DeLong, Friedman and Maximal Government

by Chidem Kurdas

The case made for minimal government by Milton and Rose Friedman in their 1979 book, Free to Choose, has been debunked,  according to Berkeley professor Brad DeLong.  Basically, he avers that the Friedman program has been tried and failed. As a commentary on Friedman, this is outrageously misleading. But Mr. DeLong  provides a revealing glimpse of the left-liberal mindset.

He makes three main points. One is that steady monetary growth does not foster macroeconomic stability, contrary to Milton Friedman’s analysis. Ben Bernanke used the Friedman script in the recent recession and yet here we are with anemic growth. That’s the evidence Mr. DeLong cites.

Freidman argued against discretionary policymaking and in favor of an automatic, consistent mechanism. Federal Reserve policy has been anything but steady and automatic in the past 20 years. The Fed opened the sluices in 1998, thereby encouraging the stock bubble. The Fed kept rates low in the early 2000s, thereby feeding the credit and property bubbles. John Taylor derived a flexible rule that would meet the Friedman criterion of consistency but showed that the Fed deviated from this rule.  The Fed bubble blowing episodes strengthen the case for steady, rule-based monetary growth, consistent with Friedman’s reasoning.

How to deal with externalities, or effects on third parties, is the second ground on which Mr. DeLong claims to rebut Friedman. He suggests the courts fail to correct externalities, in particular in the medical area. It is true that tort litigation has become a travesty with gigantic class action suits that redistribute income to lawyers. Friedman was an optimist –as he and Rose acknowledged in their memoir – and he expected certain parts of the government to work relatively well. That the courts work badly does not support Mr. DeLong’s suggestion that more regulation is the solution.

In fact almost every activity in America is increasingly handicapped by regulation. While Friedman’s optimism has not been born out, he looks more prophetic than ever in warning against pullulating regulation and working to stop this trend.

Mr. DeLong’s third point is that inequality has escalated, again contrary to Friedman’s expectation. Notwithstanding his optimistic outlook, Friedman had a solution for poverty. He favored a simple negative income tax that would automatically supply income to anyone who fell below a given level. This has not been tried—instead the US supplies an intricate mass of benefits to some and imposes myriad burdens on others, with some degree of arbitrariness.

Mr. DeLong does not get into that. He concludes that government provision of a limited safety net, courts and steady monetary growth does not achieve “a relatively equal and prosperous society with full employment and equal opportunity.” Minimal government is out of fashion. Maximal government is in.

Indeed, that is what we’re getting. This year Federal spending will soak up  24.3% of GDP, up from 20.8% four years earlier—as Glenn Hubbard argued, a level of spending that will almost certainly increase most Americans’ tax burden.  And President Obama’s new budget weighs in at $3.6 trillion.

That’s the thing about maximal government. Some intervention to reduce inequality and create safety is not enough. Why not more intervention to further reduce inequality, create more safety and do a thousand other things besides? Thus it grows and grows. Mr. DeLong might have looked around in his own state of California to see the consequences of unbounded government.

Friedman tried to ward off the danger and his patient, thoughtful work had some result. But his influence was temporary. That is our tragedy.