Anyway, research continues to come out that's at odds with the PIH. A recent study by Northwestern’s Luenz Kueng found that when Alaskans got a sudden payout of money from the Alaska Permanent Fund (the state’s wealth fund, which collects money from natural resource industries), they went and consumed the windfall immediately instead of sticking it in the bank like Friedman would predict. That kind of random natural experiment, which is becoming more and more popular in the econ profession, is powerful and simple evidence.
The mounting evidence against the PIH -- the papers I cited are only a small sampling -- is causing economists to cast around for an alternative. My Bloomberg View colleague Narayana Kocherlakota recently blogged that:
The choices made 25-40 years ago - made then for a number of excellent reasons - should not be treated as written in stone or even in pen. By doing so, we are choking off paths for understanding the macroeconomy.
Kocherlakota thinks macroeconomists should set aside their big, complex formal models of the economy, since these elaborate constructions are built on a foundation that probably doesn’t describe reality all that well. He recommends that economists go back to the drawing board, and look around for new, more accurate kernels of insight with which to build the theories of tomorrow.
In the meantime, we should all recognize that Milton Friedman’s ideas might have been too influential. His impact on economics was deep and lasting, but this theory, at least, hasn’t stood the test of time.
Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.