One year ago, I argued in Reason that Milton Friedman’s writings on the Great Depression inspired the Federal Reserve’s response to the current economic crisis. Friedman held that artificially induced inflation would have prevented the ordeal of the 1930s, so I inferred that Fed Chairman Ben Bernanke’s implicit goal is likewise to ramp up inflation as a cure to our present ills.
A year later, the Fed is beginning to make that goal explicit. Over the past few weeks, Bernanke and other Fed bigwigs have been dropping conspicuous hints that they plan to boost inflation and pump another round of conjured-up cash into the economy. One proposal is to inject $100 billion per month. It’s being called Quantitative Easing 2 (QE2).
But why should the sequel be any more compelling than the original, which cost over $1 trillion and failed to move the unemployment rate or decisively revive the American economy?
This time, the Fed evidently believes that low interest rates and printed money no longer suffice, because—as the Chicago Fed president recently announced, and as John Maynard Keynes predicted would happen in an environment of zero interest rates—the U.S. is stuck in a liquidity trap. To get us out, the Fed is deploying its wonder-weapon: placebo inflation. Bernanke wants to start people thinking that prices will rise so that prices will rise. The Fed is planting a self-fulfilling prophecy in our heads. It’s kind of trippy.
Chicago Fed President Charles Evans, one of inflation’s loudest proponents, laid out the logic in an interview with the Wall Street Journal on Oct. 2:
If we could indicate to the public that we want inflation to increase toward that price stability goal [of 2 percent per year], that would serve to lower real interest rates given that short-term nominal interest rates [as set by the Fed] are close to zero.
More recently, Evans suggested temporarily coaxing inflation above 2 percent so that consumers and businesses splurge their money now, knowing that it will lose value if they hold onto it.
It’s not hard to spot Friedman’s posthumous hand in this business of inflationary QE2. Evans came right out with it in the Journal:
Milton Friedman looked at the U.S. economy in the 1930s and he saw low interest rates as inadequate accommodation, that there should have been more money creation at that time to support the economy…. I’ve come to the conclusion that conditions continue to be restrictive even though we have a lot of so called accommodation in place. An improvement would be a dramatic increase in bank lending. That would be associated with broader monetary aggregate increases. Then we would begin to see more growth and more inflationary pressures and then that would be a time to be responding.
Evans invoking Friedman is bizarre for several reasons—and not only because the theories of the late libertarian patron-saint are being trotted out to justify gigantic interventions in the world market.
- Friedman’s prescription was for a period, 1929-1933, of cataclysmic double-digit deflation. Today, the U.S. is experiencing glacial-paced disinflation, if that. The inflation rate now stands at 1.1 percent, and even Evans forecasts that inflation, if allowed to run its course, would only come down to 1 percent by 2012. There is no apparent risk of imminent catastrophic deflation, and still the Fed is considering emergency inflationary measures that Friedman only proposed for a period when the money supply had contracted by roughly a third.
- Friedman made his reputation as an inflation-fighter. His philosophy of monetarism conquered Keynesianism in the 1970s by promising an end to the chronic inflation of the time, and his first laboratory was authoritarian Chile, whose inflationary chaos he helped tame.
- Anna Schwartz—the only living progenitor of monetarism and the co-author of Friedman’s The Great Contraction: 1929-1933—told me last year that the Fed’s policies risk runaway or even hyperinflation. Indeed, she has become one of the most outspoken critics of her would-be monk, Ben Bernanke, the very man who provided the afterword to the latest edition of The Great Contraction, which Bernanke cited as the basis for today’s zero interest rates.
The Fed’s avowed monetarism should give pause to people like the Tea Partiers, who are convinced that the U.S. is caught in a neo-Fabian or Leninist transformation and that QE2 is another extension of socialist planning that could plunge America into civil war. That Fed Chairman Bernanke claims to be a disciple of Milton Friedman, and that Alan Greenspan was a follower of both Friedman and Ayn Rand, suggests that the Federal Reserve, the pre-eminent economic bureaucracy in the world, is a throne of libertarianism.
It is Friedman, not Marx or even Keynes, who has had the deciding influence on the world economy of the past and present century. Don’t take my word for it. Read this 2006 New York Times obituary of Friedman, entitled “The Great Liberator,” in which Lawrence Summers, chief economic advisor to President Obama, wrote:
Not so long ago, we were all Keynesians. (“I am a Keynesian,” Richard Nixon famously said in 1971.) Equally, any honest Democrat will admit that we are now all Friedmanites. Mr. Friedman, who died last week at 94, never held elected office but he has had more influence on economic policy as it is practiced around the world today than any other modern figure.
Friedman is dead. Long live Friedman.