Last Friday the University of Chicago hosted a wonderful Centennial Celebration of Milton Friedman and the Power of Ideas. All of the speakers, especially Jim Heckman, Kevin Murphy, Bob Lucas, and Gary Becker chose to focus on how amazingly well Milton integrated data, theory, and policy in inseparable ways in his research and writings, and that this was the key to the power of his ideas.

That well-documented facts and sound economic theory informed his policy views in practice is very evident in the case of monetary policy, which was the focus of the session where Bob Lucas, Allan Meltzer and I spoke and Lars Hansen moderated.

Lars asked me to address these two questions in my remarks for the session
— How do you see Fed behavior at this juncture?
— To what extent has monetary policy alone run out of gas in nurturing a more healthy macroeconomic recovery?

Because I had given the opening talk at Milton Friedman’s 90th birthday conference in Chicago exactly ten years ago in November 2002, I found that the best way for me to answer these questions was to begin my presentation at the Centennial by returning to that 2002 talk and bringing back some of the charts

From the vantage point of 2002 I was very positive about Fed behavior because of its greater reliance on steady rule like behavior in the 1980s and 1990s, and I gave credit to Milton for that change at the 90th birthday. The result was solid economic performance especially in comparison with the economic mess of the 1970s when discretion dominated.

But the steadier monetary policy and good economic performance did not last. Little did I know in November 2002 that the Fed would soon do it again. It went back to the types of discretionary actions it had used in the past. The results have not been good.

The obvious implication is that a change in policy would lead to improved economic performance. In this sense, I do not think it is correct to say that monetary policy has run out of gas: A return—a steady gradual return—to the type of steady-as-you-go policies we had in the 1980s and 1990s and until recently would be as big a positive for the economy as it was in those decades.