The Age Of Milton Friedman

Harvard economist Andrei Shleifer has a new paper on The Age Of Milton Friedman that begins with:

The last quarter century has witnessed remarkable progress of mankind. The world’s per capita inflation-adjusted income rose from $5400 in 1980 to $8500 in 2005.Schooling and life expectancy grew rapidly, while infant mortality and poverty fell just asfast. Compared to 1980, many more countries in the world are democratic today.

The last quarter century also saw wide acceptance of free market policies in both rich and poor countries: from private ownership, to free trade, to responsible budgets, to lower taxes. Three important events mark the beginning of this period. In 1979, Deng Xiao Ping started market reforms in China, which over the quarter century lifted hundreds of millions of people out of poverty. In the same year, Margaret Thatcher was elected Prime Minister in Britain, and initiated her radical reforms and a long period of growth. A year later, Ronald Reagan was elected President of the United States, and also embraced free market policies. All three of these leaders professed inspiration from the work of Milton Friedman. It is natural, then, to refer to the last quarter century as the Age of Milton Friedman.

The full paper can be found here. Link via Greg Mankiw.

10 Responses to “The Age Of Milton Friedman”


  • HP -

    What happened to your regular posts with charts and graphs talking about how great the economy is doing.

    could it be that Bush’s 8 years of deficits, high oil prices, unregulated lending and investing. Has created what could be a disastorous credit crunch, recession, stagflation, energy crisis, whe have seen in generations.

    Is there any way Bush can just retire early, set the nation up in some kind of blind trust, move the election up and let the new guy fix these major problems.

    Bush is clearly the worst president ever.

  • Yeah, I could see Clinton and Obama coming in and raising taxes…now that will make the economy so much better. ;-)

  • HP,
    MIke has a great point. What your take on the FEDS intruding on the free market to bail out country wide and many other banks? Should the feds have stayed out? What about a bail out for consumers?

    What has been unfotunate (IMHO) to see was that according to some sources up to 73% of HIGH INCOME Black and Hispanic borrowers were were given sub-prime loans versus 17% of similar-income Whites. In particular when they were steered into subprime loans, when they (subprime loas) were oalmost forbidden in previous times.

  • Gerardo,

    I’m curious Gerardo, do you know anybody who was affected by the subprime? I don’t ask this rhetorically, I ask this because it has been my experience that the vast majority of people affected by subprime…lied on their application. In other words, it wasn’t whether they could afford a 30 year fixed loan vs. a subprime loan…no, it was usually a subprime loan or nothing. And since the market for housing was going up and up, many took a bet on it and lost. It’s that simple. No need for conspiracy theory, no having to see the home buyers as children who couldn’t make decisions for themselves…simply a risk that turned out to go bad.

    And this makes sense given the fact that most of these lending organizations are losing soo much money. Think about it: if these lending organizations went in and intentionally fooled these buyers, wouldn’t you expect them to have made alot of money? The fact that they lost alot of money testifies that many of these subprime loans should not have been made in the first place…a risk that the buyer and lender took…and one they both lost. It reminds me of this quote from a blogger I read, “Firstly, it’s easy to vilify banks for “predatory lending” practices when they sold strange and exotic mortgages to homeowners, but I don’t think that’s fair. “Predatory lending” kind of makes sense when your interest rate is usuriously high, and the borrower has no other options, but it boggles the mind to use that phrase when the interest rate turns out to be too low. Let me put it another way — if a car dealer gives you absolutely cut price financing on a new car, are they “preying” on you in any way, or are you “preying” on their desire to make a sale?”

    This is also what the data shows, see here, quote, “Their research found that as much as 70% of early payment default loans contained fraud misrepresentations on the application.” In other words, banks letting you put “stated income”, not verifying sources, mixed in with the rush of everybody trying to buy a home created what we have now. Its the fault of the banks, yes, but its also the fault of the buyers. Here is Thomas Sowell on how much blame the government deserves.

    Incidentally, I, a brown man, bought my condo in 2003. And I’m still making payments every month, on time.

  • HP,

    you state:
    Think about it: if these lending organizations went in and intentionally fooled these buyers, wouldn’t you expect them to have made alot money? The fact that they lost alot of money testifies that many of these subprime loans should not have been made in the first place…a risk that the buyer and lender took…and one they both lost..

    Krugman on the Wall Street Journal:

    Finally, there’s injustice: the subprime boom involved predatory lending … on an epic scale. The Wall Street Journal found that more than 55 percent of subprime loans made at the height of the housing bubble “went to people with credit scores high enough to often qualify for conventional loans with far better terms.”

    This is what happens happens when you have less regulation—people get taken advantage of. HP, 8 years of BUSH are a wonderful case study of how less regulation isn’t a win-win for everyone. Much like CA deregulation and the Energy industry…
    http://www.cbsnews.com/stories/2004/06/01/eveningnews/main620626.shtml

    I respect you HP, you make some strong arguments sometimes, but unfortunately the “theory” doesnt seem to work very well when put into practice (freer markets). Im glad that as a brown man you got your condo. How do we ensure that “people with credit scores high enough to often qualify for conventional loans with far better terms” get them?

  • You still didn’t answer my question: If what Krugman says is true, then why the foreclosures? Why the bank loses? In other words, if these people had good credit, why were they not able to make their payments? If they couldn’t pay when the very low prime rate goes up…what makes you think they would have been able to pay with a “conventional loan with far better terms”, since their rates would have likely been higher?

    Take for example my situation. I bought my condo at a 30 year fixed, as conventional as a loan could get. But some of my friends could not afford a 30 year fixed…the monthly payments would have been too much for them. So they took out subprime loans, with very, very low monthly payments…often times in the multiple hundreds less per month. In other words, their alternative was subprime or nothing.

    Then you have the fraud…which you did not address. 70% of home buyers lied, straight out lied, on their application. Banks were allowing them to put ‘stated income’, meaning they could just state what their income was, they didn’t have to prove it. Some just flat out lied.

    Then, lastly, you have people who fit into Krugman’s scenario, people who could have afforded higher interest (translates to higher monthly payments) conventional loans, but who decided against it. Why? Well there are many reasons why somebody would rationally choose a subprime over a conventional loan. For example, people who were betting on the housing market to continue to rise and planned to quickly turn around and sell the house making a nice profit, which means they didn’t want to spend more money per month on payments. Or people who were expecting the real estate market to rise, thereby giving them equity in their home, and planned to refinance later…giving them an overall better interest rate. So on and so on.

    In other words, you dont have to take the standard liberal view that home buyers were children who did not know what they were doing and needed the government to hold their hand. There are many rationale reasons why buyers could have had conventional loans but chose subprime loans instead…and more importantly…the fact that the banks and are losing so much money makes me think lenders and borrowers both made bad bets on the future of the real estate market. It was a bubble and like all bubbles both sides overestimated the duration. Its really that simple.

    If you disagree, and are going to respond with another quote about how this really was the case of the ‘powerful greedy banking industry taking advantage of the little guy’, answer me this question: why are the banks losing so much money then? If you are right that they did this to price gouge the little guy, then wouldn’t you expect them to have made record profits? Why then are they making record loses? How do you explain that?

    More importantly, you write, “This is what happens when you have less regulation—people get taken advantage of.”….you also write, “unfortunately the “theory” doesnt seem to work very well when put into practice (freer markets)”. This is a very telling statement. Do you honestly believe that ‘less regulation’ means ‘people get taken advantage of’? Or that free markets don’t work in practice? Is there no limit to how far you would go here?

    Be careful how much weight you give to liberals Gerardo. There is fundamental differences in the way we see the world and these differences matter, especially to us minorities. Left wing economists, to simplify a bit, prefer the European style of capitalism – with more welfare and more regulations. Right wing economists, again to simplify a bit, prefer the USA style of capitalism – with less welfare and less regulations. So here we see how the world would play out if each side got their way.

    And you know what reality shows? The USA style of capitalism is far better for minorities than the European style of capitalism. Take for example unemployment rates, the countries with more European style capitalism have the worst unemployment rates, and the ones with more USA style of capitalism have the least unemployment. See, for example, here, and here. …and you know what? Unemployment is multiple times worse for minorities, see here.

    You might say, ‘but atleast they get free healthcare and more leisure’…sure, but they do so at the expense of the underclass. In other words, I can understand why an upper middle class white guy might prefer the European style of capitalism, but not a lower class minority, as we get the butt end of the deal.

    This pattern directly rebuts your claim. Economic theory predicts that the more capitalist a country, the better off are its citizenry…especially those at the bottom. And if you look at the practice, as my Europe example above shows, it also demonsrates that the more capitalist a country is, the better off are its citizenry (especially minorities) (see here, for the general pattern).

    Going back to the subprime mess…allow me to give you some history on it. History that Krugman leaves out. If you rewind time, say about 10+ years ago, you will see that the problem with lending to the poor was the opposite of today – lenders were not lending enough. Why? Because regulations and requirements were soo stringent that it was not financially beneficial to lend to those at the bottom…what resulted is that many potential poor homeowners were being shut out of the real estate market – again, because of regulations. So what does the politicians and talking heads do?

    Create more regulations to reverse the problem….now the problem is that there was TOO MUCH lending to the poor. This is a problem I have with the likes of Krugman, Stiglitz and many liberal economists in general. They all tend to get on their high horses and argue both sides of the argument as if life didn’t involve trade offs AND without giving specific policy recommendations either way. Ten or so years ago it was that “credit rationing meant that banks made too few loans to high-risk borrowers”…now its the opposite. The problem is that there is an inherent trade-off involved…the more regulations you make on lending to the poor the less lenders will be willing to lend to poor people. But the less regulations the more you have a risk for bubbles sweeping people into bad loans. So how you balance those two concerns is tricky…not something that makes one person evil and the other good. But Krugman and their ilk will always pontificate on both sides of the issue, never suggesting what to do. What do you think would have happened if Greenspan did as Krugman suggests, and created more regulations making it difficult to finance “high-risk borrowers” (read: poor)? You would get Krugman now complaining about all the “high-risk borrowers” shut out by the ‘free market’. In other words, the world is only good when Krugman, as King, would rule it.

    Remember, just as subprime is now making alot of people lose their homes, it is ALSO the reason why alot of people were able to buy a home who otherwise would not have. I know a few friends who are certainly in that positive category.

    So how to balance that delicate trade-off? First its important to remember that nobody is in a better position to know what decisions to make for their financial futures than consumers themselves. They are certainly in a better position than politicians far removed from the subtleties of it all. So on situations like this, unless I see some pressing need otherwise, I always err on the side of less regulations and more opportunity for ‘high-risk borrowers’ – exactly the opposite conclusion as Krugman.

    Fore more on the subprime mess go here, here, here, here and here.

  • HP you ask

    “Do you know anybody who was affected by the subprime?”

    The answer is for everyone is yes. We are all affected by this. The fact that you are asking about this makes me wonder if you really understand what happens outside of your Econ classroom in the real world. This is affecting everybody in the world.

    Banks bundled these subprimes into CMO’s and sold these investments to financial institutions. These investments were worthless when the rates adjusted and default hit. Due to these worthless investments we now have one of the most prestigious Wall Street firms in Bear Stearns being sold at $2 a share for the sole purpose that if Bear Stearns were to go under the economy is done. We have a sever credit crisis. This could be the worst credit crisis since the Great Depression. I am not exagerating. We have enormous margin calls going on now. Our financial markets are teetering on collapse now.

    Don’t you think the government was asleep at the switch with their deregulation.

    The best reswponse you can give is that Clinton and Obama may raise taxes, you like Bush do not understand the depth of our financial problems right now.

    Our financial markets are heading for the s**t house.

  • Michael,

    If you look more closely at the context of my question you will see that it was precisely because I know so many people affected by this that I asked the question.

    Also, you write, Don’t you think the government was asleep at the switch with their deregulation. What deregulation are you talking about? The banking and financial industry is one of the most regulated parts of our society. In other words, nobody can win with the ‘more regulation’ crowd…even when the most regulated area of the economy go bad the problem was always ‘too little regulations’.

  • The margin regulations have been loosened significantly. Bear Stearns collapsed because they had fewer assets supporting their debt than was previously required.

  • I still wonder what the overall affect was…again, as I said above, I also know many people who now own homes (and are paying their mortgage successfully every month) who would otherwise have not been able to without subprime.

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