Ultimate magazine theme for WordPress.

Milton Friedman is more relevant than ever

But it is not, as the current inflation debate shows. People may disagree on what causes 6.2% inflation, but there is consensus on the solution: it will be up to the Fed – and monetary policy – to bring price inflation back down. Furthermore, as Friedman would predict, this disinflation process will be painful and trigger a recession.

And while the timing of this response is much debated – markets are expecting several rate hikes over the next year – the importance of the Fed’s decisions is beyond question. Restoring monetary stability is again a major issue, both for financial markets and for the American public.

In his earlier writings, Friedman made a mistake in emphasizing the stability of the demand for money. This is usually a safe assumption, but the Fed began paying interest on the reserves in 2008, which dramatically increased bank demand for reserves. This offset the huge increase in monetary aggregates and eased inflationary pressures. Friedman’s theories were not valid at the time.

Subscribe to Crain’s for $ 3.25 per week

And yet it is the extraordinary time when the demand for money moves so strongly and so quickly. Today Friedman’s ideas are closer to the goal. The money multiplier and open market operations do not work as they did in Friedman’s day, and in that sense the system can best be described as a modified version of monetarism. But again, all eyes are on the central bank, both in America and in Europe.

Friedman also stressed that discretionary monetary and fiscal policies would lead to mistakes as policymakers would likely not turn out to be omniscient. With that he has proven himself once again.

And the Friedman revival is not limited to macroeconomics. For decades Friedman was a critic of the US Food and Drug Administration, which he viewed as a sluggish bureaucracy that hampered the development of new drugs and treatments. The pandemic has cemented this view: The FDA was too slow to allow rapid antigen tests and booster vaccinations, among other things. Other public health agencies, such as the Centers for Disease Control, weren’t the targets of Friedman’s criticism, but their poor performance fits Friedman’s basic understanding of health bureaucracies.

Education is another area where Friedman’s ideas appear newly relevant. Friedman was a strong advocate of school choice, but over time the movement stalled as a variety of studies showed school returns from school voucher programs that were either modest, zero, or negative. Proponents of school choice then moved on to the argument that vouchers allow parents to choose the kind of education they want for their children, whether or not test scores go up. This argument also led to nothing.

Then came the pandemic when millions of American parents encountered a public school system that didn’t seem too concerned about their children’s education. Schools remained closed or offered inferior distance learning and generally followed their own bureaucratic imperatives. Suddenly, homeschooling, charter schools, private schools, micro-schools – in short, a whole range of alternatives to “school choice” – became increasingly popular. It remains to be seen how much these trends will continue, but Friedman could win this intellectual battle, at least in part.

And it’s not just the bureaucracy, it’s what is being taught in the classroom. Consider the critical racial theory and other educational practices associated with wokeism. Whatever your views on this movement, it seems clear that it creates strong and perhaps unsolvable differences between parents, teachers, and administrators. Within a single public school district, these matters are unlikely to ever be settled to the satisfaction of everyone. Instead of waging a polarizing “life and death battle”, perhaps all sides can see that the arguments for choosing a school are stronger and more compelling than they thought.

There are repeated attempts to knock Milton Friedman off his pedestal. For the most part, however, his legacy remains strong.

Tyler Cowen is a columnist at Bloomberg. He is Professor of Economics at George Mason University and writes for the Marginal Revolution blog. His books include “The Complacent Class: The Self-Defeating Quest for the American Dream”.

Subscribe to Crain’s for $ 3.25 per week

Comments are closed.