jbdelong

As you know, Paul, ever since I decided to force my 700 Econ 1 students to read Milton and Rose Director Friedman's "Free to Choose", I have been trying to understand why those who claim to be Friedman's intellectual disciples--especially those who hold appointments at the Becker-Friedman Institute--have not been aggressively out there condemning Bush, Bernanke, and Obama for insufficient policy activism. The natural generalization of virtually all of Friedman's work to the current situation is that the task of the government is to Stabilize the Growth Path of Nominal GDP by Any Means Necessary--which means issuing cash and buying stuff that is not a perfect substitute for cash with it until nominal GDP is on its previous growth path.

Yet the ranks of Friedman disciples appear to be limited to Scott Sumner and (perhaps) David Glasner.

And in this morning's FT I read my guru Martin Wolf writing about how for central banks "The immediate task is to manage an exit from the interventions." He does go on to say that "A far greater danger exists of premature retrenchment than of excessive delay..." but the initial sound bit makes me wince. And his colleague the highly-intelligent and usually reliable Gideon Rachman denounces you for shrillness and warns us that "the assumption of unlimited Dutch and German creditworthiness" to support fiscal expansion "is unconvincing".

It seems to me that we have lost not just those professional Ph.D. economists who became addicted to DSGE and RBC models and lost touch with reality, but have also lost a good many who either want to retain contact with reality or who ought to be willing to worship Milton Friedman as their guru. And I am still not sure why, or how...

Yours,

Brad DeLong

There will come along times when you want to run deficits: wars, Marshall Plans, other national emergencies, depressions when the economy is at the ZLB and the central bank cannot or will not get you to full employment.

In all of those situations, you want to be able to run large deficits without sending your interest rates sky-high.

If you run large deficits during normal times--when the Federal Reserve is perfectly capable and willing to manage aggregate demand to get us to full employment--you use up the debt capacity that you want to hold in reserve. See Christina Romer "Fiscal Policy in the Crisis: Lessons and Policy Implictions" http://emlab.berkeley.edu/~cromer/Lessons%20for%20Fiscal%20Policy.pdf Figure 2.

Thus running big deficits in normal times--especially to fund tax cuts for the rich--is a bad idea.

Yours,

Brad DeLong