The Pot and the so-called Kettle

by Russ Roberts on January 25, 2007

in Standard of Living

In this article at the New York Review of Books (HT: Arnold Kling at EconLog), Paul Krugman accuses Milton Friedman of intellectual dishonesty. It’s a long article and there are a lot of interesting observations about post-World War II macroeconomics. But the part I found riveting was Krugman’s assessment of Friedman’s laissez-faire recommendations:

The odds are that the great swing back toward laissez-faire policies that took place around the world beginning in the 1970s would have happened even if there had been no Milton Friedman. But his tireless and brilliantly effective campaign on behalf of free markets surely helped accelerate the process, both in the United States and around the world. By any measure —protectionism versus free trade; regulation versus deregulation; wages set by collective bargaining and government minimum wages versus wages set by the marke —the world has moved a long way in Friedman’s direction. And even more striking than his achievement in terms of actual policy changes has been the transformation of the conventional wisdom: most influential people have been so converted to the Friedman way of thinking that it is simply taken as a given that the change in economic policies he promoted has been a force for good. But has it?

So according to Krugman, since the 1970’s, the world became a lot more laissez-faire. There is some truth to that. In the time since 1970, Reagan and Thatcher were elected. The Berlin Wall fell. Eastern Europe and the former Soviet Union gave up on communism. The amount of economic freedom in China increased dramatically.

But in the United States, has economic policy really “moved a long way in Friedman’s direction” as Krugman implies and goes on to assess? The key sentence is masterful rhetoric:

By any measure — protectionism versus free trade; regulation versus deregulation; wages set by collective bargaining and government minimum wages versus wages set by the market — the world has moved a long way in Friedman’s direction.

Let’s look at the three examples Krugman chooses.

Yes, trade appears to be freer today than in 1970. But trade in America was already quite free in 1970. Since 1970, there has been a small decline in average tariff rates I would guess (does anyone out there have the data?), but increases in non-tariff barriers (anti-dumping, threats of tariffs and quotas to induce “voluntary” restraints on exports by our trading partners) along with an increased regulatory apparatus surrounding trade because of so-called free trade agreements, agreements that Friedman refused to endorse. The net effect? Hard to say. But we haven’t “moved a long way” toward the trade regime that Friedman would endorse.

The importance of collective bargaining and the minimum wage have declined since 1970 but collective bargaining has steadily declined in the private sector since 1950. And the minimum wage has never affected more than a small part of the work force.

Regulation and deregulation? Yes, some key industries (trucking and the airlines) have been deregulated since 1970. But would you argue that America is less regulated today than it was in 1970? According to this source, the number of pages in the Federal Register has more than tripled since 1970. Spending by regulatory agencies, corrected for inflation, is about six times higher than it was in 1970. Staffing has more than doubled. Does Krugman seriously believe the American economy is less regulated today than it was in the 1970s?

But the cleverness of Krugman is the phrase, “by any measure.” By listing three measures, trade, collective bargaining, regulation, he implies that he has exhausted all the measures. But he ignores the most important measure in his non-exhaustive list: the size of government. Government, just measured by federal, state and local spending, corrected for inflation (and ignoring the expansion of regulations in our lives), is dramatically bigger today than it was in the 1970s. As a percentage of GDP, it is basically unchanged. The United States at least, has not “moved a long way in Friedman’s direction.”

So Krugman’s resulting analysis of the “Friedman era” is simply silly:

We have data on the real income—that is, income adjusted for inflation—of American families from 1947 to 2005. During the first half of that fifty-eight-year stretch, from 1947 to 1976, Milton Friedman was a voice crying in the wilderness, his ideas ignored by policymakers. But the economy, for all the inefficiencies he decried, delivered dramatic improvements in the standard of living of most Americans: median real income more than doubled. By contrast, the period since 1976 has been one of increasing acceptance of Friedman’s ideas; although there remained plenty of government intervention for him to complain about, there was no question that free-market policies became much more widespread. Yet gains in living standards have been far less robust than they were during the previous period: median real income was only about 23 percent higher in 2005 than in 1976.

This paragraph is full of holes. First, if you’re going to compare changes in family income across time, you have to control for demographic effects. Krugman fails to mention the explosion in divorce that began in the 1970s. That diminishes the growth rate in family incomes—a whole bunch of previously married women suddenly found themselves working and heading what the government measures as a new family. That lowered measured average income  biased growth rates downward for purely statistical reasons. (Arnold Kling makes the point in a different way, and very decisively, here.) At least Krugman doesn’t blame the higher divorce rate on say, Friedman’s enthusiasm for school vouchers. The increase in immigration in the 1990’s has the same statistical effect. Second, inflation is mis-measured and causes real income growth, particularly in recent years, to be understated.

But the real dishonesty of the paragraph is to attribute all of the alleged economic mediocrity of the last 30 years to an alleged increase in laissez-faire policies championed by Milton Friedman. You can debate whether the last 30 years or so of economic performance have been good or bad or so-so. But how can you argue that the last 30 years have been the golden era of laissez-faire?

By the way, Milton didn’t view the last three or four decades of American economic policy as the golden age of laissez-faire or a substantial triumph in practice of his ideas. Here’s what he said when I interviewed him last summer about the impact of Capitalism and Freedom and I spoke of how many of the ideas in the book that were once viewed as crazy were now reality or were at least taken seriously:

Milton Friedman: … But you’re stressing how much has since been achieved from it.

Russ Roberts: Correct.

Milton Friedman: But I’ve always stressed the opposite. If you look at the list in Chapter 1 or 2—I have a long list of things government ought not to be doing.

Russ Roberts: And it’s not exhaustive.  You say at the end of it this is just the beginnings of a list.

Milton Friedman: The only one of those that has really been achieved is a volunteer army.


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