And They Say That Allan Meltzer Used to Be a Real Economist...

Allan Meltzer should be ashamed of himself.

Here is the late Milton Friedman, arguing that supporting the banking system with extra open-market operations in late 1931-early 1932 after the shock of the British abandonment of the gold standard would have saved an awful lot of jobs--probably all the jobs lost between August 1931 and January 1932:

Suppose the [Federal Reserve] System... had accompanied the measure by purchase of government securities [for cash]... as called for by the "classic" remedy for an internal drain.... [L]et $1 billion be the amount.... What would have been the consequence?... Reserve purchases of $1 billion... would have meant an increase of $1,330 million in high-powered money... would have permitted a multiple expansion of deposits.... Even if... the deposit ratios would have fallen as much as they did--and for the deposit-currency ratio, the fall in so short a time was the largest on record--the result would have been to cut in half the decline in the stock of money.... Only a moderate improvement in the deposit-currency ratio--a decline from 8.95 to 7.10 instead of 6.47--would... have enabled the stock of money to be stable...

Here is Allan Meltzer, arging that the kind of counterfactual analysis Milton Friedman undertakes in The Great Contraction is nonsense:

http://gopleader.gov/UploadedFiles/10-30-09_Meltzer_memo.pdf: There is no greater recognition of the failure of the stimulus program to create jobs than the efforts to mislead the public into believing the program had saved thousands, or millions, of jobs. One can search economic textbooks forever without finding a concept called “jobs saved.” It doesn’t exist for good reason: how can anyone know that his or her job has been saved? The Administration can make up any number it pleases. The number has no meaning...

If the concept of "jobs saved" does not exist, how come Milton Friedman says that an extra $1 billion of open market operations in late 1931 would have stopped the Great Depression in its tracks.

You can critique models. You can critique parameters. You can critique parameters. You can critique how the calculations are done, but you cannot deny their existence, for the kind of counterfactualcalculations that Milton Friedman does are, of course, the steady diet of what economists and other policy analysts do every day.

So why is Allan Meltzer doing this--saying that Milton Friedman talked nonsense in The Great Contraction? Because it is to the temporary tactical advantage of the Republican Party for him to do so.

Exercise some moral responsibility, Allan.

Shameless partisan hack.