Milton Friedman: An Oracle Besieged

NOW that President Nixon has switched to a new and more activist economic policy, there is rising criticism of the man who provided the intellectual backing for the old one. Milton Friedman, 58, a bouncy, bantam-size economist, has seldom been a more controversial oracle than at present. Friedman argues that, because it is based on uncertain statistics and fallible judgments, Government tinkering with the economy is more likely to cause harm than good. He insists that the best policy would call for a sure and steady expansion of the nation's money supply at an annual rate of about 5%. Money supply, he says, controls economic growth and, over the long run. the pace at which prices rise or fall.

The problem is that the long run may well be too long for a nation grown impatient with inflation--and for an Administration confronted with 6% unemployment. Says a top official of the Federal Reserve Board: "We've been putting out money for some time at about the rate Friedman said, and we still have a sick economy." The unwelcome combination of recession and inflation is also spreading doubts about Friedman among businessmen, politicians and economists. Many complain that Friedman's monetarist philosophy oversimplifies the complexities of the world's largest economy. That philosophy appealed to the Nixon Administration, says Arthur Okun, who was chairman of the President's Council of Economic Advisers under Lyndon Johnson, because "it meant the less economic policy the better."

Fervor of Religion. There is no doubt that Friedman's persuasive powers helped to swing the Nixon Administration away from the precepts of Britain's late John Maynard Keynes. An apostle of intervention, Keynes acknowledged a role for money policy but preached that governments should mainly manipulate fiscal policy--that is, taxes and spending--to help determine their economic destinies. Nixon's top economists rejected the Keynesian "new economics" of the Kennedy and Johnson administrations. They labeled themselves "Friedmanesque," and indicted the "new economics'' as the cause of inflation and social unrest.

Most of today's economists, however, have been reared in the Keynesian faith, and they lean toward the Democratic Party. The monetarists, on the other hand, tend to identify with Republicans. The ensuing clash of philosophies thus involves high policy, politics and the fervor of a religious schism. Nixon's half-successful jawboning against steel-price increases suggests that Friedman may have lost his most illustrious convert. After his recently televised "conversation," the President remarked casually to a startled TV commentator: "I am now a Keynesian."

A particularly nettlesome question is: do Friedman's theories suffice in today's part-free, part-regulated U.S. economy, where industrial oligarchies can virtually dictate some prices and monopolist labor unions can virtually dictate some wages? Such "important structural changes" in the economy "make Friedmanite solutions unrealistic," argues Economist John R. Bunting, president of First Pennsylvania Banking & Trust Co. "It would be wonderful if just fixing money-supply growth within an appropriate range would make inflation and other economic problems disappear."

Friedman insists that the Nixon Administration has actually had "enormous success" in trying to arrest inflation by following his monetary prescription. "The medicine is working on schedule," he told TIME Correspondent Jacob Simms. "We have been attacking the severest U.S. inflation on record except for times of major war, but the recession is the mildest in the postwar era."

By Friedman's analysis, a predictable slowdown in the economy began about nine months after the Federal Reserve started tightening up on the growth of money supply at the beginning of 1969. After that lag, Friedman calculates, it takes an average of still another six to nine months more before reduced output --and increasing joblessness--begin to affect prices. *Last week the Commerce Department reported that in 1970 the nation's real output of goods and services fell by .5%, but prices rose 5.3%, the steepest one-year advance since 1951. Even so, Friedman tirelessly maintains that the momentum of inflation is slowing, because the annual rate of increase in the consumer price index declined from 6.3% during the first three months of 1970 to 5.8% during the second quarter and 4.2% in the third. During the first two months of the final quarter, the rate of rise went up to 4.8% annually, but that, at least, was considerably below the 6% rate at the start of 1970.

Shadows of Hope. Weak demand has forced many companies to hold down price rises. Wholesale prices rose only 2.3% over the past twelve months; they have not increased since September. The cost of basic raw materials widely used by industry has slipped 8% since March. Corporate purchasing agents are increasingly able to wangle under-the-table price discounts, from overstocked manufacturers of such disparate products as office furniture, mini-conductors, and paper cartons. Some price-cutting has spread to consumer goods, including appliances, television sets and clothing.

Friedman admits that he expected the rate of price increases to taper off faster than it has. He made a bad mistake last February when he predicted that overall inflation would decrease to a 3% annual rate by the end of 1970. On the other hand, he was correct in predicting that a recession would strike, though a bit too pessimistic about its severity. His recent record as a forecaster may be irrelevant to the validity of his main theory; yet Friedman's ideas gained popularity partly because he and other monetarists proved to be right in earlier forecasts.

Test of Nerve. It is still too soon to assess whether monetary policy has proved inadequate in curbing inflation or reviving the economy. "We have come out of this very luckily," Friedman contends. "But we aren't through yet. The test is whether the Administration and the Federal Reserve will have the guts to keep the present relatively moderate expansion policy and let inflation taper down. There is a real danger of increasing the money supply at such a rate as to rekindle inflation."

The great debate will probably lead policymakers to use an eclectic blend of Keynesian fiscal principles and Friedman monetary principles. Stanford's George L. Bach, one of the most eminent neutral economists, argues that neither fiscal nor monetary policy alone "is powerful enough to regulate the economy effectively. If the Government is sensible, it will always use both." As a decade of prosperity, inflation and recession has demonstrated, changes in taxes and Government spending are difficult to arrange but quick to act on the economy. By contrast, money policies can be changed overnight, but their effect is long delayed.

*Economists have long realized that monetary restraint affects output first, prices later. Friedman for the first time articulated the typical length of the second lag last September during a speech in London. The effect is to double the delay between dosage and result that has been popularly attributed, to monetarist medicine.

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