“Capitalism and Freedom” Summary, Chapter 5: Fiscal Policy

by Danny Fenster

This chapter is a free excerpt from Quicklet on Capitalism and Freedom.

Government has expanded since the New Deal under the excuse that it is necessary to eliminate unemployment. Expansionary measures failed to end unemployment but remained in place, creating a perpetual deficit.

More recently, government spending has been promoted as a balancing wheel; when private spending goes down, the government must spend to keep levels stable, and conversely. But "the haste with which spending programs are approved is not matched by an equal haste to repeal them," when recessions pass, leading to an expansion of government and an increased burden on federal taxes.

If one accepts the idea of the balancing wheel, the tax side would be more effective than the expenditure side. Taxes could be raised during expansions and lowered during recessions. It would be politically difficult to raise taxes in prosperous times, keeping the budget low and the state small. It has been applied to the expenditure side by the widespread belief among intellectuals that government should play a larger role in economic and private affairs, "the triumph … of the philosophy of the welfare state."


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Government has expanded since the New Deal under the excuse that it is necessary to eliminate unemployment. Expansionary measures failed to end unemployment but remained in place, creating a perpetual deficit.

More recently, government spending has been promoted as a balancing wheel; when private spending goes down, the government must spend to keep levels stable, and conversely. But "the haste with which spending programs are approved is not matched by an equal haste to repeal them," when recessions pass, leading to an expansion of government and an increased burden on federal taxes.

If one accepts the idea of the balancing wheel, the tax side would be more effective than the expenditure side. Taxes could be raised during expansions and lowered during recessions. It would be politically difficult to raise taxes in prosperous times, keeping the budget low and the state small. It has been applied to the expenditure side by the widespread belief among intellectuals that government should play a larger role in economic and private affairs, "the triumph … of the philosophy of the welfare state."

Friedman does not advocate the balance wheel theory on either side. "We simply do not know enough to be able to use deliberate changes in taxation or expenditures as a sensitive mechanism" without making matters worse. We don't need a skilled driver steering the economy through irregularities in the road, we need to prevent the monetary passenger in the back from reaching forward and jerking the wheel.

There is a widely-held belief, stemming from a Keynesian analysis, that government expenditures relative to tax-receipts is necessarily expansionary and a decrease contributes to shrinkage. This is false. It's built on assumptions of how people will spend their money, which cannot be known. It does not take into account inflation, nor does it explain where the expenditures come from.

The actual results can only be judged on empirical evidence, not reason, of which there is little. Friedman cites his own empirical research, done with students, the results of which showed that rises in government expenditures are not expansionary in any relevant sense.

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