Milton Friedman, the combative, impish free-market economist, died in 2006, too early to witness and diagnose the financial crisis of 2008 and the long economic slump we’ve experienced since. But that doesn’t mean he’s absent from the debate over how to handle it.
“I wish we could find Milton Friedman again,” Mitt Romney lamented in an October debate during the Republican primary campaign, when asked if he had any candidates in mind to run the Federal Reserve instead of Chairman Ben Bernanke. And speaking at a University of Chicago forum this spring, Romney enlisted Friedman in his side of the political fight over economic policy.
“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,” Romney said. “And that is: Government does not create prosperity. Free markets and free people create prosperity.”
Tuesday will mark the 100th anniversary of Friedman’s birth in New York. In the midst of a global economic slump and a U.S. presidential campaign focused almost entirely on the economy, it is worth considering what he might really think of our economic troubles.
Friedman burst onto the national stage when, in pioneering work with Anna Schwartz, he rewrote the history of the stock market crash of 1929 and the Great Depression. The pair concluded that, by imposing high interest rates when disaster struck, the Federal Reserve did not funnel enough money into the economy, turning the crash into a depression. If the Fed had provided plentiful cheap money, Friedman argued, the slump would have lasted a couple of years, not a decade.
Friedman leveraged this insight into a cure for “stagflation” — that crippling combination of inflation and feeble economic growth that took hold in the United States in the mid-1970s. He believed that inflation resulted from too much government spending on Keynesian stimulus programs, which led to too much money chasing too few goods. His remedy was “a steady rate of monetary growth at a moderate level,” providing “a framework under which a country can have little inflation and much growth.” In short, close control of interest rates would stabilize prices.
Paul Volcker, the Fed chairman appointed by President Jimmy Carter and kept on by Ronald Reagan to cure stagflation, took Friedman’s advice and rebooted the economy, provoking a recession and purging hyperinflation by raising interest rates. Inflation came down, and economic growth resumed.
On the face of it, there are enough similarities between the financial crises of 1929 and 2008 for Friedman to remain relevant. Before the Great Depression, ample supplies of cheap money fueled a stock market bubble. Attempting to curb such rampant speculation by tightening the money supply, the Fed plunged the economy into destructive deflation. Seventy years on, Alan Greenspan’s cheap money policy as Fed chief at the turn of the century stoked a housing bubble based on reckless lending. A stock market crash, the financial freeze, panic in the banks, George W. Bush’s “troubled asset” rescue and Obama’s near-trillion-dollar Keynesian stimulus followed in short order.
For followers of Friedman, Greenspan’s policy of keeping interest rates too low for too long was sure to lead to trouble. By happy chance, the person in charge of the Fed when the economy finally ran off the rails was Bernanke, a distinguished student of the Great Depression and a Friedman disciple. At a conference on the occasion of Friedman’s 90th birthday in 2002, Bernanke said to Freidman and Schwartz: “Regarding the Great Depression, you’re right. We [the Fed] did it. We’re very sorry. But, thanks to you, we won’t do it again.”
Bernanke seemed like the right man at the right time, and his response to the financial turmoil was to follow Friedman’s advice and open the faucets wide, pumping money into the system through “quantitative easing” that provided long-term low interest rates to bolster business confidence. But Bernanke’s actions, while they followed Friedman’s advice to the letter, have brought opprobrium on the Fed chairman from his erstwhile conservative supporters.
Indeed, despite their frequent invocations of Friedman, conservatives have long since abandoned the principles of his Chicago School remedies in favor of more stern solutions advocated by Austrian economists Ludwig von Mises and Friedrich Hayek. They want to reduce the size of the state as fast as possible by slashing government spending, paying off public debt quickly, cutting taxes and removing regulations from business.
Faced with a lifeless economy, would Friedman have taken Obama’s lead in demanding from Congress a new Keynesian spending stimulus? Unlikely. Friedman thought big government was economically inefficient and stood in the way of the private sector. He was “in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible” because “the only effective way I think to hold [public spending] down is to hold down the amount of income the government has.”
But his devotion to cutting taxes is not enough for today’s conservatives, who have adopted a near-nihilistic view of the state. Friedman believed that the Fed has a right to manage the national economy and, contrary to Romney’s oversimplified depiction, that government has a role in making markets operate fairly. “The existence of a free market does not of course eliminate the need for government,” he wrote. “On the contrary, government is essential both as a forum for determining the ‘rules of the game’ and as an umpire to interpret and enforce the rules decided on.”
Today, Friedman has been left out in the cold. His belief in an ordered, managed economy through interest rates runs counter to prevailing conservative orthodoxies. It was his certainty — and the wit with which he delivered his message — that helped popularize his views around the globe. But the fact that he did not adopt absolutist positions on the size of the state and the evils of government has made his true views irrelevant among those he used to lead.
George Shultz, an economist and a former secretary of labor, Treasury and state, once joked that “everybody loves to argue with Milton, particularly when he isn’t there.” Alas, now that Friedman is truly gone, it seems that no one cares to grapple with his vision anymore.
Nicholas Wapshott is the author of “Keynes Hayek: The Clash That Defined Modern Economics.”