Over at Forbes, John Tamny claims that I am the “most notable modern supporter” of Milton Friedman’s monetary ideas. It’s a remark at once flattering and preposterous. But Tamny does not mean it as a compliment. He proceeds to lambaste the late Friedman, David Beckworth, and me for what he takes to be our views. His main target is a recent NR essay by Beckworth and me on the case for “Monetary Regime Change.”
The vast majority of his criticisms are misplaced, since neither Beckworth nor I hold the views he attributes to us. We don’t believe that the Fed should try to engineer “stable money growth,” as he repeatedly claims. We don’t believe that “printing money” will generally “create wealth.” We don’t believe that the Fed should attempt to target the price level ten years out. And we are not opposed to a long-run decline in the price level. (See, for example, this 2008 paper by Beckworth.)
The late-’70s monetarism Tamny spends some time condemning did indeed hold that central banks should ensure stable growth of the money supply. Tamny quotes the late Robert Bartley’s criticism of the idea, which alludes to the basic problem of this policy: It wrongly assumes that the demand for money balances is constant. Bartley pointed out that the money supply needed to be able to move in response to changes in demand. Beckworth and I agree! That’s our basic critique of the Fed from 2008 onward: The government did not let the supply and demand for money reach an equilibrium.
Tamny writes that “the false logic behind their thinking [can be] fairly reduced to ‘Weak Economy? Just Add Dollars.’” No, it can’t. If the trend real-growth rate of the economy is 2 percent, no monetary policy is going to get it to 3 percent. Neither Beckworth, nor I, nor any sane person disputes this point. The government can, however, destroy wealth, and prevent wealth from being created, by engineering a problem of excess money demand. In the special circumstance where the government has caused this sort of monetary disequilibrium, ceasing to cause it can enable wealth creation.
Tamny’s invocation of Say’s Law — supply creates its own demand — similarly ignores this circumstance. It’s a law that does not apply in cases where the government has created an artificial scarcity of money, as Beckworth points out in his reply to Tamny.
Tamny repeatedly describes Beckworth and me as “central planners” and “interventionists.” Of our essay he writes, “it literally screams the very fine-tuning they quite blindly decry.” (I apologize to all readers for writing an essay that “literally screams”: That sounds painful.) Speaking for myself, I’m quite willing to entertain arguments for a separation of currency and state. But I confess to thinking that until we have free banking, central banks should set monetary policy in a way that is least likely to cause economic damage — a condition I believe is best met by keeping nominal income growing on a stable and predictable path. If you want to argue that central banks should go out of existence, fine, but that is not an answer to an argument about what central banks should do as long as they exist. And if you want to argue that what we have identified as the least-harmful monetary policy would not, in practice, be the least harmful monetary policy, fine too: But in that case you lose the right to slam us as interventionists, since other central-bank policies would be just as interventionist.
Quoting us accurately but misunderstanding the context, Tamny writes, “Further revealing their confusion, they declare that the ‘goal should be to make the price level of ten years from now as predictable as possible.’” In the passage in question, Beckworth and I are explaining what inflation targeting should aim at. But we’re explicitly against inflation targeting. We think the policy we recommend would yield a roughly predictable path for the general price level, but that’s not its main goal. We want to keep nominal income and nominal spending on a predictable path more than we want to keep prices on one.
Given these gross errors on Tamny’s part, it’s no surprise that he bulldozes right over any nuance. Thus he writes that Beckworth and I believe that nominal spending can be restored to its pre-crisis trend by “gunning the money supply.” Actually we believe that supply and demand should be brought back into balance. The more credible a central bank’s policy to stabilize nominal income expectations is, the more it would work by (in the present circumstance) reducing money demand and thereby making large increases in money supply unnecessary.
Two more points: Tamny believes that “the major spike in commodities in recent years” is “the most reliable signal we have when it comes to inflationary monetary error.” This is true only if you assume that, for example, rising Asian demand has no effect on commodity prices. As for gold’s “impressive stability,” well, I’ll just quote from Scott Sumner’s reply to Tamny: “This is written immediately after the price of gold went from $300 to $1900, and then back to $1600. Of course the gold bugs will tell you the value of gold was stable throughout that period, it was everything else that went crazy.”
Second: Tamny says that our assertion that countries recovered from the Great Depression in the order they left the gold standard is “wildly false” (his italics). He presents no evidence that this factual claim is false in any respect, let alone wildly or wildly. He claims merely that the resumption of a gold peg after World War II did not result in adverse consequences. What Tamny is saying, as Sumner points out, is that the 1950s, during which Americans could not legally own gold, represented the triumph of the gold standard while 1929–32, during which dollars were freely convertible to gold, did not demonstrate any of the gold standard’s flaws. And he says that we’re the ones who have made monetary policy into a religion.