In the end, we will remember
not the words of our enemies,
but the silence of our friends.
Martin Luther King
Wapshott, Milton Friedman and Conservatives
Over the weekend Nicholaus Wapshott pushed a Washington Post op-ed entitled "How conservatives misread and misuse Milton Friedman."
I have to say I'm confused here:
The pair concluded that, by imposing high interest rates when disaster struck, the Federal Reserve did not funnel enough money into the economy, turning the crash into a depression. If the Fed had provided plentiful cheap money, Friedman argued, the slump would have lasted a couple of years, not a decade. - NWIt is true that the Fed raised interest rates in late 1931 and 1932, which worsened contraction but two waves of bank failures occurred several months later (around harvest time) after the Fed Reserve dropped interest rates in early 1930. A bigger factor may have been the failure of the Fed Reserve as a lender of last resort during the banking panics, failing to exercise nationalized functions of clearinghouses which had helped to resolve pre-Fed panics. (As Friedman pointed out, the Fed could have purchased government bonds, which would probably have provided the necessary liquidity needed to combat bank runs.) There was moral hazard: why should fellow bankers step in (like they did before)? Isn't that the Fed's responsibility? (You can almost hear Dickens' Scrooge ask "Are there no prisons? No workhouses?") Why wouldn't Big Banks welcome the prospects of thinner competition, figuring that they would get their fair share of new depositors and customers in the process?
"The need for a lender of last resort in the U.S. banking system was due to a systemic weakness caused unintentionally by state and federal banking regulations. But the most important cause of the bank runs that began in October 1930 was bad times in the farm belt, where the banks were especially weak and poorly diversified. The number of bank runs increased exponentially in December 1930—in that single month 352 banks failed. Most of the failing banks were in the Midwest , their failures caused by farmers who defaulted on their loans because they were hit hard by the economic downturn. No sooner did the first wave of bank runs subside than another got underway in the spring of 1931, creating what Friedman and Schwartz described as a “contagion of fear” among bank depositors. Bank crises continued to come in waves until the spring of 1933."
[Among other things, banks, because of misguided, counterproductive regulations, couldn't diversify geographically, across sectors of the economy. Thus, say, if harvests were below par due to weather conditions or farmers got meager market prices for their crops and hence couldn't pay off their loans, farm state banks could go under; a diversified bank across state lines with , say, operations in a robust manufacturing sector Northeastern state, would be better able to withstand shocks in specific economic sectors.]
Indeed, despite their frequent invocations of Friedman, conservatives have long since abandoned the principles of his Chicago School remedies in favor of more stern solutions advocated by Austrian economists Ludwig von Mises and Friedrich Hayek. They want to reduce the size of the state as fast as possible by slashing government spending, paying off public debt quickly, cutting taxes and removing regulations from business. - NWI am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible. The reason I am is because I believe the big problem is not taxes, the big problem is spending. The question is, "How do you hold down government spending?" Government spending now amounts to close to 40% of national income not counting indirect spending through regulation and the like. If you include that, you get up to roughly half. The real danger we face is that number will creep up and up and up. The only effective way I think to hold it down, is to hold down the amount of income the government has. The way to do that is to cut taxes. - Milton Friedman, John Hawkins interview 9/03
His belief in an ordered, managed economy through interest rates runs counter to prevailing conservative orthodoxies. He did not adopt absolutist positions on the size of the state and the evils of government- NWNot even close. Friedman was adamantly opposed to activist Fed action: "Friedman modified some aspects of the classical theory to provide the rationale for his noninterventionist policy recommendation. In essence, monetarism contends that use of fiscal policy is largely ineffective in altering output and employment levels. Moreover, it only leads to crowding out. Monetary policy, on the other hand, is effective. However, monetary authorities do not have adequate knowledge to conduct a successful monetary policy—manipulating the money supply to stabilize the economy only leads to a greater instability. Hence, monetarism advocates that neither monetary nor fiscal policy should be used in an attempt to stabilize the economy, and the money supply should be allowed to grow at a constant rate. Friedman contends that the government's use of active monetary and fiscal policies to stabilize the economy around full employment leads to greater instability in the economy. "
In the words of Friedman himself: "This evidence persuades me that at least a third of the price rise during and just after World War I is attributable to the establishment of the Federal Reserve System... and that the severity of each of the major contractions — 1920-1, 1929-33 and 1937-8 is directly attributable to acts of commission and omission by the Reserve authorities. It is a bad system to believers in freedom just because it gives a few men such power without any effective check by the body politic — this is the key political argument against an independent central bank."
Finally, Wapshott seems to be detached from reality in talking about the Republicans, especially the Tea Party Republicans in Congress, and Mitt Romney, especially in reference to Milton Friedman. Friedman said, "I am a libertarian with a small "l" and a Republican with a capital "R". And I am a Republican with a capital "R" on grounds of expediency, not on principle."
If you look, for instance, just at renewal of the Patriot Act, very few Republicans voted against it (in the House: "Among the Republicans objecting to extending the measures were libertarian Rep. Ron Paul and eight tea party freshmen. They included Bobby Schilling, an Illinois pizza parlor owner who favors smaller government, and Justin Amash, a Palestinian-American from Michigan who has "serious reservations" related to protecting civil liberties.") Rep. Ron Paul is the only GOP legislator I've heard discuss Austrian School economics. The Wikipedia article on libertarian Republicans lists a dozen federal legislators in both houses, and it lists Rothbard (Austrian School) and Friedman (monetarist). I have repeatedly identified with this group.
So I can't understand where the author is coming from, unless he is buying into the progressive talking points on the Tea Party. The theme of limited government goes beyond fiscal conservatism or targeting morally hazardous domestic policies: for instance, it also refers to government scope creep at the expense of our privacy. The Tea Party in reality attracted a coalition of people whom shared some but not necessarily all limited government concepts (e.g., Big Defense conservatives).
As for Mitt Romney, I have often noted my differences from him on immigration, China (trade), and foreign policy (among other things). Don Boudreaux of Cafe Hayek is so irked by Wapshott that he wrote two letters to the editor over the post (here and here). (I think Don forgot to mention Romney's immigration policies.)
Speaking of Milton Friedman:
Happy Centennial Birthday Tomorrow!
Don Boudreaux of Cafe Hayek has written a fine tribute here.
Musical Interlude: My Favorite Groups
Blondie, "The Tide is High"
