Milton Friedman needs little introduction. His career as one of the world's preeminent economists and advocates of freedom has won him many accolades, best-selling books, and a Nobel Prize.
It has also brought him much satisfaction. Now, in what he is acutely conscious are probably the last years of his life, he and his wife and longtime writing partner Rose Friedman are working on their memoirs.
I met Friedman in January in his elegant high-rise San Francisco condo, with an absorbing view of both the Pacific Ocean and the San Francisco Bay. His study is filled, but not cluttered, with his own books and economics reference works. While some Great Men in his position in life might refuse nuisances like interviewers entirely, Friedman is friendly and mostly forthcoming, speaking with the slow assurance of a lifelong professor and teacher very comfortable with explaining things. He welcomed me cordially but with a distinct set of limits, both in time and in subject matter. He has a large project to finish, and not much time to finish it in; and he refuses to psychoanalyze himself, largely avoids indulging in discussion of personalities, and wants to save some stories for his memoirs.
Friedman is used to discussing policy, but except for his assessment of the new Congress's potential, we wandered far afield into reminiscence; assessment of his intellectual development; and his thoughts on the history, significance, and successes of the intellectual movement for freedom that he has served so staunchly.
Reason: You've long advocated many of the ideas the new Congress is pushing, such as balanced budget amendments and flat taxes. Do you think Congress will make your dreams come true?
Milton Friedman: I'm skeptical. The talk is good. But I expected so much out of the Reagan administration and was disappointed. I'm a great admirer of Ronald Reagan himself, and I suspect he would have gotten much more done if it hadn't been for the Cold War and the problem of Nicaragua and El Salvador.
But nonetheless, there's no doubt that while he talked about cutting down the size of government, he did not succeed. He did slow it down--you've got to give him credit for some achievements. But not the massive reduction that he hoped for and planned for. That makes me hesitant now.
Congress wants to talk in this direction. Would they really want to move in that direction? The most important reform would be term limits, six-year limits. Because from an economic point of view, one of the worst features of our system is that you have a new tax law every year or every two years. However bad the tax law is, if you didn't change it for five years it would do less harm. Why do you keep changing it? Because that's the most effective way to raise campaign funds. Lobbyists will pay you to put loopholes in; they will pay you to take them out.
If you can get a flat tax with no exemptions or deductions--the Armey plan I suppose would be fine--its main advantage would not be the greater equity of a flat tax or less interference in private incentives. It would be to end this business of changing the whole tax system every few years and keeping prosperous these hordes of tax lawyers.
Reason: You were involved in the development of the withholding tax when you were doing tax work for the government in 1941-43?
Friedman: I was an employee at the Treasury Department. We were in a wartime situation. How do you raise the enormous amount of taxes you need for wartime? We were all in favor of cutting inflation. I wasn't as sophisticated about how to do it then as I would be now, but there's no doubt that one of the ways to avoid inflation was to finance as large a fraction of current spending with tax money as possible.
In World War I, a very small fraction of the total war expenditure was financed by taxes, so we had a doubling of prices during the war and after the war. At the outbreak of World War II, the Treasury was determined not to make the same mistake again.
You could not do that during wartime or peacetime without withholding. And so people at the Treasury tax research department, where I was working, investigated various methods of withholding. I was one of the small technical group that worked on developing it.
One of the major opponents of the idea was the IRS. Because every organization knows that the only way you can do anything is the way they've always been doing it. This was something new, and they kept telling us how impossible it was. It was a very interesting and very challenging intellectual task. I played a significant role, no question about it, in introducing withholding. I think it's a great mistake for peacetime, but in 1941-43, all of us were concentrating on the war.
I have no apologies for it, but I really wish we hadn't found it necessary and I wish there were some way of abolishing withholding now.