originally published in the Moscow-Pullman Daily News January 6-7, 2007
By Judith L. Brown
Milton Friedman, the Nobel Prize-winning economist who died in November at age 94, made significant contributions both to the world of economic theory and to the world of economic policy. His influence in all sorts of areas will be felt for a long time. In one particular respect, I wish he could be a little more influential here in Idaho.
As a theoretician and academic, Friedman made seminal contributions to the understanding of monetary policy, consumer behavior, and the relationship between unemployment and inflation. Milton Friedman and John Maynard Keynes together have been described as the two most influential economists of the 20th century, the former largely for his insights into monetary policy and the latter for his fiscal policy.
As an advocate for economic policies consistent with his economic theories, Friedman was the guiding light and patron saint of conservatives in the United States and abroad. He championed unfettered so-called free markets and very limited government. He generally opposed public education; the certification of doctors, lawyers and other professionals; the criminalization of drugs; and many other regulations that in his view interfered with the working of the market.
Friedman’s “Capitalism and Freedom” was one of the first economics books I bought. I picked up a used copy at the campus bookstore as a college sophomore and read it over that summer. That battered copy remains on my bookshelf to this day.
I thought then, and I think now, that many of Friedman’s ideas are easy to refute. To my mind, he failed to understand that the market is a man-made institution, as legitimately subject to man-made revision, modification, improvement — regulation — as anything else man has made. In general he gave too little consideration to issues of social justice and placed too much faith in the ability of markets to perform when information is poor and when risk and uncertainty are high.
Friedman’s belief in unfettered markets and very limited government did not mean, however, that he saw no role for government. One thing he recognized that the market cannot do is ensure a distribution of income that allows all workers to meet basic economic needs. By all accounts Friedman was a compassionate man, and he thought this shortcoming should be remedied. To do this, he proposed a negative income tax — a policy-wonkish term if ever there was one — that would essentially be a single cash payment to every citizen every year, thus guaranteeing an income ensuring that no one would be unable to meet basic needs.
Friedman’s negative income tax was debated and revised and eventually enacted in the mid-1970s as the federal earned income tax credit — another policy-wonkish term. Since that time, the EITC has been expanded several times, including notably under President Reagan who described it as “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.” Today the maximum federal EITC for two-parent working families with two or more children is approximately $4,550.
The EITC is an effective wage supplement and tax reduction for low- and moderate-income working families. It lifts more people out of poverty than any other public program except Social Security.
As the incidence of working poverty has increased over the past decade, and as both federal and state governments have shifted more and more of the tax burden onto low-and moderate-income families, a growing number of states have enacted EITCs of their own. Today, 19 states plus the District of Columbia, two cities and one county have enacted local EITCs, further reducing working poverty in their areas.
I think a state EITC would be good for Idaho too, and perhaps in this new year the time is ripe for one. Most poverty in Idaho is working poverty, and, as Milton Friedman recognized, it is not right for people who work hard to be unable to make ends meet.
Idaho has been slowly but dramatically shifting the tax burden onto low-and moderate-income families, and that should be corrected. A state EITC would effectively do that. The other alternative sometimes being raised is to remove the sales tax from food, but a state EITC would cost much less — a topic I will explore further in a future column perhaps.
In the memory of Milton Friedman, let’s just enact a state earned income tax credit, and let’s do it now. Now that would be a step toward more compassionate conservatism.
* Judith L. Brown is an economist and director of the Idaho Center on Budget and Tax Policy. She lives in Moscow with her family and can be reached at jlbrown@turbonet.com.