From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

“Three Views of Nixonomics and Where It Leads” by Milton Friedman, Paul A. Samuelson, and Henry Wallich Newsweek, 31 January 1972, p. 74-75 ©The Newsweek/Daily Beast Company LLC

In a crucial year for the U.S. economy, what are the key issues—and how will they be resolved? Newsweek put the question to its three economic columnists monetarist Milton Friedman of the University of Chicago, Nobel laureate Paul A. Samuelson of Massachusetts Institute of Technology, and Yale’s Henry Wallich. Highlights of the ensuing debate:

1. What marks would you give President Nixon for economic performance in 1971?

FRIEDMAN: Compared with the New Economists' promised land, zero. Compared with my hopes and expectations, 75. Compared with what his 1968 opponent would have done, 100 (a foolish question deserves a foolish answer).

Monetary policy in 1971 was terrible—explosive for seven months, then highly restrictive—but the culprit was the Federal Reserve Board, not Mr. Nixon. The budget deficit was too high, but Congress had something to do with that. The President’s bold action in closing the gold window was highly desirable and long overdue; the import surcharge proved to be an effective bargaining tool that has now been dropped, after it succeeded in shaking loose the pattern of exchange rates.

Mr. Nixon’s major mistake was to impose direct controls on wages and prices. By creating widespread uncertainty and threatening to distort price relationships, they chilled the healthy recovery that was already under way. If he had stuck to his old game plan, I believe that unemployment would be lower today than it now is, and inflation no higher.

SAMUELSON: President Nixon gets a 69—that’s a C+ in my book. Until mid-August his grade was a clunking D in economic policy, both for effort and performance. But his new economic policy pulled up his average for the year. Let me add that Congress earned a B, both for forcing on the President the powers he needed and for toning down his lopsided, pro-business tax proposals. On the Nixon squad, rookie Connally easily walked off with the most-valuable-player award. The sizable depreciation of the dollar and the successful wage-price freeze robbed the Democratic opposition of much of its thunder.

WALLICH: President Nixon has clearly earned the top grade of honors. He stood by the principle of freedom of markets—which for the long run must be our guide—as long as there were prospects of curbing inflation with reasonable dispatch. When those prospects dimmed, he switched. He also had the courage to recognize that the economy was not expanding on schedule and required additional stimulation. He moved to devalue the dollar—an action generally regarded as politically damaging—when that became necessary.

If the President can be faulted on anything, it is that even before taking office he allowed his preference to become known for what was later called “gradualism.” This discouraged those of his advisors who disagreed, and may have deprived the President of their dissenting advice. The President should seek conflicting advice, if he wants to keep his options open. His skill will be

1 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

measured by his ability to see when the advice that he has been following begins to be wrong in a particular instance.

2. The standard forecast for 1972 is amazingly uniform and very bullish—about 6 per cent in real economic growth, with only 3.3 per cent inflation. Do you agree?

SAMUELSON: Almost, but not quite. It strikes me as about three-quarters of a point high on real growth and a bit low on price inflation. But I’d rather go with the fashionable forecast than with the pessimistic forecast of the monetarists.

FRIEDMAN: I expect recovery, to continue, but I think the monetary freeze of the past five months and the adverse effects of price and wage controls will make the recovery pace decidedly slower than the consensus forecast.

WALLICH: The consensus is somewhat misleading; there is a good deal of diversity among the forecasts of its major components, such as personal consumption, business investment, housing and government spending. In fact, if one makes up a “high” and a “low” GNP estimate by adding up the most optimistic and most pessimistic component estimates, the consensus collapses.

With so much excess capacity in the economy, my view is that the consensus forecast is too optimistic.

3. Must we accept a permanent higher rate of unemployment, defining “full employment” as a jobless rate of 5 per cent rather than 4 per cent?

SAMUELSON: That’s the figure Mr. Nixon’s economists are using. If you can’t deliver the pie in the sky that you promised, you’d better redefine pie!

It is true that because of the greater proportion of young people and married women in the labor force, most labor experts agree that a 4.5 per cent unemployment rate may now correspond to the 4 per cent goal of President Kennedy’s time. But that’s a big difference from 5 per cent or more. There are at least 500,000 extra unemployed in the Republican game plan.

To bring down the 4.5 per cent feasibility level will take (1) more and better retraining programs, (2) more government jobs of last resort that utilize the unskilled and (3) crash programs against discrimination by race, sex or absence of a union card.

WALLICH: For gauging inflation potential, the over-all unemployment rate is meaningless— blown up by the new influx of women and teen-agers. The way to deal with them is not to roast the economy over a fire of inflation, but to take them out of the unemployed category by placing them in training courses or offering them temporary public-service jobs.

FRIEDMAN: The total unemployment figure is at best highly misleading. Most persons classified as unemployed are actually between jobs, or between school or housework and jobs, not out of work for long periods.

We should not try to set a numerical goal. Rather, we should adopt stable monetary and fiscal policies and seek to make the labor market as free as possible. Government measures are the

2 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

primary cause of unnecessary unemployment—particularly minimum-wage laws and measures granting special immunities to trade unions. Eliminate these, and the unemployment rate, particularly among blacks, would drop sharply.

4. How well are wage and price controls working?

WALLICH: At best, so-so. The Pay Board has been unable to be tough, because it is trying to avoid a walkout by labor. As a result, price control has been tougher than wage control—which is, in turn, tough on profits.

In the long run, a system that is regarded as seriously inequitable by either side will break down, through political pressure or open defiance. But we are very far from the serious distortions, such as shortages and black markets, that some had predicted. Basically, the continued workability of the controls will depend on our not putting too much pressure on them by excessively expansionary budget and credit policies.

SAMUELSON: Phase one worked—luckily—well, but the Administration’s handling of the phase-two mechanisms would make a Balkan Graustark look efficient by comparison. Planning was shoddy and cynical; staffing was woefully inadequate. Now the honeymoon is over; the controls, I fear, will increasingly spring leaks from now on, becoming more inequitable and more ineffective.

FRIEDMAN: Fortunately the controls are mostly window dressing, affecting the index numbers much more than actual prices and wages. They will continue to be a nuisance, rather than a serious obstacle to the economy, so long as there is no really strong inflationary pressure. Experience in other countries suggests that for about a year such controls generally look good; after about two years, they collapse.

5. Will wage and price controls be a permanent necessity?

FRIEDMAN: The market provides an effective permanent form of control over wages and prices. Replacing the market with sweeping government controls would be certain to halt economic growth and to destroy personal and political freedom. If the U.S. becomes a collectivist society it will not be because the socialists win any arguments; it will be via permanent wage and price controls.

WALLICH: Trying to substitute wage and price controls for sound monetary and fiscal policies may be tempting to some, but it is a prescription for disaster. A market-oriented form of restraint on wages and prices would be something else. For instance, a tax on corporations granting excessive wage increases would stiffen the backbones of employers who now find it easier to put pressure on the consumer than on the union.

SAMUELSON: If permanent price controls could solve the problem of “stagflation,” they would be a necessary evil. But there is little in the experiences of other countries to suggest to anybody but John Kenneth Galbraith that permanent controls can be made to work and produce the desired results in our mixed economy.

3 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

I suspect that, before or after the election, the American people will turn against controls. The next phase will be saying, “What’s so bad about a little inflation?” We will be introducing escalation devices, such as cost-of-living adjustments in social security, to make creeping inflation more tolerable. The phase after that, I fear, will be stop-go driving of the economy with occasional flings at wage-price controls. I hope I am wrong, but that is what experience suggests. And the world can survive it.

6. Will the devaluation of the dollar enable the U.S. to compete evenly in world trade?

FRIEDMAN: The lowering of the dollar’s price in terms of foreign currencies will stimulate U.S. exports and curb U.S. imports. It would have been better, however, to permit currency rates to float freely without official pegs. So long as we have no commitment to sell gold or anything else, including foreign currencies, at a fixed dollar price, we can have no balance-of-payments problem.

The settlement did not cure the fundamental defect of the prior arrangements—rigid exchange rates, plus the unwillingness of countries to let internal policies be determined by the balance of payments. In consequence, the present structure cannot last.

The U.S. and all other countries would gain from a reduction in barriers to trade, because that would promote the expansion of both exports and imports. It would enable all of us to enjoy more fully the advantages of the international division of labor.

WALLICH: The devaluation will help the U.S. significantly, but we didn’t get as favorable terms as we should have, and further concessions on trade barriers are needed. They would not only help our over-all balance of payments but are critical in alleviating particular trouble spots in our export picture. They would also forestall further protectionist measures in the U.S., for which there is no justification but which may nevertheless be tacked as riders on a gold devaluation bill.

SAMUELSON: The Washington agreement was as good an outcome as anyone could have expected. No jury of international experts could agree that any greater depreciation of the dollar could be justified at this time. And given the three or more years that it takes for the medicine to take effect, most such experts think that this dose will work—which is not to deny that there are some trade barriers, here and abroad, still needing to come down. But, even if dollar depreciation works perfectly to restore balance-of-payments equilibrium and the general competitiveness of our work force, it cannot be expected to protect all the jobs in textiles, shoes, steel and the other American industries that have been losing their comparative advantage. Politically, I must fear the forces of protection even if dollar depreciation works as the doctors hope it will.

7. How would you set economic policy for this year?

SAMUELSON: Our prime need is to shape fiscal and monetary policies toward reducing the slack in the system, converting the gap of unused human and plant resources into the public programs and private living standards so long neglected. The test will come as we begin to make genuine progress toward the goal of high employment, and the voices of the gradualists begin to warn against too much progress.

4 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

WALLICH: Early in 1972 there is still room for stimulative policies. But we want both substantial progress toward achieving high employment and progress toward reasonable price stability. As we approach the capacity ceiling, the budget must be brought closer to balance—if necessary, into surplus—and the Fed must become less accommodating. We must make sure that the gains achieved are not frittered away.

FRIEDMAN: I would set policy the same as I would have for 1970 and 1971: steady and moderate monetary growth, lower government spending and lower taxes, with a roughly balanced full-employment budget; elimination of price and wage controls—both the new ones established by President Nixon and such older ones as farm price supports and regulated air fares. The key need in policy-setting is to reverse the growth of government, to leave more of our incomes for us to spend in accordance with our own values, to reduce the extent to which our Big Brother in Washington runs our lives for us.

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Compiled by Robert Leeson and Charles Palm as part of their “Collected Works of Milton Friedman” project.

Reformatted for the Web.

10/25/12

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