Milton Friedman, Stagflation, and the Busted Clock

     Delong argues that even if Friedman got many things wrong he was right in his prediction of stagflation in the 70s and that was enough to give him demigod status:

      "Paul Krugman is certainly right that history has judged, and that the judgment of history is for James Tobin over Milton Friedman so completely that there is not even a smudge left where Friedman's approach to a monetary theory of nominal income determination once stood.

      "And Robert Walmann points out, repeatedly and correctly, that there is nothing theoretically in Friedman (1967) that is not in Samuelson and Solow (1960)--that inflation above expectations might deanchor future inflation was not something Friedman (or Phelps) thought up, and that neither Friedman (nor Phelps) was thinking that high unemployment might deanchor the NAIRU."

     "And Paul Krugman points out that the vertical long-run Phillips Curve of Friedman (and Phelps) is simply wrong at low rates of inflation, and so not helpful as a fundamental tool."

      "There is, however, one big thing Friedman got right: to stand up on his hind legs and say: "Expectations of inflation are becoming deanchored right now. The accelerationist mechanism is the mechanism that is going to dominate business cycle dynamics in both the short-term and the medium-term." That was right. And that was a powerful source of manna."

      "Similarly, or perhaps not, I would argue that there is one big thing (along with a large number of medium things and small things) that Paul Krugman got right: his prediction back in 1998 of The Return of Depression of Economics. Yet somehow Uncle Paul has not gained a similar amount of manna to what Uncle Milton gained in the late 1960s…"

     http://delong.typepad.com/sdj/2013/08/correct-predictions-and-the-status-of-economists.html

     One differences is that some-like Sumner-continue to try to deny the liquidity trap; though when you look more closely you see that Sumner is kind of giving a false impression: he doesn't actually deny that conventional monetary policy runs out of bullets at the zero bound in nominal interest rates-and this is what the liquidity trap actually amounts to. 

     The real difference is that Sumner insists that unconventional monetary policy will work at the zero bound-thanks mostly to expectations that the Fed can and will do what it promises, though the Hot Potato effect also comes into the picture as does talk of Zimbabwe's hyperinflation. 

      http://diaryofarepublicanhater.blogspot.com/2013/08/then-how-do-you-explain-zimbabwe.html

     Speaking of Sumner, another thing he says a lot-we just did a post on things he says a lot:

      http://diaryofarepublicanhater.blogspot.com/2013/08/interest-rates-arent-good-gauge-of.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DiaryOfARepublicanHater+%28Diary+of+a+Republican+Hater%29

     Another thing he says a lot is that predictions aren't so impressive as he believes in the EMH which holds that correct predictions are probably just luck. Indeed, not only Sumner but probably most Neoclassical economists-including Krugman-believe this:

    http://diaryofarepublicanhater.blogspot.com/2013/06/noah-smith-vs-steven-keen-who-predicted.html

    Yet Friedman is lionized because of stagflation in the 70s. As Krugman suggests Keynesians probably conceded too much after stagflation:

     "But never mind the personal aspect. More important, stagflation led to a major rethinking of macroeconomics, all across the board; even staunch Keynesians conceded that Friedman/Phelps had been right (indeed, they may have conceded too much), and the vertical long-run Phillips curve became part of every textbook. But the Great Recession and the long stagnation that followed (and continues) have brought no such concessions from the anti-Keynesians. As I often note on this blog, even the most spectacular failures of prediction (and successes for the other side) have been met with nothing but excuses (It’s Obamacare! It’s interest on reserves! It’s uncertainty!)"

     http://krugman.blogs.nytimes.com/2013/08/16/stagflation-stagnation-and-intellectual-asymmetry/

    There's a case to be made that they did. It's great to get a major prediction right-I probably put more stock in being right then certainly Neoclassical economists. Having said this surely it's possible to be right for the wrong reasons. Remember Friedman's-and taken up by Robert Lucas-claim that only expected monetary changes have any effect? That was not only wrong but 180 degrees from the truth as anticipated changes have a greater effect. 

    On the other hand Krugman was right in 1999 for the right reasons. Surely this matters in economics as ultimately it's about having a model that is validated by empirical reality. Friedman surely didn't get to his prediction by having a superior model.