Economists have gotten a lot wrong over the course of this pandemic, and long before that, but there is one whose ideas have never looked better: Milton Friedman, the Nobel laureate who died in 2006.
Friedman’s reputation suffered after the Great Recession, as the market forces he so believed in were at fault. Worse yet, after the financial crisis, the U.S. Federal Reserve expanded the money supply dramatically, but the rate of price inflation remained stubbornly low. Monetarism, the theory he is best known for, appeared irrelevant.
Yet it isn’t, as the current debate over inflation attests. People might disagree over what is causing a 6.2% inflation rate, but there is consensus on the solution: It will be up to the Fed — and monetary policy — to get rates of price inflation back down. Furthermore, as Friedman would predict, this disinflation process will be painful and may cause a recession.
And while there is plenty of debate over the correct timing of this response — markets are expecting multiple rate hikes over the next year — the importance of the Fed’s decisions is not in question. Restoring monetary stability is once again a major issue, both for financial markets and for the American public.
In his earlier writings, Friedman erred by stressing the stability of money demand. That is usually a safe assumption, but the Fed started paying interest on reserves in 2008, dramatically increasing bank demand to hold reserves. That offset the huge increase in the money supply aggregates and blunted the inflationary pressures. Friedman’s theories did not apply at that time.
And yet it is the exceptional period when money demand moves around so much and so rapidly. Today Friedman’s ideas are closer to the mark. The money multiplier and open market operations do not work as they did in Friedman’s time, and in that sense the system is best described as a modified version of monetarism. But once again all eyes are on the central bank, both in America and in Europe.
Friedman also stressed that discretionary monetary and fiscal policy would lead to errors, as policymakers were unlikely to prove omniscient. He has been proven correct on that yet again.
And the Friedman revival is not limited to macroeconomics. For decades Friedman was a critic of the U.S. Food and Drug Administration, which he saw as a sluggish bureaucracy that hindered the development of new drugs and treatments. The pandemic has solidified this view: The FDA has been too slow to approve rapid antigen tests and booster shots, among other mistakes. Other public health authorities, such as the Centers for Disease Control, were not targets of Friedman’s critique, but their poor performance fits into Friedman’s basic understanding of health care bureaucracies.
Education is another area where Friedman’s ideas seem newly relevant. Friedman was a strong supporter of school choice, but over time the movement stalled, as a variety of studies showed scholastic gains from school-voucher programs that were either modest, zero or negative. Advocates for school choice then moved on to the argument that vouchers allow parents to choose the kind of education they want for their children, whether or not test scores go up. That argument, too, went nowhere.
Then came the pandemic, when millions of American parents encountered a public school system that didn’t seem to care too much about educating their children. Schools stayed closed or offered inferior remote instruction, and generally followed their own bureaucratic imperatives. All of a sudden, home schooling, charter schools, private schools, microschools — in short, an entire host of "school choice” alternatives — rose in popularity. It remains to be seen how much those trends will stick, but Friedman may yet win this intellectual battle, at least partially.
And it’s not just the bureaucracy, it’s what’s taught in the classroom. Consider critical race theory and other instructional practices affiliated with wokeism. Whatever your views on this movement, it seems clear that it provokes strong and perhaps irresolvable differences among parents, teachers and administrators. Within a single public school district, those matters will probably never be settled to everyone’s satisfaction. Rather than pursuing a polarizing "fight to the death,” perhaps all sides can see that the case for school choice is stronger and more compelling than they had thought.
There are periodic attempts to knock Milton Friedman off his pedestal. For the most part, however, his legacy remains strong.
Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. His books include "Big Business: A Love Letter to an American Anti-Hero."
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