In his last known interview before his death in November 2006, Milton Friedman reflected on free markets, monetary policy and nation building. The following are previously unpublished extracts from the late economist’s conversation with Emerging Markets in August 2006
How likely is a recession in the United States?
Very likely. When it will come I don’t know. I think the past 25 years have been a very remarkable period. During that period, we’ve had only three very brief recessions. There’s no other 25-year period in our history that has a record like that. So we’re in a sense embarking on a new world. And if the Fed can continue to have as successful a monetary policy, if we can keep the price level stable, if we can keep the price level reasonably stable, keep inflation low and steady, there may not be a recession. But after all, we’ve had recessions for hundreds of years. I can’t believe there is anything magical that has now eliminated them. So sooner or later we will have a recession. Whether it’ll be next year or later on I don’t know. But we’ll have one. The record of economists and anybody else of predicting short-term movements in the economy is not exactly brilliant. Do you think the Fed is more concerned about a slowdown in growth led by a rapidly deteriorating housing market, or is it actually more concerned about the threat of inflation?
I don’t know. Their behaviour suggests that they’re more concerned about a slowdown in the economy, because if they were more concerned about inflation they would have raised the rate again. If you look – going back – at what’s happened to the quantity of money, that looks very good. It looks like they’ve been following a policy of a reasonably steady 3–4% increase in the quantity of money, which ought not to be consistent with inflation. Do you think that what we’re seeing today – the greater degree of globalization and the greater reliance on market forces – has, in effect, made the job of central bankers easier by allowing markets to self-correct, or is there a sense in which it might have made it more difficult by increasing the risk of systemic imbalances?
I think that the spread of globalization has unquestionably made it easier. Many economists say that one of the gravest issues facing the US economy today is the precarious international financial position of the United States.
There is nothing wrong with the international financial position of the United States. You believe that twin deficits are not only sustainable but desirable?
Of course. The market doesn’t show any sign of concern about them. What is true is that the data are confusing and contradictory, because the balance sheet shows one thing, but the income account shows another thing. If you look at the balance sheet, the statistics say that the US has a historically high level of debt outstanding to the rest of the world.
On the other hand, if you look at the income account, the income that the US gets from abroad is higher than the interest it pays to the rest of the world. The income is higher than the outflow. Now how can that be? If you live in a house or you own a house on which you’re receiving monthly net rental payments, you’re receiving a net income, and yet the value of the house existed as less than zero. That’s nonsense. In the same way, there’s something wrong with the statistical data. I think it’s a statistical aberration that gives the impression that there’s an international financial problem. The dollar’s downward spiral has raised concerns that the pace of de-dollarization will increase globally. Does it continue to make sense for foreign central banks to invest in US Treasuries given the decline of the dollar?
Whether it makes sense or not depends on US policies. If the US monetary policy – everything depends on how the Fed behaves and what policies it follows. If it follows a policy that leads to a collapse in the world value of the dollar, what you’re suggesting would undoubtedly happen. But it doesn’t need to follow such a policy. It has all the tools it needs to keep prices reasonably stable, and if it does that, there will be no collapse in the price of the dollar. What kind of policy would lead to a collapse in the price of the dollar?
An inflationary policy would lead to a collapse in the dollar. In your view, are all indications from Bernanke’s Fed that it won’t follow such a policy?The point of view of the Fed’s announced policy – and I take it at its word – is to maintain a monetary policy of stable and low inflation. It plans to continue the policy of the Greenspan administration. What do you see as the biggest threat to global financial stability and the world economy?
The biggest threat everywhere is the situation of governments, excessive government spending. The world is in better shape today than it has been in many a year. There’s no doubt about it. The market has more to play in the allocation of the resources of the world than it ever has in history. We’ve been going through a period in which you’ve had an expansion of market arrangements, not necessarily in the United States, but certainly in emerging countries, certainly in countries in the Asia area, Thailand, India, China, Hong Kong, Singapore, and now in the last 20 years in the former Russian satellites, Latvia, Lithuania, Hungary, Czech Republic and in all of those, markets are playing a larger role than they have before. What is the proper role of government?
Cutting taxes, cutting spending and deregulating. That’s the most important thing they can do. How concerned are you about the rising protectionist sentiment in the United States? What sort of impact is it likely to have?
Protectionism is a real problem if there is a growing tide of protectionism – I don’t know that there is; protectionism has been with us since as long as the nation has existed. After all, Alexander Hamilton came out in favour of a tariff on steel as an infant industry, and that infant industry is still being subsidized. Protectionist forces are very strong and have been very strong as far back as you can see. If anything, they’ve retreated somewhat in recent years. Average tariffs are less than they were 25 to 30 years ago. So there’s been some improvement but not enough. A widespread movement of protectionism would be a serious problem, but I think what you’ve got is mostly small. There are growing questions about the relevance of the World Bank and the IMF to today’s world. What’s your take?
My position on the World Bank and the IMF is very simple. I believe both of them do more harm than good. Therefore what’s best for the world would be to give them both a happy burial. The World Bank inevitably, and it’s very difficult to find a way round this – inevitably makes loans to governments. Inevitably what it does is to strengthen the existing government, whatever it is. And what these countries need is a weaker government not a stronger government, more of a market system, more competition and more freedom. And instead, the effect of the World Bank’s actions is to make that more difficult to achieve.
As far as the IMF is concerned, it was created for a specific function, to monitor the Bretton Woods system of exchange rates. In 1973, when that system came to an end, their function came to an end. And they basically scrambled around to find a system to justify them staying alive. But there’s no excuse for them, no function for them to perform, and the best thing that could happen to them would be to put them out of their misery.
Milton Friedman died on November 16, 2006, age 94.—Interview by Taimur Ahmad