Richard Posner has an essay arguing that the influence of Milton Friedman is declining, partly because the recent crisis showed weaknesses in laissez-faire ideology. He specifically cited the deregulation of the financial markets as a cause of the crisis, even though the most persuasive studies suggest otherwise.
In fact, the profession is only beginning to catch up to what Friedman understood in 1998:
Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.
. . .
After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.
Most of the profession thought money in Japan was easy, and that monetary policy was
effective ineffective at the zero bound. Friedman knew better. Now in 2013 we are finally seeing what happens when a central bank does adopt a 2% inflation target—the currency depreciates sharply in the forex markets, in contrast to those (like Posner?) who believed in liquidity traps. Friedman was one of the few to correctly diagnose the Japanese deflation, and to provide effective solutions. It’s nice to see the world beginning to come around to his views. ”Expectations traps” are about as real as “confidence fairies.” (Funny how some believe in one but not the other.)
I found this to be even more puzzling:
Although economic libertarians advocate a number of sensible reforms, such as ending the war on drugs, authorizing physician-assisted suicide, allowing the sale of kidneys and other organs, deregulating the adoption market, abolishing tax deductions for employer-provided health insurance, liberalizing immigration, privatizing the postal service, and abolishing agricultural subsidies, many of these and other libertarian reforms are politically infeasible.
Yes, it’s politically infeasible to achieve pure libertarian solutions in the political realm. But surely a pragmatist like Posner does not view perfection as the relevant measure of influence. In fact, libertarianism is making very important gains in many of the areas cited by Posner:
1. Two states recently voted to legalize marijuana. Given the strong support for legalization among the young, and the strong opposition among voters too old to have been hippies in the 1960s, support for legalization of marijuana will continue to spread, one funeral at a time.
2. Two states have now legalized physician-assisted suicide. And as with marijuana legalization, this trend is almost certain to spread.
3. The Obama health care bill has a provision that gradually phases out the tax deductibility of health insurance. Although I was very disappointed by many provisions of ObamaCare, this provision is a huge win against the medical-industrial complex. It will eventually raise the cost of health care bought by insurance from 60 cents on the dollar, to the full cost of provision. This will provide enormous incentives to hold down health care costs. Yes, there are other provisions of ObamaCare that boost costs, but in the long run this provision is a big win. Academic economists (liberal and conservative) beat an industry controlling 18% of GDP.
4. I don’t know if the immigration liberalization plan will pass Congress, but the vote is so close that Posner can’t possible claim it is “politically infeasible.” It might well happen.
5. With the advent of email the younger generation is losing all interest in snail mail. At some point they will view the Post Office as a dinosaur, and it will be privatized. Matt Yglesias recently suggested it be turned into an employee-run company, with no subsidies.
And that’s not to mention all sorts of other ideas of Milton Friedman that have already happened (end the draft, lower MTRs on the rich, privatize SOEs, remove price controls and barriers to entry in fields like transportation), or are very much a part of the current political debate (education vouchers, HSAs, etc.)
Milton Friedman will remain relevant when other “giants” of his era (like Bob Solow) are long forgotten, or perhaps just a name attached to a growth model that has long since lost its relevance.
HT: David Henderson