Friedman-Phelps Were Not "Very Correct": DeLong Smackdown Watch for Monday, August 19, 2013
By "very correct" you mean [that Friedman-Phelps's prediction that loose monetary policy was about to de-anchor inflation expectations] "corresponds to post WWII US data because all the other evidence is long ago or far away and irrelevant". The virtical long run Phillips Curve of Friedman (and Phelps) was a terrible approximation to European data from 70 something through now. Europe has not been in a liquidity trap all those decades.
Now if "long run" is defined as "a millenium" then we--Blanchard and Summers (1986)--didn't prove them--Friedman (and Phelps) (1967)--wrong. This is because "long run" can be a metaphysical unfalsifiable claim, if the long run is longer than any time series. It is in this sense and in this sense only that Friedman hadn't been proven wrong already by 1990.
Also Friedman's most powerful devoted follower (and most devoted powerful follower) provided incredibly strong evidence that he was just totally full of it. In 1985 the border of the European unemployment problem was the Atlantic Ocean. The contrast between the UK and the US was extreme. Then the stock market crashed in 1987. Thatcher feared… pumped up the money supply (the BOE was not independent back then). This caused an inflationary boom. UK economists discussed how firms had trouble filling vancancies. There was a mystery: the Beveridge curve had shifted, with high vacancies and high unemployment (a total mystery to people who hadn't heard of the matching function).
Then UK unemployment fell and stayed low. Expansionary monetary policy was followed by persistently lower unemployment (and a bit of inflation which didn't persist). There could be no stronger test of Friedman's theory, which I now consider total cr--, because, according to an equally valid theory, I have too high a level of green bile and too little phlegm.
The result is that the status of monetarism increased: unemployment was low in the country of Friedman-loving Thatcher (who boosted the money supply) compared to the country of Friedman-hating Mitterand (who pursued monetary austerity in order for the franc to be able to look the deutschmark in the face). The evidence showed that Friedman and Thatcher had been totally wrong. But good things had happened under Thatcher, increasing Friedman's standing. (Similarly, their total utter up-is-down wrongness at the end of the 1970s about the future power of the USSR increased the status of American hawks, because their worldview was proven utterly totally false while Reagan was President).
