FRIEDMAN FRIDAY Milton Friedman Can Help Trump Make America Grow Again GLENN HUBBARD and JON HARTLEY 11/25/2016

 

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Milton Friedman Can Help Trump Make America Grow Again

This month marks 10 years since the death of Milton Friedman, the famous free-market economist who became one of the 20th century’s greatest economists. Since his death, the world has witnessed the worst recession since the Great Depression along with a massive expansion of federal regulations on commerce, government spending and taxation under President Obama.

This period of time has also marked one of the weakest economic recoveries measured by GDP growth, something Milton Friedman would argue is no coincidence. Real GDP growth has stalled between 1% and 2% in recent years, below its postwar, pre-crisis trend of 3%. Not to mention that wage growth among the poorest Americans has remained stagnant and labor force participation remains close to all-time lows among prime working age individuals.

As President-elect Trump and a stronger Republican majority will take office in January, they are presented with a substantial opportunity to carry on Milton Friedman’s free-market, pro-growth legacy in designing what American economic policy will look like over the coming years.

First, helping “the forgotten man and woman,” a chief message in the 2016 Trump-Pence presidential campaign, can best be accomplished by promoting faster economic growth. Doing so requires putting tax reform first, including expanding the earned income tax credit and lowering the corporate tax rate.

Some unfounded ideas about economic policy arose during the recent election cycle, such as doubting the net benefits of free trade and blaming the 2003 tax cuts enacted under President George W. Bush for the 2008-2009 Great Recession. We hope that as political rhetoric settles after the election, policymakers can turn to the more rigorous data-driven policy analysis that was championed by Friedman.

While we would discourage the use of tariffs or renegotiating trade agreements, which could send consumer prices skyrocketing (and which would disproportionately hurt the poorest Americans), there can and should be a role for tax credits, wage subsidies and retraining programs targeted at those who have had their jobs displaced by globalization or automation.

Milton Friedman was not opposed to ideas like wage subsidies, which resemble the “negative income tax” he endorsed in his best-selling 1962 book “Capitalism and Freedom.”

An expansion of the earned-income tax credit (EITC), a form of wage subsidy, could dramatically assist those who have taken low-paying jobs, after being displaced by the phenomena of globalization and automation, in addition to helping strengthen labor-force participation

Similarly, lowering the corporate tax rate from 35%, currently the highest rate among OECD countries, is arguably the biggest economic policy opportunity to foster job creation, particularly among low-wage workers. Such an action could help stem the tide of tax inversions whereby companies reincorporate abroad through acquisition —  taking jobs and tax dollars with them.

Furthermore, the gains from lowering tax rates for small businesses and simplifying the regulatory costs of entrepreneurship could reinvigorate the small business economy which comprises the largest number of American jobs.

Second, there is ample opportunity to spur labor market activity and efficiency through reforming the regulatory state.

One instance is the ability to overhaul the new Obama mandatory overtime rules that will raise the salary threshold from $23,600 to about $47,476 to qualify for overtime pay, which, if still implemented, could have a distortionary impact on businesses, incentivizing employers to reduce hours and reclassify salaried workers to hourly workers.

Moreover, the Obama White House further estimates that 81.8% of workers affected by expanding the mandatory overtime threshold to $47,476 would have some college, a bachelor’s degree or some advanced degree.

Such an initiative is welfare for wealthier educated individuals, who could better be assisted through middle class individual tax relief which does not interfere directly with businesses.

Reforming occupational licensing, a topic to which Milton Friedman dedicated an entire chapter in “Capitalism and Freedom,” could help improve the labor market efficiency of thousands of jobs, from those spending unnecessary hours training to be hair stylists to nurse practitioners who are outlawed from doing routine low-risk procedures in primary care.

Easily the greatest example of relaxed occupational licensing laws is the growth of Uber, Lyft and other ride-sharing companies, which have rapidly grown and created thousands of jobs and billions in consumer surplus following the relaxation of taxicab licensing laws.

Finally, a long-run pro-growth agenda could be fostered by the newfound ability for Republican policymakers to temper government spending through reforming the Affordable Care Act and other entitlement spending.

There are huge opportunities to restore fiscal balance by increasing the retirement age, reducing Social Security benefit growth for nonpoor individuals, transforming Medicare into premium support, and reducing the burden of the health care law on businesses, such as relaxing the ObamaCare employer mandates which encourage reductions in labor hours.

Education reform that improves the efficiency of our public investments in education is another fix that could help promote long-run economic growth. The idea that educational attainment could be improved through a voucher system was championed by Friedman throughout his lifetime and has been embodied in the continued work of the Friedman Foundation for Educational Choice, which Friedman and his wife, Rose Friedman, co-founded in 1996.

Thanks to their work, voucher systems have successfully been implemented in Florida, Mississippi and Tennessee, with strong positive results.

In the wake of the recession and the absence of Friedman’s intellectual presence, there have been several new trends in economic thinking that have strayed from the rigorous level of policy that Friedman applied in analyzing the economy and policy prescriptions.

We hope that President-elect Trump, his economic team and the Republican Congress look to the ideas of Milton Friedman and his intellectual descendants who have applied such rigor in their thinking. We believe that could very well be the best path to “make America grow again” and promote inclusive economic growth.

  • Hartley is an economics contributor for Forbes and a co-founder of Real Time Macroeconomics.
  • Hubbard, dean of Columbia Business School, was chairman of the Council of Economic Advisers under President George W. Bush.

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