Re: Leftists knocking Friedman ?

On Feb 16, 10:25 am, stuff_st...@[EMAIL PROTECTED]
 wrote:
> On Sat, 16 Feb 2008 02:04:29 -0600, problems@[EMAIL PROTECTED]
 wrote:
> > After some decades [eg. the 70's stagflation] the market anticipated
> >and became immune to the state manipulations.
>
> This is nonsense.
>
>

This is not nonsense at all. The government tried the tried and true
methods of fighting recessions in the 1970's and it only raised
inflation and had no effect on unemployment. The spirit of the
statement is not nonsense. However, the letter of the statement is
incorrect. It shows a misunderstanding of Freidman and Phelps and the
later rational expectations movement. See Friedman(1972) "Have
Monetary Policies Failed?". Here Friedman clearly denotes too things
to check. Did the policy have its intended effect and was the policy
appropriate. In the 1970's the answer to the first question is yes and
no. Under Keynesian demand side recession you want inflation, or
should I say less deflation,  but inflation will cause output to rise
and unemployment to drop. The later did not happen. The reason being
expectations of inflation, fueled by rising oil prices and an
understanding that government was adding to inflation not mitigating
deflation, led to workers demanding higher wages to offset inflation
and a further contraction of supply.

The statement is not nonsense but it is somewhat wrong. The government
policy had an effect. It did not have its intended effect nor was it
appropriate. We now know in similar situations it is best to bite the
unemployment bullet and work hard at bringing down inflationary
expectations.

>
> >Rightly so, Friedman pointed out that decades of post war lack of
> > market discipline had had inevitable results,
>
> More nonsense. it's not a matter of discipline. It was a matter of oil
> embargoes causing stagflation.

It was more than that. It was the adaptation of people's expectations
to government policy. Friedman and Phelps argued not that it was a
lack of market discipline. I believe Friedman is quite clear as to
other than externalities the government often hampered the economy too
much. Reagan's tax reform, and note I am talking about simplifying the
tax code not necessarily providing cuts, was straight from Friedman.
Friedman and Phelps clearly state that systematic policy changes the
way real wages are set in a market. If people know what the government
will do before it does it, which is not hard to do if they follow
systematic policy, then they will adjust to the policy as it is
happening. So in the 1970's inflationary expectations were high the
people knew the government was going to cause more inflation due to
unemployment and workers demanded high wages to keep their real wages
constant. The policy impacted the oil crisis in a bad way. It made
things worse. Friedman and Schwartz clearly show that due to lags this
is the most common outcome of policy.

This is scary considering how the current Fed chair is seeing OPEC
keeping oil prices high coupled with increasing food prices due to the
stupid ethanol policy. He is acting like Burns and going back to the
old Keynesian policy of creating inflation to lower unemployment.
Surprise, Surprise, in a similar situation to the 1970's it is not
working again. We need to be tightening up and fighting inflationary
expectations and repeal the requirement of ethanol as a gasoline
additive ASAP.