Fellows with Friedman
What are the keys to good economic policy? George P. Shultz and John B. Taylor draw from their several decades of experience at the forefront of national economic policy making to show how market fundamentals beat politically popular government interventions as a recipe for success. The two Hoover economists discuss the economic choices facing policy makers, the reasons behind the Nixon administration’s decision to impose national limits on wages and prices in the 1970s, and how the Reagan administration changed course and adopted free-market-oriented policies in the 1980s.
Their book Choose Economic Freedom reconstructs debates from the 1960s and 1970s about the use of wage and price controls as tools of policy, showing how brilliant economists can hold diametrically opposed views about the wisdom of using government intervention to spur the economy. Speeches and documents from the era include a recently unearthed memo from Arthur Burns, Federal Reserve chair, in 1971, in which he argues in favor of controls.
The first part of Choose Economic Freedom features a debate between two Nobel laureate economists, Milton Friedman and Robert Solow, about the merits of this type of government intervention in the economy. Friedman argued that such guidelines would only suppress inflation in the short term, and cause damage to the economy and destroy political freedom in the long term.
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John Cochrane offers some insightful comments about the economics of surge pricing, free- market solutions, and economic freedom. According to Cochrane, the fundamental reason so many markets are not free, and are so dysfunctional, is that the voters of our democracy don't really want freedom. He reasons that freedom will come when individuals want it and insist on it, as well as when the average voter sees free-market solutions rather than endless controls as the answer to real-world problems. The paradox of free markets is that they do not need people to understand them in order for them to work. But democracy does require voters to understand how things work.
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Lee Ohanian argues that income should not be redistributed away from the highest earners. He finds redistribution counterproductive, as it does not sufficiently recognize that our top earners create enormous surpluses for society. Bill Gates at Microsoft, Steve Jobs at Apple, Fred Smith at FedEx, Sam Walton of Wal-Mart, and many others who started new businesses have directly and indirectly created millions of new jobs, created new industries, and transformed our society. And these individuals have received only a tiny fraction of the economic value that they have created.
Society, however, should care about creating economic opportunities for the lowest earners. For the last thirty to forty years, workers with low levels of human capital have been swimming upstream against technology. Technological improvements over this period complement skilled workers, raising their marginal productivity, but are substitutes for low-skilled workers, reducing their marginal productivity. This means that increasingly sophisticated technologies that keep making capital goods better and cheaper will continue to place downward pressure on the wages and opportunities of the lowest earners.
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Free markets not only prevent the concentration of power but have also alleviated the conditions of poor nations. When we look carefully at economies that have adopted free-market reforms we often do see rising inequality, but more importantly, we also find billions of people who have been lifted out of abject poverty.
In China, income inequality has grown steadily since it began to implement free-market policies in the 1980s. But this does not mean the poor have stayed poor. In fact, since the 1990s, incomes among the poorest Chinese have increased fivefold.
Likewise, after India embraced market reforms in the 1980s and 1990s, inequality rose, but the poor were much better off. In last 30 years, the incomes of the poorest Indians doubled and hundreds of millions have escaped subsistence-level poverty.
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