Milton Friedman:Republicans are wrong to oppose payroll tax reduction (Part 2 of Friedman interview with John Hawkins)”Friedman Friday”

Milton Friedman and Ronald Reagan

John Brummett is critical of Republicans for opposing the payroll tax reduction and I have to agree with him on this.

In an interview shortly after the Bush Tax Cuts passed Milton Friedman was asked:

John Hawkins:Do you think George Bush, with the economy being as it was, did the right thing by cutting taxes?

Milton Friedman: I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible. The reason I am is because I believe the big problem is not taxes, the big problem is spending. The question is, “How do you hold down government spending?” Government spending now amounts to close to 40% of national income not counting indirect spending through regulation and the like. If you include that, you get up to roughly half. The real danger we face is that number will creep up and up and up. The only effective way I think to hold it down, is to hold down the amount of income the government has. The way to do that is to cut taxes.


Here is some more of the interview:

Written By : John Hawkins

John Hawkins:I’d like to switch to a different area here. The economy certainly did well in the Clinton years except for the recession that started right at the end of his term. Was that because of Bill Clinton’s policies, a continuation of the success of Ronald Reagan’s policies, or something else?

Milton Friedman:I think it was #1 a continuation of the Reagan policies and #2 an indication of the virtues of a President of one party and a House and Senate of the other. That’s the best combination for economic growth…

John Hawkins:Because they hold down spending?

Milton Friedman:Yes, you have a deadlock. You can’t get any major spending programs through because one party or the other will oppose it. That’s why we have what looks like a paradox. The Clinton administration, in terms of the budget, has one of the best records of holding down spending. Spending went up less under Clinton than almost any other President.

John Hawkins:So do you think if we had Democrats controlling the House and Senate we’d have much less spending from the Bush administration?

Milton Friedman:If the White House were under Bush, and House and Senate were under the Democrats, I do not believe there would be much spending.

John Hawkins:That may be true. Switching directions again, Europe has been moving towards a single currency. Do you think that’s a wise move for all the states, some of them, or none of them? Why so?

Milton Friedman:We’re in the midst of a wonderful natural experiment. You have a really different arrangement with the euro than we’ve ever had historically. We’ve had many cases in which a number of countries have used the same currency. That’s when they’ve used gold or silver as money. But each individual country has been able to control the content of its own money. So while they were using the same commodity as currency, they were always in a position to determine what the terms of exchange were between their own currency and the other currencies.

But the euro is a very different arrangement. For the first time in history, we have essentially an independent central bank for a considerable number of distinct political entities. I, in advance, was very negative about it and have been very negative & pessimistic about it. We’ll see how the Europe plan does on the one hand and on the other, how the other countries of the world, the UK, the United States, Japan, which are linked together by flexible exchange rates, we’ll see how they do.

So we’ll have a really nice, natural experiment just as before the Soviet Union dissolved, we had a natural experiment comparing socialism and capitalism.

John Hawkins:If the euro were to replace the dollar as the medium of exchange, if everyone bought and sold their goods in euros instead of dollars, would that have an impact on the US economy?

Milton Friedman:The success of the United States will depend on how much it can produce at home, how much it can sell abroad, what it buys from abroad. It’s of less importance whether it is denominated in dollars or euros.

John Hawkins:So in the end, that is really not going to make a big difference one way or the other…

Milton Friedman:That’s not going to make a great deal of difference. What’s going to make the difference is the productivity of the different countries. But personally, as I say, I believe the Euroland is going to run into big difficulties. That’s because the different countries have different languages, limited mobility among them, and they’re effected differently by external events.

Right now for example, Ireland and Spain are doing very well, but on the other hand Germany and France are doing very poorly. The question is; “Is the same monetary policy appropriate for all of them?” Germany and France on one hand and Ireland and Spain on the other: it’s very dubious that it is. That’s why you’re having increasing difficulties within the Euroland group. As you probably know Sweden, which had not joined the European Monetary Union, voted down doing so and will keep its own currency.

John Hawkins: It was 56% to 42%so they voted it down by a good margin. Switching gears again here, in your opinion, what caused us to pull out of the Great Depression? Was it Roosevelt’s policies, WW2…

Milton Friedman:Roosevelt’s policies were very destructive. Roosevelt’s policies made the depression longer and worse than it otherwise would have been. What pulled us out of the depression was the natural resilience of the economy + WW2.

You know, it’s a mystery as to why people think Roosevelt’s policies pulled us out of the Depression. The problem was that you had unemployed machines and unemployed people. How do you get them together by forming industrial cartels and keeping prices and wages up? That’s what Roosevelt’s policies in the New Deal amounted to. Essentially, increasing the role of government, enhancing the monopolistic position of labor, and creating as I said before the equivalent of price fixing cartels made things worse. So most of his policies were counterproductive.

John Hawkins:Fast forward to today and there are a lot of Democrats & people on the left out there who say, “Why don’t we just have exorbitant taxes on the rich and minimal taxes on everyone else”? What would that do to the economy?

Milton Friedman:That would eliminate the rich.

John Hawkins:Right. Would it have a negative effect on economy overall?

Milton Friedman:Well, who would provide the funds, the capital, and the entrepreneurship for the new industries? In a world in which there were no rich people, how would you have ever gotten the capital to produce steel mills or automobile plants? You can do it through the state, but the world tried that with the Soviet Union.

It’s an interesting thing. If you ask yourself, “what tax system would be best for the low income group,” it’s the opposite of what they’re saying there. It would be a system with a maximum amount of taxation rather than a minimum. If you look at the taxation system in China for example, which is now doing very, very, well, that’s exactly what it is. In Russia you now have a 20% flat tax which is having the effect of increasing revenues rapidly and also stimulating production. You cannot help the poor by destroying the rich.

John Hawkins:If we don’t “fix” Social Security, what sort of impact is it going to have on the economy in say 10-20 years?

Milton Friedman:Well, Social Security is having a bad effect now through the tax system. But ya know, when Adam Smith was told that the British loss at Yorktown would be the ruination of Britain, Adam Smith replied, “Young man, there’s a deal of ruin in a nation.” So, we’re a very strong country, lots of able people, lots of active entrepreneurs, and so the Social Security system will be a burden, but it won’t destroy the country.

I think it will be changed of course. I think there is a great and growing pressure towards privatizing Social Security, converting it into individual accounts. We’ve been moving that way indirectly through 401ks and the equivalent retirement accounts. I think Mr. Bush will go back to his emphasis on privatizing Social Security. I think there’s a good chance it can be done. It has been done in a considerable number of countries around the world. There’s no reason why it couldn’t be done here.

John Hawkins:Are there any political websites you’d like to recommend to our readers?

Milton Friedman: No, I don’t really follow any political websites. I think they’ll do better reading the Wealth of Nations(laughs)…

John Hawkins:Last but not least, is there anything else you’d like to say or promote?

Milton Friedman:I’d like to promote lots of things. I’d like to promote elimination of drug prohibition. I’d like to promote parental choice in education through vouchers. Those are two things I think are very urgent and important. They’re both more important than the harm which Social Security will do.

I think that our policy with respect to drugs is fundamentally immoral and it’s really disgraceful that we cause thousands of deaths in South America because we cannot enforce our own laws. If we could enforce our own laws against consumption of drugs, there would be no drug cartels in South America. There would be no — nearly a civil war in a place like Columbia.

Similarly, I think the performance of our school systems is disgraceful. I think roughly a quarter of the population never graduates high school. We have a lower level of literacy today than we had a hundred years ago. That’s not despite, but because of the poor schools, particularly in low-income areas.

But I think that’s enough for you. It has been nice to talk to you.

John Hawkins:Thank you for your time Mr. Friedman.

If you’d like to find out more about Mr. Friedman, you can do so at the Milton & Rose D. Friedman Foundation & the Hoover Institution.

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