Milton Friedman Essay, Research Paper
Dr. Friedman insisted I use national income data (instead of GDP) for measuring economy size. He continually stressed the necessity of recognizing the add-on load to the economy of regulatory compliance costs. And, don’t forget to include your data sources, he said. Comment to assist your readers, but show them the hard data as your base. And, don’t get side-tracked by what other nations are doing – - make all comparisons to America’s own history. Good advice.
In his letters Dr. Friedman included comments such as: “I am impressed”, “Very well done”, “Your objective is one I fully endorse”, “your charts and analyses are excellent”, “I congratulate you and applaud your continuing effort”, “I certainly commend you for the Grandfather Report you have produced and for the imaginative way in which you have displayed data highly relevant to very important issues”, etc. – - continually motivating and leading a slow (but, persistent) ’student-admirer’ onward. Who says retired persons can’t learn? Well, that depends on the motivator. Dr. Friedman is one of the best, in this regard.
As the compilation of data with 90 charts matured to reveal clear pictures of macro trends, I was stunned at the findings. I assumed a responsibility to make this information available to other grandparents, parents and youth to increase general awareness – - so that more people can view for themselves the results of this effort. I believe that “Knowledge is Power – - if you have it.” Believing ‘a picture is worth a thousand words,” an easy-to-read format together with color graphics of long term trends backed by hard data from reputable sources was developed. The report was given a name: THE GRANDFATHER ECONOMIC REPORTS, a series of picture-reports showing economic issues facing families and youth, compared to prior generations – and published on the world wide web at http://mwhodges.home.att.net/ . It wasn’t long before the email in-box was out of control. Parents and grandparents sent data to be added. Students wrote and compiled their own research papers. Economic professors use the information in their classes and exams. Some supporters of centralized power and debt complained. I found an insatiable appetite across our nation for reliable information that is easy to understand and which carries historic perspective. A small public information service was born, at no cost to the public, offering a unique view of economic trends – - that can be understood by most regardless of their education attainment. Its possible benefit may never be known.
The major concerns which emerged from my research are that our nation is more government-spending-dependent and more debt-dependent – - than ever before – - and that we have shifted from individual responsibility, small government and minimal debt to granting government responsibility (some call this ‘collectivism’) for many areas not intended by our nation’s founders.
OBJECTIVE: If you ask, “How much of our economy’s national income should be controlled by federal, state and local government and how much federal debt should be allowed in peace-time?” Most will answer, “About 20% of the economy for spending, with zero debt.” But, today’s government consumes more than twice that much – approximately 42% of the economy – - and federal debt is $5.6 Trillion. The objective of this report is to address this issue – - and determine spending and debt targets, with an eye to historic precedent – -and develop a master plan to acquire the target.
SUMMARY: This report, with history as a guide, will point toward a reduction of federal government spending from 27% of national income to 12%, and state & local spending from 15% of the economy to 8% (bringing said combined spending close to that achieved prior to WW II) – and, federal debt from $5.6 trillion to zero over 20 years. Said reductions will be accomplished by spending reductions (primarily by cuts and privatization in the social arena). In addition, any budget surpluses created by today’s excessive tax rate/revenue shall be refunded to citizens via tax rate cuts.
The approach taken here in establishing targets is to do so on the spending ratio side, instead of the tax/revenue side. This is the proper approach, as spending ratio reductions MUST be the target. However, politically speaking it is more difficult to implement spending program cuts necessary to realize the approximate 60% reduction required per the above table. Big government proponents are a powerful force, and will claim every dollar of any spending cut is actually a plan to starve children and old people. This has been an effective argument in the past, resulting in huge government. It will be used as a tactic time and again. So, spending reduction plans are one thing. How to implement is another.
Nobel Laureate Economist Milton Friedman (in his book, ‘Bright Promises, Dismal Performance’): “I favor tax cuts. Our basic long-term need is to stop the explosive growth in government spending. I am persuaded by the experience of decades that the only effective way to do so is limit government revenue, by cutting taxes – - at any time for any excuse in any way. The reason is that government will spend whatever the tax system raises plus more – - but not an indefinite amount more – - as the out-cry for deficit spending will limit this. The most effective way to force each of us to economize is to reduce our income. The restraint is less rigid on government, but it is there and seems to be the only one we have.”
DEBT REDUCTION AS A MEANS TO REDUCED SPENDING AND REDUCED DEBT
We have seen in the Government Size Report, and in the Federal Government Spending Report, that total government spending has grown 4 times faster than the economy’s growth, and the federal government sector alone has grown 10 times faster than the economy. Nobel laureate Milton Friedman views about the effectiveness of government spending were that it is the high level of total government spending that is the problem. I, for another, concur with his ‘its the high level of total (meaning federal + state/local) govt. spending that is the problem’. And, Friedman also says ‘I am convinced in all my studies that governments will continue to spend all revenues they receive (plus some more), and am convinced the only solution to reducing spending is to reduce revenue (taxes).’ What he’s saying is you must put pressure on the available revenue side. And, as the Reagan era shows, by reducing taxes spending may not be reduced at first but such produces deficit pressures which in turn forces a spending slowdown (restraint), below what it would have been without said tax cut. (had Bush & Clinton, in the 1990s, not reversed that course via record tax increases, the Reagan action would have resulted in even more spending cuts over time than occurred). Taking this a step further, if we call for a reduction of debt principal, the same should happen as far as spending is concerned, as to meet an amortization of some type in a budget (and politicians should be required to have debt principal payments in each budget) other spending would have to be reduced. So, the Friedman approach holds for spending reductions, whether you reduce taxes or pay down debt principal. Therefore, if reduced spending is a goal, then all approaches to accomplish same are viable, taxes and/or debt principal reduction. Of course whenever one calls for tax cuts, then those for big government spending know tax cuts will force mullet-year spending cuts, eventually – - and they use the defense to protect turf that all tax cuts are ‘for the rich’ to de-rail said efforts. From this, I conclude that those against reducing debt are in fact also in the camp of those for big government who are against reducing spending. But, debt reduction cannot be defended against by ‘for the rich’, and represents a vital strategy to spending reductions. Therefore, I am for debt reduction as a means to reduced total govt. spending as a share of our economy.
I am for debt reduction as a means of realizing lower spending ratios, AND lower debt, as a beneficial bequeath to the next generation.
NOTE: if today excessive tax collection (highest in peace-time history per Tax Report) cause a surplus in the ‘on-budget’ accounts, then said surplus should be returned to citizens via tax rate cuts. Then, the spending ratio targets of this report should be achieved by reducing said spending.
From the above, we have seen that in order to reduce spending ratios, a combination of tax cuts AND debt principal reduction should be employed as the only effective methods
IT IS RECOGNIZED
TO ACHIEVE THESE TARGETS REQUIRES A CONTROLLED AND PHASED REDUCTION OF GOVERNMENT (federal AND state & local ) SPENDING OF MORE THAN 50% FROM CURRENT LEVELS, and ELIMINATION OF OVER $ 5.6 TRILLION IN DEBT
With this in mind, many will simply throw up their hands, announce mission impossible and do nothing. With nearly 50% of our economy now dependent on government spending, there will be fierce resistance from many adults. This will be despite the knowledge of most seniors, that not only are their own living standards better by far than their forefathers, but they actually paid significantly less share of their income during their working years for their elderly than do their own working children today. And, most young adults are very concerned about the economic future of their children, and the lower quality of their education. To be concerned on one hand and resist corrective action on the other is the challenge
His New Industrial State (1967) expanded on Galbraith’s theory of the firm, arguing that the orthodox theories of the perfectly competitive firm fell far short in analytical power. Firms, Galbraith claimed, were oligopolistic, autonomous institutions vying for market share (and not profit maximization) which wrested power away from owners (entrepreneurs/shareholders), regulators and consumers via conventional means (e.g. vertical integration, advertising, product differentiation) and unconventional ones (e.g. bureaucratization, capture of political favor), etc. Naturally, these were themes already well-espoused in the old American Institutionalist literature, but in the 1960s, they had been apparently forgotten in economics.
Galbraith’s The New Industrial State is probably his most important work. In it he argues that the enormous amount of capital required to create a major corporation demands that there be a high degree of certainty about the demand for the product, the supply of labor, the extent of competition in its markets, the regulatory and tax policies and any other factor in its environment. Large corporations try to enhance and stabilize the demand for their products by advertising heavily. They try to maintain stability in the matters of public policy by lobbying government and establishing working relationships with politicians and bureaucrats. In labor matters large corporations find it is convenient to deal with large labor unions which are predictable. The net result is that there has developed a symbiotic relationship between Big Business, Big Government and Big Labor. This is the New Industrial State
Free Market Fraud.
The excellent month I’m called upon for two celebrations-one for the distinguished career of Robert Heilbroner, the most interesting, innovative, and influential of liberal economists, and the other for The Progressive magazine, now ninety years young. I here venture the same theme for both. It is this: Most economists commit what I, in a professionally cautious way, call innocent fraud. It is innocent because most who employ it are without conscious guilt. It is fraud because it is quietly in the service of special interest.
Let’s begin with capitalism, a word that has gone largely out of fashion. The approved reference now is to the market system. This shift minimizes-indeed, deletes-the role of wealth in the economic and social system. And it sheds the adverse connotation going back to Marx. Instead of the owners of capital or their attendants in control, we have the admirably impersonal role of market forces. It would be hard to think of a change in terminology more in the interest of those to whom money accords power. They have now a functional anonymity.
But most of the people who use the new designation-economists, in particular- are innocent as to the effect. They see nothing wrong with their bland, descriptive terminology. They pay no attention to the important question: Whether money- wealth-accords a special power. (It does.) Thus the term innocent fraud.
The fraud also conceals a major change in the role of money in the modern economy. Money, we once agreed, gave the owner, the capitalist, the controlling power in the enterprise. So it still does in small businesses. But in all large firms the decisive power now lies with a bureaucracy that controls, but does not own, the requisite capital. This bureaucracy is what the business schools teach their students to navigate, and it is where their graduates go. But bureaucratic motivation and power are outside the central subject of economics. We have corporate management, but we do not study its internal dynamics or explain why certain behaviors are rewarded with money and power. These omissions are another manifestation of fraud. Perhaps it is not entirely innocent. It evades the often unpleasant facts of bureaucratic structure, internal competition, personal advancement, and much else.
This innocent or not-so-innocent fraud masks an important factor in the distribution of income: At the highest levels of the corporate bureaucracy, compensation is set by those who receive it. This inescapable fact fits badly into accepted economic theory, so it is put aside. In the textbooks, there is no bureaucratic aspiration, no reward for bureaucratic achievement, no bureaucratic enhancement by merger and acquisition, and no personally established compensation. Bypassing all of this is not a wholly innocent fraud.
A more comprehensive fraud dominates scholarly economic and political thought. That is the presumption of a market economy separate from the state. Most economists concede a stabilizing role to the state, even those who urgently seek an escape from reality by assigning a masterful and benign role to Alan Greenspan and the central bank. And all but the most doctrinaire accept the need for regulation and legal restraint by the state. But few economists take note of the co-optation by private enterprise of what are commonly deemed to be functions of the state. This is hidden by the everyday reference to the public and private sectors, one of our clearest examples of innocent fraud.
Take the common outcry about corporate welfare. Here the private firm, as it is called, receives a public subsidy for its product or service. But what is called corporate welfare is a minor detail. Far more important is the full-fledged takeover by private industry of public decision-making and government spending.
The clearest case is the weapons industry. Given the industry’s command of the Congress and the Pentagon, the defense firms create the demand for weaponry prescribe the technological development of our defense system, and supply the needed funds-the defense budget. There is no novelty here. This is the military-industrial complex, a characterization that goes safely back to Dwight D. Eisenhower.
Any notion of a separation between the public and a private sector-between industry and government-is here plainly ludicrous. Nonetheless, the absorption of public functions by the arms industry is ignored in all everyday and most scholarly economic and political expression. And what is so ignored is in some measure sanctioned. I hesitate here to speak of innocent fraud; it is far from being socially benign.