Milton Friedman argues against U.S. economic stimulus

October 23, 2001

Free Market Foundation

Nobel laureate Milton Friedman says President Bush’s proposed stimulus package should be rejected. The package calls for spending increases and tax reductions totalling $60 billion to $75 billion in addition to emergency assistance of $40 billion already approved.

Here are some of the reasons he gives for rejecting the plan:

The economic slowdown to date has been relatively mild with unemployment still at levels that more often accompany prosperity than are associated with recession.

The U.S. Federal Reserve has already cut the federal funds rate from 6.5 percent to 2.5 percent and that stimulus is only now beginning to have an effect.

Any fiscal stimulus passed now is not likely to affect actual spending or tax receipts until after the economy has already started to recover and to come full flood only when the economy is expanding.

The evidence is that using government spending to stimulate the economy which he refers to as “crude Keynesianism” doesn’t work, because it involves less repayment of government debt, or incurring more debt.
In either case, private individuals have less to spend on private projects which are likely to be more productive than government projects.

Finally, the effect of tax reductions is likely to be felt when the economy is already on the mend.

Source: Milton Friedman (Hoover Institution), No More Economic Stimulus Needed, Wall Street Journal, October 10, 2001.

For text (WSJ subscribers)
http://interactive.wsj.com/articles/SB1002671888556045120.htm

For more on Economic Growth and Recessions http://www.ncpa.org/pd/economy/econ4.html

FMF\16 October 2001