Originally Posted by badhatharry
But you said unequivocally that the theory works and that the only problem is that the Fed has not been bold enough. You say that unemployment would go away of there was enough money injected into the system...but how about the jobs which have gone overseas? how about the fact that our educational system is not producing the kind of graduates that are needed for the kinds of jobs that are available? I know that there are plenty more systemic problems which contribute to unemployment that can't be fixed by a money bomb.
Right now the unemployment is 9% how much of that do you think is structural problems you mentioned? And may I remind you that this level of unemployment is a relatively new thing and not something chronic.
In our current low inflation environment the Fed can create jobs by printing money: it will discourage savings and encourage investment. If it is done sufficiently enough everyone who wants to will get to work. That is also why free trade agreements will have no impact on unemployment, which is a variable the Fed decides on.
There seems to be some disagreement about what Friedman would advise. Here's a contrary view:
Friedman’s main message for central banks was to maintain a monetary rule that kept the growth of the money supply constant. In his Newsweek column, “Inflation and Jobs” (Nov. 12, 1979), for example, Friedman emphasized that “unemployment is . . . a side effect of the cure for inflation,” so that if a central bank “cured” unemployment by inflating, it “will have unemployment later.” In other words, don’t try it.
And here is Scott Sumner's view of what Friedman would advise:
Friedman thinks near-zero interest rates are a sign that money has been too tight. And he suggest that QE is the proper response.
It seems to be pretty popular to play "What would Milton Friedman do?"
As Keynes said:
“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”
I like this one too:
"Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."
People may disagree about details but I think the verdict is that Friedman would advocate more easing not less (same as Hayek by the way). The money bomb was a solution he gave for the 1930s depression era. Moreover the fixed monetary rule is very close to Sumner's NGDP targeting which would require massive easing on Fed's part since in the past 3.5 NGDP has grown about 4% in total where as with a 5% annual target it should have grown about 18%.
More easing will mean less pain among those unemployed. People who have large savings will be slightly inconvenienced in the sense that they have to look for better investments than parking their cash. I say that is a small prize to pay to get out of this slump.