What Would Uncle Miltie Say?

I’m having a serious flashback to my days as an undergrad economics major at Princeton University in the late 1970s. Two data points came together in recent weeks to make me to think about the concept of the "Multiplier Effect," part of the academic baggage that I put behind me as soon as I graduated in 1980 as the most mediocre economics major in Princeton’s long history.

First, I read a profile of Nobel Prize-winning economist Kenneth Arrow in the September issue of Finance & Development magazine, published by the International Monetary Fund. Writer Janet Stotsky, formerly with the IMF and now a consultant on fiscal, women and development, and microeconomic topics, outlined Arrow’s contributions to economic thinking. She wrote of Arrow’s 1972 prize,

The Nobel committee cited the work of Arrow and British economist John Hicks in two areas: general equilibrium theory, which seeks to explain how prices are set across an economy, and welfare theory, which analyzed the optimal allocation of goods and services in an economy.

Back in my undergrad days, I took courses that discussed these issues in depth, along with 70s-era concerns like stagflation and the Phillips Curve, a term that’s been antique for decades. And, of course, I learned about the Multiplier Effect, something that remains implicitly ingrained in U.S. economic policy.

A day or two after I read the profile, I attended a live performance by the host Kai Ryssdal, reporters and guests of the public radio program Marketplace at the 92^nd Street Y in New York, as part of the show’s 25^th anniversary. The program was titled, “How I Learned to Stop Worrying and Love the Numbers.” Each segment featured some type of numeric aspect. What especially interested me, as an econ major, was wealth and poverty correspondent Chrissy Clark’s report on the life cycle of food stamp payments. They are digitally downloaded on to EBT cards, which sparks a rush of spending at retailers like Walmart, with billions of dollars pumped back into the economy from the government to food stamp recipients to (mostly) major retailers. Then the retailers use the payments to plump up their sales volume, which they talk about on calls with stock analysts; if the payments get cut, then cue the sad music as earnings decline. Nobody reveals how much money is passed to big retailers this way, but the dollars are huge.

Then: flashback time. Where have I heard this before? Government spends; dollars go to businesses and individuals; businesses and individuals spend, then others get the dollars in a cascade of economic impact. And that's the Multiplier Effect.

I mused on my economics courses. Not that Clark used the term, but she outlined the theory behind the Multiplier Effect, a key rationale for Keynesian economic policy, where government spending helps the economy grow.

Or does it? In my Princeton days, we learned about the theories of John Maynard Keynes, but we also had big exposure to the thinking of University of Chicago economist Milton Friedman, who was a great advocate of free markets and an approach called monetarism. I think we read Friedman's 1962 book Capitalism and Freedom. He was skeptical of Keynesian economics and advocated controls on the money supply to influence economic activity. If you go with what Wikipedia says, Friedman

thought that Keynes’s political bequest was harmful for two reasons. First, he thought whatever the economic analysis, benevolent dictatorship is likely sooner or later to lead to a totalitarian society. Second, he thought Keynes’s economic theories appealed to a group far broader than economists primarily because of their link to his political approach.

Friedman won his Nobel Prize in 1976 and died in 2006 at the age of 94. I wondered what he’d think of Clark’s report and its connect to the Keynesian multiplier effect. Would Uncle Miltie have raised the point of how billions in food stamp spending crowd out private investment, shifting tax money to consumption? Am I remembering monetarism correctly? What would Friedman say about the blowout Keynesianism that’s led to endless government deficits? Nothing positive, I suspect.

To be fair, Clark interviewed Walmart executives and others for her story about low wages at major retailers, which featured a Walmart employee on food stamps. Still, I wonder what a staunch Friedmanite would have said to her.

Friedman still excites debate decades after his major writings. Paul Krugman, another Nobel Prize winner, analyzed him in 2007 in the New York Review of Books (you can imagine the perspective there), with this kick-off statement:

Milton Friedman played three roles in the intellectual life of the twentieth century. There was Friedman the economist’s economist, who wrote technical, more or less apolitical analyses of consumer behavior and inflation. There was Friedman the policy entrepreneur, who spent decades campaigning on behalf of the policy known as monetarism—finally seeing the Federal Reserve and the Bank of England adopt his doctrine at the end of the 1970s, only to abandon it as unworkable a few years later. Finally, there was Friedman the ideologue, the great popularizer of free-market doctrine.

Friedman’s influence continues to this day, even among people who question his ideas, like this post, “My Milton Friedman Problem,” that winds through all kinds of economic theorizing beyond my ability to follow.

That people still argue with Uncle Miltie testifies to his impact; my meandering path back to him, via memories of Princeton economics inspired by Stotsky’s article on Arrow and the Marketplace celebration of the Keynesian multiplier effect, makes me think that something useful--an elegant analytical paradigm that enabled me to coolly assess the assumptions of Keynesian mainstream macroeconomic policy, perhaps?--sank in to my brain in those economics lectures and precepts at Old Nassau almost 40 years ago after all.