Yet Another New York Times Fail: Ross Douthat Department

Department of "Huh?!": John Taylor and Milton Friedman's Monetary Policy Edition

Milton Friedman, 1998: the Bank of Japan should buy bonds for cash and keep doing so until the Japanese economy recovers:

Reviving Japan: The surest road to a healthy economic recovery is to increase the rate of monetary growth, to shift from tight money to easier money, to a rate of monetary growth closer to that which prevailed in the golden 1980s but without again overdoing it. That would make much-needed financial and economic reforms far easier to achieve…. The Bank of Japan can buy government bonds on the open market, paying for them with either currency or deposits at the Bank of Japan, what economists call high-powered money. Most of the proceeds will end up in commercial banks, adding to their reserves and enabling them to expand their liabilities by loans and open market purchases. But whether they do so or not, the money supply will increase.

There is no limit to the extent to which the Bank of Japan can increase the money supply if it wishes to do so. Higher monetary growth will have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately…

That is an example of Milton Friedman advocating a "target rule".

Now comes John Taylor to claim that Milton Friedman did not advocate "target rules":

Economics One: More on Nominal GDP Targeting: [A]s Amity Shlaes argues in her recent Bloomberg piece, NGDP targeting is not the kind of policy that Milton Friedman would advocate. In Capitalism and Freedom, he argued that this type of targeting procedure is stated in terms of “objectives that the monetary authorities do not have the clear and direct power to achieve by their own actions.” That is why he preferred instrument rules like keeping constant the growth rate of the money supply. It is also why I have preferred instrument rules, either for the money supply, or for the short term interest rate…

First, John Taylor should not cite Amity Shlaes as an authority on Milton Friedman's thought (or on anything else, come to think about it). That is simply wrong. Shlaes is one of those most willing to sacrifice contact with reality in order to advance what she thinks are the current goals of Team Republican. Remember her 2005:

Bush has learnt to ride the storm: [I]s President George W. Bush's foreign policy affecting the federal government's response to New Orleans? Did America react differently to Katrina because it was thinking about Iraq?… [T]he fact that the country and President Bush personally were already mobilised for disaster has saved lives…. September 11 changed Mr Bush and the country…. The level of preparedness for a giant storm may not have been obvious outside the country. But the US was prepared for Katrina. All the old and new federal offices worked together and confronted the storm early…

Second, Milton Friedman--if he were here--would almost surely say that John Taylor's claim that the Federal Reserve "do[es] not have clear and direct power to [boost nominal GDP] by their own actions" is simply wrong. The Fed, he would say, does have the power to do so. What the Fed does not have the power to do , Milton Friedman would say, is to keep the unemployment rate at an average of 4% or real GDP growing at an average of 5%/year.

What Friedman objected to was target rules focused on real outcomes. Friedman, at least by the 1990s, definitely approved of favor of target rules focused on nominal outcomes.