The Laffer Curve charts a relationship between tax rates and tax revenue. While the theory behind the Laffer Curve is widely accepted, the concept has become very controversial because politicians on both sides of the debate exaggerate. This video shows the middle ground between those who claim “all tax cuts pay for themselves” and those who claim tax policy has no impact on economic performance. This video, focusing on the theory of the Laffer Curve, is Part I of a three-part series. Part II reviews evidence of Laffer-Curve responses. Part III discusses how the revenue-estimating process in Washington can be improved. For more information please visit the Center for Freedom and Prosperity’s web site: http://www.freedomandprosperity.org
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After reading Milton Friedman’s book “Free to Choose” in 1980, I had the opportunity in 1981 to hear Arthur Laffer speak about what great economic expansion we were about to have in the USA because of Reagan’s 25% across the board tax cuts on income taxes and sure enough he was right. In fact, our economy expanded so much that the world took notice. Basically from 1980 to 2007 we dropped our top income tax rate from 73% to 39% which is a decrease of 34% and the world saw what we did and followed along. The drop of the industrialized countries during this same time was 26% (from 68% to 42% on average).
Table 42.2
Top Individual Income Tax Rates in the OECD (percent)
Change
Country 1980 1985 1990 1995 2000 2005 2007 1980–2007
Australia 62 60 49 47 47 47 45 17
Austria 62 62 50 50 50 50 50 12
Belgium 76 76 58 61 60 53 53 24
Britain 83 60 40 40 40 40 40 43
Canada 64 57 49 49 48 44 44 20
Czech Rep. n.a. n.a. n.a. 43 32 32 32 11
Denmark 66 73 68 64 59 59 59 7
Finland 68 67 60 57 54 53 52 16
France 60 65 60 62 61 56 49 11
Germany 65 65 53 57 56 44 47 18
Greece 60 63 50 45 43 40 40 20
Hungary n.a. n.a. 50 44 40 38 36 14
Iceland 63 56 40 47 45 39 36 27
Ireland 60 65 58 48 42 42 41 19
Italy 72 81 66 67 51 44 44 28
Japan 75 70 65 65 50 50 50 25
Korea 89 65 64 48 44 39 39 50
Luxembourg 57 57 56 50 47 39 39 18
Mexico 55 55 40 35 40 30 28 27
Netherlands 72 72 60 60 52 52 52 20
New Zealand 62 66 33 33 39 39 39 23
Norway 75 64 51 42 48 40 40 35
Poland n.a. n.a. n.a. 45 40 40 40 5
Portugal 84 69 40 40 40 40 42 42
Slovakia n.a. n.a. n.a. 42 42 19 19 23
Spain 66 66 56 56 48 40 39 27
Sweden 87 80 65 50 55 56 56 32
Switzerland 38 40 38 37 36 34 34 4
Turkey 75 63 50 55 45 40 40 35
United States 73 55 38 43 43 39 39 34
Average 68 64 52 49 47 43 42 26
SOURCE: James Gwartney and Robert Lawson, Economic Freedom of the World (Vancouver: Fraser Institute,
2007), as updated to 2007 by the authors. Data includes the national and average subnational tax rates.
NOTE: n.a. not applicable.
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I know that Max Brantley and many of his friends over the Arkansas Times like to say that the Reagan tax cuts increased the deficit but that clearly is not true.
President Ronald Reagan’s record includes sweeping economic reforms and deep across-the-board tax cuts, market deregulation, and sound monetary policies to contain inflation. His policies resulted in the largest peacetime economic boom in American history and nearly 35 million more jobs. As the Joint Economic Committee reported in April 2000:2
In 1981, newly elected President Ronald Reagan refocused fiscal policy on the long run. He proposed, and Congress passed, sharp cuts in marginal tax rates. The cuts increased incentives to work and stimulated growth. These were funda-mental policy changes that provided the foundation for the Great Expansion that began in December 1982.
Many critics of reducing taxes claim that the Reagan tax cuts drained the U.S. Treasury. The reality is that federal revenues increased significantly between 1980 and 1990:
Total federal revenues doubled from just over $517 billion in 1980 to more than $1 trillion in 1990. In constant inflation-adjusted dollars, this was a 28 percent increase in revenue.3
As a percentage of the gross domestic product (GDP), federal revenues declined only slightly from 18.9 percent in 1980 to 18 percent in 1990.4
Revenues from individual income taxes climbed from just over $244 billion in 1980 to nearly $467 billion in 1990.5 In inflation-adjusted dollars, this amounts to a 25 percent increase.
The Laffer Curve, Part II: Reviewing the EvidenceThis video is second installment of a three-part series. Part I reviews theoretical relationship between tax rates, taxable income, and tax revenue. Part III discusses how the revenue-estimating process in Washington can be improved. For more information please visit the Center for Freedom and Prosperity’s web site: http://www.freedomandprosperity.org.The Laffer Curve, Part III: Dynamic Scoring
Mitt Romney rightly noted, “Milton Friedman understood what, frankly, our president, President Obama, I don’t think has learned even after three years and hundreds of billions of dollars in federal spending,” Mr. Romney said. “And that is: Government does not create prosperity. Free markets and free people create prosperity.”
Here is a fine paper written on Milton Friedman by Stephen Moore:
Milton Friedman, who would have turned 100 on Tuesday, helped to make free markets popular again in the 20th century. His ideas are even more important today.
It’s a tragedy that Milton Friedman—born 100 years ago on July 31—did not live long enough to combat the big-government ideas that have formed the core of Obamanomics. It’s perhaps more tragic that our current president, who attended the University of Chicago where Friedman taught for decades, never fell under the influence of the world’s greatest champion of the free market. Imagine how much better things would have turned out, for Mr. Obama and the country.
Friedman was a constant presence on these pages until his death in 2006 at age 94. If he could, he would surely be skewering today’s $5 trillion expansion of spending and debt to create growth—and exposing the confederacy of economic dunces urging more of it.
In the 1960s, Friedman famously explained that “there’s no such thing as a free lunch.” If the government spends a dollar, that dollar has to come from producers and workers in the private economy. There is no magical “multiplier effect” by taking from productive Peter and giving to unproductive Paul. As obvious as that insight seems, it keeps being put to the test. Obamanomics may be the most expensive failed experiment in free-lunch economics in American history.
Equally illogical is the superstition that government can create prosperity by having Federal Reserve Chairman Ben Bernanke print more dollars. In the very short term, Friedman proved, excess money fools people with an illusion of prosperity. But the market quickly catches on, and there is no boost in output, just higher prices.
Next to Ronald Reagan, in the second half of the 20th century there was no more influential voice for economic freedom world-wide than Milton Friedman. Small in stature but a giant intellect, he was the economist who saved capitalism by dismembering the ideas of central planning when most of academia was mesmerized by the creed of government as savior.
Friedman was awarded the Nobel Prize in economics for 1976—at a time when almost all the previous prizes had gone to socialists. This marked the first sign of the intellectual comeback of free-market economics since the 1930s, when John Maynard Keynes hijacked the profession. Friedman’s 1963 book “A Monetary History of the United States,” written with Anna Schwartz (who died on June 21), was a masterpiece and changed the way we think about the role of money.
More influential than Friedman’s scholarly writings was his singular talent for communicating the virtues of the free market to a mass audience. His two best-selling books, “Capitalism and Freedom” (1962) and “Free to Choose” (1980), are still wildly popular. His videos on YouTube on issues like the morality of capitalism are brilliant and timeless.
In the early 1990s, Friedman visited poverty-stricken Mexico City for a Cato Institute forum. I remember the swirling controversy ginned up by the media and Mexico’s intelligentsia: How dare this apostle of free-market economics be given a public forum to speak to Mexican citizens about his “outdated” ideas? Yet when Milton arrived in Mexico he received a hero’s welcome as thousands of business owners, students and citizen activists hungry for his message encircled him everywhere he went, much like crowds for a modern rock star.
Once in the early 1960s, Friedman wrote the then-U.S. ambassador to New Delhi, John Kenneth Galbraith, that he would be lecturing in India. By all means come, the witty but often wrong Galbraith replied: “I can think of nowhere your free-market ideas can do less harm than in India.” As fate would have it, India did begin to embrace Friedmanism in the 1990s, and the economy began to soar. China finally caught on too.
Friedman stood unfailingly and heroically with the little guy against the state. He used to marvel that the intellectual left, which claims to espouse “power to the people,” so often cheers as states suppress individual rights.
While he questioned almost every statist orthodoxy, he fearlessly gored sacred cows of both political parties. He was the first scholar to sound the alarm on the rotten deal of Social Security for young workers—forced to pay into a system that will never give back as much as they could have accumulated on their own. He questioned the need for occupational licenses—which he lambasted as barriers to entry—for everything from driving a cab to passing the bar to be an attorney, or getting an M.D. to practice medicine.
He loved turning the intellectual tables on liberals by making the case that regulation often does more harm than good. His favorite example was the Food and Drug Administration, whose regulations routinely delay the introduction of lifesaving drugs. “When the FDA boasts a new drug will save 10,000 lives a year,” he would ask, “how many lives were lost because it didn’t let the drug on the market last year?”
He supported drug legalization (much to the dismay of supporters on the right) and was particularly proud to be an influential voice in ending the military draft in the 1970s. When his critics argued that he favored a military of mercenaries, he would retort: “If you insist on calling our volunteer soldiers ‘mercenaries,’ I will call those who you want drafted into service involuntarily ‘slaves.'”
By the way, he rarely got angry and even when he was intellectually slicing and dicing his sparring partners he almost always did it with a smile. It used to be said that over the decades at the University of Chicago and across the globe, the only one who ever defeated him in a debate was his beloved wife and co-author Rose Friedman.
The issue he devoted most of his later years to was school choice for all parents, and his Friedman Foundation for Educational Choice is dedicated to that cause. He used to lament that “we allow the market, consumer choice and competition to work in nearly every industry except for the one that may matter most: education.”
As for congressional Republicans who are at risk of getting suckered into a tax-hike budget deal, they may want to remember another Milton Friedman adage: “Higher taxes never reduce the deficit. Governments spend whatever they take in and then whatever they can get away with.”
No doubt because of his continued popularity, the left has tried to tie Friedman and his principles of free trade, low tax rates and deregulation to the global financial meltdown in 2008. Economist Joseph Stiglitz charged that Friedman’s “Chicago School bears the blame for providing a seeming intellectual foundation” for the “idea that markets are self-adjusting and the best role for government is to do nothing.” Occupy Wall Street protesters were often seen wearing T-shirts which read: “Milton Friedman: Proud Father of Global Misery.”
The opposite is true: Friedman opposed the government spending spree in the 2000s. He hated the government-sponsored enterprises like housing lenders Fannie Mae and Freddie Mac.
In a recent tribute to Friedman in the Journal of Economic Literature, Harvard’s Andrei Shleifer describes 1980-2005 as “The Age of Milton Friedman,” an era that “witnessed remarkable progress of mankind. As the world embraced free-market policies, living standards rose sharply while life expectancy, educational attainment, and democracy improved and absolute poverty declined.”
Well over 200 million were liberated from poverty thanks to the rediscovery of the free market. And now as the world teeters close to another recession, leaders need to urgently rediscover Friedman’s ideas.
I remember asking Milton, a year or so before his death, during one of our semiannual dinners in downtown San Francisco: What can we do to make America more prosperous? “Three things,” he replied instantly. “Promote free trade, school choice for all children, and cut government spending.”
How much should we cut? “As much as possible.”
Mr. Moore is a member of the Journal’s editorial board.
Corrections & Amplifications
“A Monetary History of the United States, 1867-1960” by Milton Friedman and Anna Schwartz was first published in 1963. A previous version of this article said the publication date was 1971.
Nobel Laureate Dr. Milton Friedman discusses the principles of Ronald Reagan during this talk for students at Young America’s Foundation’s 25th annual National Conservative Student Conference
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Passing the Balanced Budget Amendment would be what the founding fathers would have wanted. Look at what my favorite economist once said.
“The amendment is very much in the spirit of the first 10 amendments — the Bill of Rights. Their purpose was to limit the government in order to free the people. Similarly, the purpose of the balanced-budget-and-tax-limitation amendment is to limit the government in order to free the people — this time from excessive taxation.”
“The balanced budget amendment has good aspects, but it is simply not good enough in dealing with fundamental constitutional change for our country.” And thus with that 23-word statement in 1997, Democrat Sen. Robert Torricelli of New Jersey sunk conservative spirits. No longer did the U.S. Senate have the two-thirds it needed to enshrine a fundamental principle of governing into the highest law of the land: that politicians should pay for what they spend.
Controversial, I know. Pfft.
Due to Democrat Torricelli’s jellyfish backbone, the 1997 Balanced Budget Amendment fell one vote short of hitting the needed threshold, which was the same margin of failure as just one year before. And liberals couldnt have been happier. Their penchant for obligating the taxpayers of tomorrow to pay for the spending binges of today remained unbroken.
Not that the dissenting senators worded their objections that way. Nope. To Vermont’s incorrigible leftist Sen. Patrick Leahy, inserting a mechanism into the Constitution that would enable our government’s books to mirror the realities American businesses and families face daily was “bumper sticker politics” and “sloganeering.” The way toward rectifying Uncle Sam’s balance sheet was, according to Leahy, “political courage,” not tinkering with the Constitution. Thirty-three of Leahy’s Democratic colleagues agreed.
Mind-Boggling Debt
Of course, by “political courage,” Leahy didnt mean reforming our insolvent entitlement systems or abolishing many of the improvident, senseless, and unconstitutional government bureaucracies and programs in existence. Nah. He meant tax increases on the rich. You know the drill, people.
Prescience, however, is not a valued commodity in Washington, D.C., as lawmakers pursue policies that are in the best interest of their reelection, not of the republic.
When the balanced budget amendment failed in 1997, the federal deficit stood at just $22 billion and the national debt hovered around 5.5 trillion — meager compared with today’s obscene figures, where we have a deficit topping $1.6 trillion this year alone accompanied by a mind-boggling debt of $14 trillion and growing.
To put our debt in perspective, Kobe Bryant makes $25 million playing for the Los Angeles Lakers. Any guesses on how many seasons Kobe would have to play in order to pay off today’s national debt? How about a whopping 560,000. That’s chilling, and quite frankly, incomprehensible.
Heck, we’ve run deficits in 54 of the last 60 years, as the National Taxpayer Union points out. That’s a figure that would make Keynes himself blink.
Ironically, Leahy was on the right track when he spoke of the need for political courage. This country desperately needs it, but it must manifest itself in the form of politicians who will defend the property rights of all Americans as opposed to the current lawmaking that treats this nation’s treasury as a personal ATM card.
The brute political courage we need is for politicians to plug Congress’s desire to ransack the appropriations process to engineer winners and losers in the marketplace and thus perpetuate a class of constituents whose inspiration to vote is driven by keeping the government gravy train on a track straight to their bank accounts.
Thanks to the midterm elections, the time for real political courage is now: The balanced budget amendment is making a comeback thanks to one veteran and one freshman senator.
“The people are calling for it. They are clamoring for it. They’re demanding it,” said newly elected Utah Sen. Mike Lee, who has 19 of his colleagues, including Jim DeMint and Rand Paul, rallying in support of his balanced budget amendment. “The American people overwhelmingly demand it, and if members of Congress value their jobs, they are going to vote for it,” he told Human Events in an exclusive interview.
Lee’s a Tea Party faithful who believes his job boils down to this bare-bones task: produce a government in the original mold of the Constitution, which is to say, one whose legislative reach is restricted and clearly defined. In other words, a federal government that looks absolutely nothing like what we have today.
Opportune Time Needed
Lee is so intent on getting a vote on his balanced budget amendment that he’s ready to filibuster the vote on whether or not to raise the debt ceiling as a tactical move.
“I can tell you that there are a lot of people who will not even consider it [a vote on the debt limit] without a balanced budget amendment first being proposed by Congress,” he said emphatically.
That’s certainly one approach — to hold the Senate hostage until real, austere statutory spending limits are adopted.
Utah’s senior Sen. Orrin Hatch doesnt see it that way. He’s looking for a vote on his balanced budget amendment too, but at a time believed to be the most opportune for passage. He hasn’t set firm timetables or made any strict demands.
“You have to have a bipartisan vote. You have to have a President that does care, and you have to have a setting in time where people can’t do anything but vote for it,” Hatch explained. “Right now, I don’t think we have that.”
If youre keeping score, the two senators from Utah both have competing balanced budget amendments floating around the Senate. In some ways, these jockeying amendments are a reflection of the Tea Party being a big kid on the block within the GOP.
Hatch, though, has been in the Senate for more than three decades, and is confident that he can get a balanced budget amendment through, which is why he’s taking a softer tone and insisting on waiting for the best moment to accomplish that.
And there’s something to be said for Hatch’s, well, “political,” approach. He’s shepherded the balanced budget amendment since 1982, when it was approved in the Senate, but torpedoed in the House by then-Speaker Tip O’Neill. And, as noted above, Hatch came painstakingly close twice in the Senate, both in 1996 and 1997.
“It’s every bit as difficult now, but it’s important that we bring it up and that we make all the strides we can,” he said.
The long-serving senator has 32 co-sponsors for his bill, including Chuck Grassley of Iowa, who is the ranking member on the Judiciary Committee.
When it comes down to it, both Hatch and Lee’s amendments have the same goal: ending profligate spending. In fact, as Nobel Laureate James Buchanan said, “The balanced budget norm is ultimately based on the acceptance of the classic principles of public finance, meaning that politicians shouldn’t spend more than they are willing to generate in tax revenues, except during periods of extreme and temporary emergency.”
Wait, why is this concept controversial again? Because it handcuffs Big Government believers from exerting influence over our personal decision making, thats why.
Courts Involved
There are notable differences between the balanced budget amendments of Hatch and Lee, which we lay out in detail in the accompanying chart. While Mike Lee would restrict government spending to 18% of the gross domestic product (GDP), Hatch’s limits the figure to 20%. The 40-year average of tax receipts to GDP is around 18%, and Hatch knows this to be the case, but, to quote him, “If you get it too low, then you lose any chance with the Democrats.” And that, right there, encapsulates the internal friction the GOP will face with this budding Tea Party caucus going head-to-head with those who are willing to work with Democrats to deliver a final product.
But there’s more: Hatch’s proposal allows a simple majority vote to waive the balanced budget requirement when there’s a declaration of war or a designated military conflict, whereas Lee’s amendment provides no such exception. His threshold is much higher — a two-thirds vote.
When aren’t we in a military conflict? Lee quips.
There are also differences in the enforcement mechanism. Lee would grant standing in federal court to members of Congress if flagrant violations of the amendment occur. Hatch doesnt want the courts anywhere near enforcement, believing that public pressure placed on politicians instead provides the best form of accountability. Plus, “Who wants the courts doing it?” asked Hatch, alluding to their predilection toward activism.
Lee himself acknowledges that court intervention would be rare, but that the mere possibility that it could occur would add some additional incentive to Congress to make sure that it stays within their restrictions.
So far, so good.
But procedurally, how would our gargantuan budget ever get balanced? We’re dealing with trillions of dollars here, after all, a highly complex web of arithmetic. Congress must make a good-faith effort, say Hatch and Lee, to use the best possible projections of spending and receipts. Even with the accurate projections, economic conditions change throughout the year that may inhibit the Feds’ budget from being balanced, such as underestimating costs, which happens more frequently than not these days. If such a scenario plays out, and a fiscal year does end with a deficit, such spending cuts can be incorporated into the next fiscal year’s budget and make up the difference on the back end. Under both plans, by the way, two-thirds of Congress would be needed to raise taxes, so it would be more likely than not that the budget would be balanced by spending cuts, not tax increases.
Hey, were all game for that.
Naturally, getting a balanced budget amendment adopted as part of the Constitution will not be an easy feat. And not because of the numerical hurdles and multiple steps needed to get any amendment through the Constitution (the process should be difficult). It’s because Democrats will kick and scream over the severe cuts to spending that would ensue after the adoption of a balanced budget amendment.
Heck, Senate Majority Leader Harry Reid and his left-wing posse went apoplectic at a proposed spending reduction of $61 billion over the next seven months, calling it “extreme” and “draconian.” Just $61 billion. Thats it. To realize just how absurd such objections were, $61 billion is only a one-third of the money needed to cover the interest payments for U.S. bondholders this year alone.
Imagine when formal debate begins on the need to cut trillions in spending to rein in our deficit? Democrats may cut off their right arms in protest.
“This is exhibit A for why we need a balanced budget amendment,” responded Lee. “Politicians have reached the conclusion that they are the bad guys unless they say ‘yes’ to more spending, and it’s in light of that aspect of human nature that particularly tends to affect politicians, and that’s why we need a constitutional amendment.”
Unified GOP Caucus
“If this is going to get passed in the next two years,” says Hatch, “President Obama will have to step to the plate. Ultimately you’ll need presidential leadership because everybody knows that you’re not going to get spending under control until we take on entitlements as well. You cannot do it without presidential leadership.”
Remider: There’s always new presidential leadership come 2012. Well, we hope so anyway.
In the end, expect the GOP to have a unified caucus on a merger of the Hatch and Lee balanced budget amendments. It’s hard enough (almost impossible) to get one through when Democrats are in control of the Senate and the presidency, so the Republicans will need a unified front like they’ve had in the past.
A balanced budget amendment restricts the power of lawmakers, and that’s why the left despises it, and will work vigorously to defeat it. Get ready.
In the end, it is exactly what the Constitution needs. And esteemed economist Milton Friedman identified why two decades ago.
Said Friedman: “The amendment is very much in the spirit of the first 10 amendments — the Bill of Rights. Their purpose was to limit the government in order to free the people. Similarly, the purpose of the balanced-budget-and-tax-limitation amendment is to limit the government in order to free the people — this time from excessive taxation.”
If we cannot cut the Welfare State under these distressing economic conditions, then we’ll never do it. Now’s the time.
This week, House Republican freshmen Members held a press conference to discuss the importance of passing a balanced budget amendment to the United States Constitution and how now is the time for a permanent solution to our nation’s spending-driven debt crisis. We need a balanced budget amendment to ensure a prosperous future for our children and grandchildren. It’s the right thing to do.
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Dear Senator Pryor,
Why not pass the Balanced Budget Amendment? As you know that federal deficit is at all time high (1.6 trillion deficit with revenues of 2.2 trillion and spending at 3.8 trillion).
On my blog www.HaltingArkansasLiberalswithTruth.com I took you at your word and sent you over 100 emails with specific spending cut ideas. However, I did not see any of them in the recent debt deal that Congress adopted. Now I am trying another approach. Every week from now on I will send you an email explaining different reasons why we need the Balanced Budget Amendment. It will appear on my blog on “Thirsty Thursday” because the government is always thirsty for more money to spend.
Over and over in the past Milton Friedman pleaded for restraint in our federal spending. Below you will see a fine article supporting the Balanced Budget Amendment and it points out that Friedman favored this mechanism to control our spending.
The question is how to solve our problem of unsustainable debt.
The United States of America is on the road to bankruptcy, with a federal debt of more than $14.2 trillion, almost half of which is owned by foreign countries. (Communist China alone owns fully a quarter of the foreign-held portion). The problem is so well known that it almost came as an anticlimax when Standard & Poor’s recently downgraded U.S. debt from its coveted AAA rating to an unheard-of AA+. As for the budget deficit, it is expected to total $1.3 trillion for this year alone, with tax revenues of about $2.3 trillion and total expenditures of about $3.6 trillion. If a household ran its budget like that, we would say it was headed for a rude shock.
Making matters worse is that our debt is structural rather than cyclical: the federal budget is in deficit both in good economic times and bad. When George W. Bush took office in 2001, the gross federal debt was $5.76 trillion. When he left eight years later, the debt was up to $10.626 trillion, an increase of $607 billion a year. During Barack Obama’s presidency it has risen by $1.7 trillion a year and now almost 40 percent higher than when he took office. Deficits of this size are quite simply unsustainable.
The only way to fix this mess is to radically cut federal spending, cap the budget with pay-as-you-go spending rules, and then enact a balanced budget amendment (BBA).
The most important point is that we need to cut spending, not raise taxes. Total federal spending as a percentage of Gross Domestic Product (GDP) has skyrocketed from around 18 percent, when George W. Bush became president, to more than 25 percent today. This shows that our current deficit problem is entirely due to overspending. If tomorrow we cut spending back to the levels of January 20, 2001, when Bush took office, the deficit would almost disappear.
Then we need to cap and balance the budget, once we’ve cut overall spending back to 2001 levels. To do this effectively, we need to enact a federal BBA to the U.S. Constitution. This amendment should have several features.
First, it should require that the president submit to Congress each year a balanced federal budget with no fiscal gimmicks. Presidential failure to do so would be an impeachable offense. Congress should be constitutionally required to hold a vote in both houses on the president’s proposed budget within three months, with the president and Congress having up to six months to adopt a final budget in any given calendar year (this requirement should be waivable during any time of declared war for up to two years). If they fail to do that, all federal spending except for payments on the debt should be frozen at levels 10 percent lower than in the preceding fiscal year. To help impose this, any one of the several states should have standing to sue in the Supreme Court’s original jurisdiction for enforcement of this requirement.
Second, the BBA should cap federal spending at 18 percent of GDP. A spending cap of this proportion would keep the federal government at the size it was under President Bill Clinton — hardly onerous or severe. The amendment should require a two-thirds vote of both houses of Congress to enact any new taxes or to raise tax rates. Votes to raise the national debt limit should also require a two-thirds majority. These provisions are essential to prevent a BBA from becoming just an excuse to raise taxes.
THE USUAL RESPONSE to calls for such an amendment is that we ought not tamper with the Constitution. Critics of a BBA also claim it is not needed since a majority of Congress could balance the budget today if it really wanted to. There are at least five reasons why those critics are dead wrong.
First, it is a core principle of American constitutionalism that there be no taxation without representation. The American Revolution was fought in part to prevent taxation by a British Parliament in which Americans were not represented. When Congress borrows 40 cents of every dollar it spends, as it is doing today, it passes the burden of paying for current spending on to our children and grandchildren who cannot vote right now — nothing less than taxation without representation.
Second, a core purpose of the Constitution is to protect fundamental principles like freedom of speech and of the press from being whittled away during moments of legislative passion. Exactly the same argument holds true with respect to spending more money than the government collects in tax revenue. Constitutionalizing the balanced budget requirement is as necessary as constitutionalizing the protection of freedom of speech and of the press. This is an argument that was first made more than 30 years ago by Noble Prize laureate Milton Friedman.It is just as true today as it was then.
Third, there is an economic reason why it is easier to assemble lobbies for government spending than it is to assemble a nationwide lobby for a balanced budget. Consider the farm lobby that argues for agricultural price supports, or the AARP that lobbies for benefits for the elderly. It is cheaper and easier for small groups with a shared common interest to lobby Congress than for a large, diffuse majority of the American population to do the same. That’s why the silent majority is silent. A BBA in the Constitution would prevent the special interests from ripping off the children and grandchildren of the silent majority. James Madison wrote in The Federalist No. 51 that the secret of constitutional government was to make ambition counteract ambition. The way to check and balance over-spending is to constitutionalize a pay-as-you-go rule while making tax increases hard to enact.
Fourth, yet another economic reason for a BBA is that it would reduce risk and thereby promote investment. When people are looking for a place to invest, one of their first questions is how risky is the investment and how large is the potential reward. Foreign and American investors since World War II have invested in the U.S. and in its debt because our Constitution of checks and balances makes it hard to do crazy things like nationalize industries or set up a single payer health insurance monopoly.
A BBA would reduce further the risk of investing in the U. S., and that would promote investment and economic growth by constitutionally committing itself not to overspend. The risk of inflationary devaluation of the dollar would thus go way down. This in turn would bolster the dollar as the world’s reserve currency. It would also prevent federal borrowing from crowding out private sector borrowing in the U.S. This would free up a capital for investment in job-creating ventures.
A fifth argument for the BBA paradoxically grows out of one of the arguments commonly made against it: it would be purely symbolic. Or as James Madison would have said, “a mere parchment barrier” against overspending.
This criticism fails for many reasons. A BBA of the kind I argue for would have enforcement teeth. Presidential failure to submit a good-faith balanced budget would be a specific ground for impeachment. Then too, if Congress failed to enact a balanced budget, state governments could sue for an across theboard spending cut of 10 percent.
But suppose Congress wimps out and enacts a BBA without teeth. Would such a symbolic victory be worth anything? The answer again is clearly yes. Almost every state has some form of a balanced budget requirement in its constitution or law. The fact is that balanced budget requirements actually do work at the state level. This strongly suggests they would work at the federal level as well.
CONSTITUTIONAL PROVISIONS, even symbolic ones, set the agenda of political debate. The Second and Tenth Amendments clearly do that in the U.S. today, even though the federal courts almost never enforce them. A BBA would work very much the same way.
The case for a BBA is so powerful that Germany and Switzerland — both models of fiscal sobriety — actually require a balanced budget in their own constitutions. And now Germany and France have actually proposed requiring that all Eurozone countries amend their national constitutions to require a balanced budget. What is good enough for almost every state in the Union and for many countries of Europe is certainly worth trying at the federal level here.
So what harm could come from enacting a BBA to the U.S. Constitution? Is there any argument against such an amendment that outweighs the arguments in favor of it?
One concern conservatives have is that it might lead to tax increases. I share that concern and therefore would couple it with a super-majority requirement for tax increases. That should make a BBA clearly appealing to conservatives of all stripes. But what if such an amendment gets ratified that does not protect against tax increases? Would we then be worse off?
I think the answer is no. It is harder politically for Congress to tax real people living today than it is to borrow money from the children and grandchildren of the silent majority. People living today will mobilize in many ways against tax increases. The correct solution is to cut, cap, and balance, but I would not let concerns about tax increases stop us from doing what virtually every state constitution does.
Another real concern for conservatives is that a BBA could lead to dangerous cuts in spending on national defense. This concern I share. The U.S. is a world leader and the greatest force for liberty and economic opportunity in history. We must always be ready to defend liberty worldwide.
The problem is, however, that current levels of deficit spending — almost half of which is financed by foreign countries — is itself a threat to U.S. global might. We simply cannot defend liberty in Asia, for example, if we continue to borrow massively from the Chinese. We cannot defend freedom in Arab countries while being so dependent on Saudi Arabia and others for imported oil and purchases of our debt. The status quo is at least as threatening to America’s military might as is living under a BBA, for the status quo is not sustainable.
Finally, some conservatives argue that the solution to congressional deficit spending is a line item veto amendment giving the president the same power over spending enjoyed by a majority of state governors. I am quite skeptical about such an amendment because of the enormous power it would shift from Congress to the president. Imagine for a moment that President Obama could threaten senators or representatives with line item vetoes of locally important spending projects unless they voted his way on socialized medicine. Or on a card check law reform making it easy to fraudulently form a union. Do we really want to cede that much power from Congress to the president? I do not think so.
In sum, we need to cut, cap, and balance. To do that permanently, we must enact a BBA. Nothing less than the future of government of the people, by the people, and for the people is at stake.
I know that every President says he believes in freedom but how many have fought hard to protect both our economic and personal freedoms?
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 last 30 plus years. Here is part four which consists of a lively discussion between Friedman and several other interested scholars concerning his film.
To take an example that at first sight seems about as far away as you can get __ the language we speak; the words we use; the complex structure of our grammar; no government bureau designed that. It arose out of the voluntary interactions of people seeking to communicate with one another. Or consider some of the great scientific achievements of our time __ the discoveries of an Einstein or Newton __ the inventions of Thomas Alva Edison or an Alexander Graham Bell or even consider the great charitable activities of a Florence Nightingale or an Andrew Carnegie. These weren’t done under orders from a government office. They were done by individuals deeply interested in what they were doing, pursing their own interests, and cooperating with one another.This kind of voluntary cooperation is built so deeply into the structure of our society that we tend to take it for granted. Yet the whole of our Western civilization is the unintended consequence of that kind of a voluntary cooperation of people cooperating with one another to pursue their own interests, yet in the process, building a great society.DISCUSSIONI’m Linda Chavez. Welcome to Free to Choose. Joining Dr. Friedman in a discussion of the power of the market are David Brooks of the Wall Street Journal, and James Galbraith of the University of Texas at Austin. Dr. Galbraith, should we follow the example of Hong Kong and simply allow an unregulated free market?Galbraith: I think we do better in this country whereas the combination of a free market and its advantages, and a well regulated, carefully thought out structure of government, which provides a chance to pick up some of the losers from the market process and give them a second start. It provides us with a chance to make the economic process a little safer, a little healthier, a little more environmentally sound and protective, than you might get from a strict adherence to the free market such as Professor Friedman has described in the case of Hong Kong.Chavez: Dr. Friedman, is there any such thing as a well-regulated market?Friedman: No. He is begging the question. Obviously he is right. If you could have a well-regulated, carefully thought out, properly done market, benevolent dictatorship is the best of all forms of government.
Galbraith: Oh, I don’t agree with that at all.
Friedman: Neither do I.
Galbraith: Constitutional democracy is the best of all forms of government.
Friedman: No. Constitutional democracy is the least bad of all forms of government. But you beg all the questions when you talk about well-regulated, carefully thought out __ if you look at the actual programs that governments follow, they most always have effects that are the opposite of those that were intended by their well-meaning advocates.
Galbraith: Let me tell you what troubles me.
Friedman: I will tell you something. Matching the invisible hand of the market is the invisible foot of government.
Galbraith: You make the point in the program that in every case where you have a smaller role of government and a freer market, you have a higher standard of living.
Friedman: No. I didn’t say that. I didn’t say that. I said there are better conditions for the poorer people.
Galbraith: Okay. Better conditions for the poorer people. Fine, I will accept that. At the same time you are making the argument in the program that the conditions in Hong Kong are better, for example, than in the United States, which is manifestly not true. You are making the argument that Hong Kong is more free than we are.
Friedman: It is more free.
Galbraith: Does it then follow that the conditions for poor people in Hong Kong are better than they are in the United States? That I don’t believe is true.
Friedman: I said in there where you compare like with like.
Galbraith: Okay this is an important qualification.
Friedman: Hong Kong obviously started out from a much lower position. If I were to compare conditions in Hong Kong in 1945 or 1950 with conditions in the United States in 1820 or 1830, you would have a much closer comparison.
Galbraith: Are you then saying, a position which I would find much more congenial, that where you have a country which has developed a base of material wealth, a degree of comfort for the average citizen, that it is then legitimate for the government of that country to step in and provide some guarantees and some security for poor people and old people.
Friedman: No. I am not saying that at all. Every time they step in and try to do that, they end up doing the opposite.
Galbraith: This discussion reflects a feature of the program that I found to be most troubling which is the failure to make a distinction between governments of the kind that we have developed in this country over 200 years, and governments of the kind that you described in the People’s Republic of China. It’s perfectly clear that one can have, and many countries do have, the curse of repressive dictatorships. It is also perfectly clear that an economy that is organized by Commissars is going to fail. We have certainly seen laid out before us over the last several years, the ashes of those failed economies. But is it possible to take the example of the Soviet Union, Poland, Hungary, and to say that because their governments, which were after all dictatorships modeled after the system of government installed in the Soviet Union by Stalin, are in fact parallel to the actions of our government which is a government which operates on many different federal levels, and where fundamentally what you have is the ability of the ordinary citizen whose power is not weighted by the amount of money he or she has, to use the vote in order to make some collective decisions. Granted, after ten years of Reagan’s Washington, you’ve got a serious problem of corruption. Does that mean we should abandon the idea that you have a democratic process that should be entrusted with certain important decisions __ I don’t think so.
Friedman: You don’t have a democratic process in the sense in which you mean it. We have a democracy. We have a majority rule, but the majority that rules is a collection of minorities. It is a collection of special interests. You cannot tell me that the consumers in this country would vote for a sugar quota that makes the price of sugar three times the world price. When you say you can’t compare it to Russia, you are quite right, but only because they are 100% and we are 50%. If our system, if our present regulations and rules had prevailed, our scope of government had prevailed 100 years ago, we wouldn’t be where we are today.
Chavez: Let me understand you Dr. Friedman. Do you believe that there should be no role at all, whatsoever, for government?
Friedman: Of course there should be a role for government __ a very important role for government.
Chavez: What is that role?
Friedman: The role for government is first of all, to protect people from physical coercion by their neighbors or by foreign countries, that is to protect the national defense and to protect law and order at home. There is a role for government enabling us to have a mechanism whereby we decide on the rules which we want to run, how we define private property, what we mean by private property. There is a role for government in adjudicating disputes between us. There is a role for government. A very important role and I believe our government played that role quite well for about 100 years until the Great Depression.
Brooks: I would go a little further. I think there is a health and safety role as well. The problem is that you have to keep your regulations simple and minimal. You have to realize that there are costs and often the costs outweigh the benefits. In fact, in Washington there are interests who want to divert costs to themselves, so there is sort of a built in structure, a dynamic to make costs outweigh the benefits.
Galbraith: We are making progress here. I would add that the government has a role to protect the environment. I would say the government has a role to set standards for products, where information is very costly for the individual consumer to obtain. I like very much the fact that the steaks that the dentist was eating were inspected by the USDA. Their purity was guaranteed by a rather well-functioning aspect of our government.
Brooks: On the other hand, you have the FDA which has these long delays, 10 years to get a drug approved so that the effect is that you have to be a big drug company to get any kind of dent of the market. Basically you are closing off the market.
Galbraith: On the other hand, you have had a set of regulations which have disappeared without any well-justified regrets. For example, the regulations that govern the entry into interstate trucking; the regulations that govern entry and rates in the airlines.
Friedman: Don’t tell me that that was done under the Reagan administration.
Galbraith: Oh no. Those reforms were done under the Carter administration.
Brooks: There is no doubt that Carter did the heavy lifting on deregulation.
___________
Thank you so much for your time. I know how valuable it is. I also appreciate the fine family that you have and your committment as a father and a husband.
Sincerely,
Everette Hatcher III, 13900 Cottontail Lane, Alexander, AR 72002, ph 501-920-5733, lowcostsqueegees@yahoo.com
My hero Milton Friedman was a big supporter of the Balanced Budget Amendment and in an article on this subject in 1983 he wrote:
“The key problem is not deficits but the size of government spending. […] I have never supported an amendment directed solely at a balanced budget. I have written repeatedly that while I would prefer that the budget be balanced, I would rather have government spend $500 billion and run a deficit of $100 billion than have it spend $800 billion with a balanced budget. It matters greatly how the budget is balanced, whether by cutting spending or by raising taxes.”
As a member of the Conservative Action Project, CEO Susan Carleson and leaders of 28 other organizations, representing a broad cross section of the conservative movement, are united in supporting a Balanced Budget Amendment that actually reins in national spending and increasing our national debt – without raising taxes.
MEMO FOR THE MOVEMENT: A Balanced Budget Amendment — in addition to balancing the budget — should make it difficult to raise taxes, tough to increase the debt, and prohibit any court from ordering a tax increase or deciding budget priorities.
“I wish it were possible to obtain a single amendment to our Constitution. I would be willing to depend on that alone for the reduction of the administration of our government; I mean an additional article taking from the Federal Government the power of borrowing.”
Thomas Jefferson, 1798
RE: In accordance with the Budget Control Act of 2011, sometime between October 1 and December 31, 2011 both houses of Congress must vote on a balanced budget amendment (BBA) to the U.S. Constitution. It is important that any such amendment must protect taxpayers by not forcing automatic tax increases to keep revenues in line with rising expenditures. Our fiscal problems are caused not by under taxation–but by over-spending.
ISSUE-IN-BRIEF: Not all balanced budget Amendments were created equal. The most comprehensive BBA proposed is S.J. Resolution 10 co-sponsored by all 47 Republican members of the United States Senate. It caps spending at 18% of GDP; requires a 2/3 vote of congress to raise taxes; requires a 3/5 vote of congress to increase the debt ceiling; and prohibits any court from ordering an increase in taxes. Proposed BBA’s that do less can have the unintended effect of managing a tax increase instead of limiting spending and would be counter-productive and must be opposed.
A STRONG BBA MUST BE EASY TO UNDERSTAND AND NOT HAVE LOOPHOLES:
Require a Balanced Budget every year: The federal debt is on track to consume our country’s entire Gross Domestic Product. The BBA would force Washington to live within its means.
Prohibit Perpetual Deficit Spending: Deficit spending is a tax on future earnings.
A debt ceiling will actually be a ceiling: The debt ceiling has been raised 11 times in the past decade. S.J. 10–co-sponsored by 47 members of the U.S. Senate– would require a three-fifths majority in both chambers to raise the debt ceiling. This is also an important provision to prevent cheating and other budget gimmicks because actual spending cannot exceed actual revenue for long without hitting the debt limit.
Congress may waive BBA requirement by simple majority if a declaration of war is in effect; and it would require a three-fifths majority to waive if the country is engaged in a military conflict that causes an imminent and serious military threat to our national security.
Courts setting any budget priorities would be a problem. Court-ordered military cuts or activist “declaratory judgments” requiring increased welfare spending would also be intolerable. S.J. 10 can be improved with an explicit ban on courts exercising jurisdiction on any of these essential political questions.
A “Weak” BBA will increase the size of Government and pave the way for Tax Increases:
Unlike other proposals, such as a “Weak” BBA, not only should a BBA have a supermajority requirement to raise taxes, there should be no loopholes for creative accounting.
Without a limitation on tax increases and a specific prohibition on courts ordering revenue increases a “Weak” BBA would allow judges the power to implement higher taxes to bring the budget into balance.
A “Weak” BBA would allow a simple majority of Members of Congress to raise the federal debt ceiling and continue to borrow against future generations. That’s why there is a three-fifths majority requirement to raise the debt ceiling in S.J. 10
Why the Tax Hike Limitation Component is Important to any BBA:
“The key problem is not deficits but the size of government spending. […] I have never supported an amendment directed solely at a balanced budget. I have written repeatedly that while I would prefer that the budget be balanced, I would rather have government spend $500 billion and run a deficit of $100 billion than have it spend $800 billion with a balanced budget. It matters greatly how the budget is balanced, whether by cutting spending or by raising taxes.”
Americans Support a Balanced Budget Amendment:
Americans have always overwhelmingly support a balanced budget amendment. A Fox News poll (June 30), shows support is 72-20.
On Message, Inc., on behalf of Let Freedom Ring, shows 81% of the American people (including 74% of Democrats) support Congress balancing their budget every year. In addition 66% of Americans favor capping federal spending at the historically average 18% of GDP.
“Of course, the best way to permanently reduce spending would be to enact a balanced-budget amendment to the Constitution requiring a supermajority in both houses of Congress to run an annual deficit, raise tax rates, or increase the debit ceiling.”
James A. Baker III, Ronald Reagan’s Secretary of the Treasury from 1985-1988
Stephen Moore in the Wall Street Journal rightly noted:
In the 1960s, Friedman famously explained that “there’s no such thing as a free lunch.” If the government spends a dollar, that dollar has to come from producers and workers in the private economy.
Milton Friedman was my favorite economist and Ronald Reagan was my favorite President. I wish people would grasp the fact that there is no free lunch today. Here is a great article that described Milton Friedman. Ronald Reagan sought to put Friedman’s philosophy into practice in his eight years in office and as a result we had the biggest great in our economy in the history of our country.
Four days ago, The Wall Street Journal published an outstanding article by Stephen Moore titled, The Man Who Saved Capitalism. One of the reasons President Reagan’s economic policies were so successful was because he relied upon the advice and wisdom of Milton Friedman. The entire article is worth reading. I am convinced liberals will never understand the genius of Friedman. If you ever want to have some fun, look up the numerous YouTubes of Friedman eviscerating the brightest of liberals. Here are some excerpts of Moore’s excellent article (also, see a great video at the WSJ URL):
It’s a tragedy that Milton Friedman—born 100 years ago on July 31—did not live long enough to combat the big-government ideas that have formed the core of Obamanomics. It’s perhaps more tragic that our current president, who attended the University of Chicago where Friedman taught for decades, never fell under the influence of the world’s greatest champion of the free market. Imagine how much better things would have turned out, for Mr. Obama and the country.
Friedman was a constant presence on these pages until his death in 2006 at age 94. If he could, he would surely be skewering today’s $5 trillion expansion of spending and debt to create growth—and exposing the confederacy of economic dunces urging more of it.
In the 1960s, Friedman famously explained that “there’s no such thing as a free lunch.” If the government spends a dollar, that dollar has to come from producers and workers in the private economy. There is no magical “multiplier effect” by taking from productive Peter and giving to unproductive Paul. As obvious as that insight seems, it keeps being put to the test. Obamanomics may be the most expensive failed experiment in free-lunch economics in American history.
Equally illogical is the superstition that government can create prosperity by having Federal Reserve Chairman Ben Bernanke print more dollars. In the very short term, Friedman proved, excess money fools people with an illusion of prosperity. But the market quickly catches on, and there is no boost in output, just higher prices.
. Small in stature but a giant intellect, he was the economist who saved capitalism by dismembering the ideas of central planning when most of academia was mesmerized by the creed of government as savior.
[…]
More influential than Friedman’s scholarly writings was his singular talent for communicating the virtues of the free market to a mass audience. His two best-selling books, “Capitalism and Freedom” (1962) and “Free to Choose” (1980), are still wildly popular. His videos on YouTube on issues like the morality of capitalism are brilliant and timeless.
In the early 1990s, Friedman visited poverty-stricken Mexico City for a Cato Institute forum. I remember the swirling controversy ginned up by the media and Mexico’s intelligentsia: How dare this apostle of free-market economics be given a public forum to speak to Mexican citizens about his “outdated” ideas? Yet when Milton arrived in Mexico he received a hero’s welcome as thousands of business owners, students and citizen activists hungry for his message encircled him everywhere he went, much like crowds for a modern rock star.
Once in the early 1960s, Friedman wrote the then-U.S. ambassador to New Delhi, John Kenneth Galbraith, that he would be lecturing in India. By all means come, the witty but often wrong Galbraith replied: “I can think of nowhere your free-market ideas can do less harm than in India.” As fate would have it, India did begin to embrace Friedmanism in the 1990s, and the economy began to soar. China finally caught on too.
Friedman stood unfailingly and heroically with the little guy against the state. He used to marvel that the intellectual left, which claims to espouse “power to the people,” so often cheers as states suppress individual rights.
[…]
He loved turning the intellectual tables on liberals by making the case that regulation often does more harm than good. His favorite example was the Food and Drug Administration, whose regulations routinely delay the introduction of lifesaving drugs. “When the FDA boasts a new drug will save 10,000 lives a year,” he would ask, “how many lives were lost because it didn’t let the drug on the market last year?”
He supported drug legalization (much to the dismay of supporters on the right) and was particularly proud to be an influential voice in ending the military draft in the 1970s. When his critics argued that he favored a military of mercenaries, he would retort: “If you insist on calling our volunteer soldiers ‘mercenaries,’ I will call those who you want drafted into service involuntarily ‘slaves.'”
By the way, he rarely got angry and even when he was intellectually slicing and dicing his sparring partners he almost always did it with a smile. It used to be said that over the decades at the University of Chicago and across the globe, the only one who ever defeated him in a debate was his beloved wife and co-author Rose Friedman.
The issue he devoted most of his later years to was school choice for all parents, and his Friedman Foundation for Educational Choice is dedicated to that cause. He used to lament that “we allow the market, consumer choice and competition to work in nearly every industry except for the one that may matter most: education.”
As for congressional Republicans who are at risk of getting suckered into a tax-hike budget deal, they may want to remember another Milton Friedman adage: “Higher taxes never reduce the deficit. Governments spend whatever they take in and then whatever they can get away with.”
No doubt because of his continued popularity, the left has tried to tie Friedman and his principles of free trade, low tax rates and deregulation to the global financial meltdown in 2008. Economist Joseph Stiglitz charged that Friedman’s “Chicago School bears the blame for providing a seeming intellectual foundation” for the “idea that markets are self-adjusting and the best role for government is to do nothing.” Occupy Wall Street protesters were often seen wearing T-shirts which read: “Milton Friedman: Proud Father of Global Misery.”
The opposite is true: Friedman opposed the government spending spree in the 2000s. He hated the government-sponsored enterprises like housing lenders Fannie Mae and Freddie Mac.
In a recent tribute to Friedman in the Journal of Economic Literature, Harvard’s Andrei Shleifer describes 1980-2005 as “The Age of Milton Friedman,” an era that “witnessed remarkable progress of mankind. As the world embraced free-market policies, living standards rose sharply while life expectancy, educational attainment, and democracy improved and absolute poverty declined.”
Well over 200 million were liberated from poverty thanks to the rediscovery of the free market. And now as the world teeters close to another recession, leaders need to urgently rediscover Friedman’s ideas.
I remember asking Milton, a year or so before his death, during one of our semiannual dinners in downtown San Francisco: What can we do to make America more prosperous? “Three things,” he replied instantly. “Promote free trade, school choice for all children, and cut government spending.”
Mark Levin interviews Senator Hatch 1/27/2011 about the balanced budget amendment. Mark is very excited about the balanced budget amendment being proposed by Senator Orin Hatch and John Cornyn and he discusses the amendment with Senator Hatch. Senator Hatch explains the bill it’s ramifications and limitations. Senator Hatch actually worked on this bill with renowned economist Milton Friedman. This ammendment is the first big step in saving our country.
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I really wish we would restraint the growth of the federal budget and the only way to do that is to pass the Balanced Budget Amendment. My favorite economist was Milton Friedman and he discusses that below:
Yesterday, I did a twenty minute interview by phone with Milton Friedman. Of course, Mr. Friedman has an INCREDIBLE resume. He won the 1976 Nobel Memorial Prize for economic science, won the “Presidential Medal of Freedom in 1988 and received the National Medal of Science the same year”.
He was also an “economic adviser to Senator Barry Goldwater in his unsuccessful campaign for the presidency in 1964, to Richard Nixon in his successful 1968 campaign, to President Nixon subsequently, and to Ronald Reagan in his 1980 campaign.”
There is much, much, more I could add. But I think the fact that Mr. Friedman finished in a tie for the 15 slot when RWN had conservative bloggers select, “The Greatest Figures Of The 20th Century gives you some idea of Mr. Friedman’s stature.
Enjoy the interview!
John Hawkins:Slate’s Chris Suellentrop has pointed out that Howard Dean has said “that he would demand that other countries adopt the exact same labor, environmental, health, and safety standards as the United States” if they wanted trade agreements with us (Dean said something similar to the WAPO). If that policy were ever implemented, what sort of damage do you think it would cause to the US economy?
Milton Friedman: I think it would cause immense damage, not to the US economy, but to other economies around the world — much more to the others than to us.
John Hawkins: Really? So you don’t really think it would hurt the US economy that much?
Milton Friedman: It would hurt the US economy, but it would be disastrous for the countries that are smaller than we are. World trade depends on differences among countries, not similarities. Different countries are in different stages of development. It is appropriate for them to have different patterns, different policies for ecology, labor standards, and so forth.
From my point of view, we in the United States have gone overboard in respect to the extent of regulation and detailed control of labor standards, industry, and the like. It’s bad for us, but fortunately we had two hundred years of relatively free development to provide a strong basis to sustain the cost. But to impose this on other countries that are not at that stage would be a disgraceful thing to do.
John Hawkins: Because it would keep them from ever getting to the point we’re at?
Milton Friedman: That’s right.
John Hawkins: Do you think George Bush, with the economy being as it was, did the right thing by cutting taxes?
Milton Friedman: I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible. The reason I am is because I believe the big problem is not taxes, the big problem is spending. The question is, “How do you hold down government spending?” Government spending now amounts to close to 40% of national income not counting indirect spending through regulation and the like. If you include that, you get up to roughly half. The real danger we face is that number will creep up and up and up. The only effective way I think to hold it down, is to hold down the amount of income the government has. The way to do that is to cut taxes.
John Hawkins: Now let me ask you about that. In the Reagan years, we cut taxes and it ended up leading to economic growth which increased the amount of revenue that came into the government.
Milton Friedman: Well, economic growth will inevitably increase the amount of revenue coming into the government. But so far as the Reagan years were concerned, we have to be careful there. There were initial cuts in 1981-1982 and then there was a very good income tax law in 1986. But in between that, there were increases in taxes as well. So it’s not an entirely clear picture that you can attribute the growth in revenue entirely to the tax reductions. But it’s a hard thing to disentangle the effects of several things happening at the same time. In particular, there’s no doubt that growth is very favorable to government revenue.
John Hawkins: Well let me ask you a related question about holding down the deficit. Really, I’m not seeing much political will on either side of the aisle to hold down costs. Do you think we should consider a Balanced Budget Amendment?
Milton Friedman: What we should consider and what has been considered is a Tax And Spending Limitation Amendment, an amendment to hold down total spending. I don’t think it needs to be in the form of a Balanced Budget Amendment, but that’s one form it can take.
John Hawkins: So would you favor for example a 3/5th’s majority to raise taxes like they suggested in the “Contract with America”?
Milton Friedman: Yes, but the example that comes to mind really is the Colorado Tax And Expenditure Limitation Amendment that requires the spending to increase no more from year to year than population and inflation. Also, it requires that any revenues in excess of spending have to be returned to the taxpayers.
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 know that you have expressed how much you desire as President to protect our freedoms. I wanted to share this info below with you from Milton Friedman who has influenced me greatly over the last 30 plus years.
Two hundred years ago in Scotland, Adam Smith taught at the University of Glasgow. His brilliant book, The Wealth Of Nations, was based on the lectures he gave here.The basic principles underlying the free market, as Adam Smith taught them to his students in this University, are really very simple. Look at this lead pencil, there is not a single person in the world who could make this pencil. Remarkable statement? Not at all. The wood from which it’s made, for all I know, comes from a tree that was cut down in the State of Washington. To cut down that tree, it took a saw. To make the saw, it took steel. To make the steel, it took iron ore. This black center, we call it lead but it’s really compressed graphite, I am not sure where it comes from but I think it comes from some mines in South America. This red top up here, the eraser, a bit of rubber, probably comes from Malaya, where the rubber tree isn’t even native. It was imported from South America by some businessman with the help of the British government. This brass feral __ I haven’t the slightest idea where it came from or the yellow paint or the paint that made the black lines __ or the glue that holds it together. Literally thousands of people cooperated to make this pencil. People who don’t speak the same language; who practice different religions; who might hate one another if they ever met. When you go down to the store and buy this pencil, you are, in effect, trading a few minutes of your time for a few seconds of the time of all of those thousands of people. What brought them together and induced them to cooperate to make this pencil? There was no Commissar sending out orders from some central office. It was the magic of the price system __ the impersonal operation of prices that brought them together and got them to cooperate to make this pencil so that you could have it for a trifling sum.That is why the operation of the free market is so essential. Not only to promote productive efficiency, but even more, to foster harmony and peace among the peoples of the world.These people are crossing between two very different societies. This is Lo Wool, the official border crossing point between China and Hong Kong. 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 of the border, people are free not only in the marketplace, but in all their lives. They are free to say what they want, to write what they want, to do pretty much as they please. Not so over there.That is why people in China who cannot get permission to leave go to desperate lengths to escape. They risk their lives in the process. Many lose their lives, but that doesn’t keep others from following. Some are attracted by the higher material standard of life in Hong Kong, but more by the natural human desire to be free.The people who get official permission to leave China are fortunate. They are going to be able to enjoy the benefits of the economic freedom they will find in Hong Kong. More important, that will give them a much wider freedom.Human and political freedom has never existed and cannot exist without a large measure of economic freedom. Those of us who have been so fortunate as to have been born in a free society tend to take freedom for granted __ to regard it as the natural state of mankind __ it is not. It is a rare and precious thing. Most people throughout history, most people today have lived in conditions of tyranny and misery, not of freedom and prosperity. The clearest demonstration of how much people value freedom is the way they vote with their feet when they have no other way to vote.Of course, many of the people who pour into Hong Kong will end up in conditions that most of us in the West would find appalling. Hong Kong is very far from utopia. It has its slums, its crime, its desperately poor people. But the people are free. That’s after all, why so many of them have come here, despite having to live in leaky house boats in one of Hong Kong’s many small harbors. Here they have the freedom and the opportunity to better themselves, to improve their lot, and many succeed. There’s appalling poverty in Hong Kong, it’s true, but the conditions of the people have been getting better over time. They’re far better off now than they were when they first came across the border from China. And that poverty, appalling to us, because we’re accustomed to much higher standards of life, is not poverty as viewed by most of the people in the world. It’s the poverty to which they would aspire. A state of affairs they would like to achieve.There is an enormous amount of poverty in the world everywhere. There is no system that’s perfect. There is no system that’s going to eliminate completely poverty in whatever sense. The question is, which system has the greatest chance? Which is the best arrangement for enabling poor people to improve their life? On that, the evidence of history speaks with a single voice. I do not know any exception to the proposition that if you compare like with like, the freer the system, the better off the ordinary poor people have been.
Ask yourself what it is that assures these garment workers in Hong Kong a good wage; not high by Western standards; but high enough to enable them to live far better than most people in the world. It is not government or trade union, these workers do well because there is competition for their labor and skills.
When a businessman faces trouble, a market threatens to disappear, or a new competitor arises, there are two things he can do. He can turn to the government for a tariff or quota or some other restriction on competition, or he can adjust and adapt. In Hong Kong the first option is closed. Hong Kong is too dependent on foreign trade so that the government has simply had to adopt a policy of complete noninterference. That’s tough on some individuals, but it is extremely healthy for the society as a whole. Only the businessmen who can adapt, who are flexible and adjustable survive and they create good employment opportunities for the rest.
The complete absence of tariffs or any other restrictions on trade is one of the main reasons why Hong Kong has been able to provide such rapidly rising standard of life for its people. Even Communist China recognizes Hong Kong’s success, it set up shop here and now excepts the universal symbol of capitalism. The Bank of China, the official bank of Communist China is the largest bank in Hong Kong. There’s no doubt that Communist China recognizes the power of the market.
In all this, the government of Hong Kong has played an important part, not only by what it has done, but as much by what it has refrained from doing. It has made sure that laws are enforced and contracts honored. It has provided the conditions in which a free market can work. Most importantly, it has not tried to direct the economic activities of the colony.
No government official is telling these people what to do. They are free to buy from whom they want, to sell to whom they want, to work for whom they want. Sometimes it looks like chaos and so it is, but underneath it’s highly organized by the impersonal forces of a free marketplace. The impersonal forces of a free marketplace at work back here in the United States, prices are the key. The prices that people are willing to pay for products determines what’s produced. The prices that have to be paid for raw materials, for the wages of labor, and so on, determine the cheapest way to produce these things.
In addition, these self same prices, the wages of labor, the interest on capital, and so on, determine how much each person has to spend on the market. It’s tempting to try to separate this final function of prices from the other two. To think that some how or other you can use prices to transmit the information about what should be produced and how it should be produced, without using those prices to determine how much each person gets. Indeed, government activity over the past few decades has been devoted to little else. But that’s a very serious mistake. If what people get is not going to be determined on what they produce, how they produce it, on how successfully they work, what incentive is there for them to act in accordance with the information that is transmitted. There is only one alternative: force __ some people telling other people what to do.
The fundamental principal of the free society is voluntary cooperation. The economic market, buying and selling, is one example. But it’s only one example. Voluntary cooperation is far broader than that.
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Thank you so much for your time. I know how valuable it is. I also appreciate the fine family that you have and your committment as a father and a husband.
Sincerely,
Everette Hatcher III, 13900 Cottontail Lane, Alexander, AR 72002, ph 501-920-5733, lowcostsqueegees@yahoo.com
You have always said that as President you want to protect our personal freedoms. 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 last 30 plus years. Here is part two.
Friedman: Of course she didn’t stay here a long time, she stayed here while she learned the language, while she developed some feeling for the country, and gradually she was able to make a better life for herself.Similarly, the people who are here now, they are like my mother. Most of the immigrants from the distant countries __ they came here because they liked it here better and had more opportunities. A place like this gives them a chance to get started. They are not going to stay here very long or forever. On the contrary, they and their children will make a better life for themselves as they take advantage of the opportunities that a free market provides to them.The irony is that this place violates many of the standards that we now regard as every worker’s right. It is poorly ventilated, it is overcrowded, the workers accept less than union rate __ it breaks every rule in the book. But if it were closed down, who would benefit? Certainly not the people here. Their life may seem pretty tough compared to our own, but that is only because our parents or grandparents went through that stage for us. We have been able to start at a higher point.Frank Visalli’s father was 12 years old when he arrived all alone in the United States. He had come from Sicily. That was 53 years ago. Frank is a successful dentist with a wife and family. They live in Lexington, Massachusetts. There is no doubt in Frank’s mind what freedom combined with opportunity meant to his father and then to him, or what his Italian grandparents would think if they could see how he lives now.Frank Visalli: They would not believe what they would see __ that a person could immigrate from a small island and make such success out of their life because to them they were mostly related to the fields, working in the field as a peasant. My father came over, he made something for himself and then he tried to build a family structure. Whatever he did was for his family. It was for a better life for his family. And I can always remember him telling me that the number one thing in life is that you should get an education to become a professional person.Friedman: The Visalli family, like all of us who live in the United States today, owe much to the climate of freedom we inherited from the founders of our country. The climate that gave full scope to the poor from other lands who came here and were able to make better lives for themselves and their children.But in the past 50 years, we’ve been squandering that inheritance by allowing government to control more and more of our lives, instead of relying on ourselves. We need to rediscover the old truths that the immigrants knew in their bones; what economic freedom is and the role it plays in preserving personal freedom.
That’s why I came here to the South China Sea. It’s a place where there is an almost laboratory experiment in what happens when government is limited to its proper function and leaves people free to pursue their own objectives. If you want to see how the free market really works this is the place to come. Hong Kong, a place with hardly any natural resources. About the only one you can name is a great harbor, yet the absence of natural resources hasn’t prevented rapid economic development. Ships from all nations come here to trade because there are no duties, no tariffs on imports or exports. The power of the free market has enabled the industrious people of Hong Kong to transform what was once barren rock into one of the most thriving and successful places in Asia. 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 refugees from countries that don’t allow the economic and political freedom that is taken for granted in Hong Kong.
Despite rapid population growth, despite the lack of natural resources, the standard of living is one of the highest in all of Asia. People work hard, but Hong Kong’s success is not based on the exploitation of workers. Wages in Hong Kong have gone up fourfold since the War, and that’s after allowing for inflation. The workers are free. Free to work what hours they choose, free to move to other jobs if they wish. The market gives them that choice. It also determines what they make. You can be sure that somebody somewhere is willing to pay for these cheap, plastic toys. Otherwise they simply wouldn’t be made.
Competition from places like South Korea and Taiwan has made cheap products less profitable, so Hong Kong businessmen have been adapting. They have been developing more sophisticated products and new technology that can match anything in the West or East and their employees have been developing new skills.
Hong Kong never stops. There’s always some business to be done, some opportunity to be seized. Its long been a tourist center and a shoppers paradise and it’s now one of the business centers of the East. It’s the ordinary people of Hong Kong who benefit from all this effort and enterprise.
This thriving, bustling, dynamic city, has been made possible by the free market __ indeed the freest market in the world. The free market enables people to go into any industry that they want; to trade with whomever they want; to buy in the cheapest market around the world; to sell in the dearest around the world. But most important of all, if they fail, they bear the cost. If they succeed, they get the benefit and it’s that atmosphere of incentive that has induced them to work, to adjust, to save, to produce a miracle. This miracle hasn’t been achieved by government action __ by someone sitting in one of those tall buildings and telling people what to do. It’s been achieved by allowing the market to work. Walk down any street in Hong Kong and you will see the impersonal forces of the market in operation.
Mr. Chung makes metal containers. Nobody has ordered him to. He does it because he has found that he can do better for himself that way than by making anything else. But if demand for metal containers went down, or somebody found a way of making them cheaper, Mr. Chung would soon get that message.
A few doors away, Mr. Yu’s firm has been making traditional Cantonese wedding gowns for 42 years. But the demand for these elaborate garments is falling. The firm has already gotten that message and is now looking for another product. The market tells producers not only what to produce, but how best to produce it through another set of prices __ the cost of materials, the wages of labor, and so on. For example, if these workers could earn more doing something else, Mr. Ho would soon find a way to mechanize his picture frame production.
Inside this Chinese medicine shop, a market transaction is going on. The customer’s confidence that this painful looking ordeal will help him doesn’t rest on any official certification of the bone doctor’s qualifications __ it comes from experience __ his own or his friends. In his turn, the doctor treats him not because he has been ordered to, but because he gets paid. The transaction is voluntary so both parties must expect to benefit or it will not take place.
Believe it or not, this backyard is an entrance to a factory. The workers here are some of the best paid in Hong Kong. It’s hot, sticky, and extremely noisy. The workers are highly skilled so they can command high wages. They could induce their employer to improve working conditions by offering to work for less, but they would rather accept the conditions, take the high wages, and spend them as they wish. That’s their choice. The best known statement of the principles of a free market, the kind of free market that operates in Hong Kong, was written on the other side of the world.
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Thank you so much for your time. I know how valuable it is. I also appreciate the fine family that you have and your committment as a father and a husband.
Sincerely,
Everette Hatcher III, 13900 Cottontail Lane, Alexander, AR 72002, ph 501-920-5733, lowcostsqueegees@yahoo.com
To put our debt in perspective, Kobe Bryant makes $25 million playing for the Los Angeles Lakers. Any guesses on how many seasons Kobe would have to play in order to pay off today’s national debt? How about a whopping 560,000. That’s chilling, and quite frankly, incomprehensible.
Utah’s senior Sen. Orrin Hatch doesnt see it that way. He’s looking for a vote on his balanced budget amendment too, but at a time believed to be the most opportune for passage. He hasn’t set firm timetables or made any strict demands.
“If this is going to get passed in the next two years,” says Hatch, “President Obama will have to step to the plate. Ultimately you’ll need presidential leadership because everybody knows that you’re not going to get spending under control until we take on entitlements as well. You cannot do it without presidential leadership.”
The Daily Hatch 