I made the case earlier that Miltion Friedman would have endorsed QE2 in some form. So what would F.A. Hayek say about QE2? Where would he stand on this issue? Larry White says he would not support QE2 , but he would have supported QE1:
But Lawrence White, an economist at George Mason University in Washington, DC, argues that this is an unfair characterisation. “Hayek was not a liquidationist,” he says, referring to the philosophy of Andrew Mellon, President Herbert Hoover’s Depression-era treasury secretary, who wanted to “purge the rottenness out of the system”. Hayek believed the central bank should aim to stabilise nominal incomes. On that basis Mr White thinks the Fed was right to pursue the first round of quantitative easing, since nominal GDP was falling, but wrong to pursue a second round with activity recovering.
Yes, F.A. Hayek was a fan of stabilizing nominal spending, a point I have discussed before on this blog. The question that I don't know the answer to is whether he would have stabilized nominal spending around its existing trend level or some other value. If Hayek were stabilizing it around its existing trend level then he would be in favor of something like QE2. Presumably, though, he would have implemented it in a more rules-based form than the current ad-hoc design of QE2.
White believes, however, that Hayek would not have maintained nominal spending at its existing trend level. Okay, let's assume as a baseline case Hayek would have stabilized nominal spending at the point where it was before its collapse in 2008. If this were the case and if we looked to nominal spending per capita, I think one can make the case that Hayek might have been sympathetic to a rules-based version of QE2. Here is the reason: (Click on figure to enlarge)
White believes, however, that Hayek would not have maintained nominal spending at its existing trend level. Okay, let's assume as a baseline case Hayek would have stabilized nominal spending at the point where it was before its collapse in 2008. If this were the case and if we looked to nominal spending per capita, I think one can make the case that Hayek might have been sympathetic to a rules-based version of QE2. Here is the reason: (Click on figure to enlarge)
This figure shows that domestic demand per capita is only at its 2007:Q2 value. Aggregate demand per capita shows the same thing: nominal spending per person has yet to reach its previous peak. So maybe Hayek would be sympathetic to further monetary stimulus. Again, there is no doubt he would have objected to the way QE2 is being implemented. I would love to know what type of nominal spending target he would have favored.
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