PAY IT BACKWARDS: The Federal Budget Surplus with Milton Friedman

funding for this program is provided by the John M Olin Foundation and the star foundation welcome to uncommon knowledge I'm Peter Robinson our show today the federal surplus but before we get to the federal budget a few words about the family budget mortgage credit card bills the kids wanting a new computer it goes without saying that for most of us there's seldom enough money to go around but suppose for one wonderful moment just suppose that instead of having too little money you suddenly found yourself with a big windfall and inheritance a bonus at work what would you do with it would you use it to reduce your debt paying down your mortgage would you invest it buying stocks and bonds or would you blow it all on one glorious Caribbean vacation which brings us to the federal budget you see for several years now for the first time in decades the federal budget has been running surpluses big surpluses this year the federal surplus is projected to exceed two hundred and eighty billion dollars what should the federal government do with all that money pay down its debt invest it cut taxes with us today Milton Friedman dr. Friedman is a Nobel Prize winning economist and a senior fellow at the Hoover Institution he was also an adviser to presidents Richard Nixon and Ronald Reagan two hundred and eighty billion dollars Milton will have a few ideas Milton Friedman with a sole exception of one year 1969 in every year from 1962 all the way through 1997 the federal budget ran a deficit in 1998 that changed the deficit of all those decades was replaced by a surplus of 69 billion dollars in 1999 the surplus rises to 124 billion in the year 2000 Rose still higher and here we are early in 2001 and according to the latest budget forecasts of the Congressional Budget Office the surplus in 2001 could hit in the range of two hundred and seventy two hundred and eighty billion dollars what changed in the first place you had a tremendous economic boom going on which is raising incomes and we have a tax system under which a ten percent rise in income yields more than a ten percent increase in taxes people are shifting into higher brackets they're shifted into paying higher rates of tax so that without passing a law the taxes go up more than proportionally to income that's the first thing so receipts went up as a result of the very rapid economic expansion but the second even as American as the American people have the sense that they themselves are doing pretty well unbeknownst to them the feds are doing even better absolutely all right very good but second of all we had gridlock we had a Democratic president a Republican House and Senate under those certain all Democratic House and Senate you would not have a surplus it would have been spent if you would add an all Republican House Senate and White House it would either have been spent or would have been returned in lower taxes but because you had divided government you had fortunately for the taxpayer you had a gridlock and the money was not spent and that's the only reason you had a surplus so this is a temporary anomaly that arises from a very good economy with money gushing in and the principal actors in Washington unable to agree on what to do with exact all right and it will not last once you have as you do now a Republican president a Republican House and a Republican all right let's let's cast the budget surplus may be temporary but as long as we've got it what should we do with it the surplus could be used to spend to increase government spending programs it could be used to pay down the public debt or it could be sent back to the American people in the form of a tax cut or of course some combination of the three could we take go through all three of those here is the case as I understand it for spending that surplus 0.1 as a practical matter that's what Congress seems to want to do anyway last year with the extra money coming in Congress which even then was controlled by Republicans enacted more than 60 new spending programs our friend and colleague John Cogan an economist now participating in george w bush's administration said to me the other day you know what the definition of a surplus is a surplus is when the money is coming in so fast that even Congress can't figure out how to spend it they have practical reality leans in that direction as a matter of principle the country faces an urgent need for productive capital 2012 the first baby boomers both those born in 1947 begin to retire the proportion of those in the working population to the whole population that needs to be fed clothed and housed shrinks we need to increase their productivity by giving them greater capital and higher government spending on research and infrastructure is a good way of increasing our stock of productive capital so why don't we just spend it will carry that logic own and you're saying government taking over the whole economy would be a good way of increasing productivity that's an argument for socialism we have socialism now where the economy is 50 percent socialist if you take 30 percent socialist you mean you don't mean the government owns the means of production yes my lord what does ownership of the mean of production means it means you're entitled to the proceeds to the income that they receive so they own 50 percent of well government if you take spending federal state and local spending in amounts to 40 percent of the national income if you add in addition the mandates which government imposes on private spending your government insists that you have anti-pollution devices on your car that might as well be in the budget if you add those the regulations and restrictions on enterprises that accounts for about another ten percent so about fifty percent of the output of the country is controlled by the federal government which is equivalent is saying that they own 50 percent of the means of production so we're 50 percent socialist but let's go back to your analysis I think in all of these you have to distinguish the economics of the per subject from the politics of the subject on purely economic grounds government spending is adverse to productivity not favorable to productivity can you let me quote an economist very Bluestone who makes I quote him not because this is hugely insightful but because it's an argument that's in the air a great deal I quote it was the federal government's investment that led to the Internet the latest theoretical breakthroughs and computer miniaturization are going on in university and private labs but almost all the funding has come from the Pentagon there's it there's no doubt that the Pentagon funding has led to research but you don't know what would have been done with that money if the government hadn't been spending it and in order to judge the efficacy of government spending we have to look on a much broader range how is it that a place like Hong Kong can have roughly nearly the same average income per person as the great United States economy can have surely it's not because of Hong Kong's plethora of resources it's not a rocky little rocks and a lie on nothing it's because government spending in Hong Kong has been about 10 or 15 percent of the national income it's now under and under the new regime in Hong Kong starting to go up and Hong Kong is going to lose its vaunted productivity it's that comparison of that versus the nearly 50 percent in the United States that explains how little Hong Kong can match the United States so government if you take it further we saw a society in which 100 percent of the spending was government namely the Soviet Union it's hardly an advertisement for government spending as a road to productivity what is it that is inherently inferior or less productive about government spending when money is spent by way of the political mechanism why is that inherent because earlier nobody spend somebody else's money as carefully as he spends his own it is as simple as that that's a fundamental principle absolutely that's why I do not think government spending is the answer on the contrary I think government spending is much too high now from an economic point of view they argue if Milton says no to government spending what about paying off the debt option to get the debt off our backs from a purely economic point of view that makes a great deal of sense if it were feasible to take the whole surplus and use it to Aletta to we do is pay down the debt I might well be in favor of the argument against that is political that if you do if you say you're going to pay down the debt the political pressure suspended are so strong that you will in fact spend it now hang on I want to get to the pause for a moment on the economic arguments there why would you would you rather pay down the debt than return the money in the form of tax cuts that's a distinction between investment and consumption is it not all right could you explain that distinction I personally would rather have to go back to pay to go back in the form of lower taxes regardless of political garnish the political satirist right now why is that here's your little but the argument the other way right the argument that people will make the argument that supports it is that if it's if you pay back the debt the money is going to people who will invest it correct going to replace present asset and they will try to get other assets which will include in this can I let me quote Robert Solow and you see Mott the position I'm in he's a Nobel Prize winning economist you're Nobel Prize winning economist how do I choose between the two Robert Solow he's a very good economist quote reduction of the public debt will make more capital available to private business most of the funds previously tied up in Treasuries will add to the demand for corporate securities some potentially productive investments that had been held back will now be more valuable so they get made some businesses will finance productive investments that would not have been profitable the business sector invests the economy expands that's the thing to do but even in principle you're not in favor of that oh as against argument is a valid argument right it would have that effect but question is it appropriate for the government to decide how much of the public's money it should devote to investment and how much its devote to consumption isn't that something for you to decide and for me to decide is that a proper national objective I think not I think that the total amount of investment ought to be the amount an individual separately you me and everybody else that part of their income that they want to use for that purpose so you're making a moral argument after that is simply no business of the government's because it is no business of the government right all right now the political argument that you were met you said you'd be open to paying down the debt if it were politically feasible it's not politically feasible because you you quoted before the pressures on Congress to spend it and those pressures mean that they it will be spent look what's been happening to the surplus so far they've been getting rid of it as fast as they could under very difficult circumstances because divided government up to now has meant that it's hard to get agreement what to do and even so they've been able to put through a lot of government spending so the notion history shows over the long period of time government will spend whatever the tax system raises plus as much more as they can get away with that's why you've had Universal deficits okay but now let me ask you a historical question this form of government the cons the Congress of everything we live with today is set up over 200 years ago and yet federal government remains small relative to the economy relative to the powers of state government small and even disciplined one might say right up through the middle of the last century what happened then to change it that is to say the incentives the fundamental institutional structures and incentives were always there what weren't you what happened was a Great Depression which which changed people's views before the Great Depression in 29 to 33 the general public vision was that the government was a necessary evil and that you should rely on the private market the Great Depression was wrongly attributed it was in my opinion it was produced by government mismanagement but it was wrongly attributed to a failure of the capitalist system and public attitudes changed drastically as a result of the Great Depression from regarding the government as a necessary evil they recorded the gutter they came to regard the government as the cure to all problems as the answer all problems and that's set in motion beginning with FDR's New Deal that said an emotional process under which government has been incremental e growing from then on even under Ronald Reagan next topic one of Milton Friedman's favorites cutting taxes option three tax cuts you favor that above all first of all I favor it on economic grounds because it enables the ultimate consumer the ultimate individual you and me to decide how the money should be used you know it makes no sense for me to send my money to Washington to have somebody in Washington decide how to use it I'd rather decide how to use it myself whether for charity or for welfare or for other purposes so that's a first and most important argument but the political argument for it is that it's the only way to keep Congress from spending it they really don't have it if they don't have I have been in for a long time I've been in favor of any tax cut under any circumstances in any way in any form whatsoever on any pretext on any creature because that's the only one to keep down government spending here's the argument against a tax cut again Robert Solow I quote tax reduction especially income tax reduction fattens the disposable income of households most of it flows into consumption only a small fraction is saved the choice between debt reduction and tax reduction as ways of disposing of a budget surplus is mainly a choice between adding to investment investment is good and adding to consumption that is between a provision for the future and enjoyment today so you cut taxes Milton Friedman and all you're going to do is enable the American people to go on a brief giddy spree not a brief giddy spay I'm going to enable the American people to do what the American people want to do not what Bob Solow thinks they ought to do okay so that if that again though is immoral almost a moral argument yes that's part that's a moral argument absolutely are there any other arguments fundamentally don't doesn't it all come down to a moral argument well now what's an a moral argument well as opposed to say an economic argument I mean you are at least open to the notion that other things being equal it would be a better idea to pay down the debt because that would promote investment than to engage in tax cuts because that would simply promote consumption if I believe that the government ought to decide what fraction of the national income should go to investment and what fraction should go to consumption and if I believed that the government ought it that right now investment is too low then of course I would be open to that argument but I do not believe that it's the government's business to decide what fraction of my income should be invested and what fraction should be consumed all right you've just let's find out what Milton Friedman thinks of President Bush's plan for the budget surplus you've just given we've taken this through we'll be sending a tape to this to the White House and President George W Bush has just heard it from Milton Friedman cut taxes any way you can here's what he proposed during the campaign only devoting about 25 percent of the surplus to tax cuts 50 percent goes to Social Security and Medicare and of the remaining 25 percent or so to new spending programs 25% of the surplus to tax cuts is that big enough for you know it at least ought to be 50% or they include the 25 percent it's incorrect in there for new programs we don't need new program we need fewer programs you know if there are only some way in which you could ensure that no law could be passed without repealing another law we ought to have a law of conservation of laws you only get four hundred laws and if you want to pass a new one you've got to subtract an old one but you can't do that idea because a law can be anything right now lately we're taping this show in the winter early in the year of 2001 lately we have been hearing and reading from Washington DC that because the economy is slowing the Bush administration may accelerate its tax cut as a way of getting the economy pumped up and rolling along again Paul Krugman Krugman I think it's pronounced had an article in which he called this suggestion he's no friend of the Bush administration generally I quote him a crude Keynesian view of economic policy and he continued to say again I quote him if Milton Friedman weren't still alive he'd be spinning in his grave what do you make of that he's right he's right absolutely what you just you just told us you tax cut taxes or any at any time under any pretext so let him cut taxes more I know but but that's not the reason for cutting taxes he's not to stimulate the economy I was just as much in favor of cutting taxes a year or two years ago when the economy was booming I don't believe in that the Keynesian remedies are valid now it's an interesting thing Bob Solow is a Keynesian but he was against reducing taxes he would be before I wonder whether he would now be in favor of reducing taxes I doubt it the Keynesian there's no no circumstance conceivable circumstance under which they're in favor of cutting taxes so but you it is wrong for the government to stimulate the economy by cutting taxes courts simply would not stimulate it would not emulate the economy look if you want if you I can give you a long theoretical argument as to what the problem but just let me turn to one dominant fact all right you have Japan which has been in a kind of a rolling recession for ten years in that period has had either four or five major fiscal stimuli programs that is to say increases in government spend creatures in government spending and reductions in government taxes they've been another failure they haven't had any effect on the economy whatsoever on account of because if the government spends more or less somebody else has less or more to spend there's an offsetting element unless the government spending is financed by printing money what really matters is what happens to monetary policy if monetary policy goes one way and fiscal policy goes the other way if you look at all such examples monetary policy is always dominated not fiscal policy see if government if you reduce taxes then people have more to spend but on the other hand government has less to spend why is there any net increase in total spending and on on the go so there's no net change in total spending but on the contrary as you've just instructed us the people's money will be spent more wisely more productively and everybody's better off right okay so I'm in favor of the tax cuts but not because you're in a recession yeah I would yeah your view is accelerate the tax cut because the surplus is coming in faster than original forecast act just get that money out of Washington and back into people's pockets and bank accounts where it belongs before before Congress can spend before Congress can spend it okay and that's the correct reason to do it and now that we have said last topic is a fiscal stimulus such as a tax cut or increased spending the best way to deal with a slowing economy you just said that the old notion of a Keynesian fiscal stimulus cutting taxes to stimulate the economy boosting government spending to stimulate the economy won't work well we have george w bush getting comfortable in the Oval Office but he has a problem which is that the economy is softening and everybody's turning to him what should he do sit there let me give you a conscience do something sit there let me give you a comparable case in 1980-81 just prior to that we were in a situation where inflation was running ten twelve double-digit double-digit of all digits the Fed after after the election because before the election in the five months before the election this fed was very stimulative it was pumping money in like mad the more rapid increases in the quantity of money in that five month period than any other comparable five months period since the end of world wars was it all Volcker the chairman of the photopolymer was a culpable absolu is that a direct effort to reelect Jimmy harder in my opinion it was at any rate the month after the election the money growth slowed down and went down very sharply and the economy went into a recession what did Grinnell Reagan do in my opinion no other president in the post-war period would have stood by and sat there but Ronald Reagan sat there and supported Paul Volcker in his measures it brought an end to the inflation it started us on our path of lower and lower inflation of dis inflation and the recession lasted for a year and a half it was a fairly deep recession so but it turned around in 1982 early 83 August of 82 is when the stock market starts to recover and from then on that's the beginning of this incredible period of good economic growth and a booming stock markets that we've had since now the advice on that everybody was giving to Reagan at that time was that he should step in and stop that recession from growing right if he had done that we would now still be having inflation in double digits we would never have climbed out of that hole stagnation row 1970s so lesson the George W Bush is then if you stand still if you just wait a while it's not going to be a major recession it'll be a minor recession if there is a recession we still don't know whether we're going to have a recession and I might tell you that the record of economists in predicting a recession is not one you would want to stand on it's a very poor record so we may not have a recession but if we do it will be like most poor post-war recessions relatively mild in the last less than a year or a little more than a year and then the economy will turn around start going up again he should support Alan Greenspan in maintaining a stable growth stable and relatively predictable that is winks and nods to the market people have a some notion about where the growth of the money supply will come from what it will be he should cut taxes because you should cut taxes he should lean against government increases in government spending and for the rest of it he should just sit there sit tight so far as a recession so far as the recession is concerned Milton let me close it out then by asking you to make a prediction you've just told us economists don't predict recessions very well I'm asking you now to make a political prediction when George Bush the elder left off as the federal budget showed an annual deficit of 290 billion a year as William Jefferson Clinton left office the federal budget was showing a surplus almost a mirror image of perhaps 282 70 to 90 maybe even 300 billion dollars when Bush the younger leaves office where will the federal deficit or federal budget what will the federal budget be showing zero or deficit zero or deficit because that is the normal course cetera of government but the situation right now is very abnormal under current governmental arrangement the natural and normal way is to run a deficit not to run a circus Milton Friedman thank you very much glad to be here according to Milton Friedman the federal surplus is an what's normal and natural instead is for the federal government to run a deficit I know just how that feels I'm Peter Robinson thanks for joining us funding for this program was provided by the John M Olin Foundation and the star foundation this is PBS

Channel: Hoover Institution

Views: 109,343

Rating: 4.910913 out of 5

Keywords: HooverInstitutionUK, budget surplus, taxes, government

Id: ZiTVachByhM

Length: 26min 47sec (1607 seconds)

Published: Sat Apr 21 2012