My interest in economics was sparked by watching old interviews and talks given by Milton Friedman in the 1960’s up through his death in 2006. I have gone on to read several of his books and papers, which I plan to include in a complete bibliography on this site, which served as an initial foundation of knowledge related to economic and political thought. My self-initiated studies have been above and beyond undergraduate and graduate degrees in business and over two decades of experience in the financial services industry. None of my prior education and experience, however, had helped me make complete sense of the financial crises, and its aftermath, that began in 2008. Thus, the search for more information. Sure, I had a sense as early as 2005 that the residential real estate market was in a bubble. I had advised clients through the late 1990’s Asian and Long Term Capital Management crises, the Dot Com boom and bust, and the same tell tale signs were emerging that things could come crashing down again. They did. By the way, it always takes longer for these things to fully play out like you think they might, but they do play out.
While I have broadened my studies well beyond Friedman’s theories and policy prescriptions, his free-market approach to solving problems not only resonated with me, but it seemed to run exactly counter to what mainstream economists and supposed experts were saying and doing. I have since come to find out that many of his Chicago-school doctrines turned out to be not free-market approaches in the least, but instead modifications, albeit mostly improvements, to government or statist approaches to public policy. None the less, Milton Friedman was able to catch my attention, and the attention of many others, to whom a further investigation of economics, and other related subject matters, might not have been likely. While I do not agree with one hundred percent of its vast content, for me, it has been primarily writings from the Austrian school of economics that logically and coherently demolishes not only established mainstream, what I can only describe as, Keynesian economic quackery, it expands on Classical and Chicago free-market thought and the confluence of the state and markets. Austrian theory also, through Austrian Business Cycle Theory (ABCT), offers the only plausible explanation to bubbles and financial crises including the Great Depression, the dot-com boom and bust, and the recent real estate bubble. In any event, my overall investigation lead me to read The Great Deformation, by David Stockman, which prompted this post.
If you have not read the book, The Great Deformation, I highly recommend it. I have much respect for the author, Mr. Stockman, who takes the reader through a history of government and financial markets in the twentieth century up through the recent aftermath of the 2008 financial crises. He was front and center in 1980’s politics and was, in fact, one of the, if not the primary, architect of the financial reform package submitted by Ronald Reagan upon entering the White House. Austrian friendly and popularly known as supply-side economics, and after witnessing four decades of ever-expanding welfare and entitlement programs, Stockman envisioned a much leaner federal government marked by lower taxes on income as an incentive to workers to produce, thus the supply-side moniker. The cherry-on-top was that in the long run higher production from the national labor force, even at lower income tax rates, was supposed to maintain or even increase government revenues. Budget deficits were supposed to be a thing of the past. In the short term, supply-side tax revenue reductions were supposed to be accompanied by equal and offsetting reductions in government spending and a roll-back of the entitlement and welfare state. As history would have it, Stockman ran headlong in to the political machination realities of Washington, DC. The spending cuts never came.
What started as an economic stimulus package built on lower taxes and putting the country back to work, ended as a mirror image of Keynesian fiscal stimulus. Keynesian fiscal policy relies on increased government spending through borrowing, and maintaining the same revenue base, now supply-side became a system whereby government spending remained the same, and even increased as the 1980’s wore on, while revenues were supposed to decline as a percentage of total output. In short, what started out as a program to balance the federal government budget, concluded with the largest budget deficits the country had ever seen. Stockman was vexed. A battle raged at the time between the Supply-siders, the Keynesians and the Monetarists, of which Milton Friedman was its recognized leader. While Milton Friedman on one hand supported a reduction of government, he was somewhat infamous for justifying, or at least tolerating government deficits, and de-prioritizing balanced budgets. He was on record as willing to accept a reduction of taxes without equal and offsetting reductions in government spending while lobbying for balanced budget amendments at all levels of government. If this sounds like working both sides of an issue, that’s because it was. David Stockman, to this day, has never wavered from his beliefs. Round 1, Stockman.
In The Great Deformation Stockman goes to great strides to discredit and malign Milton Friedman. In particular, Friedman’s role and the impact he had on monetary policy, including floating exchange rates and his rejection of a gold standard ran counter to a major pillar of supply-side economics, sound money. Friedman supported a rules-based approach to managing the supply of national currency, Stockman, a return to the gold standard. It turns out, neither would necessarily have their way, though Friedman, despite going to great efforts to discredit discretionary monetary policy, went to great lengths to compliment and support the policies pursued for the entire tenure of Alan Greenspan. Stockman, not so much. An Austrian, and Stockman’s, view of the dot-com bubble, that finally burst in 2000, puts the blame squarely in the lap of the Federal Reserve (Fed) and its Chairman at the time, Alan Greenspan. Friedman on Greenspan, a symphony, Stockman on Greenspan, a cacophony.
Friedman also found no culpability in Federal Reserve actions in the lead-up to the 1929 stock market crash. To the contrary, he saw the 1920’s as the Federal Reserves high water mark. If that were not telling enough, in one of his last appearances Milton Friedman was interviewed by Richard Fisher, then Dallas Federal Reserve President, in 2005. You can find the interview on YouTube. This is in the midst of the largest real estate bubble in, perhaps, the history of the world, and Friedman was highly complimentary of Federal Reserve policy and saw no indication of any asset bubbles. The Austrian-centric view held by Stockman, was that the Fed was indeed solely responsible for easy-money policies in the 1920’s, 90’s and 2000’s, and that those policies directly impacted asset prices which ultimately manifested in full blown bubbles. Easy-money policies, in particular the suppression of interest rates, override the transmission of pricing information in the time, or loan, markets. Easy money inflates asset prices, tighter money will result in a decline of asset prices. Friedman failed to identify this connection. Round 2, Stockman.
With regards to monetary policy prescriptions, as eluded to above, Friedman supported a rules-based approach. His most recognizable position was to fix the percentage increase in money supply and replace the Fed with a computer. The exact percentage evolved over time, but ranged from between 2% and 5%. While he concluded that some Fed Chairpersons and members had been, and will always be, more adept at handling the Nations money supply than others, putting discretionary authority in the hands of just a few, was not prudent. What is perplexing, and I’m not certain he ever realized this, was that the setting of the fixed rate of money growth, or even a formula to be plugged in to a computer, was, itself, based on discretion. And, who would make the decision? A small handful of potentially error-prone and priority-conflicted humans. Rules versus discretion is like a debate on flat versus graduated income tax rates. Heads the government wins, tails the public loses. (In his later writings, and as a postscript, Friedman questioned whether government had any roll in money. His conclusion? It was kind of like, yes, I see some benefit in having private companies compete in supplying first-class mail service, but it will never work, and no one down at the post office thinks its a good idea anyways. Despite substantial legal hurdles, not to mention an incumbent monopolist, Friedman contended that there was essentially nothing stopping anyone from issuing their own money. He also concluded, quite correctly, that no one in the current Federal Reserve system was lobbying for a change. Well, I guess not.)
If you go back through history and look at major dislocations in money and economies it is not whether or not a gold standard or some other standard was in place. Dislocations have mainly occurred when governments, through their central banks, intervene in to markets and attempt to shield their excesses, from war to the welfare state, through artificial manipulations. Committing to a fixed redemption amount of gold for dollars, the anchor of the gold standard, was supposed to hold governments in check, and it did much of the time. Governments, theoretically, could not and would not be able to print more currency than available gold. David Stockman, and other supporters of a gold standard, or sound money, believe in the efficacy of this feature. Unfortunately, there are plenty of historical examples that would lead one to conclude, in practice, that politicians would override, ignore, change, or even abolish the fixed exchange rate as soon as it became politically expedient to do so. When its not your money, or its not your capital, there is essentially nothing that will stop you from spending it. When it is your money or capital at risk, even the spendthrift must eventually face reality. That is why I advocate for the elimination of monopoly fiat money and central banking and support open and free competition in the issue of money and free banking, which might include a standard for gold, but would also include privately issued bank notes, digital currency and other financial assets. In the final analysis, though, if one were to compare the historical performance of a discretionary rules-based approach to a fully functioning gold standard, the gold standard ranks as superior. Round 3, Stockman.
At least with regards to economists in the 20th century, Milton Friedman’s impact on government policy and the popularity he garnered, might only be exceeded by John Maynard Keynes. His legacy as a free-market advocate and monetary economist, for some of the reasons I have described above and additional ones I have not covered, is not as clear. David Stockman, on the other hand, has consistently and persistently fought for reductions in government and sound fiscal and monetary policies his entire career, both inside and outside government. Perhaps it is no surprise then, that it looks like three rounds go to Stockman, none for Friedman, David Stockman wins by unanimous decision.