Monday, June 26, 2017

John Taylor - Making the Rules and Breaking the Mold (Allan Meltzer)

Robert Pringle alerted me to this tribute article by John Taylor written about economist Allan Meltzer. It is clear that Mr. Meltzer was a widely respected contributor to economic thought despite also being a sometimes vocal critic of the Federal Reserve. Below are a few excerpts from the John Taylor article appearing in followed by some additional comments. Further below Robert Pringle recalls the first time he met Allan Meltzer.
John Taylor writes about the extraordinary life of a pioneering economist whose lifelong work defied traditional rules – but one who strongly advocated them for central banks

"Allan Meltzer, who died in May at the age of 89, had a long and productive career fundamentally affecting the fields of economics, central banking and economic policy, more broadly. An extraordinary scholar, he immersed himself in the practical world of policy making in many ways. He had a unique ability to understand, explain and improve the interface between the fields of economics and economic policy.

For Meltzer, it was not enough to develop a novel theory of the economic impact of monetary policy, which he did in his research on the financial system, starting with Swiss economist Karl Brunner. He also examined the institutions responsible for policy through his landmark books A History of the Federal Reserve, Volumes 1 and 2 and the Carnegie-Rochester Conference Series on Public Policy, which he co-founded with Brunner.

For Meltzer, it was not sufficient to show empirically that policy mistakes caused poor economic performance. He also researched why the mistakes were made, including by developing theories of political economy and decision-making with Scott Richard and Alex Cukierman. It was also not enough for him to conduct research and teach at Carnegie Mellon University, where he was a professor.

He also threw his hat into the ring of real world policy making, serving on the US president’s Council of Economic Advisers (CEA), chairing the Meltzer Commission on international monetary reform, writing reports for Congress, and often testifying in congressional committees on monetary policy.

And it was not even enough for him to have had a profound impact on central banking – he also delved into the operations of the whole market system, asking the key question in the title of his book Why Capitalism? and answering that it is “the only system that the world has ever known that produces both growth and freedom”.

. . . . .

"In sum, Meltzer concluded that the Great Depression was mainly due to bad economics: mistaken beliefs about interest rates and bank borrowings; the Great Inflation was a combination of both factors, with political pressures dominating near the end as beliefs changed but policies did not; the Disinflation avoided big mistakes of either type as the Fed regained independence and restored basic monetary fundamentals, which continued into the Great Moderation, a period of more rules-based policy; the Global Financial Crisis and its aftermath was a return to a combination of both kinds of errors. Meltzer’s research thus led him to a clear policy conclusion, as he wrote in the second volume of his History, published in 2010: “Discretionary policy failed in 1929–33, in 1965–80 and now.” And equally clear and convincing is that “the lesson should be less discretion and more rule-like behaviour”. This considered assessment, based on years of research and study, is perhaps his most fundamental contribution to central banking."

My added comments: When Mr. Meltzer passed away, Robert Pringle mentioned to me at that time that they had been friends for many years and he had enjoyed exchanging ideas with Allan Meltzer. Later, he pointed me to this interesting exchange of emails he had with Mr. Meltzer in 2014 posted on his blog site.

This is a good example of the very kinds of discussions I have seen doing research for this blog. I think it well illustrates how the topic of reform for the existing global monetary system is debated and discussed around the world. No consensus has been achieved, but it is clear that various ideas on what should be done if we do get another major financial crisis are out there and that the possibility is taken seriously. Here are the links to the two part article featuring their email exchanges on The Money Trap blog:

Debate with Allan Meltzer - Part I - their first email exchange just below:

Thinking further about the international monetary system, I now find it difficult to conceive monetary stability being established in one country alone – even if that country is the US. This is to me the main lesson of the crisis and why I have changed my mind. I would welcome your view.
Allan replied:
Yes, international stability would be a big improvement.  But it isn’t possible without better domestic policy–limits on budget deficits and money growth.  If forced to choose, I would choose limits on deficits.
Notice, please, that Germany chugs along year after year without world currency stability.And Japan has for decades gone its own way, remaining stable while growing very slowly.

Debate with Allan Meltzer - Part II - a key excerpt from Robert Pringle just below:

"But suppose that the next crisis brings unemployment to 20%, further financial chaos, leading to nationalisation of the finance industry, extreme controls on personal freedom, state-directed investment, restrictions on travel and capital flows. And imagine that there is a plan to jump to a world money where we could have freedom in all these respects and restore capitalism  IF governments accepted limitations of national sovereignty –  and if there is a good plan ready – we would have a chance of selling it to a desperate world. And I think there WILL BE another worse crisis!"  

- Robert Pringle (3-15-2014)

. . . . .

Allan Meltzer’s closing statement (20 March 2014):
Robert Pringle and I have discussed the problem of achieving greater international financial stability.  Although we started from very different origins we converged to a small number of principles.  We agreed that the current non-system reduces growth and productive opportunities and that no international system can last without a major change everywhere but especially in the United States to less expansive, and less variable budget policies accompanied by more stable monetary policies.  We agreed also that countries should seek a voluntary system that, like the old gold standard, depends on market enforcement. 
A remaining disagreement is over the ability of a single country, particularly a large country like the United States to achieve stability acting alone.   In his very good book, The Money Trap, Robert makes a strong case for his system.  I agree that a multi-national system has great merit.  I differ by believing that Germany, Japan and some others have achieved stability by following relatively independent policies. I hope our exchange will stimulate others to discuss the requisites of much greater financial stability.
Allan Meltzer

(note: bold and underline emphasis above is mine)

Robert Pringle also gave me permission to share these thoughts on Allan Meltzer he expressed by email:

"I first met Allan when he was looking for people with a wide range of interests to invite to a seminar series that he was setting up with Karl Brunner. It was called officially the Interlaken Seminar on Analysis and Ideology that met annually from 1974 to the late 1980s. The aim of the Seminar ( as he put it in his own tribute to Brunner ) was to extend economic analysis into many areas of social policy. As he described it, the conference organization was as unusual as the topics discussed: "We met only in the morning. Afternoons were given over to hiking in the Swiss Alps, or for a few playing golf. The idea was to have informal discussions while hiking. We reassembled for dinner."

You can imagine how much I, as a young financial writer with an interest in economic history and sociology , leapt at the chance of participating. It was a top rate group with future nobel laureates such as Jim Buchanan and others participating - only about 25 of us in all.  I was privileged to attend for several years - every year in fact until  I joined the G30 in New York in 1980.

We have remained in touch ever since. He was a tremendous supporter of Central Banking and a founding member of our editorial advisory board from 1990. 

By the way, he wanted John Taylor to be the next Fed chair."           

All best,

Added note: A thank you to Willem Middelkoop for a nice Twitter comment on this article.

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