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With each passing week that the assault against global capitalism continues in Washington, I become more nostalgic for one missing voice: Milton Friedman's. Imagine what the great economist would have to say about the U.S. Treasury owning and operating several car brands or managing the health-care industry. "Why not?" I can almost hear him ask cheerfully. "After all, they've done such a wonderful job delivering the mail."
In the midst of this global depression, rotten ideas like trillion-dollar stimulus plans, nationalization of banks and confiscatory taxes on America's wealth producers are all the rage. Meanwhile, it is Milton Friedman and his principles of free trade, low tax rates and deregulation that are standing trial as the murderers of global prosperity.
The myth that the stock-market collapse was due to a failure of Friedman's principles could hardly be more easily refuted. No one was more critical of the Bush spending and debt binge than Friedman. The massive run up in money and easy credit that facilitated the housing and credit bubbles was precisely the foolishness that Friedman spent a lifetime warning against.
Milton's ideas on capitalism and freedom did more to liberate humankind from poverty than the New Deal, Great Society and Obama economic stimulus plans stacked on top of each other.
At one of our dinners, Milton recalled traveling to an Asian country in the 1960s and visiting a worksite where a new canal was being built. He was shocked to see that, instead of modern tractors and earth movers, the workers had shovels. He asked why there were so few machines. The government bureaucrat explained: "You don't understand. This is a jobs program." To which Milton replied: "Oh, I thought you were trying to build a canal. If it's jobs you want, then you should give these workers spoons, not shovels."
But in the energy industry today we are trading in shovels for spoons. The Obama administration wants to power our society by spending three or four times more money to generate electricity using solar and wind power than it would cost to use coal or natural gas. The president says that this initiative will create "green jobs."
I recently phoned Rose Friedman and asked her what she thought about the attacks on her husband. She was mostly dismayed at how far off-course our country has veered under President Obama. "Is this the death of Milton's ideas?" I hesitantly asked. "Oh no," she replied, "But it is the death of common sense."
Friday, May 29, 2009
Missing Milton
Steve Moore has a nice article in today's WSJ that reminds us of the great legacy of Milton Friedman. It's a real shame that liberals are still trying to blame free markets for the crisis we are now exiting, when in fact it was government intervention in free markets that screwed everything up. I was lucky enough to meet Milton and I attended quite a few of his talks. His brilliance was awesome. Excerpts from Steve's article:
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19 comments:
I remember when Milton and Rose's book Free To Choose came out in the early 80's and how some of us recent college grads thought this was a breath of fresh air after all of the kenynsian doctrine we had ingested. Question to you Scott. How do you remain the optimist on our economy and stock market that you appear to be in light of all that is happening?
Optimism was embedded in the US Constitution. We live on the sunny side of the street. Always.
Greg: I've remained optimistic about the economy and equities because a) it's easy to be optimistic when the market expects Armageddon, b) I think people always underestimate the ability of the US economy to overcome obstacles, and c) I have faith that the American people and the markets will eventually force a correction to Obama's hard-left policies that are the major threat to the future.
Question from confused old person. Given the supply of bonds coming on the market for the next several years plus the Medicare bonus supply, wouldn't interest rates go up and business expansion slow down? What will cause the inflation? Certainly not a capacity shortage in manufacturing. Not a booming economy. Peak oil may have an impact but so might natural gas as a vehicle fuel, reducing the need for oil. Will demand for other commodities be such that demand will exceed supply once inventories are replaced?
What is the free market solution to global warming, if burning coal is super cheap but eventually kills us all? I'm wondering where your disagreement originates.
Is it:
A. There is no serious threat from global warming?
B. There is a threat, but we'll do nothing in particular about it and just burn whatever cheap fossil fuels are available. Bangladesh might be flooded (or NYC) but they'll just shift to higher ground over time.
C. We should do something about it, but the free market will somehow deal with the externalities on its own?
Free markets are great at optimizing use of resources when the price signals are right. When my factory can dump toxic sludge into your supply of drinking water for free, I just might wind up doing a little more of it than you would like. Presumably you would prefer to impose some cost on me to prevent this sort of impoliteness.
Are there any good examples of a pollution problem where the market found a solution without any form of government intervention? The usual libertarian line of response is "create property rights in the shared resource that is being polluted". Should we auction off ownership of the atmosphere? Would anyone bid?
To STS:
I suppose it's difficult to identify what is a free market in todays' environment. I remember going from leaded to unleaded gasoline. Every gas station had to be rebuilt. Lead was killing people! Electric cars will plug into the grid and add batteries that need to be disposed of. We could put new Natural Gas pumps in stations just like unleaded. Every local government I know runs buses on Natgas. Argentina runs 1/3 of its cars on natural gas autos built by American companies.The Honda DX is for sale in the US and runs on Natgas. We solve Peak Oil and reduce pollution 30% to 50% in less than five years. No foreign dependence. We use the ocean(check out OPT) to power the grid. We use algae to make diesel fuel in 10 to 15 years. We use geothermal. It is all scaleable. You can CHOOSE to be irresposible and DUMP toxic materials. You should be thrown in jail! Who cares if "global warming" is real. We are running out of oil! Problem solved! See above!
Old Guy: your instincts are correct. A big expansion of government will depress the economy, slowing the rate at which it grows in coming years. Higher taxes will reduce risk taking, and that will also slow the rate at which the economy grows. The Fed's efforts to support the economy by buying T-bonds will only cause inflation to rise, and higher inflation will eventually lead to a Fed tightening that will probably cause the next recession. Inflation comes from the Fed, and only the Fed. But you can see the inflation starting by observing rising commodity prices and a weaker dollar.
STS: Excellent question that I've been meaning to address.
To begin with, I think there is a role for government when it comes to externalities such as air pollution. The classic solution is to impose a tax on pollution, or in the case of global warming, to impose a tax on carbon. Greg Mankiw has been a excellent proponent of this:
http://gregmankiw.blogspot.com/2006/10/pigou-club-manifesto.html
Assuming you accept the need for a reduction in hydrocarbon fuel use, here is a huge problem with this solution, however. Unless all countries adopt policies designed to curb carbon emissions, it is an exercise in futility. The country that imposes a carbon tax will lose jobs and production to those that don't, and the net global reduction in carbon emissions will be minimal. Efforts to correct this by imposing tariffs on the goods of non-carbon-taxing countries will only lead to a trade war with disastrous consequences. Cutting U.S. carbon emissions by a significant amount would be a triumph for the global warming activists, but China and India together could easily negate this by emitting more as their economies grow.
I happen to be a global warming skeptic. But even if I weren't, I don't see any decent solution to the problem of carbon emissions. I don't think it's possible to get poor countries to sign on to the carbon tax idea, and in any event I don't see how mankind can possibly reduce carbon emissions by enough to make a difference to the global climate.
Interesting factoid: all the oil ever produced by man would be only enough to fill Lake Tahoe (California's largest lake). It's a big lake, but compared to the size of the globe it's a teeny tiny freckle.
I know that you might not like to hear this, but most of my ideas about how to handle this crisis come via the writings of Milton Friedman. Of course, he changed his mind in some cases, I suppose. Still, I'm largely following his lead. I can direct anyone to my sources for these positions. They include:
1) Narrow Banking
2) A Guaranteed Income
3) Quantitative Easing, Helicopter Money
4) The idea that QE and a Stimulus complement each other: held by Viner, Simons, Knight, and Fisher, during the Great Depression. Hardly leftists.
5) Health care should have either much less govt or much more govt.
Also, a stimulus could be a Sales Tax Cut and Tax Cuts on Investment.
In general, I follow Brittan in liking this essay:
"A Monetary and Fiscal Framework for Economic Stability"
I don't know Rose Friedman, and she might well be bothered by my politics, but I believe that she knows a lot about the Chicago School Proposal during the Great Depression. It would be great to hear what she remembers about it.
Don the libertarian Democrat
Don: As long as something makes sense I'm open to it, especially if Milton likes it. (I must admit however to disagreeing with him on his advocacy of a constant rate of money growth.)
I have no problem with quantitative easing, as long as it is in response to a significant increase in money demand. I've said in many posts here that the Fed's QE program was fully justified given the realities on the ground.
Fiscal stimulus (done the right way, with meaningful tax cuts) and QE would have been the perfect solution to this crisis. Unfortunately the stimulus we got was just not stimulative at all. Many posts on this subject as well.
Healthcare could be fixed almost overnight if we got government out of the healthcare business.
Scott,
We need less government in every way imaginable. Until the fiscal authorities abandon their desire to control the markets ups and down, do not expect the congressional side (left or right) to give up on its quest to do the same through taxes, regulation, pork projects, and wars.
I have a strong feeling that the big government binge we have seen--and the trillions of dollars that have been spent in a very short period--will result in an almost endless series of scandals, corruption charges, boondoggles, bridges to nowhere, fraud, and very angry taxpayers. Some smart politician from the right will eventually figure out how to ride the rising tide of anger with a simple message: we need to shrink the government, big-time.
Old Guy:
I think you are saying Peak Oil => Global Warming solved. We'll run out of carbon to burn before we have a problem? I'm pretty sure that is incorrect. We have enormous amounts of coal left and coal produces more CO2 than petroleum does. We're already at about 380ppm atmospheric CO2 vs. 650k+ yr range of 200-300ppm. Burn all the coal we know about and it can go to double or triple the current high level.
My worry is that economically, there will not be a sufficient incentive to do all the great alt energy items you mentioned. At least not without Pigouvian taxation.
Scott:
I'm also a member of Club Pigou ;)
Your response sounds like something between my options B and A. B: ain't nuthin gonna be done about it, so let's hope A is true (global warming is bunk). I can relate, but absent an argument for A it is uncomfortably similar to 'being in denial.'
Of course, if the alternative to denial is trying to tackle intractable issues in global governance ... well ... how 'bout another drink? Have a few cubes of Antartic ice with that ;)
Btw. I highly recommend Nate Lewis' talk. It's the Al Gore slide show as given by a real scientist. He is talking his book as a solar energy researcher, but still. Market economics tell us that the people who will solve any given problem are precisely the ones whose economic incentives prompt them to do so.
STS: do you know of anyone who has come up with a climate model that has any predictive power for atmospheric CO2? I don't.
Given a) the enormous cost of shifting away from cheap carbon-based energy, b) our inability to predict or define the benefits to doing so, and c) the likelihood that huge, poor, and growing carbon emitters such as India and China will not join our efforts, I think I am fully justified in saying that those who say we must do something about climate change no matter what the cost are on a quixotic quest at best.
I suppose it is reasonable to place the burden of proof on those making the argument for dramatic action. There is certainly a tinge of Don Quixote to trying to address such a large scale issue, given how poorly we are equipped to handle many smaller ones. I'd be happier with the Don Quixote metaphor than with the other one that comes to mind: Cassandra.
Nobody listened to Cassandra's warnings because they were outside their past experience. (Soldiers? Inside a big horse? 'cmon!) She didn't have a model with any predictive power by their standards. But if anybody remembered her words, they were probably convinced by the time Troy was burning. Too late ;)
Are there any specific events that you would consider clear evidence of a need for action? You are effectively saying "I'm not buying it", but you haven't made any lower bid. Maybe it's just an idea you wouldn't buy at any price? Or on any evidence?
Maybe I'm looking for "the China price" here. Perhaps evidence sufficient to make China and the rest of the developing world do their part would change your reasoning? But I'll admit it's hard to envision that. Maybe the China price on Global Warming is 0 RMB. Sort of like the China price on democracy.
STS:
I agree with your statement:"There is certainly a tinge of Don Quixote to trying to address such a large scale issue, given how poorly we are equipped to handle many smaller ones." I also agree with Scott that I have yet to know any model that has great predictability beyond that of a potential guide(ask Wall Street). Dr. James Hansen of NASA, not a climatologist, is the Guru of Al Gore for Global Warming. It seems he is the same person that was forecasting an Ice Age for the
'80s. NASA seems to have difficulty knowing the next day whether or not the weather will be ok for the space shuttle to land or take off.
THE DEPARTMENT OF ENERGY has spent $30 Billion a year for over 30 years on something-I don't know what. On an inflation adjusted basis my guess is 2 Trillion! An additional $15 billion is planned each year over the next ten. My point is that the solutions are here. Money is not the answer!That is why Global Warming/Climate change(it was changed because the last ten years were cooler) is irrelevant.
I may not have explained my solutions clearly. My initial proposals are to solve automotive problems first by using compressed Natural Gas. Second, we use Natgas for power plants. These can be implemented in five years. By then, perhaps we know how to clean coal. Natgas can be used by cars today and cost about a $1.00 per gallon equivalent for gasoline. It not only burns cleaner but will also enable the car engine to last longer. Longer term, maybe we continue to use coal, but we still have reduced "greenhouse gas emissions" below ANY forecast for the next 30 years. India is installing Natgas pumps for its cars as we write.
I believe Ocean Power is a possible solution for electric power. Algae Oil for diesel power to replace drilled oil is another solution. Hybrids and batteries are political solutions backed by rebates. Remember ehtenol? remember THE DEPARTMENT OF ENERGY!
Old Guy
STS: I keep hearing the Cassandra argument. But it's not really relevant. Global warming is still an unproven theory. Advocates say that we can't afford to not take steps to reduce global warming, but taking any steps at all means gigantic expenditures. And if we don't understand global warming enough to prove it exists, then how do we know that the gigantic expenditures we make are going to be worthwhile?
For all I know, global warming is driven by sun cycles, and there is absolutely nothing that we can do about it.
And even if we try really hard to reduce carbon emissions, we are very unlikely to make much of a difference. And even then, one volcano could undo all of our efforts in a matter of days.
Scott,
I'm sorry that I didn't reply earlier. There is a big difference between myself and Milton Friedman, and that it that I consider myself first and foremost a follower of Edmund Burke. There is no chance of getting government out of health care. None. Consequently, by not allowing the government to better run the current system, you are helping to perpetuate the current system, which is the worst possible system. Here's Milton Friedman:
http://www.prospect.org/cs/articles?articleId=10764
RK: But, you know, physicians incomes relative to other highly skilled professionals are relatively lower in the western countries that have universal health insurance, so I think it is kind of indeterminate.
MF: We have the worst of all of all worlds on that score
RK: I couldn't agree with you more. We have the worst mix of government and private, I could not agree with you more.
MF: We ought to have much more private or much more government. ( NB DON )
My difference with MF is practical. We are not going to have a lot less govt in health care. Period. Consequently, by denying this political reality, you are helping keep our system in this middle ground morass that MF says is worse than more govt. That's my position. I'd prefer to do it in connection with a guaranteed income, as Charles Murray does in In Our Hands, but MF was correct. You must have one or the other.
If I thought that your view had a chance to get implemented, I'd be much more accepting of your view. But it doesn't, in my opinion. In the meantime, we're stuck with, as MF says, the worst of all worlds.
Take care,
Don the libertarian Democrat
PS It's fine to disagree with MF. I just find that, on close inspection, many of his ideas are not what people seem to think that they are. That's why he's getting such bad and unfair press.
Don: Thanks for the link to the Kuttner-Friedman discussion. I read the whole thing, but I don't see where MF comes across as strongly favoring an all-government healthcare system.
MF says, and I agree 100%, that the fundamental problem with healthcare is the third party payer problem. Get rid of that and you would totally transform the industry. All it would take is a stroke of the pen: either allow everyone to deduct healthcare expenses or no one.
If you go to an all-government system, MF correctly notes that in the end you will get rationing. I don't see that as an acceptable alternative.
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