Good sentences from Nick Rowe

The right won the economics debate; left and right are just haggling over details.

And here is another bit, one which is in danger of falling down the memory hole:

We easily forget how daft the 1970’s really were, and some ideas were much worse than pet rocks. (Marxism was by far the worst, of course, and had a lot of support amongst university intellectuals, though not much in economics departments.) When inflation was too high, and we wanted to bring inflation down, many (most?) macroeconomists advocated direct controls on prices and wages. And governments in Canada, the US, the UK (there must have been more) actually implemented direct controls on prices and wages to bring inflation down. Milton Friedman actually had to argue against price and wage controls and against the prevailing wisdom that inflation was caused by monopoly power, monopoly unions, a grab-bag of sociological factors, and had nothing to do with monetary policy.

Imagine if I argued today: “Inflation is dangerously low. In order to increase inflation, governments should pass a law saying that all firms must raise all prices and wages by a minimum of 2% a year, unless they apply for and get special permission from the Prices and Incomes Board to raise them by less.” What are the chances my policy proposal would be accepted?

Friedman had a mountain to move, and he moved it. And because he already moved it, we simply cannot have a Friedman today.

There is more here, mostly on Milton Friedman.


Can't we also say that the Great Recession showed the value of the left side of the economic debate? The right did great stuff from the 70s.....but did not have the answer to the Great Recession? And also that the social programs the right dislikes (Social Security / welfare / Medicare) were crucial to softening the pain of the recession? Isn't whoever is right relative to the condition of the economy at that time?

And yet the spending to gdp went down, energy investments and innovation created a price war in the petroleum market.

If Friedman was around he'd be making the case for basic income.

Yes, this.

This may be so, in which case Friedman may not be the best person by which to identify the Right.

Also, Friedman's ideas on monetary policy are not well-understood or appreciated by the right:

"This may be so, in which case Friedman may not be the best person by which to identify the Right."

Really? You should attempt to explain to an average person on the Left and to an average person on the Right, that you want to take all of the money from US Federal wealth transfers and give it to every citizen equally. And then see who thinks it's a good idea.

>that the social programs the right dislikes (Social Security / welfare / Medicare)

You need to put down the New York Times and actually talk to people who are on the right.

Pointing out that a useful program is bankrupt, and inevitably headed deeper into bankruptcy, is not "disliking" the program.

Or suggesting that getting people to work is better than keeping them on welfare.

Social Security is not "bankrupt". Words have meanings and Social Security's finances are not covered by the meaning "bankrupt", even used hyperbolically.

"Social Security is not “bankrupt”. Words have meanings ... " Yes they do, but it's not an inaccurate appraisal of the situation.

"Neither Medicare nor Social Security can sustain projected long-run program costs in full under currently scheduled financing, and legislative changes are necessary to avoid disruptive consequences for beneficiaries and taxpayers."

"Social Security’s Disability Insurance (DI) program satisfies neither the Trustees’ long-range test of close actuarial balance nor their short-range test of financial adequacy and faces the most immediate financing shortfall of any of the separate trust funds.
While legislation is needed to address all of Social Security’s financial imbalances, the need has become most urgent with respect to the program’s disability insurance component.

"After 2019, Treasury will redeem trust fund asset reserves to the extent that program cost exceeds tax revenue and interest earnings until depletion of combined trust fund reserves in 2033, the same year projected in last year’s Trustees Report. Thereafter, tax income would be sufficient to pay about three-quarters of scheduled benefits through the end of the projection period in 2088. "

Most people would consider the program only paying out 75% of the scheduled benefits to be a form of bankruptcy.

I'm not sure we should consider the elections of 2008/2012 as proving the left won the economic debate and "had the answers" to the great recession. Especially since 2010,2012,2014 suggest the public want something "in between."

And some economists believe that longer UI payouts actually create more unemployment, and don't "soften" it exactly. Note that once 99 weeks was cut back to normal, jobs sprang back. Think ripping of a bandaid vs. slowly peeling it away. Which sounds more painful? Which is in reality more painful?

Interesting post. Thanks.

That's true for a policy area which is understood today to be a technocratic macroeconomic question (rather than as a political-struggle-in-tripartite-capitalism question). I should observe that it is not true that "the" right won, as opposed to a particular branch of the right having won - recall that the mainstream right of the 1970s bought into the monopoly-unions/regulatory-costs argument itself.

On the other hand, similarly ivory-tower branches of the left won on other fronts. Mainstream pollution policy is now a question of technocratic measurement, rather than a complex philosophical/judicial struggle over the rights of people and states. The struggle to link tobacco to lung cancer has had a far larger impact on modern culture wars than the vague anti-industrialism in vogue in the 1970s. Ehrlichian anti-immigration and anti-developmentalist populism in the environmental movement has been pushed to the edges within the left since the 70s; on the other hand, the status of environmental issues as something that governments are obligatorily concerned about, and the vague consensus on which environmental values matter, has been largely settled in favour of the left.

Friedman himself would probably not have objected to an embrace of the concept of externalities in the conventional wisdom, but that was very much a niche position amongst the political right way back when.

Until I read your comment, I would have placed the rise of environmentalism as a great victory for the left over the last few decades. But now you show me that it only came because the left stood down from most of their positions, and are pushing only those which could always have gained acceptance from parts of the right.

The better victory for the left is on social issues, where of course the right has stood down from most of its positions, unless you select first small, libertarian sliver which agreed with the left in the first place.

Environmentalism is a good example where ideology gives way to interests. The left is mostly right about environmentalism but it is because the right forgets its own ideology. Stuff works because of property righs. If I own a fish market, I will generate a lot of waste. It costs money to get someone to pick that up and haul it away. I have to incorporate that cost both in deciding how much fish to process coming in and how much to charge for it going out.

Almost all environmental problems boil down to a business interest that has asserted it has a right to 'free property'. A right to put as much CO2 in the air as it wants, or to dump chicken waste in the local river, or coal ash and so on.

"Property rights" As in the discussion of the "property rights" of not-even-conceived humans ala AGW? The "property rights" of an even lesser class than those the US aborts 2 million of annually? Or are there mysterious tracts of land not owned in the United States, or whose owners are restricted by law from suing those who damage their property?

Or are you just making up some BS, ala' Boonton?

I don't think that environmentalism can be classified into left/right sort of thinking, but it appears as though there are very orchestrated efforts by the right to paint environmentalism into a leftist corner.

It seems to be working. I think they are mostly concerned that traditional Conservatives who have the "God said be stewards of the earth" sort of people might leave traditional right wing parties to vote for economically conservative parties which represent environmental issues.

"anti-developmentalist populism in the environmental movement"

You must not live in California. That is alive and well here. Labor unions have even used it as a weapon against investors who were planning to have a non-union plant. Sacramento's new stadium had to have legislators save it from complying with environmental regs. We have entire freeway building projects shut down due to spiders, we are not giving farmers water to save the Delta smelt. There is no offshroe drilling or fracking.

Studying economics in early 2000s, all these weird ideas (Marxism, price controls) were presented to me as stupid ideas and I totally agree. However, if you were asked to pick one or two products/commodities to effectively move prices up or down what would be it?

Oil would make the list easily, wouldn't it?

But, of course, prices move prices. Inflation does not budge by much due to oil compared to the effects of monetary policy, and even then one must isolate the extent to which oil prices change due to special (monopolistic) features of the market.

The Sozialmarktwirtschaft is still wondering when American Exceptionalism will bother to look around at other ways of framing issues than either/or, left/right, black/white, etc.

On the other hand, America is not a country where nobody wants to invest anything because there will be fewer working-age Americans by the time the plant is finished. Classical social democracy works well when there is lots of new labour to pay for everything, but seems not to work as a steady state anywhere.

Perhaps the US learned so well from the French. Take any journal and you'll find at least one opinion article on the "gauche" or "réactionnaires".

I recall Nixon's wage and price freeze of August 15, 1971. It was quite popular and respectable at the time. Friedman's Newsweek column was the main voice against it. National Review did a clever satire. They announced that all their employees deserved raises, so to get around the wage freeze every employee on the masthead was given a promotion to a more pompous title, such as the "Librarian" was promoted to "Keeper of the Tablets."

Wow, I thought you were under 60 yrs old.

Well I am well under 60 years old and I remember the wage and price freeze too. It's true I don't remember the Newsweek column and I certainly had never heard of the National Review. But Steve doesn't write that he remembers those.

Nixon at the same time was pushing the Fed for a looser monetary policy. This caused an increasing growth rate in nominal GDP and increasing inflation.

I also remember Edward Heath, the Conservative Prime Minister of the UK in the early 70s, who also pushed for looser monetary policy and supported wage and price controls with disastrous outcome.

Canada pursued some ridiculous policies in the 70s under then prime minister Trudeau, not the least of which was the nationalization of the Alberta energy industry.

This was on par with Trudeau's friendship with Castro and his socialist dream/prediction that the future was in Siberia.

But have things changed?

His son - a former part time drama teacher - now leads the Liberal Party. He's completely daft, but his support along with support for the socialist NDP, the Greens and Bloc Québécois effectively means 60% of Canadians would be perfectly happy with policies of the 70s.

Canada has - sadly - only performed so well because the multi party system has blunted the ignorance of the majority.

All I know about Trudeau the younger is how much you guys hate him, which surely only helps him. Rob Ford comments:

The next major policy battle to win is on the issue of Open Borders but many on the right are unfortunately not willing to embrace true Free Market principles

You're back! I've missed you.

Oh, I assumed it was getting back on the gold standard. Thanks for clarifying.

Memories are selective, aren't they. Lots of conservatives wanted to control wages, but not prices. And they did win the argument, as wages have been falling in the U.S. since the 1970s. Why is that? Is it a good thing? Something to brag about?

That was due not to wage controls, but to the vanishing of inflationary pressures when a billion Chinese stopped killing each other in the name of the Marxist revolution and started exporting.

I thought this post argued that inflation is solely related to monetary policy? Would liberalization in china have anything to do with inflation in that case?

My theory is that capitalism 'works' by lowering prices given a fixed money supply. The 'background level' of capitalist deflation has increased over the past generation due to China joining the worldwide economy.

To me, this is the basic reason why are seeing deflationary pressures despite what appears to money to be 'extraordinarily accommodative' central bank activity among developed nations around the globe.

Tech is also lowering costs in massive ways.

". Lots of conservatives wanted to control wages,"
In modern time, the only prominent, universal wage control the US has is the minimum wage. And it's pushed far more by the Left than the Right.

Except in Venezuela, where Friedman's lessons go unheeded.

Of course, it was the Nixon administration that imposed wage/price controls and the Ford administration that came out with the WIN (Whip Inflation Now) buttons. Nixon was mostly interested in foreign policy and allowed domestic policy to veer leftward (hello EPA). The establishment Republicans despised Goldwater and did not think any better of Reagan (parallels the conflict between the establishment Republicans and Tea Party types today).

I studied economics in the late 60's and early 70's, with Samuelson's Economics as my intro book. In it I learned about cost-push and demand-pull inflation, and that the Soviet Union's growth rate would enable it to surpass the US economy. Don't hear much about those anymore.

Nixon was indeed very interested in foreign policy, but he was also interested in expanding the appeal of the Republican Party. Much of Nixon's domestic program was geared toward winning the working class for the GOP.

Tyler - since the 70's we purged all the daft ideas from mainstream economics.

Tyler - since the 70's we've lived under the great stagnation.

Some success.

Great post from Nick. Thanks for sharing.

Imagine if I argued today: “Inflation is dangerously low. In order to increase inflation, governments should pass a law saying that all firms must raise all prices and wages by a minimum of 2% a year, unless they apply for and get special permission from the Prices and Incomes Board to raise them by less.” What are the chances my policy proposal would be accepted?

Don't give them any ideas, Nick.

Many good points, but I'd claim that the daft ideas did not come from economists. It just took a while to beat back, here and there, the stupidity of politicians. Microeconomics then was like macro is now. Politicians, not economists, came up with the idea of cutting the deficit during a recession.

Did we cut the deficit during the recession?

Or did we cut it 2-3 years later in the recovery?

As someone who lived through the end of inflation as an active money market economist,
Friedman had little to do with the defeat of US inflation.

The Fed pretended to make money supply growth a target so they could blame the markets for the high interest rates and Congress pretended to believe them.

Tight money and high rates are two sides of the same coin.

Which one caused people to change their behavior--i seriously doubt it was money supply growth.

Targeting nominal GDP growth will have the same problems that targeting money supply did.

The prime rate reached 21% because money was too tight?

How Paul Volcker became a practical monetarist:

Scott Sumner and the Market Monetarists have refined Friedman's macro concepts and advanced the discussion in ways that nobody has since the original.

As Sumner notes, the regime he advocates was mostly figured out and then disremembered by others, so maybe he doesn't get the Nobel. Newsweek is gone, so he doesn't get to write for it for 30 years as Friedman did, but he does have blogging. Sumner's style is similarly pellucid, plain and mostly devoid of the ranting that colors so much econo-blogging.

MM has renewed my hopes that we can tame the macroeconomy and create an essentially permanent moderation, at least after today's thought leaders fade away.

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