Real life Milton Friedman style Monopoly?

Posted: February 28, 2011 by chad98036 in Uncategorized


Last week I posted about an article in the NY Times entitled Monopoly, the Milton Friedman Way.  It was about a game of Monopoly played according to rules derived from Friedman’s monetary theories.  The relevant part read:

Prices shot up, which we all knew, even in that inebriated state, was the consequence of expanding the money supply. (After all, the great economist told us, “Inflation is always and everywhere a monetary phenomenon.”)

The inflation became so extreme that we eventually voted to alter the rules again: we’d cut the money supply. Any money we printed that came back to the bank would be taken out of circulation.

A severe depression kicked in, of course. Prices plummeted and it was a race to liquidate assets. One by one the players quickly went bankrupt, and sometime around 4 that morning the game was over.

Now according to at least one economic analyst we are on the verge of seeing this play out in real life:

A Republican plan to sharply cut federal spending this year would destroy 700,000 jobs through 2012, according to an independent economic analysis set for release Monday.

Zandi, an architect of the 2009 stimulus package who has advised both political parties, predicts that the GOP package would reduce economic growth by 0.5 percentage points this year, and by 0.2 percentage points in 2012, resulting in 700,000 fewer jobs by the end of next year.

"Significant government spending restraint is vital, but given the still halting economic recovery, it would be counterproductive for that restraint to begin until the economy is creating enough jobs to bring down the still very high unemployment rate," Zandi writes. "Shutting the government down for any length of time would also be taking a big chance with the recovery, not only because of the disruption to government services, but also due to the potential hit to the fragile collective psyche."

This is the exact lesson that I have taken from my, admittedly very limited, reading of Friedman – Deflation is worse than inflation and the way to avoid deflation is to keep the monetary supply at a steady level.  If inflation has occurred suddenly decreasing the monetary supply will cause an economic contraction.  We may be in a position to test those theories again shortly.

Update: 3/1/2011 3:00pm

Per this article on “The Hill”, Ben Bernanke disagrees with the assessment above. He estimates that the 60 to 100 billion dollars in cuts proposed by the GOP would only slow growth by .1 to .2%.

Federal Reserve Chairman Ben Bernanke says a plan from House Republicans to cut $61 billion in spending this year would not harm economic growth.

The GOP’s proposed spending cuts, passed as part of a continuing resolution, would probably reduce “growth on the margins” and lower gross domestic product by only one- or two-tenths of a percent, Bernanke told the Senate Banking Committee.

He reiterated previous statements that, while the debt and deficits are major issues for the nation, Congress needs to tackle the issue of long-term budget imbalances.

“Sixty billion won’t have much impact on the long run,” he said. “Congress needs to address the budget deficit over a 5- to 10-year window.”

Bernanke said he would like to see the nation’s structural budget deficit reduced by 2 to 3 percentage points in the next decade.

  1. Mitchell says:

    Spend, baby spend!! Damn the inflationary torpedoes! Printing presses – full speed ahead!!!

  2. Veeshir says:

    I don’t get how reducing gov’t spending is the same as reducing the supply of money.

    • MikeD says:

      Or reducing it.

    • Sockless Joe says:

      To the extent that government borrows the money for its increased spending, there is an increase in money supply. And if you’re a Keynesian like Zandi you also think that the multiplier effect will increase money supply.

      I’d say the former is a real phenomenon, the latter phony.

      • Veeshir says:

        To the extent that government borrows the money for its increased spending, there is an increase in money supply

        I don’t know if I agree with that.
        The gov’t has to take my money and keep me from doing what I want to do with it in order to use it.
        So they’re just moving where the money is.

        • Sockless Joe says:

          It’s a variation of the old “banks create money” thing. Treasury borrows $100bn from China, now China has an asset (-a bond) worth $100bn and the Treasury has $100bn to blow on dog parks, free condoms, and drugs for monkeys. Total money supply is now $200bn.

          • Veeshir says:

            No, it’s a zero.
            The 100bn we’ve borrowed is a plus, the 100bn we then owe is a negative. 100bn+(-)100bn=0.
            All we’ve done is transfer hundreds of millions of dollars (in interest) to China while wasting money. They pay more for goods than they’re worth with a crapload of it sticking to govt’s hands.
            Or are you saying that creating money for China is the same as creating it for America?

            If the gov’t “creating” money that way is good, how come we’re so fucked after just 2 years of rich, creamy, blowing my money goodness?

            • Sockless Joe says:

              The sum total of balance sheets is zero. The money supply is still $200bn.

              A more in-depth explanation of money creation:

              You did hit upon the problem of this type of money supply expansion, which is that government blows it on stupid shit. The money supply technically expands, but the real economy ends up aligning itself to produce goods not naturally or rationally demanded.

              That which gets measured gets managed. In this case, the money supply.

              • Veeshir says:

                Okay, that’s my problem.

                Increasing gov’t is the same as printing more money, I’ll give you that, but decreasing government is not the same as reducing the amount of money.

                Because if you reduce the gov’t from its current extra- ridiculously-bloated condition, that could be done to act as if it’s keeping the supply of money the same.
                Reducing it enough, or even close to enough, or even just “some”, should not have a negative effect, but increasing it even a trivial amount adds more to inflation.

                Your “either or” looks pretty Keynesian to me.
                Increasing gov’t to a point is okay, but we passed that point at least 70 years ago, maybe 80 or more, depending on who you ask.
                Reducing it to just ‘really fucking bloated’ can’t be bad.

                The GOP lost because they were fiscally irresponsible 4+ years ago (and started looking feckless on the War on (Some) Terror), so I would suggest that reducing the size of gov’t to 2006 levels would be the least they should do.

                And by “least”, I mean “That’s not even close to as far as they should go but they’re scummy bastids who hate me but love spending my money.”

  3. Rich says:

    I stopped reading after “Zandi, an architect of the 2009 stimulus package…” That really tells me all I needed to know about Mr Zandi’s credibility on this issue.

  4. chad98036 says:

    No one is saying that creating large amounts of money is an absolute good, only that it helps keep the supply in circulation steady. The side effects, inflation, are bad, but not as bad as the alternatives. Friedman would say that the Fed is fulfilling it’s primary responsibility as a lender of last resort, and that congress in removing this money from circulation suddenly is breaking the cycle. I think Friedman would advocated a slower decrease in spending and a rise in interest rates after the economy had sufficiently recovered, let’s say unemployment reaches 7% vs. 9% (that’s pulled out of my butt on my part, but it serves as an example), then you begin raising interest rates slowly in order to counter inflationary pressures and remove money from circulation. He would probably also highly encourage regulatory reform, and decreased spending at the same time.

    In my reading it appears Hayek agreed with Friedman to an extent, the important thing in a recession is to avoid the deflationary spiral. He disagreed in that he thought Friedman accepted to many of the dominant Keynesian hypothesis that were in vogue at the time, he may have had other disagreements but that is the one I have seen expressed most often. (Again my interpretation ad I am not an economist) I look at it as Friedman doing in History of Money what Newton did in the Principa Mathematica using the dominant theory of thought to prove his new ideas and then destroy, or greatly modifying, the existing theories.

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