"Cap and Trade" and Friedman's Legacy
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Friday, 31 July 2009 12:43 |
 Proposals now before Congress seek to reduce greenhouse gas emissions in the United States through a "cap and trade" system, under which U.S. producers would receive tradable permits to emit greenhouse gasses.
Producers buying the permits would, in effect, pay a tax for the privilege of emitting greenhouse gasses currently emitted without charge. The resulting "carbon tax" would have a negative effect on production and employment, according to an economic analysis by the Beacon Hill Institute.
Increased energy prices under cap-and-trade would inflict significant harm on the South Carolina economy.
- The South Carolina economy would shed 1,763 jobs by 2020 and 20,605 jobs by 2050
- Gross per-capita wages would fall by $322.53 annually by 2020 and $2,689.63 by 2050.
Job losses and price increases would combine to reduce real incomes as firms, households and governments spend more of their budgets on energy and less on other items, such as home goods, entertainment and clothing. As a result:
- Real disposable income would drop by $1.71 billion per year by 2020 and $14.27 billion by 2050.
- Annual investment in the state would fall by $201.34 million by 2020 and $1.68 billion by 2050.
State and local government tax collections would also suffer from the economic damage. By 2020, the state of South Carolina can expect annual tax revenues to fall by $160.87 million, while local governments would lose $195.09 million in tax revenue, for a combined state and local revenue loss of $355.96 million. By 2050, state and local government tax revenue losses would swell to over $2.97 billion, with the state losing $1.34 billion and local governments losing $1.63 billion.
Remembering Milton Friedman and his Lessons
 Today would have been Nobel Laureate Milton Friedman's 97th birthday. The modern economic voice for capitalism and freedom, Friedman died in 2006. On his birthday today, it is an appropriate time to remember Friedman's lessons as well as his guidance against government intrusion in the marketplace.
In 2002, Ben Bernanke, current chairman of the Federal Reserve, credited Friedman with correctly identifying the Federal Reserve as the leading cause of the Great Depression. Bernanke was referring to research Friedman did almost 40 years prior, pointing to the Fed as a major culprit in causing - and worsening - the Great Depression of the 1930s. Milton Friedman was the first economist to write a different version of the events of the 1930s, shifting blame away from the "fallacies of the free market." His book - cowritten with Ana Schwartz - A Monetary History of the United States, outlines the view that the Federal Reserve policies after the stock crash of 1929 negatively impacted the nation's economy.
From 1929-1933, there was a massive deflation of the money supply - to the tune of 30%. The Federal Reserve was created to have prevented such a catastrophic collapse. With such a high demand for money, Friedman argues the Fed should have increased money supply, which could have helped slow the Depression from the start.
In order to understand Friedman's take on the Fed, it is important to understand banking in the United States before 1913. Created in 1913, the Fed was given the task of preventing bank panics. Prior to the Fed, it was the responsibility of commercial bank clearinghouses to halt massive bank failures. In 1907 there was a panic as stocks crashed and an ensuing run on banks. However, a restriction of payments resulted, and the crisis was relatively short-lived, as economic growth resumed the next year.
But with the 1929 crash, banks assumed the Federal Reserve was there to provide assistance. The actions of the Federal Reserve during the 1930s are sadly ironic. Rather than power being dispersed among multiple private organizations, all monetary distribution rested at the Fed. And when the Fed decided to sit on its hands in 1930 and let bank after bank fail, it contradicted prior signals, leading to massive instability in the market. This essentially exponentially worsened the situation, causing the recession of 1929 to become a Great Depression well into the 1930s.
We can learn a lot from the lessons that Friedman taught us about economic growth and government actions. In his book Capitalism and Freedom, Friedman wrote:
"The Great Depression in the United States, far from being a sign of the inherent instability of the private enterprise system, is a testament to how much harm can be done by mistakes on the part of a few men when they wield vast power over the monetary system of a country."
One of the major reasons for the severity of today's recession are the Fed's actions that artificially stimulated the boom period. During the recession of 2001, the Federal Reserve continued to lower interest rates to encourage more investment - from around 6 percent in 2001 to nearly zero in 2004. This helped boost prices, which led to a massive bubble.
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