What Would Milton Say? Scott Sumner on Market Monetarism

There are several well-documented cases of collective memory lapses, in which masses of people have become convinced of something that never actually happened. Contrary to popular belief, the queen in Snow White never says "Mirror, mirror on the wall," the Monopoly man doesn't wear a monocle, Nelson Mandela did not die in prison, and the Federal Reserve did not ease monetary policy leading up to the Great Recession. Beginning in 2009, a professor named Scott Sumner became perturbed by an apparent false memory of the events around the housing crash and subsequent downturn. He started a blog called *The Money Illusion,* which noted certain parallels between the insufficient action taken by the Fed during the Great Depression, and the timid policy pursued under Chairman Ben Bernanke. Bernanke – himself an economic historian par excellence – gave a speech on Milton Friedman's 90th birthday apologizing to him for making the Great Depression far deeper than it needed to be. "You're right," he said, "we caused the Great Depression. We're sorry. But thanks to you we'll never do it again." Yet just a few years later, Bernanke stood idly by as nominal spending plunged, and inflation fell temporarily to negative levels. The failure to act more aggressively stood in direct opposition to Friedman's recommendations for Japan, which ushered in a whole decade of slow growth because of overly tight money. Somehow, the economics profession seemed to forget all about Bernanke's apology (and Friedman's recommendations), acting as if fiscal policy and other regulations were the only way to avoid another recession.

This Sunday (2/25), Professor Sumner joins Bob's producer Charlie Deist from 8-9am PACIFIC to conclude a three-part series on monetary policy and business cycle theory. Sumner is neither a Keynesian nor an Austrian economist, but rather positions himself within Milton Friedman's monetarist tradition. While Friedman advocated a simple rule for targeting the money supply to stabilize prices, Sumner has adapted monetarist ideas for the 21st century, arguing for a "nominal GDP target" (real output plus inflation) that would automatically adjust based on the market's forecast. Tune in live, and stay tuned for the podcast.



Reviving Japan, by Milton Friedman Hoover Digest, April 30, 199