Ben and Milton are together. Ben is asking Milton a question: “Shall there be action, Master, or depression?” Ben is like Obi-Wan Kenobi to Milton’s Yoda. At first, Milton doesn’t answer. Finally, Milton speaks. “Depression let it be. Deflation it must be.”
This dialogue between Ben S. Bernanke, the Federal Reserve chairman, and Milton Friedman, the great economics professor, never happened. It’s a fantasy. But you can bet a gold dollar that some version of the question, with or without the “Star Wars” motif, rolls over and over again at night in the minds of those who obsess about the economy.
Perhaps the Fed chairman is abusing his old connection to the monetary master, Friedman, as a cover for a policy that Friedman might not endorse. That policy is doing anything Bernanke feels like -- dumping money in the economy, or simply scaremongering -- with the defense that doing so is honoring Friedman’s desire to avoid that deflation, that recession or that Depression.
It is time to call Bernanke’s Friedman bluff. It seems destructive for Bernanke to make statements like the recent one in which he warned that a “very sharp change in fiscal stance” (the tax cuts expiring) would slow the recovery, that we would trip into a “pothole.” We want to get Friedman back to tell us he never wanted concern over a depression to be used this way. Bernanke is operating with a license Milton never gave him.
But, of course, we can’t haul Yoda back. Friedman died in 2006. What we can do, though, is go back through the record and try to discern what Friedman intended.
This story begins 10 years ago, when Bernanke, then a mere Fed governor, publicly honored Friedman on Friedman’s 90th birthday. Friedman had often suggested that a more vigilant Fed would have prevented the strong deflation that featured in the early part of the 1930s, that monetary intervention and change in policy might have prevented the Great Depression.
Concern about Fed errors had been the basis of Friedman’s first great work, co-written with Anna J. Schwartz, “A Monetary History of the United States.” Now Bernanke swore out loud before Friedman that he would use his powers to block a repeat: “Thanks to you,” Bernanke said, “we won’t do it again.”
That does not mean, however, that Friedman always thought monetary policy was the most important kind of policy, or that he would have endorsed all the moves that Bernanke and the Fed take in relation to money. Survey his former padawans, his old apprentices in economics, and they will give you different answers, but most say Friedman disliked policy that was too arbitrary. After all, Friedman’s career was not all monetary. You could even say monetary was “Milton I,” that is, a period in the master’s life. In addition to his “Monetary History,” Friedman wrote “Capitalism and Freedom,” which placed much emphasis on other factors that affect the economy: taxes, regulation, rent control and cronyism. All, at one time or another, were Friedman’s subjects.
While Friedman considered deflation more dangerous than many economists did, especially Friedrich Hayek and others of the Austrian school, he moved beyond it. Many Americans know that Friedman did monetary work, but remember that they first encountered him when they read “Capitalism and Freedom,” or his Newsweek magazine column, or the landmark TV series featuring Friedman, “Free to Choose.”
Other scholars and students do not believe that Friedman would have sanctioned the dollar amounts or the style of “QEII,” the second great quantitative easing by the Fed; or Operation Twist and other recent interventions of the Bernanke Fed. One skeptic is John B. Taylor, a former undersecretary of the Treasury. Taylor’s math suggests that the Fed started to err back in the period of Bernanke’s predecessor, Alan Greenspan, then continued to err later.
An Untidy Performance
In a new book, “First Principles,” Taylor takes on temporary stimuli, such as Fed purchases of debt. He has lately taken pains to point out that Friedman, while emphasizing the importance of the monetary tool, also liked monetary rules: Friedman believed money supply should follow a regulation, not a whim.
Another skeptic has been Anna J. Schwartz herself, who said as far back as 2009 that Bernanke had been too “ad hoc.” Said Schwartz: “Considering Bernanke’s background, you would have expected a much more, should I say, a tidy kind of performance by the Federal Reserve.” Or, as Yoda might have put it: “Reckless is he: now matters are worse.”
Other clues to what Friedman might have done can be found in his analyses of foreign economies. He took a good look at postwar India, which was enduring a problem from which the U.S. suffers today: slow growth. Friedman thought India could grow at 5 percent per annum, a level many other development experts found too high. He blamed the slow growth on the “attempt to control private investment in too rigid and detailed a fashion,” and the “attempt to do too much in the public sector.”
Friedman didn’t say monetary policy didn’t matter in India. He rather made it clear he didn’t believe that monetary policy should be foremost. Monetary policy should get out of the way: “a stable monetary climate is a basic prerequisite.”
But because Friedman is gone, and because Bernanke is a great scholar in a high post, we cannot contradict Bernanke. The only way to get around this problem is to appoint more Fed governors who are trained by other masters: Taylor, or, say, Friedrich “Yoda” Hayek.
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