Tag Archives: Milton Friedman

Monetary Alchemy, Fiscal Science

          The year 2013 marks the 100th anniversaries of two separate major institutional innovations in American economic policy:  the Constitutional Amendment enacting the federal income tax, ratified on February 3, 1913, and the law establishing the Federal Reserve, passed in December 1913.  
           It took some time before the two new institutions became associated with the explicit concepts of fiscal policy and monetary policy, respectively.   It wasn’t until after the experience of the 1930s that they came to be viewed as potential instruments for managing the macro-economy.  John Maynard Keynes, of course, pointed out the advantages of expansionary fiscal policy in circumstances like the Great Depression.   Milton Friedman blamed the Depression on the Fed for allowing the money supply to fall.    [Tools of fiscal policy used by governments, in addition to tax rates and tax deductions, are spending and transfers.  Tools of monetary policy used by central banks include interest rates, quantities of money and credit, and instruments such as reserve requirements and foreign exchange intervention used in various (non-US) countries.]

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The Death of Inflation Targeting

It is with regret that we announce the death of Inflation Targeting.    The monetary regime, known affectionately as “IT” to its friends, evidently passed away in September 2008.   That the demise of IT has not been officially announced until now testifies to the esteem in which it was widely held, its usefulness as a figurehead for central banks, and fears that there might be no good candidates to assume its position as preferred anchor for monetary policy.

Inflation Targeting was born in New Zealand in March 1990.   Admired for its transparency and accountability, it achieved success there, and soon also in Canada, Australia, the UK, Sweden and Israel.  It subsequently became popular as well in Latin America (Brazil, Chile, Mexico, Colombia, and Peru) and in other developing countries (South Africa, South Korea, Indonesia, Thailand and Turkey, among others).   

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Fiscal Stimulus: What do Ronald Reagan and Joseph Stalin have in common?

Photo of Miltie from Univ.Tennessee at Chattanooga

What do Milton Friedman, Ronald Reagan, and the current US Congress have in common with Joseph Stalin?

No, it’s not that they are dead.

Recently I appeared on one of those TV shows where a right-wing host interrupts the guest frequently. (Not that I had realized what it was. I had not heard of the guy, Glen Beck, and the producer had only told me they wanted me to talk about Washington’s reaction to new recession fears.) On the show I said I thought it would be a good idea if the recipients of tax rebates this time around included lower-income Americans, at least those workers who did not make enough to pay income taxes, but who did pay payroll (social security) taxes. This would be in contrast to the last 7 years of tax cuts which have left these people out. The TV host’s reaction was “Welcome to the show Mr. Stalin.” A media watch site called Media Matters for America picked this up, as an egregious comment even by the standards of talk show hosts. Of course the Democratic and Republican leadership of Congress, with the encouragement of the White House, have decided to include precisely these lower-income workers in the tax cuts this time. So I guess they are Stalinists. And Milton Friedman originally proposed the negative income tax, which was enacted as the Earned Income Tax Credit, and became highly successful when expanded by Ronald Reagan (1986) and Bill Clinton (1993). Quite a few Stalinists around!

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