Afternoon Must-Read: Robert Waldmann: Debates
Name a Friedman Solow debate which, with the benefit of hindsight, we agree was won by Friedman. I do not think this is easy to do….
My challenge was to name a Friedman-Solow debate and convince me (Robert Waldmann) that Friedman was right. Rowe interpreted ‘we’ to refer to… mainstream… macroeconomics…. For that set of people I use the pronoun ‘they’….
Take it as agreed that new Keynesian macroeconomics is basically Friedmanite macroeconomics… are very different from old Keynesian macroeconomics and [from] real business cycle theory…. This victory came in one of two ways… the victory over the straw man of the expectations-unaugmented Phillips curve…. The conventional recollection of that alleged debate is almost entirely fictional…. Samuelson and Solow 1960. Yes the profession (also over here with huge persistent unemployment) believes in the natural rate hypothesis. The profession is crazy. The permanent income hypothesis is… rejected… now the permanent income model and it is assserted that although it isn’t true it may be useful (the logic is almost that since it isn’t exactly true it must be useful)…. There is the idea that AD should be managed with monetary policy…. Recent experience doesn’t show that good monetary policy solves AD problems….
There is strong evidence that expansionary fiscal policy (as in China) works, that modestly expansionary fiscal policy (the ARRA in the USA) works moderately and that austerity has terrible consequences…. The weight of evidence is very strongly against the idea that the best way to manage AD is always monetary policy. I note that part of the Friedman vs Old Keynesian debate was whether liquidity trapping was possible. Friedman argued no. I think the debate should be considered settled….
Floating exchange rates may beat the alternative, but the idea, which I ascribe to Friedman, that they won’t fluctuate widely with associated huge current account surpluses and deficits is now known to be false…. Rules v discretion in monetary policy. Has anyone noticed that the FOMC is not working according to a rule?…
Rowe and I agree that Friedman dominates mainstream (non RBC) macro…. He seems to think that this is the result of some sort of inquiry which might be construed as scientific. I think it is based on… contempt for the evidence….
I see I have gotten off topic…. I can think of two debates. One alleged and very famous debate was about the Phillips curve. However, recollections of Solow’s position are inconsistent with what he actually wrote. I see two points where Solow disagreed with Friedman…. Solow argued that inflation expectations were sometimes anchored…. Here, current discussion seems to me to follow Solow almost exactly. Second, Solow discussed cyclical unemployment becoming structural. This is now called hysteresis. As far as I know, Friedman didn’t consider the issue. It seems to be quite important….
On the PIH, Solow dismissed Ricardian equivalence. Friedman didn’t use the phrase, but he clearly appealed to the concept. I think the evidence on this point is very clear….
Alan Marin wrote something I was groping towards above:
Finally, for now at least, I think that on the crucial Rules vs. Discretion 1970s disagreement between Friedman and the Keynesians, current practice… is closer to the Keynesians. Nick Rowe overstated the Friedman ‘victory’ by ignoring the distinction between instruments and targets. Steady inflation is now viewed as a target, but Central Banks are given full discretion over their use of the instrument. This is very different than a Friedmanite rule…. Similarly, CB monetary policy does not take Friedman’s view that the lags in the effects of policy are so long and variable as to make any response to current events undesirable.