Tape 48 - Income Tax, Economic Models, Canada vs. US in Cost Depression, Pollution
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- | The Chicago Tribune, welcoming you again | 0:02 |
on behalf of Instructional Dynamics, | 0:04 | |
to another visit with the distinguished economist, | 0:06 | |
professor Milton Friedman of the University of Chicago. | 0:09 | |
And Dr. Friedman and I are recording this interview | 0:12 | |
on April 15th, which of course is a significant date | 0:15 | |
in this country with it's income tax connotations. | 0:20 | |
Dr. Friedman, you have some interesting thoughts | 0:23 | |
on the income tax, which you express many times. | 0:25 | |
But, I wonder if you would bring us up to date | 0:28 | |
on your thinking. | 0:30 | |
- | Well the main thing that impresses me | 0:32 |
about the income tax as it now exists, | 0:34 | |
is that I just wrote a column for Newsweek | 0:38 | |
on it in which the last sentence | 0:42 | |
expresses a point I want to make now. | 0:44 | |
The last sentence says, "this is an exercise | 0:46 | |
"in mass masochism, with few parallels | 0:49 | |
"in the annals of mankind." | 0:53 | |
And what I have in mind by that is | 0:54 | |
that we all of us struggle for the past few weeks | 0:56 | |
with this incredibly complicated tax. | 0:59 | |
We have an army of people filling out returns, | 1:01 | |
an army of lawyers and accountants advising us | 1:04 | |
how to reduce our taxes, and so on. | 1:07 | |
We have an army of people in the Internal Revenue office. | 1:09 | |
And the question is, why? | 1:13 | |
For what are we imposing this on ourselves? | 1:14 | |
Why are we torturing ourselves? | 1:16 | |
And the answer will come back, of course, and not evilly. | 1:18 | |
Well we're doing it either in order to have equity | 1:21 | |
in the burdens on people, | 1:24 | |
or to raise revenue for Government. | 1:26 | |
But the fact is, that the most incredible complexities | 1:28 | |
of our present income tax do not in fact | 1:33 | |
either produce equity or revenue. | 1:35 | |
They are simply a relic of something | 1:37 | |
that grew like Topsy over time. | 1:40 | |
If you look at this, what you have | 1:43 | |
is a combination of tax rates | 1:45 | |
that are very high on paper, going from 14 to 70%. | 1:47 | |
And then in order to assure that those | 1:51 | |
high tax rates don't really bite too hard | 1:53 | |
or destroy incentive too much, you'll have | 1:57 | |
a mass of loopholes, special treatments | 1:59 | |
of tax exemptions, and so on. | 2:01 | |
And the combination offset one another, | 2:03 | |
both with respect to equity, and with respect to revenue. | 2:06 | |
That is, people who get exactly the same income | 2:09 | |
but one gets it let's say from wages, | 2:12 | |
and the other gets it in a form in which | 2:15 | |
he can convert it into capital gains, | 2:16 | |
will pay vastly different taxes. | 2:19 | |
And if you look across income levels, | 2:20 | |
the statistics of income make it clear | 2:22 | |
that the high rates yield no revenue, | 2:24 | |
but the average rate of tax paid is highest | 2:26 | |
in the middle income classes. | 2:29 | |
I don't mean middle in the sense of 5,000.00. | 2:30 | |
I mean middle in the sense of 40 or 50,000.00. | 2:32 | |
- | Yes. | 2:34 |
- | And then go down, as you get | 2:35 |
up into the very much higher classes. | 2:36 | |
And indeed I made an interesting calculation | 2:38 | |
in preparation for this Newsweek column | 2:41 | |
that brings out my point very clearly. | 2:43 | |
And that is, the latest figures | 2:45 | |
that are available are for the year 1967. | 2:47 | |
If you in that year had replaced all rates | 2:51 | |
above 25%, with a top rate of 25%, | 2:54 | |
So you left the tax schedule, | 2:58 | |
the marginal rate schedule, as it was, | 3:00 | |
except wherever you had a number | 3:03 | |
higher than 25, you put in 25. | 3:04 | |
Suppose you had done that. | 3:06 | |
And suppose every tax payer had reported | 3:08 | |
exactly the same amount of income | 3:10 | |
that he actually did report. | 3:12 | |
There was no other change. | 3:13 | |
Well then it turns out that this | 3:15 | |
would have reduced total revenue by 8%. | 3:16 | |
Well now that's a gross exaggeration, | 3:20 | |
because as all of us subscribers recognize | 3:23 | |
if the top rate were 25%, then it | 3:26 | |
would pay people to report more income, that is to say. | 3:29 | |
There's no use suspending 40 cents, | 3:33 | |
to reduce your taxable income by a dollar, | 3:35 | |
if that's only going to save you 25 cents in revenue, | 3:38 | |
while there is a great deal of sense | 3:40 | |
in spending 40 cents if that's going to | 3:42 | |
save you 50 cents, or 70 cents in revenue, | 3:44 | |
the tax that is it presently. | 3:47 | |
As a result, it would be in the interest | 3:49 | |
of tax payers to report a larger income. | 3:51 | |
And that would make up some of the revenue. | 3:53 | |
Indeed, it's not at all impossible. | 3:55 | |
If you left the law exactly as it is, | 3:58 | |
and simply put 25% rate for all the higher rates, | 4:01 | |
you'd raise as much revenue as you now do. | 4:05 | |
It turns out that in order for that to happen, | 4:07 | |
the people who now pay rates higher than 25%, | 4:10 | |
leaving out the people at the bottom, | 4:14 | |
would have to report 33% more income | 4:15 | |
than they now report, taxable income, | 4:19 | |
that is not gross income, but taxable income. | 4:22 | |
And it seems to me, that's not at all | 4:24 | |
unreasonable that they would do that. | 4:26 | |
Well, another illustration of this kind of thing | 4:28 | |
is a calculation I made some years ago, | 4:30 | |
that in 1929, when the top rate was 25%, | 4:32 | |
you had adjusting for the difference | 4:37 | |
in income between then and now, | 4:40 | |
adjusting for the change in population, | 4:43 | |
you had 10 times more people reporting incomes | 4:45 | |
of the equivalent today of over a million dollars a year. | 4:48 | |
Now you cannot tell me that the actual | 4:51 | |
income distribution has changed that much. | 4:53 | |
The main reason is, that people are ingenious | 4:55 | |
and they have found ways of not reporting those incomes. | 4:58 | |
So my own belief is that those high rates | 5:01 | |
yield neither equity nor revenue, | 5:04 | |
and that everybody would be better off | 5:06 | |
if we made a deal in which we eliminated the high rates, | 5:08 | |
and also eliminated the loopholes | 5:13 | |
and the special deductions and the special treatment. | 5:15 | |
If you did that, if you for example | 5:18 | |
thought of having what I would prefer, | 5:20 | |
which is a tax on income above exemptions | 5:22 | |
with no special treatment, except for | 5:26 | |
strict occupational expenses, | 5:28 | |
I have no doubt whatsoever that you could | 5:30 | |
double present exemptions. | 5:32 | |
You could have a flat rate of not more than 20%, | 5:34 | |
and raise as much revenue as you now raise | 5:37 | |
without all of this fuss, without all | 5:39 | |
of this business of enormous complications. | 5:40 | |
Now the people would really be hurt by this temporarily, | 5:43 | |
pardon the lawyers and accountants. | 5:46 | |
However, it's not even clear they would be hurt, | 5:50 | |
because first of all their own taxes would | 5:52 | |
be adjusted more reasonably. | 5:54 | |
They would waste less of their income | 5:56 | |
in getting tax evasion gimmicks. | 5:58 | |
And in the second place, | 6:00 | |
these are very clever intelligent able people, | 6:01 | |
and I don't think they'd have much trouble | 6:03 | |
fitting into our economy and getting themselves | 6:06 | |
a good job somewhere else. | 6:08 | |
- | It's extremely interesting, and it sounds so sensible. | 6:10 |
Do you think there is any chance that such a revision | 6:13 | |
in our income taxes that you suggest | 6:16 | |
might someday be adopted? | 6:18 | |
- | There is a chance, but unfortunately it's not very great. | 6:19 |
The reason is, a political one. | 6:22 | |
See there is a potential deal between | 6:24 | |
what you might call the left and the right. | 6:28 | |
What you would call what people, I don't like those terms | 6:31 | |
because they are very undescriptive, | 6:34 | |
but it will help us to use them. | 6:35 | |
The people whom you would regard on the right | 6:36 | |
would be willing to give up the loopholes | 6:39 | |
and the special deductions, in return for getting | 6:42 | |
a low level of less steeply graduated rates. | 6:45 | |
On the other hand, the people you would call the left, | 6:50 | |
would be willing to give up the highly graduated rates, | 6:52 | |
if they could get an elimination | 6:56 | |
of the loopholes and the deductions. | 6:57 | |
So you would think that there was a deal | 6:59 | |
to be made between the two groups. | 7:01 | |
The problem is, that neither group trusts the other. | 7:03 | |
And both groups are right. | 7:06 | |
The people on the right would say, | 7:08 | |
well we'll give up our loopholes and deductions | 7:10 | |
for lower rates, but the next thing we know is | 7:12 | |
that those rates will start creeping up again. | 7:14 | |
And the people on the left say, | 7:17 | |
we'll give up the higher rates | 7:18 | |
for those loopholes and deductions | 7:19 | |
and the next thing we know the loopholes | 7:21 | |
and deductions will start creeping in. | 7:22 | |
And both sides, I think, are right. | 7:24 | |
That is what would happen. | 7:26 | |
That's how we got into our present situation. | 7:27 | |
And therefore I have for long believed | 7:29 | |
that the only really feasible way | 7:31 | |
of getting a fundamental reform | 7:34 | |
would be through the very difficult course | 7:37 | |
of amending the constitution. | 7:40 | |
If you change the income tax amendment, | 7:42 | |
something as follows which said, | 7:44 | |
congress may enact an income tax provided first, | 7:47 | |
that the base of the tax allows only occupational expenses, | 7:51 | |
plus the personal exemption as a deduction. | 7:56 | |
And second, that the maximum rate imposed | 7:58 | |
is not more than twice the minimum rate. | 8:01 | |
- | You don't even have to require | 8:04 |
to be a flat rate, but something. | 8:06 | |
But now an income tax amendment along those lines, | 8:08 | |
would as it were guarantee both sides, | 8:11 | |
that the other side wouldn't renege on the deal. | 8:12 | |
And in principal, it seems to me there is | 8:15 | |
a possible backing for that kind of an amendment. | 8:18 | |
But as a piratical political matter, | 8:22 | |
it's very had to see where the pressure group | 8:24 | |
will come from that will go after that amendment. | 8:27 | |
And that's the real problem in politics, | 8:32 | |
is you have to have a pressure group | 8:33 | |
in order to get something done. | 8:35 | |
And unfortunately each one of us | 8:36 | |
yells and screams and tears our hair | 8:38 | |
between April 10th and April 15th. | 8:40 | |
Then we breathe a sigh of relief and go about our business. | 8:42 | |
- | Very interesting comments on the subject | 8:46 |
much on our mind today, April 15th. | 8:48 | |
Dr. Friedman, we have some interesting | 8:51 | |
questions sent in by subscribers. | 8:53 | |
Shall we get into some of those at this time? | 8:55 | |
- | Fine. | 8:57 |
- | May I read this one? | 8:58 |
The question reads as follows, "Governor Sherman Maisel," | 9:01 | |
and he's talking to a member of the board of governors | 9:04 | |
at the Federal reserve system, | 9:06 | |
"said to me on March 12th, 1970, | 9:07 | |
"that you, Dr. Friedman, have never made | 9:10 | |
"a correct economic forecast, and that any | 9:14 | |
"econometric model is a more reliable guide | 9:17 | |
"than you're projections." | 9:20 | |
In particular, he said, "your forecast | 9:22 | |
"for the rate of inflation in 1969 | 9:25 | |
"was much lower than the rate which occurred. | 9:29 | |
"Please comment on your relative success | 9:32 | |
"in economic forecasting and the relative merits | 9:34 | |
"of econometric models." | 9:37 | |
- | Well that's a straight forward direct question. | 9:39 |
- | That's a good challenge. | 9:41 |
- | Yes, I hope Sherman Maisel is little bit more careful | 9:42 |
in the comments and suggestions he makes | 9:46 | |
for Federal reserve policy than he is | 9:48 | |
in these off-hand comments. | 9:50 | |
There are two different parts of it. | 9:52 | |
One is about my own record, | 9:53 | |
and the other is about econometric models. | 9:54 | |
I don't really want to spend much time | 9:57 | |
on the first half of those. | 9:59 | |
I can only say that the real test | 10:00 | |
to that is not what people say, | 10:02 | |
but to look at the record in print. | 10:05 | |
In the book I published a couple of years ago, | 10:07 | |
Dollars and Deficits, I reprinted quite | 10:11 | |
a number of memos, including some memos | 10:13 | |
that I had written for the Federal Reserve board | 10:16 | |
in meetings and consulting meetings, | 10:18 | |
in which I did have predictions in print. | 10:20 | |
And in each case I tried to add a footnote | 10:23 | |
indicating that what actually happened in reality | 10:26 | |
to compare with the forecast. | 10:30 | |
Anybody who is interested in checking up on me, | 10:32 | |
I suggest that he go and look at the book, | 10:34 | |
and those footnotes, and make his own judgment. | 10:36 | |
And as to the more recent record, | 10:39 | |
I might just refer to a Newsweek column | 10:41 | |
I had on August 18th, 1969, entitled Monetary Overkill. | 10:43 | |
Now the burden of that Newsweek column | 10:49 | |
was that the Fed was engaging in two tight a policy, | 10:52 | |
and if it continue we were going | 10:55 | |
to have a serious economic problem. | 10:57 | |
And I might quote a few sentences from it. | 10:59 | |
"Let the Fed continue on its present course | 11:02 | |
"much longer however, and the economic | 11:04 | |
"consequences are sure to be serious." | 11:06 | |
Well now I think almost everybody would agree, | 11:12 | |
first that the Fed did continue on that course, | 11:15 | |
until the end of 1969, and second, that the recession | 11:19 | |
we are now in are the serious economic consequences | 11:23 | |
that I was speaking of. | 11:26 | |
And that as of that time in August, | 11:27 | |
there were not very many people | 11:29 | |
who were concerned about the fact | 11:30 | |
that we were going into a recession. | 11:32 | |
But let me go on. | 11:34 | |
I said, "inflation has an inertia of its own." | 11:35 | |
This is getting directly to Sherman's question | 11:38 | |
about the price rise. | 11:40 | |
"Many prices and wages are determined | 11:42 | |
"long in advance, and will continue to rise | 11:44 | |
"even after the pull of demand has eased. | 11:46 | |
"We shall be doing well, if by early 1970 | 11:49 | |
"the price rise is brought down to 4% a year." | 11:53 | |
Well now, by early 1970 the price rise | 11:57 | |
has not come down to 4% a year. | 12:00 | |
The rate or price rise has, in my opinion, come down some. | 12:02 | |
It hasn't come down as much as I expected, | 12:05 | |
and I will plead guilty to having thought | 12:07 | |
that we would have a sharper decline | 12:10 | |
in the rate of price rise. | 12:12 | |
Let me continue. | 12:16 | |
"Some retardation in grown, and some increase | 12:17 | |
"in unemployment is inevitable upon welcome | 12:19 | |
"byproduct of stopping inflation." | 12:21 | |
"But there is no need and every reason | 12:23 | |
"to avoid a retardation of the severity | 12:26 | |
"that will be produced by continuation | 12:28 | |
"of the Feds present monetary overkill." | 12:30 | |
Well, I'm perfectly willing to stand on that record. | 12:33 | |
- | I sure hope so. | 12:38 |
- | And I think if anyone is interested in checking further, | 12:40 |
he can check the other ones in my Newsweek column, | 12:42 | |
where I am in print. | 12:44 | |
Now, I may say incidentally on this score, | 12:47 | |
that so far as the Federal Reserve board | 12:50 | |
is concerned, over the past 10 years, | 12:51 | |
its record on economic forecasting is not bad. | 12:53 | |
The problem with monetary policy | 12:56 | |
has not been that their forecast has been bad, | 12:58 | |
it's been that their policy has been bad | 13:01 | |
and the life of the forecast. | 13:02 | |
They have made mistakes and subjected us | 13:04 | |
to unnecessary ups and downs, | 13:07 | |
because they have insisted on looking | 13:09 | |
at the wrong target, namely the interest rates, | 13:11 | |
rather than the quantity of money. | 13:12 | |
And that's been the fundamental source of their problem. | 13:14 | |
They've been no worse than forecasting than anybody else. | 13:16 | |
But let me talk, and what I really want to talk about | 13:19 | |
are the econometric models. | 13:21 | |
There's been a lot of misunderstanding about them. | 13:23 | |
In the first place, you should realize | 13:25 | |
that econometric models really go back over 30 years now. | 13:27 | |
The first substantial econometric models | 13:33 | |
were constructed in the late 1930s by Tim Burgen, | 13:36 | |
in Geneva where he was working for | 13:41 | |
the League of Nations by gardener means | 13:43 | |
and some associates at the national resources | 13:45 | |
planning board in Washington. | 13:48 | |
Then you had quite a number of econometric models | 13:51 | |
constructed in the immediate postwar period. | 13:55 | |
And we've had one after another ever since. | 13:58 | |
Now the fact that will shock you, | 14:01 | |
but this is an observed and documented fact, | 14:04 | |
is that so far there has not be a single econometric model | 14:09 | |
that has been successful in making forecasts | 14:13 | |
as well as very very simple naive models. | 14:16 | |
Most models have done worse. | 14:20 | |
For example, in simply saying that next quarter | 14:24 | |
will be the same as this quarter | 14:27 | |
plus the average rate of change over past years. | 14:28 | |
Every model has done worse than simple | 14:31 | |
single equation models relating changes | 14:35 | |
in income to changes to money for example. | 14:39 | |
Now I'm not saying anything that will not | 14:42 | |
be agreed to by the makers of the models. | 14:45 | |
We have had over and over again studies | 14:47 | |
of the forecasting ability. | 14:51 | |
The first extensive study was about 15 or 20 years ago | 14:52 | |
when the National Bureau of Economic research | 14:58 | |
had a conference dealing the the ability | 15:00 | |
of econometric models to forecast. | 15:03 | |
I wrote a comment on a paper at that time, | 15:05 | |
in which I said at that time, | 15:09 | |
this was about 15 or 20 years ago, | 15:10 | |
that I was very dubious that they would succeed. | 15:12 | |
Now, we're in the future and such econometric models, | 15:16 | |
and having very good forecast. | 15:18 | |
And as of that time, professor Carl Christ, | 15:20 | |
who is now professor at Johns Hopkins University, | 15:23 | |
made a detailed retrospective examination | 15:25 | |
of a model which had been constructed primarily | 15:28 | |
by Lawrence cline, by people at the Cowles commission, | 15:31 | |
in which he came to the conclusion | 15:33 | |
that had had essentially a zero success | 15:35 | |
so far as forecasting the future was concerned. | 15:38 | |
Now since then, each of the various models | 15:40 | |
that has been constructed, has been subjected | 15:42 | |
as similar kinds of tests. | 15:45 | |
There's a new book coming out by the National Bureau | 15:46 | |
under the authorship of Victor Zarnowitz | 15:50 | |
of which again examines the forecasting ability | 15:52 | |
of econometric models and also of various other | 15:55 | |
forecasters and individual forecasters. | 15:57 | |
And without putting too fine a point on it, | 16:00 | |
without getting into detail, the fundamental thing is | 16:02 | |
that none of them as yet have any | 16:05 | |
very good record of successful forecast. | 16:07 | |
Now this tends to be concealed by the fact | 16:11 | |
that the people who use the forecast econometric models | 16:14 | |
and issue forecast, almost never | 16:17 | |
issue them straight and unvarnished. | 16:20 | |
There's an awful lot of judgment | 16:22 | |
that goes into them as it were, | 16:23 | |
improve them by introducing, for example, | 16:26 | |
modifications where they think the model is going haywire. | 16:30 | |
In order really to judge an econometric model, | 16:34 | |
you have to let it ride completely mechanically | 16:37 | |
without introducing any judgment. | 16:40 | |
And the statements I've been making | 16:42 | |
about their lack of success comes | 16:43 | |
from various experiments and tests | 16:45 | |
that have let them run. | 16:47 | |
Now the latest of these big models is the MIT FRB model. | 16:48 | |
And as yet, it doesn't have a very good record. | 16:52 | |
Recently one of my collogues here did a paper, | 16:55 | |
comparing its forecast with that of | 16:58 | |
a very simple monetary one equation model. | 17:00 | |
And it did not do as well. | 17:06 | |
I'm not saying that anybody has a magic philosopher stone | 17:08 | |
which will enable them to make a forecast. | 17:12 | |
I'm only saying that I think that there are | 17:13 | |
few areas in which there has been more smoke | 17:15 | |
with less fire, more puffing with less basis, | 17:18 | |
then the area of the advertising about econometric models. | 17:23 | |
Now again, I'm not anti econometric models. | 17:26 | |
I think we need investigation | 17:29 | |
in a lot of different areas. | 17:32 | |
I think we never know in advance | 17:34 | |
which way you're going to get real results. | 17:36 | |
And I applaud those people who are interested | 17:39 | |
in the econometric models. | 17:41 | |
More power to them. | 17:42 | |
Let them develop. | 17:43 | |
But let's not overstate their present state of performance. | 17:44 | |
- | That's interesting. | 17:48 |
Now here is an inquiry which goes directly | 17:50 | |
to your February 12th tape. | 17:53 | |
Reads as follows, "in Dr. Friedman's February 12th tape, | 17:56 | |
"he described the situation with banks | 17:59 | |
"in the United States and Canada, | 18:01 | |
"during the 1930, 33 depression. | 18:03 | |
"Dr. Friedman stated that the seriousness | 18:06 | |
"of the depression in the United States | 18:08 | |
"was the result of contraction of the money supply | 18:10 | |
"due to withdrawals from the banking system | 18:13 | |
"and failure of banks in the United States. | 18:16 | |
"You also stated that Canada did not suffer bank failures | 18:19 | |
"because of a more enlightened central banking system. | 18:21 | |
"You also stated, however, that the Canadian depression | 18:24 | |
"was as severe as was the depression in the United States. | 18:27 | |
"The question is then, does this disprove | 18:30 | |
"the theory of money supply, since | 18:33 | |
"the Canadian depression took place, | 18:35 | |
"even though the money supply did not contract | 18:37 | |
"as it did in the United States?" | 18:39 | |
- | That's a very good question. | 18:42 |
And it's based on the carelessness, | 18:43 | |
I think, with which I stated the facts. | 18:46 | |
Because if the facts were, as this gentleman stated, | 18:49 | |
it would raise very real questions. | 18:52 | |
But the facts are not that way, and let me explain. | 18:54 | |
In the first place, I did not mean to suggest | 18:57 | |
that Canada had a more enlightened central banking system, | 19:01 | |
in fact they did not have a central banking system, | 19:04 | |
at the time really. | 19:06 | |
What it was, was it had a more enlightened, | 19:07 | |
or differently structured commercial banking system. | 19:10 | |
Canada had a commercial banking system | 19:14 | |
under which there are a small number | 19:16 | |
of large banks spread throughout the nation | 19:18 | |
with many branches all over the country. | 19:21 | |
And consequently it did not have | 19:23 | |
a large number of independent banks. | 19:25 | |
It did not have many bank failures. | 19:27 | |
But although it did not have bank failures, | 19:29 | |
it did have a very large decline in the quantity of money. | 19:31 | |
The only thing is that that decline | 19:35 | |
and the quantity of money took place without bank failures. | 19:36 | |
While in the United States, | 19:40 | |
it took place through bank failures. | 19:41 | |
So in both cases you had a large decline. | 19:43 | |
Now the decline in the quantity of money | 19:46 | |
was greater in the United States than it was in Canada. | 19:47 | |
And the economic depression was about the same. | 19:52 | |
How do we explain that? | 19:56 | |
Well that's perfectly consistent with | 19:58 | |
the theory of money supply, | 20:00 | |
because the failures of banks made cash | 20:01 | |
a less desirable asset to hold in the United States, | 20:05 | |
than it otherwise would have been. | 20:08 | |
It reduced the demand for money, | 20:10 | |
compared to that in Canada. | 20:13 | |
And this showed up in the fact that.. | 20:14 | |
you had a slightly different relationship between | 20:19 | |
the decline in money and the decline in income | 20:23 | |
in the United states, then you did in Canada. | 20:25 | |
I may say that this particular question | 20:27 | |
is discussed in detail in the book | 20:29 | |
by Anna Schwartz and myself, on | 20:31 | |
A Monetary History of the United States, | 20:32 | |
in which we take up precisely the point | 20:34 | |
that this gentleman quite properly writes, | 20:36 | |
and ask ourselves whether the difference | 20:38 | |
in the behavior of the two countries | 20:40 | |
contradicts the hypothesis that we are there presenting. | 20:42 | |
And in the brief, the answer is, no it is not. | 20:45 | |
And let me emphasize again, as I have over and over again, | 20:50 | |
I do not want to leave anybody with the impression | 20:53 | |
that I think there is a perfect precise mechanical | 20:55 | |
relation ship between changes in the quantity | 20:58 | |
of money, and changes in income. | 21:00 | |
There is a close relationship, | 21:02 | |
but it varies from time to time. | 21:03 | |
It has a good deal of noise, and it has lots | 21:05 | |
of room for the small kinds of differences | 21:08 | |
that there were between Canada | 21:10 | |
and the United States at that time. | 21:11 | |
- | Dr. Friedman, a few interviews ago | 21:14 |
you commented on the subject of pollution, | 21:17 | |
time didn't permit you to talk for very long on it, | 21:20 | |
and we've had number of subscribers | 21:23 | |
who have asked if you wouldn't sometime elaborate | 21:25 | |
on those comments on pollution. | 21:28 | |
- | Well I would be very glad to do so. | 21:30 |
It's fascinating how these fads arise, | 21:33 | |
and pollution is one those topics | 21:36 | |
on which there is an enormous fad. | 21:38 | |
That the amount of tension it's getting | 21:40 | |
has a number of features that I think | 21:43 | |
are king of disturbing. | 21:44 | |
The discussion is hysterical rather than rational. | 21:46 | |
It tends to proceed as if the choice were | 21:51 | |
between zero pollution and all pollution. | 21:55 | |
On the one hand, it seems to me it has | 21:58 | |
two characteristics that are disturbing. | 22:00 | |
One is, to try to make it into a black or white question, | 22:01 | |
pollution versus no pollution. | 22:05 | |
And the second is, to try to make it into a devil question, | 22:08 | |
a question of devils versus good people. | 22:12 | |
There are some bad manufactures and industrialists | 22:14 | |
who out of the blackness of their hearts | 22:17 | |
are pouring pollutants into the air | 22:19 | |
to destroy the rest of us. | 22:21 | |
And if only the good people will arise | 22:22 | |
in their righteous wrath, and step on the bad people, | 22:24 | |
everything can be alright. | 22:28 | |
Well this is an absurd picture in the first place. | 22:29 | |
The real problem is, what's the right amount of pollution? | 22:33 | |
Not, zero pollution. | 22:36 | |
Only an utter fool would argue that | 22:38 | |
the right amount of pollution is zero pollution. | 22:41 | |
You have to ask, at what costs, and for what purpose? | 22:44 | |
It costs something to reduce, what we call pollution. | 22:49 | |
Are we willing to pay that cost? | 22:54 | |
You could stop the pollution from automobiles immediately | 22:56 | |
by outlawing the automobile. | 22:58 | |
Would we be willing to go without the automobile? | 23:00 | |
You'd condemn a 100 million people to death | 23:03 | |
because you couldn't produce the food. | 23:05 | |
Or to take a simpler example, | 23:06 | |
one of the major pollutants is carbon dioxide. | 23:08 | |
And one of the problems ecologists worry about | 23:10 | |
is the rising carbon dioxide content of the air. | 23:13 | |
Well every time you or I exhale, we exhale carbon dioxide. | 23:16 | |
We could stop that pollution by stopping breathing. | 23:19 | |
Would that make sense? | 23:22 | |
Not at all. | 23:23 | |
What you have here is a straight forward economic question. | 23:24 | |
The economic question is that what's called pollution | 23:28 | |
is part of the consequences of your productive activity. | 23:32 | |
In order to produce steel, you put smoke into the air. | 23:35 | |
Now, what you have here is scarce resources. | 23:39 | |
You can use those scarce resources | 23:43 | |
to produce steel or to produce clean air. | 23:45 | |
Clean ais is one of the products we want to buy. | 23:47 | |
And as always, you want to spend part | 23:50 | |
of your income on clean air, but you don't want | 23:52 | |
to spend all of your income on clean air. | 23:54 | |
You don't want to carry the clean air up to the point | 23:56 | |
where you go without clothes and shirts and so on. | 23:58 | |
So the key problem is a problem of, | 24:01 | |
what is the right balance between | 24:04 | |
the cost involved in reducing pollution, | 24:07 | |
and the productive gains involved in having some pollution? | 24:10 | |
And that's a standard economic question, | 24:13 | |
and arises only because it is difficult | 24:15 | |
in the case of pollution, to assess the costs | 24:18 | |
on the person responsible. | 24:21 | |
In the ordinary case this problem | 24:23 | |
is solved automatically because | 24:25 | |
a man who produces steel, pays a cost of producing steel. | 24:26 | |
And he has no incentive to pay those costs, | 24:30 | |
unless the purchaser of steel | 24:33 | |
is willing to pay him that much. | 24:34 | |
Well if the costs imposed on others by polluting the air | 24:36 | |
were included in the cost of steel, | 24:41 | |
this solution would be solved in the same way, | 24:44 | |
by the fact that the purchaser of steel | 24:47 | |
would be paying those costs, | 24:50 | |
and you would produce the steel only if | 24:52 | |
the benefits were greater than the cost. | 24:54 | |
But the problem arises that the pollution | 24:56 | |
is often widespread. | 24:58 | |
A steel company in Gary pollutes the air | 24:59 | |
and that comes down on Chicago. | 25:01 | |
And the Gary US Steel doesn't take into account. | 25:04 | |
I may say with respect to the pollution | 25:06 | |
in Gary itself, there is no problem. | 25:08 | |
Because that pollution forces US Steel | 25:11 | |
to pay higher wages in order to keep people | 25:15 | |
working for it in Gary. | 25:16 | |
If it were cheaper to clean up the air, | 25:18 | |
then the amount that the workers demanded | 25:20 | |
in higher pay, undoubtedly that would be | 25:22 | |
in US Steel's own interest. | 25:24 | |
The real source of pollution, is the consumer | 25:29 | |
who demands the products from which pollution comes. | 25:31 | |
To this argument, to put it... | 25:34 | |
in a rather extreme way, | 25:40 | |
the argument that it's the manufactures rather | 25:42 | |
than the consumers who are responsible for pollution. | 25:46 | |
It's sort of like blaming the obstetrician for the baby. | 25:49 | |
It's the people who drink the beer, | 25:54 | |
who demand the beer in bottles which are nonreturnable. | 25:56 | |
They are the ones. | 26:00 | |
Producers, manufacturers are willing | 26:02 | |
to provide consumers with what they want. | 26:03 | |
If consumers wanna buy clean air, | 26:05 | |
the manufacturers will sell clean air. | 26:06 | |
The social problem is how do we construct | 26:08 | |
arrangements in such a way as to enable | 26:11 | |
the demand for clean air to be effective, | 26:15 | |
to enable people to buy clean air. | 26:17 | |
In view of the fact, and this is the only | 26:20 | |
distinctive feature about pollution, | 26:22 | |
that it is very hard to identify | 26:24 | |
the particular persons who are affected. | 26:26 | |
Now ultimately the only people | 26:31 | |
who can pay are the consumers. | 26:32 | |
And the question is only, | 26:34 | |
how do you impose the cost on them? | 26:35 | |
Of the various modes of doing so, | 26:37 | |
the least bad, there isn't a good way. | 26:39 | |
If there were a good way, | 26:41 | |
you wouldn't have a problem at all. | 26:42 | |
The problem arises because it is so hard | 26:43 | |
to identify the cost and the return. | 26:45 | |
Of the various ways, I think the best way | 26:48 | |
is by imposing taxes on manufactures | 26:50 | |
in accordance with the amount of pollution they emit. | 26:54 | |
That is to say, so many cents per | 26:57 | |
so many units of sulfur dioxide. | 27:00 | |
Or so many cents per so many units | 27:02 | |
of effluent issued into the water. | 27:05 | |
Because if you try to estimate that tax, | 27:08 | |
and what it is worth to the consumers to get that reduced. | 27:11 | |
Then you give the manufacturers and the producers | 27:15 | |
the right incentives to reduce it. | 27:18 | |
You don't want them to reduce it | 27:20 | |
if it costs more than that. | 27:21 | |
You'd rather have the money. | 27:22 | |
On the other hand, you do want them to spend | 27:24 | |
up to that amount to reduce. | 27:25 | |
And more over, the idea that you should have | 27:27 | |
an extensive governmental agency | 27:29 | |
which will decide exactly what factory one, | 27:31 | |
two, and three shall do, is absurd, | 27:33 | |
because you'll never be able to do it, | 27:35 | |
and you're far better off by doing it in this indirect way. | 27:37 | |
- | Thank you very much Dr. Friedman. | 27:41 |
We've been visiting with Dr. Milton Friedman | 27:44 | |
in the University of Chicago. | 27:46 | |
If you have questions or subjects | 27:47 | |
you would like to hear the doctor discuss | 27:49 | |
on future tapes, please send your suggestions | 27:52 | |
in to Instructional Dynamics Inc. | 27:54 | |
166 East Superior Street, Chicago Illinois 60611. | 27:57 | |
This is William Clark of the Chicago Tribune. | 28:03 | |
We'll be visiting with Dr. Friedman | 28:05 | |
a couple of weeks hence. | 28:07 |
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