And we should have learned another lesson when the Fed (with strong support from Ronald Reagan) then put the inflation genie back in the bottle in the 1980s.
But today’s central bankers must have been very bad students.
Writing for National Review, E.J. Antoni explains that we are once again bearing the inevitable cost of bad monetary policy.
…central banks are allowing interest rates to rise in an effort to belatedly respond to a crisis they helped cause. …the global economic downturn has been baked into the cake for months. …central banks around the world laid the groundwork for economic pain when they decided to finance trillions of dollars in unfunded government spending in 2020.As those central banks continued — and in some cases accelerated — their excessive money creation throughout 2021 and into 2022, a global downturn became inevitable. …History shows that high levels of inflation almost always lead to recession …once inflation became apparent central bankers persisted with their earlier course, feeding inflation, rather than starving it. If they had acted earlier, far less drastic treatment would now be required. …there is no way around the harsh reality that the bill is coming due for the last two years of monetary malfeasance.
However, while I agree with the above article, I don’t agree with the title. It should be changed to: “Economies Can’t Avoid the Consequences of Central Bank Actions.”
Why the new title?
For the simple reason that central bankers are actually very capable of dodging responsibility for their mistakes.
For instance, has anyone heard the head of the Federal Reserve, Jerome Powell, apologize for dumping $4 trillion of liquidity into the economy in 2020 and 2021, thus creating today’s big price increases in the United States?
A more glaring example comes from the United Kingdom, where the former Governor of the Bank of England wants to blame Brexit. I’m not joking. Here are some excerpts from a Bloombergstory.
Former Bank of England Governor Mark Carney pointed to Brexit as a key reason why the UK central bank is now having to hike interest rates in its struggle to contain inflation. Alongside rising energy prices and a tight labor market, Britain’s exit from the European Union added to the economic headwinds for the UK,according to Carney. “In the UK, unfortunately, we’ve also had in the near term the impact of Brexit, which has slowed the pace at which the economy can grow,” Carney said in an interview with BBC Radio 4’s “Today” program on Friday. …“The economy’s capacity would go down for a period of time because of Brexit, that would add to inflationary pressure, and we would have a situation, which is the situation we have today, where the Bank of England has to raise interest rates despite the fact the economy is going into recession.”
This is galling.
Brexit did not cause inflation. The finger of blame should be pointed at the Bank of England.
Like the Fed, the BoE dramatically expanded its balance sheet starting in the spring of 2020.
And, like the Fed (and the European Central Bank), it maintained an easy-money policy for the remainder of the year and throughout 2021 – even after it became very clear that the pandemic was not going to cause an economic crisis.
To be fair, Carney left the Bank of England in early 2020, so it’s possible he might not have made the same mistake as Andrew Bailey, who took his place.
But Carney blaming Brexit shows that, if nothing else, he is willing to prevaricate to protect the BoE’s reputation.
What makes his analysis so absurd is that he almost surely would have made the same claims regardless of what happened after Brexit.
Boris Johnson delivered Brexit, but then proceeded to enact bad policies such as higher taxes and more spending. The economy weakened and Carney says this is why the BoE is being forced to raise interest rates.
But if Johnson had enacted good policy (the Singapore-on-Thames scenario), the economy would be performing much better. In that case, Carney doubtlessly would have claimed interest rates needed to rise because of overheating.
In reality, of course, interest rates are going up because the BoE is trying to undo its easy-money mistake.
Too bad Carney isn’t man enough to admit what’s really happening. Maybe a woman would be more honest.
P.S. The current Governor of the BoE, Bailey, also likes shifting blame since he wants people to think that Liz Truss’ proposed tax cuts were responsible for financial market instability – even though his easy-money policies are the real culprit.
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This past article below from Dan Mitchell tells the story of Ronald Reagan’s successful strategy against inflation. I had a front row seat since I got to read the book and see the film FREE TO CHOOSE by Milton Friedman in 1980 who Reagan agreed with on this issue and I have included below the episode on inflation!
He also restored America’s national defenses and reoriented foreign policy, both of which led to the collapse of the Soviet Empire, a stupendous achievement that makes Reagan worthy of Mount Rushmore.
But he also has another great achievement, one that doesn’t receive nearly the level of appreciation that it deserves. President Reagan demolished the economic cancer of inflation.
Even Paul Krugman has acknowledged that reining in double-digit inflation was a major positive achievement. Because of his anti-Reagan bias, though, he wants to deny the Gipper any credit.
Robert Samuelson, in a column for the Washington Post, corrects the historical record.
Krugman recently wrote acolumnarguing that the decline of double-digit inflation in the 1980s was the decade’s big economic event, not the cuts in tax rates usually touted by conservatives. Actually, I agree with Krugman on this. But then he asserted that Ronald Reagan had almost nothing to do with it. That’s historically incorrect. Reagan was crucial. …Krugman’s error is so glaring.
Samuelson first provides the historical context.
For those too young to remember, here’s background. From 1960 to 1980, inflation — the general rise of retail prices —marched relentlessly upward. It went from 1.4 percent in 1960 to 5.9 percent in 1969 to 13.3 percent in 1979. The higher it rose, the more unpopular it became. …Worse, government seemed powerless to defeat it. Presidents deployed complex wage and price controls and guidelines. They didn’t work. The Federal Reserve — custodian of credit policies — veered between easy money and tight money, striving both to subdue inflation and to maintain “full employment” (taken as a 4 percent to 5 percent unemployment rate). It achieved neither. From the late 1960s to the early 1980s, there werefour recessions. Inflation became a monster, destabilizing the economy.
The column then explains that there was a dramatic turnaround in the early 1980s, as Fed Chairman Paul Volcker adopted a tight-money policy and inflation was squeezed out of the system much faster than almost anybody thought was possible.
But Krugman wants his readers to think that Reagan played no role in this dramatic and positive development.
Samuelson says this is nonsense. Vanquishing inflation would have been impossible without Reagan’s involvement.
What Reagan provided was political protection. The Fed’s previous failures to stifle inflation reflected its unwillingness to maintain tight-money policies long enough… Successive presidents preferred a different approach: the wage-price policies built on the pleasing (but unrealistic) premise that these could quell inflation without jeopardizing full employment. Reagan rejected this futile path. As the gruesome social costs of Volcker’s policies mounted — the monthly unemployment rate would ultimately rise to a post-World War II high of10.8 percent— Reagan’s approval ratings plunged. In May 1981, they were at 68 percent; by January 1983, 35 percent. Still, he supported the Fed. …It’s doubtful that any other plausible presidential candidate, Republican or Democrat, would have been so forbearing.
What’s the bottom line?
What Volcker and Reagan accomplished was an economic and political triumph. Economically, ending double-digit inflation set the stage for a quarter-century of near-automatic expansion… Politically, Reagan and Volcker showed that leaders can take actions that, though initially painful and unpopular, served the country’s long-term interests. …There was no explicit bargain between them. They had what I’ve called a “compact of conviction.”
By the way, Krugman then put forth a rather lame response to Samuelson, including the rather amazing claim that “[t]he 1980s were a triumph of Keynesian economics.”
As preached and practiced since the 1960s, Keynesian economics promised to stabilize the economy at levels of low inflation and high employment. By the early 1980s, this vision was in tatters, and many economists were fatalistic about controlling high inflation. Maybe it could be contained. It couldn’t be eliminated, because the social costs (high unemployment, lost output) would be too great. …This was a clever rationale for tolerating high inflation, and the Volcker-Reagan monetary onslaught demolished it. High inflation was not an intrinsic condition of wealthy democracies. It was the product of bad economic policies. This was the 1980s’ true lesson, not the contrived triumph of Keynesianism.
If anything, Samuelson is being too kind.
One of the key tenets of Keynesian economics is that there’s a tradeoff between inflation and unemployment (the so-called Phillips Curve).
Yet in the 1970s we had rising inflation and rising unemployment.
While in the 1980s, we had falling inflation and falling unemployment.
But if you’re Paul Krugman and you already have a very long list of mistakes (see here, here, here, here,here,here,here, here, andherefor a few examples), then why not go for the gold and try to give Keynes credit for the supply-side boom of the 1980s
P.S. Since today’s topic is Reagan, it’s a good opportunity to share my favorite poll of the past five years.
P.P.S. Here are some great videos of Reagan in action. And here’s one more if you need another Reagan fix.
Milton Friedman’s FREE TO CHOOSE “How to cure inflation” Transcript and Video (60 Minutes)
In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount. I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?” and “Created Equal” and From Cradle to Grave, and – Power of the Market.“If we could just stop the printing presses, we would stop inflation,” Milton Friedman says in “How to Cure Inflation” from the Free To Choose series. Now as then, there is only one cause of inflation, and that is when governments print too much money. Milton explains why it is that politicians like inflation, and why wage and price controls are not solutions to the problem.
http://www.freetochoosemedia.org/freetochoose/detail_ftc1980_transcript.php?page=9While many people have a fairly good grasp of what inflation is, few really understand its fundamental cause. There are many popular scapegoats: labor unions, big business, spendthrift consumers, greed, and international forces. Dr. Friedman explains that the actual cause is a government that has exclusive control of the money supply. Friedman says that the solution to inflation is well known among those who have the power to stop it: simply slow down the rate at which new money is printed. But government is one of the primary beneficiaries of inflation. By inflating the currency, tax revenues rise as families are pushed into higher income tax brackets. Thus, inflation transfers wealth and resources from the private to the public sector. In short, inflation is attractive to government because it is a way of increasing taxes without having to pass new legislation to raise tax rates. Inflation is in fact taxation without representation. Wage and price controls are not the cure for inflation because they treat only the symptom (rising prices) and not the disease (monetary expansion). History records that such controls do not work; instead, they have perverse effects on both prices and economic growth and undermine the fundamental productivity of the economy. There is only one cure for inflation: slow the printing presses. But the cure produces the painful side effects of a temporary increase in unemployment and reduced economic growth. It takes considerable political courage to undergo the cure. Friedman cites the example of Japan, which successfully underwent the cure in the mid-seventies but took five years to squeeze inflation out of the system. Inflation is a social disease that has the potential for destroying a free society if it is unchecked. Prolonged inflation undermines belief in the basic equity of the free market system because it tends to destroy the link between effort and reward. And it tears the social fabric because it divides society into winners and losers and sets group against group.(Taxation without representation: Getting knocked up to higher tax brackets because of inflation pt 1)http://www.youtube.com/watch?v=b1dTWDNKH3c
Volume 9 – How to Cure Inflation
Transcript:
Friedman: The Sierra Nevada’s in California 10,000 feet above sea level, in the winter temperatures drop to 40 below zero, in the summer the place bakes in the thin mountain air. In this unlikely spot the town of Body sprang up. In its day Body was filled with prostitutes, drunkards and gamblers part of a colorful history of the American West.
A century ago, this was a town of 10,000 people. What brought them here? Gold. If this were real gold, people would be scrambling for it. The series of gold strikes throughout the West brought people from all over the world, all kinds of people. They came here for one purpose and one purpose only, to strike it rich, quick. But in the process, they built towns, cities, in places where nobody would otherwise have dreamed of building a city. Gold built these cities and when the gold was exhausted, the cities collapsed and became ghost towns. Many of the people who came here ended up the way they began, broke and unhappy. But a few struck it rich. For them, gold was real wealth. But was it for the world as a whole. People couldn’t eat the gold, they couldn’t wear the gold, they couldn’t live in houses made of gold. Because there was more gold, they had to pay a little more gold to buy goods and services. The prices of things in terms of gold went up.
At tremendous cost, at sacrifice of lives, people dug gold out of the bowels of the earth. What happened to that gold? Eventually, at long last, it was transported to distant places only to be buried again under the ground. This time in the vaults of banks throughout the world. There is hardly anything that hasn’t been used for money; rock salt in Ethiopia, brass rings in West Africa, Calgary shells in Uganda, even a toy cannon. Anything can be used as money. Crocodile money in Malaysia, absurd isn’t it?
That beleaguered minority of the population that still smokes may recognize this stuff as the raw material from which their cigarettes are made. But in the early days of the colonies, long before the U.S. was established, this was money. It was the common money of Virginia, Maryland and the Carolinas. It was used for all sorts of things. The legislature voted that it could be used legally to pay taxes. It was used to buy food, clothing and housing. Indeed, one of the most interesting sites was to see the husky young fellows at that time, lug 100 pounds of it down to the docks to pay the costs of the passage of the beauteous young ladies who had come over from England to be their brides.
Now you know how money is. There’s a tendency for it to grow, for more and more of it to be produced and that’s what happened with this tobacco. As more tobacco was produced, there was more money. And as always when there’s more money, prices went up. Inflation. Indeed, at the very end of the process, prices were 40 times as high in terms of tobacco as they had been at the beginning of the process. And as always when inflation occurs, people complained. And as always, the legislature tried to do something. And as always, to very little avail. They prohibited certain classes of people from growing tobacco. They tried to reduce the total amount of tobacco grown, they required people to destroy part of their tobacco. But it did no good. Finally, many people took it into their own hands and they went around destroying other people’s tobacco fields. That was too much. Then they passed a law making it a capital offense, punishable by death, to destroy somebody else’s tobacco. Grecian’s Law, one of the oldest laws in economics, was well illustrated. That law says that cheap money drives out dear money and so it was with tobacco. Anybody who had a debt to pay, of course, tried to pay it in the worst quality of tobacco he had. He saved the good tobacco to sell overseas for hard money. The result was that bad money drove out good money.
Finally, almost a century after they had started using tobacco as money, they established warehouses in which tobacco was deposited in barrels, certified by an inspector according to his views as to it’s quality and quantity. And they issued warehouse certificates which people gave from one to another to pay for the bills that they accumulated.
These pieces of green printed paper are today’s counterparts of those tobacco certificates. Except that they bear no relation to any commodity. In this program I want to take you to Britain to see how inflation weakens the social fabric of society. Then to Tokyo, where the Japanese have the courage to cure inflation. To Berlin, where there is a lesson to be learned from the West Germans and how so called cures are often worse than the disease. And to Washington where our government keeps these machines working overtime. And I am going to show you how inflation can be cured.
The fact is that most people enjoy the early stages of the inflationary process. Britain, in the swinging 60’s, there was plenty of money around, business was brisk, jobs were plentiful and prices had not yet taken off. Everybody seemed happy at first. But by the early 70’s, as the good times rolled along, prices started to rise more and more rapidly. Soon, some of these people are going to lose their jobs. The party was coming to an end.
The story is much the same in the U.S. Only the process started a little later. We’ve had one inflationary party after another. Yet we still can’t seem to avoid them. How come?
Before every election our representatives would like to make us think we are getting a tax break. When they are able to do it, while at the same time actually raising our taxes because of a bit of magic they have in their kit bag. That magic is inflation. They reduced the tax rates but the taxes we have to pay go up because we are automatically shoved into higher brackets by the effective inflation. A neat trick. Taxation without representation.
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Pt 2 Many a political leader has been tempted to turn to wage and price controls despite their repeated failure in practice. On this subject they never seem to learn. But some lessons may be learned. That happened to British P
Bob Crawford: The more I work, it seems like the more they take off me. I know if I work an extra day or two extra days, what they take in federal income tax alone is almost doubled because apparently it puts you in a higher income tax bracket and it takes more off you.
Friedman: Bob Crawford lives with his wife and three children in a suburb of Pittsburgh. They’re a fairly average American family.
Mrs. Crawford: Don’t slam the door Daphne. Okay. Alright. What are you doing? Making your favorite dish.
Friedman: We went to the Crawford’s home after he had spent a couple of days working out his federal and state income taxes for the year. For our benefit, he tried to estimate all the other taxes he had paid as well. In the end, though, he didn’t discover much that would surprise anybody.
Bob Crawford: Inflation is going up, everything is getting more expensive. No matter what you do, as soon as you walk out of the house, everything went up. Your gas bills keep going up, electric bills, your gasoline, you can name a thousand things that are going up. Everything is going sky high. Your food. My wife goes to the grocery store. We used to live on say, $60 or $50 every two weeks just for our basic food. Now it’s $80 or $90 every two weeks. Things are just going out of sight as far as expense to live on. Like I say it’s getting tough. It seems like every month it gets worse and worse. And I don’t know where it’s going to end. At the end of the day that I spend nearly $6,000 of my earnings on taxes. That leaves me with a total of $12,000 to live on. It might seem like a lot of money, but five, six years ago I was earning $12,000.
Friedman: How does taxation without representation really effect how much the Crawford family has left to spend after it’s paid its income taxes. Well in 1972 Bob Crawford earned $12,000. Some of that income was not subject to income tax. After paying income tax on the rest he had this much left to spend. Six years later he was earning $18,000 a year. By 1978 the amount free from tax was larger. But he was now in a higher tax bracket so his taxes went up by a larger percentage than his income. However, those dollars weren’t worth anything like as much. Even his wages, let alone his income after taxes, hadn’t kept up with inflation. His buying power was lower than before. That is taxation without representation in practice.
Unnamed Individual: We have with us today you brothers that are sitting here today that were with us on that committee and I’d like to tell you….
Friedman: There are many traditional scapegoats blamed for inflation. How often have you heard inflation blamed on labor unions for pushing up wages. Workers, of course, don’t agree.
Unnamed Individual: But fellows this is not true. This is subterfuge. This is a myth. Your wage rates are not creating inflation.
Friedman: And he’s right. Higher wages are mostly a result of inflation rather than a cause of it. Indeed, the impression that unions cause inflation arises partly because union wages are slow to react to inflation and then there is pressure to catch up.
Worker: On a day to day basis, try to represent our own numbers. But that in fact is not the case. Not only can we not play catch up, we can’t even maintain a wage rate commensurate with the cost of living that’s gone up in this country.
Friedman: Another scapegoat for inflation is the cost of goods coming from abroad. Inflation, we’re told, is imported. Higher prices abroad driving up prices at home. It’s another way government can blame someone else for inflation. But this argument, too, is wrong. The prices of imports and the countries from which they come are not in terms of dollars, they are in terms of lira or yen or other foreign currencies. What happens to their prices in dollars depends on exchange rates which in turn reflect inflation in the United States.
Since 1973 some governments have had a field day blaming the Arabs for inflation. But if high oil prices were the cause of inflation, how is it that inflation has been less here in Germany, a country that must import every drop of oil and gas that it uses on the roads and in industry, then for example it is in the U.S. which produces half of its own oil. Japan has no oil of its own at all. Yet at the very time the Arabs were quadrupling oil prices, the Japanese people were bringing inflation down from 30 to less than 5% a year. The fallacy is to confuse particular prices like the price of oil, with prices in general. Back at home, President Nixon understood this.
Nixon: “Now here’s what I will not do. I will not take this nation down the road of wage and price controls however politically expedient that may seem. The pros of rationing may seem like an easy way out, but they are really an easy way in for more trouble. To the explosion that follows when you try to clamp a lid on a rising head of steam without turning down the fire under the pot, wage and price controls only postpone the day of reckoning. And in so doing, they rob every American of a very important part of his freedom.
Friedman: Now listen to this:
Nixon: “The time has come for decisive action. Action that will break the vicious circle of spiraling prices and costs. I am today ordering a freeze on all prices and wages throughout the United States for a period of 90 days. In addition, I call upon corporations to extend the wage price freeze to all dividends.”
Friedman: Many a political leader has been tempted to turn to wage and price controls despite their repeated failure in practice. On this subject they never seem to learn. But some lessons may be learned. That happened to British Prime Minister James Callahan who finally discovered that a very different economic myth was wrong. He told the Labor Party Conference about it in 1976.
James Callahan: “We used to think that you could use, spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candor that option no longer exists. It only works on each occasion since the war by injecting a bigger dose of inflation into the economy followed by a higher level of unemployment as the next step. That’s the history of the last 20 years.”
Friedman: Well, it’s one thing to say it. One reason why inflation does so much harm is because it effects different groups differently. Some benefit and of course they attribute that to their own cleverness. Some are hurt, but of course they attribute that to the evil actions of other people. And the whole problem is made far worse by the false cures which government adopts, particularly wage and price control.
The garbage collectors in London felt justifiably aggrieved because their wages had not been permitted to keep pace with the cost of living. They struck, hurting not the people who impose the controls, but their friends and neighbors who had to live with mounting piles of rat infested garbage. Hospital attendants felt justifiably aggrieved because their wages had not been permitted to keep up with the cost of living. They struck, hurting not the people who impose the controls, but cancer patients who were turned out of hospital beds. The attendants behaved as a group in a way they never would have behaved as individuals. One group is set against another group. The social fabric of society is torn apart inflicting scars that it will take decades to heal and all to no avail because wage and price controls, far from being a cure for inflation, only make inflation worse.
Within the memory of most of our political leaders, there’s one vivid example of how economic ruin can be magnified by controls. And the classic demonstration of what to do when it happens.
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(Wage and Price Controls don’t work)
Inflation is just like alcoholism. In both cases when you start drinking or when you start printing too much money, the good effects come first. The bad effects only come later.
That’s why in both cases there is a strong temptation to overdo it. To drink too much and to print too much money. When it comes to the cure, it’s the other way around. When you stop drinking or when you stop printing money, the bad effects come first and the good effects only come later.
Pt 3
Germany, 1945, a devastated country. A nation defeated in war. The new governing body was the Allied Control Commission, representing the United States, Britain, France and the Soviet Union. They imposed strict controls on practically every aspect of life including wages and prices. Along with the effects of war, the results were tragic. The basic economic order of the country began to collapse. Money lost its value. People reverted to primitive barter where they used cameras, fountain pens, cigarettes, whiskey as money. That was less than 40 years ago.
This is Germany as we know it today. Transformed into a place a lot of people would like to live in. How did they achieve their miraculous recovery? What did they know that we don’t know?
Early one Sunday morning, it was June 20, 1948, the German Minister of Economics, Ludwig Earhardt, a professional economist, simultaneously introduced a new currency, today’s Deutsche Mark, and in one fell swoop, abolished almost all controls on prices and wages. Why did he do it on a Sunday morning? It wasn’t as you might suppose because the Stock Markets were closed on that day, it was, as he loved to confess, because the offices of the American, the British, and the French occupation authorities were closed that day. He was sure that if he had done it when they open they would have countermanded the order. It worked like a charm. Within days, the shops were full of goods. Within months, the German economy was humming along at full steam. Economists weren’t surprised at the results, after all, that’s what a price system is for. But to the rest of the world it seemed an economic miracle that a defeated and devastated country could in little more than a decade become the strongest economy on the continent of Europe.
In a sense this city, West Berlin, is something of a unique economic test tube. Set as it is deep in Communist East Germany. Two fundamentally different economic systems collide here in Europe. Ours and theirs, separated by political philosophies, definitions of freedom and a steel and concrete wall.
To digress from inflation, economic freedom does not stand alone. It is part of a wider order. I wanted to show you how much difference it makes by letting you see how the people live on the other side of that Berlin Wall. But the East German authorities wouldn’t let us. The people over there speak the same language as the people over here. They have the same culture. They have the same for bearers. They are the same people. Yet you don’t need me to tell you how differently they live. There is one simple explanation. The political system over there cannot tolerate economic freedom. The political system over here could not exist without it.
But political freedom cannot be preserved unless inflation is kept in bounds. That’s the responsibility of government which has a monopoly over places like this. The reason we have inflation in the United States or for that matter anywhere in the world is because these pieces of paper and the accompanying book entry or their counterparts in other nations are growing more rapidly than the quantity of goods and services produced. The truth is inflation is made in one place and in one place only. Here in Washington. This is the only place were there are presses like this that turn out these pieces of paper we call money. This is the place where the power resides to determine how rapidly the amount of money shall increase.
What happened to all that noise? That’s what would happen to inflation if we stop letting the amount of money grow so rapidly. This is not a new idea. It’s not a new cure. It’s not a new problem. It’s happened over and over again in history. Sometimes inflation has been cured this way on purpose. Sometimes it’s happened by accident. During the Civil War the North, late in the Civil War, overran the place in the South where the printing presses were sitting up, where the pieces of paper were being turned out. Prior to that point, the South had a very rapid inflation. If my memory serves me right, something like 4% a month. It took the Confederacy something over two weeks to find a new place where they could set up their printing presses and start them going again. During that two week period, inflation came to a halt. After the two week period, when the presses started running again, inflation started up again. It’s that clear, that straightforward. More recently, there’s another dramatic example of the only effective way to deal with rampant inflation.
In 1973, Japanese housewives going to market were faced with an unpleasant fact. The cash in their purses seemed to be losing its value. Prices were starting to sore as the awful story of inflation began to unfold once again. The Japanese government knew what to do. What’s more, they were prepared to do it. When it was all over, economists were able to record precisely what had happened. In 1971 the quantity of money started to grow more rapidly. As always happens, inflation wasn’t affected for a time. But by late 1972 it started to respond. In early 73 the government reacted. It started to cut monetary growth. But inflation continued to soar for a time. The delayed reaction made 1973 a very tough year of recession. Inflation tumbled only when the government demonstrated its determination to keep monetary growth in check. It took five years to squeeze inflation out of the system. Japan attained relative stability. Unfortunately, there’s no way to avoid the difficult road the Japanese had to follow before they could have both low inflation and a healthy economy. First they had to live through a recession until slow monetary growth had its delayed effect on inflation.
Inflation is just like alcoholism. In both cases when you start drinking or when you start printing too much money, the good effects come first. The bad effects only come later.
That’s why in both cases there is a strong temptation to overdo it. To drink too much and to print too much money. When it comes to the cure, it’s the other way around. When you stop drinking or when you stop printing money, the bad effects come first and the good effects only come later. That’s why it’s so hard to persist with the cure. In the United States, four times in the 20 years after 1957, we undertook the cure. But each time we lacked the will to continue. As a result, we had all the bad effects and none of the good effects. Japan on the other hand, by sticking to a policy of slowing down the printing presses for five years, was by 1978 able to reap all the benefits, low inflation and a recovering economy. But there is nothing special about Japan. Every country that has had the courage to persist in a policy of slow monetary growth has been able to cure inflation and at the same time achieve a healthy economy.
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Pt 4
The job of the Federal Reserve is not to run government spending; it’s not to run government taxation. The job of the Federal Reserve is to control the money supply and I believe, frankly, I have always believed as you know, that these are excuses and not reasons for the performance.
DISCUSSION
Participants: Robert McKenzie, Moderator; Milton Friedman; Congressman Clarence J. Brown; William M. Martin, Chairman of Federal Reserve 1951_1970; Beryl W. Sprinkel, Executive Vice President, Harris Bank, Chicago; Otmar Emminger, President, Ieutsche Bundesbank, Frankfurt West Germany
MCKENZIE: And here at the Harper Library of the University of Chicago, our distinguished guests have their own ideas, too. So, lets join them now.
BROWN: If you could control the money supply, you can certainly cut back or control the rate of inflation. I’d have to say that that prescription is a little bit easier to write than it is to fill. I think there are some other ways to do it and I would relate the money supply __ I think inflation is a measure of the relationship between money and the goods and services that money is meant to cover. And so if you can stimulate the goods, the production of goods and services, it’s helpful. It’s a little tougher to control the money supply, although I think it can be done, than just saying that you should control it, because we’ve got the growth of credit cards, which is a form of money; created, in effect, by the free enterprise system. It isn’t all just printed in Washington, but that may sound too defensive. I think he was right in saying that the inflation is Washington based.
MCKENZIE: Mr. Martin, nobody has been in the firing line longer than you, 17 years head of the Fed. Could you briefly comment on that and we’ll go around the group.
MARTIN: I want to say 19 years.
(Laughter)
MARTIN: I wouldn’t be out here if it weren’t for Milton Friedman, today. He came down and gave us advice from time to time.
FRIEDMAN: You’ve never taken it.
(Laughter)
MCKENZIE: He’s going to do some interviewing later, I warn you.
MARTIN: And I’m rather glad we didn’t take it __
(Laughter)
MARTIN: __ all the time.
SPRINKEL: In your 19 years as Chairman of the Federal Reserve, Bill, the average growth in the money supply was 3.1 percent per year. The inflation rate was 2.2 percent. Since you left, the money supply has exactly doubled. The inflation rate is average over 7 percent, and, of course, in recent times the money supply has been growing in double-digit territory as has our inflation rate.
EMMINGER: May I, first of all, confirm two facts which have been so vividly brought out in the film of Professor Friedman; namely, that at the basis of the relatively good performance of Western Germany were really two events. One, the establishment of a new sound money which we try to preserve sound afterwards. And, secondly, the jump overnight into a free market economy without any controls over prices and wages. These are the two fundamental facts. We have tried to preserve monetary stability by just trying to follow this prescription of Professor Friedman; namely, monetary discipline. Keeping monetary growth relatively moderate. I must, however, warn you it’s not so easy as it looks. If you just say, governments have to have the courage to persist in that course.
FRIEDMAN: Nobody does disagree with the proposition that excessive growth in money supply is an essential element in the inflationary process and that the real problem is not what to do, but how to have the courage and the will to do it. And I want to go and start, if I may, on that subject; because I think that’s what we ought to explore. Why is it we haven’t had the courage and don’t, and under what circumstances will we? And I want to start with Bill Martin because his experience is a very interesting experience. His 19 years was divided into different periods. In the first period, that average that Beryl Sprinkel spoke about, averaged two very different periods. An early period of very slow growth and slow inflation; a later period of what at the time was regarded as creeping inflation __ now we’d be delighted to get back to it. People don’t remember that at the time that Mr. Nixon introduced price and wage controls in 1971 to control an outrageous inflation, the rate of inflation was four-and-a-half percent per year. Today we’d regard that as a major achievement; but the part of the period when you were Chairman, was a period when the inflation rate was starting to creep up and money growth rate was also creeping up. Now if I go from your period, you were eloquent in your statements to the public, to the press, to everyone, about the evils of inflation, and about the determination on the Federal Reserve not to be the architect of inflation. Your successor, Arthur Burns, was just as eloquent. Made exactly the same kinds of statements as effectively, and again over and over again said the Federal Reserve will not be the architect of inflation. His successor, Mr. G. William Miller, made the same speeches, and the same statements, and the same protestations. His successor, Paul Volcker, he is making the same statements. Now my question to you is: Why is it that there has been such a striking difference between the excellent pronouncements of all Chairmen of the Fed, therefore it’s not personal on you. You have a lot of company, unfortunately for the country. Why is it that there has been such a wide diversion between the excellent pronouncements on the one hand and what I regard as a very poor performance on the other?
MARTIN: Because monetary policy is not the only element. Fiscal policy is equally important.
FRIEDMAN: You’re shifting the buck to the Treasury.
MARTIN: Yes.
FRIEDMAN: To the Congress. We’ll get to Mr. Brown, don’t worry.
MARTIN: Yeah, that’s right.
(Laughter)
MARTIN: The relationship of fiscal policy to monetary policy is one of the important things.
MCKENZIE: Would you remind us, the general audience, when you say “fiscal policy”, what you mean in distinction to “monetary policy”?
MARTIN: Well, taxation.
MCKENZIE: Yeah.
MARTIN: The raising revenue.
FRIEDMAN: And spending.
MARTIN: And spending.
FRIEDMAN: And deficits.
MARTIN: And deficits, yes, exactly. And I think that you have to realize that when I’ve talked for a long time about the independence of the Federal Reserve. That’s independence within the government, not independence of the government. And I’ve worked consistently with the Treasury to try to see that the government is financed. Now this gets back to spending. The government says they’re gonna spend a certain amount, and then it turns out they don’t spend that amount. It doubles.
FRIEDMAN: The job of the Federal Reserve is not to run government spending; it’s not to run government taxation. The job of the Federal Reserve is to control the money supply and I believe, frankly, I have always believed as you know, that these are excuses and not reasons for the performance.
MARTIN: Well that’s where you and I differ, because I think we would be irresponsible if we didn’t take into account the needs and what the government is saying and doing. I think if we just went on our own, irresponsibly, I say it on this, because I was in the Treasury before I came to this __
FRIEDMAN: I know. I know.
MARTIN: __ go to the Fed; and I know the other side of the picture. I think we’d be rightly condemned by the American people and by the electorate.
FRIEDMAN: Every central bank in this world, including the German Central Bank, including the Federal Reserve System, has the technical capacity to make the money supply do over a period of two or three or four months, not daily, but over a period, has the technical capacity to control it.
(Several people talking at once.)
FRIEDMAN: I cannot explain the kind of excessive money creation that has occurred, in terms of the technical incapacity of the Federal Reserve System or of the German Central Bank, or of the Bank of England, or any other central bank in the world.
EMMINGER: I wouldn’t say technically we are incapable of doing that, although we have never succeeded in controlling the money supply month that way. But I would say we can, technically, control it half yearly, from one half-year period to the next and that would be sufficient __
FRIEDMAN: That would be sufficient.
EMMINGER: __ for controlling inflation. But however I __
VOICE OFF SCREEN: It doesn’t move.
FRIEDMAN: I’m an economic scientist, and I’m trying to observe phenomena, and I observe that every Federal Reserve Chairman says one thing and does another. I don’t mean he does, the system does.
MCKENZIE: Yeah. How different is your setup in Germany? You’ve heard this problem of governments getting committed to spending and the Fed having, one way or the other, to accommodate itself to it. Now what’s your position on this very interesting problem?
EMMINGER: We are very independent of the government, from the government, but, on the other hand, we are an advisor of the government. Also on the budget deficits and they would not easily go before Parliament with a deficit which much of it is openly criticized and disapproved by the same bank. Why because we have a tradition in our country that we can also publicly criticize the government on his account. And second, as if happened in our case too, the government goes beyond what is tolerable for the sake of moral equilibrium. We have let it come through in the capital markets. That is to say they have enough interest rates that has drawn public criticism and that has had some effect on their attitude.
_________________________________________
Pt 5
I think that is a very important point that Dr. Emminger just made because there is not a one-to-one relationship between government deficits and what happens to the money supply at all. The pressure on the Federal Reserve comes indirectly. It comes because large government deficits, if they are financed in the general capital market, will drive up interest rates and then we have the right patents in Congress and their successors pressuring the Federal Reserve to enter in and finance the deficit by printing money as a way of supposedly holding down interest rates. Now before I turn to Mr. Brown and ask him that, I just want to make one point which is very important. The Federal Reserve’s activities in trying to hold down interest rates have put us in a position where we have the highest interest rates in history. It’s another example of how, of the difference between the announced intentions of a policy, and the actual results. But now I want to come to Clarence Brown and ask him, shift the buck to him, and put him on the hot seat for a bit. The government spending has been going up rapidly, Republican administration or Democratic administration. This is a nonpartisan issue, it doesn’t matter. Government deficits have been going up rapidly. Republican administration or Democratic administration. Why is it that here again you have the difference between pronouncements and performance? There is no Congressman, no Senator, who will come out and say, “I am in favor of inflation.” There is not a single one who will say, “I am in favor of big deficits.” They’ll all say we want to balance the budget, we want to hold down spending, we want an economical government. How do you explain the difference between performance and talk on the side of Congress?
BROWN:
FRIEDMAN: I think that is a very important point that Dr. Emminger just made because there is not a one-to-one relationship between government deficits and what happens to the money supply at all. The pressure on the Federal Reserve comes indirectly. It comes because large government deficits, if they are financed in the general capital market, will drive up interest rates and then we have the right patents in Congress and their successors pressuring the Federal Reserve to enter in and finance the deficit by printing money as a way of supposedly holding down interest rates. Now before I turn to Mr. Brown and ask him that, I just want to make one point which is very important. The Federal Reserve’s activities in trying to hold down interest rates have put us in a position where we have the highest interest rates in history. It’s another example of how, of the difference between the announced intentions of a policy, and the actual results. But now I want to come to Clarence Brown and ask him, shift the buck to him, and put him on the hot seat for a bit. The government spending has been going up rapidly, Republican administration or Democratic administration. This is a nonpartisan issue, it doesn’t matter. Government deficits have been going up rapidly. Republican administration or Democratic administration. Why is it that here again you have the difference between pronouncements and performance? There is no Congressman, no Senator, who will come out and say, “I am in favor of inflation.” There is not a single one who will say, “I am in favor of big deficits.” They’ll all say we want to balance the budget, we want to hold down spending, we want an economical government. How do you explain the difference between performance and talk on the side of Congress?
BROWN: Well, first I think we have to make one point. I’m not so much with the government as I am against it.
FRIEDMAN: I understand.
BROWN: As you know, I’m a minority member of Congress.
FRIEDMAN: Again, I’m not __ I’m not directing this at you personally.
BROWN: I understand, of course; and while the administrations, as you’ve mentioned, Republican and Democratic administrations, have both been responsible for increases in spending, at least in terms of their recommendations. It is the Congress and only the Congress that appropriates the funds and determines what the taxes are. The President has no authority to do that and so one must lay it at the feet of the U.S. Congress. Now, I guess we’d have to concede that it’s a little bit more fun to give away things than it is to withhold them. And this is the reason that the Congress responds to a general public that says, “I want you to cut everybody else’s program but the one in which I am most particularly interested. Save money, but incidentally, my wife is taking care of the orphanages and so lets try to help the orphanages,” or whatever it is. Let me try to make a point, if I can, however, on what I think is a new spirit moving within the Congress and that is that inflation, as a national affliction, is beginning to have an impact on the political psychology of many Americans. Now the Germans, the Japanese and others have had this terrific postwar inflation. The Germans have been through it twice, after World War I and World War II, and it’s a part of their national psyche. But we are affected in this country by the depression. Our whole tax structure is built on the depression. The idea of the tax structure in the past has been to get the money out of the mattress where it went after the banks failed in this country and jobs were lost, and out of the woodshed or the tin box in the back yard, get it out of there and put it into circulation. Get it moving, get things going. And one of the ways to do that was to encourage inflation. Because if you held on to it, the money would depreciate; and the other way was to tax it away from people and let the government spend it. Now there’s a reaction to that and people are beginning to say, “Wait just a minute. We’re not afflicted as much as we were by depression. We’re now afflicted by inflation, and we’d like for you to get it under control.” Now you can do that in another way and that without reducing the money supply radically. I think the Joint Economic Committee has recommended that we do it gradually. But the way that you can do it is to reduce taxes and the impact of government, that is the weight of government and increase private savings so that the private savings can finance some of the debt that you have.
FRIEDMAN: There is no way you can do it without reducing, in my opinion, the rate of monetary growth. And I, recognizing the facts, even though they ought not to be that way, I wonder whether you can reduce the rate of monetary growth unless Congress actually does reduce government spending as well as government taxes.
BROWN: The problem is that every time we use demand management, we get into a kind of an iron maiden kind of situation. We twist this way and one of the spikes grabs us here, so we twist that way and a spike over here gets us. And every recession has had higher basic unemployment rates than the previous recession in the last several years and every inflation has had higher inflation. We’ve got to get that tilt out of the society.
MCKENZIE: Wouldn’t it be fair to say, though, that a fundamental difference is the Germans are more deeply fearful of a return to inflation, having had the horrifying experience between the wars, especially. We tend to be more afraid of recession turning into depression.
EMMINGER: I think there is something in it and in particular in Germany the government would have to fear very much in their electoral prospects if they went into such an election period with a high inflation rate. But there is another important difference.
MARTIN: We fear unemployment more than inflation it seems.
EMMINGER: You fear unemployment, but unemployment is feared with us, too, but inflation is just as much feared. But there is another difference; namely, once you have got into that escalating inflation, every time the base, the plateau is higher, it’s extremely difficult to get out of it. You must avoid getting into that, now that’s very cheap advice from me because you are now.
(Laughing)
EMMINGER: But we had, for the last fifteen, twenty years, always studied foreign experiences, and told ourselves we never must get into this vicious circle. Once you are in, it takes a long time to get out of it. That is what I am preaching now, that we should avoid at all costs to get again into this vicious circle as we had it already in ’73_’74. It took us, also, four years to get out of it, although we were only at eight percent inflation. Four years to get down to three percent. So you __
MCKENZIE: Those were __ yes.
EMMINGER: You have, I think, the question of whether you can do if in a gradualist way over many, many years, or whether you don’t need a sort of shock treatment.
____________________________________
her we go into a period of still higher unemployment later on and have it to do all over again. That’s the only choice we face. And when the public at large recognizes that, they will then elect people to Congress, and a President to office who is committed to less government spending and to less government printing of money and until that happens we will not cure inflation
Pt 6
SPRINKEL: The film said it took the Japanese _ what _ four years?
FRIEDMAN: Five years.
SPRINKEL: Five years. But one of my greatest concerns is that we haven’t suffered enough yet. Most of the nations that have finally got their inflations __
BROWN: Bad election speech.
SPRINKEL: __ well, I’m not running for office, Clarence.
(Laughter)
SPRINKEL: Most countries that finally got their inflation under control had 20, 30 percent or worse inflation. Germany had much worse and the public supports them. We live in a Democracy, and we’re getting constituencies that gain from inflation. You look at people that own real estate, they’ve done very well.
MCKENZIE: Yes.
SPRINKEL: And how can we get there without going through even more pain, and I doubt that we will.
FRIEDMAN: If you ask who are the constituencies that have benefited most from inflation there are no doubt, it is the homeowners.
SPRINKEL: Yes.
FRIEDMAN: But it’s also the __ it’s also the Congressmen who have been able to vote higher spending without having to vote higher taxes. They have in fact __
BROWN: That’s right.
FRIEDMAN: __ Congress has in fact voted for inflation. But you have never had a Congressman on record to that effect. It’s the government civil servants who have their own salaries are indexed and tied to inflation. They have a retirement benefit, a retirement pension that’s tied to inflation. They qualify, a large fraction of them, for Social Security as well, which is tied to inflation. So that the beneficial __
BROWN: Labor contracts that are indexed and many pricing things that are tied to it.
FRIEDMAN: But the one thing that isn’t tied to inflation and here I want to come back and ask why Congress has been so __ so bad in this area, is our taxes. It has been impossible to get Congress to index the tax system so that you don’t have the present effect where every one percent increase in inflation pushes people up into higher brackets and forces them to pay higher taxes.
BROWN: Well, as you know, I’m an advocate of that.
FRIEDMAN: I know you are.
MCKENZIE: Some countries do that, of course.
FRIEDMAN: Oh, of course.
MCKENZIE: Canada does that. Indexes the __
BROWN: And I went up to Canada on a little weekend seminar program on indexing and came back an advocate of indexing because I found out that the people who are delighted with indexing are the taxpayers.
FRIEDMAN: Absolutely.
BROWN: Because as the inflation rate goes up their tax level either maintains at the same level or goes down. The people who are least __ well, the people who are very unhappy with it are the people who have to plan government spending because it is reducing the amount of money that the government has rather than watching it go up by ten or twelve billion. You get a little dividend to spend in this country, the bureaucrats do every year, but the politicians are unhappy with it too, as Dr. Friedman points out because, you see, politicians don’t get to vote a tax reduction, it happens automatically.
MCKENZIE: Yeah.
BROWN: And so you can’t go back and in a praiseworthy way tell your constituents that I am for you, I voted a tax reduction. And I think we ought to be able to index the tax system so that tax reduction is automatic, rather than have what we’ve had in the past, and that is an automatic increase in the taxes. And the politicians say, “Well, we’re sorry about inflation, but __”.
FRIEDMAN: You’re right and I want to __ I want to go and make a very different point. I sit here and berate you and you as government officials, and so on, but I understand very well that the real culprits are not the politicians, are not the central bankers, but it’s I and my fellow citizens. I always say to people when I talk about this, “If you want to know who’s responsible for inflation, look in the mirror.” It’s not because of the way you spend you money. Inflation doesn’t arise because you got consumers who are spendthrifts; they’ve always been spendthrifts. It doesn’t arise because you’ve got businessmen who are greedy. They’ve always been greedy. Inflation arises because we as citizens have been asking you as politicians to perform an impossible task. We’ve been asking you to spend somebody else’s money on us, but not to spend our money on anybody else.
BROWN: You don’t want us to cut back those dollars for education, right?
FRIEDMAN: Right. And, therefore, __ well, no, I do.
MCKENZIE: We’ve already had a program on that.
FRIEDMAN: We’ve already had a program on that and there’s no viewer of these programs who will be in any doubt about my position on that. But the public at large has not and this is where we come to the political will that Dr. Emminger quite properly talked about. It is __ everybody talks against inflation, but what he means is that he wants the prices of the things he sells to go up and the prices of the things he buys to go down. But, sooner or later, we come to the point where it will be politically profitable to end inflation. This is the point that __
SPRINKEL: Yes.
FRIEDMAN: __ I think you were making.
SPRINKEL: The suffering idea.
FRIEDMAN: Where do you think the __ you know, what do you think the rate of inflation has to be and judged by the experience of other countries before we will be in that position and when do you think that will happen?
SPRINKEL: Well, the evidence says it’s got to be over 20 percent. Now you would think we could learn from others rather than have to repeat mistakes.
FRIEDMAN: Apparently nobody can learn from history.
SPRINKEL: But at the present time we’re going toward higher and not lower inflation.
MCKENZIE: You said earlier, if you want to see who causes inflation look in the mirror.
FRIEDMAN: Right.
MCKENZIE: Now, for everybody watching and taking part in this, there must be some moral to that. What does need __ what has to be the change of attitude of the man in the mirror you’re looking at before we can effectively implement what you call a tough policy that takes courage?
FRIEDMAN: I think that the man in the mirror has to come to recognize that inflation is the most destructive disease known to modern society. There is nothing which will destroy a society so thoroughly and so fully as letting inflation run riot. He must come to recognize that he doesn’t have any good choices. That there are no easy answers. That once you get in this situation where the economy is sick of this insidious disease, there’s gonna be no miracle drug which will enable them to be well tomorrow. That the only choices he has, do I go through a tough period for four or five years of relatively high unemployment, relatively low growth or do I try to push it off by taking some more of the hair of the dog that bit me and get around it now at the cost of still higher unemployment, as Clarence Brown said, later on. The only choice this country faces, is whether we have temporary unemployment for a short period, as a side effect of curling inflation or whether we go into a period of still higher unemployment later on and have it to do all over again. That’s the only choice we face. And when the public at large recognizes that, they will then elect people to Congress, and a President to office who is committed to less government spending and to less government printing of money and until that happens we will not cure inflation.
____________________________________
FRIEDMAN: And therefore the crucial thing is to cut down total government spending from the point of view of inflation. From the point of view of productivity, some of the other measures you were talking about are far more important.
BROWN
Pt 7
BROWN: But, Dr. Friedman, let me __
(Applause)
BROWN: Let me differ with you to this extent. I think it is important that at the time you are trying to get inflation out of the economy that you also give the man in the street, the common man, the opportunity to have a little bit more of his own resources to spend. And if you can reduce his taxes at that time and then reduce government in that process, you give him his money to spend rather than having to yield up all that money to government. If you cut his taxes in a way to encourage it, to putting that money into savings, you can encourage the additional savings in a private sense to finance the debt that you have to carry, and you can also encourage the stimulation of growth in the society, that is the investment into the capital improvements of modernization of plant, make the U.S. more competitive with other countries. And we can try to do it without as much painful unemployment as we can get by with. Don’t you think that has some merit?
FRIEDMAN: The only way __ I am all in favor, as you know, of cutting government spending. I am all in favor of getting rid of the counterproductive government regulation that reduces productivity and disrupts investment. But __
BROWN: And we do that, we can cut taxes some, can we not?
FRIEDMAN: We should __ taxes __ but you are introducing a confusion that has confused the American people. And that is the confusion between spending and taxes. The real tax on the American people is not what you label taxes. It’s total spending. If Congress spends fifty billion dollars more than it takes in, if government spends fifty billion dollars, who do you suppose pays that fifty billion dollars?
BROWN: Of course, of course.
FRIEDMAN: The Arab Sheiks aren’t paying it. Santa Claus isn’t paying it. The Tooth Fairy isn’t paying it. You and I as taxpayers are paying it indirectly through hidden taxation.
MCKENZIE: Your view __
FRIEDMAN: And therefore the crucial thing is to cut down total government spending from the point of view of inflation. From the point of view of productivity, some of the other measures you were talking about are far more important.
BROWN: But if you concede that inflation and taxes are both part and parcel of the same thing, and if you cut spending __
FRIEDMAN: They’re not part and parcel of the same thing.
BROWN: If you cut spending you __ well, but, you take the money from them in one way or another. The average citizen.
FRIEDMAN: Absolutely.
BROWN: To finance the growth of government.
FRIEDMAN: That’s right.
BROWN: So if you cut back the size of government, you can cut both their inflation and their taxes.
FRIEDMAN: That’s right.
BROWN: If you __
FRIEDMAN: I am all in favor of that.
BROWN: All right.
FRIEDMAN: All I am saying is don’t kid yourself into thinking that there is some painless way to do it. There just is not.
BROWN: One other way is productivity. If you can __ if you can increase production, then the impact of inflation is less because you have more goods chasing __
FRIEDMAN: Absolutely, but you have to have a sense of proportion. From the point of view of the real income of the American people, nothing is more important than increasing productivity. But from the point of view of inflation, it’s a bit actor. It would be a miracle if we could raise our productivity from three to five percent a year, that would reduce inflation by two percent.
BROWN: No question, it won’t happen overnight, but it’s part of the __ it’s part of a long range squeezing out of inflation.
FRIEDMAN: There is only one way to ease the __ in my opinion there is only one way to ease the pains of curing inflation and that way is not available. That way is to make it credible to the American people that you are really going to follow the policy you say you’re going to follow. Unfortunately I don’t see any way we can do that.
(Several people talking at once.)
EMMINGER: Professor Friedman, that’s exactly the point which I wanted to illustrate by our own experience. We also had to squeeze out inflation and there was a painful time of one-and-a-half years, but after that we had a continuous lowering of the inflation rate with a slow upward movement in the economy since 1975. Year by year inflation went down and we had a moderate growth rate which has led us now to full employment.
FRIEDMAN: That’s what __
EMMINGER: So you can shorten this period by just this credibility and by a consensus you must have, also with the trade unions, with the whole population that they acknowledge that policy and also play their part in it. Then the pains will be much less.
SPRINKEL: You see in our case, expectations are that inflation’s going to get worse because it always has. This means we must disappoint in a very painful way those expectations and it’s likely to take longer, at least the first time around. Now our real problem has not been that we haven’t tried. We have tried and brought inflation down. Our real problem was, we didn’t stick to it. And then you have it all to do over.
BROWN: Well I would __ I would concede that psychology plays a great, perhaps even the major part, but I do believe that if you have private savings stimulated by your tax system, rather than discouraged by your tax system, you can finance some of that public debt by private savings rather than by inflation and the result will be to ease to some degree the paint of that heavy unemployment that you seem to suggest is the only way to deal with the problem.
FRIEDMAN: The talk is fine, but the problem is that it’s used to evade the key issue: How do you make it credible to the public that you are really going to stick to a policy? Four times we’ve tried it and four times we’ve stopped before we’ve run the course.
(Several people talking at once.)
MCKENZIE: There we leave the matter for tonight, and next week’s concluding program in this series is not to be missed.
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Friedman Friday:(“Free to Choose” episode 4 – From Cradle to Grave, Part 1 of 7) Volume 4 – From Cradle to Grave Abstract: Since the Depression years of the 1930s, there has been almost continuous expansion of governmental efforts to provide for people’s welfare. First, there was a tremendous expansion of public works. The Social Security Act […]
_________________________ Pt3 Nowadays there’s a considerable amount of traffic at this border. People cross a little more freely than they use to. Many people from Hong Kong trade in China and the market has helped bring the two countries closer together, but the barriers between them are still very real. On this side […]
Aside from its harbor, the only other important resource of Hong Kong is people __ over 4_ million of them. Like America a century ago, Hong Kong in the past few decades has been a haven for people who sought the freedom to make the most of their own abilities. Many of them are […]
“FREE TO CHOOSE” 1: The Power of the Market (Milton Friedman) Free to Choose ^ | 1980 | Milton Friedman Posted on Monday, July 17, 2006 4:20:46 PM by Choose Ye This Day FREE TO CHOOSE: The Power of the Market Friedman: Once all of this was a swamp, covered with forest. The Canarce Indians […]
Milton Friedman: Free To Choose – The Failure Of Socialism With Ronald Reagan (Full) Published on Mar 19, 2012 by NoNationalityNeeded Milton Friedman’s writings affected me greatly when I first discovered them and I wanted to share with you. We must not head down the path of socialism like Greece has done. Abstract: Ronald Reagan […]
But I am vaguely hopeful that things may get better. More specifically, Argentina almost surely will suffer a major collapse at some point in the future.
When that happens, the only option will be liberalization. Simply stated, politicians no longer will have any ability to pillage the private sector (sort of like the Soviet Union and Eastern Europe when communism collapsed).
Naomi Klein views this scenario as “disaster capitalism,” but it’s the only hope for Argentina.
But there’s a catch. Politicians in Buenos Aires will only be forced to reform if they don’t get another bailout from the International Monetary Fund.
Unfortunately, there are (according to Professor Steve Hanke) 22 reasons to expect the IMF to do the wrong thing.
The bureaucrats at that international bureaucracy have a terrible track record of rewarding Argentina when it gets in fiscal trouble.
I wrote just last month that Italy is getting closer and closer to a fiscal crisis and I warned that the IMF may intervene to prop up that country’s bad policy. And when other European countries get in trouble, IMF bureaucrats will probably try to make a bad situation even worse with further bailouts.
The shift toward free markets, which began in the mid-1970s, was especially beneficial for the less fortunate (see here, here, and here).
But it’s quite common for critics to assert that Chile is a bad example because many of the reforms were enacted by General Augusto Pinochet, a dictator who seized power in 1973. And some of those critics also attack Milton Friedman for urging Pinochet to liberalize the economy and reduce the burden of government.
Are these critics right?
To answer that question, I very much recommend the following cartoon strip by Peter Bagge. Published by Reason, it accurately depicts the efforts of reformers to get good reforms from a bad government.
It starts in 1973, with a group of Chilean economists, known as the “Chicago Boys,” who wanted free markets.
In 1975, they invited Milton Friedman to help make the case for economic reform.
This 1982 strip shows some of the controversies that materialized.
But by the time we got to the 21st century, everything Friedman said turned out to be true.
First, I’ll be able to share it with people who want to delegitimize Chile’s transition to a market-oriented democracy (ranked #14 according to the most-recent edition of Economic Freedom of the World). Simply stated, it was bad that Chile had a dictatorship, but it was good that the dictatorship allowed pro-market reforms (particularly when compared to the alternative of a dictatorship with no reforms). And it was great that Chile became a democracy (a process presumably aided by mass prosperity).
Second, we should encourage engagement with distasteful governments. I certainly don’t endorse China’s government or Russia’s government, but I’ve advised government officials from both nations. Heck, I would even give advice to Cuba’s government or North Korea’s government (not that I’m expecting to be asked). My goal is to promote more liberty and it would make me very happy if I could have just a tiny fraction of Friedman’s influence in pursuing that goal.
P.S. Here’s Milton Friedman discussing his role in Chile.
P.P.S. While I disagree, it’s easy to understand why some people try to delegitimize Chile’s reforms by linking them to Pinochet. What baffles me are the folks who try to argue that the reforms were a failure. See, for instance, Prof. Dani Rodrik and the New York Times.
José Niño is a graduate student based in Santiago, Chile. A citizen of the world, he has lived in Venezuela, Colombia, and the United States. He is currently an international research analyst with the Acton Circle of Chile. Follow@JoseAlNino.
EspañolThe power of ideas to help shape political movements has been grossly underestimated over the years. In truth, some of the largest political transformations in human history have come from ideas that were developed in the secluded confines of an intellectual’s home or in obscure academic institutes. Regardless of the origins, ideas can snowball into powerful vehicles of social change.+
As Friedrich Hayek noted in one of his most powerful works, Intellectuals and Socialism,the triumph of socialist ideas can largely be attributed to the ideas first put forward by various intellectuals. They began with relatively well-off intellectuals and then made their way to “second-hand dealers” — journalists, scientists, doctors, teachers, ministers, lecturers, radio commentators, fiction writers, cartoonists, and artists — who then spread those ideas to the masses.+
Intellectuals like Milton Friedman took it upon themselves to reverse this trend and create an environment that was more favorable to free markets. Steadfast in his beliefs in the power of ideas, Friedman knew that big changes usually start out in small venues.+
It was in Chile where Friedman’s vision was first implemented on a large scale. The results were nothing short of spectacular, as Chile was able to escape a veritable economic collapse and experience an unprecedented boom.+
Chile’s economic success was no mere coincidence; it was the product of ideas that Milton Friedman put forward in the 1950s. To understand how such a radical change was brought about, one must first look at the origins of the Chicago Boys, the group of Chilean economists that played a pivotal role in the transformation of Chile’s economy during the 1970s and 1980s.+
The Chicago Boys
Under the tutelage of the United States Agency for International Development (USAID), the University of Chicago signed a modest agreement with the Pontifical Catholic University of Chile in the 1950s to provide a group of Chilean students training in economics.+
In exchange, the University of Chicago would send four faculty members to help the Catholic University build up their economics department. Of these four faculty members, Arnold Harberger would serve as the Chicago Boys’ principal mentor.+
What at first looked liked just another exchange program between universities would play a substantial role in Chile’s economic rise.+
A Country Mired By Statism
At the start of this program, Chile’s economy was in the doldrums. Another victim of Raúl Prebisch’s Import Substitution Industrialization (ISI) policy, Chile had a very loose central banking policy, featured 15 different exchange rates, heavy tariffs, and a number of import and export controls. Subsequent governments maintained the same neo-mercantilist structure up until the 1970s.+
During this era of economic malaise, the Chicago Boys constructed El Ladrillo(The Brick), a text primarily shaped by economist Sergio de Castro which advocated for economic liberalization in all sectors of the Chilean economy. Sadly, this text was largely ignored at that time.+
It wasn’t until the presidency of Salvador Allende that the Chicago Boys’ talents would be desperately needed.+
On the Road to Cuba 2.0
Though democratically elected by a narrow margin in 1970, Salvador Allende was determined to turn Chile into the next Cuba by undermining all of its democratic institutions. Through price controls, arbitrary expropriations, and lax monetary policy, Allende put the Chilean economy on the verge of collapse. By 1973, inflation reached 606 percent and per capita GDP dropped 7.14 percent.+
Under the command of General Augusto Pinochet, the military deposed Allende’s government. Despite this tumultuous change, the military ruler did not have a clear economic vision for Chile.+
Enter Milton Friedman
Milton Friedman’s visit to Chile in March 1975 proved to be quite fateful. Friedman was on a week-long lecture tour for various think thanks. Eventually, Friedman sat down with the general himself for 45 minutes. Right off the bat, Friedman recognized that Pinochet had very little knowledge of economics. After their meeting, Friedman sent Pinochet a letter with a list of policy recommendations.+
Friedman was blunt is his diagnosis of Chile’s economy: for the country to recover, it had to truly embrace free-market measures.+
Ideas Put in Action
Cooler heads prevailed and Pinochet let the Chicago School disciples occupy various posts in the military government. In April 1975, El Plan de Recuperación Económica (The Economic Recovery Plan) was implemented. Soon Chile curbed its inflation, opened up its markets, privatized state-owned industries, and cut government spending. By the 1990s, Chile was experiencing the largest economic boom in its history.+
A principled libertarian, Friedman criticized Pinochet’s repressive political measures. Friedman understood that economic and political freedoms are not mutually exclusive. The principles laid in Friedman’s book Capitalism and Freedom inspired José Piñera, a notable Chilean reformer, to become a part of Chile’s classical liberal revolution.+
Like Friedman, Piñera understood the link between economic and political freedom. This motivated him to help ratify the Chilean Constitution of 1980. The most classically liberal constitution in Latin America’s history, it established the transition towards free elections and Chile’s return to democracy.+
Additionally, Piñera was the architect of Chile’s private social security system that empowered millions of workers and has fostered the growth of an ownership society. This model has been exported to dozens of countries abroad and has served as a market-based alternative to government-run pension systems.+
The “Chilean Miracle” represented the first major triumph against communism during the Cold War. Chile’s classical-liberal revolution subsequently inspired the Thatcher Revolution of 1979 and the Reagan Revolution of 1980. These ideas had resounding effects all over the globe and marked the beginning of the end for Soviet-style models of economic organization.+
There is still much work to do, as the illegitimate children of Marxist and Keynesian thought still run loose these days throughout Latin America. But one thing is absolutely certain: an idea whose time has come is unstoppable.+
RIP Milton Friedman
Milton Friedman is the short one!!!
Milton Friedman’s Free to Choose (1980), episode 3 – Anatomy of a Crisis. part 1
Milton Friedman The Power of the Market 5-5 How can we have personal freedom without economic freedom? That is why I don’t understand why socialists who value individual freedoms want to take away our economic freedoms. I wanted to share this info below with you from Milton Friedman who has influenced me greatly over the […]
The insult to injury was that some people then blamed free enterprise. Indeed, there are still people who think government actually saved the economy.
Sort of like applauding an arsonist after a fire is extinguished.
Whenever I deal with people who harbor these illusions, I ask them a series of questions, none of which have good answers (at least if the goal if to maintain the illusion).
Was it the fault of capitalism that the Fedpursued bad monetary policy?
Was it the fault of capitalism that Hoover and FDR increased spending?
Today, let’s look at the role of tax policy in the 1930s. Chris Edwards wrote on this topic last week, citing a new book by Art Laffer, Brian Domitrovic, and Jeanne Cairns Sinquefield.
Here are some excerpts from Chris’ article.
Many economists would point to monetary policy mistakes for causing the initial slide into the Great Depression. …But Laffer and coauthors argue that the “chief cause of the Great Depression was taxation.” That is a bold claim because policymakers made many mistakes during the 1930s. …Let’s explore the major tax increases of the 1930s… Herbert Hoover signed the first two laws listed here and Franklin Roosevelt the others.
Smoot‐Hawley Tariff Act of 1930.
Revenue Act of 1932.
Gold Confiscation.
Agricultural Adjustment Act.
National Industrial Recovery Act.
Alcohol.
Revenue Act of 1934.
Revenue Act of 1935.
Social Security Act of 1935.
Revenue Act of 1936.
Revenue Act of 1937.
Revenue Act of 1938.
State and local governments jacked up taxes during the 1930s. …high earners responded strongly to the income tax increases of the 1930s… the reported incomes of high earners got slugged in the early 1930s and remained low the rest of the decade. This suggests major economic damage. …Despite these taxpayer responses to higher tax rates, …governments did manage to squeeze substantially more money out of the public during the 1930s. Tax revenues as a percentage of GDP rose from 10.3 percent in 1929, to 15.4 percent in 1933, and then to 16.6 percent in 1940. Meanwhile, government spending soared from 9.9 percent of GDP in 1929 to 18.0 percent in 1932, and then remained near the higher level the rest of the decade.
Here’s a chart that accompanied the article showing the aggregate increases in the fiscal burden of government.
You’ll notice that aggregate tax revenues increased by about 60 percent during the 1930s.
Yet tax rates increased by a far greater amount. There’s a lesson to be learned, as I explained last year, about the Laffer Curve.
P.S. Our friends on the left like class-warfare tax increases because they hurt the rich, but they don’t seem to care that everyone else suffers collateral damage.
The Great Depression Could Have Been Avoided if the Fed Had Not So Badly Botched Its Monetary Policy
September 2007 • Volume: 57 • Issue: 7
The author extends special thanks to Lawrence H. White and Ivan Pongracic, Sr., for their helpful comments.
Few events in U.S. history can rival the Great Depression for its impact. The period from 1929 to 1941 saw fundamental changes in the landscape of American politics and economics, including such monumental events as America ‘s going off the gold standard and the founding of Social Security. It was a watershed for the growth of the federal government.
The Great Depression created a widespread misconception that market economies are inherently unstable and must be managed by the government to avoid large macreconomic fluctuations, that is, business cycles. This view persists to this day despite the more than 40 years since Milton Friedman and Anna Jacobson Schwartz showed convincingly that the Federal Reserve’s monetary policies were largely to blame for the severity of the Great Depression. In 2002 Ben Bernanke (then a Federal Reserve governor, today the chairman of the Board of Governors) made this startling admission in a speech given in honor of Friedman’s 90th birthday: “I would like to say to Milton and Anna: Regarding the Great Depression, you’re right. We did it. We’re very sorry.”
Friedman, the great free-market champion of the last 50 years and one of the most influential economists of the last 200 years, died in November 2006 at 94. He left us an immense intellectual legacy, including his explanation of the Great Depression, which, while persuading a majority of the economics profession, has yet to fully trickle down to the public. It is truly a great mystery why Friedman’s explanation has not been more widely recognized and accepted, especially given its influence among economists. Maybe the reason is that it does not lend itself to quick sound bites by politicians eager to justify more power. Or maybe it is usually presented in a way that makes it too difficult for the layperson to understand. Or maybe it is just that people find it easier to blame the “capitalists” rather than the hallowed Federal Reserve. Whatever the case, it would be beneficial to revisit Friedman’s argument.
The standard explanation of the Great Depression, found in most American high-school history texts, is that it was created by the wild and irrational stock-market speculation that ultimately led to the Great Crash of October 1929. Investor speculations were so excessive—so the story goes—that once the bubble popped, it triggered the most severe decline in economic activity in U.S. history. The key point of this story is that the crash and the subsequent depression were due to factors that are innate to the capitalist system, unchecked under the supposedly laissez-faire policies of Herbert Hoover. It was only once Franklin Delano Roosevelt came into office that the government jump-started the recovery. It is thus claimed that FDR’s policies were responsible not only for the recovery, but in fact for “saving capitalism from itself” when many Americans were willing to consider adopting full-blown socialism in the 1930s as a way to deal with the downturn.
Most people do not realize how much of this explanation had been shaped by Keynesian economics, the dominant economic paradigm from the 1940s to the 1970s. Keynesian economics got its start with the publication of John Maynard Keynes’s General Theory of Employment, Interest, and Money in 1936. There Keynes proposed a view of the Great Depression that was at odds with the rest of the economics profession at the time. Most economists of the era tended to agree that market economies are “self-adjusting” and that they cannot get stuck in a recession for very long. However, this view seemed to be at odds with the ugly reality of the time: persistent unemployment rates of 20 percent and more, even as high as 25 percent in 1933—with no end in sight.
Keynes seemed to be the right man for the time as he was reflecting the increasingly common view that blamed the capitalists themselves for the situation. In the General Theory Keynes rejected the view that the boom-bust cycle was due to over-expansive government monetary policy and that the stubbornness of the Depression was due to government interference with market mechanisms. He labeled all economists who believed such views as “classical”—in other words, hopelessly out of touch with reality. Instead, Keynes proposed a “general theory” that he thought capable of explaining not only the good times but also the bad.
According to Keynes, what drives the economy is aggregate demand or aggregate expenditures. Aggregate demand can be broken down into three main components: personal consumption (C), private investment (I), and government expenditures (G). The relationship can be summed up with this formula: AD = C + I + G. If Aggregate Demand is strong, the economy will be strong. However, if Aggregate Demand falters, businesses will end up with large unsold inventories and will cut back on production to avoid surpluses in the future. As they cut back they will of course need fewer inputs—including labor—and high unemployment will result.
The culprit in this story, the element that throws the entire system out of whack, is private investment. Private investment consists of business expenditures on machines, buildings, factories, and so on. In other words, investment is capital formation. Keynes claimed that private investment is inherently unstable due to what he called the “animal spirits” of businessmen/capitalists. He believed that businessmen are ultimately irrational and prone to herd-like behavior. Like sheep that blindly follow other sheep in the herd, it is easy for businessmen to become “irrationally exuberant”—as well as irrationally lethargic. Investment lethargy would trigger a large decrease in private investment, thus decreasing aggregate expenditures and triggering an economic downturn.
From Downturn to Depression
How do we go from this downturn to a full-blown recession or even a depression? As the economy slows down, unemployment rises and leads to a loss of consumer confidence. Consumer pessimism will lead to more saving and less spending, thus decreasing the personal-consumption component of aggregate demand, exacerbating the downturn. Notice that both I and C are therefore driven by the expectations of private individuals (irrational in the case of business investors): if both investors and consumers become pessimistic and expect a recession, they will cut back on their expenditures and thus cause the aggregate demand to be too low to bring about full employment of available resources. According to Keynes, a recession is, in a nutshell, a self-fulfilling prophecy.
The Great Depression was therefore a long stubborn period of dismally low aggregate expenditures, and according to Keynes, there were no economic forces working to pull the economy out of this situation automatically. In other words, he thought there is no self-corrective mechanism (or invisible hand) in a free-market economy. Instead, irrational changes in expectations would regularly lead to wide and destructive fluctuations in the macroeconomy. So we see that the business cycle is the natural and expected consequence of the unfettered operation of a market economy. Therefore if an unfettered market economy results in depressions, it is clearly undesirable. It also should be obvious now that the standard high-school history-book explanation is basically just a simplified version of this Keynesian story.
What is required to avoid a recession, then, is for the government to insure that the aggregate expenditures are enough to achieve full employment. The government can do that through either fiscal policy (taxation and government spending) or monetary policy (control of the money supply). Keynes favored fiscal policy and recommended that the government engage in massive deficit spending. Deficit spending would allow for an increase in government spending without an offsetting increase in the tax burden on private individuals and businesses. Thus increased government spending could neutralize any decreased expenditures in the private sector, preserving employment and incomes and ultimately reversing the pessimistic expectations that led to the downturn in the first place. Keynesian “demand management” clearly prescribed an important role for the government.
Keynes’s explanation, in addition to creating a new way of analyzing the economy as a whole, heavily influenced policymakers and ordinary people around the world. It was soon accepted that the government must engage in a countercyclical policy of demand management to stabilize the market economy. Both FDR and Keynes were proclaimed the “saviors of capitalism”!
Friedman Follows the Facts
In the 1950s, Friedman and Anna Schwartz began compiling historical data on monetary variables without any particular agenda or intention of overturning the dominant explanation of the Great Depression. But it became obvious that the data were at odds with the standard Keynesian explanation. So in their 1963 book, A Monetary History of the United States, 1867–1960, they presented the empirical evidence that led them to a completely different explanation.
As a result of examining more closely the key years between 1929 and 1933, Friedman and Schwartz first concluded that the Great Depression was not the necessary and direct result of the stock-market crash of October 1929, which they attribute to a speculative investment bubble. (The popping of the “bubble” may have been instigated by the Federal Reserve’s raising of the discount rate—the interest rate the Fed charges on loans to commercial banks—in August 1929. The cause of the speculative bubble that led to the crash is a somewhat controversial topic. Whereas Friedman and Schwartz accepted that the bubble was caused by investors, seemingly endorsing—at least partly—the Keynesian “animal spirits” explanation, Austrian economists have argued otherwise.) In fact, they believed that the economy could have recovered rather rapidly if only the Fed—the central bank of the United States —had not engaged in a series of disastrous policies in the aftermath of the crash.
The Fed had only been in existence for 15 years at the time of the crash, having opened its doors in 1914. The United States had two central banks before the Fed (the Bank of United States, 1792–1812; and the Second Bank of the United States, 1816–1836), but had been without a central bank of any sort for over 75 years until the creation of the Fed. It was created primarily to act as a “lender of last resort” from which private banks could borrow money in times of crisis. The need for a lender of last resort in the U.S. banking system was due to a systemic weakness caused unintentionally by state and federal banking regulations. (Canada, with a freer banking system, had no such systemic weakness and no need for a lender of last resort.) Weak banks are subject to crisis when their depositors are no longer confident that their bank holds sufficient reserves to satisfy all withdrawal demands at a certain time. This can trigger a “bank run,” where depositors attempt to get to the bank before the other depositors in order to withdraw their money before the bank’s limited reserves run out. A run on a bank can easily generate other bank runs as depositors become worried about the financial health of their own similarly weak banks.
The problem with bank runs is that when depositors withdraw money and stuff it under their mattresses rather than trust it to other banks, the money supply shrinks. To understand this phenomenon, we have to explain how we measure the money supply. The simplest measures include not only currency but also checking deposits, since they are commonly used to make payments. What complicates things is that fractional-reserve banking leads to a multiple expansion of deposits. When someone puts money in a bank his checking account reflects the deposit, but the bank does not keep all the money on hand—it’s not a warehouse. Instead, it keeps only a fraction as “reserves” and lends the rest to a borrower, who in turn buys goods or services. The seller then deposits her new income in a bank, where she gets a checking account. The money supply increases by the amount of the new deposit. This process will continue, though in ever-decreasing amounts since banks have to keep some part of the new deposits as reserves. Yet each cycle will increase the money supply by increasing the overall amount of deposits held at banks.
This process works in reverse too. When banks lose reserves due to bank runs, the economy experiences a multiple contraction of deposits. The deposits that are removed from the economy greatly exceed the additional currency that the public now holds, so the money supply decreases.
The stock-market crash of October 1929 made it more difficult for many businesses to repay their loans to the banks, and many banks found their balance sheets impaired as a result. But the most important cause of the bank runs that began in October 1930 was bad times in the farm belt, where the banks were especially weak and poorly diversified. The number of bank runs increased exponentially in December 1930—in that single month 352 banks failed. Most of the failing banks were in the Midwest , their failures caused by farmers who defaulted on their loans because they were hit hard by the economic downturn. No sooner did the first wave of bank runs subside than another got underway in the spring of 1931, creating what Friedman and Schwartz described as a “contagion of fear” among bank depositors. Bank crises continued to come in waves until the spring of 1933.
Roosevelt Comes In
FDR was inaugurated on March 4, 1933, and two days later he declared a “bank holiday,” allowing banks legally to refuse withdrawals by depositors; it lasted ten days. With his famous phrase, “The only thing we have to fear is fear itself,” he intended to dissuade depositors from running on their banks, but by then it was far too late. In 1929 there were a total of 25,000 banks in the United States. As the bank holiday ended, only 12,000 banks were operating (though another 3,000 were to reopen eventually). The effect on the money supply was equally dramatic. From 1929 to 1933 it fell by 27 percent—for every $3 in circulation in 1929 (whether in currency or deposits), only $2 was left in 1933. Such a drastic fall in the money supply inevitably led to a massive decrease in aggregate demand. People’s savings were wiped out so their natural response was to save more to compensate, leading to plummeting consumption spending. Naturally, total economic output also fell dramatically: GDP was 29 percent lower in 1933 than in 1929. And the unemployment rate hit its historic high of 25 percent in 1933.
Friedman and Schwartz argued that all this was due to the Fed’s failure to carry out its assigned role as the lender of last resort. Rather than providing liquidity through loans, the Fed just watched as banks dropped like flies, seemingly oblivious to the effect this would have on the money supply. The Fed could have offset the decrease created by bank failures by engaging in bond purchases, but it did not. As Milton and Rose Friedman wrote in Free to Choose:
The [Federal Reserve] System could have provided a far better solution by engaging in large-scale open market purchases of government bonds. That would have provided banks with additional cash to meet the demands of their depositors. That would have ended—or at least sharply reduced—the stream of bank failures and have prevented the public’s attempted conversion of deposits into currency from reducing the quantity of money. Unfortunately, the Fed’s actions were hesitant and small. In the main, it stood idly by and let the crisis take its course—a pattern of behavior that was to be repeated again and again during the next two years.
According to Friedman and Schwartz, this was a complete abdication of the Fed’s core responsibilities—responsibilities it had taken away from the commercial bank clearinghouses that had acted to mitigate panics before 1914—and was the primary cause of the Great Depression.
The obvious question is: Why didn’t the Fed act? We don’t know for sure, but Friedman and Schwartz proposed several possible explanations: 1) the Fed officials did not fully understand the disastrous consequences of letting so many banks go under. Friedman and Schwartz wrote that Fed officials may have “tended to regard bank failures as regrettable consequences of bank management or bad banking practices, or as inevitable reactions to prior speculative excesses, or as a consequence but hardly a cause of the financial and economic collapse in process”; 2) Fed officials may have been acting out of their own self-interest since many of them were affiliated with large Northeastern banks. Bank failures, at least in the early stages, “were concentrated among smaller banks and since the most influential figures in the system were big-city bankers who deplored the existence of smaller banks, their disappearance may have been viewed with complacency”; 3) The inactivity may have been caused by political infighting between the Federal Reserve Board in Washington, D.C., and regional Fed banks, in particular the New York district bank, which was the most important part of the system at that time. But we may never know the real reason.
Dangers of Centralized Power
There is an important lesson to be learned from this episode: When we centralize great responsibility and power in one institution, its failure will have far-reaching and terrible consequences. The Fed was instituted to act decisively in the exact circumstances that occurred in 1930–33. Friedman and Schwartz pointed out that the Fed’s failure was all the more serious and difficult to understand given how easily it could have been avoided:
At all times throughout the 1929–1933 contraction, alternative policies were available to the system by which it could have kept the stock of money from falling, and indeed could have increased it at almost any desired rate. Those policies did not involve radical innovations. They involved measures of a kind the system had taken in earlier years, of a kind explicitly contemplated by the founders of the system to meet precisely the kind of banking crisis that developed in late 1930 and persisted thereafter. They involved measures that were actually proposed and very likely would have been adopted under a slightly different bureaucratic structure or distribution of power, or even if the men in power had had somewhat different personalities.
This is the most worrisome fact. The institution failed because of the people within it. And given the immense power and influence it had over the economy, its failure was disastrous. It is important to understand that the Great Depression could have been avoided if the Fed had not so badly botched its monetary policy. In fact, Friedman and Schwartz claimed that the depression would not have been a Great Depression if there had been no Federal Reserve in the first place: “[I]f the pre-1914 banking system rather than the Federal Reserve System had been in existence in 1929, the money stock almost certainly would not have undergone a decline comparable to the one that occurred.”
That point was effectively elaborated by Milton and Rose Friedman in Free to Choose:
Had the Federal Reserve System never been established, and had a similar series of runs started, there is little doubt that the same measures would have been taken as in 1907—a restriction of payments. That would have been more drastic than what actually occurred in the final months of 1930. However, by preventing the draining of reserves from good banks, restriction would almost certainly have prevented the subsequent series of bank failures in 1931, 1932, and 1933, just as restriction in 1907 quickly ended bank failures then. . . . The panic over, confidence restored, economic recovery would very likely have begun in early 1931, just as it had in early 1908.
The existence of the Reserve System prevented the drastic therapeutic measure: directly, by reducing the concern of the stronger banks, who, mistakenly as it turned out, were confident that borrowing from the System offered them a reliable escape mechanism in case of difficulty; indirectly, by lulling the community as a whole, and the banking system in particular, into the belief that such drastic measures were no longer necessary now that the System was there to take care of such matters.
In the February 15, 2007, New York Review of Books economist and columnist Paul Krugman charged Friedman with “intellectual dishonesty” because Friedman repeatedly called for a significant reduction of the Fed’s power or even its outright abolition as a result of his work on the Great Depression. Krugman, however, concluded that the real lesson to be learned from Friedman’s explanation is that government institutions should be more active, not less. Krugman believes his conclusion to be so obvious that he is convinced that Friedman’s contrary recommendation must be driven by an ideological agenda and thus is an example of intellectual dishonesty. However, Krugman is clearly missing the point.
Friedman’s conclusion was perfectly logical given his belief that had the Fed not been created, the downturn of 1929 would not have become a major depression. Friedman claims in the paragraph above that without the Fed “the same measures would have been taken [in 1930] as in 1907—a restriction of payments,” which he believes would have prevented the crisis from spreading to “stronger banks,” those not guilty of overextending themselves through over-risky loans. Monetary economist Lawrence H. White of the University of Missouri-St. Louis filled in the blanks in Friedman’s “institutional counter-factual” on the Division of Labour blog (March 12, 2007):
Friedman understood . . . that before the Federal Reserve Act financial panics in the US were mitigated by the actions of private commercial bank clearinghouses. Friedman and Schwartz’s view of the 1930′s was that the Fed, having nationalized the roles of the clearinghouse associations [CHAs], particularly the lender-of-last-resort role, did less to mitigate the panic than the CHAs had done in earlier panics like 1907 and 1893. In that sense, the economy would have been better off if the Fed had not been created. This position is perfectly consistent with the position that, provided we take the Fed’s nationalization of the clearinghouse roles for granted, the Fed was guilty of not doing its job.
Thus the Fed’s failure in the early ’30s shows the dangers of excessive centralization of important market functions that were previously dispersed among multiple private institutions. Friedman’s bottom line remains intact: The Fed caused the Great Depression.
The Perfect Storm
In the decades following Friedman and Schwartz’s work economists started examining other government-policy failures in the aftermath of the crash. They have found an abundant supply of them. Here are several key examples of these bad policies: 1) In response to a sharp decrease in tax revenues in 1930 and 1931 (caused by a slowdown of economic activities), the federal government passed the largest peacetime tax increase in the history of the United States, which clearly applied the brakes on any recovery that could have taken place; 2) the federal government also passed the Smoot-Hawley Tariff Act in 1930, substantially increasing tariffs and leading to retaliatory restrictions by trading partners, which resulted in a considerable decrease in demand for U.S. exports and a further slowdown in production (not to mention a loss of mutually advantageous division of labor); 3) the federal government also instituted all sorts of “public works” programs, beginning under Herbert Hoover and increasing dramatically under FDR; the programs removed hundreds of thousands of people from the labor market and engaged them in economically wasteful activities, such as carving faces of dead presidents into the sides of a mountain, preventing or delaying necessary labor-market adjustments; 4) another federal policy that prevented (labor and other) market adjustments was the price and wage controls enacted under the National Recovery Administration and in effect from 1933 until 1935 (when ruled unconstitutional); this policy massively distorted relative market prices, impairing their ability to function as guides to entrepreneurs; 5) the Fed was not blameless after 1933 either. It increased bank-reserve requirements in three steps in 1936 and 1937, leading to another significant decrease in the money supply. The result was the 1937–38 recession within the Depression, adding insult to injury.
Economists have come to understand the Great Depression as a “perfect storm” of policy failures. A truly frightening number of destructive policies were carried out nearly simultaneously. In retrospect it seems as though whenever the economy began showing the slightest inkling of recovery, a policy would be enacted that would put a quick stop to it.
The better explanation of the Great Depression revealed it was not caused by unfettered market forces. There is nothing in the operation of free markets that would create depressions or even recessions. Rather, we now know that we must look for causes of these phenomena in mismanaged and erroneous government policies. And much of the credit for this change in the way economists look at the Depression must go to Friedman and Schwartz’s groundbreaking work on the Fed’s role. Friedman provided—and ultimately persuaded most economists of—this alternate explanation because of his insistence on honest intellectual inquiry, untainted by ideological biases. It was a courageous thing to do at the time of absolute Keynesian dominance of the economics profession, and it could have been damaging or even destructive to his career. But Friedman’s personal strength of character and intellectual honesty obliged him to stick to the truth, and we are all much better for it today.
Ironically, as a result of the banking crisis of 1930–33, the Fed was granted more responsibilities and more control over banking. As is often the case in politics, failure was used to justify an expansion of power. That expansion of the Fed’s power resulted in a great amount of economic destruction through the subsequent decades. In 1980 Milton and Rose Friedman wrote of the Fed’s record over the 45 years after the banking crisis of 1930–33:
Since 1935 the [Federal Reserve] System has presided over—and greatly contributed to—a major recession of 1937–38, a wartime and immediate postwar inflation, and a roller coaster economy since, with alternate rises and falls in inflation and decreases and increases in unemployment. Each inflationary peak and each temporary inflationary trough has been at a higher and higher level, and the average level of unemployment has gradually increased. The System has not made the same mistake that it made in 1929–1933—of permitting or fostering a monetary collapse—but it has made the opposite mistake, of fostering an unduly rapid growth in the quantity of money and so promoting inflation. In addition, it has continued, by swinging from one extreme to another, to produce not only booms but also recessions, some mild, some sharp.
The Fed’s performance has improved since 1980, but that does not mean it is no longer capable of mistakes that would have devastating consequences for our lives. Friedman’s work should serve as a warning of what can happen when so much power is artificially concentrated in one institution. It is for this reason that it is so vitally important that people today be taught the real story of the Great Depression. Their faith in government institutions might be considerably undermined if they understood what really happened.
Last week, I explained that “supply siders” need to be ardent advocates of spending restraint. After all, there is no chance of good tax policy in the future if the burden of federal spending continues to expand.
In an article for National Review, Philip Klein speculates whether there is any appetite for spending restraint, even among self-described conservatives.
For much of the history of the American conservative movement, limiting the size and scope of government has stood as one of its central goals. …In 2022, such messages were barely anywhere to be found on the campaign trail…conservatives have largely moved on from making the case for reducing the size and power of Washington. In some cases, this shift has been passive. …It has become popular in some circles on the right to mock “zombie Reaganism” and insist that while it may have made sense back in the 1980s to argue for smaller government, such a message is now outdated. …the argument that the battle to limit government has already been lost also neglects to recognize that things could always get worse. That is, even though the federal government has gone through extraordinary growth since the New Deal, it would have grown even larger had there been no conservative movement to push back. One need only look at Europe, where conservative parties long ago made their peace with the welfare state, to see how government agencies have crowded out civil society… There is no way in which a nation with…a ballooning welfare state will be an accommodating place for conservatives in the long run, no matter how much some may fantasize about seizing the dragon and precisely aiming its fire at their enemies during the relatively brief windows in which Republicans have power. Conservatives…should not abandon the fight for limited government.
Those are easy columns to write since it is the same argument I’ve been making my entire life. But what is depressing now is that there is opposition from Republicans as well as Democrats.
Maybe they should all be forced to watch my video series on the economics of government spending.
In the Wall Street Journal, Andy Kessler explains that smaller government is the recipe for more growth.
Winston Churchill…said: “We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucketand trying to lift himself up by the handle.” The U.S. should heed that advice… economic growth is going to come from efficient supply chains and productivity in manufacturing in the U.S. Tax andspending cuts are the cure. …Republicans must resist the urge to subsidize higher energy costs and instead help slay inflation and bring back a strong, productive economy.
Let’s look at some new academic research bolstering Kessler’s argument.
Megha JainAishwarya Nagpal, and Abhay Jain published a study last year in the South Asia Journal of Macroeconomics and Public Finance.
The key findings deal with the Armey-Rahn Curveand can be found in the abstract.
The current study attempts to examine the linkage between government (public) spending and economic growth in the broader framework of selected South Asian Nations (SANs), BRICS and other emerging nations by using two sets of empirical modelling over the period 2007–2016 by using inverted U-shaped hypothesis, propounded by Armey curve (1995).…The key findings signify the existence of an inverted U-shaped relationship for the selected data set of emerging nations and, therefore, support the Armey curve hypothesis. The projected threshold (tipping) levels (as a percentage of GDP) are 24.31% for the government total expenditures (GTotExp), 12.92% for consumption spending (GConExp) and 7.11% for investment spending (GInvExp). It has been observed that a rise in the public spending (size) resulted in a substantial…decrease…in the growth rate when the public spending was…after…the optimal threshold level, indicating a non-monotonic association.
For what it’s worth, I think the study is wrong and that the growth-maximizing level of government spending is much lower than 24.3 percent of economic output.
But since total government spending in the United States now consumes about 40 percent of GDP, at least we can all agree that there will be more prosperity if America’s fiscal burden is dramatically reduced.
If we ever bring the spending burden back down to 24.3 percent of economic output, we can then figure out whether the ultimate goal is even lower (as it was for much of America’s history).
There is one point from the study that merits further attention. The authors estimated not only the growth-maximizing level of total spending, but also how much the government should spend on “consumption” and “investment” outlays (an issue I addressed last month).
Here’s a chart from the study showing that consumption outlays should be less than 13 percent of economic output.
P.S. If you want to watch videos that address the growth-maximizing size of government, click here, here, here, here, and here.
P.P.S. Ironically, the case for smaller government is bolstered by research from normally left-leaning international bureaucracies such as the OECD, World Bank, ECB, and IMF.
March 31, 2021
President Biden c/o The White House
1600 Pennsylvania Avenue NW
Washington, DC 20500
Dear Mr. President,
Please explain to me if you ever do plan to balance the budget while you are President? I have written these things below about you and I really do think that you don’t want to cut spending in order to balance the budget. It seems you ever are daring the Congress to stop you from spending more.
“The credit of the United States ‘is not a bargaining chip,’ Obama said on 1-14-13. However, President Obama keeps getting our country’s credit rating downgraded as he raises the debt ceiling higher and higher!!!!
Washington Could Learn a Lot from a Drug Addict
Just spend more, don’t know how to cut!!! Really!!! That is not living in the real world is it?
Making more dependent on government is not the way to go!!
Why is our government in over 16 trillion dollars in debt? There are many reasons for this but the biggest reason is people say “Let’s spend someone else’s money to solve our problems.” Liberals like Max Brantley have talked this way for years. Brantley will say that conservatives are being harsh when they don’t want the government out encouraging people to be dependent on the government. The Obama adminstration has even promoted a plan for young people to follow like Julia the Moocher.
Imagine standing a baby carrot up next to the 25-story Stephens building in Little Rock. That gives you a picture of the impact on the national debt that federal spending in Arkansas on Medicaid expansion would have, while here at home expansion would give coverage to more than 200,000 of our neediest citizens, create jobs, and save money for the state.
Here’s the thing: while more than a billion dollars a year in federal spending would represent a big-time stimulus for Arkansas, it’s not even a drop in the bucket when it comes to the national debt.
Currently, the national debt is around $16.4 trillion. In fiscal year 2015, the federal government would spend somewhere in the neighborhood of $1.2 billion to fund Medicaid expansion in Arkansas if we say yes. That’s about 1/13,700th of the debt.
It’s hard to get a handle on numbers that big, so to put that in perspective, let’s get back to the baby carrot. Imagine that the height of the Stephens building (365 feet) is the $16 trillion national debt. That $1.2 billion would be the length of a ladybug. Of course, we’re not just talking about one year if we expand. Between now and 2021, the federal government projects to contribute around $10 billion. The federal debt is projected to be around $25 trillion by then, so we’re talking about 1/2,500th of the debt. Compared to the Stephens building? That’s a baby carrot.
______________
Here is how it will all end if everyone feels they should be allowed to have their “baby carrot.”
How sad it is that liberals just don’t get this reality.
While living in Europe in the 1760s, Franklin observed: “in different countries … the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer.”
Alexander Fraser Tytler, Lord Woodhouselee(15 October 1747 – 5 January 1813) was a Scottish lawyer, writer, and professor. Tytler was also a historian, and he noted, “A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy.”
[Jefferson affirms that the main purpose of society is to enable human beings to keep the fruits of their labor.— TGW]
To take from one, because it is thought that his own industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, “the guarantee to every one of a free exercise of his industry, and the fruits acquired by it.” If the overgrown wealth of an individual be deemed dangerous to the State, the best corrective is the law of equal inheritance to all in equal degree; and the better, as this enforces a law of nature, while extra taxation violates it.
[From Writings of Thomas Jefferson, ed. Albert E. Bergh (Washington: Thomas Jefferson Memorial Association, 1904), 14:466.]
_______
Jefferson pointed out that to take from the rich and give to the poor through government is just wrong. Franklin knew the poor would have a better path upward without government welfare coming their way. Milton Friedman’s negative income tax is the best method for doing that and by taking away all welfare programs and letting them go to the churches for charity.
_____________
_________
Thank you so much for your time. I know how valuable it is. I also appreciate the fine family that you have and your commitment as a father and a husband.
Sincerely,
Everette Hatcher III, 13900 Cottontail Lane, Alexander, AR 72002, ph 501-920-5733
We got to act fast and get off this path of socialism. Morning Bell: Welfare Spending Shattering All-Time Highs Robert Rector and Amy Payne October 18, 2012 at 9:03 am It’s been a pretty big year for welfare—and a new report shows welfare is bigger than ever. The Obama Administration turned a giant spotlight […]
We need to cut Food Stamp program and not extend it. However, it seems that people tell the taxpayers back home they are going to Washington and cut government spending but once they get up there they just fall in line with everyone else that keeps spending our money. I am glad that at least […]
Government Must Cut Spending Uploaded by HeritageFoundation on Dec 2, 2010 The government can cut roughly $343 billion from the federal budget and they can do so immediately. __________ Liberals argue that the poor need more welfare programs, but I have always argued that these programs enslave the poor to the government. Food Stamps Growth […]
Milton Friedman – The Negative Income Tax Published on May 11, 2012 by LibertyPen In this 1968 interview, Milton Friedman explained the negative income tax, a proposal that at minimum would save taxpayers the 72 percent of our current welfare budget spent on administration. http://www.LibertyPen.com Source: Firing Line with William F Buckley Jr. ________________ Milton […]
Dan Mitchell Commenting on Obama’s Failure to Propose a Fiscal Plan Published on Aug 16, 2012 by danmitchellcato No description available. ___________ After the Welfare State Posted by David Boaz Cato senior fellow Tom G. Palmer, who is lecturing about freedom in Slovenia and Tbilisi this week, asked me to post this announcement of his […]
Is President Obama gutting the welfare reform that Bill Clinton signed into law? Morning Bell: Obama Denies Gutting Welfare Reform Amy Payne August 8, 2012 at 9:15 am The Obama Administration came out swinging against its critics on welfare reform yesterday, with Press Secretary Jay Carney saying the charge that the Administration gutted the successful […]
Thomas Sowell – Welfare Welfare reform was working so good. Why did we have to abandon it? Look at this article from 2003. The Continuing Good News About Welfare Reform By Robert Rector and Patrick Fagan, Ph.D. February 6, 2003 Six years ago, President Bill Clinton signed legislation overhauling part of the nation’s welfare system. […]
Uploaded by ForaTv on May 29, 2009 Complete video at: http://fora.tv/2009/05/18/James_Bartholomew_The_Welfare_State_Were_In Author James Bartholomew argues that welfare benefits actually increase government handouts by ‘ruining’ ambition. He compares welfare to a humane mousetrap. —– Welfare reform was working so good. Why did we have to abandon it? Look at this article from 2003. In the controversial […]
Thomas Sowell If the welfare reform law was successful then why change it? Wasn’t Bill Clinton the president that signed into law? Obama Guts Welfare Reform Robert Rector and Kiki Bradley July 12, 2012 at 4:10 pm Today, the Obama Department of Health and Human Services (HHS) released an official policy directive rewriting the welfare […]
I have been writing President Obama letters and have not received a personal response yet. (He reads 10 letters a day personally and responds to each of them.) However, I did receive a form letter in the form of an email on July 10, 2012. I don’t know which letter of mine generated this response so I have […]
The Wall Street Journaleditorialized last month about this unfortunate similarity. Here are some of the highlights…or lowlights would be a better term since the net result of protectionism is to hurt taxpayers and consumer.
President Biden has rolled back some of Donald Trump’s destructive tariffs, but not enough, and they’re still doing economic harm. New analyses of Mr. Trump’s Section 232 steel and aluminum tariffs show how consumers and manufacturers are still paying for the border taxes that benefit only a few companies.A study by Harbor Aluminum for the Beer Institute finds that the 10% tariff on imported aluminum cost U.S. beverage manufacturers $1.7 billion from March 2018 through August 2022. About 93% of the $1.7 billion has been pocketed by domestic aluminum producers and smelters in the U.S. and Canada. …By raising the cost of production, tariffs constrain manufacturers, who cut jobs and pass costs to consumers. …Repealing the Trump Section 232 tariffs could reduce prices at the margin. The longer they stay in place the more they deserve to be called the Biden-Trump tariffs.
Since the above column mentioned the Section 232 tariffs, this would be an opportune moment to cite the Tax Foundation’s research on the topic.
…economists have reached…negative conclusions regarding the impacts of the recent Section 232 tariffs on the economy. Lydia Cox and Kadee Russ, using an estimate derived from a Federal Reserve Board paper, calculated that the Section 232 tariffs reduced manufacturing employment by about 75,000 jobs. Kyle Handley and other economists looked at the impacts of the import tariffs on export growth in the U.S. and found that companies exposed to the Section 232 tariffs experienced reduced export growth. This occurred because the cost of their inputs rose due to the tariffs, which hindered firms’ ability to increase their exports. For each 1 percent increase in the tariffs on steel and aluminum, export growth fell by 0.11 percent. …The aluminum tariffs in particular have disproportionately harmed certain industries. …Ford and General Motors estimated that the tariffs cost them about $1 billion each the first year they were in effect—roughly $700 per vehicle produced.
And here’s the Tax Foundation’s estimate of how the economy would benefit if these taxes on trade were repealed.
Since I’ve been criticizing Biden for being a protectionist, I’ll close by speculating whether Republicans have learned from Trump’s protectionist mistakes.
Here are some excerpts from a column in the Wall Street Journal by former Congressman Jeb Hensarling.
Numerous studies have shown that almost all the costs of tariffs initiated under the Trump administration were paid by American consumers and businesses. …According to the American Action Forum, Mr. Trump’s tariffs combined have increased consumer costs by approximately $51 billion a year.…Republicans love to talk about “draining the swamp” in Washington. But the tariffs imposed by the Trump administration empowered hundreds of bureaucrats at the Commerce Department and the Office of the U.S. Trade Representative to grant waivers under what can at best be described as an opaque process with discretionary standards. …A schedule of tariffs doesn’t drain the swamp. It fills it with well-connected lawyers and lobbyists who know how to work the system.
The bottom line is that protectionism does not work if Republicans do it, and protectionism does not work if Democrats do it.
P.S. A big problem is that politicians genuinely don’t understand that a “trade deficit” is automatically and necessarily offset by a capital surplus. Helping them to understand this fact is key to renewing support for free trade.
Larry Elder wrote in 2016: “As economist Milton Friedman says, protectionism discriminates against low prices!”
The pandemic has shocked every sector of the economy. Trade restrictions enacted by the Trump administration and maintained by President Biden have rippled through the U.S. economy but have particularly impacted U.S. ports. The pandemic highlighted that American ports have broader efficiency problems and could use some serious policy and management reforms.
On the west coast in particular, ship congestion has caused severe delays, wreaking havoc on the supply chain. While factories and ports in Asia are working 24/7 to supply American consumers with valuable goods, U.S. ports have been open for far fewer hours because labor union contractsdictate the hourly terms. However, after months of backlog, the ports of Los Angeles (LA) and Long Beach (LB) are finally switching to 24/7 shifts to move goods more quickly.
As a result of these union contracts, government offices are also not open 24/7. The ports of LA and LB account for almost half of all U.S. imports. The Customs and Border Protection (CBP) officials who must clear and admit goods do not work nights or weekends. These limits create additional pressure to have goods shipped to the United States during a prohibitive time frame, or leave ships idling around the ports until they can get in. The latter is the most common response. Recently, ships have been waiting an average of 12.5 days to enter the LA port. Ship idling has caused other problems too. Orange County, CA was affected by an oil spill that is suspected to have been caused by a pipeline hit with idling ship anchors. These differences in operating hours have caused huge ports efficiency losses that are felt across the country.
While it is positive that retailers, couriers, and the International Longshore and Warehouse Union (ILWU) are making changes to run ports more efficiently, permanent trade policy changes would help ease America’s coastal shipping problems.
The best policy would be to unilaterally remove tariffs by the United States. Simply eliminating tariffs would reduce an administrative burden both for traders and CBP officials. Duty‐free trade would increase imports and exports but all other things equal, the freed‐up CBP resources would help to move goods more swiftly through the ports.
However, a few smaller reforms could be implemented now that would considerably help the efficiency of U.S. ports. Removing Section 232 tariffs on steel and aluminum imports could temper the current domestic scarcity of some transportation‐related goods, including chassis (the frame of a vehicle that holds containers). Thesematerials are vital inputs for such products and the Section 232 tariffs are affecting American manufacturers’ ability to meet domestic demand. Eliminating duties and tariffs on transportation‐related goods, including the 221 percent antidumping and countervailing (AD/CVD) duties and 25 percent Section 301 tariffs on Chinese chassis, could help increase the U.S. supply of chassis. While some freighters are paying the higher prices for Chinese chassis, the supply of transportation is still constrained, which has resulted in higher sticker prices on consumer goods.
As LA and LB move to 24/7 shifts, CBP offices should also be open 24/7. Given the sheer volume of trade these two ports process, it would seem sensible to make staffing 24/7 a permanent change at these ports, and at others depending on trade volumes.
Reforming the Jones Act could also help. All freight moved between U.S. ports mustuseU.S.-built, -crewed, and -flagged ships. As a result, traders circumvent these regulations by using alternative modes like trucks and trains. It would be prudent to reform the Jones Act to allow ships not in compliance with the Jones Act to pick up shipments in one U.S. port and unload at another. This would reduce pressure on inland transit that is currently being impacted by the aforementioned tariffs.
These bottlenecks have provided insight into the problems that exist at U.S. ports and with coastal shipping more broadly. Improvements in trade policy have a role to play and policymakers would be remiss not to consider permanent changes that would be beneficial now and could preempt pressures during future economic shocks.
Milton Friedman – Free Trade vs. Protectionism
Free to Choose Part 2: The Tyranny of Control (Featuring Milton Friedman
Larry Elder rebuts candidate’s ‘they’re taking our jobs’ claim
Published: 02/03/2016 at 6:39 PM
One of Donald Trump’s talking points and biggest applause lines is how “they” – Japan, China and Mexico – are “beating us in trade” and are “taking our jobs.” He proposes tariffs, for example, on Chinese goods in retaliation for that country’s alleged “cheating.”
To someone who is out of work in an industry where foreign workers do what he or she once did, Trump-like protectionism sounds appealing. But Trump actually proposes punishing the American consumer. As economist Milton Friedman says, protectionism discriminates against low prices.
It is certainly true that many countries prop up or subsidize companies or even whole industries by providing capital or special privileges. This allows them to produce goods and services “below cost” – or at prices below what a competitor could charge and still make a profit. But doing so also means that taxes in that country, which could have gone to a more productive use, are squandered to keep a company in business that otherwise wouldn’t exist or would have gone out of business. This means consumers in other countries with which the “cheater” country trades can buy those imported goods at a cheaper price.
Trump proposes to retaliate by placing tariffs on those imported goods. But this prevents American consumers from benefiting from the “cheater” country’s folly of propping up companies that would not survive but for the taxes spent to keep it alive. Why compound the stupidity?
Another justification for this kind of protectionism is that a foreign country “exploits” America through the use of “slave labor” which, as to wages, causes a “race to the bottom.” Certainly forced labor, as when “blood diamonds” are mined by workers with guns pointed to their heads, is criminal and immoral. But free laborers offering to work for less money than others is how poor countries become wealthier – by allowing other countries to buy goods more cheaply.
NAFTA, the North American Free Trade Agreement, established in 1994, has become exhibit A on how “we lose” on trade. After all, many American jobs have been “outsourced” to Mexico. But that looks at but one side of the ledger. That an American pays less for certain things frees up capital to spend on something or on someone else. A machinist sees his job “shipped to Mexico,” but the planner or analyst hired by a company with the “savings” might not see the direct relationship between free trade and the fact that he or she has this new job. When NAFTA was debated, businessman and presidential candidate Ross Perot predicted “a giant sucking sound” as jobs and incomes would be lost to Mexico.
The American Enterprise Institute writes: “It is an article of faith among protectionists that NAFTA harmed American workers. … The justification may be that NAFTA went into force at the beginning of 1994 and the U.S. trade balance with Canada and Mexico, two of our top partners, then deteriorated.
“But the American job market improved as these trade deficits grew. Unemployment fell more than two points from the beginning of 1994 through the middle of 2000. Already high labor force participation edged higher to its all-time record by early 2000. Manufacturing employment rose until mid-1998 and was above its pre-NAFTA level until April 2001. Manufacturing wages rose. The strength in the American job market from 1994 to 1999 is not due primarily to NAFTA, but it is plain that the job market, including manufacturing, strengthened after NAFTA.”
Trump is also schizophrenic on this issue. On the one hand, he opposes illegal immigration, which most often is an economic decision where, for example, a poor, unskilled worker from Mexico sneaks into America to make money. On the other hand, Trump deems it unfair and a form of “cheating” if an American company relocates to or builds a factory in Mexico to take advantage of that unskilled Mexican worker’s willingness to work for less.
If Trump were talking about the excessive taxes or regulations that induce American companies to leave the U.S. or to put factories in foreign countries, that would be one thing. The U.S. general top marginal corporate income tax rate is the highest in the industrialized world – and, worldwide, is only exceeded by Chad and the United Arab Emirates. Unnecessary regulations also increase the cost of doing business stateside. But this is not Trump’s argument.
About free trade, the father of modern economics, Adam Smith, in 1776 wrote in “The Wealth of Nations”: “In every country it always is and must be in the interest of the great body of the people to buy whatever they want of those who sell it cheapest. The proposition is so very manifest that it seems ridiculous to take any pains to prove it; nor could it ever have been called in question had not the interested sophistry of merchants and manufacturers confounded the common sense of mankind. Their interest is, in this respect, directly opposite to that of the great body of the people.”
Milton Friedman’s FREE TO CHOOSE “The Tyranny of Control” Transcript and Video (60 Minutes) In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount. I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and […]
In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount. I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?” and “Created Equal” and From Cradle to Grave, […]
In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount. I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?” and “Created Equal” and From Cradle to Grave, […]
In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount. I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?” and “Created Equal” and From Cradle to Grave, […]
In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount. I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?” and “Created Equal” and From Cradle to Grave, […]
In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount. I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?” and “Created Equal” and From Cradle to Grave, […]
In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount. I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?” and “Created Equal” and From Cradle to Grave, […]
In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount. I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?” and “Created Equal” and From Cradle to Grave, […]
Open letter to President Obama (Part 654) (Emailed to White House on July 22, 2013) President Obama c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500 Dear Mr. President, I know that you receive 20,000 letters a day and that you actually read 10 of them every day. I really do respect you […]
Open letter to President Obama (Part 650) (Emailed to White House on July 22, 2013) President Obama c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500 Dear Mr. President, I know that you receive 20,000 letters a day and that you actually read 10 of them every day. I really do respect you […]
In the Wall Street Journal, Andy Kessler explains that smaller government is the recipe for more growth.
Winston Churchill…said: “We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucketand trying to lift himself up by the handle.” The U.S. should heed that advice… economic growth is going to come from efficient supply chains and productivity in manufacturing in the U.S. Tax andspending cuts are the cure. …Republicans must resist the urge to subsidize higher energy costs and instead help slay inflation and bring back a strong, productive economy.
Let’s look at some new academic research bolstering Kessler’s argument.
Megha JainAishwarya Nagpal, and Abhay Jain published a study last year in the South Asia Journal of Macroeconomics and Public Finance.
The key findings deal with the Armey-Rahn Curveand can be found in the abstract.
The current study attempts to examine the linkage between government (public) spending and economic growth in the broader framework of selected South Asian Nations (SANs), BRICS and other emerging nations by using two sets of empirical modelling over the period 2007–2016 by using inverted U-shaped hypothesis, propounded by Armey curve (1995).…The key findings signify the existence of an inverted U-shaped relationship for the selected data set of emerging nations and, therefore, support the Armey curve hypothesis. The projected threshold (tipping) levels (as a percentage of GDP) are 24.31% for the government total expenditures (GTotExp), 12.92% for consumption spending (GConExp) and 7.11% for investment spending (GInvExp). It has been observed that a rise in the public spending (size) resulted in a substantial…decrease…in the growth rate when the public spending was…after…the optimal threshold level, indicating a non-monotonic association.
For what it’s worth, I think the study is wrong and that the growth-maximizing level of government spending is much lower than 24.3 percent of economic output.
But since total government spending in the United States now consumes about 40 percent of GDP, at least we can all agree that there will be more prosperity if America’s fiscal burden is dramatically reduced.
If we ever bring the spending burden back down to 24.3 percent of economic output, we can then figure out whether the ultimate goal is even lower (as it was for much of America’s history).
There is one point from the study that merits further attention. The authors estimated not only the growth-maximizing level of total spending, but also how much the government should spend on “consumption” and “investment” outlays (an issue I addressed last month).
Here’s a chart from the study showing that consumption outlays should be less than 13 percent of economic output.
P.S. If you want to watch videos that address the growth-maximizing size of government, click here, here, here, here, and here.
P.P.S. Ironically, the case for smaller government is bolstered by research from normally left-leaning international bureaucracies such as the OECD, World Bank, ECB, and IMF.
March 31, 2021
President Biden c/o The White House
1600 Pennsylvania Avenue NW
Washington, DC 20500
Dear Mr. President,
Please explain to me if you ever do plan to balance the budget while you are President? I have written these things below about you and I really do think that you don’t want to cut spending in order to balance the budget. It seems you ever are daring the Congress to stop you from spending more.
“The credit of the United States ‘is not a bargaining chip,’ Obama said on 1-14-13. However, President Obama keeps getting our country’s credit rating downgraded as he raises the debt ceiling higher and higher!!!!
Washington Could Learn a Lot from a Drug Addict
Just spend more, don’t know how to cut!!! Really!!! That is not living in the real world is it?
Making more dependent on government is not the way to go!!
Why is our government in over 16 trillion dollars in debt? There are many reasons for this but the biggest reason is people say “Let’s spend someone else’s money to solve our problems.” Liberals like Max Brantley have talked this way for years. Brantley will say that conservatives are being harsh when they don’t want the government out encouraging people to be dependent on the government. The Obama adminstration has even promoted a plan for young people to follow like Julia the Moocher.
Imagine standing a baby carrot up next to the 25-story Stephens building in Little Rock. That gives you a picture of the impact on the national debt that federal spending in Arkansas on Medicaid expansion would have, while here at home expansion would give coverage to more than 200,000 of our neediest citizens, create jobs, and save money for the state.
Here’s the thing: while more than a billion dollars a year in federal spending would represent a big-time stimulus for Arkansas, it’s not even a drop in the bucket when it comes to the national debt.
Currently, the national debt is around $16.4 trillion. In fiscal year 2015, the federal government would spend somewhere in the neighborhood of $1.2 billion to fund Medicaid expansion in Arkansas if we say yes. That’s about 1/13,700th of the debt.
It’s hard to get a handle on numbers that big, so to put that in perspective, let’s get back to the baby carrot. Imagine that the height of the Stephens building (365 feet) is the $16 trillion national debt. That $1.2 billion would be the length of a ladybug. Of course, we’re not just talking about one year if we expand. Between now and 2021, the federal government projects to contribute around $10 billion. The federal debt is projected to be around $25 trillion by then, so we’re talking about 1/2,500th of the debt. Compared to the Stephens building? That’s a baby carrot.
______________
Here is how it will all end if everyone feels they should be allowed to have their “baby carrot.”
How sad it is that liberals just don’t get this reality.
While living in Europe in the 1760s, Franklin observed: “in different countries … the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer.”
Alexander Fraser Tytler, Lord Woodhouselee(15 October 1747 – 5 January 1813) was a Scottish lawyer, writer, and professor. Tytler was also a historian, and he noted, “A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy.”
[Jefferson affirms that the main purpose of society is to enable human beings to keep the fruits of their labor.— TGW]
To take from one, because it is thought that his own industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, “the guarantee to every one of a free exercise of his industry, and the fruits acquired by it.” If the overgrown wealth of an individual be deemed dangerous to the State, the best corrective is the law of equal inheritance to all in equal degree; and the better, as this enforces a law of nature, while extra taxation violates it.
[From Writings of Thomas Jefferson, ed. Albert E. Bergh (Washington: Thomas Jefferson Memorial Association, 1904), 14:466.]
_______
Jefferson pointed out that to take from the rich and give to the poor through government is just wrong. Franklin knew the poor would have a better path upward without government welfare coming their way. Milton Friedman’s negative income tax is the best method for doing that and by taking away all welfare programs and letting them go to the churches for charity.
_____________
_________
Thank you so much for your time. I know how valuable it is. I also appreciate the fine family that you have and your commitment as a father and a husband.
Sincerely,
Everette Hatcher III, 13900 Cottontail Lane, Alexander, AR 72002, ph 501-920-5733
We got to act fast and get off this path of socialism. Morning Bell: Welfare Spending Shattering All-Time Highs Robert Rector and Amy Payne October 18, 2012 at 9:03 am It’s been a pretty big year for welfare—and a new report shows welfare is bigger than ever. The Obama Administration turned a giant spotlight […]
We need to cut Food Stamp program and not extend it. However, it seems that people tell the taxpayers back home they are going to Washington and cut government spending but once they get up there they just fall in line with everyone else that keeps spending our money. I am glad that at least […]
Government Must Cut Spending Uploaded by HeritageFoundation on Dec 2, 2010 The government can cut roughly $343 billion from the federal budget and they can do so immediately. __________ Liberals argue that the poor need more welfare programs, but I have always argued that these programs enslave the poor to the government. Food Stamps Growth […]
Milton Friedman – The Negative Income Tax Published on May 11, 2012 by LibertyPen In this 1968 interview, Milton Friedman explained the negative income tax, a proposal that at minimum would save taxpayers the 72 percent of our current welfare budget spent on administration. http://www.LibertyPen.com Source: Firing Line with William F Buckley Jr. ________________ Milton […]
Dan Mitchell Commenting on Obama’s Failure to Propose a Fiscal Plan Published on Aug 16, 2012 by danmitchellcato No description available. ___________ After the Welfare State Posted by David Boaz Cato senior fellow Tom G. Palmer, who is lecturing about freedom in Slovenia and Tbilisi this week, asked me to post this announcement of his […]
Is President Obama gutting the welfare reform that Bill Clinton signed into law? Morning Bell: Obama Denies Gutting Welfare Reform Amy Payne August 8, 2012 at 9:15 am The Obama Administration came out swinging against its critics on welfare reform yesterday, with Press Secretary Jay Carney saying the charge that the Administration gutted the successful […]
Thomas Sowell – Welfare Welfare reform was working so good. Why did we have to abandon it? Look at this article from 2003. The Continuing Good News About Welfare Reform By Robert Rector and Patrick Fagan, Ph.D. February 6, 2003 Six years ago, President Bill Clinton signed legislation overhauling part of the nation’s welfare system. […]
Uploaded by ForaTv on May 29, 2009 Complete video at: http://fora.tv/2009/05/18/James_Bartholomew_The_Welfare_State_Were_In Author James Bartholomew argues that welfare benefits actually increase government handouts by ‘ruining’ ambition. He compares welfare to a humane mousetrap. —– Welfare reform was working so good. Why did we have to abandon it? Look at this article from 2003. In the controversial […]
Thomas Sowell If the welfare reform law was successful then why change it? Wasn’t Bill Clinton the president that signed into law? Obama Guts Welfare Reform Robert Rector and Kiki Bradley July 12, 2012 at 4:10 pm Today, the Obama Department of Health and Human Services (HHS) released an official policy directive rewriting the welfare […]
I have been writing President Obama letters and have not received a personal response yet. (He reads 10 letters a day personally and responds to each of them.) However, I did receive a form letter in the form of an email on July 10, 2012. I don’t know which letter of mine generated this response so I have […]
Today, courtesy of the folks at the Committee for a Responsible Budget, you can agree or disagree with 24 statements to determine your “budget personality.”
I have some quibbles about some of the wording (for instance, I couldn’t answer “neither” when asked to react to: “The government should spend more money on children than on seniors”).
But I can’t quibble with the results. Given the potential outcomes, I’m glad to be a “Minimalist” who is “in favor of smaller government.”
Though I’m disappointed that I apparently didn’t get a perfect score on “Size of Government.”
And I need to explain why I got a mediocre score on the topic of “Fiscal Responsibility.”
The budget geeks at the Committee for a Responsible Federal Budget (CRFB) have a well-deserved reputation for rigorous analysis. I regularly cite their numbers and appreciate the work that they do.
I agree with Milton Friedman, who wisely observed that ““I would rather have government spend one trillion dollars with a deficit of a half a trillion dollars than have government spend two trillion dollars with no deficit.”
The folks at CRFB would disagree.
Indeed, they are so fixated on red ink that they would welcome tax increases.
At the risk of understatement, that would be a very bad approach.
The evidence from Europe shows that higher taxes simply lead to higher spending. And more debt.
Indeed, Milton Friedman also commented on this issue, warning that, “History shows that over a long period of time government will spend whatever the tax system raises plus as much more as it can get away with.”
EP 4 – From Cradle to Grave [6/7]. Milton Friedman’s Free to Choose (1980)
March 1, 2021
President Biden c/o The White House
1600 Pennsylvania Avenue NW
Washington, DC 20500
Dear Mr. President,
Thank you for taking time to have your office try and get a pulse on what is going on out here in the country. I wanted to let you know what I think about the minimum wage increase you have proposed for the whole country and I wanted to quote Milton Friedman who you are familiar with and you made it clear in July that you didn’t care for his views!Let me challenge you to take a closer look at what he had to say!
Progressives have gone crazy over the minimum wage.
President Obama got the ball rolling when he called for hiking the federal minimum wage from $7.25 to $10.10 per
Dreamstime
hour. Now, bothDemocratic presidential candidates are trying to one-up him, with Bernie Sanders demanding a $15 federal wage and Hillary Clinton $12. Meanwhile, California and New York have already passed laws mandating the Bernie rate, and scores of cities across the country are clamoring to follow suit.
And all the while, minimum wage advocates are making increasingly fanciful claims on behalf of their beloved laws.
The left’s minimum wage obsession dovetails with a shifting academic consensus that until the 1990s considered such hikes a recipe for killing jobs, especially for low-skilled workers. For a long time, the generally accepted rule of thumb was that, all else remaining equal, every 10 percent increase in the minimum wage would decrease low-skilled employment by 1 to 2 percent, since the more employers had to pay these employees, the fewer jobs they could afford to provide.
This consensus began to fray with a 1992 study by economists David Card and Alan Kreuger, who found that New Jersey’s minimum wage hike—from $4.25 to $5.05—did not lead to expected job losses in the state’s fast food restaurants. This finding has been hotly contested, but even if it were true, it doesn’t mean there are no other downsides to minimum wage laws. For example, sometimes employers don’t respond to minimum wage hikes by laying off workers, but instead by raising prices for consumers. (Minimum wage opponents haven’t helped their case by hitching it almost exclusively to job losses while ignoring the other, equally pernicious, adjustment responses by businesses.)
There is only one scenario, according to Naval Postgraduate School economist David Henderson, under which a modest legally mandated minimum wage might do more good than harm: when employers enjoy monopsony power (a monopoly on the buying side) in the labor market, either because there are very few of them or because workers can’t leave for some reason. Employers then have a relatively free hand to hold wages down. A mandated minimum wage under those circumstances merely diverts the firm’s “excess profits” to the worker, something that would have happened automatically in a more competitive market. But it doesn’t diminish a company’s productivity or its incentive for additional hiring—thereby actually boosting job growth. But genuine monopsony isn’t common and would require a very finely calibrated and skillfully crafted minimum wage, which is not how blanket policies work in the real world.
America’s federal minimum wage of $7.25 per hour works out to about 42 percent of its $17.40 hourly median wage. Even the most gung-ho academics only advocate raising it to 50 percent of the median — which means a little over $8.70. This in itself is a crude benchmark that lumps together high-wage service occupations with low-wage construction and other non-service ones whose market realities are completely different. Be that as it may, it is inconceivable that a $15 minimum wage—equal to 86 percent of America’s median wage, and the highest in the Western world—wouldn’t kill jobs, especially in small towns and cities where wages tend to be lower. Witness the chronic double-digit unemployment rate that a far less insane minimum wage has generated in France, Spain, Belgium, and other European countries.
And yet, minimum wage enthusiasts are abandoning all caution and making increasingly extravagant claims. Here are four of their sillier arguments:
False: Minimum wage hikes will lead to productivity-boosting automation
The standard rap against minimum wage laws is that by raising the cost of hiring workers, they prompt companies to invest in labor-saving technologies, throwing people out of work. But Matthew Yglesias claims that this would by no means be a “bad thing.” Why? Because productivity is the engine of economic progress. And if machines are more productive than people, then policies that prod employers to replace people with machines would mean more wealth without toil for everyone. This is the reverse of the Luddite fallacy that seeks to boost jobs by eschewing labor-saving technologies. Nobel laureate Milton Friedman once heard a Third World bureaucrat, suffering from this fallacy, defend his decision to have poor workers dig a massive canal with shovels rather than earth movers because that meant more jobs. Friedman asked: Why don’t you replace their shovels with spoons?
Increasing productivity is not simply a matter of increasing output, but doing so in the most cost-effective way. You do not encourage that with policies that force investments in capital equipment when labor is plentiful. Indeed, this raises the overall opportunity cost, rendering an economy less efficient. If Friedman were alive, he may well have asked Yglesias why, by his logic, he doesn’t just advocate a ban on all manual labor.
False: Minimum wage hikes helps firms make more money
This claim strains credulity. How would a $15 mandate that almost doubles a company’s labor costs actually boost profits? The argument that former Labor Secretary Robert Reich offers is that higher wages means happier employees and lower turnover, something that saves a company money. If so, the million-dollar question is why aren’t greedy companies doing this already? Are they too stupid or sadistic or both to pass up on a win-win deal for both themselves and their workers?
False: Minimum wage hikes will stimulate the economy
Michael Reich, an economist at the University of California, Berkeley, claims not only that a $15 minimum wage wouldn’t produce job losses in the short run, but would actually stimulate the economy, resulting in job gains in the long run. “They’d (employees) have more money to spend, the overall level of demand for goods and services would be higher, and so would the level of employment,” he claims.
But shifting wealth around doesn’t generate real economic growth. Boosting productivity does. Indeed, ordering employers to give artificial raises means that they would have less money to spend or invest, cancelling out any extra spending by workers.
False: Minimum wage hikes will diminish the strain on welfare programs
Advocates of the minimum wage claim that without a suitably high minimum, low-income workers are forced to rely on food stamps and health care programs to make ends meet. In essence, they argue, welfare programs end up subsidizing McDonald’s low-wage workforce, which is hardly fair to taxpayers. Forcing companies to pay something resembling “living” wages would diminish low-wage workers’ dependence on government programs.
This assumes that boosting the minimum wage would hand more workers a raise than it would throw people out of work, of course — which is hardly a reasonable assumption, as pointed out earlier. Indeed, notesUniversity of California, Irvine’s David Neumark, the probability that a family will escape poverty due to higher wages will be offset by the probability that another will enter poverty because it has been priced out of the labor market.
The core fallacy in this line of reasoning is that employers can set wages based on employee needs rather than market forces. Hence, they can simply be forced to hand over more money to their workers. That, however, is not how things work, especially in a globalized world where forcing employers to cough up wages higher than the market can bear would undermine their competitiveness—not something that helps anyone in the long run.
Thank you so much for your time. I know how valuable it is. I also appreciate the fine family that you have and your commitment as a father and a husband.
Sincerely,
Everette Hatcher III, 13900 Cottontail Lane, Alexander, AR 72002, ph 501-920-5733
There are some Caribbean jurisdictions that are very rich and successful, such as the Cayman Islands. There are others that have middle-of-the-road track records, such as Barbados.
Then there’s the basket case of Haiti.
Here’s data from the World Bank about per-capita economic output, showing how these three jurisdictions compare to both the United States and the world average.
And if you want another perspective, the United Nations’ Human Development Index also shows big gaps (the Cayman Islands is a territory of the United Kingdom rather than an independent nation, so it’s not part of the UN’s dataset).
So why am I citing this data?
Because Lydia Polgreen has a column about Haiti in the New York Times that contains a lot of fascinating history about that unfortunate nation, including the reign of left-wing firebrand Jean-Bertrand Aristide earlier this century.
But I was especially interested in her analysis about the current crisis and what may happen in the future.
Haiti is in free fall. …Gangs, most of which have ties to political and business leaders, have all but shut down Haiti’s economy by cutting off the flow of fuel and food. Hunger is bearing down on many families. Cholera, which once killed around 10,000 people here, is again spreading. …For all its seeming complexity, the current upheaval turns on the same question that has driven almost every crisis on this island for the past 230 years: Who will rule Haiti?…Haiti has long had independence, but where was its true freedom? …What does the world owe Haiti today? First and foremost to leave it alone. To give Haitians the time, space and support to imagine a different future for their own country. ..Over the past dozen years, Haitian politics has grown ever more fractured as the country has been battered by a shattering earthquake and a series of storms and hurricanes. The political scene has been dominated by American-backed center-right leaders… In the absence of a modern industrial economy, the country quickly stratified. There is a mercantile class that makes most of its money importing goods and selling them to everybody else — desperately poor people surviving on subsistence wages and remittances from a thriving diaspora in the United States, Canada, France and beyond. …The first step to helping Haiti fulfill its destiny, to be the independent Black republic its revolution promised, may be for the rest of us to get out of its way.
I’m in favor of Haiti having a stronger and better democracy. That hopefully would lead to improvements in the “rule of law.”
But I fear that Haiti’s economy is mostly being held back by statist economic policy.
The Heritage Foundation’s Index of Economic Freedomranks Haiti a lowly #150 (out of 177 nations), with failing scores in many categories.
The Fraser Institute’s Economic Freedom of the World gives Haiti a somewhat better score (though still a dismal #96 out of 165).
But notice that the nation’s overall level of economic liberty today is lower than it was in the early 2000s, when Aristide was in power.
So if Haiti has been “dominated by American-backed center-right leaders” in recent years, as Ms. Polgreen writes in her column, they obviously are not center-right on economic policy.
The bottom line is that we know the recipe that makes nations economically successful. And we also know that Haiti has not been following that recipe (other than perhaps looking at what works and then choosing the opposite).
So even if the nation somehow achieves perfect democracy, don’t hold your breath expecting a big jump in living standards.
There are certain topics that seem to be slam-dunk wins for those who favor free markets and limited government, and one reason I make this assertion is that folks on the left don’t even bother to make counter-arguments.
Here are just a few examples:
Nobody on the left ever tries to produce an alternative explanation for the IRS data showing that rich people paid a lot more taxafter Ronald Reagan lowered the top income tax rate from 70 percent to 28 percent.
Nobody on the left ever tries to produce an alternative explanation for the success of Switzerland’s spending cap.
Prior to today, I also would have included this example:
Nobody on the left ever tries to produce an alternative explanation for Chile’s amazing jump from poverty to prosperity after the country shifted to pro-market policies such as private social security.
But now I can no longer include Chile’s economic renaissance because I finally found someone who concocted an alternative explanation.
As part of a column in today’s Washington Post about Chile’s upcoming presidential election, Anthony Faiola made this claim about that nation’s economic performance.
After Pinochet’s ruthless rule came to an end in 1990, the newly democratic nation witnessed a historic period of economic growth.Gross domestic product growth between 1990 and 2018 averaged 4.7 percent annually, well above the Latin American average. Over that same period, democratic governments increased social spending. Extreme poverty (below $1.5 per day) was virtually wiped out.
But now let’s consider whether this alternative explanation is accurate.
Mr. Faiola wants readers to believe that the positive developments in Chile (“historic period of growth” and “extreme poverty…was virtually wiped out”) occurred after 1990.
As shown by these two charts, it’s far more likely that the dramatic rise in per-capita economic performance around 1980 is the result of a big increase in economic liberty (as measured by Economic Freedom of the World) that also was occurring around that time.
One should always be careful about interpreting numbers. For instance, national economic data at a given moment in time will be affected when there are periods of global recession, such as the early 1980s and 2008.
Which is why it is important to look at longer periods of time. And when looking at decades of data for Chile, the big jump in prosperity clearly began after the economy was liberalized, not after Pinochet ceded power in 1990.
We’ll close with some bad news and good news.
The bad news, as captured by the bottom-half of the stacked charts abvoe, is that there hasn’t been much pro-market reform in recent decades.
But the good news is that Chile hasn’t deteriorated. The nation has endured some left-leaning governments, but economic freedom has remained high by world standards. Which means the economy continues to grow.
P.S. I’ll add some worrisome news. The left in Chile wants a new constitution that would give politicians more power over the economy. If that effort is successful, I fear the country will suffer Argentinian–styledecline.
P.P.S. I suppose Mr. Faiola deserves some credit for cleverness. Some leftists have tried to argue Chile is a failed “neoliberal experiment.” Given the nation’s superior performance, that’s obviously an absurd strategy. So Faiola came up with a new hypothesis that acknowledges the growth, but tries to convince readers that it’s all the result of things that happened after 1990. He’s wildly wrong, but at least he tried.
P.P.P.S. I have a three-part series (here, here, and here) on how low-income people have been big winners as a result of Chile’s shift to free enterprise.
P.P.P.P.S. Here’s a column on Milton Friedman’s indirect contribution to Chilean prosperity.
The shift toward free markets, which began in the mid-1970s, was especially beneficial for the less fortunate (see here, here, and here).
But it’s quite common for critics to assert that Chile is a bad example because many of the reforms were enacted by General Augusto Pinochet, a dictator who seized power in 1973. And some of those critics also attack Milton Friedman for urging Pinochet to liberalize the economy and reduce the burden of government.
Are these critics right?
To answer that question, I very much recommend the following cartoon strip by Peter Bagge. Published by Reason, it accurately depicts the efforts of reformers to get good reforms from a bad government.
It starts in 1973, with a group of Chilean economists, known as the “Chicago Boys,” who wanted free markets.
In 1975, they invited Milton Friedman to help make the case for economic reform.
This 1982 strip shows some of the controversies that materialized.
But by the time we got to the 21st century, everything Friedman said turned out to be true.
First, I’ll be able to share it with people who want to delegitimize Chile’s transition to a market-oriented democracy (ranked #14 according to the most-recent edition of Economic Freedom of the World). Simply stated, it was bad that Chile had a dictatorship, but it was good that the dictatorship allowed pro-market reforms (particularly when compared to the alternative of a dictatorship with no reforms). And it was great that Chile became a democracy (a process presumably aided by mass prosperity).
Second, we should encourage engagement with distasteful governments. I certainly don’t endorse China’s government or Russia’s government, but I’ve advised government officials from both nations. Heck, I would even give advice to Cuba’s government or North Korea’s government (not that I’m expecting to be asked). My goal is to promote more liberty and it would make me very happy if I could have just a tiny fraction of Friedman’s influence in pursuing that goal.
P.S. Here’s Milton Friedman discussing his role in Chile.
P.P.S. While I disagree, it’s easy to understand why some people try to delegitimize Chile’s reforms by linking them to Pinochet. What baffles me are the folks who try to argue that the reforms were a failure. See, for instance, Prof. Dani Rodrik and the New York Times.
José Niño is a graduate student based in Santiago, Chile. A citizen of the world, he has lived in Venezuela, Colombia, and the United States. He is currently an international research analyst with the Acton Circle of Chile. Follow@JoseAlNino.
EspañolThe power of ideas to help shape political movements has been grossly underestimated over the years. In truth, some of the largest political transformations in human history have come from ideas that were developed in the secluded confines of an intellectual’s home or in obscure academic institutes. Regardless of the origins, ideas can snowball into powerful vehicles of social change.+
As Friedrich Hayek noted in one of his most powerful works, Intellectuals and Socialism,the triumph of socialist ideas can largely be attributed to the ideas first put forward by various intellectuals. They began with relatively well-off intellectuals and then made their way to “second-hand dealers” — journalists, scientists, doctors, teachers, ministers, lecturers, radio commentators, fiction writers, cartoonists, and artists — who then spread those ideas to the masses.+
Intellectuals like Milton Friedman took it upon themselves to reverse this trend and create an environment that was more favorable to free markets. Steadfast in his beliefs in the power of ideas, Friedman knew that big changes usually start out in small venues.+
It was in Chile where Friedman’s vision was first implemented on a large scale. The results were nothing short of spectacular, as Chile was able to escape a veritable economic collapse and experience an unprecedented boom.+
Chile’s economic success was no mere coincidence; it was the product of ideas that Milton Friedman put forward in the 1950s. To understand how such a radical change was brought about, one must first look at the origins of the Chicago Boys, the group of Chilean economists that played a pivotal role in the transformation of Chile’s economy during the 1970s and 1980s.+
The Chicago Boys
Under the tutelage of the United States Agency for International Development (USAID), the University of Chicago signed a modest agreement with the Pontifical Catholic University of Chile in the 1950s to provide a group of Chilean students training in economics.+
In exchange, the University of Chicago would send four faculty members to help the Catholic University build up their economics department. Of these four faculty members, Arnold Harberger would serve as the Chicago Boys’ principal mentor.+
What at first looked liked just another exchange program between universities would play a substantial role in Chile’s economic rise.+
A Country Mired By Statism
At the start of this program, Chile’s economy was in the doldrums. Another victim of Raúl Prebisch’s Import Substitution Industrialization (ISI) policy, Chile had a very loose central banking policy, featured 15 different exchange rates, heavy tariffs, and a number of import and export controls. Subsequent governments maintained the same neo-mercantilist structure up until the 1970s.+
During this era of economic malaise, the Chicago Boys constructed El Ladrillo(The Brick), a text primarily shaped by economist Sergio de Castro which advocated for economic liberalization in all sectors of the Chilean economy. Sadly, this text was largely ignored at that time.+
It wasn’t until the presidency of Salvador Allende that the Chicago Boys’ talents would be desperately needed.+
On the Road to Cuba 2.0
Though democratically elected by a narrow margin in 1970, Salvador Allende was determined to turn Chile into the next Cuba by undermining all of its democratic institutions. Through price controls, arbitrary expropriations, and lax monetary policy, Allende put the Chilean economy on the verge of collapse. By 1973, inflation reached 606 percent and per capita GDP dropped 7.14 percent.+
Under the command of General Augusto Pinochet, the military deposed Allende’s government. Despite this tumultuous change, the military ruler did not have a clear economic vision for Chile.+
Enter Milton Friedman
Milton Friedman’s visit to Chile in March 1975 proved to be quite fateful. Friedman was on a week-long lecture tour for various think thanks. Eventually, Friedman sat down with the general himself for 45 minutes. Right off the bat, Friedman recognized that Pinochet had very little knowledge of economics. After their meeting, Friedman sent Pinochet a letter with a list of policy recommendations.+
Friedman was blunt is his diagnosis of Chile’s economy: for the country to recover, it had to truly embrace free-market measures.+
Ideas Put in Action
Cooler heads prevailed and Pinochet let the Chicago School disciples occupy various posts in the military government. In April 1975, El Plan de Recuperación Económica (The Economic Recovery Plan) was implemented. Soon Chile curbed its inflation, opened up its markets, privatized state-owned industries, and cut government spending. By the 1990s, Chile was experiencing the largest economic boom in its history.+
A principled libertarian, Friedman criticized Pinochet’s repressive political measures. Friedman understood that economic and political freedoms are not mutually exclusive. The principles laid in Friedman’s book Capitalism and Freedom inspired José Piñera, a notable Chilean reformer, to become a part of Chile’s classical liberal revolution.+
Like Friedman, Piñera understood the link between economic and political freedom. This motivated him to help ratify the Chilean Constitution of 1980. The most classically liberal constitution in Latin America’s history, it established the transition towards free elections and Chile’s return to democracy.+
Additionally, Piñera was the architect of Chile’s private social security system that empowered millions of workers and has fostered the growth of an ownership society. This model has been exported to dozens of countries abroad and has served as a market-based alternative to government-run pension systems.+
The “Chilean Miracle” represented the first major triumph against communism during the Cold War. Chile’s classical-liberal revolution subsequently inspired the Thatcher Revolution of 1979 and the Reagan Revolution of 1980. These ideas had resounding effects all over the globe and marked the beginning of the end for Soviet-style models of economic organization.+
There is still much work to do, as the illegitimate children of Marxist and Keynesian thought still run loose these days throughout Latin America. But one thing is absolutely certain: an idea whose time has come is unstoppable.+
RIP Milton Friedman
Milton Friedman is the short one!!!
Milton Friedman’s Free to Choose (1980), episode 3 – Anatomy of a Crisis. part 1
Milton Friedman The Power of the Market 5-5 How can we have personal freedom without economic freedom? That is why I don’t understand why socialists who value individual freedoms want to take away our economic freedoms. I wanted to share this info below with you from Milton Friedman who has influenced me greatly over the […]
Senate Majority Leader Chuck Schumer, D-N.Y., exults at a news conference after Senate passage of the Inflation Reduction Act at the Capitol on Sunday after a marathon session. The entirely party-line vote was 51-50, with the tie-breaking vote being cast by Vice President Kamala Harris. (Photo: Drew Angerer/Getty Images)
As Senate Democrats achieve their goal of jamming through the so-called Inflation Reduction Act, reality is becoming clear: The bill will likely increase near-term inflation, depress household incomes, and produce the long-term deficits that fuel long-term inflation.
Using the Congressional Budget Office’s latest scoring, estimates of the most recent changes, and accounting for very expensive gimmicks, it’s likely that the bill will produce deficits.
The cumulative deficit would be around $52.5 billion over the next four years, at least $110 billion through fiscal year 2031, and more beyond. That would mean adding to near-term and long-term inflationary pressures, in contrast to what proponents such as Sen. Joe Manchin, D-W.Va., claim.
In short, the bill is about as far away from a genuine Inflation Reduction Act as possible. Though it would be harmful under any circumstances, signing it into law during a period of stagflation would be the worst possible timing.
The Inflation Reduction Act utilizes three major sets of common congressional gimmicks to mask its true costs: cherry-picked expiration dates, ignoring net interest costs, and indirect tax burdens.
As one very costly example, the bill would extend for three more years “temporary” Obamacare subsidies that were supposed to expire this year. That brings to mind the wisdom of the late economist Milton Friedman, who once observed, “Nothing is so permanent as a temporary government program.”
Despite the Obamacare subsidies being peddled as temporary, extending them was among the first provisions of the Inflation Reduction Act that Senate Democrats committed to voting for. It just goes to prove something the everyone knows: There are certain taxpayer-funded handouts and giveaways that seem to always get extended in perpetuity.
To keep the reported cost of the provision down, a three-year expansion was chosen because it is what they could afford on paper. However, accounting for political reality, these subsidies will likely cost at least $146.5 billion more than what is being reported through fiscal year 2031.
That would be further compounded by Congress yet again delaying implementation of the Trump-era Medicare rebate rule, a move that shifts federal costs further into the future and arbitrarily reduces the portion of the costs included in the budgetary window. While the future costs would remain real, they would conveniently slip under the radar of the formal score.
Yet another overestimation of savings presented by the bill’s authors is a claim to $204 billion in increased revenues from cracking down on tax fraud.
While increased enforcement activity might result in higher revenue collections, estimates are highly speculative. Because the actual results are so uncertain, such revenues are not included in official cost estimates under the bipartisan scorekeeping guidelines.
The deficits created by the bill, and the fact that they are front-loaded, would increase federal net interest costs by more than $14 billion—a fact that is not reflected in the formal CBO estimates.
In total, the bill would add at least $110 billion to the federal deficit through fiscal 2031.
To put that level of spending in perspective, $110 billion is roughly four-and-a-half times NASA’s annual budget, or nearly the cost of the ships in six U.S. Carrier Strike Groups. In this case, however, the $110 billion will be used to buy more inflation.
When the federal government runs a deficit, it eventually must be paid back. That’s either done through job- and wage-killing taxes or by way of the Federal Reserve printing new money to finance the deficits.
During the height of the COVID-19 pandemic, the Fed financed 56% of new federal debt with trillions upon trillions of newly created dollars. Those dollars devalued paychecks and Americans’ lifetime savings.
When the federal government attempts to print its way out of fiscal irresponsibility, it does so by imposing an inflation tax on every American household.
With that precedent, no one can be certain of how much the federal government will use new taxes or new money creation to cover deficits. The expectation of future money printing causes immediate inflationary pressures as people act now to mitigate such future possibilities.
As such, the deficits created by the Inflation Reduction Act would simply be the newest addition to the current inflation tax.
To add insult to injury, almost every provision of the bill will bleed the bank accounts of American families. Tragically, the deficit- and inflation-increasing aspects of the Inflation Reduction Act are only the beginning of its burdens.
In these provisions we find the third set of gimmicks; namely, indirect tax burdens. Despite President Joe Biden’s assurances, the tax and price-control burdens of the Inflation Reduction Act will fall squarely on families trying to make ends meet.
Companies are combinations of workers, tools, and institutional knowledge that when brought together can produce the goods and services we need and enjoy. As such, companies can’t absorb a tax. They only direct how American households will feel it.
The bill’s business-tax hike will leave companies with no choice but to cut wages, increase consumer prices, or cut future investments in a growing and prosperous economy. The bill’s requirement that the government get a deal on drug prices will simply mean that drug prices will go up for families and that research budgets for new lifesaving drugs will be slashed.
In reality, this bill is a litany of policies aimed at scoring political points that has been recklessly and hurriedly slapped together. If it’s signed into law as expected, long after the press conferences and congressional pats on the back have faded into distant memory, it’s inflationary, tax, and other burdens will continue to haunt every American household.
Have an opinion about this article? To sound off, please email letters@DailySignal.com and we’ll consider publishing your edited remarks in our regular “We Hear You” feature. Remember to include the url or headline of the article plus your name and town and/or state.
Milton Friedman’s FREE TO CHOOSE “How to Stay Free,” Transcript and Video (60 Minutes)
In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount. I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “The Anatomy of a Crisis” and “What is wrong with our schools?” and “Created Equal” and From Cradle to Grave, and – Power of the Market. In this episode “How to Stay Free” Friedman makes the statement “What we need is widespread public recognition that the central government should be limited to its basic functions: defending the nation against foreign enemies, preserving order at home, and mediating our disputes. We must come to recognize that voluntary cooperation through the market and in other ways is a far better way to solve our problems than turning them over to the government.”
— On Mon, 12/6/10, Everette Hatcher <lowcostsqueegees@yahoo.com>wrote:
From: Everette Hatcher <lowcostsqueegees@yahoo.com>
Subject: Vol 10 How to stay Free,Videos and Transcript Free to Choose
To:
Date: Monday, December 6, 2010, 8:50 AM
The Great Depression of the 1930s changed the public philosophy regarding the appropriate role of government in American life. Before the Depression, government was not assumed to have special responsibilities for individual or business welfare. The severity of the economic tragedy of the 1930s resulted in a dramatic change in public attitudes. Many believed the Depression represented a “failure of capitalism.” Because of this alleged failure, government has ever since been expanding its power and the scope of its control. Government growth has resulted in waste, inefficiency, and a loss of personal freedom. Intended to serve the interests of the people, many governmental programs have been revealed to serve primarily the interests of the bureaucrats. Many government programs serve at cross purposes. For example, different agencies attempt, on the one hand, to discourage use of tobacco as potentially dangerous to good health and, on the other hand, to encourage production of tobacco through subsidies to tobacco farmers. The list of government inconsistencies and inefficiencies goes on and on. Dr. Friedman, however, says that there is reason for optimism. Today, he notes, the public is better informed about these matters and is increasingly willing to take a stand against further unnecessary expansion of government services. He suggests the most fruitful approach is to remove discretionary budget power from the government. Friedman favors passage of a Constitutional amendment limiting the government’s budget and forcing government to work within that budget. But this is only the first step. As Dr. Friedman points out, “What we need is widespread public recognition that the central government should be limited to its basic functions: defending the nation against foreign enemies, preserving order at home, and mediating our disputes. We must come to recognize that voluntary cooperation through the market and in other ways is a far better way to solve our problems than turning them over to the government.”
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Milton Friedman makes the point: “If power were really concentrated in monolithic in a few hands, it would be hopeless to reform the system. But because it’s fragmented, because it’s split up, we can see how much waste there is, we can see how inefficient it is, how the left hand seldom knows what the right hand is doing.” IN OTHER WORDS A DICTATOR IS NOT RUNNING THE GOVERNMENT WE HAVE A CHANCE TO CHANGE WHAT IS GOING ON!!!
Volume 10 – How to Stay Free
Transcript:
Friedman: Every day hundreds of people flock to the capital in Washington, D.C. attracted only by power. That power has accumulated here over the past 50 years at the seat of government of the most powerful nation on Earth.
Worker: How do you do? Glad to meet you. How are you? How’s it going? What are you talking about? Guns?
Warren Richardson: Hello, this is Warren Richardson. Oh Mary, yes, what’s on your mind?
Friedman: Warren Richardson makes his living by knowing who has power and influence to trade.
Warren Richardson: I’ll be waiting for you.
Friedman: He’s a lobbyist.
Warren Richardson: Thanks a lot. Bye.
Unidentified Member of the House: The official administration position on this bill, however, is that its consideration would be premature in view of the President’s….
Friedman: He trades with people like these. Members of the House Committee on Agriculture. They make some of the laws and regulations that among other things, control the food we eat. They are elected officials who have the power to spend billions of dollars of our tax money.
Mr. Baldus: It’s all of page two. It takes all of page three.
Friedman: Naturally, lots of people would like to get their hands on that money.
Mr. Baldus: That’s the kind of stuff that ought never go into the statute books. And I think anybody who’s practicing justice court knows it.
Unidentified Member of the House: Bill, the way you get common sense administration is by having common sense administrators. And it seems like there’s more common sense administration in agriculture.
Michael Masterson (Congressional Aide): Access is all important and how you gain access. It used to be there were only a few hundred lobbyists in this town, now we record up to 15,000 lobbyists plus ancillary personnel, secretaries, receptionists and typists and the researchers that go with that. They are calling upon all the law firms imaginable. So there is a tremendous support base out there for the lobbying effort.
Friedman: You don’t have to walk these corridors for very long before you begin to realize that the concentration of power in the hands of a few people, however well intentioned, is a real threat to the freedom of the individual. Of course, Warren Richardson doesn’t see it that way. Over the years he’s successfully lobbied for special interest groups in energy, environment, wages and prices. Today he’s arguing the case for another special interest. The National Action Committee on Labor Law Reform, hoping to swing influence his way.
Warren Richardson: When the bill goes overboard in terms…much, much too far.
Friedman:There’s hardly a time when the corridors of Congressional Office buildings are not peppered with people waiting for their chance to see and influence the elected man at the center of power.
Unidentified Member of the House: Within that legislation for funds for communities of 50,000 and under, the goals of the existing law and certain statutory paperwork requirements are often very unrealistic for smaller communities.
Friedman: The deals made here effect all of us and sometimes in ways we don’t like. But don’t blame the people making the deals. They’re just pursuing their own self-interest which may be as narrow as making a buck or as broad as trying to reform the world. We, the citizens, are to blame because we’ve handed over much of our lives of personal decision making to government. And we now find that was government does severely limits our freedom.
The leather and wood paneled official offices of a Congressman in Washington, D.C. It’s the mecca of those who try for behind the scenes influence. Weaving his way between special interest groups can be tough for a politician. To stay in office he needs votes. To get votes he often has to make deals.
Unidentified Politician: The chances of our party regaining the White House. Republicans. If the President sends the policies to the public …..
Friedman: It’s frequently a frustrating business.
Michael Masterson: When you have people who are coming in not for purposes of debate and dialogue and discussion on something, but merely they demand their special interest or their single issue concern. That’s where it becomes extremely difficult because there might be an equal number on the opposite side of the coin.
Friedman: Every time I come to Washington I’m impressed all over again with how much power is concentrated in this city. But we must understand the character of that power. It is not monolithic power in a few hands like the way it is in countries like the Soviet Union or Red China. It is fragmented into lots of little bits and pieces and with every special group around the country trying to get its hand on whatever bits and pieces it can. The result is that there’s hardly an issue in which you won’t find government on both sides. For example, in one of these massive buildings spread, scattering all through this town filled to the bursting with government employees, so of them are sitting around trying to figure out how to spend our money to discourage us from smoking cigarettes. In another of the massive building, maybe far away from the first, some other employees, equally dedicated, equally hardworking, are sitting around figuring out how to spend our money to subsidize farmers to grow more tobacco. In one building they’re figuring out how to hold down prices, in another building they’ve got schemes for raising prices. The prices the farmers receive or import prices or keeping out cheap foreign goods. We set up an enormous Department of Energy with 20,000 employees to encourage us to save energy. We set up an enormous Department of Environmental Protection to figure out ways to get cleaner air involving our using more energy.
Now, many of these effects cancel out but that doesn’t mean that these programs don’t do a great deal of harm and that there aren’t some very bad things about it. One thing you can be sure of, the costs don’t cancel out, they add together. Each of these programs spends money taken from our pockets that we could be using to buy goods and services to meet our separate needs. All of these programs use very able, very skilled people who could be doing productive things. They, all of them, grind out rules, regulations, red tape, forms to fill-in. I doubt that there’s a person in this country who doesn’t violate one or another of those rules or regulations or laws everyday. Not because he wants to or intends to, but simply because it’s impossible for anybody to know what they all are. Those are the bad things. But there’s something good about this fragmentation of power too. And that is, that it enables us to do something about it.
If power were really concentrated in monolithic in a few hands, it would be hopeless to reform the system. But because it’s fragmented, because it’s split up, we can see how much waste there is, we can see how inefficient it is, how the left hand seldom knows what the right hand is doing.
It wasn’t always like this. The armies of bureaucrats administering our lives making our decisions spending our money, all supposedly for our good. Our nation was founded with something fundamentally different in mind.
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In this episode Milton Friedman makes the point, “From regarding government as a threat to our freedom, we have come more and more to regard government as a benefactor from which all good things flow. We have assigned increasing tasks of great importance to government. We have turned over to government a larger and larger fraction of our income to be spent on our behalf and the results are plain for all the same they are disappointing.”
Pt 2
Almost 200 years ago a remarkable group of men gathered in this room to write a Constitution for the new nation that they had helped to create a few years earlier. They were a wise and learned group of people. They had learned the lesson of history. The great danger to freedom is the concentration of power, especially in the hands of a government. They were determined to protect the citizens of the new United States of America from that danger. And they crafted their Constitution with that in mind. That Constitution has served us well. It has enabled us to preserve our freedom for close on to 200 years. But in the past 50 years, we have been forgetting the lesson that these wise men knew so well. From regarding government as a threat to our freedom, we have come more and more to regard government as a benefactor from which all good things flow. We have assigned increasing tasks of great importance to government. We have turned over to government a larger and larger fraction of our income to be spent on our behalf and the results are plain for all the same they are disappointing. The great expectations have not been achieved and our freedoms have suffered in the process.
Where did it all go wrong? Government began to take an increasing part in our personal affairs nearly 50 years ago. It was 1933, at the lowest point of the worst depression in history. The idea took root that capitalism had failed and that failure was responsible for the human and economic tragedy. In the early 30’s, Franklin Delano Roosevelt and his advisors met here to devise programs to meet the problems of the depression. Their answer was to give central government more power. Out of that beginning came today’s welfare state.
This Empire State Plaza in Albany, NY is a fine example of the difference between public political power and private economic power. It was constructed while Nelson Rockefeller was Governor of the state of New York. The Rockefeller family has spent millions of its private money on good causes. It has endowed universities like my own, at the University of Chicago, financed medical research, reconstructed Williamsburg, yet not all the private money of the Rockefeller family gave them anything like the amount of power that Nelson Rockefeller was able to have as Governor of the State of New York. He constructed monuments like this all over the state, using every expedient he could think of to finance them. When he left office, taxes per persons in New York State were higher than in any other state in the country excepting only Alaska. And there was a monumental debt besides. So much so, that his successor, who had the reputation as a Democratic congressman of being a big spender, had to use his inaugural speech to preach the virtues of austerity and to say the time of wine and roses is over.
Look at this skyline. It’s Chicago and I think it’s very beautiful. Much of it is less than 20 years old. Those tall buildings were built by private enterprise for use by private enterprise. Not by government for use by government bureaucrats. These are productive monuments, not a burden on the taxpayer, a burden that has almost bankrupted New York City. The irony is that for the most part it was good intentions that led us to where we are today, a nation governed by bureaucratic empires. I wonder whether when they built this building, they realized that it was going to come out looking like a fortress. From modest beginnings in 1953, the Department of Health, Education and Welfare has grown into a veritable empire. Only a small part of its total staff is housed in this headquarters building, a mere 2,000 bureaucrats. Its budget is the third largest budget in the whole world exceeded only by the entire budget of the United States and of the Soviet Union. It employs directly 150,000 full time people and the empire it rules employs another million. More than one out of every 100 people in the U.S. works in the HEW empire.
As we have seen in this series, the Department of Health, Education and Welfare is spending increasing amounts of our money each year on health. One effect is simply to raise the fees and prices for medical and hospital services without a corresponding improvement in the quality of medical care that we receive. It is controlling more and more of the food and drugs we buy. In the process, discouraging the development and preventing the marketing of new drugs that could be saving tens of thousands of lives a year. In the field of education the sums being spent are skyrocketing. Yet by common consent, the quality of education is declining. More and more money is being spent and increasingly rigid controls imposed to promote racial integration. Yet our society is becoming more fragmented. In the field of welfare, billions of dollars are being spent each year, yet at a time when the standard of life of the average American is higher than it has ever been in history, the number of people on welfare roles is growing. Social Security, the budget is colossal, yet it is in deep financial trouble. The young complain and with considerable justice about the high taxes they must pay and those taxes are needed to finance the benefits that are going to the old, yet the old complain and also with justice that it is difficult for them to maintain the standard of life that they were led to expect. A system that was enacted to make sure that the old never became objects of charity sees an increasing number of our older folk on the welfare roles. By its own accounting, HEW in one year lost through fraud, abuse and waste and amount of money that would have built well over 100,000 houses costing $50,000 a piece. Little wondered that those initials are increasing coming to stand for “How to encourage waste.”
Martin Anderson: We found in some cities that upwards of 20_25% of all the people currently receiving welfare are either totally ineligible for welfare or are receiving more than they should be receiving. And it appears in looking into this that the main reason for this is not the welfare laws themselves, but the way they are administered. They are administered in a very lax and loose manner. One of the most famous cases, in fact it just happened last week, they arrested a woman in southern California, they referred to her as the Welfare Queen. And over the past six or seven years she has received $300,000 in welfare payments. Which of course is on an after tax basis, so if you put her on a before tax basis, it might be equivalent to over a million dollars in before tax income. And, she and her husband were living in a nice $170,000 home, nice cars, and she used a very simple technique. She just used alias, used false names, and signed up to get countless different welfare agencies and departments and drove around and collected her checks.
Friedman: Something had to be done about this scandalous state of affairs. What better bureaucratic decision than to set up a special department crammed with computers and civil servants all dedicated to tracking down waste using taxpayers money, of course, in the process. $27.5 million in the first year.
When there is a high rate of taxation then you have people cheating on their taxes and you can see that in England today.
Pt 3
As Adam Smith wrote over 200 years ago, in the economic market people who intend to serve only their own private interests are led by an invisible hand to serve public interests where there was no part of their intention to promote. In the political market, there is an invisible hand operating as well. But unfortunately it operates in the opposite direction. People who intend only to serve the public interest are led by an invisible hand to serve private interests that was not part of their intention to promote. The reason is simple, as we have seen in case after case, the general interest is diffused among millions and millions of people with special interest its concentrated. When reformers get a measure through they go on to their next crusade leaving no one behind to protect the public interest. But they do leave behind some money and some power and the special interests that can benefit from that money and from that power are quick to gain it at the expense of most of the rest of us. By now, after 50 years of experience, it is clear that it doesn’t really matter who lives in that house. Government will continue to grow so long as the rest of us believe that the way to solve our problems is to turn them over to government.
Yet there are many people who want to solve their own problems, who want to use their own skills and energy and resources. We found such a person here in southern California.
John McCalm, a fireman, was planning his retirement. He decided to fulfill his life’s ambition, he built his own house with his own hands. He bought a site with a magnificent view, cleared the ground and realized that he was the first man who ever cultivated this land. It made him feel good. He pulled a trailer on to the edge of his plot and moved in with his wife to live there while they worked on the house. He made his own adobe bricks, he planted avocado trees, learned about carpentry and plumbing. It was going well when one day a local official arrived with a warning. It was alright to build a house he said, but it was against regulations to live in the trailer any longer. The McCalms thought that the rules were bureaucratic and foolish and they resented them. They decided to leave the trailer exactly where it was and defy the authorities.
Pat Brennan became something of a celebrity in 1978 because she was delivering mail in competition with the United States Post Office. With her husband she set up business in a basement in Rochester, NY. Soon it was thriving. They charged less than the post office and they guaranteed delivery the same day of parcels and letters in downtown Rochester. There is no doubt now that they were breaking the law as it stood. The post office took them to court. The case against them was simply that they should not be handling letters. The Brennan’s decided to fight and local businessmen provided the financial backing.
Pat Brennan: I think there’s going to be a quiet revolt and perhaps we’re the beginning of it. That you see people bucking the bureaucrats where years ago you wouldn’t dream of doing that because you’d be squelched. Now, with tax revolts and with what we’re doing, people are deciding that their fates are their own and not up to somebody in Washington who has no interest in them whatsoever. So, it’s not a question of anarchy, but it’s a questions of people rethinking the power of the bureaucrats and rejecting it.
Friedman: The Brennan customers were clear about one thing. After all, the Brennan’s service was cheaper than the regular mail.
Thomas O’Donaghue (storekeeper): We’re not sure that they have done anything illegal and I’d like to know more about this and I hope that this gets further into the courts than it has already. And someone will listen to their appeal because when we use the Brennan’s we know for a fact that same day delivery is going to be happening day after day after day, whereas with the other guy, you’re not sure and you’re sure what kind of shape it’s going to get there in. So I am behind the Brennan’s 100% and anything I can do to help them, I will.
Pat Brennan: Well, the questions of freedom comes up in any kind of a business. Whether you have the right to pursue it and the right to decide what you are going to do. There is also the question of the freedom of the consumers to utilize the service that they find is inexpensive and far superior. And according to the federal government and the body of laws called the Private Express Statutes, I don’t have a freedom to start a business and the consumer does not have the freedom to use it. Which seems very strange in a country like this that the entire context of the country is based on freedom and free enterprise.
Friedman: The post office won the case. It went all the way to the State Supreme Court and the Brennan’s were closed down. Put out of the business of delivering mail.
What we’ve been looking at is a natural human reaction to the attempt by other people to control your life when you think it’s none of their business. The first reaction is resentment. The second is to attempt to get around it. And finally there comes a decline in respect for law in general. There’s nothing especially American about this. It happens all over the world whenever some people try to control other people. For example, take a look at what’s happening to the British.
For most of the past century Britain was known throughout the world for the respect which its citizens gave to the law, but no longer. Graham Turner (Author “Business in Britain) Nothing is perfect that we have become in the course of the last ten or fifteen years, a nation of fiddlers. How do they do it? They do it in a colossal variety of ways. Lets take it right at the lowest level. Take a small grocer in a country area, say Devon. Very small turnover. How does he make money? He finds out that by buying through regular wholesalers he’s always got to use invoices. But if he goes to the cash and carry and buys his goods from there, and the profit margin on those goods can be untaxed because the tax inspector simply don’t know he’s had those goods. That’s the way he does it. Then if you take it to the top end, if you take a company director, well there’s all kinds of ways they can do it. They buy their food through the company, they have their holidays on the company, the put their wives as company directors even though they never visit the factory. They build their houses on the company by a very simple device of building a factory at the same time as a house, it goes absolutely right through the range from the ordinary person, the ordinary working class person, doing quite menial jobs right to the top end, businessmen, senior politicians, members of the Cabinet, members of the Shadow Cabinet, they all do it. I think almost everybody now feels the tax system is basically unfair. And, everybody who can tries to find a way around that tax system. Now, once that happens, once there is a consensus that the tax system is unfair, the country in effect becomes a kind of conspiracy. And everybody helps each other to fiddle. You’ve no difficulty fiddling in this country because other people actually want to help you. Now 15 years ago that would have been quite different. People would have said, hey, you know, this is not quite as it should be. So that’s the first reason. A very high level of taxation. But I think personally there’s another fact that comes into it. And that is that over the years we’ve had a huge growth in bureaucracy, government expenditure, cotton wool, if you like, to protect people from the slings and arrow of ordinary life, you know, health service, all kinds of benefits of one sort or another. And I think this comes into the consciousness of people almost a sort of new factor feeling that things don’t quite have the value that they did that money is not a thing of value, if your short you get it from some government body or other
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In this episode Milton Friedman makes the point:
“It will be no easy task to cut government down to size. Today in country after country the strongest special interest has become the entrenched bureaucracy. Whether at the national or at the local level. In addition, each of us gets special benefits from one or another governmental program. The temptation is to try to cut down government at someone else’s expense while retaining our own special privileges. That was a stalemate.”
Ep. 10 – How to Stay Free [4/7]. Milton Friedman’s Free to Choose (1980)
Friedman: Criminal tax evasion in Britain, laws and regulations defied in the U.S. It’s nothing to celebrate. The hopeful thing is that throughout the free world the public is coming to recognize the dangers of big government and is taking steps to control it. But it will be no easy task to cut government down to size. Today in country after country the strongest special interest has become the entrenched bureaucracy. Whether at the national or at the local level. In addition, each of us gets special benefits from one or another governmental program. The temptation is to try to cut down government at someone else’s expense while retaining our own special privileges. That was a stalemate. The right approach is to tackle head on the explosive growth in government spending. Lets give the government a budget the way each of us has a budget. A movement in this direction is already underway in the U.S. with the many proposals for Constitutional Amendments limiting government spending. Several states have already adopted such an amendment. There is strong pressure for a similar amendment at the federal level. Those amendments would force government to operate within a strict budget. Each special interest would have to compete with other special interests for a larger share of a fixed pie instead of all of them being able to join forces at the expense of the taxpayer.
This is an important step, but it is only a first step. No piece of paper by itself can solve our problems for us.
What we need is widespread public recognition that the central government should be limited to its basic functions. Defending the nation against foreign enemies. Preserving order at home. Mediating our dispute. We must come to recognize that voluntary cooperation through the market and in other ways is a far better way to solve our problem than turning them over to the government.
This is where much of the future strength of the United States lies. In places like Utuma, Iowa where ordinary hardworking American people live. People of all economic levels live in Utuma, but there are no extremes of either wealth or poverty. All are part of a community. Each part of which depends on the others for a stable and happy life worth living. This is a kind of community that formed the character of democratic America.
We began this series by stressing two ideas, the idea of human freedom as embodied in Thomas Jefferson’s Declaration of Independence, the idea of economic freedom as embodied in Adam Smith’s Wealth of Nations. Those two ideas working together, came to their greatest fruition here in the heartland of America. But the basic character of the society that they created has been changing as a result of the rise of another set of ideas.
We have forgotten the basic truth that the founders of this country knew so well. That the greatest threat to human freedom is a concentration of power whether in the hands of government or anyone else. Throughout the Western world, more and more of us are coming to recognize the dangers of an over-governed society. But it will take more than a recognition of danger. Freedom is not the natural state of mankind. It is a rare and wonderful achievement. It will take an understanding of what freedom is, of where the dangers to freedom come from. It will take the courage to act on that understanding if we are not only to preserve the freedoms that we have, but to realize the full potential of a truly free society.
Lawrence E. Spivak: Milton, all through your discussions, you hammer away at two things, the theories of Adam Smith on the free market and of Thomas Jefferson on central power. One thing that troubled me a little bit about your discussions is that it seemed to me that you are little bit the way psychoanalysts used to talk about Freud. That you believe they had given us the word and that even thought 200 years have gone by, it was still in the world, that circumstances had not changed the meaning anyway. Are you that fixed about their ideas?
Friedman: There’s a great difference between principles and the application of principles. The application of a principle has to take account of circumstances. But the principles that explain how it is that an automobile operates, are no different from the principles that explain how a horse and buggy operated or how a bow and arrow operated. The principles that Adam Smith enunciated, the philosophy that Thomas Jefferson enunciated, are every bit as valid today as they were then. But the circumstances are different and therefore the applications in many cases are very different. In addition, there has been a great deal of work and study and scholarly activity that has gone on since then. We know a great deal more about the way in which an economy works than Adam Smith knew. He was wrong in many individual details of his theory but his overall vision, his conception of how it was that without any central body planning it, millions of people could coordinate their activities in a way that was mutually beneficial to all of them. That central concept is every bit as valid today as it was then, and indeed, we have more reason to be confident in it now than he had because we’ve had 200 years more experience to observe how it works.
Lawrence E. Spivak: Let’s go back to Jefferson. You say cut the functions of central government to the basic functions advocated by Jefferson which was what? Defense against foreign enemies, preserve order at home, and mediate our disputes. Now, can we do that in the complicated, the complex world we live in today, without getting into very serious trouble.
Friedman: Suppose we look at the activities of government in the complex world of today. And ask to what extent has the growth of government arisen because of those complexities? And the answer is, very little indeed. What is the area of government that has grown most rapidly? The taking of money from some people and the giving of it to others. The transfer area. HEW, a budget 1_1/2 times as large as a whole defense budget. That’s the area where government has grown. Now, in that area, the way in which technology has entered has not been by making certain functions of government necessary, but by making it possible for government to do things they couldn’t have done before. Without the modern computers, without modern methods of communication and transportation, it would be utterly impossible to administer the kind of big government we have now. So I would say that the relation between technology and government has been that technology has made possible big government in many areas, but it’s not required it.
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In this episode Milton Friedman makes the point, “There was no widespread public demand for Social Security programs… it had to be sold to the American people primarily by the group of reformers, intellectuals, new dealers, the people associated with FDR. The Social Security is one of the most misleading programs. It has been sold as an insurance program. It’s not an insurance program. It’s a program which combines a bad tax, a flat tax on wages up to a maximum with a very inequitable and uneven system of giving benefits under which some people get much, some people get little.”
Pt 5
Lawrence E. Spivak: I know, I believe, I say I know, I think I know, but I’ll say I believe that you felt, you blame the government for the Great Depression of 1929 through 1933 and of course, you had to blame FDR for all he did, but most people feel that he saved this free economy of ours.
Friedman: Given the catastrophe of the Great Depression, there is no doubt in my mind that emergency government measures were necessary. The government had made a mess. Not FDR’s government, it was the government that preceded him. Although it was mainly the Federal Reserve System which really wasn’t subject to election. But once FDR came in he did two very different kinds of things.
Lawrence E. Spivak: Well, had the government made a mess by what it did or but by what it didn’t do.
Friedman: By what it did. By it’s monetary policies which forced and produced a sharp decline in the total quantity of money. It was a mismanagement of the monetary apparatus. If there had been no federal reserve system, in my opinion, there would not have been a Great Depression at that time. But given that the depression had occurred, and it was a catastrophe of almost unimaginable kind, I do not fault at all, indeed on the contrary I commend Roosevelt for some of emergency measures he took. They obviously weren’t of the best, but they were emergency measures and you had an emergency you had to deal with. And the emergency measure such as relief programs, even the WPA which was a make work program, these served a very important function. He also served a very important function by giving people confidence in themselves. His great speech about the only thing we have to fear is fear itself was certainly a very important element in restoring confidence to the public at large. But he went much beyond that, he also started to change, under public pressure, the kind of government system we had. If you go beyond the emergency measures to the, what he regarded as reform measures, things like NRA and AAA, which were declared unconstitutional, but then from there on to the Social Security system, to the …
Lawrence E. Spivak: Take the Social Security System for a minute. The people wanted that, they wanted that protection. They were frightened, they wanted welfare.
Friedman: Not at all.
Lawrence E. Spivak: When you said pressure, who, pressure from whom?
Friedman: Pressure from people who were expressing what they thought the public ought to have. There was no widespread public demand for Social Security programs. The demands…….
Lawrence E. Spivak: No demand for welfare with 13 million people …….
Friedman: There was a demand for welfare and assistance I was separating out the emergency measures from the permanent measures. Social Security in the first 10 years of its existence, helped almost no one. It only took in money. Very few people qualified for benefits. It wasn’t an emergency measure. It was a long term measure. And it had to be sold to the American people primarily by the group of reformers, intellectuals, new dealers, the people associated with FDR. The Social Security is one of the most misleading programs. It has been sold as an insurance program. It’s not an insurance program. It’s a program which combines a bad tax, a flat tax on wages up to a maximum with a very inequitable and uneven system of giving benefits under which some people get much, some people get little. So that Social Security….
Lawrence E. Spivak: Would you now abolish Social Security?
Friedman: I would not go back on any of the commitments that the government has made. But I would certainly reform Social Security in a way that would end in its ultimate elimination.
Lawrence E. Spivak: If you’re not afraid then of the free market under any circumstances, where cooperation which you find necessary which you believe all to come, fails to come, where competition becomes so fierce and becomes very frequently corrupt and where, all where it becomes stupid. Take for example what’s happening in today’s market, the conglomerates. Which have been seizing up all sorts of, we happen to live in a hotel that’s run by a conglomerate. Why should ITT, for example, run a hotel and how are you going to stop that.
Friedman: Well in the first place, once again,
Lawrence E. Spivak: Without government, without…..
Friedman: Once again, it’s government measures that have promoted the conglomerates. The only major reason we have conglomerates is because they are a very effective way to get around a whole batch of tax legislation. Let me ask a different question. Who is more effected by government regulations, by government controls?
Lawrence E Spivak: I thought I was supposed to ask the questions. But I was warned that you might turn these on me.
Friedman: Well tell me, whose more effected the big fellow who can deal with it or that have a separated department to handle the red tape, or the poor fellow?
Lawrence E. Spivak: The big fellow can always take care of himself under any system.
Friedman: Right, and therefore he’ll want a system which gives the big fellow the least advantage. And the system under which he can get government to help him out, gives him the most advantage, not the least. You say am I afraid of greed, of lack of cooperation. Of course. But we always have to compare the real with the real. What are the real alternatives? And if we look at the record of history, if we go back to the 19th century which everybody always points to as the era of the robber baron who strode around the land and ground the poor under his heel, what do we find? The greatest outpouring of voluntary charitable activity in the history of the world. This University, this University of Chicago is an example. It was founded by contributions by John D. Rockefeller and other people. The colleges and universities throughout the Midwest. If you go back and ask when was the Red Cross founded, when was the Salvation Army founded, when were the Boy Scouts founded, you’ll discover all of that came during the 19th century in the era of unregulated rapacious capitalism.
Lawrence E. Spivak: I’d like to go back for a minute to the question of conglomerates. Granted that what you say that the government policies concentration on central government if you will, or whatever you want to call it, are responsible for the growth of conglomerates. What would we, what should we do about them now? Government try to undue them? Or should anybody try to undue them?
Friedman: No.
Lawrence E. Spivak: Or should you just let them fail?
Friedman: You should let them fail, of course. I am strongly opposed to government bailing any of them out. You should let them fail. The best things you can do in my opinion, are first to have complete free trade so you can have conglomerates in other countries compete with conglomerates in this country. We may have only two or three automobile companies, but there’s Toyota, there’s Volkswagen, competition from abroad is effective. But in the second place…
Lawrence E. Spivak: When do you say complete free trade you mean all over the world?
Friedman: No sir. I mean the U.S. all by itself unilaterally should eliminate all trade barriers. We would be better off if all the countries did the same.
Lawrence E. Spivak: What do you think would happen if we just did it though?
Friedman: I think we’d be very much better off and a lot others would then follow our example. That’s what happened in the 19th Century when Great Britain in 1846 completed removed, unilaterally, all trade barriers so that…..
Lawrence E. Spivak: You don’t think this country would be flooded with goods of all kinds from all over the world, maybe cheaper in that we wouldn’t have great unemployment in this country?
Friedman: What would the people who sold us goods do with their money? They’d get dollars, what would they do with the dollars? Eat them. If they want to send us goods and take dollars in return, we’re delighted to have them. No. That’s not a problem as long as you have a free exchange rate. Because we cannot export without importing, we cannot import without exporting. You would not have a reduction in employment, what you’d have would be a different pattern of employment. You’d have more employment in export industries and less employment in those industries that compete with import. But go back to conglomerates, Larry for a moment. I just want to ask a very different kind of a question. Conglomerates are not very attractive, I would much rather have a lot of small enterprises. But there’s all the difference in the world between a private conglomerate and a government conglomerate. In general, the government conglomerate can get money from you without your agreeing to give it to him. You and I pay for Amtrak and for the postal deficit whether we use the services of Amtrak or the postal deficit or not. I don’t pay your conglomerate unless I rent one of their apartments. I get something for my money. So bad as private conglomerates are, they’re less bad than one of the alternatives.
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Milton Friedman in this episode makes this point, ” If you compare the conditions of people in a place like Singapore with the conditions of people in a place like Red China, or for that matter, Indonesia, you will see that the economic freedom is a very important component of total freedom”
Pt 6
Lawrence E. Spivak: Milton, suppose I agree with almost everything you say and say it would be wonderful if we … starting from scratch
Friedman:….If you agree with everything I say, you are a unique human being.
Lawrence E. Spivak: I don’t say I do agree, but I said suppose I agree for the sake of argument. We can’t start from scratch. How do we undo what we have done? How would you undo it, not me?
Friedman: That’s the hardest problem and I agree that is the real question. How do we get from where we are to where we want to go? And we can’t get there overnight, we cannot get there by simply eliminating the things that should not have been done. As in the case of Social Security, we have it. And we’ve got to live up to our obligations. So we do have to develop a series of policies which will enable us gradually to move from where we are to where we want to be. The first and most important step in my opinion, is to stop moving in the wrong direction.
Lawrence E. Spivak: Milton, you said a few minutes ago that throughout the free world, the public is coming to recognize the danger of big government and is taking steps to control it. But how with the example of what freedom does before them, how do you explain the new countries that have been coming up, all going in the direction of dictatorship?
Friedman: The climate, the intellectual climate of opinion has an enormous influence on what happens and the popular intellectual attitude within the free countries for the poor countries has been that they have to have centralized government. And that has served the interests of small elite groups within those countries. In one backward country after another what has happened is they’ve gotten their freedom supposedly from colonial rule, you’ve had a small elite take over and they have run that country for their own benefit and at the expense of the poor. It’s a tragedy of the modern era. Change the climate of opinion in the major countries. As the climate of opinion is changing, as the philosophy, the attitude what’s being taught at the universities is different, and you will see that these other countries, these backward countries will follow it and there are, there is some evidence that way. If you look at the countries where the backward countries which are doing best for themselves, they are places like Hong Kong, like Singapore, like Taiwan, like Korea, they’re not free countries in our sense of the term but they have much larger elements of freedom. Much greater scope for individual initiative. Many other countries of the world which have gone much further in the Communist centralized controlled direction.
Lawrence E. Spivak: How, for example, Singapore in Taiwan, have had you say very free economies. Now how do there economies, remain free but their politics and their human freedom is still curtailed. And as I understand in many cases, rather severely curtailed. They don’t have any of the freedoms we have. Press, religion,
Friedman: Economic freedom is a necessary condition for a human, all humans, but it is not a sufficient condition. You can have an economy that is largely free with large elements of restrictions. For example, let me take the American experience before the Civil War. We had a mixture of a largely free economy, with a segment of the population, the slaves, held in the condition of involuntary servitude. But even where you don’t have complete political freedom in the case of a Singapore or a Taiwan, human beings are much freer than they are in those societies where there is no economic freedom either. If you compare the conditions of people in a place like Singapore with the conditions of people in a place like Red China, or for that matter, Indonesia, you will see that the economic freedom is a very important component of total freedom. It’s not something different, it’s not something separate. Economic freedom is part of total freedom and for most people it’s the most important part. Freedom doesn’t mean very much to a starving man. And if a free society could not help the starving man, it would be very difficult for, to remain free very long. That’s why the ability of a free society to improve the lot of the ordinary person is a very, very necessary condition for its remaining free but it’s not the fundamental reason why I want a free society. I want a free society for the human and ethically and moral values that you stressed as pertaining to freedom. Freedom really rests, the value of freedom.
Lawrence E. Spivak: But suppose the moral values mean a lot to me. But, again, as I say, they mean nothing to the man who is hungry. It means absolutely nothing to him. What are you going to…. well do you think it does mean something to him.
Friedman: No. At first I think it means something to many of them. Of course, many men have died for their moral values, have put those moral values much above life itself. But I, you and I are citizens of a free society, will not stand the sight of…
Lawrence E. Spivak: … Well let me put it a different way, suppose you turn and you made a speech to all the people on welfare and you said to them, look there are, freedom is much more important than the welfare money that you are getting. Their ethical concepts, their spiritual things about the, men have died for this things. What if you told them all that and then said and we’re going to withdraw welfare now. What do you think would happen now?
Friedman: Would tell them something else. I would tell them.
Lawrence E. Spivak: I know also what you’d do.
Friedman: I tell them both what I would do and what I would tell them. I would tell them welfare has been corrupting you. Look at what it is doing to you. Look at what it’s doing to your children. You would be far better off in every respect….
Lawrence E. Spivak: But suppose they said to you, I don’t see that at all. Without that welfare we’d be in an awful mess.
Friedman: Your wrong, you wouldn’t be in an awful mess, but I understand your feeling and I do not propose to withdraw assistance from you like that all at once. I think it would be intolerable to throw the millions of people who are now depending on welfare on to the streets. We’ve got to go gradually from here to there. That’s why I proposed a negative income tax as a transitional device. That it would enable us to give help to people who really need help while not at the same time having the kind of mess we have now where most of the benefits go to people who are not but look at the way in which the welfare system has been corrupting the very fabric of our society. We have put people in a trap which is of no part of your own making. I don’t blame them, but they’ve been put in a trap where we are inducing them to become dependents, to become children, not to become independent human beings. The virtue and the desire of freedom is for what people can do with their freedom. Freedom is not an individual value, it’s a social value. A Robinson Caruso on an island, freedom is a meaningless concept to him.
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Milton Friedman says this in the following episode:
I believe that there is a strong enough component of freedom in our society that we will be able to preserve it, that we’re going to turn this trend back, that we are going to cut government down to size, we’re going to lay the ground work for a resurgence for a, a flowering, of that diversity which has been the real product of our free society.
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Pt 7
Lawrence E. Spivak: Milton, how bad is the state of freedom in this country today?
Friedman: It’s a mixed bag. In some areas we have more freedom than we’ve ever had before. In some other areas our freedom has been drastically reduced. Our freedom to spend our own money as we want has been cut sharply. Our freedom to go into whatever occupation we want has been reduced sharply. Our freedom to have various businesses has been reduced sharply. And these restrictions in our economic freedoms have carried over to restrictions on the freedom with which we speak and we talk, the activities we carry on, our attitudes toward governmental officials and all the rest. In those areas, our freedoms have been very seriously restricted.
Lawrence E. Spivak: What about your yourself? You as an individual and we really have to do with, deal with millions of hundreds, two hundred million, two hundred twenty million individuals. What about you? What freedom do you think you’ve lost?
Friedman: Well, I have been a very fortunate individual. I always have…
Lawrence E. Spivak: That sounds like a cop out.
Friedman: No, it’s not a cop out because I’m going to add to it. I’ve always said about the only people who have effective freedom of speech these days in the United States are tenured professors at private universities who are on the verge of retirement or have retired. And that’s been my situation in these recent years. Consider the freedom of, for example, a professor of medicine at any one of our great institutions. He’s almost certainly having his research financed by the Federal Government. Don’t you suppose he’d think two or three times before he gave a lecture on the evils of socialized medicine? Or consider one of my colleagues at the University who happens to be getting grants of money from the National Science Foundation. Do you think he really feels free to speak out on the issue of whether government ought to be financing such research. Of course, you ought not to have freedom without costs. But the costs ought to be reasonable. They ought not to be disproportionate, there’s no businessmen in this country today who can speak out. Why is it, why is it that the businessmen today are so mealy-mouthed in what they say? There are very few of them who are willing to come out and say openly what they believe. Why?
Lawrence E. Spivak: About what?
Friedman: About anything. Take for example the recent attempts by President Carter to impose voluntary wage and price controls. There’s hardly a businessman in this country who doesn’t think it’s terrible. There are only about two or three businessmen who have had the courage to stand up and say something about that. But again, as I say, go to my academic colleagues. Many of them feel as I do that government is devoting altogether too much money. That there’s been altogether too much subsidization of state universities and colleges all along the line. Yet very few of them are willing to speak out.
Lawrence E. Spivak: What about the generation that doesn’t know what freedom is as you knew it, and therefore, doesn’t mind so much what has happened. Just takes for granted what he’s living under now.
Friedman: I think that’s a very real problem. I think we’re living on our inheritance. We have inherited a philosophy and a set of attitudes and they tend to be eroded. People get accustomed to what they know. There’s an enormous tear in the status quote and most people, most of the time, accept the circumstances that are around them. There’s a natural human drive for freedom which always expresses itself. But, its stronger or weaker and I think a great danger in continuing along the path that we’ve been going on is that we will lose still more of our inheritance, still more of our basic values of our basic beliefs in freedom and that we will have still less protest as more and more freedoms are taken away. The real value of freedom is that it provides diversity and diversity is in turn the real protection of freedom. People who like to live in small cities, can live in small cities. People who like the impersonality of the metropolis can live in a metropolis. We have loyalties to our churches, we have loyalties to our universities, to our schools, to our clubs, to our cities, to our states. It’s this diversity. That fact that there isn’t a monolithic conformity imposed on us, that is, the source of protection for our freedom and also the fruit of freedom. It’s because freedom protects diversity, allows, you will remember the phrase when Mao said he was going to allow a 100 flowers to bloom. But of course he didn’t. As soon as people spoke out and 100 flowers bloomed, he cut them off. But it’s the blooming of many flowers, the fact that you have all of these different expressions of people’s individuality and produces the great achievements of civilization and that provides the great hope a protection of our freedom.
Lawrence E. Spivak: Why are you saying that there are pockets of freedom still existing in the countries?
Friedman: As I said before, the picture’s a mixed bag. In certain respects we have more freedom than we’ve ever had, but in other respects we’ve had very much less freedom. Of course there are great pockets of freedom, this is predominantly still a free country. We must not confuse the trend with the situation. We have been moving away from freedom. Our freedom is in jeopardy but by no means has been completely destroyed. I believe that there is a strong enough component of freedom in our society that we will be able to preserve it, that we’re going to turn this trend back, that we are going to cut government down to size, we’re going to lay the ground work for a resurgence for a, a flowering, of that diversity which has been the real product of our free society.
Milton Friedman The Power of the Market 1-5 How can we have personal freedom without economic freedom? That is why I don’t understand why socialists who value individual freedoms want to take away our economic freedoms. I wanted to share this info below with you from Milton Friedman who has influenced me greatly over the […]
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For those interested in this remarkable story of human enrichment, Don Boudreaux and Deirdre McCloskey have must-watch videos on how capitalism enabled (some) nations to escape poverty.
But not everybody understands or appreciates the benefits of capitalism.
MSN has an article, authored by Claire Conway, about new research that ostensibly shows that capitalism has been bad news for people.
…a study recently published in World Development…provided three conclusions. They found that extreme poverty was not, in fact, a normal or universal condition prior to the 19th century. …The second conclusion is that the riseand expansion of capitalism saw a dramatic deterioration in human welfare. …The third conclusion reached is that recovery from this prolonged period of immiseration occurred only recently. Progress in human welfare did not begin until the late 19th century in Northwest Europe and not until the mid-20th century in the global South. Researchers point out that this coincides with the rise of the labor movement, de-colonization, and socialist political parties.
At the risk of understatement, these results are very shocking.
So I tracked down the study, authored by Dylan Sullivan and Jason Hickel, which can be read here. Here are some highlights from the research.
The common notion that extreme poverty is the “natural” condition of humanity and only declined with the rise of capitalism rests on income data that do not adequately capture access to essential goods. Data on real wages suggests that, historically, extreme poverty was uncommonand arose primarily during periods of severe social and economic dislocation, particularly under colonialism. The rise of capitalism from the long 16th century onward is associated with a decline in wages to below subsistence, a deterioration in human stature, and an upturn in premature mortality. ..Where progress has occurred, significant improvements in human welfare began only around the 20th century. These gains coincide with the rise of anti-colonial and socialist political movements.
Yes, shocking results. But, having read the article, they are not accurate results.
Some of the mistakes are fundamental, such as blaming capitalism for bad results under colonialism.
Other mistakes are the result of data manipulation, such as the authors arbitrarily deciding that poverty only exists during times of famine.
But I want to focus on one of the study’s final points, which is that human progress is correlated with the rise of socialism.
Here are some further excerpts from the study.
The European data, then, does not support the standard poverty narrative. …The rise of capitalism, rather than delivering improvements in human welfare, was associated with plummeting wages… Progress did not begin until the 1880s in the European core, and the 20th century in the European periphery…The evidence reviewed here suggests that, where poverty has declined, it was not capitalism but rather progressive social movements and public policies…that freed people from deprivation. …Poverty alleviation and gains in human health have historically been linked to socialist political movements and public action, not to capitalism.
Is this true? Were people in Western Europe just as poor in 1875 as they were in 1575? Or perhaps even worse off? Did living standards only increase after government started to intervene and redistribute?
Let’s go to Our World in Data, operated by Max Roser and his team at Oxford University.
Here’s a chart on major European economies (along with the United States, for the benefit of U.S. readers). As you can see, it does appear that almost all the growth has occurred very recently.
But we just looked at a linear chart, which is considered inferior when measuring and understanding long-run trends.
In other words, Sullivan and Hickel have a very shaky hypothesis that collapses like a house of cards when you examine real-world data.
But we don’t need to rely on numbers from 100 years ago or 200 years ago. My “anti-convergence club” is based on dozens of comparisons over recent decades and in every case we see that market-oriented nations easily out-perform countries with more bigger and more intrusive governments.
The bottom line is that Sullivan and Hickel have no good answer to my never-answered question.
P.S. The authors assert that there’s more statism today than in the 1800s, probably because they are focused on fiscal policy. But that may not be truebecause of big, offsetting improvements in other policy areas.
The funny thing about Brantley calling Mike Huckabee a “tax fugative” is that liberals just can’t have it both ways. They praise Dale Bumpers for raising the state income tax to 7% and they get made when wealthy Arkansans leave the state for places like Texas, Tennessee and Florida that do not have a state income tax. Max, I called you on this before but you keep on doing it over and over. I guess it sounds good to your liberal friends, but being a being a liberal stinks when you run out of other people’s money to spend.
I got a quick response from the person going by the username “Vigilantejustice” and I answered:
“Vigilantejustice” does a great job of showing the difference between the liberal and conservative view concerning the creation of wealth and the use of that wealth.
“So, where did the rich people get it? Oh yeah, subsidies, the political buddy system, outsourcing, lying, cheating, preying on the less fortunate, fraud, their rich parents, and hiding from tax laws.” My view is that people will always act in their self interest and the free enterprise system has been responsible for helping the poor more than any other system. I remember like yesterday when I saw Milton Friedman on the Phil Donahue Show. Donahue had thrown up one of those liberal accusations against the free enterprise system and against the rich people in the USA.
Below is the exchange that I saw that day:
Phil Donahue: When you see around the globe, the mal-distribution of wealth, a desperate plight of millions of people in underdeveloped countries. When you see so few “haves” and so many “have-nots.” When you see the greed and the concentration of power. Did you ever have a moment of doubt about capitalism and whether greed is a good idea to run on?
Milton Friedman: Well first of all tell me is there some society you know that doesn’t run on Greed? You think Russia doesn’t run on greed? You think China doesn’t run on greed? What is greed? Of course none of us are greedy, it’s only the other fellow who is greedy. The world runs on individuals pursuing their separate interests.The great achievements of civilization have not come from government bureaus. Einstein didn’t construct his theory under order from a bureaucrat. Henry Ford didn’t revolutionize the automobile industry that way.In the only cases in which the masses have escaped from the kind of grinding poverty you’re talking about – the only cases in recorded history – are where they have had capitalism and largely free trade.If you want to know where the masses are worst off, it’s exactly in the kinds of societies that depart from that. So that the record of history is absolutely crystal clear that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.
Donahue: But it seems to reward not virtue as much as ability to manipulate the system…
Friedman:And what does reward virtue? You think the Communist commissar rewarded virtue? You think a Hitler rewarded virtue? You think – excuse me – if you’ll pardon me – do you think American Presidents reward virtue ?Do they choose their appointees on the basis of the virtue of the people appointed or on the basis of their political clout ?Is it really true that political self-interest is nobler somehow than economic self-interest ? You know, I think you’re taking a lot of things for granted. Just tell me where in the world you find these angels who are going to organize society for us ? Well, I don’t even trust you to do that.
(also blame Lyndon Johnson and Richard Nixon for appointing the wrong people).As those central banks continued — and in some cases accelerated — their excessive money creation throughout 2021 and into 2022, a global downturn became inevitable. …History shows that high levels of inflation almost always lead to recession …once inflation became apparent central bankers persisted with their earlier course, feeding inflation, rather than starving it. If they had acted earlier, far less drastic treatment would now be required. …there is no way around the harsh reality that the bill is coming due for the last two years of monetary malfeasance.
according to Carney. “In the UK, unfortunately, we’ve also had in the near term the impact of Brexit, which has slowed the pace at which the economy can grow,” Carney said in an interview with BBC Radio 4’s “Today” program on Friday. …“The economy’s capacity would go down for a period of time because of Brexit, that would add to inflationary pressure, and we would have a situation, which is the situation we have today, where the Bank of England has to raise interest rates despite the fact the economy is going into recession.”
Like the Fed, the BoE dramatically expanded its balance sheet starting in the spring of 2020.
He also restored America’s national defenses and reoriented foreign policy, both of which led to the collapse of the Soviet Empire, a stupendous achievement that makes Reagan worthy of Mount Rushmore.
(the so-called Phillips Curve).
The Daily Hatch 