April 27, 2003
The case AGAINST Greenspan
With all of this argument over whether, how, and how big the tax cut should be, at least we can all agree that Greenspan should be appointed to another term, right? Not exactly. I remember Milton Friedman saying recently that he thought Greenspan should be replaced with a computer. The point being that human error in monetary policy has wreaked massive economic havoc (Friedman suggests that is was failed monetary policy that made the great Depression so "great.") and a rule-based system might be preferable. So in the midst of the latest Greenspan love-in, it is worth reading Lawrence Kudlow’s piece that make the supply-side case for rules, not rulers when it comes to monetary policy. Excerpt:
Still, numerous supply-siders — including myself — have fretted in recent years about the threat of deflation. This is another pernicious form of monetary instability, one that contributed mightily to the longest and deepest stock market plunge in 60 years.
For these and other reasons many economists would prefer a price-rule standard of monetary conduct. Such a rule would rely on real-time market indicators, like commodities (including gold), bonds, and the international exchange value of the dollar. These price indicators would tell policymakers how well the volume of money created by the central bank is calibrated with the amount of money demanded by financial markets and the economy.
But without such a rule in place, we are subject to the prescriptions of a single person — the Fed chairman.