Scott Sumner  

The Wall Street Journal must think Milton Friedman was a Keynesian

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This has to be one of the most amusing things I've read all year:

The problem comes from believing that QE is some magic growth elixir. The world's Keynesians have convinced themselves that the U.S. is now growing faster than Europe simply because the Federal Reserve implemented QE while Europe hasn't.
Where does one begin? Keynesians believe that QE does not work at the zero bound. Indeed that's pretty close to a defining characteristic of Keynesianism. Both Milton Friedman and John Hicks claimed that the liquidity trap was the key insight of the General Theory.

Market monetarists have been arguing that QE does work, and before us Milton Friedman made that argument for America in the 1930s, and Japan in the 1990s. Instead, Keynesians believe the eurozone has done worse than the US because of fiscal austerity, even though the US has done more austerity than the eurozone over the past 4 years.

If a few heterodox Keynesians have come to believe that QE works, it's not because they "convinced themselves" but rather because they became convinced that the market monetarists were correct.

I guess there are worse things than being ignored by the WSJ; look how the Financial Times describes market monetarism:

The market monetarists argue that the central bank should target a certain measure of broad money in circulation to achieve price stability.
PS. If you read between the lines, the rest of the WSJ article suggests that they want the ECB to push the eurozone into a grinding depression so that voters will be persuaded that socialism doesn't work and the continent can adopt the supply-side policies that the WSJ (and I) favor. That's a really bad idea, for all sorts of reasons.

HT TravisV


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COMMENTS (9 to date)
David R. Henderson writes:

Great post, Scott.

Tom writes:

I frequently see these types of errors come from news media. In my opinion in comes largely from two things:

1) Writers laziness, they are looking to draw people to an article and are not as much concerned with the underlying details

2) Economics is complicated and the average writer/journalist simply does not have the knowledge base to be able to distinguish between different viewpoints.

The one thing that bothers me about the field of economics is that personal opinion is so often combined with “reporting”- the idea that everyone is an expert on the economy. However the same level of bias is typically not represented in articles pertaining to other sciences such as health.

PK’s recent interview at BusinessInsider has him “Destroy The Argument That We Can't Pay Fast-Food Workers Higher Wages” by essentially claiming that raising the minimum would not hurt the job market… Great argument, but that gets shuffled back into the liberal self-perpetuating loop of economic doctrine: Raising the minimum wage is good for the economy.

Journalism today is very sloppy.

Now here's a post that should be entered in the Coolidge contest.

Thanos writes:

Ofcourse in a sense you are right but most central bank economists support QE and they are New Keynesians right??

ThomasH writes:

Keynesians believe that QE does not works at ZLB?

I thought the Keynesian position was that buying T bills does not work at the ZLB + that the Fed/ECB is politically constrained* (in different ways) from doing (much) QE but are not (at least the Fed is not) likely to let an increase issue of T-bills push rates above the ZLB. Hence there is a role for an increased fiscal deficit to increase aggregate demand.

* by inflation hawks on the Fed Board, fears of "financial instability" concerns about allocation effects of purchasing certain LT assets and not others, or who knows what else.

J.V. Dubois writes:

What I would find funny about WSJ article - if it was not so sad at the same time - is if you put it in the context of recent blog "Class interests" by Simon Wren-Lewis. Here are his thoughts:

"... but there could be a reason why now, like the 1980s, is a particularly important time to keep unemployment high for a while. The reason for this is that the aftermath of financial crisis is extremely threatening to the neoliberal political consensus and the position of the 1%."

So both on the right and on the left we see people believing that fall in aggregate demand is damaging to neoliberalism/socialism. That may surely explain something.

But in the end I kind of agree more with Simon Wren-Lewis. Only I do not think that the type of socialism this policy breeds is his preferred one.

Greg Jaxon writes:
The problem comes from believing that QE is some magic growth elixir.
Scott and Tom can dispute the author's use of collectivist labels til the cows come home with no effect. The meat of the argument is whether this commoner journalist's gut feeling that "QE does not a vibrant economy make" is correct, and whether faith in centrally-planned and -executed QE is not, perhaps, a major philosophical mistake of modern economists.

"[T]he idea that everyone is an expert on the economy" may be wrong if one seeks a master of the aggregated data. But by definition of an economy (independent agents acting in their own self-interest) everyone is master of their own role. The logical consequences of this are equally accessible to all who give it enough thought, credentials notwithstanding.

I concur with Scott's reading of the WSJ's intentions regarding European austerity. But I'm dismayed that none of you support organic monies, free banking, or other classical remedies to the new era of Boom+Bust, Stagnate...., (repeat).

Greg Jaxon writes:

Tom writes:

The one thing that bothers me about the field of economics is that personal opinion is so often combined with “reporting”- the idea that everyone is an expert on the economy.

Greg retorts:
The one thing that bothers me is the idea that someone is the expert on the economy. Not only is this idea false by construction, it has led to the legalization of economic authorities and the establishment of elite hangers-on that believe the Fed, the ECB, et al can somehow act outside the Laws of economics (assume monopoly control of the Money-Good) by virtue of having Good Intentions.

My reading of Scott and Tom's complaints about this article is that it is all elitist tsk tsking that the reporter failed to kowtow to the proper authorities on the subject or to help their teams jostle for most-favored status in the pecking order of economic central planning they both advocate.
If reporters are expressing doubt about QE even at this late stage, could it perhaps be that none of the original arguments for it were ever totally convincing; that Scott's additional claims that there is a dose-dependent discontinuity in its effect are nonsense; that the practical effects are not impressively positive; that the commoner subjects of this elite plan want to see it reviewed a few more times until the basic flaw is clear to all.


Scott Sumner writes:

Greg, I support free banking, I just don't think it solves the problem of the business cycle.

Everyone, Just to be clear, many Keynesians say something to the effect "I don't think QE works at zero rates, but it's worth a shot." So yes, they "support it." But it's certainly not a Keynesian idea.

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