There is a wonderful Q&A with Milton Friedman in today’s San Jose Mercury News. Milton Friedman is 94, and won the Nobel Prize for economics in 1976.
He is most famous for being the intellectual backbone for more libertarian monetary policy, and the economic grounding for the Reagan administration.
MercuryNews.com | 11/05/2006 | Q&A with Milton Friedman
It is very hard to read the writings of Friedman, or even his live Q&A, without being immediately struck by the depth of his intellect and the strength of his convictions. You may disagree with some of his policy conclusions, but his type of clarity is rare.
Since I was only 5 years old when Reagan was elected, I obviously didn’t appreciate at the time the momentous step this country took in rejecting Jimmy Carter and embracing Reagan in the heart of hyper-inflation, recession, and international trauma. However, I’ve learned over time that many of the aspects of the Reagan administration that I did appreciate seem to be derivatives of Milton Friedman’s philosophy.
I’m going to reproduce the text of the article here, only because I don’t trust the SJ Mercury news to keep the link live forever. However, if the link above still works, use it.
Q&A with Milton Friedman
NOBEL PRIZE WINNER EXPOUNDS ON EDUCATION, HEALTH CARE, IRAQBy Scott Duke Harris
Mercury NewsWhen Milton Friedman talks, not everybody listens. To many, his libertarian views are predictable. But he always offers grist for debate.
Friedman recently sat down with the Mercury News for an interview. Following are edited excerpts of the conversation:
Q You’ve described yourself as “a libertarian with a small ‘I’ and a Republican with a capital ‘R,’ ” for expediency. Yet you’ve expressed disappointment with Republican control of the federal government. Why?
A If you look at the record, the structure of government that is most favorable to low spending and low taxes is a Democrat in the White House and Republicans in control of both houses of Congress, because the spending propensities of the Democrats are held down by Republicans. And when you have a Republican government in power, those spending propensities aren’t held down. In this case, we’ve got Republicans all around, and the budget has gotten out of control.
Obviously the Republicans had been out of [the White House] for a long time, and when they got it [in 2000], they had things they wanted to do, and they did it regardless of the budget consequences.
The problem is not the deficit. The problem is the amount of spending — the fraction of people’s income — which is spent for them, on their behalf by their government.
Q But many people find the deficits troubling.
A I am not concerned with deficits in the federal budget at all. I am concerned with the level of the federal budget. I’d rather have a $1 trillion budget with a deficit of $1 trillion, than have a $2 trillion budget that is completely balanced with taxes.
The deficit is a form of hidden taxation. . . . So I’m not satisfied with a high structural deficit, but it’s really because that implies a high level of government spending.
Q What troubles you about the spending?
A Everything. Most of the spending is wasted. . . . The worst is the “earmarks,” because they have no democratic control at all, being arbitrarily set in by individual members.
If you take education: The federal constitution doesn’t have the word education in it, but every state constitution does. . . . In 1994, when the Republicans took over [Congress], their “Contract With America” included abolishing the Department of Education. Instead, 12 years later now, the [department’s] budget has tripled or quadrupled — something like that.
Q Your ideas influenced the rise of economic conservatism, from Reagan to George Bush today. How would you compare the Reagan and Bush administrations?
A The thing that endears [Reagan] is that he was a person of principle. He was willing to take political chances in order to promote his principles.
At the time Reagan became president, in 1980, we had gone through a period of high inflation and high unemployment. The Federal Reserve, after Reagan got elected, changed to a very restrictive policy, which broke the back of the inflation, but also created a very substantial recession. And Reagan’s standing in public opinion polls went way down.
No other president in the post-war period would have stuck with that policy. Every one of them would have forced the Fed to reverse that policy before it really broke the hold on recession. . . .
I think the problem with the Bush administration is that the whole thing is dominated by Iraq. . . . I think going into Iraq was a mistake. But once you got into it, you’ve got to live with what you’re doing. And it would be an equally big mistake, or bigger, to pull out prematurely. You’ve got to try to come out with some honor and some measure of success. I don’t know how to do it, and the prospects do not look good. The situation looks terrible. . . .
To look beyond Iraq, Bush had been on the right side. He cut taxes, and he was in favor of trying to privatize Social Security. . . . He’s been in favor of getting rid of the inheritance tax, which is the right thing.
Q Is there no tax you like?
A Yes, there are taxes I like. For example, the gasoline tax, which pays for highways. You have a user tax. The property tax is one of the least bad taxes, because it’s levied on something that cannot be produced — that part that is levied on the land. So some taxes are worse than others, but all taxes are bad.
As things are now, taxes amount to something like 35 to 40 percent of national income, if you include federal, state and local taxes. Out of every dollar the average citizen earns, he gets to spend 60 cents of it — and not according to his own views, because the government also steps in and says what you can and cannot spend on. For example, according to the government, you cannot spend it on cocaine. I’m in favor of legalization of all drugs.
Q And prostitution?
A Well, sure.
Q What are the economic issues you’re thinking about now?
A On the one hand, health care. And on the other hand, education . . .
We have a very poor education system. I’m talking about elementary and secondary. Something like a quarter to a third of all youngsters never graduate high school and those who graduate high school are in many cases barely literate in terms of reading, writing and arithmetic. In international comparisons, our kids do quite well at grade 1 to 4, but as you go up the grade levels, the performance gets worse and worse in comparison other countries. So it looks like we have a system that teaches kids not to learn rather than one that teaches them to learn.
And in health care today, most transactions are third party transactions. Traditionally, you would go to the doctor and there would be a deal between you and him. Direct payment. [Today] that almost never happens because of insurance — so-called insurance.
It’s a misnomer really. It isn’t insurance at all. Insurance makes sense when you have a small probability for a large cost and you want to share that probability with others. But it doesn’t make sense for ordinary day-to-day care. What we call medical insurance is not really insurance at all. It’s pre-paid medical care.
Q How would you respond?
A By getting rid of third-party payment — by returning it to a deal between the patient and the provider. You don’t need that institutional framework. That huge framework largely is the result of third-party payment.
Q Has anything in recent history made you question your convictions?
A No, on the contrary. . . . The basic conviction is that the biggest danger to human freedom comes from government. . . .
The collapse of the Soviet Union has persuaded almost everybody around the world that collective organization is not a good way to run a country.
Is there anybody now who believes that’s a good way to run a country? I don’t think so.
Psychohistory 
Since you were only 5 years old when Reagan took office, you don’t remember that Nixon imposed wage and price controls FOUR TIMES ,trying to control inflation. By the time Ford took office, interest rates were in the double digits. Two years later when Jimmy Carter took office the inflation had been rising for a very long time. And your hero Ronald Reagan? I got a home loan in the THIRD YEAR of Reagan’s first term at the low low rate of only 13% interest. Blaming Carter for inflation is like blaming Clinton for 911! Only a Republican who is totaly ignorant of history is still beating either of those dead horses.
Hi Thomas,
Your comment here sounds a bit condescending, but I’ll ignore that and do my best to respond. I should point out the point of my post was about Milton Friedman, not Jimmy Carter and Ronald Reagan, but, I did mention it.
First, I agree with you that Nixon was an idiot for implementing price & wage controls. He may have been a Republican, but implementing government based caps and timelines was a better fit in the Soviet Union than any capitalist economy. Of course, these were not removed until 1981 when Reagan came into office.
Jimmy Carter, however, did not make the situation better. If anything, he made it much worse. Just look to his famous “Misery Index” which he believed the economy should be measured by. It worsened by 50% when he was in office!
The biggest thing Reagan changed in regards to inflation was the recognition that it was largely a monetary, not a fiscal, phenomenon. He gave Paul Volker the breathing room to crush it, even at the expense of a terrible recession. That 13% rate you paid was exactly the right thing to do, and there isn’t an economist with any credibility around who believes otherwise at this point. And of course, you miss the point that the Federal Reserve handles interest rates, not the President.
I’m not going to take the flame bait on the 9/11 comment.
Reagan won by a landslide. Looking back, it wasn’t a Republican victory – it was a victory for the US. I had the opportunity to watch the Carter vs. Reagan presidential debate on PBS a few years ago. I may have been 5 when it happened live, but it was obvious to me why he won. Everything Carter discussed was about failure, about accepting the limitations of a “large, mature economy”. What a terrible future Carter proposed for this country. Thank goodness that the positive picture painted by Reagan in 1980 turned out to be the one that actually transpired.
In his inauguration, Reagan said, “Government is not the solution to our problem; government is the problem.” That was what I was talking about in my post. At the time, I thought this was uniquely Reagan’s point of view. It was only later that I learned that the intellectual base for Reagan’s feelings here came from Friedman.
Republican/Democrat is not the point here. Both parties have flip-flopped historically on almost every fiscal issue. The point of this post was that away from politics, there are great minds, like Friedman, who for offer clear and compelling explanations for key economic policies. You may disagree with the message, but in this case you should respect the messenger.
Please read through the links provided about for more detail and background on these topics.
Thanks for reading my blog, and making me dig deeper on researching this response!
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Excuse me sir, but I wonder if you wouldn’t mind answering a question. It seems to me that Friedman has mistakenly left out the Depository Institutions Deregulation and Monetary Control Act, which was instituted by Carter and not Reagan. If you’re still responding, I’d like to know your thoughts.
There were a lot of congressional riders in that bill, but the primary driver was moving the deposit insurance from $40K to $100K. I don’t think Milton Friedman was mistakenly leaving out this bill, it just doesn’t reflect a material change in approach to financial markets. http://en.wikipedia.org/wiki/Depository_Institutions_Deregulation_and_Monetary_Control_Act