September 2009 Archives

Milton Friedman was a highly visible economist, statistician, and policy commentator during the Twentieth Century. Before he died in 2006, he wrote and co-wrote several books relating economic theory, policy studies, and statistics. He was the recipient of the Nobel Prize in economics in 1976.

I just finished reading “Free To Choose: A Personal Statement,” written by Thomas Friedman and his wife, Rose Friedman. The book is dense and full of well thought-out arguments for free markets, smaller government, and how policies that adhere to these principles will result in greater liberty and freedom for the people that live under them.

This book is almost thirty years old and it shows. Many of the numbers the Friedmans use in the book are laughable today, especially those they use as salaries for the common man or the cost of an average home.

It’s fascinating, however, they write at the end of the Carter administration that “the tide is turning.”

The failure of Western governments to achieve their proclaimed objectives has produced a widespread reaction against big government. In Britain the reaction swept Margaret Thatcher to power in 1979 on a platform pledging her Conservative government to reverse the socialist policies that had been followed by both Labour and earlier Conservative governments ever since the end of World War II.

“Free To Choose” is organized in chapters that each spend a liberal amount of print on a specific category of policy thinking. The first chapter, “The Power Of The Market” spends nearly 30 pages covering the ideals of a free market, the dangers of price controls, and the role of government with respect to markets. The second chapter is devoted to governments’ role in free trade and overall liberty and economic growth. Hint: Friedman isn’t a fan of tariffs or any other kind of government meddling with trade between nations. He offers a compelling historical argument for free trade by examining the governance and trade policies of Japan during the latter half of the 19th century and India during the latter half of the 20th century.

The third chapter, “The Anatomy of Crisis,” is perhaps the most relevant to readers today. It examines the modern banking system in the United States from the inception of the Federal Reserve in 1913, the depression nobody remembers from 1920-21, and the Great Depression of the 1930s. For those who believe we are currently at risk of suffering from the same mistakes or making greater ones today in our vulnerable financial status, this chapter offers some brilliant insights.

In the conclusion of this chapter, the Friedmans write:

In one respect the (Federal Reserve) System has remained completely consistent throughout. It blames all problems on external influences beyond its control and takes credit for any and all favorable occurrences. It thereby continues to promote the myth that the private economy is unstable, while its behavior continues to document the reality that government is today the major source of economic instability.

The fourth chapter, “Cradle to Grave,” examines the development of the welfare state beginning in Europe in the late 1800s and then in the U.S. in the 1920s. Friedman spotlights health, education, and welfare in this chapter because at the time the book was written, they fell under a single department within the federal government.

The waste is distressing, but it the least of the evils of the paternalistic programs that have grown to such massive size. Their major evil is their effect on the fabric of our society. They weaken the family; reduce the incentive to work, save, and innovate; reduce the accumulation of capital; and limit our freedom. These are the fundamental standards by which they should be judged.

The following chapter challenges the popular notions of what “equality” means. The Friedmans distinguish between the following:

• Equality of outcome
• Equality of opportunity
• Equality before God

Concerning equality of outcome, they write:

Life is not fair. It is tempting to believe that government can rectify what nature has spawned. But it is also important to recognize how much we benefit from the very unfairness we deplore.

This chapter goes on to examine the effects of egalitarian policies as practiced in the US and in other modern societies.

… a society that puts freedom first will, as a happy by-product, end up with greater freedom and greater equality. Though a by-product of freedom, greater equality is not an accident. A free society releases the energies and abilities of people to pursue their own objectives. It prevents some people from arbitrarily suppressing others. It does not prevent some people from achieving positions of privilege, but so long as freedom is maintained, it prevents those positions of privilege from being institutionalized; they are subject to continued attack by other able, ambitious people. Freedom means diversity but also mobility. It preserves the opportunity for today’s disadvantaged to become tomorrow’s privileged and, in the process, enabled almost everyone, from top to bottom, to enjoy a fuller and richer life.

Next, the Friedmans attach “What’s Wrong with Our Schools?”

It’s no surprise their position is that centralized planning is a substantial culprit of the problem with schools. Again, freedom is the answer, they say. Vouchers, for example, tied with freedom to choose public schools, are an ideal way to encourage competition between private and public schools and drive education quality up.

I found this passage about public subsidies of higher education shocking considering what we have observed in 2009:

When we first started writing about higher education, we had a good deal of sympathy for the (justification that public subsidies was an investment in future productivity and economic growth of society). We no longer do. In the interim we have tried to induce the people who make this argument to be specific about the alleged social benefits. The answer is almost always simply bad economics. We are told that the nation benefits by having more highly trained people, that investment in providing such skills is essential for economic growth, that more trained people raise the productivity for the rest of us. These statements are correct. But none is a valid reason for subsidizing higher education. Each statement would be equally correct if made about physical capital (i.e., machines, factory buildings, etc.), yet hardly anyone would conclude that tax money should be used to subsidize the capital investment of General Motors or General Electric.

Milton Friedman is undoubtedly spinning in his grave today.

Following education is the question of “Who Protects the Consumer?” This chapter discusses the development of the Interstate Commerce Commission, The Food and Drug Administration, The Consumer Products Safety Commission, The Department of Energy and the Environmental Protection Agency. The Friedmans raise some very valid questions about the government’s role in establishing these authorities and whether they are effective in their stated objectives.

For example, many are familiar with Ralph Nader’s book, “Unsafe at Any Speed,” in which he supposedly documents the safety risk the Chevrolet Corvair was to its occupants. This book ignited a firestorm that eventually crushed the Corvair out of production and resulted in new government regulations pertaining to the manufacture of automobiles. It’s difficult to argue that the outcome was a bad thing, but what about the original premise? Was the Corvair that bad? My dad was a Corvair collector and had two that he tinkered with, restored, and drove around on occasion. I always thought they were odd cars because the engine was in the back. The Friedmans point out that ten years after Nader’s book landed, “one of the agencies that was set up in response to the subsequent public outcry finally got around to testing the Corvair that started the whole thing. They spent a year and a half comparing the performance of the Corvair with the performance of other comparable vehicles and they concluded, ‘The 1960-63 Corvair compared favorably with the other contemporary vehicles used in the tests.’”

Next is “Who Protects the Worker?” Here labor unions land square in the crosshairs. Also addressed are government interventions into work such as regulations against child labor, minimum wage laws, OSHA oversight, workers compensation, and more.

Chapter 9 is about inflation. This isn’t very relevant right now, but likely will deserve a re-read in a year or so.

Here, Friedman puts his statistician muscles to work and establishes through numbers a strong correlation between monetary control and consumer prices. When the the Treasury and the Federal Reserve flood the market with money, prices respond by going up.

The final chapter is a nice capstone on the book and discusses how the U.S. Constitution relates to many of the policies discussed and how it is eroded by some.

Appendix A is an interesting inclusion. It is the party platform from the Socialist party during the 1928 presidential campaign. The Friedmans go through each of the 14 items in the platform and demonstrate that despite the Socialist Party not having a chance in Hell of ever having a candidate elected, since 1928, just about each and every one of these ideas put forth by the Socialist Party has been enacted.

That’s something to think about.

“Free To Choose” is available in paperback at a MSRP of $15.00. It’s not a quick read, but definitely an informative and educational one.

I finally got around to watching the documentary film I.O.U.S.A., which I rented from NetFlix. Wow. I recommend anybody and everybody in the U.S.A. watch this film. If you’re not up to renting it or buying it, watch the 30-minute byte-size version available on YouTube.

David Walker, former Comptroller General of the United States and head of the Government Accountability Office (GAO), now President of the Peter G. Peterson Foundation, takes on the seemingly insurmountable task of explaining our national debt and does so successfully with finesse.

I learned a lot from this film. I mean, because I’ve been pretty well plugged-in, politically, I knew our national debt was a huge problem, that the federal government’s budget deficits were only making things worse and federal programs like Social Security and Medicare only exacerbate the problem. What I didn’t know was that our trade deficit is so huge, the largest in the world, in fact.

Before watching I.O.U.S.A., President George W. Bush was not my favorite president. While he did a good job responding to the terror attacks in 2001 and going after terrorists where they operate in the Middle East, he and his administration seemed to ignore problems here at home, like the growing problem of illegal immigration and adding more liabilities to Medicare with the Part D prescription drug coverage. Overall, I think he was a mediocre president.

After watching I.O.U.S.A., I’m beginning to wonder if George W. Bush didn’t commit some kind of treason against this country by letting all things economic get so out of hand under his watch!

After watching I.O.U.S.A., I’ve developed an increased respect for the Clinton administration for how they handled economic matters by getting the federal budget under control for a couple of years. Granted, things were easier then with no War On Terror to fund and what-not.

So, what about our present president? Well, he sucks too! Maybe worse than Bush!

Walker is dead on by identifying the four big economic problems facing America:

• Federal budget deficit
• Savings deficit
• Trade deficit

And finally,

• Leadership deficit

For example, the Democrats’ healthcare reform proposal does not help our debt situation. The government’s own policy analysts show that it too will only add an increasingly large liability to an already fast-growing balance we owe. Yes, we need reform, but this ain’t what the proverbial doctor ordered.

One big chunk of our trade deficit is our dependence on foreign oil. Our president’s solution is to pull new, alternative energy solutions out of his butt to replace all energy infrastructure. You know, that might be a fine solution if we were already in a good economic situation, where we had economic surpluses to rely on as we went through the painful process of converting to a scientifically, environmentally superior form of energy generation, but in the state we’re in right now, it simply does not make sense.

What does make sense is for the U.S. to start getting more energy production from its own resources. We have lots of it. Oil. Coal. Natural gas. We’ve got gazillions of tons of it, literally, but we’re staying away from it, on principle, I guess.

Leadership deficit! We need leaders that will do what’s right regardless of what’s popular or what their party, platform, or agenda might be. President Obama wants to usher the U.S. into a new era of green-ness, environmentalism, ecological awareness, etc. etc. He needs to realize we’re never going to be able to do that unless we address our vast economic imbalance represented by our debt and unfunded liabilities.

What our government aims to do now is a classic example of cart before horse.

Here’s another tough pill I had to swallow watching I.O.U.S.A.: We probably will need to raise taxes to get out of this mess. But our legislators need to reduce the overall size of government at the same time. We’ll need to raise taxes and reduce spending.

That trade deficit thing just keeps bothering me. I want to know more about why the United States doesn’t produce much anymore. Common sense tells me it’s because other nations can produce cheaper than we can. Why? Is it high labor costs? Is it restrictive regulation?

At the state capitol rally on Saturday 9/12, a young woman (Nicole Condie, I think her name was) was an unscheduled speaker. She said she had interned for Orrin Hatch and, as an intern, was responsible for handling incoming mail. She said she would prepare responses to letters from concerned constituents and sign them with an autopen. She said she assumed the senator’s staff would at least collect statistics on what issues his constituents were writing in about and how they felt. However, she said, no statistics were being collected at all. She said there were always protests happening near the senate offices, but the senators never heard or saw them and had private entrances to the building that allowed them to come and go without any exposure to these protests.

Is it really any wonder why our senators seem to be off in their own little world?

I’ve been reading Free To Choose by Milton and Rose Friedman. This book was written in 1979-1980 and it talks about many of the important political and economic issues of that time. Friedman explains things so well and his points are still very relevant. However, as I was reading the chapter “What’s Wrong with Our Schools?” something jumped out at me. See if you can pick it out. I’ll add emphasis it to give you a hint.

When we first started writing about higher education, we had a good deal of sympathy for the [justification that public tax subsidies for state schools was an investment in the future productivity of members of society]. We no longer do. In the interim, we have tried to induce the people who make this argument to be specific about the alleged social benefits. The answer is almost always simply bad economics. We are told that the nation benefits by having more highly skilled and trained people, that investment in providing such skills is essential for economic growth, that more trained people raise the productivity of the rest of us. These statements are correct. But none is a valid reason for subsidizing higher education. Each statement would be equally correct if made about physical capital (i.e. machines, factory buildings, etc.) yet hardly anyone would conclude that tax money should be used to subsidize the capital investment of General Motors or General Electric. If higher education improves the economic productivity of individuals, they can capture that improvement through higher earnings, so they have a private incentive to get the training. Adam Smith’s invisible hand makes their private interest serve the social interest. It is against the social interest to change their private interest by subsidizing schooling. The extra students — the ones who will only go to college if it is subsidized — are precisely the ones who judge that the benefits they receive are less than the costs. Otherwise they would be willing to pay the costs themselves.

Wow. Hardly anyone, indeed. Yet, it has happened in the last year and some would argue it was unavoidable because no one in any administrative position (i.e. George W. Bush, John McCain, or Barack Obama) has/had the courage and wisdom to hold back and not “save” failing companies.