FRIEDMAN FRIDAY What Reagan’s Greatest Economic Adviser Thought About Austerity

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13,462 viewsJun 5, 2013, 09:38am

What Reagan’s Greatest Economic Adviser Thought About Austerity

Pascal-Emmanuel Gobry

Pascal-Emmanuel GobryContributor BusinessThis article is more than 2 years old.

Ronald Reagan wearing cowboy hat at Rancho del...

(Photo credit: Wikipedia)

Conservatives agree the government should be smaller and spend less. The question is how to get there–how hard and how fast to cut?

No one knows better about it than the greatest economic adviser that conservative hero Ronald Reagan ever had: Milton Friedman. Friedman refused to work in Reagan’s White House so as not to lose his ability to speak out independently, but he was a key advisor to Ronald Reagan, especially in his presidential campaign.

Conservatives should listen to Friedman for a few important reasons:

  • Friedman was one of the very greatest economists of the 20th century. Even among Nobel Prize Winners, he stands head and shoulders above almost anyone else.
  • Friedman couldn’t be intellectually dishonest even if he’d tried. He didn’t dissemble about what he believed, and only went where the facts led him. And he certainly didn’t play politics. So when he said something, you could be sure he meant it, and that was his carefully considered view.
  • Friedman was no squish. No one believed in small government more than Milton Friedman. He is rightfully seen as a hero by small government conservatives. He believed in freedom with every fiber of his being.

Given Friedman’s tremendous talent as an economist, honesty and unquestionable small government bona fides, we should pay attention to what he says.

So, Milton Friedman was asked about it, and he gave an answer, on the Donahue Show in 1979. Here’s a link to the clip, which starts at the right point, 33:10.

Friedman is asked what he would do to put the economy back on track. He says the number one thing is to cut government spending.Today In: Business

But how? This is the crucial part. Here’s the quote: “Cut down government spending–to hold down the rate of growth of government spending in dollars and to cut it in terms of purchasing power.”

This is absolutely crucial. Friedman says the right way to shrink government is NOT immediate spending cuts. The right way to shrink government is to hold down the rate of growth of government so that it shrinks in real terms, over time.

It’s important to keep in mind the context. This is 1979. Ronald Reagan was already running for President, and Milton Friedman was one of his key economic advisers. Right before answering on government spending, he noted that he wanted to stay out of government to keep being able to say what he honestly meant–in other words, what he’s saying is not “shrinking the growth rate is the politically more convenient way” to cut government, he is saying “shrinking the growth rate is the right way” to cut government.

It’s also important that he’s saying this in 1979 because this was before the IMF-imposed austerity programs of the 1990s which weakened the case for austerity even further among academic economists. Friedman would have been well within the libertarian and conservative mainstream AND the academic economist mainstream if he’d called for deep immediate spending cuts. And yet that’s not what he called for. Because he thought it was wrong–not wrong politically, but wrong on the merits.

Why, because like it or not, deep immediate spending cuts are bad for the economy. For the exact same reason that tax cuts are good for the economy. (Here’s Friedman in 1999: “I am in favor of reducing taxes under any circumstances, for any excuse, for any reason whatsoever.”) No one believed in small government more than Milton Friedman, and yet he couldn’t endorse austerity and immediate spending cuts.

We’ve seen this all over the world. Governments that implement austerity tank their economy, become unpopular and are voted out. In the US, even if a pro-austerity majority could be elected (very tall order) and actually followed through on its promise, it would very quickly lose the future elections, because the economy would tank and the economy drives elections. The cause of small government would be discredited for a long time. And a lot of unnecessary human suffering would occur as people lose their jobs.

Milton Friedman understood this. He loved small government, but he wouldn’t endorse austerity.

Milton Friedman was perhaps the greatest small government thinker of the 20th century, and he understood economics better than anyone. Conservatives and libertarians should see Friedman as their lodestar and remember his views on austerity. If we actually want to shrink government instead of just posturing, we have to reject austerity and take the longer view.

Milton Friedman

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