Friedman Makes a Mistake?

My first exposure to the ideas of Milton Friedman came when I was 13 years old at summer camp. My dad mailed me a quote relating government spending to gift-giving. The gist was that when you spend your own money on a gift for yourself, you spend thriftily and choose wisely. When you spend someone else's money on a gift for yourself, you are less careful about how much you spend, but still careful about the choice of gift. When you spend someone else's money on a gift for someone else, you are careless with both the amount you spend and the gift you choose. The final scenario represents the government spending other people's money (taxes) on programs not intended for citizens. This explains why so much wasteful spending occurs in Washington.

At that moment, I became a capitalist. The ideas made pure sense. Ever since, I've held Friedman as the gold-standard of a modern intellectual: brilliant but easy to understand. However, the way he outlines his ideas in layman's terms has lead some to criticize him for oversimplifying complex concepts. Much to my sadness, I encountered an example of oversimplification in a quote attributed to Friedman. The quote goes, "If a tax cut increases government revenues, you haven't cut taxes enough." Assuming that Friedman has faith in the Laffer curve, a basic model generally used to defend tax-cuts, he has overlooked the basic format of the model itself.

Refer to graph: If taxes originate at level t1, well above the optimum revenue-generating value t*, and are lowered to level t2, overall revenue has been increased. However, an additional tax-cut would not further raise revenue as Friedman suggests, but would continue to depart from the optimal level. Unless Friedman assumes that all tax-cuts are perpetrated slowly and continuously (and it is impossible to instate tax-cuts in such a manner), his claim is inaccurate.Maybe I am wrong to criticize Friedman on such a technical matter. His claim is true for the entire right half of the curve. Also, I don't believe that the U.S. has operated at a level to the left of the optimum in recent years (who's ready for a second gilded age??). Nor do we have to worry about taxing too little with the way this congress is spending. President Bush is also responsible.

My recent wave of interest in Milton Friedman stems from this post from Cafe Hayek. Follow the link to video of Friedman being interviewed by Phil Donahue. Needless to say, Donahue gets owned.