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I am working on an article with the preceding title. I have some ideas, but am also looking for help on a few points. I’ve come up with 2 arguments suggesting that Friedman would have opposed market monetarism, and 10 arguments suggesting he would have favored it. I need more “against” arguments as I’m obviously biased. This is going to be a “scholarly” paper, and hence there cannot be any bias in my analysis. That’s not allowed in scholarly papers. It’s why there is no lumping of t-stats at around 2.0 in published papers. Oh wait . . .

But seriously, I’d like arguments either way. Also I’d appreciate a quotation of Friedman opposing NGDP targeting. Here are two arguments suggesting Friedman would have opposed MM:

1. He once said he opposed NGDP targeting.

2. Other aging monetarists seemed to drift slightly more in the neo-Austrian direction during 2008-09. I’m thinking of Anna Schwartz, and to a lesser extent Allan Meltzer. Friedman might have had the same visceral response to the crisis.

Here are 10 arguments suggesting Friedman might have been receptive to MM:

1. His analysis of Japan circa 1997 bears an uncanny resemblance to the MM analysis of the Great Recession. He diagnoses an excessively tight monetary policy based on the following Japanese data:

Golden period 1982:2 to 1987:2 Troubled Times 1992:2 to 1997:2

M2 + CDs 8.2% 2.1%

NGDP 5.0% (5.4%) 1.3% (2.2%)

Prices 1.7% (2.2%) 0.2% (1.5%)

RGDP 3.3% (3.1%) 1.0% (0.7%)

The figures in parentheses represent US data for our Great Moderation (1990:4 to 2007:4) and the subsequent 5 years (2007:4 to 2012:4). They are obviously similar, except I couldn’t find US data for M2 plus CDs. But the data I did find suggests that US money growth did not slow sharply, which is a significant difference from Japan. However note how he establishes monetary disequilibrium with the NGDP data, and then breaks it down into the two components, prices and RGDP. A very market monetarist way of analyzing the past 5 years.

2. Friedman’s view of the Great Depression was part of a broader strategy to rescue capitalism from the disrepute it fell into during the 1930s. He wanted to show that the Depression was a failure of monetary policy, partly so that it would no longer be seen as a failure of capitalism. We all know that 2008-09 was initially seen as another failure of capitalism, particularly a deregulated financial system run amuck. How would Friedman have countered that view? One option was the Austrian critique of easy money during the “bubble” years. But AFAIK, Friedman (who died in 2006) did not criticize the Fed during this period. On the contrary, he praised the job Greenspan was doing. (I know this is true in 1999, can anyone confirm he continued to praise Greenspan in the 21st century?) So he would not have been able to play the Austrian card in 2008, it was too late. Arguably Anna Schwartz was guilty of the same inconsistency, but people pay less attention to her earlier remarks–Friedman is a huge target for those on the left. Market monetarism (the view that tight money in 2008-09 caused the deep recession) was his only option for defending capitalism. If that seems far-fetched, recall he blamed tight money at the BOJ for bad times in Japan, and they had near-zero interest rates plus QE.

3. Even late in his life he continued to be a fierce critic of the Austrian position. This is from a 1999 interview:

EPSTEIN You were acquainted with the Austrian economist Friedrich Hayek and also are familiar with the work of Ludwig von Mises and his American disciple, Murray Rothbard. When you were talking about bad investments, you were alluding to Austrian business-cycle theory. A certain concept that has pretty much gone into our parlance and understanding fits in with what you said about what happened in Asia. There can be times and conditions in which the stage can be set for malinvestment that leads to recession. FRIEDMAN That is a very general statement that has very little content. I think the Austrian business-cycle theory has done the world a great deal of harm. If you go back to the 1930s, which is a key point, here you had the Austrians sitting in London, Hayek and Lionel Robbins, and saying you just have to let the bottom drop out of the world. You’ve just got to let it cure itself. You can’t do anything about it. You will only make it worse. You have Rothbard saying it was a great mistake not to let the whole banking system collapse. I think by encouraging that kind of do-nothing policy both in Britain and in the United States, they did harm.

4. Other conservatives like John Cochrane adopted a sort of “liquidity trap” monetary impotence view. But Friedman was totally contemptuous of that view over his entire life.

5. Late in his life he began moving away from strict adherence to money supply targeting. From the same interview:

EPSTEIN It seems you are giving Alan Greenspan qualified praise because you are suggesting that, even if you did believe in the institution, then the best way to run the Fed is to target a monetary aggregate rather than a fed funds rate.

FRIEDMAN No, I think circumstances do make a difference. I think there is no doubt that, from 1992 to 1995, around there, there was a very sharp uptick in the velocity of M2 and that targeting money supply at that time in a rigid fashion would not have been a good thing to do. EPSTEIN You are saying, in effect, that the relationship between the money supply and nominal gross domestic product broke down. The old rules no longer held.

FRIEDMAN It has always been a very loose relationship. EPSTEIN But it became much looser.

FRIEDMAN Right. EPSTEIN To the point that you would have abandoned””

FRIEDMAN I don’t know what I would have done. I am not going to speculate on that. I only say in retrospect that Greenspan did the right thing in abandoning primary reliance on M2 during that period. Whether I would have had the sense to do that or not, I don’t know.

Wow! That’s sounds like a really flexible, open-minded guy. Is that how Paul Krugman describes him?

6. In a book written in 1992 (Money Mischief) he endorsed Robert Hetzel’s proposal for an inflation targeting regime based on stabilizing TIPS spreads. That’s certainly consistent with the “market” part of market monetarism.

7. He came close to endorsing the view that fiscal stimulus was ineffective due to “monetary offset.” From the same interview:

EPSTEIN You don’t see any role for fiscal policy that would take the form of running budget deficits?

FRIEDMAN I see a role for fiscal policy from a supply-side point of view; that is, cutting high marginal tax rates will increase incentives on the supply side. But I don’t see any role for it from the demand side. Indeed, it is not easy to find any case in which fiscal policy has worked in the absence of monetary policy.

8. He strongly disagreed with the view that low interest rates or a bloated monetary base indicated easy money. Other monetarists like Anna Schwartz and Alan Meltzer did seem to take one or both of those views in recent years. On the other hand MMs have been equally vehement in rejecting either interest rates or the base as appropriate indicators of monetary policy. Unlike others on the right, we said high inflation was not on the way, and indeed that inflation was likely to fall below target.

9. He differed strongly from the modern view of conservatives, which is that “printing money doesn’t create goods and services.” (Plosser.) He argued on many occasions that money was too tight. Not just the Great Depression and the Japanese deflation, but other recessions as well. Look at his (prescient) warning that the euro was a risky project:

EPSTEIN Do you think the European Monetary Union will be a success?

FRIEDMAN I hope so, but I am very dubious. EPSTEIN Why so?

FRIEDMAN Because the European Union is not an appropriate area for a single currency. There are some cases where a single currency is desirable and some where it is not. It is most desirable where you have countries that speak the same language, that have movement of people among them, and that have some system of adjusting asymmetric effects on the different parts of the country. The United States is a good area for a common currency, for all those reasons. But Europe is the opposite in all these respects. Its inhabitants speak different languages, have different customs. And there is limited mobility between countries. The exchange rate between different currencies was a mechanism by which they could adjust to shocks that hit them asymmetrically””that hit one area differently from another. The Europeans have, in effect, entered into a gamble in which they have thrown away that adjustment mechanism. It may work out all right. But on the whole, I think the odds are that it will be a source of great trouble. EPSTEIN What kind of trouble?

FRIEDMAN The trouble will not be for all of them. Some among them will be affected by developments that would have called in the past for a depreciation of their currency. But given that they are locked into a single currency, the alternative will be a recession.

He could have said it will lead to excessively high inflation in places like Germany, which won’t be able to revalue. But he didn’t. He says (by implication) it will lead to excessively low inflation in countries that need to devalue, but won’t be able to. He didn’t believe that recessions were always and everywhere a tight money phenomenon, but he came pretty close. Certainly far closer than most modern conservatives.

10. Thought experiment. Milton Friedman is in heaven, debating James Tobin. Tobin throws him a curve ball. “But Milton, suppose your policy of a steady 4% growth in the money supply led to an absolutely stable velocity. A velocity that never changed. Wouldn’t that be bad?” Friedman looks perplexed. He wonders if he is walking into a trap. Friedman responds; “No, usually people complain V is unstable, I’d be happy with stable velocity. Indeed I believe that stable growth in M would make V much more stable.” Tobin replies; “But you are on record saying NGDP targeting would be a bad thing, and money supply targeting combined with a stable V is NGDP targeting.”

That’s the moment it hits Milton. “Yes, I see now that the market monetarists are right. I was a market monetarist all along, I just didn’t realize it. NGDP futures targeting is the way to go.”

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