Capitalism and Freedom, Milton Friedman

Friedman on Fiscal Policy and Secular Stagnation

Graph: When high unemployment continues despite the spending, the spending is often followed by a sharp economic contraction like the recession of 2008.

Milton Friedman states,

“Ever since the new deal, a primary excuse for the expansion of government activity at the federal level has been the supposed necessity for government spending to eliminate unemployment.”

At first Keynesians say that government spending is necessary to ‘prime the pump.’ They argue incorrectly over and over again, that temporary expenditures by the Fed would get the economy going and the government could then ‘step out of the picture.’ Well the government never steps out of the picture.

Secular Stagnation
Even during good times, theories are needed to keep the government spending going. Keynesian economics theory of “Secular Stagnation” was developed to help justify continuing spending. The Theory explains as the economy becomes mature, there are no new opportunities for investment and people still want to save. Therefore it is necessary for the governemnt to spend, spend, spend and run a perpetual and increasing deficit. The theory goes on to make the claim that the securities issued to finance the deficit would provide individuals with a way to accumulate savings while increasing governmental expenditures will ultimately provide the needed employment.

Regarding Secular Stagnation, Friedman wrote in 1962:

This view has been thoroughly discredited by theoretical analysis and even more by actual experience.

The whole idea of secular stagnation is embraced only by the ever enlarging government program bureaucrats. The new spending programs didn’t work then, yet are still with us today. Instead of government ‘stepping out of the picture’ the government keeps the new bureaucracy keeps growing year after year. Worse of all, many of the programs don’t even go into effect until after the recession has passes.

To keep the spending going it is argued that a healthy expansion must not be jeopardized by cuts in government expenditures. Instead the long term effects are damaging to the economy by creating an ‘inflationary bias’ in government policy while increasing the tax burden on Americans.