Milton vs. Mitt

If it’s within 72 hours since the latest job report, that means it’s time for centrist and left-of-center commentators to excoriate the Fed for its continued refusal to do a damn thing about the tepid recovery. And so it is!

Mr. Yglesias (you guys ever heard of him?) has been banging on this particular drum for years now, to little effect. He’s not a lonely drummer; were it deemed necessary for the cause, a marching band of likeminded econobloggers could be assembled by nightfall! As Yglesias is willing to concede, there is an almost comic asymmetry of influence present in the current debate over monetary policy:

On one team are the leaders of the Federal Reserve, the European Central Bank, the Bank of Japan, and the Bank of England. Alongside them are the political leaders of the United States, Germany, Japan, and England along with the main opposition parties in all of those countries. The Bank of International Settlements wants tighter money. Every few months Brazilian politicians pop up to complain about “currency wars.” And then on the other side you have … a handful of economics bloggers.

Overcrowded though the tight money bandwagon may be, they’ll have to make room for one more.

Two years late and from stage far, far right, here comes the one politician in America who makes Barack Obama look like a restless spirit of impulsive outbursts of emotion; the current, former, future and alleged CEO of Bain Capital, Willard Mitt Romney!

From the AP:

Mitt Romney says the Federal Reserve shouldn’t use new stimulus measures to boost the still-sluggish economy.

The Republican presidential hopeful says he doesn’t think another round of stimulus would help the economy, arguing that previous measures didn’t work.

Romney tells CNN’s “State of the Union” in an interview scheduled to air Sunday morning that business incentives are preferable to more government intervention.

Business incentives are indeed preferable to more government intervention, much in the same way that cake is preferable to death. It’s a less than enlightening dichotomy the (presumptive) Republican nominee is employing in defense of his chosen policy. Maybe Romney misrepresents the nature of the Fed’s decision because his current position is so radical, it wasn’t until mid-January of 2009 that it ceased to be exclusive property of the rightwing fringe. Perhaps Romney’s gone a little scatterbrained from the cognitive dissonance of being a self-described “severe conservative” while at the same time rejecting the most significant work of Milton Friedman, one of movement conservatism’s patron saints.

It was none other than Reagan’s favorite economist who argued that central bankers should never consider themselves out of options, even if they’ve lowered the interest rate (their preferred means of influencing the economy) to zero. Engaging in an after-speech Q&A session at the Bank of Canada, in the year 2000, Friedman had this to say about Japanese monetary policy:

As far as Japan is concerned, the situation… shows how unreliable interest rates can be as an indicator of appropriate monetary policy.

During the 1970s, [Japan] had the bubble period. Monetary growth was very high. There was a so-called speculative bubble in the stock market. In 1989, the Bank of Japan stepped on the brakes very hard and brought money supply down to negative rates for a while. The stock market broke. The economy went into a recession, and it’s been in a state of quasi recession ever since. Monetary growth has been too low. Now, the Bank of Japan’s argument is, “Oh well, we’ve got the interest rate down to zero; what more can we do?”

It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.

The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy. Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity.

Friedman died in 2006, so we’ll never know what his advice to Ben Bernanke and Barack Obama would have been. But judging from these recent comments and, more importantly, his groundbreaking work on the Federal Reserve and the Great Depression, it’s hardly outlandish to claim Friedman, were he alive today, would read much like Yglesias (just with fewer typos). Cato’s Timothy Lee  certainly thinks so. Not to put too fine a point on it, but here’s where Romney stands: To the far right of Milton Friedman and Cato. At least he hasn’t yet threatened bodily harm.

[x-posted]