The Role of Money

As I listen to this debate, and it seems to have gone on for a long time, I notice that people take various positions. One is that Milton Friedman is completely wrong; another is that Friedman is almost completely wrong. A third is that there is a grain of truth to what Friedman says, but it is not very important; and, therefore, fiscal policy matters far more than the so-called monetarists say. Always, there is a subtle suggestion that some of us know a great deal more about the way in which the economic system operates than we have time to tell. If the argument and evidence could be presented, everyone could see that there is a considerable amount of evidence available showing the sizable effect of fiscal policy operations and supporting some very detailed econometric model of the economy. Now, I haven’t seen that evidence, and I would like to see it. I do know that last November, at the University of Michigan forecasting conference, the forecast of the Michigan econometric model for the first quarter of 1969 was that GNP would increase by $4.4 billion. At about the same time, the Wharton econometric forecasting unit predicted a $5.2 billion rise in first quarter GNP and a $7.4 billion rise in second quarter GNP. We now know that these predicted changes, made only six weeks before the start of the quarter, missed from 2/3 to 3/4 of the actual change. We will soon know that the second quarter GNP changes predicted by those models are considerably less than 50 percent of the actual second quarter change. Moreover, the econometric models forecast larger changes in the second and third quarters than in the first quarter, contrary to the pattern that we can now expect. You may also recall that a year ago Arthur Okun, then Chairman of Council of Economic Advisers, warned us of the dangers of "fiscal overkill"; talked about the threat of a downturn in the third and fourth quarter of last year as if it were almost a certainty; and argued that the surtax and the prospective reduction in expenditures were likely to push the economy into a recession. These predictions, like the predictions of the Wharton and Michigan models, proved incorrect. The last few years have shown that it is very difficult to forecast GNP a year in advance until we know what the Federal Reserve is