MILTON'S PARADISE GAINED: Milton Friedman's Advice for the Next President

funding for this program is provided by the John M Olin Foundation and the star foundation welcome to uncommon knowledge I'm Peter Robinson on our show today Nobel prize-winning economist Milton Friedman offers a little free advice to the next president of the United States right now Al Gore and George W Bush are both busy spending millions on their presidential campaigns they have some decisions to make how much to spend on TV spots how much to spend on print ads for that matter how much to spend on confetti at the conventions but when one of them is finally elected president the money in his campaign coffer will look like chicken feed by comparison with the money in the federal treasury for the next president whoever he is five questions how to keep the economy growing what to do about the federal surplus how to fix Social Security how to improve education and what to do about health care in each case billions of dollars are at stake consider the surplus will the next president use it to pay down the federal debt to launch big new federal programs or to cut taxes and put a little money back in the taxpayers own pockets needless to say on each of the five questions Milton Friedman has an answer we now give the next president the opportunity to be briefed by Milton Friedman will send tapes to all the candidates so question number one if you will have complete freedom to throw boy question number one keeping the economy growing let me open if I may with a tale of two administrations the economy expands during the administration of Ronald Reagan and during the administration of Bill Clinton but of course they represent two quite different approaches Rajon reagan cuts marginal income tax rates quite dramatically top rate goes from about 70 percent under 40% but largely because he increases defense spending he piles up massive that's not the notion okay correct raising the massive defense yep you had massive deficits right was because they were more successful in producing inflation than they had anticipated inflation is very productive of tax right right because at that time there was no indexing of tax brackets and inflation pushed people up and higher and higher brackets so they gave a larger percentage of their real income to the government right now after 1980-81 when inflation came down very much much more sharply than anybody had predicted mm-hmm if you look at the predictions at that time they thought it would take ten or more years to bring inflation out of the economy it took more more like three or four years and as a result the actual tax receipts during those periods were very much lower than the estimated tax receipts based on the higher inflation assumption that's the main reason you've got a deficit but we did get it there because actual spending the increase in spending on on the military was offset by reductions in spending in the rest of the budget not entirely not entirely not interpret but very large okay I'm rejiggering my question as we go here but I'll keep going so we have the Reagan cutting taxes but with deficit piles up but nevertheless the economy grows then we have Clinton who raises taxes early in his administration and indeed his tax increases are on top of tax increases enacted by President Bush but Clinton we actually have whether you give credit to President Clinton or the Republicans in Congress we actually have relatively moderate growth in federal spending so that as a proportion of GDP the federal government actually shrinks we end up in the last couple of years of the Clinton administration with a surplus who's a better model for the next president the better model is Reagan cutting taxes the reason you have a surplus today today in my opinion mm-hmm the credit for that has to be given overwhelmingly to gridlock to gridlock if you would had a Democratic House and Senate as well as a Democratic president you would not have a surplus today in my opinion they would have spent it right similarly if you had had a Republican president as well as a Republican House and Senate I doubt that there would have been a surplus today because they would either have spent it or had tax reductions so when President Clinton steps forward to take his vows you don't applaud at all well I applaud he provided gridlock okay you applaud but for different reasons from the one he he supposes the the the really thing that really contributed to our successful economy last recent years is that the government has stayed out pretty much notice the team White House and the Congress and the Senate haven't done much in this upcoming election you'd hope for the White House in Congress to be captured by different parties you vote for gridlock or what would you tell the next president well about keeping the economy growing first of all I don't think the president has a great deal to do with keeping the economy going all right I think presidents have a great deal to do with keeping the economy from growing they can follow policies which will cause contractions right but I think the economy is largely independent of the government and what keeps it going is its own internal development however you can short-circuit that internal development if you impose very high taxes right and eliminate the incentive to innovate to improve to take risks and do things you'll kill the economy now that's what's happened over and over again and other countries around the world and I have to remind you at this point of a story that I heard from James Buckley who served in the United States Senate he's elected in 1972 he flew down to Washington to meet President Nixon as the door to the Oval Office opened Nixon was concluding a meeting with John Ehrlichman his domestic policy adviser and as James Buckley walked into the Oval Office the first words he heard Richard Nixon utter were I don't care what Milton Friedman says he's not running for re-election so the point is if you were suggesting that the next president say in his inaugural dress my fellow Americans I promise not to get in the way of the economy you're promising something that a politician finds unsatisfied what would you just what what is there any positive yes okay cut taxes cut taxes what does Milton suggest we do with the federal budget surplus we have money piling up in the federal coffers and you think you have choices well you think you have choice we could spend it on the job Rams don't you think if right let me ask you a question all right go ahead suppose you don't cut taxes right do you think the surplus will last do I think the sir in other words you're asking a political question absolutely Congress resists the right exactly exactly my opinion is no right nevermind - alright I think they cannot resist so this notion of paying down the debt is a nice idea but it'll never happen it'll never happen moreover I'd go farther further than that let's suppose you succeed what may happen what may really happen is it because of the gridlock for two or three years you do pay down the debt that what do you suppose will happen to those saved interest payments you're Socrates I think I see where you're going with this and I want to ask you another question that ties in with that I believe and you believe that that saved interest payments would be spent on another government project with that government project to more or less harm than the payment of interest on the current debt that's a good question isn't it yes it is that isn't obvious I know we're not obvious I think the answer is obvious the marginal projects the government would undertake would certainly do more harm all right then the hamlet what see one of the least harmful of government's expenditure projects it's a payment of interest on debt oh I see that's a transfer of money from taxpayers to taxpayers well the government's giving a little something for the bureaucracy that's right but in the main you're taking money from taxpayers and you're giving it over to other taxpayers who own the bonds and the harm that's done is by what the government takes off and by the fact that the higher tax rate tends to reduce incentives right but that's so for regardless of what the money is used for and if you look at what the money is used for most government spending projects do harm not good okay now let me ask you I want to back up to this question of cut taxes versus pay down the debt so what you're saying is cut taxes because Congress will never be able to resist the temptation to spend it paying down the debt may be a good idea but it'll never happen but let me ask you as an economic matter if Congress could find the will power to pay down the debt should it in other words if you have mom what would be better at this point for me early on an economic analysis paying down the debt or cutting taxes well let me talk about paying down the debt Loree because that ties in with your social security problem yeah they're not really playing down the dad they're converting funny Brett no my converting funded debt to unfunded death because of the coming problem in Social Security let's look at it this way right they pay down the debt they buy up government bonds what do they do with those government bonds they put them over here in a box labeled trust fund for Social Security now you come to the period when current receipts from what from wage tax are to field to sports to pay benefits right into the Social Security so they take these bonds out and send them again to the public how else are they going to pay for it so what you're doing is simply changing the form of the debt but you're not really reducing the debt because you've got these obligations are going to be there and they've notified you as a debt right and that debt is all recorded in this fake trust fund which is pure paper artifice has no real role but if you cut taxes yeah what does that do to help the government meet its unfunded obligations doesn't do a thing but let's go back right to meet the unfunded obligations you really need a change in Social Security all right all of the rest of this talking about food paying down the debt as a way of solving the social security problem is not an evasion in the long run government will spend whatever the tax system will raise plus as much more as it can get away with that's what history tells us I think and so my view has always been cut taxes on any occasion for any reason in any way that's politically feasible as the only way to keep down the size of government so you for example would be in favor of this ban on internet taxes that's a little difficult no I'm not saying that you're not no no no no I want to cut taxes but there are better and worse taxes better and worse in taxes to cut and there is and the income tax is the one that really needs to be whacked out the income tax is the one that really needs to be whack because the disincentives Milton has already suggested the need to change Social Security what would he do Social Security how would you fix it Milton the only way really to fix it in the long run is to convert into a strictly private privatized investment funds because what you really need is to increase savings you see why is it that when you get a life insurance policy for example you don't have the same problem why is it that there isn't an unfunded liability of the life insurance companies why don't they have a problem in the future and the answer is because when you pay for your life insurance I'm paying for my life insurance you're right the company takes that money and invest it in real capital right and that real capital the Machine the building the house whatever it is provides an income which will be available to pay you your benefits when the time comes right on the other hand in the case of the present Social Security system the money you pay isn't tight that isn't being used to produce any real capital that won't be productive in the future it's being put in two pieces of paper to promise this to pay there's nothing there which will yield more income so the only real solution to Social Security is to shift to a system under which you have higher savings under what you have fully funded benefits fully funded annuities mm-hmm but without going in too much technical detail the essence of it is that you have to shift to a privatized system you have to recognize that as oh for a while you're going to have to pay twice as it were right that is to say my generation and the one that follows will have to pay for retirees and themselves the young you have always paid for the Social Security of the old but what it used to be is that people the young young would pay for the Social Security of their parents now the young pay for the Social Security is somebody else's parents right and that's a that's a change for the worse and not the better I think it's a very unjust you don't but I mean the one even the harshest critics of the welfare state say look we have to admit that Social Security eliminated poverty among the elderly that is the one success that everyone agrees on right sure and you let what cost all right tell me here's a young man 40 years old he suddenly discovers he's got AIDS mm-hmm he's got 10 more years to live and the government comes along and say we have to take 15% of your income to provide for your old age after 65 and it's by law and we don't care when you die we're going to take that money right is that just no no that's ridiculous we want responsible individuals people should take care of their own old-age miss nunu president take note education Milton we have education ought not to be a federal issue but the president has to say something about it yes all the polls show that it's not what his concerns what should he say what did she should say I am announcing tonight that the federal Department of Education is disbanded right that the amount of money that we are now sending to the states we will continue to send in the form of free funds for them to use at a declining rate and get through with that subsidy over the next ten years and we want the education to be handled by the individual state by the local government by the parents that the parents are the only ones who have a real responsibility for the schooling of their children there is nothing in the Constitution the judge justifies the federal government being involved in schooling children you know Milton if this next issue for the next president what to do about health care medical care now that's something that you may say the federal government ought not to be in it but it's in it yes and we have this paradox this peculiar paradox that in recent decades we've seen one miraculous medical breakthrough after another and yet at the same time increasing dissatisfaction with health care in this country and an enormous increase in spending and an enormous increase in spending in the period from 1929 to 1950 spending on medical care in the United States never very it was it was between 3 & 5 percent of national income 1929 to 1950 yeah between 3 & 5 percent that's that's low well I mean by comparison with anything I ever heard about what's going on today yeah all right today it's 14% all right today the nation is spending more on medical care and on all the food alcohol and tobacco they put there man we've had an absolutely tremendous overshoot increase and what's more the US spending on medical care is way out of line with other countries okay so you're not you're suggesting then that this is out of whack it's not chest ileana where do payment for all these marvelous breakthroughs we've had all of these other countries have had these marvelous breakthroughs the highest second-highest country is now Germany at 10 percent 14 where over 14 they're 10 so we should of course socialized our medical system the way Germany has yes that's one answer but it's not the right answer if we really fully socialized the medical system right costs would go down they would indeed go down because government would ration medicine okay so now the right let me go back the reason we have trouble mm-hmm fundamental reason why we have high expenses in trouble is because everything is a third party payment nobody pays for himself very rarely I don't know that's an exaggeration right but most payments for medicine are third party payments the insurance company pays the government pays but if you're my physician and I come to you there's no payment between us right and as a result everybody is spending everybody else's money and nobody spends somebody else's money as carefully as he spends his own why should people have to get their medical care in that way why shouldn't they be able to arrange for themselves why shouldn't they be able to pay for it directly the problem really resolves itself into catastrophe versus ordinary with respect to ordinary medical care expenses mm-hmm they're relatively modest there's no reason why people can't pay for them on their own ordinary would be I have a cold my kid get the flu that sort of thing have an annual examination you take your kids in for a regular examination those are the ordinary expenses right the catastrophic expenses arise when you you know you have a major thing AIDS heart attack cancer and in most areas we buy insurance only for catastrophic expenses you don't insure your house for against the cost of having to mow your lawn no you don't insure your car in such a way that if you buy gasoline you get repaid by the insurance company right right but in medical care we've gotten almost to the point at that point where medical insurance provided by the employer if you get if you have to get some aspirins you have to get approval and it's paid for that's a little exaggeration because there's not that much our deductibles right the deductibles are relatively small right and and so the the system that should have developed in sync to me is a system under which people would buy insurance for catastrophic expenses very very high deductible deductible of four or five thousand dollars a year not a few hundred or thousand but with the employer providing medical care that's not of course what you're going to have right but any tax exemption there's a huge incentive to push as much under the exemption as you can afford right okay so it has two effects it causes you to have this third party payment but it also causes them to spend more on medical care than you would spend if you were free to dispose of your income after tax as you wish right so the right solution in my opinion is again to privatize and there are two ways to do that right you can either eliminate the tax exemption which i think is politically not feasible right or you can spread the tax exemption and say it will apply okay well apply to expenses paid by you see if you pay now the medical care expenses you pay now out of your own pocket or after tire after tax right but with medical savings accounts then you can you set it up so that you put money into the medical saving account and when you pay your medical tax mom tax money when you pay your medical care from that it's not subject to tax so how would extend the tax exemption but permit the elimination of employer-provided or at least the substitution that personally provided medical care and you what would you do you'd phase out Medicaid and Medicare somehow in my ideal situation I would phase out Medicare and Medicaid but I would have government provide catastrophic insurance voucherize it you would have you would keep the location of catastrophic insurance in the government no no no I'll explain under Medicare all right the government is committed to paying for a certain part of my medical care right let them give me a voucher which I can use to buy a catastrophic insurance policy I see equal to the amount that they're committed to spend on me I see but let the decision now becomes that of the individual in the market that's the market work okay Milton has given us a few radical proposals does he really think the next president could carry them out now Milton here's what I see you counseling the next president to say my fellow Americans you're the great writer we're eliminating Social Security I'm whacking the Department of Education I'm phasing out Medicare and Medicaid and by the way this tax exemption for medical expenses when it's paid by the employer I'm looking at scant at that - now this is a little hard to that's why I'm not Apollo K now here's my last question you're never gonna do one of these right but it's well to have in mind what you'd like to do oh that is for sure so that the incremental everything has to be be done incrementally and Roby done right but if unless you have in mind where you want to go you're not sure your steps are taking you there right and so I'm not putting this force as a practically feasible platform for tomorrow I'm saying let's look at the long run where you would like to be and let's ask ourselves with respect to each proposal does it take it in that direction or does it take it in the opposite direction all right that's that's a that's a fair statement now as it applies to politics I read one of the central lessons of your whole life's work as this the less government the better all right let me ask you to make a prediction there let's assume that the next president whoever he is this is this is your judgment of the political state of the country the next president whoever is let's assume that he serves two terms so eight years from now 2008 will the federal government as a proportion of GDP be smaller than it is at present or bigger whether it's smaller or bigger will not depend on whether people that listen to this program or have read what I write it will depend on how effective the Internet is in making it hard to collect taxes oh now you've just thrown a whole new topic at me to explain what you mean by that well the Internet is one of the great virtues of the Internet is that it enables people to make transactions at a distance anonymously over various countries right now and in secret and critique encrypted right and so it makes it very much more difficult to collect taxes and if that effect is strong enough then gee then government spending as a fraction of GDP will be lower than it isn't it so so sales taxes also would be in trouble because I can I could presumably buy my l.l.bean sweater in an encrypted form through some secondhand reseller in Bermuda or a Beto's and I could presumably if I could swing this it would be marvelous I could get paid through coração and also my income could be encrypted absolutely so what would the government be left to tax property my car my house and that's a that's a world that makes you smile no no it's not gonna go that far oh it won't it won't go that far there are things that you're not gonna be able to avoid the most obvious subjects for taxation are things that are fixed that's why property taxes can't hide my house yeah you tax people they can move that's why state income taxes can't possibly reach the level the federal income taxes reach because a barrier to a person moving from one country to another is much higher than moving across California to Nevada right right right similarly the internet comes along and now computer companies are hiring in India to do their work for them and they're paying them in India that's something that never gets into the US tax system right so you have in addition to the kind of tax evasion that you're speaking of you'll have the fact that transactions take place in a way that are attracted to the low tax areas so you're this was sort of concluding note to the next president would be if you're a Democrat this may upset you if you're a Republican it may cause you secretly but one way or the other the technology is moving such that government is likely to get smaller right Filton Friedman thank you very much one of Milton Friedman's central pieces of advice to the next president cut taxes to give money back to the taxpayers every chance you get something about me especially like that piece of advice I'm Peter Robinson thanks for joining us

Channel: Hoover Institution

Views: 63,658

Keywords: HooverInstitutionUK, Friedman, economy, national debt, budgets

Id: HNLvOOZpeCo

Length: 26min 25sec (1585 seconds)

Published: Sun Apr 22 2012