Interview. "Nobel Laureate Milton Friedman Discusses His Personal Views of How to Deal with the Economy." Interviewed by Louis Rukeyer et al. Louis Rukeyser's Wall Street, CNBC (television broadcast), 20 September 2002. RUKEYSER: And now let s fire up the satellite from our living room perch and talk with tonight s special guest, Milton Friedman. Milton, how are you tonight? Mr. MILTON FRIEDMAN (Nobel Laureate Economist): Fine, thank you. RUKEYSER: Pleasure to have you with us, and happy birthday. Mr. FRIEDMAN: Delighted to be with you. Thank you. RUKEYSER: Milton Friedman turned 90 on July 31st, but he s still coming up with an original thought every five minutes. He was the prime intellectual force behind the monetarism and free-market economics of both Ronald Reagan and Margaret Thatcher, but those who try to classify him as a conservative have to contend with a wide range of his other long-held views, including decriminalization of drugs and the thenradical suggestion of free choice and vouchers for schools. At bottom, his cause, which often fails to endear him to conservatives or liberals, is freedom. Milton, how do you assess the present and future of the US economy, and what would you recommend to improve the outlook? Mr. FRIEDMAN: I think the present and the future of the US economy is is good. I think we re at a high level of income, we ve had a good decade of the 90s, and there s no reason why we shouldn t continue to proceed along the same path, provided we don t let ourselves get involved in having government bigger and bigger. And I think the main thing we need to do to improve things is to let the market work, to get rid of the obstacles, which there are, to market performance. RUKEYSER: A few years ago, it seemed obvious that human freedom was on the march worldwide. Now there s some counterindications. Russia s experience has been mixed at best. We see, with the new worries
about international security, a growth of government at home. What do you make of the state and future of human freedom worldwide? Mr. FRIEDMAN: Well, I think the state of human freedom has has never been better. The fraction of the world s population that lives in societies which can be called free is higher than it has ever been in history, and it s going to grow more. You have China, which has been moving very much in the direction of freedom. It s still a Communist state, still by no means, a free state, and yet, the people in China are far better off than they were 10 or 20 years ago and have more freedom than they did then. You have the whole former Soviet bloc Hungary, Czechoslovakia, Romania, Slovakia and so on. There s no question that there s been an enormous increase in freedom in that area. The places where you have to worry are places like the United States and the more advanced countries. We have had a high degree of personal freedom, but we ve been allowing our economy to become more and more controlled and more regulated over time. And unless we stop that, it will continue to reduce our freedom. RUKEYSER: How does the Bush administration stack up in this area, and what do you make of such moves as higher steel tariffs and internationally controversial farm subsidies? Mr. FRIEDMAN: In those areas, the Bush administration stacks up very poorly. It s disgraceful that we ve had the rash of protectionist measures in agriculture, steel, lumber that we have had. We preach free trade, and yet we don t practice it. I have to give the Bush administration very high marks on having produced a major tax reduction. I have to give him very high marks on the talk that emanates from the Bush administration. But in terms of practice on the economic front, you have to say that they re a disappointment. RUKEYSER: Let's turn to the economy. While inflation seems to be under reasonable control now, at historically very good control, many people now take the opposite view and say the real problem is deflation. What do you think? Mr. FRIEDMAN: I don t think deflation is going to be a real problem. It certainly has been a problem in Japan. There s no doubt about that. But for the United States, for other countries and I think we all know the 2
cure for deflation. The cure is to print money, and I think every central bank in the world has learned that lesson. If you have reasonably stable prices, you re going to have a year or two or an episode or two of minor price declines, but I think there is no chance whatsoever of having the long, continued deflation that you had in the 1930s or even that Japan had in the 1990s. RUKEYSER: You have praised Alan Greenspan highly, but isn t it true that he has not followed your own prescription for steady, predictable growth in the money supply? Mr. FRIEDMAN: Well, as you know, if I had my way, I would get rid of the Federal Reserve system altogether and substitute a computer which would keep the money supply growing gradually, but that s a dream and it s not going to happen. We have a Federal Reserve, and as long as we have it, people are going to manage it. They re going to have the money supply grow more rapidly at sometimes and less at others. And on the whole, Alan has done an extremely good job. The rate of growth in the money supply has been more stable under the Greenspan administration than in almost any previous administration. I think by comparison with earlier Feds, Alan stands out as having done an absolutely first-rate job. RUKEYSER: Do you feel that the Mr. FRIEDMAN: What happened RUKEYSER: current rate of growth is a good rate, too high, too low? Mr. FRIEDMAN: Well, the current rate of growth has been varying around. For a few months, it was too low. For a few months, it s been a little too high. But averaged out, it isn t bad. You re in a situation now where you need a more rapid than usual rate of monetary growth if you re going to try to fine-tune it as he is and that s because of the large amount of uncertainty which there is now. You have a world in which there are threats of war, in which you are engaged in a war, in which there has been all this controversy and discussion about corporate governance in which no CEO in the country is going to take a chance on anything that might be risky no matter how profitable it might be because he doesn t want to get stuck in this media storm. 3
So in a world of uncertainty like that, people, on the average, will want to hold more cash relative to their income. And that s, I think, what the present rate of growth is providing for. RUKEYSER: How seriously do you view the recent headlines about corporate and accounting scandals, and what, if anything, do you think is the correct policy response? Mr. FRIEDMAN: Well, I think the correct policy response is the opposite of what we ve been doing. You know, these scandals are a testimony to how effective the free enterprise system is, not to its failure. The scandals were not discovered by government. Enron wasn t found out by the attorney general. Enron was discovered by the market, which downgraded its security. The same thing goes for WorldCom and for Global Crossing. In all of those cases, it was the market that first found out what was happening and first informed the public at large that there was something going wrong there. Moreover, the market also administered its punishment. The people who were involved in those have not benefited from what they ve done. They ve all been they ve all seen their property depreciated, their income s gone the market has done an extraordinary good job of detecting misperformance and of punishing it. That s what the market is for. We have a profit-and-loss society. Free markets involve profit and loss, and the loss part is every bit as important as the profit part. It s the loss part which keeps from a waste of capital. Consider, if there is a similar malfeasance in government, the end result is not to get rid of it, what s going on, but to enlarge it. Now we have a failed agriculture program. Do we get rid of it? Oh, no. We increase it. I don t agree with the present hysteria about corporate governance and I don t think it shows that there s something wrong with our our free market system. I think it shows that there s something right with it. RUKEYSER: To our profit, let s bring in the panel, starting with Marty Zweig. Mr. MARTY ZWEIG (Zweig Funds Chairman): Milton, you ve written that we had a stock market bubble. In 96, late in the year, Greenspan pretty much acknowledged that and the money supply M2 was growing at about 4 percent. The next three years, he let it grow at 7 percent with a high of about 9 1/2 percent. Do you think that growth might have fed the bubble? 4
Mr. FRIEDMAN: I think the bubble was under way before that growth. I think the growth certainly contributed to the growth in national income, but I don t think it contributed much to the bubble, no. Ms. MARY FARRELL (Paine Webber): Milton Mr. FRIEDMAN: And I think once a bubble like that gets going, it really is self generating. Ms. FARRELL: Milton, the US has been running very large trade deficits for some time now. Is that a bill that s going to have to be paid at some point down the road? Mr. FRIEDMAN: No, I don t believe so. We re running trade deficits because people around the world believe that the US is a better place in which to have their wealth than other places around the world. As long as you have a free exchange rate, the market will take care of the problem of the trade deficits. If indeed foreigners believe that they have a better place to put their money, they will sell their assets in the United States, get dollars, sell those dollars and that will drive down the price of the dollar. And that will go on as long as is necessary to bring back the equilibrium. So long as you don t have a pegged rate, so long as you have a free exchange rate, there is really nothing to worry about, so long as you know that the inflow of capital is for the purpose of adding to the total capital stock. We are not borrowing from abroad in order to finance consumption. That would be a bad thing. We re borrowing from abroad in order to finance investment. Mr. ED BROWN (Brown Capital Management President): Milton, in our economic history, have you ever seen the excesses that built up in the telecommunications sector with supply running so far ahead of demand? And if so, how long has it taken to correct that, to get things back in balance? Mr. FRIEDMAN: Well, I guess perhaps the nearest thing you can do is to come to the 1920s and automobiles. There were hundreds of automobile companies, literally. They had much very high capacity. And I think that was not I think that was roughly comparable to what happened in the telecommunications industry. I think those kinds of things happen from time to time. There there s nothing really you know, people talk about the productivity miracle of the last 10, 15 years. Those productivity miracles are part of the history of the United States from its very beginning. We had the productivity miracle around the harvester 5
and the agricultural machines. We had the productivity miracle around the discovery and development of electricity, of automobiles, of radio and television, of electronics. So I don t believe that what happened in telecommunications is is a special events, unique. RUKEYSER: Milton, we only have a few seconds left. As you enter your 10th decade, are you an optimist or a pessimist about the world s future? Mr. FRIEDMAN: I ve always been an optimist and I remain an optimist. I think this world is so much it s so much healthier in many ways than it was 50, 60 years ago. You know, you have to go back to the period of the Depression and then of World War II to realize how much better the world is now than it was then. It s slid back in some areas. We re less free in some ways than we were 50 or 60 years ago, but taken as a whole RUKEYSER: There we have to stop, Milton, unfortunately. 6