Listen Up, Mr. President

Sunday, July 30, 2000

Let Us Now Praise Gridlock

Robinson 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.

Reagan cuts marginal income tax rates quite dramatically. Top rate goes from about 70 percent to under 40 percent. We had Reagan cutting taxes, but with a deficit that piles up. Nevertheless, the economy grows.

Then we have Clinton, who raises taxes early in his administration (on top of tax increases enacted by President Bush), but we actually have—whether you give credit to Clinton or Republicans in Congress—relatively moderate growth in federal spending. As a proportion of GDP, the federal government actually shrinks and we end up in the last couple of years with a surplus. Who’s a better model for the next president?

Friedman The better model is Reagan, cutting taxes. The reason you have a surplus today is due overwhelmingly to gridlock. If you had had a Democratic House and Senate, as well as a Democratic president, you would not have a surplus today. They would have spent it. Similarly, if you had had a Republican president, House, and Senate, I doubt that there would be a surplus today. They would either have spent it or had tax reductions.

Milton Friedman  

Robinson So when President Clinton steps forward to take his bows, you don’t applaud at all?

Friedman Well, I applaud. He provided gridlock. The winning thing that really contributed to our successful economy over recent years is that the government has pretty much stayed out of it—the White House, the Congress, and the Senate haven’t done much.

Robinson In this upcoming election, you’d hope for the White House and Congress to be captured by different parties? You vote for gridlock? And what would you tell the next president about keeping the economy growing?

Friedman First of all, I don’t think the president has a great deal to do with keeping the economy going. I think presidents have a great deal to do with keeping the economy from growing. The economy is largely independent of the government. What keeps the economy going is its own internal development.

However, you can short-circuit that internal development. If you impose very high taxes and eliminate the incentive to innovate, to improve, to take risks, and do things, you’ll kill the economy. And that’s what’s happened over and over again in other countries around the world.

Robinson But if you’re suggesting that the next president say in his inaugural address, "My fellow Americans, I promise not to get in the way of the economy," you’re asking him to promise something that a politician finds unsatisfying. Is there anything positive the president can do?

Friedman Yes. Cut taxes.

My Cut Runneth Over

Robinson We have money piling up in the federal coffers. What should we do with the federal budget surplus?

Friedman Do you think you have choices? Let me ask you a question: Suppose you don’t cut taxes, do you really think the surplus will last?

Robinson And Congress resists the temptation to spend it?

Friedman Exactly.

Robinson My opinion is no.

Friedman Right. Mine too. I think it cannot resist.

Robinson So this notion of paying down the debt is a nice idea, but it’ll never happen.

Friedman It’ll never happen. Moreover, I’d go further than that. Suppose you succeed—what may happen is that, because of gridlock for two or three years, you do pay down the debt. What do you suppose will happen to those saved interest payments? The saved interest payments would be spent on another government project. Would that government project do more or less harm than the payment on the current debt?

The answer is obvious. The marginal projects that the government would undertake would certainly do more harm. See, one of the least harmful of government expenditure projects is the payment of interest on debt. That’s a transfer of money from taxpayers to taxpayers.

Robinson With the government skimming a little something for the bureaucracy.

Friedman That’s right. But in the main you’re taking money from taxpayers and giving it over to other taxpayers who own the bonds. The harm that does exist is caused by what the government takes off, and by the fact that the higher tax rate tends to reduce incentives. Regardless of what the money is used for, most government spending projects do harm, not good.

Robinson Now I want to back up to this question of cutting taxes versus paying down the debt. So what you’re saying is, cut taxes, because Congress will never be able to resist the temptation to spend the surplus. 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 willpower to pay down the debt, should it? In other words, what would be better at this point purely on an economic analysis: paying down the debt or cutting taxes?

Friedman 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. So my view has always been: cut taxes on any occasion, for any reason, in any way, that is politically feasible. That’s the only way to keep down the size of government.

Saving Private Earnings

Robinson Social Security—how would you fix it, Milton?

Friedman The only way really to fix it in the long run is to convert it into a strictly privatized investment fund. Because what you really need is to increase savings. 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?

Because when you pay for your life insurance policy, the company takes that money and invests it in real capital. And that real capital—the machine, the building, the house, whatever it is—provides an income that will be available to pay your benefits when the time comes.

On the other hand, in the case of the present Social Security system, the money you pay isn’t used to produce any real capital that will be productive in the future. It’s being put into pieces of paper, to promises to pay. There is nothing there that 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 which you have fully funded benefits, fully funded annuities. Without going into too much technical detail, the essence of it is that you have to shift to a privatized system; you have to recognize that for a while you’re going to have to pay twice, as it were.

Robinson Right; that is to say, my generation or the one that follows will have to pay for retirees and themselves.

Friedman The young have always paid for the Social Security of the old. But the young used to pay for the Social Security of their own parents. Now the young pay for the Social Security of somebody else’s parents. That’s a change for the worse—I think it’s a very unjust system.

My view has always been that we should cut taxes on any occasion, for any reason, in any way. That’s the only way to keep down the size of government.

Robinson 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 upon. Right?

Friedman Sure. But at what cost? Tell me, here’s a young man, 40 years old. He suddenly discovers he’s got AIDS. He’s got 10 more years to live. And the government comes along and says, we’ve got to take 15 percent of your income to provide for your old age after 65.

Robinson And it’s by law, and we don’t care when you die, we’re going to take that money.

Friedman Is that just?

Robinson No, that’s ridiculous.

Friedman We want responsible individuals. People should take care of their own old age.

The Parents, Not the Feds

Robinson Education, Milton. How do we improve it?

Friedman Education ought not to be a federal issue.

Robinson But the president has to say something about it. All the polls show that it’s at the top of people’s concerns. What should he say?

Friedman That the federal Department of Education is disbanded. That the amount of money we are now sending to the states we will continue to spend in the form of free funds for them to use, at a declining rate, and get through with that subsidy over the next 10 years. That we want education to be handled by individual states, local governments, and parents.

But parents are the only ones who have a real responsibility for the schooling of their children. There is nothing in the Constitution that justifies the federal government being involved in schooling children.

Bitter Medicine

Robinson Medical care: now that’s something that you may say the federal government ought not to be in, but it’s in it. And we have 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.

Friedman And an enormous increase in spending. In the period 1929–1950, spending on medical care in the United States was 3–5 percent of national income. Today, it’s 14 percent. Today the nation is spending more on medical care than on all the food, alcohol, and tobacco they put in their mouth. We’ve had an absolutely tremendous increase. And what’s more, U.S. spending on medical care is way out of line with other countries.

Robinson Oh, so you’re suggesting then that this is out of whack. It’s not just due payment for all these marvelous breakthroughs we’ve had?

Friedman All these other countries have had these marvelous breakthroughs. The second-highest country is now Germany at 10 percent. We’re over 14, they’re 10.

Robinson So we should of course socialize our medical system the way Germany has.

Friedman That’s one answer, but it’s not the right answer. If we really socialize the medical system, costs would go down because government would ration medicine.

Robinson So the right answer is?

Friedman Let me go back. The fundamental reason we have high expenses and trouble is because everything is a third-party payment. The insurance company pays, the government pays, but if you’re my physician and I come to you, there is no payment between us. 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? Whyshouldn’t they be able to arrange for it 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, they are relatively modest; there is no reason why people can’t pay for it on their own.

Robinson Ordinary would be, I have a cold, my kids get the flu, that sort of thing.

Friedman You have an annual examination. You take your kids in for a regular examination. Those are the ordinary expenses. Catastrophic expenses arise when you have a major thing.

And in most areas, we buy insurance only for catastrophic expenses. You don’t insure your car in such a way that if you buy gasoline, you get repaid by the insurance company.

But in medical care we’ve gotten almost to that point. Where medical insurance is provided by the employer, if you have to get some aspirins, you have to get approval and it’s paid for. That’s a little exaggeration, because there are deductibles, but the deductibles are relatively small.

And so the system that should have developed, it seems to me, is a system under which people would buy insurance for catastrophic expenses with a very high deductible—say $5,000 a year. But with employer-provided medical care, that of course is not what you’re going to have.

Robinson Right. As in any tax exemption, there’s a huge incentive to push as much under the exemption as you can.

Peter Robinson and Milton Friedman  

Friedman So in addition to the problem of third-party payments, the current system also causes you to spend more on medical care than you would spend if you were free to dispose of your after-tax income as you wish.

So the right solution is again to privatize. And there are two ways to do that. You can either eliminate the tax exemption, which I think is politically not feasible; or you can spread the tax exemption, and say it will apply to expenses paid by you.

The medical care expenses you pay now out of your own pocket are after taxes. But with medical savings accounts, you set it up so that you put untaxed money into the account. When you pay your medical care from that, it’s not subject to tax. So that would extend the tax exemption, but permit the elimination of employer-provided care, or at least the substitution of personally provided medical care.

Robinson And would you phase out Medicaid and Medicare somehow?

Friedman In my ideal situation, I would phase out Medicare and Medicaid, but I would have government provide catastrophic insurance. Voucherize it.

Robinson You would keep the location of catastrophic insurance in the government?

Friedman The government is committed to paying for a certain part of my medical care. Let them give me a voucher, which I can use to buy a catastrophic insurance policy equal to the amount that they’re committed to spend on me.

Regardless of what the money is used for, most government spending projects do harm, not good.

Robinson The position becomes more that of the individual in the marketplace?

Friedman And let the market work.

Milton’s Paradise Gained

Robinson Now Milton, here’s what I see you counseling the next president to say—"My fellow Americans, we are 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 askance at that too." That’s a tough message politically.

Friedman That’s why I am not a politician. You’re never going to do all this. But it’s well to have in mind what you’d like to do. Everything has to be done incrementally, and will be done. But unless you have in mind where you want to go, you’re not sure your steps are taking you there. So I’m not putting this forth as a practically feasible platform for tomorrow. I’m saying, let’s look at the long run, where would you like to be? And then let’s ask ourselves with respect to each proposal, does it take us in that direction? Or does it take us in the opposite direction?

Robinson Now 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.

Friedman That’s right.

Robinson All right. Let me ask you to make a prediction here. Let’s assume that the next president, whoever he is, 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?

Friedman Whether it’s smaller or bigger will not depend on whether people have read what I write. It will depend on how effective the Internet is at making it hard to collect taxes.

One of the great virtues of the Internet is that it enables people to make encrypted transactions at a distance, anonymously, over various countries—so it makes it much more difficult to collect taxes. And if that effect is strong enough, then government spending as a fraction of GDP will be lower than it is now.

Robinson So your concluding note to the next president—if you’re a Democrat, this may upset you; if you’re a Republican, it may cause you secret glee—would be that one way or the other, the technology is moving such that the government is likely to get smaller?

Friedman Right.

Robinson 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 likes that piece of advice.