“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.