Recently I came across an interesting question posed (in a 2010 article) by David Beckworth and William Ruger of Texas State University: What would Milton Friedman say about Fed policy under Bernanke?
Their answer, I think, would surprise many fans of Friedman, for the heart of their argument is that the Fed has not been aggresive enough in the wake of the 2008 financial crisis and ensuing recession (including now). I had always thought of Friedman as being concerned with stable growth of the money supply. Beckworth and Ruger, however, point out Friedman’s 1992 argument requiring the Fed to stabilize inflation expectations and nominal GDP, not money growth. Because expectations can change on a dime, this policy rule requires that the Fed move aggressively to inflate the currency quickly (and perhaps dramatically) as a response to dampened inflation expectations.
Beckworth and Ruger provide a “market monetarist” reading of Friedman’s corpus. As I wrote awhile back, I think the market monetarists have the potential to become the new thing in macroeconomics. They have the potential to unite those who want an activist policy response to monetary shocks with those who are against discretionary government power, particularly the evils of fiscal policy. Their free-market approach, however, faces opposition from the loony part of the libertarian right, those infatuated with the gold standard, the power of the Fed and inflation. One might call this the Ron Paul wing of the movement (though that perhaps paint with too broad a brush). And then there are the more traditional anti-inflation types, principally those who are hurt by inflation (which is a form of a tax). But that is more of a raw interest than an ideology.
I don’t know the Friedman intellectual history, nor am I a fully convinced (maybe 85%) that the market monetarists are telling the right story. One important thing to keep in mind, though, is that in conjuring up the spirit of Uncle Milty, they have preserved Friedman’s emphasis on rules over discretion. Discretion comes in terms of picking the right rule. Friedman argued for aggressive Fed actions, but only within the framework of the rule. And, in Friedman’s world, the Fed doesn’t get to pick the rules.