| There was a symmetry to the "thumpin’" suffered by the Republicans in the recent U.S. mid-term elections and the death last week of economist Milton Friedman. After all, it was Friedman who pioneered the theory of monetarism in the 1960s that subsequently led to the neo-conservative revolution among western governments a decade later. In turn, President George W. Bush is a direct heir. But with Friedman’s passing and the imminent collapse of Republican rule in America, perhaps — just perhaps — a new political era is in sight.
The congressional elections were disastrous for the incumbent Republicans. They lost control of both Houses, returning domestic political power back to the Democrats for the first time since the early 1990s. At the same time, Bush’s personal approval ratings continue to wallow in the low 30s. It was finally conceded that all was not going to plan. Bush accepted Secretary of Defense Donald Rumsfeld’s resignation and declared himself "open to any ideas" on how to extract America from Iraq.
Yet as a symbol of change, the death of Milton Friedman, at age 94, may prove to be more significant than the shifting position of Bush Jr. More than four decades ago, Friedman broke with the post-war Keynesian consensus that governments should intervene directly in the economy, via fiscal policy, in order to prevent a repeat of the Great Depression.
On the contrary, argued Friedman, it was precisely government intervention that had made things worse in the 1930s by restricting the supply of money beneath the level of demand for goods and services. "The Federal Reserve," he claimed "was largely responsible for converting what might have been a garden-variety recession… into a major catastrophe. Far from the Depression being a failure of the free-enterprise system, it was a tragic failure of government."
Friedman’s railing against government intervention initially found few supporters in the West, including Canada where Prime Minister Pierre Trudeau embodied the view that government programs and policies (e.g. the Federal Investment Review Agency, Multiculturalism, Canadian Content regulations, etc.) could and should advance the national interest.
In the wake of the 1973-74 oil crisis, however, in which OPEC quadrupled the price of crude virtually overnight, circumstances had dramatically changed. Western economies were plagued by steep rises in both inflation and unemployment at the same time, leaving Keynesian orthodoxy without either remedy or response. Three decades of almost unbroken prosperity came to a sudden halt.
It was against this backdrop that Margaret Thatcher, a convert to monetarist thinking, brought the British Conservative party back to power in 1979. Over the next eleven years, she led a revolution that transformed Britain beyond recognition. Claiming that successive post-war Labour governments had allowed wage levels to far outpace increases in productivity, even as they poured tax revenues into generous state programs that looked after the sick, elderly and needy, Thatcher now argued that only by restricting the money supply — i.e. cutting back on government spending — could Britain’s economic competitiveness be restored.
In the short run, this meant saying goodbye to many of the benefits of the post-war welfare state (support for the unemployed, the poor, the homeless, etc.), but in the name of "short-term pain" electors bought the promise of "long-term gain" and returned Thatcher twice more in the 1980s.
Margaret Thatcher may have been many things, but stupid wasn’t among them. Especially under the close advice of fellow monetarist Sir Keith Joseph, she had developed a deep understanding of Friedman’s ideas. That many of her opponents found her political philosophy to be cold, heartless and uncaring did not, in the end, mean that she was wrong or wrong-headed.
However, as other so-called "neo-conservative" governments sought to emulate her example and success — for example, in Alberta under Ralph Klein and in Ontario under Mike Harris – the complexities of monetarism were inevitably dumbed down in order to be sold to electorates. Eventually, Friedman’s ideas were reduced to such linear equations "lower taxes = good" and "big government = bad." Today it is almost impossible to find any Conservative or Liberal candidate in Canada who has not, at one time, endorsed these notions.
Yet neither lower taxes nor reduced government services have improved the well-being of Canadians significantly, if at all. Take the recent one per cent cut in GST promised and delivered by Prime Minister Stephen Harper. Let’s assume, for the sake of argument, that each Canadian has, on average, a disposable income of $20,000 to spend as he/she wishes. At seven per cent, the GST would claim $1400 of this expenditure; at six per cent, $1200. A one-per-cent cut in GST would therefore save each individual just $200. On the other hand, with approximately 30 million Canadians, this small reduction in GST represents a loss of federal revenue of $6 billion.
The standard argument in favour of tax reduction is that individuals know how to spend their own money better than governments do. I’ve never been quite sure where this line of thought originated, but in any case it’s beside the point. There’s little in the way of health, education, roads, etc., that an individual’s $200 can buy. It is only by agreeing to forgo a certain amount of personal wealth, and instead pooling it for the good of the greater community, that we can provide such services.
Indeed, all that lower taxes have brought us is a greater sense of insecurity. Over the past two decades, cutbacks in the very same government programs that former generations of Canadians struggled to secure have resulted in ever greater numbers of the homeless, the jobless poor, the working poor, of the de-institutionalized mentally and physically ill. In fact, the only real area of growth in state intervention has been in the recruitment of police officers to deal with these problems and an increased willingness to incarcerate those who fall foul of the law as a result.
This would strike Milton Friedman as ironic, I suspect, for in addition to being the father of monetarism he was also a committed libertarian. He supported the decriminalization of drugs and prostitution, and also led opposition to the U.S. draft during the 1970s. "I am a libertarian with a small l and a Republican with a capital," he once remarked. "And I am a Republican with a capital R on grounds of expediency, not on principle."
At the moment, the Bush regime remains wedded to its monetarist approach, notwithstanding the fact that the U.S. public debt is currently more than $8.5 trillion. More than Iraq, changing this policy will be the true test of the Democrats. |
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