.

      Some things that can't be produced this way - oil, gold, silver, copper, etc.

    40. Never understood why gold is so much better than currency. As Nathanael pointed out, it's always about trust & demand. What the hell am I supposed to do with a bunch of gold? It's hard to carry easy to steal, subject to high volatility, produces nothing, and is worthless in the zombie apocalypse.

      @Neil, look at Noah's other posts on why goldbuggery is derppery. Paper currency has had some bad cases - but not in the US, because, you know, we have a functioning democracy/meritocracy. Our dollars have been a more consistent store of wealth over the past 50 years than gold. lol. I'm supposed to trust gold more? Right.

      Can you show me a case where the Fed is printing money ad infinitum? I hope you realize that this has not ever happened in the US. Btw, QE, is *not* "printing on a whim". It's QE; i.e., it's purposeful, research and theory backed monetary policy. What successes has your theory enjoyed? Right.

    41. Jefftopia, 50 years ago gold was worth $35 per ounce. Today it's worth over $1300 per ounce. So yes, if you're smart, you'd trust gold more.

      Did I say that the Fed was printing ad infinitum? What I said is that the U.S. dollar is able to be produced ad infinitum, meaning that it is possible to do so if the Fed so desired. The Fed could produce a quadrillion U.S. dollars or more today if it wanted to, simply by typing the digits into its system and allocating that amount to the accounts of financial institutions. I never said it would do that, just that it can. But they will continue to print enough to keep the banks from going bankrupt.

      And printing on a whim simply means that they can print as much as they want. If the Fed wanted to produce 85 billion gallons of oil per month, they would have purchase or build an oil company with the capital, equipment and labor necessary to produce that oil. The same goes for if they wanted to produce 85 billion grams of gold every month. They couldn't produce these things simply by wanting them. But if they want to produce 85 billion U.S. dollars per month, they just punch it in, and there it is. Magic. 85 billion dollars appear just like that, just because they want it. Have they become gods, or is there a price for doing this. I think the price will be paid by anyone holding those dollars that they are conjuring into existence.

    42. Hi Neil, fwiw, I think Ben Bernanke was perhaps GWB's best appointment. He is a learned and responsible man, and I trust his judgement re QE. Otoh, would you agree that a US debt default would be bad, probably very bad, for trust in the dollar? If you are paying attention to US politics perhaps you notice that one party has been flirting with default blackmail. Do you think we should be electing politicians who engage in that sort of behavior? And do you think such behavior distinguishes them in a substantive way from the other major party, by and large?

    43. @Neil, you're missing the point: I said *consistent* store of wealth. Gold is *volatile* - gold may be high, but it crashes too. US dollars do not. Of, we have no reason to believe so.

      Premise disagreement: Producing *a lot* of money, say, for QE is quite different from producing *ad infinitum*. If by "is able" you mean, "is possible" and by that you mean "is not impossible", then I'll concede that point. But if we're talking about mere possibility, then let's talk about situations where a asteroids full of gold or lands in the arctics or a new species of bird that poops gold is discovered and gold prices tumble.

      I'm sure you don't see these situations as similar, but that's because you just don't get how difficult it is to create hyperinflation in the US. It also doesn't help that you're wrongly comparing our Fed to the central bank of Zimbabwe, or Hungary in 1945. And on top of that, you're ignoring the numerous blog posts criticizing your view that can be accesses on a number of blogs, including this one.

      Immense sigh.

    44. Anonymous9:30 AM

      This is Neil. I don't take sides in political theater, especially when it comes to acts like the debt ceiling. The only reason the ceiling even exists is so they can put on these side shows for the public. The U.S. has a printing press, so there will never be a formal default, threats of some politicians notwithstanding. The U.S. will informally default by diluting the purchasing power of its currency, a process which has already begun but the effects of which have not yet been realized by the public. There are a lot of political advantages to an informal default. It is covert, gives you more time to live beyond your means, and enables you to blame someone else for the higher prices of goods. Speculators, retailers and large corporations are the best scapegoats. You should really stop thinking that there is a good side and a bad side in American politics. They both have the same agenda, and they arrive at that agenda by taking opposing views in the extreme and then pretend to meet in the middle.


      "which has already begun"


      Make sure you're isolating the change in value from other exogenous factors, btw.

    46. The U.S. has a printing press, so there will never be a formal default, threats of some politicians notwithstanding.

      You don't believe Congress has the power to default on US debt?

      You should really stop thinking that there is a good side and a bad side in American politics.

      How do you know what I am thinking? I certainly didn't write that.

      They both have the same agenda, and they arrive at that agenda by taking opposing views in the extreme and then pretend to meet in the middle.

      How on earth did you reach this conclusion? I do not think you arrived at that by patiently observing the real world.

    47. Anonymous11:24 PM

      "that there is such a thing as a free lunch."

      The thing is, there was such a thing as the free lunch. Saloons offered it in order to get people (well, men) onto the empty stools at lunchtime. Often they didn't even require you to buy a beer, and the price of beer at lunchtime was the same as after work. Most customers did buy a beer, and a few bought two. And the lunch they served was cheap. As long as the price of a beer and a lunch was a penny more than the cost of the beer and food - even with nothing for the bartender, rent, light, heat - it added profits to the bottom line. And the customer got a genuine free lunch.

      The true story of the free lunch is that when there are un-utilized assets that can easily be put to work - empty saloons and bored bartenders, or unemployed workers and idle machinery- you can get something for nothing.

  3. The argument in this post is just a subset of the larger point: the American right is held together by resentment and tribal affinity, lacking any coherent political or ideological ideas.

    The individual health insurance mandate was the conservative health care policy for about a quarter century. Then a black Democrat tried to compromise with the right by agreeing to implement it, whereupon every Republican politician in America denounced it as unconstitutional socialist fascism.

    As with Milton Friedman, the career of Ronald Reagan is shot through with actions that would have him read out of today's Republican Party. As president, he repeatedly raised taxes, talked to Mikhail Gorbachev (earning him comparisons to Neville Chamberlain), argued that failing to raise the debt ceiling would be ruinous, and later called for an army for the UN.

    To today's right, Reagan and Friedman stand for freedom, America, bald eagles, the Constitution, and Screw You Obama. Learning and writing about things that happened in real life is quite beside the point.

    1. Wow. But, judging from this rant, don't you clearly have just as much tribal affinity for the left as Rand Paul and Ted Cruz do for the right?

    2. Anonymous10:12 AM

      Can't speak for that guy, but this is a common straw man I see out here.

      There's a certain amount of tribal affinity amongst every individual in politics - although to what tribe we're talking about may differ (Many liberals I know do not have affinity for "Democrats," for example). No one denies that.

      That said, it does seem like one party of our current government is being held together by essentially nothing more than a closed feedback loop of the same ideas, resulting in something more than standard "tribal affinity." This isn't just the feeling that your party must be right making you predisposed to like certain ideas depending upon party support, it's absolute devotion to those ideas and absolute reviling of those that your party opposes.

    3. Steve J10:14 AM

      Neil, so complaining about the right automatically gives you affinity with the left? Am I ever allowed to criticize my own side?

    4. Naturally, you don't have a response along the lines of, "why yes, Republican thought over the last ten years has made a great deal of sense indeed! Here's why: ..." You can only say, "those facts are politically incorrect; you are not One of Us."

      The right's misremembrance of Friedman is of a piece with a much larger problem. Just ask Republicans like Bruce Bartlett and Norm Ornstein. (I know, I know, they're not One of Us anymore either...).

    5. I think we need to stop identifying ourselves with political parties or groups. Yes, the Republicans are hypocrites, but so are the Democrats. Politicians appeal to, and are followed by, the masses. Critical thinkers see through political propaganda, spin, and hypocrisy. Critical thinkers can see how politicians frame the debate in a false light, and develop their own arguments.

    6. Neil:

      People who engage in false equivalence are not critical thinkers.

      Critical thinkers can see that one side in the political debate in the US engages in far more political propaganda, spin, and hypocrisy than the other side.

    7. Let me guess: You think your side is the side that engages in less of those things?

    8. Neil, you just have to observe American politics and find out for yourself.

    9. Obsession with the individual mandate aspect of Obamacare came about because of all the criticisms thrown at it in desperation, that one seemed to resonate with the most people. So pols ran with it as a means to try to defeat the legislation as a whole. Quite a few conservatives still think an individual mandate on its own isn't a bad idea - just not part of a 2,700 page special interest monstrosity. Not sure what any of it has to do with Obama's being black.

    10. purusha1:00 PM

      Not sure what any of it has to do with Obama's being black.

      Good point -- Republicans crazily demonized the Clintons at about the same rate as they did Obama.

  4. The problem with much of the discourse on Milton Friedman is that it is ideological instead of being technical. To me the principal indication that Friedman's conception of money was wrong is that by his calculations there was no expansion of money before the 1929 crash and subsequent depression.

    This is what he and Anna Schwartz wrote: "The antecedents of the contraction have no parallel in the more than fifty years covered by our monthly data. … no other contraction before or since has been preceded by such a long period over which the money stock failed to rise." And remember, this was a period when the Dow Jones industrial average rose fivefold in the six years to its peak in September 1929.

    Friedman had no explanation for why the monetary aggregates (as defined by him) failed to mirror the real world after the early eighties or indeed why they did mirror reality in the decades before.

    The right conception of money yields the graphs seen in

    But understanding them calls for a complete relook at money.

    1. Too bad your graph doesn't include the period before and after the Great Depression.

      But I find it hard to take anyone seriously who thinks they know the absolute truth (i.e. the RIGHT conception of money). It would more convincing if you said things like - a better conception of money - or a more useful conception of money.

    2. "To me the principal indication that Friedman's conception of money was wrong is that by his calculations there was no expansion of money before the 1929 crash and subsequent depression.

      This is what he and Anna Schwartz wrote: "The antecedents of the contraction have no parallel in the more than fifty years covered by our monthly data. … no other contraction before or since has been preceded by such a long period over which the money stock failed to rise." And remember, this was a period when the Dow Jones industrial average rose fivefold in the six years to its peak in September 1929."

      Friedman and Schwartz were referring to the 18 month period between February 1928 and October 1929 when their measure of M2 failed to rise, not the entire period spanning through the 1923-24 and 1926-27 recessions:

      The increase in the Dow Jones from October 1923 to September 1929 was closer to four-fold than five. And from October 1923 to February 1928 M2 *did* increase, by about 25%.

      For those who are interested, the quote comes from the introduction to the chapter on the Great Contraction from the Monetary History:

    3. Excuse me, 20 month period.

  5. No, Noah does not have much tribal affinity for the left (as opposed to contemporary American liberals).

    Anyways, perhaps some might like my speculation on why monetary cranks exist:

  6. Anonymous10:31 AM

    RE: the Pauls. Keep the "right" away from libertarians, please. This is so wrong, like associating Occupy with Harry Reid or something. Totally wrong. Friedman was very influential in building support for market economies around the world. Macro is really a tiny part of economics, the least understood and the least useful, clearly. Friedman's concern was that government was too stupid to do things correctly and would probably make exacerbating errors. Boy did monetary policy do that. This is similar to Hayek stating the impossiblity of acquiring the important knowledge without markets. Both proved quite true.

    1. Friedman could also see that in the event of a Great Depression/Recession, a too-stupid government doing something is still better than doing nothing.

      There's a reason why he opposed Hayek. You seemed to have ignored that part.

    2. Anonymous2:02 PM

      Do you think that just because they identified a couple of "true" things, everything else they believed has merit?

      Did you think that because some of us disagree with a few things that Hayek advocated that we thought every single thing he said was "false"?

      If you think you're arguing with idiots, you probably won't make compelling points.

      I know very few people who don't acknowledge that the idea of market price discovery discussed in the Road to Serfdom is important and compelling. I am not bound, and neither are those other people, to follow Hayek's less important and less compelling arguments and beliefs.

    3. I know very few people who don't acknowledge that the idea of market price discovery discussed in the Road to Serfdom is important and compelling

      So, you think this is something that escaped Keynes?

  7. Here's a kind trick that history has played on Keynes and Friedman.

    There is a town in Buckinghamshire called Milton Keynes. Less well-known, there is a twitter account named Maynard Friedman, which is not obviously a spoof - it has a about 12 tweets, none about economics.

    Noah, could you fix it for Maynard Friedman to visit Milton Keynes?

  8. Anonymous11:34 AM

    It's a sure bet that anything, everything Krugan says is a lie.

    1. Forget economics as a morality play.
      Even better: Economics based on faith.

      Don't you dare be tempted by that Great Satan Krugman, boy!

    2. Anonymous2:06 PM

      So there's not a chance that he messes up and doesn't lie by mistake, even once? Even if I asked him what color his trousers were?

      I guess we can all make up new meanings for arbitrary strings of letters. What does "sure bet" mean in your semantic fantasyland?

    3. So there's not a chance that he messes up and doesn't lie by mistake, even once

      1. False choice - "always" and "never" are not the only possible states.

      2. If it is a mistake, it is not a "lie".

    4. Hey, you're great at setting up strawmen. Congratulations!

      Do you mean to say that when I disgaree with the assertion that "anything, everything Krugan says is a lie" then I meant that "there's not a chance that he messes up and doesn't lie by mistake, even once"?

      Are you the type of person who, when told that the statement "all balls in this bowl are black" is false, immediately thinks that the statement "all balls in this bowl are white" is true?

      I'm not sure you're aware of this, but when you are so fundamentally poor at logic, you really hurt your cause, whatever it is that you espouse.

    5. It's a sure bet that anything, everything Krugan says is a lie.

      Reminiscent of a right-wing comment at now defunct lefty blog, Obsidian Wings:

      "You don't have a brian to think with."

      I am not kidding.

    6. mattski:

      At least that one could be a typo.

      This one up there makes me think that he didn't graduate from high school.

  9. You know, I blame academic economists for this. We spend too much time talking to our students about the supply of money, and not enough talking about the demand for money. We should re-examine if the quantity theory should even be taught.

    1. I'm not sure you'd have an effect.

      I'm increasingly coming to the view that a lot of people think about economics the way they think about religion, where morality and faith plays a bigger part than any logical argument.

    2. That may not necessarily be a bad thing -- myth and religion have their uses, eh?

    3. Myth and religion, especially when taken in the place of reality & humanism, have likely caused more suffering than done good in this world.

    4. Nathanael11:12 PM

      That's a point.

      There's a basic asymmetry in economics between supply and demand. The greatest economists have all talked about this. The first part of the asymmetry is that, generally, and with interesting exceptions, demand comes before supply.

      (Now, other things come before demand. Advertising, for instance. But that's another matter.)

      The accurate model of the firm (which was not taught in intro microeconomics, when I took it in the '90s) starts off with the question of whether the firm is a "price taker" or a "price maker". Most firms are "price makers".

      So the basic economic behavior is: A firm sets a price, usually on a "cost plus" basis. They create a small supply to "test the demand". The demand then appears and is known. The firm and other firms increase production to meet the demand level, at the given price.

      Price adjustments happen rarely. Most competing firms copycat the original firm's price with perhaps a small discount, and the original firm does not change its price when they do so (it instead advertises "The Original and Best!").

      The model of a market where firms are "price takers" is quite different.

      Anyway, once you make a microeconomic model like this based on actual firm behavior, you start being horrified by the nonsense which is spewed by economists about "equilibrium prices", because it's sheer nonsense.

      So, similarly, let's make a model of money. Demand for money is determined by people who want to make transactions and can't find suitable bartering deals. Since anyone can create money (I do so every time I write an IOU), the money will promptly and spontaneously be created. But people prefer "more trustworthy" money, so different "money producers" appear offering different and more trustworthy forms of money.

      Those money producers, such as the Federal Reserve, can artificially restrict supply as part of their attempt to appear trustworthy. If people are not willing to trust other sorts of money, the artificial supply restriction can shut down economic activity which would otherwise take place. This is a *good thing* when used appropriately -- for instance, during the oil shocks, it was crucial to suppress oil-dependent economic activity, which was much of the US's economic activity. (Of course, this was not actually DONE at the time.)

      The rest of the time, the money producers should meet the demand for transactional money, because otherwise they're shutting down desirable economic activity.

      The problem is that money also gets used for hoarding. So the money producers have to create incentives to keep the money transactional, keep it in circulation, or the important measure of the money supply -- the money circulating -- will drop. There are a number of different ways to do this, the simplest of which is inflation, so that the value of the money decays over time.

      This is all pretty straightforward. I'd call it Econ 101, but Econ 101 is instead filled with useless bullshit.

    5. Anonymous3:03 AM

      Saving money is not hoarding, all saving is future spending. If the chinese were not saving so much where do you think america would borrow money from? When you go to the bank and ask for a loan where do you think that money comes from

  10. One day Noah will be remembered for his call for a return to a gold-backed currency.

    Thanks Noah.

  11. Anonymous3:45 PM

    While conservatives may abuse Friedman's monetary policy, they share many of his beliefs.

    Both Friedman and conservatives are largely free market fundamentalists who believe that most of the world's problems stem from government. Shangri-La is achieved by getting the government out of the way.

    They both believe in abolishing many government programs, that institutions like Social Security and food inspections are harmful, advocate deregulation in a variety of industries, flat income tax, educational vouchers, that the Civil Rights Acts is a coercive policy that erodes freedom, and that greed is the noblest human virtue.

    1. Anonymous4:05 PM

      Internationalists in a nutshell, is what right-hegelians have turned into.

      The 'gold backed currency" was never that good in the first place. Much like the Dollar Standard, it was the British's way with their Rothschilds benefactors to control the global economy. The "gold standard" was impossible to follow either.

      When it fell in the early 30's, a world cried in pain. The current US "fiat" system is absolutely back by something: The growth in the US economy. It grows, people happy, terrific financing for production.

    2. First, many of the world's problems do stem from government. Second, while Friedman envisioned a utopia where individuals would be able to able to take care of themselves without government involvement, but he was a pragmatist in that he recognized that a government is sometimes needed to help people get there. You should really watch this video of Friedman contrasts his view with that of Mises and Rand:

    3. Anonymous9:25 PM

      While the government does cause problems at times, there is a reason why the most developed countries on earth are liberal democracies with a strong public sector.

      The conservative/libertarian envision of America would be disastrous. This idea that we need to abolish SS, Medicare, SNAP, food inspection, OSHA, minimum wage laws, child labor laws, environmental regulations, and basically privatize every facet of the government except the military and the court system in the name of liberty is ridiculous.

      Sorry, but I have no interest in listening to Friedman or Mises. Many of their ideas are best left to intellectual masturbation, not reality.

    4. Nathanael11:16 PM

      There is quite literally no alternative to government, other than Somalia-style violent anarchy (not popular) and human extinction (which seems to be more popular every day).

      "Government" is a very vague and generic term, which defines how any society is managed. (Within the corporate office, the corporation IS a government.) The real questions are what sort of government we shall have and how it shall be be chosen.

      Personally, I think democracy is the best system we've found so far; direct democracy is best, with party-proportional democracy being a good second-best.

      Some people believe that we should instead be ruled by those who are particularly good at accounting fraud -- this form of government is called "free markets".

    5. First, except for anarcholibertarians, most libertarians do not believe that there should be no government.

      Second, no libertarian I know is in favor of abolishing child labor laws.

      Third, Milton Friedman's idea was to replace the minimum wage law with a negative income tax (like the Earned Income Tax Credit which was implemented under Nixon and expanded ynder Reagan and Bush senior.) I can keep on.

      "Sorry, but I have no interest in listening to Friedman"

      Of course not, fighting straw men is so much more convenient!

    6. Anonymous1:26 PM

      First, I never said that libertarians believed in no government. You need to learn how to read or stop being so dishonest.

      Second, many libertarians and even Republicans want to abolish or roll back child labor laws. Even the last libertarian candidate supported abolishing child labor laws.

      This is right from the libertarian platform, "We oppose laws infringing on children's rights to work or learn, such as child labor laws and compulsory education laws"

      One would think that a libertarian apologist would know more about libertarianism. Then again, most libertarians are not only ignorant about the real world, they are even ignorant about the ideology that they support.

      This idea of abolishing child labor laws and compulsory education is ridiculous, but then again, so aren't libertarians.

      Third, Friedman did support giving people a minimum income while abolishing the minimum wage and all welfare benefits, While, the NIT morphed into the EITC, this principle is still antithetical to libertarian principles of taking money from one person to give it to another.

      However, to Friedman's credit, he was even smart enough to realize that a capitalistic society could not fully operate on laissez-faire principles and required welfare (Even Friedman realized that he needed to accept reality every now and then).

      The idea to replace the NIT with minimum wage since the belief that minimum wage has large distortionary effects is not supported by the literature. Unfortunately, this does not stop many libertarians from claiming that minimum wage causes mass disemployment and out of control spiraling inflation.

      Plus, if libertarians are really concerned about welfare and poverty, they would not attack Social Security, which is by far the most successful program at reducing poverty.

    7. "First, I never said that libertarians believed in no government."

      No, what you said is this:
      "there is a reason why the most developed countries on earth are liberal democracies with a strong public sector."

      If you agree that libertarians also believe in a strong public sector (e.g. in securing property rights) and that the issue here is what role the government should play, then what point were you trying to make? Yes, I am bad at reading between the lines, I am afraid you will have to be clearer.

      Moreover, you seem to not understand the difference between correlation and causation. Richer economies can afford to pay more for public parks, public beaches, waging wars in faraway lands, etc. This does not mean that it is these government action that is responsible for making them rich. Rather, the causation runs the other way.

      Also, as there are many different strands of liberalism and conservatism, so there are many different strands of libertarianism. Here you are being the left-wing equivalent of Bill O' Reilly who picks out the most extreme strands of liberalism and uses them to evoke negative feelings against liberals. If you don't like it when he does it to you, don't do it to others.

      Thus, there is a diversity of views regarding child labor laws, which by the way are not free of problems. For example, they are responsible for pushing poor kids who could have earned a living in a decent working environment into underground and/or criminal activities (e.g. selling drugs at the corner, prostituting themselves, etc.). A much more effective method of fighting child labor would be to give poor families assistance conditional on the children's school attendance. Which brings me to the following:

      "if libertarians are really concerned about welfare and poverty, they would not attack Social Security, which is by far the most successful program at reducing poverty."

      OK, and if liberals truly cared about poor kids they wouldn't pass laws that turn them into whores and drug dealers. I hope you understand that this kind of argumentation does not lead to a productive dialogue...unless you enjoy being a troll.

      "this principle is still antithetical to libertarian principles of taking money from one person to give it to another."

      If you had not refused to watch the video you would have seen Friedman acknowledge that these are difficult questions, so one cannot take absolute positions. Principles are important guides, but they cannot be so inflexible as to render themselves irrelevant to the real world. This is what pragmatic libertarians (to be contrasted with utopians) have always said. For a pragmatic liberarian the issue is who has the burden of proof. A liberal sees government action as the answer to most social problems, as a friendly handyman. If something is not the way we like it, let's call the government to fix it. A pragmatic libertarian sees the government as a bully. Calling on a bully may be necessary sometimes (e.g. to protect you from other bullies) but you should always first consider seriously the dangers that doing so entails.

      So who knows more about libertarianism now, buster?

    8. Anonymous3:21 PM

      I was perfectly clear when I said this, "The conservative/libertarian envision of America would be disastrous. This idea that we need to abolish SS, Medicare, SNAP, food inspection, OSHA, minimum wage laws, child labor laws, environmental regulations, and basically privatize every facet of the government except the military and the court system in the name of liberty is ridiculous. "

      Many libertarians believe in a Nightwatchmen state. This is not complete anarchy as they believe that there is role for the government to provide a military and to enforce property rights.

      It is not my fault that you have a reading comprehension problem and erroneously said that I equated anarchism with libertarianism, when I clearly did not.

      You have your causality reversed. Institutions like public parks, beaches, education, infrastructure, SS, Medicare, SNAP, clean environment, labor laws, minimum wage, child labor laws are what makes a country developed and worthwhile to live in.

      Libertarianism, on the other hand, find that these institutions are an assault on their liberty and are ultimately harmful to society. Therefore, they are the cause of our problems, not the solution.

      I am not taking the most extreme form of libertarianism. I was just echoing their national platform on child labor laws.

      It is amusing watching libertarians run away from their own ideas, supported by their Presidential candidate and their own party.

      It is equally amusing watching a libertarians equate Social Security to laws that turn children into drug dealers and whores. It is in fact, liberals, who believe in laws that prevent child exploitation, while the more radical libertarians believe that children should have a right to whore themselves out.

      I am sure some libertarian will claim that child labor laws are turning our children into dope sellers and prostitutes, because they would otherwise find gainful employment flipping burgers for $3.00/hr when they are 11 years old.

      Notice that your strongest argument for Friedman and libertarianism is when they sacrifice their ideals and start accepting liberal realities, like welfare and safety nets.

      This is too funny. Essentially, you are saying that "I am not one of those libertarians who accepts libertarian principles, but I am a pragmatic libertarian who believes that government has an obligation to help the poor."

      Gosh, talk about being confused.

    9. "will claim that child labor laws are turning our children into dope sellers and prostitutes, because they would otherwise find gainful employment flipping burgers for $3.00/hr when they are 11 years old"

      An 11-year old would not be very good at flipping burgers. But yes, kids currently engaging in illegal activities would be less likely to do so if they had alternative ways of earning an income. As bad as flipping burgers may be for a 14-year old runaway, it is better than giving a blowjob to strangers at truck stops. Why you find this idea crazy I do not understand. By the way, don't toddlers and kids work in modelling, acting, performing, etc? Is that not child labor? Why is that legal?

      But yes, I am confused. You first accused Friedman for being a libertarian with specific views, and after I documented that Friedman did not share the views you ascribed to him, you start agreeing with Ayn Rand and Mises and accuse him of not being Libertarian enough. Well, arguing for the sake of arguing can be fun sometimes, but I have a life. Good night, and good luck!

    10. Anonymous6:21 PM

      Wow!!! Sorry, but our child labor laws are not causing child prostitution.

      Children can work in a variety of activities with their parent's consent. That does not mean we do not have child labor laws and other laws that prevent exploitative markets, which ironically libertarian hate, but nonetheless the outcome of a libertarian society.

      I never accused Friedman of not being libertarian enough (Once again, your lack of reading comprehension shines through). In fact, I agree with you that he supported a Negative Income Tax.

      I never denied that Friedman supported a NIT. Instead, I pointed out the fact that even Friedman was occasionally smart enough to abandon his libertarianism for reality.

      It is thoroughly amusing that the strongest argument you had to offer to support libertarianism and Friedman's views is welfare.

  12. Anonymous4:09 PM

    When Ron Paul requested to be named to Ronald Reagan's 1982 Gold Standard commission, it was packed with Friedman acolytes including Anna Schwartz as the chief counsel. Schwartz and the Friedman supporters wrote the majority report that rejected the gold standard but suggested minting new gold medalions.
    The Minority reported authored by Ron Paul and Lewis Lehrman, The Case For Gold, is at the top of the Right Wing Canon.
    Maybe Rand doesn't know that Milton was in opposition to his Dad in 1982. But Rand does want a Gold Standard Commission II, prehaps as a do over for dad?

    -jonny bakho

  13. Anonymous4:14 PM

    Nice blogpost Noah.I saw Lars Syll appreicated your post very much to and put it up!

  14. Anonymous5:53 PM

    Friedman wanted to abolish the Fed, not unlike elements of the right today, including Rand Paul...

    "Q: If you were in charge [of the Fed], what would you do that’s different?
    FRIEDMAN: My ideal is to eliminate the Federal Reserve. So I don’t like to speculate what I would do if I were running it."


    1. And yet on every occasion he admits the necessity of something like the federal reserve system to manage the supply of money. It's curious that you didn't quote the very next bit.

      EPSTEIN With respect to your saying you would not want to see a central bank, you long ago proposed that we simply pursue a policy of steady growth in a particular monetary aggregate. But wouldn’t that require a central bank to implement?
      FRIEDMAN Yes, but I would substitute a computer for it, not a central bank. All you would have to do is have it buy or sell X dollars of securities. It is purely a technical matter.

      Apparently Milton never considered in depth how the programming of the computer might be accomplished, because really, something of such importance would require close scrutiny, and frankly, what I've seen of your typical software monkey would leave me terrified at the prospects for program bugs. If anything, I'm put off by just how much work is being done by computer, which I hope we can agree will never replace human insight.

    2. ^+1

      Anon is a derp. Friedman expressed sympathy towards free banking, gold-backed, etc, but he never took the notion seriously. Nice out of context quote.

    3. Sorry, Jefftopia. A person is not properly described as a "derp". You may use the terms "twerp", "derper", or "derp-herper".

      - The grammar police

    4. derp

      *bows head in shame*

    5. Anonymous8:03 PM

      Different anonymous here-

      Don't words just mean what they are commonly understood to mean? So if people want to use derp as a noun, and most everyone understands what is signified, how would that be a misuse of the word?

  15. Anonymous6:31 PM

    Printing money is here to stay because it works. Stocks & earnings are at historic highs, inflation is low, etc. Some favor the Chicago School and others Fresh water but it's always the same type of policy of printing money, buying assets, bailouts etc in the end.

    1. Anonymous9:29 PM

      When adjusted for inflation and real growth, stocks are not at historic highs.

    2. Anonymous12:55 PM

      Printing money is here to stay because government cronies benefit from it at the expense of everyone else and especially the poor.

  16. Anonymous8:47 PM

    Professor Noah Smith,

    Saying M. Friedman invented QE is like saying Allan Meltzer invented the history of the Fed. How about Walter Bagehot invented the ideas of the lender of the last resort and QE0.

    Ralph George Hawtrey (1879 –1975) had a much deeper understanding of monetary policy and the Great Depression than M. Friedman.

  17. Anonymous8:11 AM

    It may be objected that government expenditure financed by borrowing will cause inflation. To this it may be replied that the effective demand created by the government acts like any other increase in demand. If labour, plants, and foreign raw materials are in ample supply, the increase in demand is met by an increase in production. But if the point of full employment of resources is reached and effective demand continues to increase, prices will rise so as to equilibrate the demand for and the supply of goods and services. (In the state of over-employment of resources such as we witness at present in the war economy, an inflationary rise in prices has been avoided only to the extent to which effective demand for consumer goods has been curtailed by rationing and direct taxation.) It follows that if the government intervention aims at achieving full employment but stops short of increasing effective demand over the full employment mark, there is no need to be afraid of inflation.2

  18. Anonymous3:11 PM

    inflation is a simple concept. Given a monetary unit, if the rate of monetary growth exceeds the rate of the production of real goods and services then there is inflation. Inflation can manifest itself in many forms, the current form is wealth transfer to those who get to use the new money. Conventional and historical inflation only occurs if the new money is widely disseminated. The genius of QE is that it is restricted to a very narrow class, so that the inflation is likewise seen in a narrow measure.

    1. One important innovation for monetary policy would be to disseminate new created money in a perfectly balanced manner by using the CB to conduct monetary policy directly with each adult citizen.

  19. Of course much of the "mainstream economics" is just as much a development of other, "Neo-Keynesian" economists including Tobin, Solow and Samuelson.

    In Samuelson and Solow 1960 they had a basically modern approach to macro - including short term Philips curve, natural rate of unemployment and resource shortages influencing inflation. CBs today are not blind disciples of Friedman - they do react to commodity prices for example.

    Even though Friedman was right that M2 growth was too big in the 70s, his approach that only M matters is obviously wrong; his criticism of Keynesians was political and redundant.

  20. Our full time working population shift from 69.2% in 2006 to 44.7% (current) has NEVER recovered. This invalidates ALL past popular economic theories. We'd be best to look at Japan's experience and throw out the current models that have been fully invalidated.

    Garbage in garbage out - these models are primarily used by the power elite to justify economic theft from the working class.

    We've been in a labor depression for a very long time.

  21. Anonymous11:26 AM

    Does anyone here think printing money produces anything except inflation?

    1. It doesn't seem to produce even that...

    2. Anonymous2:56 AM

      If you define inflation as a increase in the quantity of money then it would be. If the government was not printing money prices would be lower and you would have increased purchasing power.

    3. Three points:

      1. It's not right to define inflation as an increase in the quantity of money. This is because if the rate at which money circulates (velocity) changes, a larger quantity of money can be consistent with lower prices. This happened in Japan.

      Prices don't just depend on the quantity of money. They depend on how fast the money circulates.

      2. The Fed printing money does not necessarily increase the quantity of money in the economy. Private banks also influence the money supply. In fact, despite all the money the Fed has been printing in the last few years, the total amount of money in the U.S. economy has gone down, because of the actions of private banks.

    4. Oh yeah, I forgot number 3.

      3. If the government was not printing money prices would be lower and you would have increased purchasing power.

      That's not necessarily true, for the reasons listed above.

    5. Anonymous8:45 AM

      So you do not believe in the quantity theory of money? Prices should always be dropping as business and capital goods gets more efficient. I think your point 1 proves what i am saying. I do not know about your point 2. Has the m1 increased and how does the private banks decrease the money supply?

    6. Quantity theory of money says MV=PY. That's what I was referring to. It's just true by definition. If M goes up and V goes down, PY doesn't change. Simple, right?

      What banks can affect is not M1, but M2. See Wikipedia for more.

    7. Anonymous10:35 AM

      And as the quantity of money increases the less people will want to hold on to it thus causing velocity to increase.

    8. Historically, the exact opposite of what you just said has tended to happen.

    9. Anonymous11:36 AM

      He [the economically illiterate politician] observes that people get food, clothes, and all sorts of objects simply by presenting pieces of paper called checks—and he observes that skyscrapers and gigantic factories spring out of the ground at the command of very rich men, whose bookkeepers keep switching magic figures from the ledgers of one to those of another and another and another. This seems to be done faster than he can follow, so he concludes that speed is the secret of the magic power of paper—and that everyone will work and produce and prosper, so long as those checks are passed from hand to hand fast enough. If that savage breaks into print with his discovery, he will find that he has been anticipated by John Maynard Keynes.

      -Rand "Philosophy, Who Needs It?"

  22. Anonymous12:11 PM

    Keynes and Friedman were just apologists for big government and that printing money was the cure for all our woes. Keynes thought taxing the productive people of society and printing money money to build pyramids was a great idea. The state mucking around in the economy is what causes recessions then people call for more of the same. Printing money cause inflation which hurts the poor the most and then people like Krugman calls for more inflation.

  23. The good thing about inflation is that is bleeds "dead" money. "Dead" money is money in foreign bank accounts that is not part of any productive economy. Hopefully, higher inflation will force this "dead" money back into the productive economy.

    1. Anonymous11:16 PM

      Do you think the money is dead because it is in a foreign bank? Money in the bank is not dead it is leant out by the bank to people and business so as they can buy things they could not not buy with one weeks of money. All saving is the source of spending all money lent out by a bank has to have been saved by someone.

  24. Where is the flaw in this ointment?

    A lot of folks hate the Fed. Why is that? What harm has it done? I think the story goes something like this: Imagine how an entertainment promoter makes money. He hires a great band to preform. He rents a great venue, and pays for both upfront. Then he sells tickets at the right price – the highest price that almost fills the available seats. Then he sells the rest at a discount. I assume at this point that you the reader are not feeling outraged at the promoter’s behavior - free enterprise and all that. Now suppose the promoter keeps on selling tickets, at even greater discounts, until tickets outnumber seats ten to one. At show time a huge crowd gathers and to prevent chaos the ticket takers propose to require ten tickets each to enter. A riot ensues and the show is canceled.

    Isn’t this like what the Fed is doing when it prints money? No. Suppose the federal government decides to build a bridge using borrowed money. The Treasury prints T-bills, and exchanges them with the Fed for Federal Reserve Notes. Then it uses the notes to pay a private contractor to build the bridge. Now the public has a new asset – the bridge, and a new government debt, namely the T-bills held by the Fed. The Fed has new assets (the T-Bills) and new liabilities (the printed dollars). The contractor has new dollars to spend, and the money supply has increased by the cost of the bridge.

    However, the T-bills need to be repaid with interest. The Fed is sitting pretty. It doesn’t have to pay interest on the dollars it printed, but it is owed interest on the T-bills that it holds. What happens next? Suppose the government repays the loan from the Fed with interest. The government has the option of taking another loan by printing more T-bills, or by collecting dollars in taxes to repay.

    In the first case the Treasury issues new T-bills to cover the interest. Then the Fed prints dollars to buy the new T-Bills. Next the Fed pays its expenses. Then it gives all the remaining profit in dollars back to the Federal Government! Then the Treasury uses these dollars to buy back some T-bills. The net cost to the Treasury is the cost of running the Fed. This is tiny in the grand scheme of things. Note that the rate of interest paid on T-bills doesn’t matter in this transaction!

    In the second case, the Treasury (via the IRS) collects taxes and pays back the Fed for the T-bills plus interest. After expenses the Fed sends the remaining dollars of interest back to the Treasury. The net cost is the same as before.

    The end result is that the public has a new bridge. The contractor has new money. In the first case the Treasury has a larger debt, consisting of the original debt plus the cost of running the Fed. In the second case the debt is paid by the taxpayer, together with the cost of running the Fed.

    Notice that the cost of government borrowing is only the cost of running the Fed. This is due to the Fed returning all the net interest that it collects back to the Treasury. Instead of borrowing from the Fed, suppose that the Treasury borrows from the private sector by selling it T-bills. When the bills come due, all the interest is paid to the private sector, and the interest rate then matters.

    When the federal debt is “monetized” or turned into dollars, this is a good thing. The government gets an interest free loan. The private sector gets convenient risk-free tokens to exchange for goods and services such as hamburgers and haircuts.

  25. Anonymous12:05 PM

    In the end, it won't be money that matters most.

  26. Anonymous8:43 AM

    Milton Friedman wanted to ABOLISH the Federal Reserve and Friedrich Hayek was for the Federal Reserve. So this doesn't make sense.