Milton Friedman Dies

[delfunk1]

-From Bloomberg News

Milton Friedman, Nobel Prize-Winning Economist, Dies (Update1)

By Vivien Lou Chen

Nov. 16 (Bloomberg) -- Milton Friedman, the Nobel laureate economist who shaped the philosophies of Ronald Reagan, Margaret Thatcher and successive Federal Reserve chairmen, has died, his daughter Janet said. He was 94.

Friedman\'s theory that inflation results from too much money chasing too few goods inspired a generation of central bankers, beginning with Paul Volcker, who was Fed chairman from 1979 until 1987. Alan Greenspan and Ben S. Bernanke also credit Friedman\'s work as a blueprint for policy making.

``Friedman\'s monetary framework has been so influential that, in its broad outlines at least, it has nearly become identical with modern monetary theory and practice,\'\' Bernanke said at a conference in October 2003 when he was a Fed governor. He became chairman in February 2006.

Friedman wrote, co-wrote or edited 32 books, including ``A Monetary History of the United States, 1867-1960\'\' with Anna Schwarz in 1963, and argued that the goal of monetary policy should be long-term, stable growth in the supply of money. He championed individual initiative and deregulation and influenced decisions from severing the dollar\'s peg to gold in the early 1970s to ending the military draft.

``It\'s hard to think of anyone who\'s had more of a direct influence on social and economic policy in this generation,\'\' said Carnegie Mellon University Professor Allan H. Meltzer, who is preparing a two-volume history of the Fed and has been an adviser to the Bank of Japan. ``He, along with others, promoted the idea of low inflation and a more disciplined central bank.\'\'

In his later years, Friedman advocated that the Fed adopt an inflation target, a numeric price goal which the central bank should pledge to hit over a specified period of time. He supported George W. Bush\'s failed effort to overhaul Social Security, counseled California Governor Arnold Schwarzenegger and predicted the demise of the euro.

`Monetary Phenomenon\'

With his trademark pronouncement that inflation was ``always and everywhere a monetary phenomenon\'\' Friedman was among the Fed\'s most vocal critics as inflation accelerated through the 1960s and 1970s. He said the central bank failed to control the supply of money, should be stripped of its autonomy and forced to focus on keeping money supply growth steady at about 3 percent.

The Fed kept its independence. Friedman\'s arguments were acknowledged, though, when Volcker launched an attack on inflation in 1979 by targeting money supply and pushing up interest rates to crush inflation.

Reagan to Bush

The Brooklyn-born Friedman traveled the world promoting balanced budgets and limited state spending. He joined Reagan\'s Economic Policy Advisory Board in the early 1980s, helping guide and reinforce the president\'s views on government largess and tax reduction.

He served as an adviser to Thatcher, U.K. Prime Minister from 1979 to 1990, who pushed for a free-market economy, low taxation, and the sale of state-owned industries. Bush credited Friedman\'s ideas with bringing inflation under control in Chile, the adoption of a flat tax in Russia, and the creation of personal retirement accounts in Sweden.

Friedman\'s teachings at the University of Chicago helped foster the ``Chicago School\'\' of economics, known for theories associated with free-market libertarianism.

Those ideas were put to use in Chile during the 1970s and 1980s, when a group of economists trained at the University took key government positions under General Augusto Pinochet. The so- called ``Chicago Boys\'\' advocated widespread deregulation and privatization, helping Pinochet\'s military junta bring inflation down from as high as between 700 percent and 1,000 percent.

``He has used a brilliant mind to advance a moral vision: the vision of a society where men and women are free, free to choose, but where government is not as free to override their decisions,\'\' Bush said in a May 2002 speech at the White House to honor Friedman on his 90th birthday. ``All of us owe a tremendous debt to this man\'s towering intellect and his devotion to liberty.\'\'

Companion of Crisis

Friedman was born on July 31, 1912, to immigrants from Carpatho-Ruthenia, a province of the Austro-Hungarian empire that later became part of the Soviet Union. His father was involved in ``mostly unsuccessful\'\' ventures and his mother ran a small dry-goods store, he wrote in his autobiography ``Two Lucky People.\'\'

``The family income was small and highly uncertain,\'\' Friedman wrote. ``Financial crisis was a constant companion. Yet there was always enough to eat, and the family atmosphere was warm and supportive.\'\'

Scholarship

After graduating from high school before his 16th birthday, Friedman won a scholarship to Rutgers University in New Jersey, where he was taught by Arthur Burns, who later served as Fed chairman between 1970 and 1978. With plans to become an actuary, Friedman initially studied mathematics, yet failed some of his exams.

He later became interested in economics. After graduating in 1932, he studied at the University of Chicago\'s economics department, where he met his future wife, Rose Director.

``We were married six years later, when our Depression fears of where our livelihood would come from had been dissipated, and, in the words of the fairytale, have lived happily ever after,\'\' Friedman said in his autobiography.

Treasury Stint

Friedman graduated with a master\'s degree from the University of Chicago in 1933, and earned a doctorate from Columbia University in 1946. During World War II he worked in the Treasury\'s tax research department, where he developed the concept of federal tax withholding to finance wartime spending and avoid inflation.

``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,\'\' he said in a June 1995 interview with Reason magazine.

Friedman\'s rise to prominence began in the 1950s when he challenged the popular views of economists who followed the theories of John Maynard Keynes and virtually ignored the significance of money supply and monetary policy in business cycles and inflation.

``A Monetary History\'\' argued that the Great Depression wasn\'t caused by the stock market crash of 1929, but by the Fed\'s efforts to shrink the money supply because of inflation fears. The lesson for central bankers was that monetary forces could lead to powerful, destabilizing results, and the best way to avoid such a crisis is with ``a stable monetary background,\'\' Bernanke said in a 2002 speech.

Battling Inflation

Friedman was also the first to show there\'s no permanent tradeoff between unemployment and the inflation rate assumed by policy makers because the jobless rate could vary based on people\'s expectations for price increases.

``Milton Friedman was right,\'\' Minneapolis Fed President Gary Stern, said in a speech on May 1 that praised Volcker\'s battle against inflation, which saw the central bank lift its benchmark rate to as high as 20 percent in 1980. At that point, money supply growth was galloping along at 6.8 percent.

``Volcker\'s quasi-monetarist approach to policy successfully broke the back of inflation,\'\' Stern said, setting ``the stage for the long economic expansions of the 1980s and 1990s.\'\'

`Language of Monetarists\'

The consumer price index, hovering at around 12 percent when Volcker took office, soared to 14.8 percent in March 1980 and retreated to 6.8 percent two years later. It\'s stayed below 5 percent for the past 15 years, while the U.S. enjoyed its longest expansion ever between March 1991 and March 2001.

``Volcker used the language of monetarists such as Friedman to describe what he was doing to control money growth,\'\' said Meltzer, a member of Reagan\'s Council of Economic Advisers. ``The extent to which he did it is less clear, but he deserves enormous credit for persisting long enough to bring the inflation rate down.\'\'

Greenspan, who succeeded Volcker, showed it was possible for central banks to quell inflation and thus avoid recession, Friedman wrote in the Wall Street Journal on Jan. 31. Price stability reduces uncertainties, allowing the businesses to muster resources more efficiently, Friedman wrote.

Some of the ideas conceived of or improved on by the economist and his wife include vouchers to help parents select children\'s schools, legalization of drugs, and privatization of Social Security.

Goldwater Campaign

Friedman served as an economic adviser during facist Senator Barry Goldwater\'s presidential campaign in the 1960s, won the Presidential Medal of Freedom in 1988, and was most recently a senior research fellow at the Hoover Institution at Stanford University.

While Goldwater was trounced by Lyndon Johnson in 1964, he\'s been credited as an influence by facists such as former House of Representatives Speaker Newt Gingrich, Reagan and Bush.

``Freedom is a great objective,\'\' Friedman said in a Dec. 27, 2005, interview with PBS\'s Charlie Rose. ``It enables people who hate one another, who don\'t speak the same language, who would fight one other if they had the chance, to cooperate together economically.\'\'

He opposed one form of economic integration: the monetary union of 11 European Union nations in 1999 that resulted in the replacement of national currencies with the euro. Greece joined in 2001, bringing the number to 12.

As Europe was preparing for the euro\'s introduction, Friedman told German weekly Die Zeit in September 1997 that the euro would make conflict more, not less, likely.

Euro Doomsayer

The continent\'s many borders and diverse cultures make a single currency unit unfeasible, as Europeans are more dependent on their own country rather than the ``common market or the idea of ``Europe.\'\' The introduction of the euro would turn economic shocks into political conflict, Friedman said.

The euro went ahead as planned and the introduction of notes and coins two years later went off without a hitch.

In addition to his wife, Friedman\'s surviving family members include two children, Janet and David.

[skalnbyc]

Sad to hear of this great thinker\'s passing, he was sharp till the very end (read interviews with him as recently as this summer).