Worthwhile Reads – Link Round-up for May 20


What Would Milton Friedman Do?

“‘When your inflation forecast fails for 5 straight years, perhaps it’s time to change your inflation model” by Michael Darda via James Pethokoukis

“When your inflation forecast fails for five consecutive years perhaps it’s time to change your model of inflation?

We would start with some recommended readings from Milton Friedman, many followers of whom (Old Monetarists, or OMs) do not seem equipped with an ongoing understanding of his 1968 American Economic Review article on the role of monetary policy nor his 2003 essay on The Fed’s Thermostat.

Friedman, unlike the OM’s warning repeatedly and falsely about an imminent surge in inflation, looked not just at the money supply but also money demand (i.e. both M and V in the equation of exchange).

Of course, we don’t need to know M or V if we can directly observe NGDP (which is the functional equivalent and the focus on the Market Monetarist movement). This business cycle’s signature feature is the slowest recovery in NGDP of any post war business cycle, following the largest contraction of NGDP since the late 1930s.

It should be no surprise, then, that inflation has averaged its second lowest rate of any post war cycle.Friedman would understand that rates are low because the demand for money/risk free assets has been high and thus, the Fed has not, repeat, has not been inflationary or unduly accommodative.”

The attached chart nicely illustrates: more inflation results in more growth. Those fear-mongering about runaway inflation have done great harm to the economy, and their predictions have been proven false repeatedly.

Judging Monetary Policy

“Why does Geithner think money was tight during the 1930s?” by Scott Sumner

That last claim caught my attention.  I wondered why Geithner thought money was tight during the 1930s. I presume he’s mostly referring to the Great Contraction, from roughly August 1929 to March 1933. Here are some things the Fed did during the Great Contraction:

1.  Short term interest rates were cut quickly and sharply, from about 6.5% to just above zero.

2.  When rates got low the Fed did more and more QE, raising the monetary base through open market purchases of securities.

3.  There was also the Reconstruction Finance Corporation, aimed at helping to support the banking system.

Geithner is right in claiming that money was tight during the 1930s.
But here’s what I can’t understand, why does Geithner think money was tight during the 1930s? I’m pretty sure he’s not a market monetarist, based on his other expressed opinions.  I suppose he might cite the Friedman and Schwartz data on M2, but does anyone seriously think he uses M2 as an indicator of the stance of monetary policy?  Didn’t the Fed stop publishing M3 (its modern equivalent) because almost no one even cared? So once again, what are these “lessons” that the Fed learned from the Great Depression?  Why does Geithner think monetary policy was tight in the 1930s but easy since 2008?  How does he determine the stance of monetary policy?

In other words, those who keep talking about easy monetary policy right now are looking at the wrong variables. Monetary policy has been unnecessarily tight, and therefore harsh on workers and economic growth, for some time now. Until this is recognized by those in and around the Federal Reserve, our prospects will be damaged and we will not fully Fix the Jobs.

Sign of the Jobs Crisis

“U.S. job growth is coming in all the wrong places” by Emily Badger at the Washington Post

“Low-wage industries accounted for 22 percent of the jobs lost during the recession from 2008 to 2010. But they’ve accounted for 44 percent of the employment growth since then, for a net growth of about 1.85 million jobs. That means that the economy we have today is skewed more heavily than it was pre-recession toward the kind of employment that may not even cover basic housing costs.”

Victory of the Month

“ECB readies package of rate cuts and targeted measures” by Andreas Framke, Paul Carrel, and John O’Donnell of Reuters

“The European Central Bank is preparing a package of policy options for its June meeting, including cuts in all its interest rates and targeted measures aimed at boosting lending to small- and mid-sized firms (SMEs).

Five people familiar with the measures being prepared detailed plans involving a potential rate cut, including the ECB’s deposit rate going negative for the first time, along with the targeted measures SME measures.

The package offers some stimulus for the euro zone economy but falls short of the large-scale effect the ECB could unleash with a major program of quantitative easing (QE) – money printing to buy assets.”

For all the mistakes made in the United States, things have been worse in Europe. It is good to see policy makers in other areas moving in the right direction.

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