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“The Goldwater View of Economics” by Milton Friedman New York Times Magazine, 11 October 1964, pp. 35, 133-137 © Milton Friedman What is the economic philosophy of Barry Goldwater? The responses of most people to this question have one point in common: they are based upon a particular proposal or two, correctly or incorrectly attributed to the Senator. He is against Social Security (wrong) or for less regulation of business by the Federal Trade Commission (right). He is opposed to labor unions (wrong) or for less government spending (right). The unusual aspect of the answers is not that some are wrong—no doubt many people are also mistaken about some of President Johnson’s views. The unusual aspect is that no one seems to realize that Goldwater does have a philosophy, and not merely views on particular economic problems. Yet the philosophy is far more important than the views on particular issues. If Senator Goldwater is elected President, like all Presidents he will find that he cannot get some policies he wants, and he will change some of his particular views. Senator Goldwater’s philosophy, however, will not change—it is a basic part of the man. Freedom and opportunity are Senator Goldwater’s basic goals for mankind: freedom of the individual to pursue his own interests so long as he does not interfere with the freedom of others to do likewise; opportunity for the ordinary man to use his resources as effectively as possible to advance the well-being of himself and his family. Government exists to protect this freedom and to widen this opportunity. Throughout history, the great enemy of freedom has been concentrated power—private or governmental. If freedom is to be secure, power must be limited and it must be dispersed. The most effective way simultaneously to disperse private power and to limit governmental power is to rely primarily on voluntary exchange through a free market—competitive capitalism—to organize economic activity. The most effective way to disperse the remaining governmental power is to rely on a constitutional system of checks and balances, and a federal system of decentralized political responsibility. As Senator Goldwater said in opening his campaign in Prescott, Ariz., “This country has grown great and strong and prosperous by placing major reliance on a free economy. … Private property, free competition, hard work—these have been our greatest tools. This system has preserved and protected our freedom, our right to disagree, our diversity, our independence from arbitrary interference in our affairs. This system is the mighty engine of progress which enabled this country to develop from a small but independent citizenry to become a multitude spanning the continent and living on a level that is the envy of the world.” Wherever men are today reasonably free and relatively prosperous, they have gained their freedom and earned their prosperity through a system based on private property, free enterprise, and free markets. There is not a single exception. Centralized governmental control over the economy has been able to produce spectacular achievements—from the pyramids of ancient Egypt to the sputniks and space exploits of Russia today. Such a system has been able to attain great military strength. But it has never been able to achieve either freedom or a decent standard of living for the ordinary man. The Berlin Wall is a dramatic monument to the superiority of the free economy. Before they were torn asunder, the Germans, east and west, shared the same technology, had much the same level of living, and they are the same people. The West Germans chose the path of freedom. The East Germans had collectivism thrust upon them. The results are clear for all to see—growth and prosperity under freedom versus stagnation, deprivations and misery under collectivism. Of course, every economy is a mixture. In all, economic activity is partly organized through a free market, partly through rigid customary relations, partly through explicit governmental authority. But the proportions vary widely. Freedom and prosperity have gone along with a mixture in which the market is dominant; tyranny and misery, with one in which custom and the government sector are dominant. Yet the evidence is often misread. After a talk I once gave in Kuala Lumpur, I was informed that the success of the United States was attributable to the 20 per cent of socialism in its mixture, and the failure of India to the 20 per cent of free enterprise in its! Governmental activity, though it must be limited to its proper sphere and decentralized as much as possible, is of critical importance in protecting men’s freedom and widening their opportunities. Government must provide for the common defence, preserve law and order, define the rights of men and enforce contracts among them, keep markets free, provide a stable monetary and fiscal framework for the private economy, construct public facilities that for one reason or another cannot be provided by the market, and assist in easing distress and relieving misery. It is always tempting to have governments go still further, to have them try to do directly for the people what the people seem at the moment not to be able to or to want to do for themselves. But history teaches that this course seldom achieves the intended objectives; that it generally only weakens the capacity of the ordinary man to provide for his own needs. In addition, it has unintended consequences. Governmental power, once established, gravitates into the hands of private groups that use it for their own selfish purposes—groups that, by forming a coalition with government, are able to strip the consumer of the protection of the market place. How does the Senator apply these general principles to specific economic problems? To illustrate his approach, I shall consider five issues: (1) The economics of defense; (2) Federal expenditures and taxation; (3) Business-cycle policy; (4) Welfare programs; (5) Federal-state relations. THE ECONOMICS OF DEFENSE Senator Goldwater’s proposal to man the armed forces by attracting willing volunteers has important economic implications. If adopted, the books of the Government might show a higher dollar cost for personnel. But if so, it would be an optical illusion. Ending the draft will end an inequitable and capricious system of taxation in kind, recorded on the books neither as receipts nor as expenditures. 2 By any valid accounting, the gain in equity will be accompanied by substantial savings in cost through reduced turnover, lower expenditures on training and retraining, less waste of personnel and improved morale and quality of the armed forces. And the savings may well be enough to reduce even recorded costs. In addition, the private economy will be strengthened as youngsters will be able to plan their training and careers with confidence and can cease conducting their lives with one eye on the draft board. The need to keep our defences strong makes it all the more important to restrain other activities of the Federal Government. The economic pie is limited—the more we spend for other purposes, the less is available for the military. There is no surer way to condemn this nation to the status of a second-rate power incapable of exerting influence in the world at large than to fritter away our taxable capacity in a miscellany of costly schemes—as we have been doing. Though nondefense spending accounts for only a little more than half of total Federal spending, it accounts for twothirds of the recent rapid increase in Federal spending. Some leading pundits have criticized Senator Goldwater as inconsistent because he wants a stronger military establishment, which is necessarily a Federal responsibility, and at the same time favors reducing the scope of the Federal Government in other areas. If these policies are inconsistent, then so are the actions of the family faced with large medical bills that feels impelled to cut down food costs. FEDERAL EXPENDITURES AND TAXATION The size of Federal expenditures is important on the grounds of economy. The more of the nation’s resources the Federal Government absorbs, the less is left for other units of government and for citizens in their private capacity. But it is important also on grounds of freedom. The power of a centralized purse is very great indeed—as President Eisenhower warned so eloquently in his farewell speech to the nation from the White House. Political independence, a willingness to oppose the powers that be and to stand up for and finance unpopular causes—these are luxuries that people, firms and whole industries dependent for their economic life on Federal favor tend to dispense with. Freedom, too, is a scarce resource. On grounds of both economy and freedom, the Federal Government is now too big and is growing bigger at a dangerous rate. The need to halt this trend is the cornerstone of Senator Goldwater’s immediate economic program. As he put it at Prescott: “Today you work from January through April just to provide government with the money it spends. Until early February you are working to pay the expenses of local and state government. For twice as long thereafter you are working to pay the expenses of the Federal Government. Only then do you work for money that you yourself can use for what you yourself choose. This cancerous growth of the Federal Government must and shall be stopped.” In his specific approach to cutting the Government down to size, Senator Goldwater’s conservatism comes to the fore. We must, he says, proceed gradually and slowly, with forethought and care. We must not disappoint reasonable expectations or fall to honor commitments made. We must not introduce erratic and abrupt changes that will disturb the 3 private economy: “Much as we wish it were otherwise, we shall only gradually be able to alter many polices of the central Government.” Being a realist as well as a conservative, Mr. Goldwater realizes full well that a change in direction will not come by itself, that we must plan for it. That is the purpose of his proposed program of regular tax reductions: a 5 per cent across-the-board cut in income taxes each year for five years. As the economy grows, Federal tax receipts grow even more rapidly. Congress has regularly succumbed to the temptation to spend the proceeds—and a bit more. The Senator wants to reverse this process. A firm commitment to reduce tax rates will put steady and effective pressure on Congress to hold down spending. At the same time, the reduction in tax rates will strengthen private incentives and so foster a healthier and stronger economy. Senator Goldwater is determined to achieve fiscal responsibility. His proposed tax reduction is part of a package involving a firm commitment to hold down Federal spending, and is intended to help achieve that result. Since the proposed tax reduction will absorb only part of the increased revenue that economic growth at stable prices can be expected to generate, the commitment is only to a slowing down in the growing rate of spending, not to an absolute decline. Mr. Goldwater is hopeful that it will be possible to do still better and to use further savings to reduce the debt and to make further tax cuts. It is worth emphasizing how great are the cumulative effects of his program. This past year we had a massive tax cut of $11 billion. That was the first major cut in nine years. The five-year program Senator Goldwater has proposed would mean a gradual reduction in taxes totaling over $15 billion. BUSINESS-CYCLE POLICY In the Employment Act of 1946, Congress declared that it is “the responsibility of the Federal Government … to promote maximum employment, production, and purchasing power.” Senator Goldwater fully supports this declaration; he regards it as essential that the monetary and fiscal policies of the Federal Government be designed to promote full employment and stable prices—which is what the quoted words have come to mean. In addition he believes that it is long past time that another objective listed in the act—”to foster and promote free competitive enterprise”—should be honored in the observance rather than the breach. It is easy to accept these objectives. The question is how to achieve them. Senator Goldwater has said bluntly that the economic “wind cannot always blow fair. Occasionally rough weather cannot be avoided.” What should government then do? The Senator emphasizes that the spells of rough weather are often of the Government’s own making—though, of course, the Government never admits that; it always blames the private economy. Erratic monetary policy has frequently introduced instability that the private economy has had to cope with, and, despite all the talk of using fiscal policy to stabilize the economy, the Government’s own expenditures and receipts have been among the most unstable elements in the national economy—and in a direction increasing economic instability, not offsetting it. 4 The first need is therefore that Government conduct its own affairs in an orderly and dependable fashion to provide a stable monetary and fiscal base for the private economy. His proposed fiveyear program of regular tax cuts would contribute to that objective. It is in sharp contrast with the recent massive tax cut. That was an isolated action in a year of high prosperity and, along with other measures taken by the Administration in an election year, threatens to overstimulate the economy and to store up serious trouble for the future. With stable monetary and fiscal policies, any recession sets off automatic built-in responses that tend to moderate the recession. These have the great advantage that they start operating promptly and in a magnitude proportional to the need. Some, like unemployment insurance, have also the desirable feature that they ease any temporary distress or loss of income. On the fiscal side, the automatic responses make for deficits in recessions and surpluses in prosperity. On this point, the Senator has been much misunderstood. His emphasis on fiscal responsibility has been taken to mean that he is in favour of balancing the budget every single year. That is not his view. As a businessman, he knows full well that it would be extremely short-sighted for a business that experienced a temporary decline in sales immediately to discharge employees, stop all research work, and so on. The Government, like a prudent business man, must aim at balance over a period of years. To reinforce the built-in responses favoring recovery, Mr. Goldwater would call first on monetary policy, which can react quickly yet gradually. In the past; monetary policy has all too often been restricted during much of a recession and so has made the recession deeper. Instead, the quantity of money and credit should increase at an encouraging rate. Further, the Senator, in addition to having the Government continue its legitimate spending programs, would postpone any marginal reductions in spending and accelerate any tax reductions that would otherwise have been made later. In all these measures, he would emphasize steadiness and the avoidance of erratic actions. Past experience suggests that overreaction, which creates unnecessary problems for the future, is a very real danger. Above all, Senator Goldwater would emphasize that the true strength of the economy is in the private sector. Government policies that provide a favorable environment for the private economy, that promote competition and avoid governmental intervention, that leave private individuals with more of their own money for their own purposes, that avoid both inflation and deflation would release a great reservoir of strength in our economy; they would mean widened opportunities for all our citizens; they would be the occasion for a rebirth of vigor, for healthy and rapid economic growth that would make any temporary recessions even milder than they have been in the postwar period. WELFARE PROGRAMS The Government’s primary role in the area of welfare, in Senator Goldwater’s opinion, is to alleviate distress, to see to it that there is a floor below which no American need fall in the level of his consumption of goods and services. The Senator would like to see this objective achieved insofar as possible by voluntary and civic agencies, by private philanthropy. by cities and by states. But he recognizes that the Federal Government must stand by in case of need to assure 5 that the floor is truly there and truly universal. That, in his view, is the prime purpose of Social Security. This approach is very different from one that would have government redistribute income in order to achieve material equality. There is all the difference in the world between 90 per cent of us voting to tax ourselves to help the other 10 per cent, and 90 per cent of us voting to tax the other 10 per cent to help 10 per cent—and more than likely, the other 80 per cent as well. Widely shared taxes to help the distressed are appropriate in a free society. A policy of “soaking the rich” would ultimately destroy it. Senator Goldwater’s approach is also very different from one that would relieve the individual of personal responsibility and make the Government every man’s keeper. The welfare state, with its vision of the “experts” knowing better than the people themselves what is good for them, and spending their money for them—for their own good—is completely at odds with the Senator’s vision of a community of self-reliant individuals promoting common objectives through government and turning to government and turning to government for help only in time of need. In judging government action, we must distinguish between intentions and results. Most measures taken in the name of welfare have been wasteful and inefficient. They have not achieved their expressed intention, but have generally imposed burdens on the poor to benefit the not-so-poor The agricultural program is an obvious example. In the name of helping low-income farmers, it has saddled low-income city dwellers with higher food costs and heavier taxes. Most of the proceeds have been wasted in higher costs of production, or have gone to large commercial farmers, owners of farm land, and the food storage industry. Very little indeed has trickled down to the farmers who most need assistance. This case is no exception. Program after program has had effects the opposite of those intended by its well-meaning proponents. But instead of getting rid of the failures, we are constantly being persuaded to adopt yet more sweeping programs of the same kind. In the year 1963, cities, states and the Federal Government spent a total of $45 billion, or onequarter of total government spending, on assorted programs ostensibly designed to help the distressed—agricultural subsidies, Social Security payments, public housing, public assistance payments, and so on. And yet the present Administration has just launched with much fanfare a “War on Poverty,” to be won with a so-called antipoverty bill that calls for expenditures of not quite $1 billion a year—and most of that on programs that only by the wildest stretch of the imagination have anything to do with poverty. If any private enterprise were to engage in such misleading advertising, it would surely and quite properly be required to cease and desist by the F.T.C. In recent decades, as over the longer history of our country, there has been a steady and striking improvement in the material well-being of the less advantaged among our citizens. This improvement owes little to government welfare programs. It has come primarily from the economic growth of the private sector. That has been the one truly effective weapon against poverty. 6 Senator Goldwater believes that we must both do more to help those who are really in need and spend less on the ill conceived miscellany of schemes that have been enacted under misleading labels. He believes that perhaps the most important single step that could be taken toward that end is to reduce the extent to which the Federal Government undertakes tasks that could be done better by local and state governments. FEDERAL-STATE RELATIONS The Federal Government now has a host of programs involving grants-in-aid to local communities, states and other smaller units of government. The grants are for specified purposes, and are made under conditions that frequently tie the hands of the people close to the local need and lead them to spend funds on projects they know to be wasteful. The excuse given for these programs is that the Federal Government has greater financial capacity than the local units of government. For the country as a whole this is clearly not so. The economic resources available to the country are simply the sum of what is available to the separate states. Sending money to Washington and back can hardly make it grow. It is far more likely to do the reverse. Certainly communities differ in available resources, and some better-off communities may wish to tax themselves to provide funds for less fortunate communities. But that hardly calls for raising money in all the states to send back to all the states. Here again, there is a problem of transition, of how to go from here to there. The Federal Government, on the one hand, is pre-empting sources of revenue; on the other, it is financing many local activities. To eliminate both overnight would be neither fair nor prudent. Again, Senator Goldwater’s answer is to move gradually toward the ultimate goal. We should consider, he suggests, separating the provision of funds from control over their use. Suppose we were to consolidate many grant-in-aid programs and have the Federal Government make lump-sum cash grants to the states and localities roughly equal to the amount that is now going to them. Local communities would then be free to use the funds at their own discretion. We could at one fall swoop, reduce the Federal bureaucracy and administrative expense and widen the freedom of the local communities, while keeping unchanged the financial burden in both the Federal Government and local communities. These examples illustrate, I hope, the Senator’s general approach to specific problems. His goal is always the same: to promote the freedom of the individual and to widen his opportunity; to stop the drift toward centralization and collectivism that has been under way in the past few decades, a drift that has not achieved its professed objectives but that has served to curtail individual freedom, to undermine individual responsibility and to weaken the moral fibre of the people. His means are various but always conservative, in the position that they emphasize gradualness, order and dependability, the limitations of our present knowledge and the need to learn from experience. 7 The same approach explains his policy on other specific issues: his support of free collective bargaining, combined with his concern over compulsory unionism and his fear that we are drifting toward compulsory arbitration; his vote against the so-called “Trade Expansion Act,” on the grounds that, despite its label, its grant of discretionary power to the Administration to impose and to change restrictions on trade would lead to greater restrictions rather than less—as has, indeed, been the outcome; his vote against the interest equalization tax, on the grounds that it will interfere with the free flow of capital, is a further step toward the direct control of foreign transactions and yet will be ineffective in reducing the payments deficit; his belief that a strong domestic economy is the surest guarantee of the strength of the dollar in world markets and that if the U.S. follows sound policies at home, it need have no fear of a run on the dollar; his unwillingness to see Federal aid to education, if enacted, go solely to public schools and thereby impose penalties on these parents who wish to send their children to private schools, whether religious or secular. Senator Goldwater is often depicted as a reactionary mossback who wants to turn the clock back to an earlier but vanished era. The irony is that the critics who charge him with retreading to the 19th century, are themselves working as hard as they can to turn the clock back to the mercantilism of the 16th and 17th centuries. The policies of government intervention, of wageand price-fixing, of control over the flow of trade, of paternalism that they favour are the very policies that were then the rule throughout Britain and Western Europe. It was those very policies that had to be overthrown to permit the economic, social and political revolution of which we are the beneficiaries. Mr. Goldwater is, of course, inspired by ideas of an earlier age. So are we all. How else can we get wisdom and knowledge, except by learning from experience? As the Senator said in accepting the Republican Presidential nomination. “We must and we shall return to proven ways—not because they are old, but because they are true.” 10/3/12 8