Who Will Be the Next Milton Friedman?

I was recently watching a business program on television where several people were debating the wisdom of spending another vast sum of money in another stimulus bill (now called a jobs bill) in order to stimulate the economy. One of the people made the statement, “Anyone who has taken economics knows that in a recession you need to inject money into the economy to stimulate spending and jobs.” That started me thinking, “Where did this guy learn economics?”

This thinking is the product of Keynesian economics, named after John Maynard Keynes (1883-1946). Keynes hypothesized that government can use fiscal and monetary policy to mitigate the adverse effects of business cycles with their periodic recessions. Keynesian theories were the basis of the policies of Franklin D. Roosevelt and the New Deal when massive amounts of government spending and government agencies were set up in an attempt to restart the economy during the Great Depression. If you distill Keynes down into a word, it would be demand. Keynesian economics attempts to create demand to level out a downturn in the economy.

If this guy had a balanced lesson in economics, he would have learned about the theories of Milton Friedman (1912-2006). Friedman, a disciple of Keynes, went to Washington in 1943 to work in Roosevelt’s New Deal. He realized there was a flaw in Keynesian theory in that the “Phillips Curve” which described the consumption function did not work. During the 1950’s, Friedman became the leading advocate opposing Keynesianism and promoted a macroeconomic policy called monetarism. He argued that the government could not micromanage the economy because the people would realize what the government was doing and would change their behavior and neutralize the policies. He predicted that Keynesianism would cause “stagflation,” high interest rates and minimal growth. (Remember Jimmy Carter?). Friedman argued that a small increase in the money supply and relaxing of business regulations were all that were required.

Friedman and his disciple, Arthur Laffer (The Laffer Curve), were the architects of the policies of Ronald Reagan, which took only 18 months to turn around the malaise of the Carter years. If you boil Friedman down to a word, it would be supply. In the Reagan years, this was known as supply side economics. The increase in money supply was provided by tax cuts which resulted in an economic turnaround that also increased the total tax revenue to the government. This also worked for John F. Kennedy who used a tax cut to avoid a recession. George W. Bush also used tax cuts which increased total revenues, but strayed from Friedman in that he allowed spending and the size of government to increase which negated the positive effects.

Keynesian thought came to the forefront again in 2007 and has been the basis for the policies of Barack Obama and former British Prime Minister, Gordon Brown. Gordon Brown has now been removed from office. The Obama administration has pumped trillions of dollars into the economy and has little to show for it except they have doubled the national debt in 18 months. We have had only minimal growth. The Fed is loaning money to banks at zero interest in an effort to hold down inflation, but that is the only thing currently keeping us from a full blown case of stagflation.

The causes of our economic crash are for another time. Read Paul Schiff’s book, "Crash Proof: How to Profit From the Coming Economic Collapse" (2006). Written one year before the economic problems started, he predicted both the stock market and the real estate collapses. There is a third collapse in his prediction, the collapse of the dollar. There is your stagflation. Friedman is dead. Arthur Laffer is seventy years old and retired. Where is the next great economic theorist to get us out of this Keynesian debacle? I wonder.

Fannie Mae on Wheels?

I’m seeing an ominous parallel here. In yesterday’s Charlotte Observer, I read an article about General Motors’ upcoming purchase of Americredit. They called it, “a deal that allows the automaker to expand loans to customers with poor credit…” It further states that, “GM, which is 61% owned by the US Government, is getting back into the business of making risky loans.” The article goes on to say that GM is missing sales opportunities due to lack of credit for lease deals and financing for subprime buyers.

We the people (US Government) own 61% of GM; the unions own a big chunk of the rest. We the people will now own 61% of Americredit which will finance GM cars to buyers with subprime credit. If these subprime borrowers default on their loans, the loss will be ours.

It’s one thing for a company to raise capital and risk it to offer subprime financing in return for a chance to get a higher reward from higher interest rates. It’s totally another for the government to do it and force the risk onto the taxpayers.

This is exactly what happened to the real estate market. The government passed laws to encourage subprime loans to homebuyers to increase home ownership. These loans are purchased by Fannie Mae and Freddie Mac, two quasi government agencies, which are backed by the US Government. The taxpayers are now on the hook for the future losses of these agencies which now own over half of the outstanding home mortgages.

So, now we are in the process of creating a Fannie Mae on wheels. I, for one, cannot see anything good coming out of this. GM will have the unfair advantage of offering subprime loans to buyers with poor credit; all backed by the people of the United States.

How does this affect competition with Ford Motor Company, which did it the right way? When Ford saw the government’s deal, they walked away. They sold off or mortgaged assets to build up cash. They invested in new technologies, quality control, cross platform efficiency and designing cars that people will buy. They made a deal with the unions to eliminate the “job bank.” This allowed them to close unnecessary factories. Ford started making a profit and has actually made a big payment into the pension fund to reduce the unfunded pension liabilities. Ford has increased market share while GM, Chrysler and Toyota have all decreased. Ford has now surpassed Toyota in the J. D. Power ratings of buyer satisfaction. Now they have to compete against US, the taxpayers of the United States who now have a huge stake in the success of GM.

Until GM pays back all the money to taxpayers and fixes its own problems, I will buy Fords. It is my little protest. I say little because when I buy a car, I drive it until it drops or until I can’t stand it anymore. My 2 year old Ford has given me 37,000 trouble free miles so far. It may be a long time before I need another.