MILTON FRIEDMAN: THE MIND BEHIND THE REPUBLICAN TAX REVOLT

The on-going debate over raising the debt ceiling has focused on many areas of disagreement between Democrats and Republicans but none bigger than the Republican determination not to raise taxes.  Many pundits credit this to the political power of Grover Norquist and his Americans for Tax Reform who have spent years collecting “No Tax Increase” pledges from Republican candidates.  Others attribute Republican intransigence on taxes to a near religious belief in supply side economics, a school of thought founded by economist Arthur Laffer and journalist Jude Wanniski in the late 1970s.

The true seeds of this attitude toward tax increases, in my view, actually go back farther and can be traced to an even nobler pedigree.  The real inspiration for this conviction comes from the late Nobel prize-winning economist, Milton Friedman.  It is only by understanding Friedman’s reasoning and his values that one can fully understand why Republican refuse to see spending cuts and tax increases as simply two sides of the same budget-balancing coin.

This was not always the Republican, or even the conservative, position.  During the 1950s, it was Democrats who advocated tax cuts to stimulate the economy and President Eisenhower who insisted “we can never justify going further into debt to give ourselves a tax cut at the expense of our children.”

In 1964, the eventual Republican nominee for president, Senator Barry Goldwater, voted against the so-called Kennedy tax cuts (actually passed after Kennedy’s assassination the previous year) because he was convinced the resulting deficits would be inflationary.  Even after losing the presidential election to President Lyndon Johnson in a landslide later that year, Goldwater predicted a Republican comeback, telling U.S. News & World Report that a no-win war in Vietnam and high inflation would prompt a backlash against the Democrats two years later (he was right on both counts).

So if Eisenhower and Goldwater represented Republican orthodoxy in the 1950s and ‘60s, what happened?  In large part, it was an intellectual revolution in conservative/libertarian thought prompted by economist Milton Friedman.  While Friedman rejected the simplistic Keynesian (and later supply-side) notion that tax cuts automatically stimulate the economy, he believed that higher taxes were bad because they led to more and bigger government, which he was convinced at best led to waste and at worse to greater government control over our economy, our lives and our freedoms.

In 1967, three year’s after the Kennedy tax cuts, the Johnson Administration was already running huge deficits thanks to the a combination of Great Society social programs and the Vietnam War.  Writing in his regular Newsweek column on August 7, 1967, Friedman expresseded his concern that this would soon lead to higher taxes, using an analysis that would become familiar to his readers over the years:

“.If we adopt such programs, does not fiscal responsibility at least call for imposing taxes to pay for them?  The answer is that postwar experience has demonstrated two things. First, that Congress will spend whatever the tax system will raise—plus a little (and recently, a lot) more.  Second, that, surprising as it seems, it has proved difficult to get taxes down once they are raised.  The special interests created by government spending have proved more potent than the general interest in tax reduction.

“If taxes are raised in order to keep down the deficit, the result is likely to be a higher norm for government spending. Deficits will again mount and the process will be repeated.”

Sure enough, a year later a 10% income tax surcharge was enacted by Congress to cut the deficit and fight inflation.  His prediction having been confirmed, Friedman returned to the subject in another Newsweek column dated July 15, 1968.  He now described a familiar pattern of how Democrats used the traditional view of fiscal conservatism to convince Republicans to help pay for the Democrats’ own profligate spending:

“The standard scenario has been that the Democrats—in the name of the New Deal, the Fair Deal, or the Great Society—push through large spending programs . . . generally against the opposition of the Republican leadership.  The spending programs not only absorb the increased tax yield generated by the ‘fiscal drag,’ they go farther and produce deficits.

“The Democrats then appeal to the Republicans’ sense of fiscal responsibility to refrain from cutting tax rates or, as in this case, to raise them.  The Republicans cooperate, thereby establishing a new higher revenue base for further spending.  The Democrats get the ‘credit’ for the spending; the Republicans, the ‘blame’ for the taxes; and you and I pay the bill.”

Fast forward seven years, when Republican President Gerald Ford was proposing a tax cut to stimulate the economy during a brief recession.  As an economist who believed monetary, not fiscal, policy was the best way to keep the economy on a stable path to growth, Friedman did not believe the proposed tax cut would have its intended stimulatory effect.  He explained why in another Newseek column on July 15, 1975 but went on to say:

“Yet I must confess that I favor tax cuts—not as a cure for recession but for a very different reason.  Our basic long-term need is to stop the explosive growth in government spending.  I am persuaded that the only effective way to do so is by cutting taxes—at any time for any excuse in any way.

“The reason is that government will spend whatever the tax system raises plus a good deal more—but not an indefinite amount more.  The most effective way to force each of us to economize is to reduce our income.  The restraint is less rigid on government, but it is there and seems to be the only one we have.

“So hail the tax cut—but let’s do it for the right reason.”

Another six years went by and now it was the newly-elected president, Ronald Reagan, who was proposing a large, multi-year tax cut to get the economy moving. At the time, he was also proposing off-setting spending cuts (which we all know didn’t happen).  Friedman wrote yet another Newsweek column dated July 27, 1981, refuting objections to the plan by liberal economists while also discounting many of the claims of supply-siders in the Reagan Administration.  Friedman still supported the tax cuts, of course, and explained why liberals were suddenly worried about deficits:

“The analysis so far treats government spending and taxes as if they were two independent entities.  They clearly are not.  We know full well that Congress will spend every penny—and more—that is yielded by taxes.  A cut in taxes will mean a cut in government spending.  And there is no other way to get a cut in spending.

“That is the real reason why the big spenders and the big inflationists of the past have suddenly been converted to fiscal conservatism and to preaching the virtues of fighting inflation.  They know that a multi-year tax cut will force multi-year spending reductions.  They hope that a one-year tax cut will quiet public agitation and allow them to revert next year to their high-spending ways.”

Taken as a whole, these excerpts from columns written for a popular magazine by a Nobel laureate economist between 1967 and 1981—44 to 30 years ago—spell out precisely the philosophy that today motivates many Republicans in and out of Congress to firmly oppose any tax increase as part of a deficit reduction or budget-balancing plan proposed by Democrats.

Like Milton Friedman, they are firmly convinced that any taxes they raise will ultimately result in increased government spending.  They believe government spending necessarily translates into more and bigger government.  They believe the federal government is already too big, threatening not just the health of the economy but their freedom and way of life as well.

One can argue with Friedman’s assumptions as well as the conclusions he draws from them.  But until those on the other side—including the President, Democratic congressional leaders and the media—understand the reasoning and motivations behind the anti-tax sentiments of Republicans from Capitol Hill to the Tea Party activists, it’s hard to imagine anything more than a temporary truce in the battle being waged over the budget.

Charlie Rose interview of Milton Friedman

My favorite economist:

Milton Friedman : A Great Champion of Liberty  by V. Sundaram  

Milton Friedman, the Nobel Prize-winning economist who advocated an unfettered free market and had the ear of three US Presidents – Nixon, Ford and Reagan – died last Thursday (16 November, 2006 ) in San Francisco at the age of 94. Gordon St Angelo, President and CEO of the Milton and Rose D Friedman Foundation in Indianapolis said in a statement, ‘Milton’s passion for freedom and liberty has influenced more lives than he ever could possibly know. His writings and ideas have transformed the minds of U.S. presidents, world leaders, entrepreneurs and freshmen economic majors alike.’

While honoring Milton Friedman at a public function in 2002, US President Bush said: ‘Milton Friedman has used a brilliant mind to advance a moral vision – the vision of a society where men and women are free, free to choose, but where government is not as free to override their decisions. That vision has changed America, and it is changing the world.’

The Great Depression of the 1930s was blamed on free markets and brought a vast expansion of government interference with the economy. Then came the II World War and with that the position became even worse with government controlling all aspects of the economy in USA. After the war, when anybody who favored rolling back the power of government inevitably faced the question, ‘What about the Great Depression?’. Without all the laws from that era, it was feared, there would again be high unemployment, chronic monopolies and gross inequalities. Nobel laureate Milton Friedman did more than anyone else to change thinking on these issues. He gathered massive documentary evidence to show that the Great Depression occurred primarily because the money supply contracted by one-third between 1929 and 1933, although the Federal Reserve (Central Bank) in USA had been granted the power to prevent such a catastrophe.

Milton Friedman argued that the Great Depression was a government failure. Further he also proved that – inflation is always and everywhere a monetary phenomenon. He made a formidable case that government ‘fine-tuning’ is more likely to backfire: by the time Central Bankers realize that the economy is slipping into a recession or depression and they inflate the money supply, the effects are likely to be felt after the economy has already recovered, worsening the subsequent inflation. Conversely, by the time Central Bankers realize inflation is a problem and they contract the money supply, the effects are likely to be felt after the economy has slowed down, worsening the next recession or depression. Thus Friedman effectively proved that Government is the biggest source of instability in the economy. All this he proved in his most important single work on economics called ‘A Monetary History of the United States 1867 – 1960’ which he co-authored with Anna Jacobson Schwartz and which was published in 1963.

Many champions of liberty have generally done well to achieve significant impact on a single area of public policy. Bur Friedman has had a significant impact on many public policies in USA. He helped usher in the era of free foreign exchange markets. He campaigned for ballot initiatives to limit government spending and taxes. He inspired the movement for educational choice using tuition vouchers that would enable poor people to opt out of public schools. He courageously spoke out against drugs prohibition and he helped fight President Clinton’s effort to seize an eighth of the US economy in his plan for Government-run health care. His greatest achievement of which he was most proud was that of helping to end military conscription in the United States.

Milton Friedman was born on 31 July, 1912 at Brooklyn in New York. He entered Rutgers University in 1928. He graduated from Rutgers University in 1932. He moved over to University of Chicago in 1932 for higher studies. In Jacob Viner’s Price Theory class, the student who always sat next to him was the petite and lively Rose Director. She was to become his future wife. She was doing Ph D in economics under Frank Knight and Friedman worked as assistant under another economics professor Henry Schultz. Friendship between the two developed into romance and Milton and Rose got married in New York on 25 June, 1938. Another Chicago economist Henry Simons had a big impact on Friedman. In 1934, Simons wrote A Positive Programme for Laissez Faire in which he emphasized that people generally share common goals, such as promoting prosperity and the major differences of opinion are often about the most effective ways to achieve the goals. Friedman won over millions by embracing this fundamental approach and making a practical case that private individuals in competitive markets are much better at solving problems than bureaucrats are. Simons had warned that political liberty can survive only within an effective competitive economic system and this became a major theme of Friedman.

In 1937 Friedman went to Columbia University to do his Ph D. In September 1937, future Nobel laureate Simon Kuznets invited Friedman to work at the National Bureau of Economic Research where he studied independent professionals, lawyers, accountants, engineers, dentists and doctors. This work became the basis for Friedman’s doctoral dissertation and first book, Income from Independent Professional Practice, co-authored by Simon Kuznets.

From 1941 to 43, Friedman worked in the Treasury Department’s Division of Tax Research. In September 1946, Friedman began teaching at the University of Chicago and became an international celebrity. His most widely quoted essay The Methodology of Positive Economics published in 1953 maintained that when one makes statements about phenomena, they ought to be verified by some kind of observation. The primary test of economic analysis is the correctness of predictions. In 1956, William Volker Charities Fund arranged for Friedman to deliver a series of lectures about general principles and major public policy issues such as unemployment, monopolies, racial discrimination, social security and international trade. His wife Rose Friedman edited the lectures into a book, Capitalism and Freedom, which the University of Chicago published in 1962. This book went on to sell some 500,000 copies. It was smuggled into the Soviet Union and served as the basis for an underground edition. After the fall of the Berlin Wall in 1989, this book was translated into Serbo-Croatian, Chinese, Polish and Estonian and many other languages.

In his next important book, ‘A Theory of the Consumption Function‘ published in 1957 Friedman explained that people decide how much to spend and save according to their expected earning, not the amount of government spending. Friedman’s work, together with data developed by Simon Kuznets and others, overthrew a key Keynesian claim that government spending was essential for prosperity. In 1962 and 1963, Friedman and his wife traveled around the world, visiting 21 countries. He reported in Harper’s, ‘Wherever we found any large element of individual freedom, some beauty in the ordinary life of the ordinary man, some measure of real progress in the material comforts at his disposal, and a live hope of further progress in the future – there we also found that the private market was the main device being used to organize economic activity. Wherever the private market was largely suppressed and the State undertook to control in detail the economic activity of its citizens, there the ordinary man was in political fetters, had a low standard of living, and was largely bereft of any conception of controlling his own destiny.’

In 1966, Newsweek’s editor invited Milton Friedman to contribute a weekly column on public issues. All his writings in Newsweek were collected and published in three volumes : An Economist’s Protest (1972), There’s No Such Thing as a Free Lunch (1975) , and Bright Promises, Dismal Performance (1983). Milton Friedman continued to contribute articles to the Wall Street Journal, New York Times, Washington Post, San Francisco Chronicle and other publications.
In 1976 he was awarded the Nobel Prize in economics for his work in the field of consumption analysis, monetary history and stabilization policy. His theory of monetarism, adopted in part by the Nixon, Ford and Reagan administrations, opposed the traditional Keynesian economics that had dominated US policy since the New Deal. He was a member of Reagan’s Economic Policy Advisory Board.
In 1977, Friedman was requested to present a TV programme under the title Free to Choose and the first part of this programme was broadcast in January 1980. It became one of the most popular programs around the world. Later it came in the form of a book Free to Choose and became the top selling non fiction book in the 1980s. It was translated into 17 languages.

In numerous books, a Newsweek magazine column and a PBS show, Milton Friedman championed individual freedom in economics and politics. He pioneered a school of thought that became known as the Chicago school of economics.

Former British Prime Minister Margaret Thatcher said: ‘Milton Friedman was an intellectual freedom fighter. He revived the economics of liberty when it had been all but forgotten. Never was there a less dismal practitioner of a dismal science.’
President Bush in his memorial tribute has said that ‘America has lost one of its greatest citizens. Milton Friedman was a revolutionary thinker and extraordinary economist whose work helped advance human dignity and human freedom.’

 26-Nov-2006