PeakTrader.com Forum Index PeakTrader.com
Economics, Portfolio Optimization, and Technical Analysis
 
 FAQFAQ   SearchSearch   MemberlistMemberlist   UsergroupsUsergroups   RegisterRegister 
 ProfileProfile   Log in to check your private messagesLog in to check your private messages   Log inLog in 
Log inFast Charts

Interview: Friedman - Fed - U.S. Economy 1982-07

 
Post new topic   Reply to topic     PeakTrader.com Forum Index -> Articles
View previous topic :: View next topic  
Author Message
administrator
Site Admin


Joined: 28 Dec 2005
Posts: 11966

PostPosted: Fri Jul 18, 2014 1:24 pm    Post subject: Interview: Friedman - Fed - U.S. Economy 1982-07 Reply with quote

PeakTrader:

The Fed has to work in the future economy, because of lags in the adjustment process. Moreover, there are positive and negative shocks to the system in the short-run that require adjustments in the money supply, e.g. in recent years, technology shocks, Y2K, 9-11, oil shocks (or commodities in general), the creative-destruction process (mostly from 2000-02), the financial crisis, etc..

Also, I may add, it seems, Friedman believed Greenspan was an excellent Fed chairman:

AN INTERVIEW WITH
MILTON FRIEDMAN
Interviewed by John B. Taylor
Stanford University
May 2, 2000

Taylor: Well, whatever the break point is, why do you think things have changed? Why, as you put it, does the Fed seem to be operating the monetary-policy thermostatic regulator so much better now? What do you think the reason is?

Friedman: I’m baffled. I find it hard to believe. They haven’t learned anything they didn’t know before. There’s no additional knowledge. Literally, I’m baffled.

Taylor: What about the idea that they have learned that inflation was really much worse than they thought in the late 1970’s, and they therefore put in place an interest-rate policy that kept inflation in check and reduced the boom/bust cycle?

Friedman: I believe that there are two different changes. One is a change in the relative value put on inflation control and economic stability and that did come in the eighties. The other is the breakdown in the relation between money and GDP. That came in the early nineties, when there was a dramatic reduction in the variability of GDP. What I’m puzzled about is whether, and if so how, they suddenly learned how to regulate the economy. Does Alan Greenspan have an insight into the movements in the economy and the shocks that other people don’t have?

***

Asset booms and busts are unimportant.

What’s important is sustainable growth, of goods & services, which is optimal growth.

The Fed has done an increasingly better job at smoothing-out both long-wave and short-term business cycles, particularly since the U.S. went off the gold standard, causing faster growth.

Economic boom/bust cycles are inefficient, both in the boom and bust phases, because of periods of strain and slack.

***

The Fed reduces income inequality by smoothing-out business cycles, to maintain sustainable growth, and keeping the country near full employment, ceteris paribus.

Per capita real income, real compensation, and even median real income are much higher.

For example, real median household income doesn’t rise steadily over time. There was a steep rise over five years in the 1990s, including when actual output exceeded potential output, when the Baby Boomers were at their prime, rising from $49,000 to $56,000.

However, it generally maintained that steep 1990s rise, falling to $54,000 and almost rising to $56,000 again in 2007.

It has declined from about $56,000 in 2007 to $51,000 today, over this unnecessary depression.

Chart: http://research.stlouisfed.org/fred2/graph/?g=qHy

****

The U.S. had a long-wave bust cycle from 1973-82, a long-boom from 1982-07, and a recession/depression after the economy peaked in 2007.

Average annual per capita real GDP growth:

1973-82: 0.99%
1982-07: 2.30%
2007-12: -0.03%

Source: BEA

And, there are many factors that influence growth.

Economic booms & busts, feasts & famines, floods & droughts, etc. are suboptimal to a larger extent.

****

And, it should be noted, U.S. average annual per capita real GDP growth in the “long-boom” doesn’t fully capture the vast improvements in living standards, labor standards (or working conditions), and environmental standards, since the U.S. consumed up to $750 billion a year more than it produced in the global economy.

The U.S. has been a “black hole” in the global economy, attracting imports and capital, and even attracting the owners of that capital themselves.

***

Wall Street and Corporate America created enormous value, in the U.S. economy, through efficiencies in production and "gains-in-trade," at the height of the Information Revolution, from 1982-07.

More output, with more market power, was produced with fewer inputs; older industries, with declining prices, were offshored and those goods were imported at lower prices and higher profits; and our trading partners exchanged valuable goods for worth less dollars (rather than for U.S. goods).

Enormous resources (e.g. labor and capital) were freed-up and flowed into emerging industries and high-end manufacturing. Consequently, the U.S. not only leads the world in the Information and Biotech Revolutions (in both revenue and profit), it leads the rest of the world combined, while U.S. manufacturing as a share of world output remained roughly constant at 20%, although huge trade deficits raised our trading partner's output.

****

“In The End of Prosperity, supply side guru Art Laffer and Wall Street Journal chief financial writer Steve Moore point out that the Reagan recovery grew into a 25-year boom, with just slight interruptions by shallow, short recessions in 1990 and 2001. They wrote:

“We call this period, 1982-2007, the twenty-five year boom–the greatest period of wealth creation in the history of the planet. In 1980, the net worth–assets minus liabilities–of all U.S. households and business was $25 trillion in today’s dollars. By 2007, net worth was just shy of $57 trillion. Adjusting for inflation, more wealth was created in America in the twenty-five year boom than in the previous two hundred years.””

****

Arthur Laffer:

“B.A. in Economics from Yale University (1962) and an M.B.A. (1965) and a Ph.D. in Economics (1971) from Stanford University…member of Reagan’s Economic Policy Advisory Board (1981–89)…best known for the Laffer curve…played a key role in writing California Proposition 13, the property-tax-cap initiative that inspired a tax revolt across the nation…a staunch fiscal conservative and libertarian…stated publicly that he voted for President Bill Clinton in 1992 and 1996…references President Clinton’s conservative fiscal policies as cornerstones of his support.”

****

Menzie Chinn, I agree, expansionary fiscal policy is needed in a recession.

However, politicians/lawyers spend too much when the economy isn’t in recession.

From Commanding Heights:

“Keynes intended government to play a much larger role in the economy. His vision was one of reformed capitalism, managed capitalism — capitalism saved both from socialism and from itself.

Fiscal policy would enable wise managers to stabilize the economy without resorting to actual controls. The bulk of decision making would remain with the decentralized market rather than with the central planner.

…fiscal policy — spending, deficits, and tax. These tools could be used to manage aggregate demand and thus ensure full employment.

As a corollary, the government would cut back its spending during times of recovery and expansion. This last precept, however, was all too often forgotten or overlooked.”

---
Back to top
View user's profile Send private message
Display posts from previous:   
Post new topic   Reply to topic     PeakTrader.com Forum Index -> Articles All times are GMT - 8 Hours
Page 1 of 1

 
Jump to:  
You cannot post new topics in this forum
You cannot reply to topics in this forum
You cannot edit your posts in this forum
You cannot delete your posts in this forum
You cannot vote in polls in this forum


Powered by PeakTrader 2.0.8 © 2001, 2002