Issues & Insights Friday, June 28, 2002
Laffer, Friedman Play Down Economic Worries Du Jour
BY NICK TURNER
INVESTOR'S BUSINESS DAILY
It was billed as the economic debate for the ages: Milton Friedman, the great monetarist, vs. Arthur Laffer, the great supply-side economist.
The two faced off at a luncheon in San Francisco Wednesday. But it really wasn't much of a debate. Friedman and Laffer agree on too much.
Both called for lower taxes, freer trade and less government. And both were bullish on the U.S. economy in the long term.
Nor did the two conservative icons seem bothered about current worries such as the widening trade deficit, the falling U.S. dollar or the aftermath of the much-discussed tech wreck.
There was never any tech-fueled "new economy," they said.
"We've had a new economy for 200 years," Friedman said, comparing the tech boom and bust to what happened with autos and electricity in the 1920s.
The trade deficit also isn't a cause for concern, both men said. "We ran trade deficits from 1640 to 1870," Laffer said. "We built our country with foreign capital."
People tend to pick apart trade data and draw the wrong conclusions, Laffer added. "One of the best ways to help this would be to abolish international trade statistics," he joked.
There's little danger the falling dollar will hurt the U.S., they said.
Even currency crises typically have a good outcome, Friedman said.
Why? Because people in a weak position sell their currency to people in a strong position. So there's more money in the hands of people who can use it to help the broader economy.
Friedman went on to rail against the euro, saying the new currency will do more harm than good. "The euro was a mistake," Friedman said.
Countries in Europe are too diverse, with their own customs, income levels and laws, he said.
Their economies react to world events in different ways, and some may be booming while others are in recession.
"They have to be able to adapt," he said. Without flexible exchange rates, European countries can't depend on their currencies to change with the times. They can only change their prices.
That's not so bad for Ireland and other fast-growing countries. If Ireland outperforms its neighbors, it may see a higher level of inflation, but nothing too onerous.
Underperforming countries, such as Greece, may have to cut prices to adapt, Friedman said.
This deflation could be painful - especially since Europe has such rigid wage and labor laws.
Laffer did cite some positive trends in Europe. Tax-cut hawks are winning more clout in Germany, Portugal and Spain, he said.
Even France is moving in the right direction, Laffer said. Socialist Lionel Jospin was soundly defeated in the last presidential election.
"I am extremely optimistic about French fiscal reform," Laffer said.
China may be a different story. Its long-term prospects are good, both men said.
The percentage of firms controlled by the government has fallen steeply since Mao died in the 1970s. But the government has rolled back some of that progress in the last three years, Laffer said.
Laffer and Friedman saved some of their harshest criticism for the U.S. the school system and government's involvement in it.
"There is no other branch of the government that is so technologically backward," said Friedman.
"You would have a revolution if you could get a competitive educational system," he said.
Friedman and Laffer are two of the most influential economists of the last half-century.
A monetarist, Friedman in his work examines the way money supply affects inflation. He believes government should keep the money supply steady. Never try to fix the economy by tinkering with the supply of money, Friedman says.
Laffer is a supply-sider. An adviser to Presidents Nixon and Reagan, he argues that tax cuts spur productivity and growth.
He's famous for the Laffer Curve, which he jotted down on a cocktail napkin in 1974 for Dick Cheney and Donald Rumsfeld.
The curve showed lower tax rates actually would increase tax revenue because people would make more money and pay more in taxes - even at the lower rates.
Laffer helped form the basis of Reaganomics, and the famed cocktail napkin now sits in the Smithsonian.
Friedman called Reagan the greatest president of his lifetime and called himself a supply-sider.
"As I understand it, a supply-sider is someone who thinks that how hard people work depends on how much they get from it," he said. That means tax rates shouldn't rise with incomes. "I've always been a fan of a flat tax."
Laffer echoed those comments.
"You have to be an economist from Harvard to think that if you tax people who work and pay people who don't work, you'll get more people working," said Laffer, a Yale graduate.
Supply-side economics is often criticized for helping the rich at the expense of the poor. That's not a fair claim, both said.
"Almost all progress has ultimately benefited the poor," Friedman said. "The auto started as a luxury for the rich and ended as a necessity for the poor."
People respond to incentives, said Laffer. If you give more money to the poor, you'll suddenly have a lot more poor people.
"The dream in America has always been to make the poor rich, not the rich poor," he said. "The best way of helping the poor is cutting the taxes to the rich."
With lower taxes, those rich people will start companies, create jobs and invent things, Laffer said.
Despite their conservative economics, Friedman and Laffer part with Republicans on some issues. They were rankled by President Bush's recent decision to impose steel tariffs.
And Friedman sees America's war on drugs as immoral. It's especially harmful to the U.S.' southern neighbors, he said. "There's no doubt that eliminating prohibition of illicit drugs would benefit Latin America," Friedman said.
Laffer spoke up for free and open immigration. The issue divides both parties, but he said immigration goes hand in hand with free trade. "There should be open borders for goods and people," he said. |
