Emily Rooney: The late economist Milton Friedman was one of the boldest and most provocative figures of our time. He was born in 1912, making this the one-hundredth anniversary of his birth. Milton Friedman received the Nobel Prize in Economics in 1976, and as a professor at the University of Chicago; he transformed a generation of economists. It’s safe to say his work influenced the entire field. He was an author and an advisor to several presidents. His ideas won him millions of advocates and opponents all over the world. While some place had greater emphasis on financial equality, Friedman advocated economic liberty. In 1980, he shared his ideas with millions of TV viewers in the landmark PBS series Free To Choose. Hi, I’m Emily Rooney, and here surrounded by images of the University of Chicago, Milton’s intellectual home, we’ll engage four distinguished guests in a discussion of the relevance of Friedman’s ideas today. How much control should the government have over our everyday choices when it comes to spending our money? Some would argue that government regulation protects us from the market extremes. The booms and busts that affect us all, and protects the poor from falling too far behind. Milton Friedman believed such government intervention would only stifle innovation, feed special interest groups and ultimately lead to less freedom for everyone. In his 1980 landmark series Free to Choose, Friedman dedicated an entire program to what he termed the tyranny of government intervention in the marketplace. But is it really tyranny, can government play a productive role in the economy? In the next hour, we will take a closer look at Friedman’s case with our panelists. Joining me are Amity Shlaes, author of the bestseller, The Forgotten Man: a History of the Great Depression. Austan Goolsbee, former chair of the Council of Economic Advisors in the Obama Administration, and a professor of economics at the University of Chicago’s Booth School of Business. Bryan Caplan, a professor of economics at George Mason University and Clarence Page, a Pulitzer Prize-winning columnist at the Chicago Tribune. Welcome to all. Alright, we are going to begin with a clip from Free To Choose where Friedman took issue with safety net programs America has come to know since the Great Depression. Milton. Milton Friedman: The idea that government had to protect us came to be accepted during the terrible years of the Depression. Capitalism was said to have failed and politicians were looking for a new approach. Roosevelt’s first priority after his election was to deal with massive unemployment. A public works program was started. The government financed projects to build highways, bridges and dams. The National Recovery Administration was set up to revitalize industry. Roosevelt wanted to see America move into a new era. The Social Security Act was passed and other measures followed. Unemployment benefits, welfare payments, distribution of surplus food. With these measures of course came rules, regulations, and red tape. As familiar today as they were novel then. The government bureaucracy began to grow, and it’s been growing ever since. We’ve become increasingly dependent on government. We have surrendered power to government; nobody has taken it from us. It’s our doing. The results, monumental government spending. Much of it wasted. Little of it going to the people whom we would like to see helped. Burdensome taxes, high inflation. A welfare system under which neither those who receive help, nor those who pay for it are satisfied. Trying to do good with other people’s money simply has not worked. Rooney: Austan, monumental waste, the money not going to the people who need it. What about now? Welfare and unemployment has been a lifeline to so many people. Austan Goolsbee: Well, you know, you got to remember this, Free To Choose getting made after the 1970s- and in fairness to Milton Friedman’s ideas, I think that there were a lot of growing bureaucracy, growing silos in the government and wasteful government spending, that largely stops with the coming in of Ronald Reagan and the changing of the focus of government spending. So now most of government spending is going through the big social insurance programs, and I think the kind of mixing of saving the Great Depression with things like Social Security are mixing up apples and oranges. I think that if you ask when a Hurricane Katrina hits, when something like this semi-depression recession hits- do you truly not want the government to do anything? I think that that’s sort of an extreme case that few people would agree with. If you say: Should we create massive structures that last for fifty, a hundred years beyond when the crises are over? I think a lot of people would probably agree, no, we don’t want to do that. Rooney: But to say, Bryan- that the money didn’t really help anybody; or it didn’t get to the people who needed it; you saw those people went back to work. We still don’t have some of those programs in place. It jump-started something. Bryan Caplan: I mean it’s an exaggeration to say that nobody at all was helped. But I think that Friedman’s point is that that you spend an enormous amount of money on people…most of whom actually can take care of themselves, or who could have taken care of themselves if they had known that it was their responsibility, and if you think about Social Security, I mean this is given to everybody in the country- including the very rich, including the middle class. These are all people who have savings and could have saved more if they’d known that it was their own responsibility, and yet we pay taxes to provide benefits to everyone. It just doesn’t make sense. Rooney: What about the idea though now? You are an expert on the Great Depression. Stimulus programs- are they ever viable to get out of a recession or out of a depression? Both Bush and Obama have used stimulus programs to get us out of recessions, is that a bad thing? Amity Shlaes: Well, it’s insufficient, that’s what we’ve learned. The remarkable thing about Milton saying this in 1980 and now is how much we’ve re-dealt the New Deal, we replayed it, we’ve tried to create jobs, we tried to fix the banks, banks have failed, we’ve tried to fix the stock market and regulate it. And what Milton pointed out- and we are seeing again is, that doesn’t really work. He used the word “work.” Where we are a few years later- isn’t where we hoped to be, given that all our energy and all those efforts. The second part of that, Emily, that’s a true replay, is you have an effort to fix the economy, and then suddenly you are doing reform that is unrelated to the recession. So, in the 30s, that was Social Security and now its healthcare. We have a whole new area we are entering of the economy, the government on the pretext that’s been given us by the recession, doesn’t seem to be working either- so Milton foresaw that apparently. Clarence Page: The question is: What works? Milton Friedman was saying, Well, that doesn’t work. Of course it works quite often. You know, if you don’t have enough money in the economy first of all, unless you got a recession- adding money to the economy works. It won’t solve everything, but when people are in a depression and they are out of work, they haven’t got food for the family, getting direct payments, creating jobs, building bridges, sidewalks, CCC camps, fixing up the parks- it works to get some people to work and get some money back into some communities. It’s better than nothing. The question is: How much do you do? It doesn’t solve everything, though. The question is: you know, when you are in hard times, and America certainly has been in hard times lately, the question is: do you sit back and say, “Don’t worry, you will be okay eventually, and you should have prepared yourself.” When my father was elderly and needed to go to a nursing home, thirty-five-thousand dollars a year and that was back in the 90s. You know, how’s he going to pay for that? He never made more than a hundred dollars a week. He paid Social Security throughout the history of Social Security. He never made more than a hundred dollars a week in actual salary, Medicaid took care of it. Most Medicaid goes to elderly folks- and not because half of them are middle-class, a lot of them have to spend down to poverty because they can’t afford nursing home care. Shlaes: I just want to say Page: But they at least got nursing homes. Back in the 70s- where we were talking about cat food for the elderly and that sort of thing, and those kind of rumors, but they don’t talk about that anymore. Our elderly are some of the best off in the world. Shlaes: I just want to say one thing to rebut that, when you see about the New Deal, but when you go back is that the unemployment in the later 1930s was terrible- that they continued to have a high unemployment. So a very humane-sounding program- and we all have individuals we love who were helped in the New Deal, or we heard about in our family, was not particularly humane because humane is unemployment of five percent. Page: Number four-point-seven. (several speaking at once) Page: You are working now, you weren’t working before. Rooney: What would America look like without any social programs? None. Caplan: I think that it would be a lot better, actually. I think that so, people that there would be a lot of people right now who are provided for by the government, who would be taking care of themselves, there would be insurance, people would need to plan ahead for their retirement. So, people would need to do things like, purchasing insurance when they are young to make sure the rates are affordable when they are older and there would be a lot more private charity. So, when people know the government is taking care of people, they also know that they really don’t need to worry about it themselves, and we would avoid the burdens of the very high taxes that we pay. So yeah, I think that overall it’s a better picture. Goolsbee: I would say and when things like Hurricane Katrina hit- you have a lot of people dead in the Superdome. The facts are that when you abandon social insurance or any kind of safety net, you can avoid the costs when times are good, but we have seen, repeatedly, and not just in the U.S., but in a lot of other countries that if you rip up the rules of the road, if you do things that facilitate people to go literally only for themselves and somewhat disregarding the impact that that’s having on the broader economy, you can lead to catastrophic problems. Now, I think Milton Friedman was ahead of the game on that, and he opposed corporate welfare, and he was for a strong anti-trust regime to try to enforce competition. But I do think let’s not pretend that everything was always hunky-dory. We did get into the Depression without all of these government programs. Rooney: Milton Friedman believes though that that prompts sort of a culture of dependency. Do we have that now, is that where we are? Page: Cultural dependency is a real danger and I think that one of the lessons of welfare reform on the 90s, when even Daniel Patrick Moynihan was expecting to see starving mothers on the streets, sleeping on grates it didn’t happen. Of course, the economy was robust. A robust, growing economy does lift a lot of boats and we saw that happen. We don’t, but cultures of dependency do happen and I’ve seen that happen. I am talking about, you know, working people, and we talk about Social Security for example, we are talking about working people in good faith, collecting their money in a government program that’s got some guarantees, it may not be the best in the world, but at least, you haven’t got to worry about it, you know, disappearing in some Bernie Madoff Ponzi scheme on Wall Street. Rooney: Right, can you ever do good with somebody else’s money? Caplan: It’s certainly possible; I just don’t think that it’s very common in the world. Rooney: You can’t think of an example? Caplan: I could go and take some of Austan’s money’s and go and give it to a homeless person on the street right now and I think that it might do some good, but is that a good system to adopt? I don’t think so. Page: You don’t like Medicaid? Caplan: I do not like Medicaid. Page: You don’t like nursing homes being paid for? Caplan: I don’t like nursing homes being paid for… Page: (inaudible comment) Caplan: Here’s the thing, whenever you go and see a disaster strike- it is very easy to say: What would happen if government hadn’t done anything? And if people are expecting government to solve a problem, and the government doesn’t solve a problem, it’s a disaster. Rooney: Alright. Caplan: The thing to remember is: What would people have planned instead if they weren’t expecting the government to take care of themselves when disaster strikes? Rooney: More on Milton Friedman. Okay. As most Americans know, the rise of the global marketplace has meant the outsourcing of jobs and factories to other countries, but the question Milton asked is: Is it really the government’s job to preserve someone’s livelihood? Milton. Friedman: Many still maintain today that markets cannot be left to operate freely; that they must be controlled by government. This dock side is in Scotland. A British government, a socialist government, decided that its role was to protect the workers here from competition. So down there in Govan Shipyards they are building these vessels for the Polish government. To get the order, the British government is using the money of British taxpayers to subsidize the work. In other words, British people are making these ships in order to sell them at a loss to the Poles. Not only the Poles, but also we, in America, benefit from this kind of philanthropy. The steel industry in the United States makes a fine product. Other countries do too, and their steel is often cheaper, sometimes because their taxpayers subsidize it. So why shouldn’t the American consumer buy steel wherever he can get it cheapest, at home or abroad? The American Steel Industry works very hard trying to persuade us that it’s not in our self-interest to buy in the cheapest market. They urge the government to restrict what they call, “unfair competition.” When anyone complains about unfair competition, consumers beware. That is really a cry for special privilege… always at the expense of the consumer. What we needed in this country is free competition; as consumers buying in an international market, the more unfair the competition, the better. That means lower prices and better quality for us. If foreign governments want to use their taxpayers’ money, to sell people in the United States goods below cost, why should we complain? Their own taxpayers will complain soon enough, and it will not last for very long. Rooney: Amity, is there any such thing as unfair trade? Of course the steel industry has changed dramatically, but now you’ve got China, who pays its workers pennies compared to our dollar. They are dumping steel on the market below cost; it’s hard to argue that there shouldn’t be a tariff placed on that. Do you believe that there is no such thing as unfair trade? Shlaes: Over time, the deities place a tariff on that, because it’s an irrational situation, so the question is: Whether the government intervenes to stop something like that a government, or someone else, but what strikes one about Rooney: What government, the China? Shlaes: No, our own government through tariffs. But what strikes one about the video of Milton traveling over to Britain to look at a loser industry that the government there has perversely subsidizing is that, had he made that today, he needed only to go to Detroit. To get the same picture, which is an industry we’re propping up autos in very complex ways, involving Wall Street- that maybe it’s not a worthy effort, maybe the people of the Midwest would do better if we didn’t focus so much on the auto industry, the troubled industry and created the situation in the Midwest that new companies could arise. So, that’s what’s striking about this segment of this film is that we went to the U.K. to see a subsidized industry, or a favored industry, or a re-dealed industry and now we have one of our own. Rooney: The Obama Administration would argue that they made money in the crisis that they were in. Shlaes: They made money in a cynical way, on paper. But by keeping the emphasis on autos in the Midwest, you hurt the Midwest by saying, It’s okay to have high taxes, as long as our auto industry is okay. You hurt the future of the Midwest- which used to be a very hopeful and important place for this country. Rooney: Is it the government’s job, Austan, to protect domestic jobs? Goolsbee: Not in a direct way. I mean the government; I don’t think is in any way the sustainable driver of job creation in the country. I don’t know that I do agree with what Amity said, but I was struck by the first two-thirds of what Milton said there, I think most people agree with. You know, if you start looking at corporate welfare, big subsidies trying to prop up industries on a continuous basis, there is a lot of mischief that is going on in the world, based on that as the rationale. I think in the case of autos now, it’s a little bit different because it is not a… it was not, and better not be intended to be a continuous subsidy of the form that kind of Milton is describing there with the British, but I think it shows you that how times have changed, that at the time Milton said that, it was probably fairly controversial, now, I sort of think that that whole first part is not controversial at all. Rooney: What about subsidies though in the name of promoting competition? You got the EU promoting the air bus, giving subsidies to that, I mean, Boeing was the only game in town did that not work? Caplan: No, I don’t think it did; worked in a sense that there is an industry that existed, or a firm that existed because the government did something, sure. But did this actually benefit consumers to have the government go and take a bunch of money from taxpayers who didn’t actually want to invest in the industry in saying this is a good idea I don’t think so. I mean, if you have a firm that really has such a good idea, they should be able to raise money from investors. The reason why government takes taxpayers’ money is that because the people would not put their own money into it- is because they think that it’s not going to work. Page: Sometimes people don’t get a chance to put their own money into it, or make their own choice, or maybe they can’t buy a car because they haven’t got a job, you know, this is the upper Midwest, the rust belt, I look with fond nostalgia with Milton Friedman showing those steel ingots rolling out, because I worked in the steel mill. That is how I worked my way through college. Kids from my hometown-Speaker John Boehner’s district, by the way, who wanted to do that, who had a much harder time doing it, because the jobs aren’t there. This is not, the thing is, I kind of resent the way Friedman separated government from the people, when he wants to say something mean he talks about government, let’s talk about something wonderful. The people decide this. Well, what is the government? Its elected by the people! I think most Americans if you put it to them, about the modest way the auto industry will subsidized temporarily to get it back on its feet; I think that most of them would agree with it. That is the way a democratic system operates. Goolsbee: And I would say there’s a second style of subsidy, if you want to call it that, that you might say, we give a research and development tax credit which is a subsidy to businesses to try and get them to do more R and D, because precisely the fact that we’ve seen many times, each company is not taking into account the benefits that their own scientific discovery have on the rest of the industry. That the government can sponsor the National Science Foundation, can help fund kids to go to college, that those things can have spillover benefits and I hope that nobody would be saying, “Oh well, we ought to get rid of that kind of stuff.” Shlaes: Well, there’s one thing we want to mention though, which is the strong unionization makes it very hard for high-schoolers and lower earners, people coming in to get jobs now, so, the whole system that we had in the past which includes the unions who are part of the story in the U.K. and with the autos, makes it hope less for younger Americans now, exactly what Clarence is looking for jobs for young people aren’t there because of this old, encrusted structure that we had. [crosstalk] Rooney: We don’t abuse our workforce the same way that China does, too. We’ve bestowed most favorite nation status on them. I think that it was 1993, but we didn’t put any caveats there…should we have? Should we care about how they treat their workers, if we are using all their goods? Shlaes: We should care very much, but whether economically we can influence that through policy is questionable. Page: By the way, my steel mill was not a union shop. Shlaes: Yeah. Page: We’ll point this out and unions have been in decline ever since Taft/Hartley and productivity has gone up, wages have been stagnant since the 70s, largely because those jobs like mine that require less than a college degree have been drying up or going overseas. And I am not a trade protectionist, but I believe in fair trade and there is a real imbalance when China’s subsidizing their jobs and we’re not, and thus they can sell their, sell stuff to us that we could be making over here at a cheaper rate- and how long does that go on? I think that –it’s a complicated… Caplan: All this talk about fair trade… it’s very striking when you go to other countries, other countries think we are unfair. Every country rationalizes protectionism in a name of other countries unfairness. The real truth is that all countries are being unfair and all consumers in all countries are getting ripped off by their own government’s attempts to protect them from the unfairness of other countries. Page: It is of such questions that politics is made. Rooney: Was Ross Perot right about NAFTA? Caplan: No, he was wrong. Rooney: It didn’t work? Caplan: Yes. Rooney: He was wrong. Caplan: Yes, we got a lot of benefits out of NAFTA. Americans are better off, Mexicans are better off… Rooney: Most Americans don’t think so. Caplan: Most of it, it is possible for most Americans to be wrong. It has happened before. Page: They say they don’t think so, but, then they go to Wal-Mart and they buy goods and services a lot cheaper they would otherwise, precisely because of imports/exports, it’s not an easy question, but it is easily demagogued. Rooney: They are looking at the jobs aspect of it now, not the goods and trades part. Page: It depends on what side you look at. Caplan: Probably the best point about free trade is…we were just to imagine that all countries gave us everything for free. If all of our imports, they simply said, Here you go, whatever you want, gave us everything they made, we would be rich. I would hurt you, there are many jobs that would be lost, and yet consumers would be doing very well and what we would do, we would switch over to making things that other countries don’t give us for free. Rooney: Alright. Goolsbee: The thing is that Milton’s line that anybody who says that you need to be protected from unfair competition, you know, consumers watch out. I think that is also true. That doesn’t just have to do with trade; it has to do with all sorts of things. Rooney: Alright, well, everyone complains about special interests in Washington, but Friedman said that’s what happens when the government intervenes in the marketplace. Here’s Milton again. Friedman: Every time I come to Washington, I am impressed all over again with how much power is concentrated in this city. But we must understand the character of that power. It is fragmented into lots of little bits and pieces, with every special group around the country trying to get its hand on whatever bits and pieces it can. The result is: That there is hardly an issue in which you won’t find government on both sides. For example, in one of these massive buildings scattered all through this town, filled with bursting with government employees, some of them are sitting around trying to figure out how to spend our money to discourage us from smoking cigarettes. In another of the massive buildings, maybe far away from the first, some other employees equally dedicated, equally hard- working are sitting around… figuring out how to spend our money to subsidize farmers to grow more tobacco. Each of these programs spends money, taken from our pockets that we could be using to buy goods and services to meet out separate needs. All of these programs use very able, very skilled people who could be doing productive things. Rooney: Why is this necessarily unproductive, Bryan? The new example, rather than tobacco subsidies, might be corn, ethanol, subsidies, and they’re doing that at the time that they’re researching the efficiency of electric cars, so they are doing more than one may seem to cancel the other out. But, what’s wrong with that? Caplan: What’s wrong with doing two things that cancel each other out? It’s wasteful. You could just not do either of them and then be in the same place that you are ending up right now, I guess. Rooney: You might not discover that one way is better and more efficient than another. Caplan: That’s different than doing two things that cancel each other. So, if you are pursuing two different technologies for doing the same thing, there could possibly be some use in doing both, but I mean, Friedman is specifically talking about, you know, having government actually do things that are in with directly contradictory aims, I think that a case for being wasteful, it is almost impossible to deny. I mean, would you say, that’s it’s a good idea to subsidize tobacco and discourage smoking? Rooney: Its two different businesses. Caplan: Yes, exactly. Rooney: It is promoting two different businesses. Caplan: And that fact of doing both things is what? To leave things about where they would have been? Page: This is where politics don’t work; because obviously, you have two different politics at work with tobacco. You know, one of them is the politics of the tobacco states, versus, and there is senators with great seniority, other is the politics of healthcare and lung cancer, etc. Just like with ethanol, you know, coming from Illinois, I’ve seen very, Illinois, Iowa, you can’t say a bad word about ethanol. Even though we are learning now switch grass from Brazil works much better for us and is more economical. Politically you just can’t talk about, it’s just politically incorrect in Illinois and Iowa, but I don’t blame government for that, I blame politics. There’s a little difference there. Caplan: We just go back to Milton’s first segment, saying that it’s us, you know, the American voters supports at least a system like this go on and when, when you tell the public “We subsidized tobacco and we try to discourage smoking… isn’t it ridiculous that we do both? They may laugh at the absurdity, but they aren’t angry at politicians for doing both. Shlaes: An additional point is: We are taking about Washington then in 1980, and is it good or bad what it was doing? Its bigger now- relative to the economy than it was then. So whatever Washington was doing then was smaller, say it was one- fifth of the economy, now it’s moving towards one- fourth of the economy, that machine, good or bad, subsidizing tobacco while discouraging smoking is that much bigger which leaves less in the private sector. Goolsbee: I would be a little careful with that. The main thing that’s grown are: The population’s gotten older, so the big social insurance programs have gotten bigger. If you just look at what, kind of a 1979, 1980, Milton Friedman viewed as government spending, that kind of discretionary spending is way, way down, as a share of the economy since that time, and it is at least worth noting, it’s not just the government that’s got inefficient contradictions going one way and the other, that happens in the private market all the time, too. There are people gearing up the machinery to try to get you to adopt a certain kind of furnace, and their competitors have the opposite kind- and they are both advertising and they are both investing in distribution systems trying to get you to do that. So there is a great deal of inefficiency in a whole lot of things. I think the view that we ought to get the government out of steering where the competition should take place, I think is a fairly sound idea. I think, again, times begin to change around 1980 with Ronald Reagan, and I was struck by the very first sentence that Milton Friedman says, Every time I come to Washington I know, how unbelievably powerful the city is. I think most people now view Washington is not actually that powerful. There are certain segments that they control, but the vast majority of the economy is operating not under the control of Washington. [crosstalk] Rooney: Aren’t special interests just a fact of life? Its part of democracy, I mean one person’s special interest. Page: All interests are special. Rooney: If somebody else’s port project, I mean isn’t that just the way it’s going to be? Page: It’s the same thing, all interests are special. But that is politics. Politics work better sometimes than they do other times. But, the public, one thing the public does not is not crazy about is government doing nothing, especially if they see something government could do. They are very disappointed if it’s not doing it, and this is how on a local, national, and state level you get politicians losing their jobs because of inaction, but Roosevelt, even when he didn’t end the Depression, people felt that he was out there fighting for them and they re-elected him. Caplan: You are really making Milton’s point for him. His whole point is that when you give government power, then special interests will play a very large role. You can’t just think about government doing the ideal thing, you have to think about government in power, what is it actually going to do given all the pressure that it’s under, and a lot of times what it’s going to do is something that is actually bad and is worse than doing nothing. Shlaes: But just sheerly in the arithmetic if it goes from twenty to twenty-five, or from eighteen, we used to have a chart at the Wall Street Journal where I worked which was called the Eighteen Percent Chart, because government was always eighteen percent of the economy. That was sort of a golden mean, but we had to throw away the chart because it went up and it, there was a little pause, those were the Reagan years, but we seemed to be trending overall towards twenty-five for next year due to the crises, but we are at twenty-four, twenty-three, twenty-five, its bigger and that does leave less room for the private sector. It’s as simple as that. Rooney: How do you get rid of special interests? Would Milton Friedman, for instance, Bryan- support campaign finance control? Caplan: I am pretty sure he would not. I think that he would say, Just give government less to hand out and then special interests won’t bother you. Special interests hardly ever bothered me because I have nothing to hand out, so they don’t call me up and ask me if I will do one thing or another. Page: Do you really believe that? Caplan: I am pretty sure the special interests don’t call me. Page: They are going to try and squeeze more out of you, no matter whether you are handing out that much or not. Caplan: If they know that there is a limited budget, there just isnít much point. Rooney: Who’s going to limit the budget? Goolsbee: Who’s going to limit it, yeah? Rooney: That’s the whole point, there is no limit. Caplan: Then we can just spend less – that is possible. Rooney: But who is going to limit what somebody wants to spend? Caplan: I mean Friedman was a big fan of the limitation on spending or balanced budget amendment, which I think that the main problem was that if you can convince people to do that, you can convince them directly to spend less. But you know the general point of just look, we need to hand out less and there will be less pressure. I mean, I think about this with my kids, where when kids sense that parents can be lobbied kids lobby. I always tell my kids, “Look, that doesn’t work in our family, crying, saying please repeatedly gets you nowhere.” And I think that there really is there is a lot of wisdom there. Page: Well, the sad thing is that the lobby industry has expanded by leaps and bounds, and is like the Indianapolis 500 track, it only gets bigger and faster and never slows down…that’s just reality, too. Goolsbee: But I mean, take out the Medicare/Medicaid and Social Security social insurance programs, government’s gotten way smaller as a share of the economy. Caplan: Take out the major programs and government is smaller. Why should we take those programs out? Goolsbee: Because they are two different style of programs. That’s not the same thing. Rooney: In this next segment you’ll see how government regulations grew in the five decades prior to 1980. As you watch this, you can imagine what Milton Friedman would think after 30 years of additional regulations. Friedman: The Federal regulations that govern our lives are available in many places. One set is here in the Library of Congress in Washington, D.C. In 1936, the federal government established the Federal Register to record all of the regulations, hearings and other matters connected with the agencies in Washington. This is Volume One, Number One. In 1936, it took three volumes like this to record all these matters. In 1937, it took four and then it grew and grew and grew. At first rather slowly and gradually, but even so- year by year, it took a bigger and bigger pile to hold all the regulations and hearings for that year. Then around 1970, came a veritable explosion so that one pile is no longer enough to hold the regulations for that year. It takes two and then three piles. Until, on one day in 1977, September 28th, the Federal Register had no fewer than one- thousand, seven-hundred and fifty-four pages. And these aren’t exactly what you would call small pages, either. Rooney: All right, I think I know where Bryan stands on this. So I’m going to go to you, Clarence. Can you protect consumers without some kind of regulations? Page: Well I look at how the, well de-regulation really began with Jimmy Carter- Ronald Reagan accelerated it, I am glad the airlines got deregulated they are cheaper now; and although they are less luxurious and they are more like a flying bus. Nevertheless, we started deregulating the financial markets back in the 90s- and continued into the Bush era, and we look back in retrospect and we see more gambling; we see more speculating; we see Ponzi schemes; we see all kinds of cheating going on on the marketplace- and what happened? People pressured Congress, Why don’t you pass some more regulations? So, we got Dodd-Frank and other efforts to put in some more safeguards. That’s why we have regulations, partly because people don’t trust government, which Friedman could certainly identify with. Partly because people don’t trust the private sector all the way, either. Now, additional regulations do come in because of lobbyists and special interests who have what they used to call in the Illinois State Capitol, a Fetcher Bill. A bill designed to fetch bribes; essentially, with some useless regulations so somebody will pay you, or whatever, not to put it in. Yeah, but that’s not all the regulations. Rooney: There have been attempts by virtually every president since 1980 to cut regulations. There’s the infamous picture of Al Gore on the front lawn of the White House and trying to cut back. So, it wasn’t just the republicans, it was the democrats, too. Shlaes: What’s very interesting is the power of Milton is a lot of people saw that video, and there was a change in the Federal Register, and if you go back and count the number goes down significantly. So if you stick to that snapshot, I believe that there are eighty-seven- thousand items in the high point, which is around when this movie was made in 1980 it goes down. That doesn’t mean the regulation really went down, but that snapshot was taken away. That sound bite, because Milton it was so damning what Friedman showed when he showed that picture. So that is very, very, interesting. That’s the main point. If you expose people to the truth, they’ll say it’s ridiculous- and the regulation needs to be shown anew in new way. This has also questioned media. You show people a new how extreme and how weird it is and how perverse, they will respond, that’s what I was struck by. Rooney: There were piles that would not go down to zero. Shlaes: They would not go to zero, but they would go down. Rooney: If Milton were in charge. You look at the environment for instance, I mean, he acknowledged himself, that there is no cost to polluters. You know, you can go out and pollute at no cost to yourself. Something has to be done to regulate, for instance the environment. Caplan: Milton’s proposal would have been you don’t need to have a big book; you just need to charge people a certain amount for polluting. Rooney: How do you know who is polluting? I just threw my McDonald’s wrapper out the window, what are you going to do, chase me down? You have to have police and then you’d have to pay them. Caplan: That is true, that is what Milton would have said. So what is frightening to me about looking at this is that if you asked Milton at the time: What do you want instead of all this regulation? He basically would have said, Reputation. Consumers will go to firms that they trust. Firms will be concerned to make sure the consumers trust them. This will all work. At the time it would have seemed very naive. But notice in the last 30 years we have E-bay, we have Amazon marketplace; there is an enormous amount of internet commerce that is built pretty much entirely on reputation. Officially you could sue someone on Amazon marketplace if they don’t get what you want, but in practice, you just give them a bad review and that is enough. It really works, way better than even…and I think Friedman would have realized. Shlaes: This is a very important point that Bryan is raising. …post-Friedman- that Friedman would have liked, which is that there has been an awful lot of spontaneous order, new creation, spontaneous growth and new self-regulation, much more than we could have imagined from the internet now. We couldn’t have foreseen in 1980 that EBay would exist or that people wouldn’t be rooked on EBay if it did exist, and yet it does. There are wonderful studies that show, in many cultures, things like EBay function without a government regulator, but one person trades with another. We have a bilateral, and we care a lot about reputation, so the market does find solutions quite often in ways even Milton couldn’t have imagined. Goolsbee: I would say, look first, I love his shtick his coming down the stairs of the Library of Congress a beautiful building, those stacks of books. It’s a wonderful image. It’s a little unfair. I mean if you went purely to the private sector and just started looking at the size of financial contracts between two banks for example, I bet they got bigger even faster than the rules in the government. It’s just a lot of economic life has gotten more complex, I think the things that Milton Friedman identified that, at the least, we ought to be against inefficient bad regulation stuff that doesn’t apply. But if you go so far as to say, we don’t need any regulation, there I think it’s deeply wrong. I think the events of this financial crisis, as an example, show you that getting rid of regulations can be extremely detrimental to the free market if done wrong. If you look in some other countries when they privatize, for example, their Social Security, they don’t put rules on what the financial institutions have to report, so everybody picks the one month that their mutual fund did well and they are like, we had a forty-two percent return from November second to December fifth of last year. And there can be great confusion, and it can undermine the honest sellers of the world in a way that setting up rules of the road can help prevent. Rooney: Isn’t a lot of our regulation, though sort of born or our litigious society, too? One thing happens, you know, some some crib collapses or something, and before you know it, you have to have a regulation to say how exactly how you are going to make the crib; or you can’t buy a diving board anymore, because too many people got drunk and dove in off the, you know, the shallow end of the pool. Those kinds of things. People demand answers from the government for their own stupidity. Page: Well again, a litigious society the people have the right to sue, yes they do. Should limits be put on damages- that’s the debate, and I won’t go into a whole lot of numbers here. I think that in my experience the damage of litigiousness has been overrated, but it is an easy issue to demagogue. What concerns me is: We talk about regulations just being evil. I remember in the 60s, back when Cuyahoga River caught fire in Cleveland, and I was an Ohioan, and the prevailing wisdom was Lake Erie is dead, just dead, will never come back. And the EPA was passed and enforced; Lake Erie came back in ten years. The Chicago River, the first Mayor Daley said, “We are going to fish in this river.” Most people said “Well, you are nuts!” But, people do fish in it and I don’t know if they eat the fish or not, but they do fish in it. The EPA has done a lot of good. Today the EPA is under fire, this terrible litigious, fascistic, oppressive agency. It’s just not that simple. But, you know, these issues are reason to demagogue. Rooney: Would Milton Friedman have kept the EPA? Caplan: I’m pretty sure, no. I think that I, I’m not sure that I remember, but I think that his position was that there is no need for the EPA. So we did favor letting people sue for trespassing for environmental harm, but, overall no. Rooney: But he wouldn’t have had a government program in place even though he would have some regulations. Caplan: Milton was a big fan of charging people for polluting, rather than telling them whether they could or could not pollute. So, one system is, you have a giant book saying all things are allowed, we are allowed or not allowed to do, the other one is saying, Look, a thousand dollars per time, do whatever you want. [crosstalk] Goolsbee: If you’ve got chemicals poisoning your kids in the food and killing them, I think that there is a role for the government to come in and there are some things that the losses are sufficiently great that you may not want to rely on, well, you know, there will be a sufficient penalty that nobody will want to do that. I think sometimes you’ve got to be a little more aggressive in laying out the rules. Caplan: Right, but once you give the EPA that power, then there is this temptation to say, “Hey look, we are just going to ban this thing and we are going to ignore our costs and benefits and say look, any amount, no matter how much is too much.” Goolsbee: We shouldn’t do… we shouldn’t do stupid regulations. We shouldn’t be protecting people from their own stupidity or whatever, that was a nice phrase. Caplan: Really? That’s a startling admission, Austan. [crosstalk] Goolsbee: Having no rules of the road often enables massive stupidity, like what lead to the financial crisis. Page: Other people’s stupidity, that’s the issue. Shlaes: We needn’t see it all in absolutes, it’s a question of more or less and we’ve been trending more government, maybe we want to trend less. That’s what Friedman was recommending at that time. So you don’t have to go all the way over to no law at all, or all law, it’s the trend. Rooney: All right, trending down. Alright, its one thing to define the problem, but Milton went one step further proposing a solution to the explosive growth in government spending and interference in our lives. Let’s take a look. Friedman: Almost two-hundred years ago, a remarkable group of men gathered in this room to write a constitution for the new nation that they had helped to create a few years earlier. They were a wise and learned group of people. They had learned the lesson of history. The great danger to freedom is the concentration of power, especially in the hands of a government. They were determined to protect the citizens of the new United States of America from that danger, and they crafted their constitution with that in mind. But in the past fifty years, we have been forgetting the lesson that the wise men knew so well. From regarding government as a threat to our freedom, we have come more and more to regard government as a benefactor from which all good things flow. What we need is widespread, public recognition that the central government should be limited to its basic functions: defending the nation against foreign enemies; preserving order at home, mediating our disputes. We must come to recognize that voluntary cooperation, through the market and in other ways is a far better way to solve our problems than turning them over to the government. But it will be no easy task to cut government down to size. Today, in country after country the strongest special interest has become the entrenched bureaucracy- whether at the national or at the local level. In addition, each of us gets special benefits from one or another governmental program. The temptation is to try to cut down government at someone else’s expense while retaining our own special privileges. That way is stalemate. The right approach is to tackle head-on the explosive growth in government spending. Let’s give the government a budget, the way each of us has a budget. A movement in this direction is already underway in the United States with the many proposals for constitutional amendments limiting government spending. Several states have already adopted such an amendment. There is strong pressure for a similar amendment at the federal level. Rooney: Alright, so defense as a central role of government. Is there any way Milton Friedman could have imagined today, you know, President Eisenhower warned of the military industrial complex, we are practically there. Defense is a great government expense, but it is also a little industry into itself. I mean trillions of dollars spent in defense but look at all the other industries it supports along the way. Shlaes: Well, one thing to point out is that while defense spending is large, as a share of the economy, it’s nowhere near where it was in the Cold War. In many of the years of Milton Friedman’s life, in the Korean War, even in the 60s, defense is expensive, it’s certainly wasteful. We may not approve of some of it, but it’s not the thing that is eating off the economy. The only reason it looks so big is because we have so many non-discretionary areas that Austan was mentioning before, things that are hard to change, like entitlement. So, defense isn’t the big, big problem, but the budget is generally. So, this go-round it would be the entitlements, that we would have to change. It would be stable money, to stabilize our money so interest rates don’t go too high, and I believe taxes as well are very important at this point. If we raise the taxes very high, there won’t be impetus to create. Page: When you say defense as a smaller portion of the budget. Shlaes: Of the economy. Page: Excuse me of the economy. Not because so much of the other economy has grown at a faster rate, but not because defense has shrunk. Shlaes: Well, what matters is the relationship, how much of our spending in the country and if it’s five or even eight, that’s not so bad. If it’s four, if it’s twelve, or fifteen, it begins to feel like a military economy. Page: But when you also mention military our military spends, we spend what more than twice what the rest of the world spends put together, something like this. [crosstalk] Rooney: You brought up earlier the idea of a balanced budget amendment, do you think, Bryan, that in this day and age Milton Friedman would support that, and maybe even go one step further with a spending cap? Caplan: I think it’s very likely that he would. The main problem with it, I mean, I think that it’s a great idea if you could actually get it to happen, but, the problem is that spending is popular and therefore it is going to be harder to get people to pass an amendment that is going to stop them from doing what they want to do. Rooney: Isn’t a constitutional amendment, you know, the most dramatic regulation of all? Caplan: It’s a regulation of government. It’s a regulation saying what government is allowed to do. It’s not a regulation of people who are being ruled by the government that tells them what they, you know, protects them from the government. I mean, you think about, is the First Amendment a regulation of government? Well, yeah a regulation it is a regulation of government. It is not a regulation of people, because people are allowed to speak freely because of the First Amendment. Rooney: To a point. [crosstalk] Goolsbee: We passed a constitutional amendment allowing the income tax. Seems to me like that’s an expression of the people’s will; that they are saying something. I am sure if Milton were alive today, he might be arguing that that’s not a good part of the Constitution. You know, we shouldn’t have enabled that. I think the, you saw two minor slights of hand in that segment. The first being, he wasn’t talking about a balanced budget amendment. He was talking about a limit on government spending which is very different. You can still run huge deficits and you could have a balanced, or you could have a balanced budget with high spending if you had tax revenues to cover it. Caplan: Or you could have both. Goolsbee: Or, you could have both. I think much of the discussion that has evolved since then, has been more about the deficits and less about what’s the size of government, and I think that it’s exactly as we are talking about, because the main part of the government that’s been growing is the part that’s popular. And so the second, somewhat sleight of hand is if what the government’s, if the government’s insurance programs are popular, rather than outright go say, let’s cut that program, let’s try to create some backdoor way to force people to get rid of things that they might otherwise want. I think there is a little bit of tension because it’s somewhat against the style of Free To Choose. Well, the people are free to choose. They are choosing, they want social insurance programs; they are willing to pay payroll taxes to get them. I think it’s a little bit strange to go in and say, “Well, you don’t know what you want; you’re mistaken, let’s put in a rule that forbids you from being able to change.” Caplan: And if Friedman were here I think that he would say, “Let the people who want the programs pay the taxes, and get the benefits, and those of us who don’t support the program not pay the taxes, and not get the benefits.” And that’s real free to choose. Page: Why bother going through taxes then, let the marketplace? And yet the marketplace shows millions- whether you believe twenty million or forty million don’t have healthcare right now. ah…ah…ah… That’s not stable for the entire system for those of us who do have healthcare. So, I think there’s some sense to having some national political action. Rooney: Aren’t you always going to hit a ceiling, though, if there is some kind of budget cap or an amendment to a constitution-there’s always going to be something that happens? We don’t even know. We can’t imagine what the future holds. Caplan: (inaudible) two-thirds override or something like that, although of course if it were that it could very might get overridden, for no good reason. Shlaes: And we would not hit that ceiling so easily if we did reform the entitlements that we have. Social Security is very easy to reform. Some conservatives had say do away with it- means test old people out. We don’t need to do that. It is a simple reform. Austan’s worked on it. We’ve all worked on it. It doesn’t cost a lot. You could do it in an afternoon and seniors who exist now would collect. Rooney: What would we get rid of right now? Shlaes: Medicare is harder; Medicare Part D, a republican legacy is hard. That’s one of the hardest. Those are the hard questions. But if we did deal with those systematically in compromise, we wouldn’t need to run over our budget so routinely. It is possible. It’s quite possible. And in a way, that’s what we learned from Milton, too. Because subsequent to him there were those cut backs; democrat and republican, in the Clinton years and in the Reagan years before them. Caplan: The main mistake that Milton made in the segment is saying the whole problem is that everyone is protecting their own benefits, and trying to get everybody else’s benefits cut. The real story, as Austan said is: that Social Security is popular, not just with the elderly, but it’s popular with all age segments in society. Medicare is popular. Medicaid is popular. And, and yet really the reality is that something has to change. You know, these are extremely expensive programs, taxes don’t nearly cover it and they’re just going to keep getting more expensive. I mean, unfortunately there has to be some way of actually convincing the public, look you are doing this out of a misguided sense that you have to support these programs completely for the good of society. Whereas really if we are going to get along, these programs have to be curtailed. They are so expensive. They are getting more costly. Rooney: Are you saying that it should be an either/or Social Security or Medicaid? Caplan: No, I am just saying that these programs have to be curtailed one way or another, and the fact they are popular makes it difficult. But the simple point of look, you want something that is so expensive that we just cannot possibly continue to afford indefinitely. Something has to be cut, and the fact that it’s popular makes politicians very reluctant to say anything about it. Goolsbee: I tend to think that’s true, but that’s why in my mind I am separating the social insurance from the kind of growth of government, and I think our long run fiscal challenge is rooted in the aging of our population, and the rising [inaudible]. We will have to confront that issue and we’ve known about it for some time. To dress that in the rhetoric of, “The government is out of control! Look at how out of control the government is!” As a share of the economy, I think is a little mistaken. I think that it’s kind of like in Guitar Hero, you know, if you play the wrong note it makes this clang, it kind of has a little bit of a clang to it to ordinary people I think because if they are talking about Social Security they are not thinking, well, wait a minute, you know, the government is not controlling my life, I actually wanted that. Caplan: But it’s worse than you are saying, Austan. I think people, when they think about out of control government spending, they think about a small number of things they don’t like and they convince themselves that this is most of the budget, so, it’s foreign aid, and it’s five-hundred dollar toilet seats and that’s what’s out of control and really Milton’s point is much deeper in saying, look, it’s the popular stuff that’s the problem. Social Security, Medicare, these programs are very expensive, they’re popular… and they’ve got to be cut. [crosstalk] Page: This is where politics fail us again, but while the problem is down the road with Social Security and the rest, so is the hope. Young people right now are the hope for reforming Social Security down the road. Right now, even if you talk about changing as President George Bush did, for those under age fifty-five, elders still resist it, but it’s young folks who don’t even expect it to be around in the future, and that’s where the serious debate needs to take place and where the serious support is. It’s going to take some time. Rooney: All right, that is it for us. Thank you all for joining us. My thanks to Amity Shlaes, Bryan Caplan, Austan Goolsbee, and Clarence Page. I’m Emily Rooney. Thanks.