Milton Friedman's Lonely Voice?? Jude Wanniski February 1, 2000

To: Larry Lindsey
From: Jude Wanniski
Re: ‘What is a Free Market?'

In your WSJournal op-ed of January 27, remarking on "The 17-Year Boom," you opened by saying President Bill Clinton probably would take credit for the booming economy when he delivered his State of the Union speech that night. He did. But as I read on, looking for your take on who should get credit, I never found the names of any of the original supply-siders or of Ronald Reagan. Instead, I find this outrageous statement: "Economists came to see ‘supply side' management of both inflation expectations and the supply of labor and capital as at least as important as ‘demand side' management of spending power. Milton Friedman's lonely voice gave way to a chorus, and the Reagan administration translated it into policy."

Larry, this 17-year economic expansion had ABSOLUTELY NOTHING TO DO WITH THE LONELY VOICE OF MILTON FRIEDMAN. It was in fact Friedman and his dopey monetarist idea that you could manage the national economy to perfection by increasing the money supply by 3% a year that caused the worst inflation in world history! When he persuaded Richard Nixon in 1973 to formally break the dollar's link to gold, the world economy went into a tailspin, from which it has not yet completely recovered. Witness the poverty of five-sixths of the world's population. It was not until Ronald Reagan ABANDONED Friedman's experiment in 1983 -- when to continue it would have meant the collapse of all our money-center banks -- that the 17-year expansion began. The Fed then was allowed to provide the liquidity being demanded by the market in order to capitalize on the lower Reagan tax rates. That's what was going on.

God only knows how you could spend all those years in the Reagan administration, Larry, then several more years as a Federal Reserve governor, and be so completely misinformed. Milton Friedman not only screwed up the world monetary system, he also fought the supply-siders on tax policy every step of the way. It was Milton Friedman who argued that TAXES SHOULD BE CUT IN ORDER TO STARVE THE GOVERNMENT OF REVENUES, while supply-siders argued they should be cut where they are higher than they need to be to provide a desired level of revenue. Didn't you at least learn that much about what was happening under your nose? It is no wonder that George W. Bush now is having such a hard time wrapping up the GOP nomination, with you as his chief economic advisor.

It gets worse. You say: "Obviously, something started in the 1980s that energized the economy as never before. What was it? Markets simply were allowed to work." For your information, Larry, a floating dollar has nothing to do with "free markets." That is a gross canard that Milton Friedman has circulated for decades. It is when the dollar is fixed to gold that the market determines both the demand for dollars and the dollars supplied. When the dollar floats, it is the board of governors that determine the supply of dollars, which in some ways also determines the demand for them. But don't take just my word for it. The subject came up on July 22, 1998, at a meeting of the House Subcommittee on Domestic and International Monetary Policy of the Banking committee, with Fed Chairman Alan Greenspan in the witness chair. The following exchange took place between Greenspan and Rep. Ron Paul [R-TX] -- who gets to be called "Dr. Paul" because he has a medical degree. Greenspan has a doctorate in economics, but only gets a "Mr.," which shows you how much a Ph.D. in economics is worth these days.

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Dr. PAUL. A very quick question. You seem to welcome, and you have been quoted as welcoming, a downturn in the economy to compensate for the surge and modest growth in the economy. Is it not true that in a free market, with sound money, you never welcome a downturn in the economy? You never welcome the idea of decreased growth, and you don't concern yourself about this? And yet, here we talk about when is the Fed going to intervene and turn down the economy? It seems that there is a welcoming effect to the fact that the Southeast Asia has tempered—you know, price pressures. Couldn't we make a case that the free market would operate a lot better than the market we use today?

Mr. GREENSPAN. I think you have to define what you mean by a ''free market.''
If you have a fiat currency, which is what everyone has in the world——

Dr. PAUL. That is not free market.

Mr. GREENSPAN. That is not free market. Central banks, of necessity, determine what the money supply is. If you are on a gold standard or other mechanism in which the central banks do not have discretion, then the system works automatically. The reason there is very little support for the gold standard is the consequences of those types of market adjustments are not considered to be appropriate in the 20th and 21st century. I am one of the rare people who have still some nostalgic view about the old gold standard, as you know, but I must tell you, I am in a very small minority among my colleagues on that issue.