David Friedman's Odd Attack On Murray Rothbard

In the February 1982 edition of The Libertarian Forum, Murray Rothbard responded to charges by some libertarians that he was being too tough on then-President Ronald Reagan. 

One point made by Rothbard was that spending actually increased under Reagan's first year compared to the previous year under Jimmy Carter.

He wrote:

In fiscal 1980, the last full year of the Carter regime, he of Big Spending and modern liberalism, total federal government spending was $579 billion. Originally, the Reagan projection of his own spending in the first full year of his regime, fiscal 1982, was $695 billion - thus keeping federal spending below the magic $700 billion mark. This "massive" and "historic" spending cut, dear reader, amounted to a 10% annual increase over the budget in the last days of the Bad Old Carter regime.

But David Friedman has a problem with this point. At his blog, he writes:

The problem with this, as should be obvious to any economist, is that these are nominal, not real, figures. From 1980 to 1982, prices increased by about 21%, so the real change implied by those numbers, the change in the quantity of goods and services consumed by government, is not +20% but -1%.

That is, he considered Rothbard's charge inaccurate. 

Rothbard in the 1982 article also responded to the Friedman charge since it had been made earlier:

 David Friedman, David Henderson, and other "libertarian" apologists for Reaganism have protested that such an attack is unfair since inflation can reduce the "real" level of government spending, as corrected for inflation. But while it is perfectly valid to correct yours and my incomes for inflation to see how well off we really are, it is impermissible to do this for the federal government, which, by its printing of counterfeit money, is itself responsible for the inflation. It is truly bizarre to try to excuse the growth of Reagan spending by pointing to inflation's reducing the "real" level of spending, for in that case, we should hope for an enormous amount of inflation and hail Reagan's spending "reductions" if such hyperinflation came about. 

And now things go way off the tracks, Friedman doesn't buy Rothbard's arguments and launches some very unusual charges:

 Note the word "unfair" in the second line. The issue was not whether he was being fair to Reagan but whether he was being honest with his audience. Taking his argument seriously, if Reagan doubled the price level we should blame him for inflation, blame him for doubling government expenditure, and praise him for doubling the U.S. economy. I doubt that would have been his response.

Part of what struck me when I found the article was the implication of his publishing it. That implies either that he really believed his own argument, however implausible it seems to me, or that he believed his readers were sufficiently under his spell to accept his arguments, however bad, if given with sufficient confidence and passion.

Got that? 

Out of nowhere, he lists as possibilities that Rothbard considers his audience under his spell that will believe anything. The only way he can possibly hold that possibility is to think Rothbard's argument is inaccurate and that Rothbard knew it and then Friedman can reach the conclusion that Rothbard disrespects his audience and does slight of mind tricks with them.

But there is another possibility, Rothbard is correct in his view and that Friedman just doesn't get it and so goes on some very odd theorizing about Rothbard spinning his audience.

A bit of thought reveals that Rothbard has an excellent point, you shouldn't adjust government spending for price inflation.

Here is the best way to understand the situation.

Let us assume an evenly-rotating economy, where the economy is moving along smoothly and there are no changes in prices. Then we introduce a central bank into the picture. The central bank proceeds to buy government securities with money printed out of thin air. The government uses the printed funds to go on a spending spree that boosts its spending beyond that of last year.

In other words, the first to get newly printed money benefits from the money print and can bid up goods and services to gain more goods and services from the pool of goods and services available. Prices do go up, but it doesn't hurt the government because it caused the prices to go up because of its use of newly printed money to bid for additional goods and services it didn't previously have. It does hurt other consumers who are now faced with higher prices and new money that only trickles down to them later in time.

In other words, Rothbard wasn't running a scam on his audience, not even close. He was making an extremely important point, the first people getting their hands on money benefit before the price inflation takes place. I hasten to add that there are others, through the banking sector, that get newly printed money first but the government gets plenty.

So did the government borrow money during the period and the Fed print money, which would tend to backup Rothbard's claim?

Here is the data from the St. Louis Fed:

During the period in question, Federal debt climbed by nearly 50%, from under $880 billion to just under $1.2 trillion, which is a $320 billion increase.

The M2 money created by the Federal Reserve during that period was an increase from $1.48 trillion to $1.91 trillion, an increase of roughly $400 billion.

You would have to track down all the money flows to see how much of the Fed money printing supported the debt increase but Rothbard's point clearly holds. With government debt exploding and the Fed printing money, there appears to be a significant edge for government to get in and buy things before the price inflation takes hold.

Friedman somehow thinks all of this is a stretch and Rothbard is conning his audience. Hmmm.

-RW