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Tuesday, March 5, 2013

Friedman and Hayek

James Pethokoukis points out (rightly, I think) the folly of the GOP pressuring the Fed to tighten when inflation is low. (I've noticed, incidentally, that the gold commercials on Fox News are careful not to claim that there's an inflation problem now; only that there's a "rising threat" of inflation, or that gold is a hedge against "debt" and "instability.") Pethokoukis also argues that GOP monetary thinking should be shaped more by Milton Friedman, less by Friedrich Hayek:
If Friedman had the same intellectual standing with Republicans today as Austrian economist Friedrich Hayek does, the GOP might at least be aware of the possibility that (1) it was a tightening of monetary policy in 2008 that exploded a modest downturn into the Great Recession, (2) today’s low interest rates signal tight money, not loose, and (3) bond buying is exactly the right policy when interest rates are near zero, inflation quiescent, and the economy moribund. 
Friedman knew that while inflation is everywhere and always a monetary phenomenon, it isn’t everywhere and always a big problem. The year 2013 is not 1980. Instead of badgering Bernanke about inflation, Corker should have hammered him for his historically awful unemployment record, for letting nominal GDP collapse in 2008 and remain below trend since, and for a stop-and-go QE strategy that undercut the policy’s effectiveness in changing the expectations of consumers, businesses, and investors.
David Frum takes heart from the above Pethokoukis passage, saying "It's getting less lonely out here."

Much as I agree with them both on this particular issue, I would also recommend the interesting analysis in a book I've mentioned, The Great Persuasion: Reinventing Free Markets since the Depression, which is basically an extended meditation on the idea that in the early post-World War II era, the right, as encapsulated by the Mont Pelerin Society and guided by Hayek, was more moderate and measured in its free-market enthusiasm than it became from the 1960s on when Friedman guided the Society and also became famous. That's somewhat counterintuitive to me (as I have always thought of the Austrian School as more "purist" than the Chicago School) but there may be something to it.

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