Arnold Kling  

Kling on Kuttner on Kuttner vs. Friedman

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My latest essay.

Kuttner has apparently missed the point of the concept of a natural rate of unemployment, which is that the unemployment rate should not be a "target for monetary policy." What Friedman means by the term natural unemployment rate is the rate toward which the economy will gravitate without any attempt at activist management by government. It is because the economy will settle on this natural rate that the Fed should not intervene to manipulate unemployment. If you are not intervening to manipulate the unemployment rate, then the accuracy of your measure of the natural rate of unemployment is irrelevant. Uncertainty about the level of the natural rate is a problem only for the opponents of Friedman, who are interventionists.

This essay refers to an article Kuttner wrote after his debate with Milton Friedman, about which I blogged here. If anything, Kuttner comes across less well solo than he did in the debate.

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CATEGORIES: Monetary Policy

COMMENTS (6 to date)
Javier writes:

Ouch. That was an excellent smackdown.

And what of the industry lobbying that led the Republican Congress, as part of the Contract with America, to weaken the laws that allowed defrauded investors to sue and virtually invited abuses? “I don’t know what those amendments were. You’ve got me out of my depth,” he said modestly.

I was surprised that Friedman didn't get Kuttner's disingenuous reference to the Private Securities Litigation Reform Act of 1995 (sometimes known as the Lerach Act after the most egregious of the California predatory trial attorneys). Especially since Stanford Law school is all over the misrepresentations of it made by the likes of Paul Krugman, his erstwhile ally Ben Stein, and now Kuttner.

To make a long story somewhat short, prior to the Act, there were professional securities fraud plaintiffs targetting high tech (i.e. Silicon Valley) publicly traded companies. They'd buy a few, or even one, share in volatile companies, and when the share price would drop by 10%, race to a courtroom claiming management wrongdoing.

Which allowed the first guy to get to court to represent all other investors (class action suit), and use his lawsuit to go on a fishing expedition in the company's files for 'evidence' of wrongdoing. The PSLRA changed the rules to put a stop to the race to the courthouse, and to require some actual reason behind the suit, besides that its stock price had dropped.

The Krugmans of the world howled that the Republicans had put an end to stock fraud suits because of it. But, Stanford Law school kept track of the before and after, and found no such thing had occurred. There's a years long running section of their website showing it:

eddie writes:

Most of Kuttner's column is ridiculous, and Arnold does a good job pointing out the flaws. But I found one section interesting:

On at least six occasions, Greenspan persuaded his colleagues to intervene very actively, stretching the limits of the law, to keep markets from destroying themselves.

He specifically mentions Greenspan's influence after the 1987 stock market crash, the 1990 Citibank bailout, the S&L bailout, the Mexican bailout, the Asia meltdown, and the Fed's actions post-tech-bubble. The last two seem like normal Fed action to maintain the money supply appropriately, but the others seem like Greenspan either directly caused or strongly advocated for intervention in the form of bailouts - actions which I would consider "intervention" quite different from simply trying to keep money supply adequate and prices stable.

I'm not really sure what Kuttner's point is, but I do have to question the correctness and/or appropriateness of Greenspan's actions, particularly from a conservative/libertarian/non-interventionist point of view. I suppose Kuttner's point is that Greenspan acted correctly, and thus saved the world from economic ruin, and thus Friedman's ideas that the Fed should just attend to monetary policy rather than targeting other macroeconomic goals is wrong.

Anyone else have any thoughts on the subject?

Dewey Munson writes:
natural rate of unemployment,

Why shouldn't an economic goal be Zero natural rate?
Then the goal would be to find each person's max utility.

Then everyone would be doing something - certainly a goal which would square with a society which tries to advance everyone.

James writes:

"Why shouldn't an economic goal be Zero natural rate?"

For the same reason zero friction is not a goal for energy policy.

Chris Bolts writes:
Why shouldn't an economic goal be Zero natural rate? Then the goal would be to find each person's max utility.

Then everyone would be doing something - certainly a goal which would square with a society which tries to advance everyone.

But what if someone wants to do nothing or is so handicapped that he or she cannot work? If this is the case, then you would always have unemployment which makes a zero natural rate not only unlikely but impossible to occur.

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