'Your World' Interview With Economist Milton Friedman

This is a transcript from David Asman's May 15, 2004 interview with economist Milton Friedman .

"Free to Choose"

David Asman: Are we more or less free today than we were in 1980, when your book “Free to Choose” was published?

Milton Friedman: That depends on what you mean by “we.” If “we” means the world, the answer is: by all means. After all, since the fall of the Berlin Wall and the collapse of the Soviet Union, millions of people who were under the Iron Curtain are much freer to chose now than they were then. Similarly, over the past two decades, in China, 1.3 billion people are freer to choose. Within the last half dozen years, in India, another billion people are freer to choose.

When you come to the Western nations, like the United States or Europe, the situation is not so obvious. Our freedom to choose has lessened. So we have a continuing fight between socialism and freedom.

DA: Bill Clinton announced that “the era of big government was over.”

MF: Of course, he said that. But then he didn’t act on it. Saying it is one thing. Doing it is very different. The facts are that during the Clinton Administration government spending did go down as a fraction of national income. However, that was almost entirely because of reductions in military expenditures.

DA: Which have gone up since then.

MF: Oh yes, because of the Iraq war. And war is an enemy of freedom.

War vs. Freedom

DA: In a time of war, how do we maintain our freedom?

MF: We don’t. We invariably reduce our freedom. But that doesn’t mean it’s a permanent reduction. As long as we really keep in mind what we’re doing, that we keep it temporary, we need not destroy our freedom.

DA: Are you concerned that some of the measures we’re taking now to fight the war, like the Patriot Act, may be more than just temporary?

MF: It’s not clear. The Patriot Act is a very complicated issue, and I’m not going to get involved in that. But I think that on the whole, this war is small enough relative to our economy that it is not going to be a serious impediment to our freedom. But the sooner we can get rid of it and out of it, the better.

DA: Do you agree with President Bush that the actions in Iraq were necessary as a part of our war on terrorism?

MF: I think you can argue either side of that. Where I do feel strongly, is that having gone into it, whether we should have or not, we must see it through.

DA: Even if it costs some of our freedoms?

MF: There’s no way to avoid a burden on your freedom. The costs themselves are a burden on your freedom. The restrictions that are necessary in order to get rid of the terrorists are a burden to your freedom. So there’s no way in the short run to avoid a restriction on your freedom. But if we’re going to avoid a permanent reduction in freedom, we have to see this war through.

Education

DA: Let’s talk about specific policies that affect our freedom to choose. Education. You have advocated vouchers since the mid-1950s. Now, briefly, vouchers would give you back that portion of your taxes that the government spends on education and let you spend it the way you feel it should be spent. It appears that experiments in vouchers in places like Milwaukee and Washington, D.C. are now being rolled out. Does this give you hope that at long last vouchers will play a part in our educational process?

MF: Vouchers are a means, not an end. The end and the objective is to get an effective educational system. The state of our educational system is a disgrace to our country. We have an elementary and secondary school system in which close to half of the youngsters never graduate properly. It’s a disgrace that there is more illiteracy today than there was 100 years ago.

DA: Whom do you blame for that?

MF: I blame the existence of a governmental, monopolistic school system. I also blame the teacher’s union, and the control they have over the school system.

DA: Is that control tightening?

MF: That control has tightened very much. In the 1960s, The National Education Association changed its character. Prior to that point it had been a professional association, similar to the American Medical Association or the American Bar Association. But then the NEA changed into a union. And from that point on you can see deterioration in the quality of schooling in the United States.

DA: How would vouchers improve education?

MF: All governments—federal, state and local—are spending about $9,000 per year on each pupil. That’s the money that goes to the education system. The voucher system rearranges this payment system radically. Instead of that money going to the schools, vouchers would direct that money to the kids, for them to use the way they and their parents think is appropriate. And you wouldn’t have to make it $9,000, because private education would be much more efficient than government. Is there anything that government does that doesn’t cost twice as much as it needs to? So if you had a voucher of $5,000 for each of your children—provided you used it for nothing other than education—and you could choose what school you want your child to go to, the competition would force individual schools to operate more efficiently. The real power that a consumer has is in deciding what to buy. And right now you don’t have that power with respect to schools.

DA: But is there evidence that what happens in the market place, with respect to competition making better products more efficiently, would also improve the quality of education?

MF: Yes, if you compare private schools with government schools. You can also see evidence of this under the experimental voucher plans. Now, the problem with the voucher experiments is that so far most of them are restricted to families below a certain income. They are largely welfare measures and not educational measures. For the purpose of having the maximum degree of competition, you would like the voucher program to be unrestricted for all of the parents to have, because that way you get the largest market within which competition would work. But even within these restricted cases, in every place where you have had a voucher, children who had vouchers to choose the school they felt would be better actually did better than children without vouchers. Moreover, in every one of those experiments, the public schools have improved, because competition forced them to become more efficient. So the competition from the private schools, enhanced by the vouchers, led to improvement in the public schools.

Health Care

DA: Another area in which government efficiency has been questioned is health care. Just to put things in perspective, I remember the days when I was sick and the doctor would come over to make a house call. My father would follow him to the door, pull a bill out of his wallet, pay the doctor, and that was it—-no papers, no government, no fuss. Will we ever get back to that?

MF: It’s very hard to believe we will. But we have to move in that direction.

DA: How?

MF: The best instrument at the moment is a health savings account—it used to be called a medical savings account. It works as follows: First of all, you buy for yourself a catastrophic insurance policy, so that in case of a major adverse medical event, you’re covered. Then you have an account, in which you or your employer deposits a certain sum of money. Let’s say there’s a deductible limit of $5,000. So you deposit $2,500 in the account, and you can use that any way you want for medical purposes. You choose the doctor, and you pay the doctor. You get the test, you pay for the test. And then if you go over $2,500, you have to pay that out of your pocket. But the maximum it can cost you is $2,500 plus the cost of the catastrophic insurance premium. And this way you have an incentive to save money. Right now, you as a customer have no incentive to save money on medicine.

DA: And the doctor has no incentive to lower his costs.

MF: And the doctor has no incentive to serve you. You are not employing the doctor. He’s being employed by the insurance company, or by the hospital.

DA: Or by the government, if he’s being paid by Medicaid or Medicare.

MF: But let me note one thing that’s interesting. We’ve been talking about education and medicine. The problem with both of them is exactly the same. The problem with both of them is third party payments. You do not have a transaction between a willing buyer and a willing seller. What you have is Mr. A, getting service from Mr. B, who is paid by Mr. C. The common feature is that you as an individual do not make the deal, do not suffer the consequence or pay the cost. Some third party pays for you.

DA: People defending the system would say that it’s become a more complex world. Now we have all this complex equipment and tests and medical specialists and with all that complication, you need somebody extra to sort things out.

MF: But the government has introduced the major complication. The major complication is caused by third party payments. The fact that you have more complexity in medicine is a good thing. During the whole of the past 100 years, life expectancy has been going up. It was going up before there were these government programs, it’s been going up since. But life expectancy actually went up faster before these programs were introduced than since.

In 1946, just after World War 2, total medical expenditures was about 5 percent of national income. Today, it’s 17 percent. And life expectancy increased far more rapidly in the 50 years before World War 2 than it is increasing today. I believe that the progress and the quality of medical care has increased independent of the amount we spend on it through government. The relationship between your father and the doctor he paid at the door could work well in our time. It doesn’t work well when your father doesn’t pay the doctor directly but calls in a third party, and some third party has to judge whether that medical procedure is necessary. That’s what causes the complication.

There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money.

Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost.

Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch!

Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. And that’s close to 40 percent of our national income.

DA: The politicians who defend this system would say that if you leave it up to the market, inevitably, there will be people left out. There will be a minority who can not take care of themselves. In order to create an equalized system of care, whether it’s education or health or social security, you need the government to come in and equalize.

MF: But do we want an equalized level of care? We can always have an equalized level at a low level. Where does progress come from? If we go back and look at the history of our country, what is behind our progress? It’s not equalizing. It’s differentiating. It’s that somebody gets a bright idea about how you can have a telegraph line. And who buys that first? Is it the poor people? No. Or look at television. How did we get the television and all its related products? We didn’t get progress in television technology by immediately demanding that every American get a television set. We got it by someone starting the venture and rich people buying it to begin with. Rich people are the experimental ground for every new development. The nature of progress is that what begins as a luxury for the rich becomes a necessity for the poor as it’s developed and passed on.

Social Security

DA: Social Security. We’ve got this mammoth system. What do we do with it?

MF: Privatize it.

DA: How?

MF: Just by letting you handle your own retirement account. Tell me, why should the government be deciding for you how much you should spend on retirement. Let’s suppose you were a young man who had a terminal disease. The government comes to you and tells you have to put away 15 percent of your income in a retirement account even though you’re going to die at 50. Does that make any sense? I think that’s a vicious program. It’s not a good idea. So in general, you ought to let people decide for themselves.

Now it’s very difficult to get to there from where we are now, because there’s so much public sentiment involved. But the first step you can take is to say, well, we’ll keep the compulsory payments. But instead of the funds going to the government, they will go into your own, personal account. So you will have a personal account. And what’s deducted from your paycheck will go into that, and you can decide how to invest it. And you can take care of it. And if you did that, you could reduce the amount that you could deduct and still provide a better retirement account.

DA: Do you see any signs of that being politically feasible?

MF: Oh, yes, I think it’s very politically feasible. The situation in social security is very simple. Something is going to have to be done. The population is getting older. The number of people who are ready to retire is rising relative to the number of people working. So the costs are going to get intolerable. And something will have to be done. I think that the most attractive device is privatization. And I suspect that that will happen.

DA: So simply out of necessity, we’ll be forced to do it.

MF: Well, in his presidential campaign, President Bush came out in favor of privatization. And if he’s re-elected I think there’s a good chance you’ll get the beginning of privatization of social security. It won’t be as broad scale as it should. It’ll be done piecemeal. For example, in the beginning you’ll be able to put aside 2 percent or 3 percent of the total account. But at least that will be a start.

DA: You mentioned President Bush. You must not be happy with the amount of money—non-defense spending—that he has been responsible for spending on government programs.

MF: He has. And that’s very bad. I’m not very happy about that. But I am very happy about the tax reductions. The big problem for a democratic government—democrat with a small “d”—is how to hold down government spending. The one thing that legislators like to do is to spend money. That’s the one way they’re sure to get some kudos from their constituents. The only way you can really hold down their spending is to keep down the amount of income they get. You have the same problem with your children. If one of your children spends too much, you cut his allowance. That’s the only effective way of doing so.

DA: But politicians have other ways to fund their spending. They can print more money and create inflation. Or they can go into debt. Those are ways that they can spend money that they don’t have.

MF: They can, but those are not politically popular.

DA: But the political consequences are not felt immediately; they’re down the line after the expenses have been made.

MF: Yes, but yet there has been a public reaction against excessive debt. Deficits are not politically popular. So keeping down the amount of tax revenue they get is still the most popular way of holding down government expenditures.

DA: So even though Bush has increased public spending a lot since he became president, his tax cuts will force politicians to lower their expenditures.

MF: They’re already having that affect.

The World

DA: Let’s talk about freedom outside the United States. We mentioned China. Can you describe its development toward freedom?

MF: China remains Communist in its political structure, but economically it has been moving very rapidly towards a freer economy.

DA: How is that possible, that you have a political system based on coercion and an economic system based more on freedom?

MF: Because if you let the market work, it doesn’t require coercion and the government can stand to one side. Dung Tsao Ping said, “I don’t care what color the cat is, provided it can catch mice.” That’s the rallying cry of private enterprise. Starting with the opening of agriculture, China has been moving rapidly. Today, private output accounts for more than 50 percent of the national income. So it’s half way toward a completely free market.

DA: When does that begin to affect the political structure?

MF: All along, it’s affecting it right now. Not in the center, but in villages, there are more leaders being chosen by ballot, and it will gradually creep up. Economic freedom is a force that often compels a move toward political freedom, because it makes it more and more expensive to maintain the control, and there’s more and more opposition to it. And remember you also have the generation effect. The leadership in China is changing. It’s changing to a younger generation, many of whom were educated in the United States and Britain. And they have a different idea about how the world should run, so I’m very optimistic about the future of freedom in China.

DA: Now, our biggest enemies today come from the Muslim world. Not to say all Muslims are our enemy. But our worst enemies today are found in the Muslim world. Now that world is basically not free, politically. Is it possible that by opening up the Muslim world economically, it could become freer politically?

MF: I believe so, I believe that if you can get economic freedom, it will tend to force political freedom. That’s not certain. But it’s also true the other way. If you do not force political freedom, economic freedom will be stymied sooner or later.

DA: Now one of the first things that we did with Iraqi oil is to announce that we’d set up a national oil company in Iraq.

MF: A terrible mistake. We had a great opportunity in Iraq. We should have privatized the oil industry. One suggestion made was that we should have established an oil company and sold all of the oil resources, take the capital and put it in a fund for the people of Iraq. Very much like we did with the oil fund that they have in Alaska.

DA: So that every single law-abiding Iraqi would have a share of Iraqi oil.

MF: That’s right. And the government would not control it. The only thing that the government would do is to get the income from it to distribute to the Iraqi people.

DA: So that the Iraqi people would have a direct stake in peace and prosperity in their own country.

MF: That’s right. Now, we ought not to be solving Iraq’s problems for it. Iraq ought to be solving its own problems. And the sooner we can transfer effective control to the Iraqis the better.

The Tide Is Turning

DA: The last chapter of your book “Free to Choose” was called “The Tide is Turning.” Do you still think that things are getting better?

MF: Yes. If you look just at the United States, and take one simple measure—government spending as a fraction of income—from 1945 to 1980, we went from a situation where government was spending 25 percent of national income to one where government was spending 40 percent. You had galloping socialism. From 1980, that started going down with Reagan. Than it went up again during the first President Bush. Then it went down again slightly during the Clinton administration. Under the second Bush it’s again going up slightly. But the main thing to note is the historical trend—which is a dramatic slowdown in the growth of government. So if anything, you’ve had creeping socialism, which is a lot better than galloping socialism. That’s a turn of the tide. And that’s been dramatically reinforced by the collapse of the Soviet Union and the liberalization of China and India and other parts of the world. So if you go away from the narrow perspective of the United States, for the world as a whole, there is no doubt that the tide has turned.

Then there’s the world of ideas. In the 1950s the overwhelming majority of intellectuals were socialists. The problem then was in changing people’s views. But that change has largely occurred. The problem now is making governments live up to what people demand of them.

DA: You are an optimist.

MF: I am. I’ve always been an optimist.

DA: More optimistic now than you were in 1980?

MF: No. No more so.

DA: What was it like growing up in an academic environment in which your views ran counter to the status quo?

MF: Well, it was wonderful! I enjoy argument.

DA: Do you think that you’ve won most of those battles that you were fighting when you started?

MF: I think on the whole I’ve done very well. I haven’t won all of them, by any means. You shouldn’t win all of them. But on the whole I feel pretty good.

DA: Do you think the economy today is in good hands today?

MF: I think politicians are getting better advice now than they were.

DA: Alan Greenspan. What do you think of the job he’s been doing?

MF: I think he’s done a remarkable job. He’s done very well. When you look at the price level—when you plot inflation—since 1985, not just in the United States but throughout the world, you’ll see a steady downward curve and a move toward stability. And that’s largely because of the improved monetary policy that Alan Greenspan is responsible for. But it’s not just Alan Greespan. It actually started in New Zealand, of all places. So the prospects are good. If we don’t restrain inflation, it’ll be because politicians can’t restrain their spending.

Who Was the Greatest President?

DA: I’ve always wanted to ask you who you consider to have been the greatest president?

MF: Well, you have the almost mythic presidents like Washington and Lincoln. Let me talk, rather, of those presidents who I’ve known in my own lifetime. And there, there’s no doubt in my mind that Ronald Reagan was by far the greatest.

DA: Why?

MF: Because he had real principles and he stuck by them. He made clear what he was going to do, and he did it. He didn’t back down. And it took real principles to do what he did. For example, one of the things he was determined to do was to end inflation. Now, there’s no way to end inflation without having recession. The month after Reagan became president, Paul Volker (then head of the Federal Reserve) started to slow down the rate of monetary growth. And that did lead to a recession. And that recession led to a sharp decline in the President’s poll ratings. In my mind there is no other president in my lifetime who would have stood by to support the Fed in those circumstances.

DA: Now simultaneous to that squeezing of inflation out of the economy, we had a tremendous cut in tax rates, across the board. And that stimulated the economy, even though we couldn’t see it at the time.

MF: Yes, that was the other part of his program. He wanted to cut taxes, lower inflation and control government spending. And he did reduce taxes and he stuck by the monetary policy. And of course it stopped inflation. It turned the economy around. And the supply side effects of the tax cuts became evident and the economy has been, on the whole, zooming ever since.

To show that this is not partisanship, in some ways it’s hard to find a president who deserves to be put lower than Richard Nixon. Now, Richard Nixon was a very intelligent and able man. And he had the right ideas. But he did not have the adherence to principles that Reagan had. He did some very good things. We owe to Richard Nixon the volunteer army—he got rid of the draft. And that was a major increase in freedom. But on the other hand, we also owe to Richard Nixon the whole stream of federal agencies—from the EPA to about 9 other new federal departments and agencies. Under Richard Nixon the number of pages in the federal registry doubled. It was cut back by Reagan. Since Clinton, the number of pages in the federal registry has been going up again.

DA: Nixon also put a stake in the heart of the gold standard. Was that a problem?

MF: No, the mistake he made in that was not doing it sooner. When he came into office, the Bretton Woods agreement about the fixed exchange rates could not be maintained. I wrote a memo to him right after he was elected, in December 1968, saying the first thing he should do when he came into office was to close the gold window and set the dollar free. And if he had done it then, he wouldn’t have had to have price controls.

But the message is you mustn’t judge a politician by talk. You have to judge them by performance.

Faith

DA: One thing I haven’t heard you talk much about is faith. Describe your own faith. Your faith in God…your faith in people.

MF: Well, faith in people and faith in basic principles of human freedom are very important. But faith in God is not. I would describe myself as an agnostic.

DA: But not an atheist.

MF: Not an atheist. The proposition that there is a God is not capable of being proved either false or true. And that’s what I mean about being an agnostic.

DA: The problem with faith, they say, is that faith is the evidence of things unseen.

MF: Yes, it is. There are statements which are capable of being contradicted by experience. Those are scientific statements. There are statements which can not be contradicted by any experience such as: “There is a God.” And those are statements of faith. And faith plays a role in everybody’s life. Everybody has a faith of some kind. But my faith is not theological.

DA: But it’s real.

MF: Oh, it’s real. But my faith is faith in people and faith in the principle of freedom. If you leave people free, if you enable them to pursue their own interests in their own way, make agreements with one another, on the whole, that will turn out well. You can not get an agreement unless both sides benefit.

Marriage

DA: Since we’re talking about faith and relationships, you have probably the most successful marriage that I know of. Your wife has been co-author with you on many books. And she continues to work with you. What’s the secret of a long, successful marriage?

MF: Well, we’ve been married successfully for 65 year, going on 66. And I think the success is do to two things. Love and tolerance. Love is the absolutely essential ingredient. But it alone won’t work, unless it’s combined with tolerance. You don’t have to agree on everything. You can disagree on a great many things. And Rose and I do. But we tolerate one another.

DA: Milton Friedman, it’s been a great pleasure.

MF: Glad to have been with you, David.