Milton Friedman on the Size of Government

Tunku Varadarajan interviews two economists in love. I once met the delightful couple – Milton and Rose Friedman – some 20 years ago and was very impressed. I had met their non-economist son at dinner a year earlier and he learned economics from two masters. So I enjoyed this:

Maladies behind us, we moved to economics, and here I made a reflexive apology for not being an economist myself. “You mean you’re not a trained economist,” was Mr. Friedman’s comeback. “I have found, over a long time, that some people are natural economists. They don’t take a course, but they understand – the principles seem obvious to them. Other people may have Ph.D.s in economics, but they’re not economists. They don’t think like an economist. Strange, but true.”

When Dr. Friedman discussed the role of government intervention, he was rightfully noting that it’s more than just capturing government expenditure to GDP. But then he tries to tell us government spending has doubled – not distinguishing between government purchases versus transfer payments:

Here, Mr. Friedman explains “the story of the postwar period” in the U.S. “In 1945-46, intellectual opinion was almost entirely collectivist. But practice was free market. Government was spending something like 20%-25% of national income. But the ideas of people were all for more government. And so from 1945 to 1980 you had a period of galloping socialism. Government started expanding and expanding and expanding.” Mr. Friedman stopped, as if deciding whether to use the word “expanding” a fourth time, before continuing: “And government spending went from 20% to 40% of national income.

As our graph shows, government purchases as a share of GDP have not gone up. Yes government expenditure was 31% of GDP (not 40%) but the increase from the late 1940’s is mostly an increase in Social Security benefits – which Dr. Friedman labels the “welfare state”. And it is true that government spending to help citizens pay for their health care is expected to rise – especially given President Bush’s inability to even consider efficiency improving health care policies. But I have to protest that an able economist like Milton Friedman has carelessly dusted off rightwing spin numbers on the size of the government in what otherwise could have been an interesting interview.

Mark Thoma has some of the highlights.