What would Milton Friedman, the great twentieth century free market economist, say about economic prospects today and, in particular, the fiscal decisions facing Congress by year's end? Were he alive today, Friedman would undoubtedly say to go over the "fiscal cliff."
Friedman's greatest concern was government spending, not taxation. Though he emphasized the latter, it was really government spending that was the focus of his ire. He would have advocated the course that would result in the least government spending--now and in the future. That course clearly is to go over the fiscal cliff.
By way of contrast to fiscal policy, Friedman emphasized monetary policy. He would have pooh-poohed the notion that the United States faces a recession through budgetary policy that reduces the size of the federal deficit. Even after going over the fiscal cliff, the budget deficit will remain unacceptably large. If the problem of the economy includes that the deficit is too much, then the answer is to reduce it.
The beauty of going over the fiscal cliff is that this would put to rest the nostrum that reducing the size of the deficit would throttle the economy.
The economy has, albeit at a very modest rate, expanded in recent quarters. If anything, growth would increase in the economy through going over the fiscal cliff because there would be more hope that the size of the deficit would diminish. The value of the dollar would increase in international exchanges. The chances of inflation would lessen as a result of less quantitative easing to accommodate the deficit.
Instead of being concerned about fiscal policy's effects on the economy, Friedman would have pointed to the damage that large deficits do to the economy at this time as a result of the loose policies of the Federal Reserve Board. These risk inflation and thus higher interest rates.
It is a strange argument indeed that if the fundamental problem in the American economy is that government is spending too much, and that too much of this spending is being created by printing money, that the answer is not to reduce government spending and the size of the federal budget deficit. These would be steps in the right direction. They are the solution to the economic problems that confront us.
Looking at the economy as a whole, Friedman would have argued that regulation as much as taxation and spending policies is harming the United States at this time. Particularly in the area of energy production, many states and communities could experience the prosperity that North Dakota is through taking advantage of abundant energy resources. Much of the decline in the American economy in recent years has been tied to the increase in oil prices--since the 1970s, downturns in the economy have followed increases in energy prices.
The market will do its magic if government stays out of the way. This would be accomplished through less federal government spending, less federal borrowing, and less creation of money. Going over the fiscal cliff would further all of these goals.
Friedman was not afraid to make bold policy pronouncements and to challenge the prevailing opinion. Piecemeal, incremental do-nothingism is not the way to solve the challenges that confront the American economy.
Members of Congress should not fear taking the hardest line possible on reducing the size of government and reducing the size of the federal debt. As spending is reduced, the economy will improve and it will be possible to make more tax cuts, not fewer.