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Sunday, July 1, 1984

A Reviewers Notebook: Tyranny of the Status Quo

The Friedmans, Milton and Rose, have jumped the boundaries of economics in their Tyranny of the Status Quo (New York: Harcourt Brace Jovanovich, 182 pp., $10.95) to make a generalized study of the way democracy works to stymie legislative innovators whether they be libertarian, socialist or mixed-breed partisans of the Middle Way. But if this is primarily a work in political science, it manages nonetheless to keep up a steady drumbeat for the Friedmans’ own economic program. Their hopeful assumption is that the American people will some day insist on returning to their ancestral ways of freedom despite the special interests that continue to frustrate them.

Briefly, the Friedmans argue that if a newly elected leader in a democracy can’t put his or her program into operation within six to eight months after taking office, the supposed “mandate” will vanish. This is what happened to Ronald Reagan in the United States and to Margaret Thatcher in England. Reagan and Thatcher had similar conservative agenda, but the “law” of democracy pays little attention to questions of “right” and “left” when it comes to preserving the status quo. Mitter-rand of France is a socialist, but he ran into the same roadblocks as Reagan and Thatcher in his efforts to change the French economy.

The Friedmans speak of an “Iron Triangle” that inevitably forms to preserve or extend the special privileges that status quo beneficiaries have already nailed down. A special interest group with a strong lobby will zero in on the politicians, with the help of bureaucrats whose jobs are connected with special interest dispensations. The special interest group may not be numerically important, but it has a strong incentive to get what it wants. Meanwhile the many who have very little money at stake in a particular instance won’t bother to fight. The “Iron Triangle” of the special interest lobby, the bureaucrats, and the politicians who are afraid to trifle with the status quo, will carry the day.

The Friedmans quote Congressman Phil Gramm to buttress their theory. “Every time you vote on every issue,” says Gramm, “all the people who want the program are looking over your right shoulder and nobody’s looking over your left shoulder. They’re sending letters back home telling people whether Phil Gramm cares about the old, the poor, the sick, the bicycle riders . . . the list goes on. It’s perfectly legitimate. The problem is that nobody’s looking over the left shoulder.”

Since our Congressmen aren’t chosen to represent all the people, that job is left to the President and the Vice President, who do have a national mandate. But if a new administration can’t establish a “hundred days” climate in Washington on first taking office, it will succumb to the status quo tyrants.

Achievements of the Reagan Administration

The Friedmans give Reagan good marks for his first year in the White House. With Congressman Jack Kemp at his elbow Reagan managed to reduce tax rates by 25 per cent over a three-year period. He provided for indexing taxes in 1985 to banish inflationary bracket creep. He cut the top income tax rate from 70 to 50 per cent. And he did manage to reduce the rate of public spending increases.

This was the extent of the Reagan honeymoon. In 1982 there was a legislated rise in “peripheral” taxes. The Social Security tax went up. There was a gas tax. The fight to lower the costs of regulation slowed. The Friedmans observed that government spending “continued to rise as a fraction of income even after allowing for the expenditures associated with recession.”

The Friedmans credit Reagan with a victory over inflation, but think the Federal Reserve Bank might have used its control over the money supply without provoking some barbarous swings that deepened recession by putting people out of work. Now that the bad days are in the past, however, the Friedmans are hoping a Reagan victory at the polls next November will be sufficiently impressive to breathe new life into the Reagan “revolution.”

A Program for Action

If Reagan does get a new mandate, the Friedmans are ready with a promising program for action. They are hoping that a Constitutional Amendment requiring a balanced budget will pass. A fiat tax, set at around 17 per cent, would raise all the money needed to keep the budget in balance and still allow for a military program strong enough to deter the Russians. The Friedmans’ fiat tax would provide for personal allowances that would exempt the poorest people from hardship, but it would deny the host of special deductions that have made the current “progressive” tax forms almost impossible for lay people to understand. The Friedmans think the “rich” would gladly give up recourse to their fancy tax shelters in favor of simplicity at a low fixed rate.

The Friedmans want to see the balanced budget requirement made part of the Constitution in order to give to timorous politicians an excuse for deserting their particular corner in the Iron Triangle. The other two occupants of corners in the Triangle—the special interests and the bureaucrats—could hardly expect legislators to flout a law that would require “package” treatment of the budget as a whole. As an additional safeguard the Friedmans also advocate giving the President an item veto.

The Friedmans part company with Jack Kemp, Lewis Lehrman, Ron Paul and others on the subject of returning to the gold standard. It would have to be international, they say, and most foreign nations are in no position to put their currencies at the mercy of runs on their treasuries. Better, so the Friedmans say, to require the federal government to keep the increase in the quantity of money it issues to a low fixed rate that will not vary widely from year to year.

To my mind, the trouble with relying on political appointees tomake a judgment of how much money is necessary to sustain a proper rate of growth is that it could always be second-guessed. With robotics and the silicon chip playing new roles in the business of making new productivity records, how do we know that a three or four per cent increase in the money supply each year is enough? The virtue of a gold standard is that it would take decisions out of the hands of the politicians. One can agree with the Friedmans that a return to gold is not likely in the near future. But why foreclose discussion of the problem?

  • John Chamberlain (1903-1995) was an American journalist, business and economic historian, and author of number of works including The Roots of Capitalism (1959). Chamberlain also served as a founding editor of The Freeman magazine.