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.