Milton Friedman opines

Taxes
Friedman has a simple rule: he’s in favor of a tax cuts for any reason in any way you can get them. The real problem is government spending: government spends 40% of the national income—25% at the federal level and 15% at the state level. Add to that what are effectively taxes via regulations (fees, etc.) and the total is 50% of national income. There is always upward pressure on spending, because once vested interests get favors they fight to keep and expand them. So the only way to control congress’s spending is the same way you control a teenager’s spending—reduce their allowance.

Friedman likes the flat tax, and thinks taxes should be based on consumption. He doesn’t like the death tax especially because it is triple taxation: the corporation pays income tax, then the dividends are taxed, then the individual is taxed at death..

Options
To the chagrin of many in Silicon Valley, he thinks options ought to be priced expensed as a liability.

The Dollar
Foreign exchange rate, Friedman points out, is a market phenomenon. There has been a large inflow of investment into the US because it is a very attractive place to invest. The only way to invest in the US is by selling the US more than you buy from the US. So the capital account surplus is the opposite side of the trade deficit. It’s true, the dollar may be overvalued in the sense that the good investment opportunities in the US may be declining in relationship to the international investment opportunities. But, Friedman stressed: it doesn’t matter. As long as there is no government intervention, it is not harmful if the exchange rate goes up or down.

For more on the dollar, read this post in R21.

Housing
The housing market has behaved unusually. Typically it is a leading indicator—going down before the economy as a whole and coming back before the economy as a whole—but lately has been non-cyclical. Will it bust? Friedman doesn’t know.

Education
The public school system is a disaster. Why? Because it is a monopoly. What other industry, Friedman asks, has had no technological improvement in 300 years? How did we get here? In the early 20th Century there were no unions and schools were under local control. In 1965, however, the National Education Association converted from a professional organization, like the American Medical Association, and became a trade union. Not coincidentally, the deterioration in education quality essentially started in the mid-60s.

Public education is a monopoly in which the producer chooses its customers—need to create a system where the customer (parents) chooses the producer (schools.) The solution: choice. Rich people have choice because they can afford to pay twice: once in taxes and once in private school tuition (or they can afford to move to a better public school district.) Poor people have no choice. But Friedman is optimistic that we are moving towards a system of choice.

Health Care
Here’s how Friedman discussed the problem with healthcare in the US:

Consider 4 scenarios:

1. You can spend your own money on yourself, in which case you are careful how much you spend and how you spend it.
   
2. You can spend your own money on someone else, in which case you are careful how much you spend but not so much how you spend it.
   
3. You can spend someone else’s money on yourself, in which case you spend more money and are careful about how you spend it.
   
4. You can spend someone else’s money on someone else—in which case you are not careful how much you spend or how you spent it.

The 4th scenario is what we have with health care and why it is so problematic. By and large health care is about people spending other people’s money on yet other people. Consider how rare it is today that you spend your own money on your own health care.

The problem started in WWII when wage controls and low unemployment compelled employers to add benefits to attract workers—and so they started paying for healthcare. By the time the IRS figured out that they should tax healthcare benefits as compensation, the legislature acted to shield healthcare from taxes. So it got ingrained. But if you think about it, there is no more reason that health care should be tax-free than food, or anything else, for that matter. And only employer-provided health benefits are tax-free—not individuals. So employers became responsible for their employees health benefits. In the 1960s, Medicare and Medicaid completed the move to third party payer.

While Friedman would prefer a move back to first party payments, he realizes there is “not a snowball’s chance in hell” that this would happen politically. So instead he argues to extend the tax credit to individuals. This could happen gradually by extending medical savings accounts (similar to IRAs). While MSAs should be popular, the “vested interests” have managed to keep them from expanding.

For more on health care, read this Holman Jenkins column in the WSJ.

Steel
Friedman was critical of Bush’s decision on steel tariffs and points out that Alexander Hamilton was responsible for implementing steel tariffs because while he was a believer in free trade, he felt steel was a nascent industry that needed nurturing. Well it’s 200 years later and the steel industry still hasn’t grown up.

Airline Security
Emphasizing that you ought to have actions coordinated with incentives, Friedman asserted that it was a mistake to federalize airline security—for the airlines have much more incentive to provide better security than the bureaucrats and should be held responsible. To the argument that they failed in the first place, Friedman points out that the incentives have changed substantially since 9/11. This does not mean that Friedman would oppose minimal federal standards.

The Great Depression
Friedman gave a speech in the early 1950s that he felt the US economy is “Great Depression proof” and he still feels it today. The only thing that could produce a great depression today is a collapse of the financial structure—which won’t happen. He pointed out that the money supply declined by 1/3 from 1929 to 1933.