Tags: Ebenstein | Friedman | QE | Obamacare

Lanny Ebenstein: Milton Friedman Would Love Fed's QE, Hate Obama Fiscal Stimulus

By Forrest Jones and John Bachman   |   Tuesday, 16 Oct 2012 07:36 AM

Nobel economist Milton Friedman would have likely agreed with the Federal Reserve’s stimulus policies, but would have turned his nose at President Barack Obama’s fiscal stimulus bill and healthcare overhaul law, said author Lanny Ebenstein.

To steer the economy away from deflationary decline, the Fed announced plans to buy $40 billion in mortgage-backed securities held by banks every month until the economy and labor market improve, a monetary policy tool known as quantitative easing (QE).

The announcement marks the third time the Fed has rolled out QE measures to jolt the economy since the 2008 financial crisis, with the first round seeing the Fed snap up $1.7 trillion in mortgage securities and the second round seeing the Fed buy $600 billion in Treasury securities held by banks.

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QE aims to stimulate the economy by injecting the financial system full of liquidity in a way that pushes down interest rates to encourage investing and job demand.

Critics say the Fed, under Chairman Ben Bernanke, is fueling inflationary pressures down the road by stimulating the economy with the hope of creating jobs today.

But Friedman probably would have sided with Bernanke.

“I think that Friedman thought in exceptional circumstances that exceptional action is called for, and he certainly would have not favored QE under normal circumstances, but Friedman, as Bernanke is, was a great student of the Great Depression, and one of the real mistakes that was made at that time was that as monetary velocity was declining, the money supply was not increased,” Ebenstein told Newsmax TV in an exclusive interview.

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“We have that same situation occurring today, which is to say that money isn’t changing hands as quickly as it previously did and therefore you have to have more money in circulation in order to compensate for that decline in the rate in which money changes hands," he said.

"In order to retain stable prices, you actually have to have something like QE,” said the author of “The Indispensable Milton Friedman: Essays on Politics and Economics.”

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Ebenstein points out that Bernanke, who draws criticism for his policies among conservatives especially, is an admirer of Friedman and even spoke at his 90th birthday celebration.

“Others could differ, but I think that Friedman would not necessarily be opposed to what the Fed has been pursuing,” he said.

Obama, meanwhile, probably would not receive much praise from Friedman, were he alive today.

The president’s $831 billion American Recovery and Reinvestment Act of 2009 coupled with his Affordable Care Act, widely known as Obamacare, run up debts while doing little to spur recovery.

Tax breaks championed by Friedman, namely those targeting the middle class, free up money that enters the economy and fuels growth and recovery.

“I think that Friedman would have been completely opposed to the stimulus package. He would have seen it as just pork, support for public employee unions at the state levels and very unlikely to have resulted in any significant stimulus at all,” Ebenstein noted.

Taxes, however, must adjust to meet the needs of the economy, and that might mean asking the richest of the richest to miss out on some tax breaks while avoiding the temptation of calling for across-the-board tax cuts.

“Friedman would not necessarily have supported the effort to keep as low taxes on the wealthy as Romney has proposed. At the top levels of taxation, there is actually relatively low levels of taxation in the United States — the top 400 taxpayers only have a combined tax rate of less than 15 percent, which is less than self-employed people pay in Social Security tax,” Ebenstein stated.

Increasing inequality can be a dangerous thing for a country as a whole, and tax cuts should come with that in mind.

“If there are going to be tax cuts that are going to try and stimulate the economy, that’s where it makes sense, which would be to try and cut taxes on working Americans and those are the Americans who are going to spend those tax funds to the extent that it gets the economy moving again.”

Obamacare would not receive a passing grade either, as it doesn’t do anything to address costs, but rather aims to extend coverage.

For Friedman, health savings accounts similar to policies available today coupled with limiting insurance to catastrophic policies would suffice if costs were cut.

“The problem we have in America is that we spend far more on healthcare as a percentage of gross domestic product than other countries. That really means those resources aren’t available for other uses in the economy and there is a great deal of waste, duplication, bureaucratization and unnecessary expense in the healthcare field and if healthcare is nationalized, it will probably make these problems worse, it won’t make them better,” he said.

“So Friedman would have opposed just about every aspect of Obamacare, from its nationalization to its coverage of all aspects of medical costs.”

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