Just one post yesterday, “Milton’s Paradise, Still Lost:”
Robert Skidelsky has an interesting note asking why quantitative easing has received so much stress in recent economic debates. Its effectiveness is, after all, questionable — whereas there is overwhelming evidence that fiscal policy works as advertised.
Skidelsky is right, I think, to downplay the idea that it’s all welfare for the financial service sector. After all, many of the most bitter critics of QE come from Wall Street.
He argues that the affection for QE comes, instead, from the alluring prospect — to some conservatives, at least — of getting economic stabilization without any need for activist government outside the narrow sphere of monetary policy. What he doesn’t say clearly, at least in this piece, is that this was the allure of old-fashioned monetarism too. Just stabilize the money supply, declared Milton Friedman, and we don’t need any of this Keynesian stuff (even though Friedman, when pressured into providing an underlying framework, basically acknowledged that he believed in IS-LM). Why, if only the Fed had stabilized M2, there would have been no Great Depression!
Friedman’s money supply rule soon proved itself inadequate, but a more flexible kind of monetarism — one that still left no role for fiscal policy — did end up ruling conventional wisdom from the mid-80s to 2007, the era of the Great Moderation. Then came the Great Recession, the Fed funds rate came up against the zero lower bound, and we were banished from the monetarist paradise. In fact, as I’ve written on a number of occasions, recent experience pretty conclusively shows that Friedman’s claims about how easy it would have been to avert depression were all wrong.
Still, QE, in the eyes of its most enthusiastic advocates, can return us to Milton’s Eden. And they are determined to read the evidence as confirming that hopeful notion.
Yet there are many economists, myself included, who regard this view as highly unrealistic, yet support more aggressive Fed action all the same. Why? First, because it might help and is unlikely to do harm. Second, because the alternative — fiscal policy — may be of proven effectiveness, but is also completely blocked by politics. So the Fed’s efforts are all we have.