An article
has just appeared on the Vox site entitled “Thinking the unthinkable: The
effects of a money-financed fiscal stimulus.” That idea is in line with the “combine
monetary and fiscal policy” idea pushed by Positive Money, Richard Werner and
Milton Friedman in the latter’s 1948 paper
“A Monetary and Fiscal Framework….”. (See his paragraph starting “Under the
proposal…”).
Of course, the idea is more sophisticated
than simply creating new base money and spending it when stimulus is needed:
that is, a right wing government, rather than go for the above “create and
spend” idea would want to keep public spending relative to GDP constant, or
even reduce it. But that is easily done under the above “PM / Werner / Friedman”
regime by cutting taxes rather than raising public spending.
The above Vox article cites
near zero interest rates as one reason for the “create and spend” policy. And
that is certainly a point: that is if interest rates are zero, it’s difficult
to reduce them any further when stimulus is needed.
However, there is a more
fundamental reason for the create and spend idea, namely that we shouldn’t
deliberately adjust interest rates at all. The latter “non-interference” with
interest rates seems to be implicit in Friedman’s above paper, and certainly I
criticise interest rate adjustments in section 1.6 of the book featured at the
top of the left hand column.
In the 1948 paper which you mention Friedman did NOT support counter-cyclical fiscal stimulus.
ReplyDeleteOn the contrary Friedman argued AGAINST fiscal stimulus: see elements 2-4 of his proposal on pages 2-3.
"No attempt should be made to vary [government] expenditures, either directly or inversely, in response to cyclical fluctuations in business activity."
"Transfer expenditures...should not be changed in response to cyclical fluctuations in business activity."
"The tax structure should not be varied in response to cyclical fluctuations in business activity."
Friedman's policies are discredited because they failed miserably in the 1970s/80s.
KK,
DeleteIn Friedman’s paragraph starting “Under the proposal..” he quite clearly favours AUTOMATIC counter-cyclical stimulus: i.e. he has no objection to government collecting more tax when the economy is buoyant and running a larger deficit in a recession as a result of government handing out more unemployment benefit, etc.
As to DELIBERATE counter cyclical stimulus (i.e. anything over and above the above mentioned AUTOMATIC stimulus), I agree he never favored that (far as I know).
But none of that is of much relevance, because my above article deals with just one narrow point: combining monetary and fiscal stimulus. And Friedman favored that.
Re your claim that ALL of Friedman’s views are discredited just because his extreme monetarist view didn’t work out in the 1970s, I don’t agree with that. He produced a WHOLE RANGE of ideas during his life. Some of them, unsurprisingly, didn’t stand the test of time, and some did.