M. Friedman Goes to Washington

by Chidem Kurdas

Early in his career, long before he became a Nobel prizewinner and the household name for free market economist, Milton Friedman worked for the US Treasury. The following anecdote is from his 1998 memoir with his wife Rose, Two Lucky People.  This revealing example of how public officials operate illustrates, in Friedman’s words, “the interaction between bureaucratic self-seeking and supposedly objective analysis.”  It complements my previous post on whether politicians pursue the public good.

World War II had started. For Friedman and others at the Treasury, the main mission was to figure out how to finance the war effort while avoiding inflation.  In 1941, President Roosevelt created a separate Office of Price Administration against “price spiraling, rising costs of living, profiteering and inflation.” OPA was headed by Leon Henderson, a New Dealer economist. His deputy was John Kenneth Galbraith, later called the “price Czar.”

OPA staffers wanted to be given legal authority to fix prices, including rents, and wages. Roosevelt had created their agency by executive order, but the authority had to come from Congress. So they lobbied Congressmen, arguing that price and wage control was the only way to stop inflation. This was a potent argument because World War I had caused high inflation and there was fear of it happening again.

Meanwhile at the Treasury, Friedman estimated the additional taxation that would be necessary to siphon off income to reduce upward pressure on prices. Both he and OPA used the same Keynesian analysis for this purpose. (Friedman was not yet the critic of Keynesian policies that he would become.) Surprisingly, the Price Administration’s estimate of the amount of necessary taxes was much lower. The price control bureaucrats fought aggressively to make sure Congress would get their low estimate, not the Treasury’s high number.

In January 1942, Congress passed an act that authorized price and wage controls. Thereupon OPA turned around and came up with much a higher tax estimate. The additional tax they now recommended was way above Friedman’s assessment.

They had not wanted the Treasury to tell Congress that higher taxes would prevent inflation because this would have militated against the Administration acquiring the power to fix prices. But once they had that power securely in hand, they asked for even higher taxes—perhaps they had less faith in the efficacy of price fixing than they let on.

Friedman asks: “Crass promotion of their own power? Or necessary tactics to achieve what they firmly believed was a public good?” He comments that the manipulation of estimates “seemed to me then, and still does, dishonesty pure and simple.”

Of course, price controls are no public good. Artificially low prices cause the quantity demanded to exceed the quantity supplied. Shortages and arbitrarily distributed benefits are the inevitable result. In Crisis and Leviathan Robert Higgs wittily describes what happened:  “non-price allocations – selling the available product to friends, to whites, to pretty girls, to those first in line – popped up everywhere…”  Those with no inside connection were discriminated against. Rationing of key products followed.

Though comprehensive and national-level price fixing ended after the war, the power and financial might of the federal government had escalated permanently, as Higgs demonstrated.

Friedman himself did not foresee the long-term consequences of what he was doing in wartime Washington. And if he did not, it is a safe assumption that nobody did. Only in retrospect did he recognize the danger: “It never occurred to me at the time that I was helping to develop machinery that would make possible a government that I would come to criticize severely as too large, too intrusive, too destructive of freedom. Yet, that was precisely what I was doing.”

He was to confront his former fellow Washington bureaucrat, Galbraith, in the court of public opinion. The one-time price czar justified extensive government interventionism for decades to come in his prolific popular writings, so much so that some referred to the intellectual movement as Galbraithianism.  Friedman’s powerful exposition of free market principles had by the 1980s weakened Galbraithianism.

But as we see today with the Obama administration, the trend for large, intrusive government has not stopped, and neither has the destruction of freedom.