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November 16, 2006

Milton Friedman, RIP

Milton Friedman, RIP

by Jim Babka

For those who have not yet heard the news, Nobel Prize winning economist Milton Friedman has died. He was 94.

In many ways, Milton Friedman is an inspiration to us at Downsize DC. Perhaps you could even say he was an original DC Downsizer, of sorts.

Friedman was a great American and was considered by most to be the leading proponent for free market theory, and is the key figure in “Chicago School theory” of economics. 

The New York Times has written, “Mr. Friedman advocated legalizing drugs and generally opposed public education and the state’s power to license doctors, automobile drivers and others. He was criticized for those views, but he stood by them, arguing that prohibiting, regulating or licensing human behavior either does not work or creates inefficient bureaucracies.”

He even had tremendous influence in the Republican Party — at least for a spell. As Jacob Sullum wrote for Reason, “He has played a leading role in eliminating the draft, discrediting wage and price controls, and popularizing reforms, such as… private retirement accounts, that shrink the realm of politics and broaden the domain of individual choice.”

Friedman had much to say and write about the Great Depression. He blamed it on the Federal Reserve Bank. In his memoir he concluded, “The Fed was largely responsible for converting what might have been a garden-variety recession, although perhaps a fairly severe one, into a major catastrophe. Instead of using its powers to offset the depression, it presided over a decline in the quantity of money by one-third from 1929 to 1933… Far from the depression being a failure of the free-enterprise system, it was a tragic failure of government.” On Friedman’s 90th birthday, no less a figure than current Federal Reserve Chairman Ben Bernanke responded, “Regarding the Great Depression. You’re right, we did it. We’re very sorry.”

Friedman also played a role in what he termed the Miracle of Chile. Military dictator Augusto Pinochet, for all is unforgivable flaws, rescued the people of Chile from the hideous and destructive impact of Marxist President Allende, by allowing the “Chicago Boys” — a group of economists influenced by Friedman and his Chicago School colleagues — to help set economic policy in the country. Friedman himself gave a lecture in Chile during that time period.

And what advice did the Chicago Boys give? Wikipedia reports, “They abolished the minimum wage, rescinded trade union rights, privatized the pension system, state industries, and banks, and abolished taxes on wealth and profits. Pinochet justified such reforms by promising to ‘make Chile not a nation of proletarians, but a nation of entrepreneurs.'”

The “miracle,” according to Friedman, was that a military dictatorship would adopt such policies. Friedman was proud of the result even though vindication wouldn’t even begin to arrive for more than 15 years. He believed that sound economic policy would lead to political liberation and prosperity. Chile became a democracy in 1990. Chile’s economy has outgrown those of its Latin American neighbors, and the 1990s saw a boom.

It took time, but Friedman was proven right.

But Friedman wasn’t perfect.

He disrespected gold as a storehouse of value and endorsed the use of a central bank issuing paper money. He clung to the modern notion that a government can manage money properly. His theories had great influence over past Federal Reserve Chairman Alan Greenspan and current Fed Chair Bernanke. The cycle of boom and bust continues. The dollar is a shadow of its former self.

Friedman was also responsible for one of the worst Big Government innovations of the 20th century — income tax withholding. Friedman worked for the Treasury Department during World War II. He defended withholding as a short-term tool to help the government build the credit it needed to fight the war. Previously, only the well-off paid the tax with a check written every March 15.

Friedman’s withholding plan was supposed to be temporary. Obviously, it wasn’t.

And one would have little difficulty arguing that, more than any other policy, withholding made it possible for the income tax to become both widely accepted and widespread.

It took only 20 or so years for the income tax to become the primary tool of social engineering. And only the issuance of currency (as determined by the Federal Reserve) exceeds the income tax as a tool for financing the seemingly unlimited growth of government. End the income tax and return to a gold standard and the burden of government would shrink dramatically.

Withholding shielded us from the true cost of government. It helped democracy along to its worst excess — the belief that we could appropriate the wallets and earnings of others. And amazingly, we all know some dolt who thinks they’re getting free money from the government after they file their returns. Previous to withholding, very, very few Americans thought that way.

Friedman and his wife Rose have devoted their final years, as well as their legacy and their estate to promoting school choice. Every parent should have a choice. States shouldn’t be able to indoctrinate children and fail them in their education, while squandering so much money. This is a noble project and a fine instinct.

Unfortunately, like withholding and the Federal Reserve, Friedman believed that government will have to finance this change. Over the years Friedman has been approached by friends and admirers, reminding him that the piper calls the tune and he who has the gold rules. If government finances schools, government will run schools by regulation — even if they’re called “private.” Friedman was never deterred.

But a tremendous American has died today. His contributions to economics and public policy have touched all of our lives, whether we realize it or not. His legacy is a positive one.

But his legacy should also include his words. Friedman was, after all, a teacher at heart. Perhaps that’s why he cared so much about the issue of education.

As Jacob Sullum also reported, Friedman once said “the war on drugs and the harm which it does are simply manifestations of a much broader problem: the substitution of political mechanisms for market mechanisms in a wide variety of areas… the problem is not the kind of people who run our governmental institutions versus those who run our private institutions. The trouble, as the Marxists used to say, is in the system.”

Friedman wanted everyone to understand that the ability to spend other people’s money at will means that government programs do not face the discipline that private businesses do. “When a private enterprise fails, it is closed down,” he noted. “When a government enterprise fails, it is expanded.”

Now that’s a Downsize DC concept!

Jim Babka is the President of the Downsize DC Foundation and, Inc. He hosts a weekly radio show on the Genesis Communications Network and is a commentator for the Free Market News Network.

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