Economist Gary Becker – “On the Debt Ceiling” (Becker-Posner Blog)

22 01 2013

A recent post in the Becker-Posner Blog (http://www.becker-posner-blog.com/) features the economic point-counter point discussions of University of Chicago Economist Gary Becker and legal scholar and Federal Judge Richard A. Posner.  A recent post by Gary Becker deals with the issue of the U.S. Debt Ceiling.  Gary Becker’s homepage is found here.

************

Following are some excerpts from Gary Becker’s latest post (1/20/2012) titled “On The Debt Ceiling“, posted at the following web address: http://www.becker-posner-blog.com/2013/01/on-the-debt-ceiling-becker.html

On the Debt Ceiling-Becker

Various attempts have been made to introduce rules that limit the aggregate level of federal spending, such as restricting the growth in spending over time to be no greater than the growth in GDP (aside from wartime and other emergencies). Balanced budget proposals do not limit spending per se, but require that enough taxes be raised to cover whatever level of spending passes the legislature and chief executive. However, neither spending limits nor balanced budget rules have ever received enough votes from Congress, although many states and local governments do require a (nominally) balanced budget.
….
The “debt ceiling” is much closer to balanced budget rules than to limits on federal spending since it tries to cap the budget deficits that are solely responsible for the growth in debt. As Posner shows, this so-called “ceiling” is not really a ceiling since it can be lifted by a majority vote in both houses of Congress combined with the support of the President. In fact, Congress has raised the ceiling more than 85 times since 1940, and 11 times since 2001.  More economically meaningful ceilings would relate debt to the level of GDP- and perhaps also to interest rates on the debt- since countries with higher incomes and lower interest rates can afford to carry higher debt levels.
….
One good reason to have properly defined debt ceilings, even though the President and Congress must approve every piece of spending and taxing legislation, is to force politicians to discuss how this legislation aggregates to produce shortfalls or surpluses between total spending and total tax revenue. Budget deficits are far more common than surpluses in recent decades…..Raising sufficient taxes to cover large and excessive spending would be worse than keeping spending within reasonable bounds while financing some with debt.
….

Ultimately, the only way to evaluate debt ceilings is to determine how much they affect the level and composition of spending and taxation. That would not be easy to do in a credible way because of the difficulty in determining the counterfactual; that is, what would have been spending and taxation by the federal government in the absence of the debt ceilings?

….

While federal government spending in real terms has grown manyfold since the end of World War II, the ratio of debt subject to the debt limit to GDP was a manageable 57% in the year 2000. This ratio has grown rapidly since then, especially during the past four years, and it is now about 98%, higher than most other rich countries. Clearly, debt ceilings have not prevented spending and taxation from growing significantly over time. Nor would the present ratio of debt to GDP be a big problem as long as interest rates remain low.

….

…what counts most for an economy is not the ratio of debt to GDP, but that of government spending to GDP. This ratio will increase or decrease as GDP grows slower or faster than government spending. A decline in this ratio would be achieved if GDP resumes its long-term growth rate of a little over 3% per year, and if the growth in entitlement and other spending were kept under control. It remains to be seen whether the American economy will regain its long-term growth rate, and whether interest groups and politicians will resist the temptation to have government spending continue to grow at a rapid rate.

Graph of Federal Debt: Total Public Debt

Graph of Federal Surplus or Deficit [-]

Graph of Federal Debt: Total Public Debt as Percent of Gross Domestic Product

Advertisements




Milton Friedman’s critique of JFK’s “Ask not what your country can do for you – ask what you can do for your country”

25 12 2012

Ask not what your country can do for you – ask what you can do for your country.” John F. Kennedy, Inaugural address, Friday, January 20, 1961. (see further info on JFK’s inaugural address here: http://www.presidency.ucsb.edu/ws/index.php?pid=8032 )

President John F. Kennedy’s Inaugural Address, January 20, 1961

Americans of all political and personal persuasions need to sincerely appreciate the work and service and sacrifice of former U.S. President John F. Kennedy.  That said, in the introduction on pages 1-2 to “Capitalism and Freedom” (1962), Economist Milton Friedman gave his thoughts and constructive critique on how a free man in a free society should respond to former President John F. Kennedy’s famous quote in his 1961 inaugural address.

No disrespect is meant here regarding the statements of President Kennedy or his contributions to our country. But rather the ideas and thoughts of Milton Friedman regarding this famous statement are particularly relevant to the role of the individual citizen in relation to the government in the United States today (emphasis in terms of bold, underlined, or italicized text are mine)

   “In a much quoted passage in his inaugural address, President Kennedy said, ‘Ask not what your country can do for you – ask what you can do for your country.’  It is a striking sign of the temper of our times that the controversy about this passage centered on its origin and not its content.  Neither half of the statement expresses a relation between the citizen and his government that is worthy of the ideals of free men in a free society.”

“The paternalistic “what your country can do for you” implies that government is the patron – the citizen, the ward, a view that is at odds with the free man’s belief in his own responsibility for his own destiny.  The organismic, “what you can do for your country” implies that government is the master or dietythe citizen, the servant or votary.” 

To the free man, the country is the collection of individuals who compose it, not over and above them. He is proud of the common heritage and loyal to common traditions, but regards government as a means, an instrumentality – neither a grantor of favors and gifts, nor a master or god to be blindly worshipped and served.  He recognizes no national goal except as it is the consensus of the goals that the citizens severally serve.  He recognizes no national purpose except as it is the consensus of the purposes for which the citizens severally strive.”

The free man will ask neither what his country can do for him nor what he can do for his country. He will ask rather “What can I and my compatriots do through government” to help us achieve our several goals and purposes, and above all, to protect our freedom?” 

And he will accompany this question with another: “How can we keep the government we create from becoming a ‘Frankenstein’ that will destroy the very freedom we establish it to protect?“”

“Freedom is a rare and delicate plant. Our minds tell us, and history confirms, that the great threat to freedom is the concentration of power.  Government is necessary to preserve our freedom – it is an instrument through which we can exercise our freedom; yet by concentrating power in political hands, it is also a threat to freedom. Even though the men who wield this power initially be of good will and even though they be not corrupted by the power they exercise, the power will both attract and form men of a different stamp.”

**********

Source: Africanliberty.org

President Kennedy’s words were no doubt intended to call, inspire, and challenge we as Americans to more selfless service to our fellow citizens – and he and his legacy are to be commended for them.  However, here Milton Friedman provided a wary warning about the leeway that Kennedy’s words of challenge and inspiration allow for the misuse of concentrated government power in inhibiting and limiting the economic and political freedoms of free people in free societies – such as is the United States.





“The Role of Prices” in a Free Market from ‘Free to Choose’ (Friedman, 1980)

29 11 2012

In their book “Free to Choose: A Personal Statement” (published by Harcourt Brace Jovanovich, Inc. 1980) authors Milton and Rose Friedman address the role of prices in a promoting the efficient use of a society’s resources.

Following of some quotes from Chapter 1 – The Power of the Market (pages 9-37) that are particularly relevant in today’s economic environment:

*********************

On the relative merits of “voluntary cooperation” as opposed to “command” economic systems….

“Just as no society operates entirely on command principle, so none operates entirely through voluntary cooperation. Every society has some command elements. These take many forms.  They may be as straightforward as military conscription or forbidding the purchase and sale of heroin or cyclamates or court orders to named defendants to desist from or perform specified actions.” (page 11)

“It makes a vast difference what the mix is – whether voluntary exchange is primarily a clandestime activity that flourishes because of the rigidities of a dominant command element, or whether voluntary exchange is the dominant principle of organization.” (page 11)

“A predominantly voluntary exchange economy …. has within it the potential to promote both prosperity and human freedom. It may not achieve its potential in either respect, but we know of no society that has ever achieved prosperity and freedom unless voluntary exchange has been a dominant principle of organization.” (page 11).  

The authors go on to say that “voluntary exchange is not a sufficient condition for (personal and economic) prosperity and freedom”, but that it is a necessary condition.

THE ROLE OF PRICES (beginning on page 13)

“The key insight of Adam Smith’s Wealth of Nations is misleadingly simple: if an exchange between two parties is voluntary, it will not take place unless both believe they will benefit from it.  Most economic fallacies derive from the neglect of this simple insight, from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.” (page 13)

“Adam Smith’s flash of genius was his recognition that the prices that emerged from voluntary transactions between buyers and sellers – in short, in a free market – could coordinate the activity of millions of people, each seeking his own interest, in such a way as to make everyone better off.  It was a startling idea then, and it remains one today, that economic order can emerge as an unintended consequence of the actions of many people, each seeking his own interest.” (pages 13-14)

Prices perform three functions in organizing economic activity: first, they transmit information; second, they provide an incentive to adopt those methods of production that are least costly and thereby use available resources for the most highly valued purposes; third, they determine who gets how much of the product-the distribution of income. These three functions are closely interrelated.” (page 14)

***********************

The accompanying 10 part PBS TV Series titled “Free to Choose” involving Milton Friedman can be accessed at the following website: http://miltonfriedman.blogspot.com/





Guidance from Friedman’s “Capitalism and Freedom” (with commentary)

22 11 2012

In the preface to Milton & Rose Friedman’s book “Free to Choose” (Harcourt Brace, Jonanovich Publishers, 1980), reference is made to the Friedman’s earlier book “Capitalism and Freedom”.

Capitalism and Freedom examines “the role of competitive capitalism – the organization of the bulk of economic activity through private enterprise operating in a free market – as a system of economic freedom and a necessary condition for political freedom.” In the process, it defines the role that government should play in a free society.

“Our principles offer,” Capitalism and Freedom says, “no hard and fast line how far it is appropriate to use government to accomplish jointly what it is difficult or impossible for us to accomplish separately through strictly voluntary exchange.  In any particular case of proposed intervention, we must make up a balance sheet, listing separately the advantages and disadvantages.  Our principles tell us what items to put on one side and what items on the other and they give us some basis for attaching importance to different items.”

The Friedman’s are being diplomatic and circumspect in providing such advice – calling on people to look carefully at both the costs and benefits of government involvement in the functions of resource allocation markets.

In recent years rapid expansion in U.S. government regulatory oversight and in some cases inhibiting interference with the functions of free market resource allocation has occurred in a number of sectors of the U.S. economy, such as the healthcare system, energy production, automobile production, and the financial / futures industries.  Furthermore, proposed increases in regulation of agricultural production systems and consumer’s food and dietary choices are also being considered by U.S. government agencies.

As governmental dictates interfere with free market resource allocation, history shows that poorer U.S. economic performance, fewer and poorer employment opportunities, and a lower economic standard of living are the near assured end result.  Governments – no matter their good intentions to correct economic and social wrongs – do a poor job of allocating scarce economic resources in comparison to free markets.

As we go through the works of Milton Friedman, Thomas Sowell, Friedrich Hayek, and other free market-oriented economists on this blog, the economic damage to efficient allocation of economic resources by over-regulating government actions will be a primary topic of analysis and discussion.





Looking to Free Market Economic Foundations: “Capitalism and Freedom” by Milton Friedman (1962)

13 11 2012

Capitalism and Freedom.jpg

The contribution of Milton Friedman’s book Capitalism and Freedom (1962) is described in an article from the Library of Economics and Liberty website (here)

“In Capitalism and Freedom, Friedman wrote arguably the most important economics book of the 1960s, making a case for relatively free markets to a general audience. He argued for, among other things, a volunteer army, freely floating exchange rates, abolition of licensing of doctors, a negative income tax, and education vouchers. (Friedman was a passionate foe of the military draft: he once stated that the abolition of the draft was almost the only issue on which he had personally lobbied Congress.)”

A Wikipedia article (here) provides a chapter by chapter summary of Friedman’s key ideas in the book. (Great credit goes to this Wikipedia author for this summary / synopsis)

Introduction

The introduction lays out the principles of Friedman’s archetypal liberal, a man who supports limited and dispersed governmental power. Friedman opts for the continental European, rather than American, definition of the term.
1) The Relation between Economic Freedom and Political Freedom

In this chapter, Friedman promotes economic freedom both a necessary freedom and also as a vital means for political freedom. He argues that, with the means for production under the auspices of the government, it is nearly impossible for real dissent and exchange of ideas to exist. Additionally, economic freedom is important, since any “bi-laterally voluntary and informed” transaction must benefit both parties to the transaction.
2) The Role of Government in a Free Society

According to the author, the government of a liberal society should enforce law and order and property rights, as well as take action on certain technical monopolies and diminish negative “neighborhood effects.” The government should also have control over money, as has long been recognized in the constitution and society.
3) The Control of Money

He discusses the evolution of money in America, culminating in the Federal Reserve Act of 1913. Far from acting as a stabilizer, the Federal Reserve failed to act as it should have in several circumstances. Friedman proposes that the Federal Reserve have a consistent rule to increase the money supply by 3-5% annually.
4) International Financial and Trade Arrangements

This chapter advocates the end of the Bretton Woods system in favor of a floating exchange rate system and the end of all currency controls and trade barriers, even “voluntary” export quotas. Friedman says that this is the only true solution to the balance of trades problem.
5) Fiscal Policy

Friedman argues against the continual government spending justified to “balance the wheel” and help the economy to continue to grow. On the contrary, federal government expenditures make the economy less, not more stable. Friedman uses concrete evidence from his own research, demonstrating that the rise in government expenditures results in a roughly equal rise in GDP, contrasting with the Keynesian multiplier theory. Many reasons for this discrepancy are discussed.
6) The Role of Government in Education

The policy advocated here is vouchers which students may use for education at a private school of their choice. The author believes that everyone, in a democracy, needs a basic education for citizenship. Though there is underinvestment in human capital (in terms of spending at technical and professional schools), it would be foolish of the government to provide free technical education. The author suggests several solutions, some private, some public, to stop this underinvestment.
7) Capitalism and Discrimination

In a capitalist society, Friedman argues, it costs money to discriminate, and it is very difficult, given the impersonal nature of market transactions. However, the government should not make fair employment practices laws (eventually embodied in the Civil Rights Act of 1964), as these inhibit the freedom to employ someone based on whatever qualifications the employer wishes to use. For the same reason, right-to-work laws should be abolished.
8) Monopoly and the Social Responsibility of Business and Labor

Friedman states, there are three alternatives for a monopoly: public monopoly, private monopoly, or public regulation. None of these is desirable or universally preferable. Monopolies come from many sources, but direct and indirect government intervention is the most common, and it should be stopped wherever possible. The doctrine of “social responsibility”, that corporations should care about the community and not just profit, is highly subversive to the capitalist system and can only lead towards totalitarianism.
9) Occupational Licensure

Friedman takes a radical stance against all forms of state licensure. The biggest advocates for licenses in an industry are, usually, the people in the industry, wishing to keep out potential competitors. The author defines registration, certification, and licensing, and, in the context of doctors, explains why the case for each one of these is weaker than the previous one. There is no liberal justification for licensing doctors; it results in inferior care and a medical cartel.
10) The Distribution of Income

Friedman examines the progressive income tax, introduced in order to redistribute income to make things more fair, and finds that, in fact, the rich take advantage of numerous loopholes, nullifying the redistributive effects. It would be far more fair just to have a uniform flat tax with no deductions, which could meet the 1962 tax revenues with a rate only slightly greater than the lowest tax bracket at that time.
11) Social Welfare Measures

Though well-intentioned, many social welfare measures don’t help the poor as much as some think. Friedman focuses on Social Security as a particularly large and unfair system.
12) Alleviation of Poverty

He advocates a negative income tax to fix the issue, giving everyone a guaranteed minimum income, rather than current measures, which he sees as misguided and inefficient.
13) Conclusion

The conclusion to the book centers on how, time and time again, government intervention often has an effect opposite of that intended. Most good things in the United States and the world come from the free market, not the government, and they will continue to do so. The government, despite its good intentions, should stay out of areas where it does not need to be.

From the article “Excerpts from Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1962), Chapter 1,…” (here), come the following relevant quotes….

“Economic arrangements play a dual role in the promotion of a free society. On the one hand, freedom in economic arrangements is itself a component of freedom broadly understood, so economic freedom is an end in itself. In the second place, economic freedom is also an indispensable means toward the achievement of political freedom.”

“Viewed as a means to the end of political freedom, economic arrangements are important becuase of their effect on the concentration or dispersion of power. The kind of economic organization that provides economic freedom directly, namely, competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other.”

“Historical evidence speaks with a single voice on the relation between political freedom and a free market. I know of no example in time or place of a society that has been marked by a large measure of political freedom, and that has not also used something comparable to a free market to organize the bulk of economic activity.”

Web references:

1) Wikipedia article: “Capitalism and Freedom”   http://en.wikipedia.org/wiki/Capitalism_and_Freedom

2) Library of Economics and Liberty Article:  “Milton Friedman (1912-2006)”  http://www.econlib.org/library/Enc/bios/Friedman.html

3) Excerpts from Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1962), Chapter 1, “The Relation Between Economic Freedom and Political Freedom,” pp. 7-17.   https://www.mtholyoke.edu/acad/intrel/ipe/friedman.htm