"Is this the death of Milton's ideas?" I hesitantly asked. "Oh no," she replied, "But it is the death of common sense."

From Calafia Beach Pundit:

"Missing Milton

Steve Moore has a nice article in today's WSJ that reminds us of the great legacy of Milton Friedman. It's a real shame that liberals are still trying to blame free markets for the crisis we are now exiting, when in fact it was government intervention in free markets that screwed everything up. I was lucky enough to meet Milton and I attended quite a few of his talks. His brilliance was awesome. Excerpts from Steve's article:

With each passing week that the assault against global capitalism continues in Washington, I become more nostalgic for one missing voice: Milton Friedman's. Imagine what the great economist would have to say about the U.S. Treasury owning and operating several car brands or managing the health-care industry. "Why not?" I can almost hear him ask cheerfully. "After all, they've done such a wonderful job delivering the mail."

In the midst of this global depression, rotten ideas like trillion-dollar stimulus plans, nationalization of banks and confiscatory taxes on America's wealth producers are all the rage. Meanwhile, it is Milton Friedman and his principles of free trade, low tax rates and deregulation that are standing trial as the murderers of global prosperity.

The myth that the stock-market collapse was due to a failure of Friedman's principles could hardly be more easily refuted. No one was more critical of the Bush spending and debt binge than Friedman. The massive run up in money and easy credit that facilitated the housing and credit bubbles was precisely the foolishness that Friedman spent a lifetime warning against.

Milton's ideas on capitalism and freedom did more to liberate humankind from poverty than the New Deal, Great Society and Obama economic stimulus plans stacked on top of each other.

At one of our dinners, Milton recalled traveling to an Asian country in the 1960s and visiting a worksite where a new canal was being built. He was shocked to see that, instead of modern tractors and earth movers, the workers had shovels. He asked why there were so few machines. The government bureaucrat explained: "You don't understand. This is a jobs program." To which Milton replied: "Oh, I thought you were trying to build a canal. If it's jobs you want, then you should give these workers spoons, not shovels."

But in the energy industry today we are trading in shovels for spoons. The Obama administration wants to power our society by spending three or four times more money to generate electricity using solar and wind power than it would cost to use coal or natural gas. The president says that this initiative will create "green jobs."

I recently phoned Rose Friedman and asked her what she thought about the attacks on her husband. She was mostly dismayed at how far off-course our country has veered under President Obama. "Is this the death of Milton's ideas?" I hesitantly asked. "Oh no," she replied, "But it is the death of common sense."

Posted by Scott Grannis "

Me:

Don said...

I know that you might not like to hear this, but most of my ideas about how to handle this crisis come via the writings of Milton Friedman. Of course, he changed his mind in some cases, I suppose. Still, I'm largely following his lead. I can direct anyone to my sources for these positions. They include:

1) Narrow Banking
2) A Guaranteed Income
3) Quantitative Easing, Helicopter Money
4) The idea that QE and a Stimulus complement each other: held by Viner, Simons, Knight, and Fisher, during the Great Depression. Hardly leftists.
5) Health care should have either much less govt or much more govt.

Also, a stimulus could be a Sales Tax Cut and Tax Cuts on Investment.

In general, I follow Brittan in liking this essay:

"A Monetary and Fiscal Framework for Economic Stability"

I don't know Rose Friedman, and she might well be bothered by my politics, but I believe that she knows a lot about the Chicago School Proposal during the Great Depression. It would be great to hear what she remembers about it.

Don the libertarian Democrat

Don said...

Scott,

I'm sorry that I didn't reply earlier. There is a big difference between myself and Milton Friedman, and that it that I consider myself first and foremost a follower of Edmund Burke. There is no chance of getting government out of health care. None. Consequently, by not allowing the government to better run the current system, you are helping to perpetuate the current system, which is the worst possible system. Here's Milton Friedman:

http://www.prospect.org/cs/articles?articleId=10764

RK: But, you know, physicians incomes relative to other highly skilled professionals are relatively lower in the western countries that have universal health insurance, so I think it is kind of indeterminate.

MF: We have the worst of all of all worlds on that score

RK: I couldn't agree with you more. We have the worst mix of government and private, I could not agree with you more.

MF: We ought to have much more private or much more government. ( NB DON )

My difference with MF is practical. We are not going to have a lot less govt in health care. Period. Consequently, by denying this political reality, you are helping keep our system in this middle ground morass that MF says is worse than more govt. That's my position. I'd prefer to do it in connection with a guaranteed income, as Charles Murray does in In Our Hands, but MF was correct. You must have one or the other.

If I thought that your view had a chance to get implemented, I'd be much more accepting of your view. But it doesn't, in my opinion. In the meantime, we're stuck with, as MF says, the worst of all worlds.

Take care,

Don the libertarian Democrat

PS It's fine to disagree with MF. I just find that, on close inspection, many of his ideas are not what people seem to think that they are. That's why he's getting such bad and unfair press.

This is the biggest bounce in this index since the housing market started turning down almost four years ago

TO BE NOTED: From Calafia Beach Pundit:

"Monday, April 27, 2009

Housing market green shoots (2)

Bloomberg's index of the stock prices of major homebuilders is now up 75% from its recent lows (current: 120, low: 68). This is the biggest bounce in this index since the housing market started turning down almost four years ago, and it comes amidst a steady drumbeat of prognistications that a housing bottom won't occur until next year. There's a decent chance the market is telling us that we have already seen the bottom, or that we are very close to the bottom.

Posted by Scott Grannis "

two deadly risks that dominated the markets at the end of last year—depression and deflation—one has largely disappeared

TO BE NOTED: From Calafia Beach Pundit:

"Deflation risk disappears

This chart is Bloomberg's calculation of the 5-year forward expected inflation rate, 5 years from now (which is presumably the Fed's preferred measure of inflation expectations). As it shows, deflation risk was at its maximum right around the end of last year. Inflation expectations have since returned to where they were prior to the recent crisis. This can also be observed in the fact that 10-yr Treasury yields have risen by almost 100 bps since year-end, while 10-yr TIPS real yields have fallen by 50 bps. This reflects a strong shift in investors' preference for TIPS over Treasuries, which is consistent with a dissapearance of deflation fears. If the line on this chart were to continue to rise, that would be an indication that the market is pricing in the risk of inflation rising to higher levels than we have seen in the past 10-15 years.

Of the two deadly risks that dominated the markets at the end of last year—depression and deflation—one has largely disappeared, and that is excellent news.

Posted by Scott Grannis "

Fannie Mae is essentially in receivership, a spread of 60 bps is not all that bad

TO BE NOTED: From Calafia Beach Pundit:

"Agency spread update

Progress towards tighter agency spreads has been slow, but it is still proceeding, from the looks of this chart. 5-year agency spreads peaked on Nov. 20th at 172 bps (intraday), and have since fallen to just under 60 bps. In a "normal" environment spreads should be 30 bps or less. Given that Fannie Mae is essentially in receivership, a spread of 60 bps is not all that bad, however. The U.S. government is essentially guaranteeing the debt, but who's to say the political winds won't shift? Investors willing to buy FNMA debentures for only 60 bps more in yield (2.5% vs. 1.9%) than Treasuries are showing a significant amount of faith in the government to honor its promises.

Posted by Scott Grannis "

balance of risks favors scenarios in which the Fed withdraws the money in an untimely fashion, thus fueling higher-than-expected inflation

TO BE NOTED: From Calafia Beach Pundit:

"Federal Budget update

For the 12 months ending March 2009, the federal government's deficit was $1.096 trillion dollars. The age of trillion-dollar deficits has finally arrived.

As the top two charts show, the main reason for the ballooning deficit is spending. A good deal of the extra spending in the past six months has been due to things like TARP and Treasury purchases of assets (e.g., $119 billion of Freddie and Fannie debt in the past three months)—which are arguably one-time, emergency measures, and they aren't really spending so much as they are investments, because Treasury is likely to earn interest on this money unless the economy completely collapses. But the thing that will give us trillion-dollar deficits in the future is the huge planned increase in plain-vanilla government spending thanks to a) the recently-passed stimulus bill and b) Obama's ambitious spending plans.

The Obama administration is making some huge assumptions when it projects that spending will slow down sharply in years to come and revenues will pick up dramatically (third chart). But it's not hard to imagine that a lot of the "temporary" spending programs that will kick in over the next year or so will end up becoming permanent, and then continue growing—that's one unwritten rule of federal budgets. If Washington lacks spending discipline in the future, then spending could remain "stuck" in the range of 26-28% of GDP. Meanwhile, if higher tax rates and higher tax burdens end up slowing the economy's recovery and sapping its future strength, then tax revenues might well fail to exceed 19% of GDP. Thus we have a plausible scenario in which the deficit ranges from 7-9% of GDP for many years to come. The current 12-month deficit of $1.1 trillion is equal to 7.8% of GDP—and there you have the makings of deficits which could be $1.5 trillion per year five years from now.

In any event, we are now in uncharted (post-war) territory. A trillion-dollar deficit is not difficult to fund in today's climate, because the one asset the world is desperate to own is U.S. government debt. Treasury could probably sell significantly more than $1 trillion of debt this year without causing more than a modest ripple in interest rates. Moreover, Japan has run deficits of more than 10% of GDP for years without the sky falling. For now, the worst thing about all this is that the prospect of a significant and lasting increase in the deficit weighs heavily on the economy, because it means that at some point in the future, tax burdens will have to rise. If you know taxes will increase in the future, you reduce the expected after-tax return on capital today, and that means a lower price for our existing capital stock. That is basic financial math, and it goes a long way to explaining why, even after a 26% gain in the S&P 500 index in the past month, equities remain historically undervalued by just about any measure.

There are other potentially worse problems that loom, the principal one being that the Federal Reserve is now buying Treasury debt and other debt in quantity. Past deficits have never been a source of inflation, mainly because they were funded by the sale of debt, rather than by printing money. That no longer holds, unfortunately. The WSJ has put together a great chart which tracks the growth of the Fed's balance sheet.

I'm reminded of the four years I spent in Argentina, when inflation averaged over 7% per month. After returning to the states I spent a good deal of time in my first job studying the Argentine economy, and it was then that I saw how and why they had so much inflation. Since the Argentine government couldn't convince anyone to buy its debt, almost all of the deficit was financed by running the printing presses 24/7. I remember figuring out an equation which translated a given deficit into a future inflation rate, and my boss (John Rutledge) and I went to talk to the government in the mid-1980s to warn them that hyperinflation was on the way (and we were right).

I'm not saying that hyperinflation is in our future, because it is still possible for the Fed to withdraw all the money it is pumping into the economy in a timely fashion. For now the economy seems desperate for more money and more Treasury bonds, but that can and most likely will change once the economy shifts into recovery mode. It is then that the risk of rising inflation could become the dominant feature on the economic horizon. It seems to me that the balance of risks favors scenarios in which the Fed withdraws the money in an untimely fashion, thus fueling higher-than-expected inflation in the years to come.

Posted by Scott Grannis"

and a return to easy money has marked the end of every recession

TO BE NOTED: From Calafia Beach Pundit:

Fed + yield curve = end of recession

Mark Perry had a nice post yesterday with an update of the Fed's model for predicting recessions and recoveries. The upward slope of the Treasury yield curve now says that the probability of recession this year is rapidly approaching zero: "the Fed's model shows a recession probability of only about 1% on average through the next 12 months, and below 1% by the end of the year."

This prompted me to update my own model, which also uses the slope of the yield curve, but which adds in the real Fed funds rate, since the latter is a good measure of just how tight or loose the Fed actually is. As this chart shows, the yield curve is always negatively sloped going into recessions and positively sloped coming out of recessions. That's because every recession in modern times has been preceded by a significant tightening of monetary policy, and a return to easy money has marked the end of every recession. So today it is clear that we have the essential monetary ingredients for a recovery. Indeed, given the rise in commodity prices and other signs of improvement that I've been noting for awhile, it seems pretty likely that the economy will be on the mend before mid-year, as I predicted at the end of last year.

Of course, when recessions end it is never immediately obvious, and it typically takes many months or even a year or more before the numbers confirm that the recession has ended. I recall how Bush Sr. lost his reelection bid in 1992 in part because of the widespread belief that the economy was hopelessly mired in recession; by the end of 1993, however, revised numbers came out which showed that the economy had actually enjoyed a decent recovery in 1992. Similarly, during the summer and fall of 2003 the mantra was that we were in a "jobless recovery," monetary policy was "pushing on a string," and deflation threatened the global economy. We later learned that the economy took off like a rocket starting in July of that year.

Posted by Scott Grannis "