Thirty years after the fall of the USSR, the same old bad ideas are gaining new traction.
Thirty years after the fall of the USSR, the same old bad ideas are gaining new traction.
T he end of December marked 30 years since the end of the USSR, which marked a transformative point in economic as well as political history.
What’s happened since?
A number of former Soviet republics have shown decent if occasionally uneven economic growth since the break-up of the USSR, but if you strip out resource-based windfalls, the most successful has been the Baltic trio (Estonia, Latvia, and Lithuania), where the commitment to the West, democracy, and free markets far exceeds anything elsewhere in what was once Moscow’s realm.
Meanwhile, the absence of the USSR and its appalling example has affected attitudes in the U.S., where a generation has grown up with no memory of the failings of Soviet-style economic control. Perhaps this partly explains the recent rise of self-described “socialists” in the Millennial and Gen Z generations. (The severity of the Great Recession may also have contributed as well.) According to a 2019 Gallup poll, about 50 percent of Millennials/GenZers have a positive view of “socialism,” while fewer than 40 percent of Gen Xers and only 30 percent of Baby Boomers have a favorable view.
At times like these, Milton Friedman, one of the free market’s greatest defenders, is much missed.
Overall interest in Milton Friedman has recently rebounded for the first time since his death in 2006. New books include Nicholas Wapshott’s Samuelson Friedman: The Battle Over The Free Market and two intellectual biographies, including one from Federal Reserve economist Ed Nelson and another Stanford historian Jennifer Burns to be released in the coming year.
At the same time, much of the renewed interest in Friedman has not necessarily been positive. President Joe Biden often went after Milton Friedman by name on the 2020 campaign trail. This past summer, The New Republic ran a cover article by titled “The End of Friedmanomics,” an effort clearly designed to bury Friedman’s ideas rather than engage seriously with them. In that, it was hardly alone. The New York Times also ran a set of essays in 2020 commemorating 40 years since Friedman’s famous 1970 NYT Sunday Magazine essay on the purpose of a corporation. Many of these essays took a critical line.
A large constituency, including the Business Roundtable, now promote so-called “stakeholder capitalism,” and erroneously argue that Friedman’s “shareholder primacy” position comes at the cost of helping other stakeholders, including customers, workers, and a company’s broader community. Helping shareholders and other stakeholders are not mutually exclusive, as I’ve argued before.
Of course, Friedman’s ideas go well beyond the maximization of shareholder value. A number are of a startling contemporary relevance. Friedman predicted “e-cash” decades before the emergence of digital currencies. He also argued that the FDA can act as an impediment to lifesaving drugs (such as lifesaving vaccines, testing kits, and pills to fight the Covid-19 pandemic).
An excellent example of the prescience and relevance of Friedman’s ideas is his 1962 classic Capitalism and Freedom, which became an instant bestseller. The book focuses on topics which are at the forefront of economic debate today — including monetary policy and inflation, fiscal policy, occupational licensing, income-share agreements, education vouchers, negative income taxes (universal basic income), and the distribution of income (inequality), among many others.
Friedman’s influence on how we conduct monetary policy today can’t be overstated. He was among the first (during a speech to the Bank of Canada in 2000) to argue that quantitative easing could be a viable tool used by central banks to promote monetary accommodation when interest rates are either at or close to zero. Shortly afterward in 2001 and ever since, the Bank of Japan has used QE as part of its economic policy toolkit, followed by other central banks in the wake of the 2008 and 2020 global recessions. (Some of my own academic work focuses on how effective QE has been.) In Capitalism and Freedom, Friedman argues that the Great Depression was in part caused by a decline in the money supply, an argument he would later repeat in his 1963 book with Anna Schwartz, A Monetary History of the United States, 1867-1960. And in a 1970 lecture, he famously argued that “inflation is always and everywhere a monetary phenomenon,” something that today’s Fed and the administration could do a better job of remembering.
Friedman also dedicates a chapter in Capitalism and Freedom to fiscal policy in which he criticizes the Keynesian argument for a boost in government spending to stimulate demand in times of recession. While it’s not necessarily the case in the age of empirical economics that fiscal policy would have a multiplier of near zero (implying stimulus has no effects on economic growth), some economists, including Barro and Redlick as well as Alesina, Favero and Giavazzi, have found that government spending multipliers are lower than previously thought. Alesina and his coauthors also find that tax fiscal multipliers are higher, suggesting that tax cuts can generate more growth than increases in government spending.
Friedman’s Capitalism and Freedom chapter dedicated to occupational licensing is strikingly relevant to today. Occupational licensing requirements were estimated to affect about 29 percent of the workforce as of the end of the 1990s, up from around just 5 percent in the 1950s (roughly just before the time Friedman was first writing) according to estimates from University of Minnesota economist Morris Kleiner. Licensing requirements for jobs end up hurting the poor the most (they hold a disproportionate amount of jobs that require licensing) and often exist for jobs such as hair braiding that clearly don’t need licensing for any sort of safety reasons. Many states, beginning with Arizona in 2019 under the leadership of Governor Doug Ducey (R.), have now begun to universally recognize out-of-state licenses, an effort, that, if it continues, could help smooth labor mobility within the U.S.
Of course, there are important instances where occupational licensing applies to more lucrative fields. Friedman once criticized the American Medical Association (AMA)’s licensing of doctors for restricting labor supply and inflating doctor wages, calling them the “strongest trade union in the United States.” He argued that it’s absurd to have enshrined in law that a doctor-controlled lobbying organization can influence their own supply of labor and their own wages.
And the AMA remains influential. Since 1992, it has controlled the resource-based relative value scale (RBRVS) which determines how much medical providers in HMOs and Medicare should be paid. Although the RBRVS system is mandated by the Centers for Medicare and Medicaid Services (CMS), the AMA maintains that their copyright of the Current Procedural Terminology (CPT) allows them to charge a license fee to anyone who wishes to associate RBVS values with CPT codes. In short, the use of the AMA’s data and methods are required by federal statute. Meanwhile, the Liaison Committee on Medical Education (LCME), the accrediting authority for medical education programs in the U.S. that is recognized by the Department of Education, is sponsored by the AAMC (American Association of Medical Colleges) and AMA. Perhaps market power is a factor causing per capita health-care costs in the U.S. to remain among the highest in the developed world.
Income-share agreements, where students pay a fraction of their income for a set number of years after graduating as an alternative to fixed-rate interest-bearing student debt, are an idea Milton Friedman invented in his essay “The Role of Government in Education,” which later formed a chapter in Capitalism and Freedom. These agreements are finally going mainstream with schools such as Purdue University now adopting them. Since the inception of the program in 2016 under the leadership of Purdue president and former Indiana governor Mitch Daniels, hundreds of students have successfully enrolled.
More and more students are becoming saddled with student loans that can take decades to pay off, and which are typically incurred with little accountability on the part of universities (schools have every incentive to increase tuition without much care for how well students do knowing that the federal government will continue to provide student loans). Income-share agreements offer a path to providing the proper incentives for students to select the right majors that lead to profitable careers and help reduce immediate post-college earnings risk. Graduating during a recession can have decade-lasting repercussions in the form of persistently lower wages, as research from Rochester economist Lisa Kahn has shown.
Vouchers and school choice were yet another area of considerable interest for Friedman (who strongly supported the idea) and are a key area of focus in Capitalism and Freeedom‘s chapter on education. In 1996, he founded the Friedman Foundation for Educational Choice, which has influenced voucher and school choice initiatives in the U.S. and around the world, for example in Colombia’s PACES program. As an example of what can be achieved, research by Angrist, Bettinger, Bloom, King, and Kremer looked at PACES results in a 2001 paper.
Colombia’s PACES program provided over 125,000 pupils from poor neighborhoods with vouchers that covered approximately half the cost of private secondary school. Since many vouchers were allocated by lottery, we use differences in outcomes between lottery winners and losers to assess program effects. Three years into the program, lottery winners were 15 percentage points more likely to have attended private school, had completed .1 more years of schooling, and were about 10 percentage points more likely to have finished 8th grade, primarily because they were less likely to repeat grades.
New York Fed economist Rajashri Chakrabarti also finds positive effects on school performance from the Florida and Milwaukee voucher programs.
The impact such programs can have on reducing inequality are too obvious to spell out here. And it’s worth emphasizing that inequality was not, contrary to some perceptions of his work, something that Friedman overlooked. He dedicated several chapters to addressing inequality and the distribution of income many decades before Piketty’s Capital in the Twenty-First Century. Instead of taking Piketty’s quasi-Marxist position (that capitalism inherently favors the rich over workers, as the returns to capital are larger than the returns of labor), Friedman chiefly blames poverty on government and extols free markets as the greatest poverty-reducing agent in human history, just one of his many prescient observations. There are plenty of examples of how government exacerbates poverty by acting as a brake on economic mobility. One that is in focus today, a decade and a half after his death, is the way that growing zoning and land-use regulations restrict the supply of housing, increasing home prices in the urban areas where higher concentrations of high-paying jobs exist.
Friedman also prescribes a negative income tax as a policy tool to alleviate poverty. Essentially this is a means-tested version of universal basic income (UBI). Like the libertarian political scientist Charles Murray, he is strongly in favor of a negative income tax as a substitute for existing welfare programs, rather than the additional supplement argued for by many progressives.
Friedman famously said that “the government solution to a problem is usually as bad as the problem.” Friedman’s set of solutions, or “Friedmanomics” as we could call them, are more than worth revisiting in our search for answers to many of today’s economic problems. So, for that matter, 30 years after the end of the USSR, are Soviet economics, but only as a warning of where the socialist road can lead.