In a long rebuttal to my criticism in today’s Wall Street Journal article, David Glasner argues that I mischaracterized America when I wrote that it was a leader in economic freedom following World War II, when it helped Japan and Europe recover and helped create the GATT and other international financial institutions. It is certainly true that American economic policy was not perfect with its regulations and high marginal tax rates, but comparatively speaking the American model was a far cry from what was being set up in the large areas of the world which were not free either economically or politically.
Another quite different part of his rebuttal is the argument that I had a different view of monetary policy as implemented in Japan in the early 2000s, when I was U.S. Under Secretary of Treasury for International Affairs, a period which I reviewed in my book Global Financial Warriors. I had similar views in the 1990s when I was a foreign honorary adviser to the Bank of Japan.
For several reasons, the economic policy situation in Japan in the 1990s and early 2000s, when I was in the Treasury, was quite different from the situation in United States today In the 1990s, but especially in the early 2000s, there was a deflation in Japan: the GDP deflator fell from 1999 to 2003. In the United States we have seen no such prolonged declines in the GDP deflator in recent years.
Second, the purpose of increasing the monetary base in Japan, as I argued in those days, was to get the growth rate of the money supply (such as M2+CD) back up. As I showed when I was an adviser to the BOJ, a decline in money growth was largely responsible for the deflation and for the poor economic performance in the 1990s. So the goal of the Japanese policy in the early 2000s, which I was approving of while I was at Treasury, was to get money growth back up. It was not to try to drive up temporarily the price of mortgage securities or stock prices, which is what is frequently used to justify the quantitative easing by the Fed today. Here are my specific views on Japan written while I was an adviser to the BOJ.
A third difference is related to the rules versus discretion debate. If a central bank follows a money growth rule of the type Milton Friedman argued for—and which is quite appropriate when the interest rate hit zero in Japan—then the central bank should increase the monetary base to prevent money growth from falling or to increase money growth if it has already fallen. In other words such an easing policy can be justified as being consistent with a policy rule, in this case a rule for the growth of the money supply. The rule calls for keeping money growth from declining. But the large-scale asset purchases by the Fed today are highly discretionary, largely unpredictable, short term interventions, which are not rule-like at all. It is the deviation from more predictable rule-like policy by the Fed (which began in 2003-2005 and continues today) that most concerns me.