What would Milton Friedman think of current monetary policy? Although we can only speculate what Friedman, who passed away in 2006, would think of policy today, his voluminous academic writing and popular commentary offers many insights for the present. The Mercatus Center has published six essays on how Friedman’s thought can inform policy today and lessen macroeconomic volatility.
The effects of broad federal policies on state economies vary according to states’ unique circumstances. Consequently, a policy can have positive or negative effects that were completely unanticipated at the policy’s inception. All too often, the adverse effects of regulation cause outsize harm to the most vulnerable members of society. We call these unintended negative consequences “regressive effects.”
The 3.43 percent NGDP gap means that the dollar size of the economy, $24.38 trillion, was greater than the expected $23.57 trillion. Moreover, it was also greater than the 10th and 90th percentiles of the NGDP gap and shows that this gap was significantly different from zero during this time. This means aggregate spending and income in dollar terms were materially higher than their expected values and that monetary policy was running hot in the first quarter of 2022.
The NGDP gap is important for two reasons. First, people make many economic decisions on the basis of forecasts of their nominal incomes. Examples include households’ decisions to take out mortgages and car loans or firms’ decisions to finance with debt and commit to multiyear contracts on plants, raw materials, and labor. Second, actual nominal incomes may turn out very different from what people expect and, as a result, may be disruptive for households and firms that are not able to adjust their economic plans quickly. These disruptions can be avoided by maintaining NGDP on the growth path expected by the public.
The Fed’s adoption of a CBDC would be a fundamental change for the US payments system. Its discussion paper acknowledges this and attempts to set out issues and identify benefits and costs following from CBDC introduction. A CBDC would fundamentally change the private sector’s role as an intermediary in the creation and distribution of credit and would place more responsibility within the central bank. Although a CBDC could reduce some sources of financial instability, it would fundamentally alter the structure of the banking system and create new risks. Finally, the Fed has not clearly articulated any market failure that a CBDC would solve or any essential objective that it alone would achieve.
High-income countries are competing for international talent, and the United States, historically the leader of all magnet countries, is lagging. But the United States can recover its international appeal with adequate immigration reform. One piece in that reform ought to be the OPT program, which should at least be made competitive vis-à-vis the programs of countries such as Canada and the United Kingdom.
