Friedman, Greed, and Economic Stimulus

by Sal on February 9, 2009

in Economy,Politics

Milton Friedman (1912-2006) was one of the great Conservative economists of the 20th century, who saw the New Deal, the Stagflation of the seventies, and the vindication of his economic theories in the 1980s and beyond.  Originally a Keynesian New-Deal proponent, he realized after much study that Keynesian economics was dead-wrong, and proposed many of the supply-side theories that Conservatives today take for granted.

His theories on consumption are the principle theories debunking the idea of a Keynesian stimulus.  Friedman realized that people’s spending habits were not based necessarily on their current income stream, or a flow of cash, but rather on their anticipation of their future income.  This is why a Keynesian stimulus doesn’t work.  Because a Keynesian stimulus is, by its nature, temporary (such as the one-time rebate checks received from the last stimulus package), it’s stimulative effect is minimal.  People are more likely to save money that is temporarily received than they are to spend it.  Income-tax cuts, however, are much more likely to result in economic growth because they contribute more to a person’s long-term income, rather than simply a quick influx of cash. This is why I also am skeptical a temporary suspension of the Payroll tax (proposed as a 1-year suspension) that has been proposed by many Conservatives.  While it may have some small stimulative value, is not a way to grow the economy, as it is still a temporary increase in income that many people may store away to save for the rough times ahead.

With all of the talk lately surrounding “Greed”, whether it be in relation to the causes of the current financial crisis or in relation to the  of CEO salaries, it is worth looking at how Friedman looked at greed, and at the same time revisit our core Conservative economic principles.  In this old interview, Friedman is asked about rewarding greed vs. rewarding virtue.  Friedman then takes the premise of the question and turns it on its head, pointing out that it is not greed, but self-interest that makes the world move.  Every political and economic system in the world is guided by self-interest, whether it be the self-interest of the few (Communism) or the self-interest of the many (Capitalism).  Friedman points out that the only systems in the world where people have risen from poverty to be able to make a life is Capitalism founded on freedom.

Friedman is right.  Only freedom from government intrusion can actually cause economic prosperity.  The GDP chart below is illustrative.

The periods of real economic growth coincided with the years that government got out of the way.  The 1920s saw high economic growth, only to be stymied by the Great Depression due to over-regulation of the monetary system in the late 1920s, and lengthened by the increased government intervention in the 1930s.  The 1950s and 1960s saw high growth due to the Government getting out of the way by ending some New Deal programs, as well as the Kennedy tax cuts in the early 1960s.  The 1970s saw a rather stagnent economy, mostly due to the Great Society measures put in place by LBJ.  The economy skyrocketed again (with minor recessions in between) due to the tax cuts and deregulation of Reagan in the 80s and the GOP congress in the 90s.  This decade has seen tremendous economic growth due to the Bush tax cuts, but has been cut short by government intervention in the real estate sector.

Economic freedom is the answer.  The recession would be painful, but somewhat short and painful, if government reduced it’s level of taxation but otherwise got out of the way.  The market would end up fixing itself after a time, and the high growth of the last 30 years would continue.  With this stimulus package, the TARP package, and the soon-to-be liberal programs of Universal Health Care, TARP II, and God-knows what else, we could be in for a long haul of economic stagnation or even contraction.  The lesson to learn from Friedman is that of Freedom.  Freedom to pursue one’s own self-interest is the key to making our economy flourish, and freedom from government is exactly the right prescription for this crisis.

{ 2 trackbacks }

The Libertarian: Milton Friedman on Greed
October 26, 2011 at 7:59 pm
October 27, 2011 at 12:10 am

{ 0 comments… add one now }

Leave a Comment

You can use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Previous post:

Next post: