Agreeing to Disagree

RK: You have obviously had the enormous satisfaction of seeing your ideas influence a revolution, both in the thinking of economists and in the premises of politics and the role of government. Does this make you any more optimistic about the ability of the political process to work, and of government to learn over time?

MF: I've always been realistic about this. I do not think you can change [government].

RK: Well at least it seems to prove that ideas have influence.

MF: There is no question that they have influence. You know, I agree very much with the famous quotation from Keynes. Sooner or later, ideas matter.

RK: Right. Let me get down to some specifics. You were the progenitor of the notion that we ought to move to floating exchange rates.

MF: I was a promoter of that idea. I was in favor of it, but I was by no
means the inventor it. That was an old idea.

RK: Well, I guess I meant in the context of the Bretton-Woods system breaking down.

MF: Well, sure I wrote and spoke about the desirability of that proposal at a fairly early time.

RK: I guess my question is: are there times when, because of the unique role of the dollar and the ability of the United States to borrow dollars from sovereign countries, exchange rates can get dangerously out of alignment, and not correct as quickly as one might hope? Is that of concern?

MF: It is not. Any policy that seeks to adjust exchange rates more quickly will in practice adjust them more slowly. How often does the government ever beat the market in terms of getting things done better and more quickly?

RK: So if &.

MF: Of course there are periods when the exchange rate gets out of line-- the question is what is the best way to adjust. The market will adjust faster than the government would.

RK: Are there structural things in the way markets are structured that can reduce the risk of bubbles?

MF: I'm not an expert on bubbles I think bubbles are something that you can only know after the fact and obviously the more flexible the market, the more information you have going, the more likely it is that you will get the right price.

RK: So there's nothing that can be done in the rules of the regime to make it less likely that you'll have prolonged bubbles and then prolonged crashes, or dangerous deep crashes.

MF: Yes of course there is. You will not have any deep crashes if you have a stable monetary policy. After all we have not had any crashes after the 1999-2000 bubble.

RK: Well that was the next thing I wanted to ask you about. I was reviewing your history with Anna Schwartz [A Monetary History of The United States, 1963], which of course changed the thinking about the causes and dynamics of the Depression. So, if I read you right, it wasn't that the government had no role to play, it was that the government, in the person of the Federal Reserve, needed to provide the system with more liquidity than it was providing, but the government did a poor job that time. My question is, do you think the Fed has learned a few things since 1929?

MF: Oh, there is no doubt. I have a paper coming out in the Journal of Economic Perspectives on a natural experiment. You have bull markets in the 20's in the United States, the 80's in Japan, and the 90's in United States, followed in each case by a stock market crash and recession. If you plot the money supply, national income, and a stock market price index , they behave very similarly in the three bull decades. All rise fairly steadily and at much the same rates in the 20's, the. 80's and the 90's,On the other hand, if you look at what happens after the bull markets, you have an almost perfect experiment. Money supply plummeted in the United States after 1929. Money supply was horizontal in Japan in the early 90's except for a couple of negative quarters. Money supply grew at a steady and fairly rapid rate in the United States after the stock market crash of 2001. That's what happened to the money supply. Much the same happened to national income and the stock market. Both plummeted in the United States after 1929. In Japan, both stagnated. In the United States after 2001, both paused briefly after the market crash and then resumed fairly steady growth. The Fed is very much aware of that history.

RK: The Greenspan Fed has probably intervened by my count at least five times. There was the 87 crash, there was the Asian meltdown, there was of course the big stock market collapse in 2001-2002, and before that there was the problem with the money center banks having gotten into deep trouble over the third world debt. And the Fed has been very proactive to prevent this sort of financial problem from cascading into the real economy. How do you square that with the strict monetary rule idea, or is this something quite apart from the desirability of a stable target that central bankers ought to do proactively. Is there any contradiction between the two notions?

MF: Let me give you my own interpretation of all of this. I believe what we did, what economists in general have done, was to overestimate how hard it is to maintain a stable price level. We've all worked on getting rules, my money rule and others, supposedly it's such a hard job to keep prices stable. Then along comes the 1980s, and central banks all over the world target price stability; and lo and behold, all of them basically succeed, there are no failures that I know of. So it must be that that is easier to do than we thought it was. The basic problem of central banks was not to maintain full employmentthat was the wrong objective. That was their major objective from 1945 to 1980. Once they really understood that avoiding inflation, keeping prices stable, was their real objective, their first order objective, and put that above everything else, they all turned out to be able to do it.

RK: But in the context of a stock market collapse, doesn't that take second place to the objective of keeping adequate liquidity in the system.

MF: No, In order to keep the general price level stable, you need to keep adequate liquidity in the system..

RK: Yes&.

MF: You have to offset velocitythe stock market will affect velocity. That is to say, when a stock market crashes, there is associated a demand for real balances, and that is equivalent to a decline in velocity. So you have to increase the money supply to offset that decline in velocity. If all you want is stability of the general price level, apparently it's an easy job to do. I really must say I am surprised at how well all of these different countries have been able to keep to their inflation targets.

RK: Do you think the greater degree of globalization and reliance on market forces has, on net, made the job of central bankers easier by allowing markets to self-correct more fluidly, or has it made their job more difficult by increasing the risk of systemic imbalances?

MF: I believe it has made their job easier by providing a larger and more liquid market.

RK: How do you reconcile that with the need to intervene very proactively after crashes.

MF: Well, there aren't very many crashes.

RK: Right

MF: In 1929, in the immediate aftermath of the crash ,the Federal Reserve Bank of New York did very well providing liquidity. The System's mistake came later when it allowed the money supply to decline by one third by 1933.The Federal Reserve in 1987 did very well in intervening, in providing liquidity. That's never been the problem.

RK: It's the money supply?

MF: It's recognizing that you are responsible for inflation, for the price level, that it isn't something that comes from outside.

RK: I wanted to ask a similar question with regard to the NAIRU [Non-Accelerating-Inflation Rate of Unemployment.] Again, this was one of your pioneering contributions, to change the thinking from that of the Philips curve tradeoff to that of a natural rate, or a non-accelerating inflation rate, of unemployment.

MF: That's not my term. My term is the natural rate of unemployment.

RK: My question is: as productivity has increased in the last decade or so, it almost looks as if the natural rate has changed. Is that consistent with your view?

MF: Sure, the mechanisms of the labor market move. The natural rate of unemployment just means whatever rate of unemployment is generated by the labor market with its friction, without producing inflation; and that depends on the one hand, on how flexible the labor market is, and on the other hand, on how many job-seekers are coming along. We've gotten a much more dynamic economy over the past ten to fifteen years than typical, and more and more companies have had mergers, and that means you have more pressure on the labor market, more firing and people being hired. And at the same time the labor market has gotten more flexible and as a whole those things offset one another. So it looks like the natural rate of unemployment has not really changed. It may have gone down a bit. [Economist] Bob Gordon has done the best job of trying to estimate it and he suggests that its 6 percent. Maybe now its 5 percent.

RK: Another question: In my own work I have argued that in most sectors of the economy markets work as advertised, but there are some sectors such as healthcare where for a variety of structural reasons, if you let the free market operate you will have socially unpleasant consequences and maybe even inefficient consequences, in that epidemics will spread and that sort of thing, and ditto maybe in the regulation of the honesty of financial markets. You and I would probably set that bar in different places in terms of how many kinds of sectors of the economy are exceptions to the rule, and what you do about it.

MF: Wherever government is largely involved, inefficiencies result. Now let me ask you a question. Dentistry does not come under Medicare. Dentistry is operating well. You never had any of the problems in dentistry that you have in medicine. If markets work in dentistry why wouldn't they work in medicine? They did work in medicine for many years. In 1945-46, total spending on medical care was about four of five percent. Now it's gone up to 13 or 14. Something happened.

RK: Well, but part of that surely is because medicine has figured out more ways to treat people.

MF: Every other technological improvement lowers costs. What technological improvement raises costs? Government is now paying at least half the costs of medical care. Obviously, that's why, whatever the technological improvement, it's generating higher and higher costs.

RK: Let's assume we repeal Medicare and Medicaid, and make provision of medical care a matter of individual purchasing power plus charity. How would that work?

MF: I can recognize that there might well be a role for government, enacting help for the poor and for catastrophic cases.

RK: But if you believe in free markets, why should there be any help?

MF: The only thing that really differentiates medicine is that an individual family has to make a decision to care for a sick person. Hopefully insurance will take care of that. It does in the case of housing and other areas. We don't subsidize automobile insurance.

RK: Would you regulate insurance companies to make it illegal for them to refuse to insure people who were deemed to be at risk of getting sick?

MF: No, I wouldn't.

RK: So in other words someone who is elderly, just wouldn't be able to get insurance, because the insurance companies couldn't make a profit insuring that person.

MF: Well that's why I am saying there could be a government role

RK: In what, subsidizing the ability to purchase insurance or&.?

MF: In providing catastrophic insurance for people who cannot afford it.

RK: Now is that a humanitarian argument or is that an efficiency argument?.

MF: Humanitarian.

RK: And what about school vouchers, where you are on record in favor of them, but the public realm would pay the freight?

MF: My ideal school system would be one in which parents would be responsible for supporting their children, as they are responsible for feeding and clothing them, in which if the government has any role at all it is solely on a humanitarian basis, for those cases of indigent families who simply cannot afford to school their child.

RK: So you see only a humanitarian argument. You don't see an efficiency argument?

MF: We have a system now in which the government finances schooling. We cannot get from here to there [a complete free market] in any single step, and I see vouchers as a measure that goes in the right direction and would improve enormously the quality of schooling for the great majority of children.

RK: Do you place any stock in the notion of positive externalities, or is this purely a humanitarian argument.

MF: Number one, it's mostly a humanitarian argument, not because I do not recognize positive externalities. There are some. What you have to do is differentiate between average externalities and marginal externalities. Suppose in the absence of government involvement, half the children were not in school. Then the positive externalities would provide a very strong case for government involvement. I do think it would make this country impossible to live in, and it could not be a free society, if you had half the population never schooled On the other hand, what if in a free market 98 percent or even 90 percent of kids go to school and are getting adequate schooling. Then on the margin, is there any great externality involved? Very little I think. Now, what are the facts? In Britain, before you had compulsory schooling, in 1870 or 1880 or whenever it was, something like 90 percent of the kids were going to school. In fact, educational performance did not go up after government got involved.

RK: So, in the context of America in the 21st century, the bottom quartile of the income distribution probably couldn't pay the going rate to have their kids schooled, so how would their kids get schooled?

MF: Well in the first place that's not clear to me. In every society, however poor, the bottom quartile does school their children. The reason why the bottom quartile has low disposable income is partly because of our lousy educational system plus the taxes they now pay for that school system. One of my major reasons for being in favor of vouchers is because I believe that defects in our educational system play a major role in the growing inequality of income

RK: So, your middle ground is that for people who'd have to spend something like 50 percent of their disposable income on tuition, those people would get government vouchers?

MF: No. Hold on. We shift back and forth between utopia and reality. In the utopia, yes. In reality, I want universal vouchers. Everybody pays taxes. Everybody is entitled to vouchers. I believe that if you have vouchers only for low-income people, it would be a very bad program for several reasons. A program for the poor would be a poor program. They say that about Social Security.

RK: Yes, I believe that too.

MF: The main reason I believe the poor would benefit much more from universal vouchers than from vouchers for the poor only, is because universal vouchers would open up the educational market to innovation and for experiments in new ventures. You know there has been absolutely no improvement in the education field in two hundred years. We're teaching kids the same way we did two hundred years ago. And that's ridiculous. The reason for that is a government monopoly administered by the trade unions. It threatens to convert the United States into a bifurcated society of the haves and the have nots.

RK: What about the practical problem of a middle class family being able to supplement the value of the voucher with their own means and the poor family not being able to.

MF: Tell me, would the poor people have benefited when television sets were first being developed if government, to assure that television was affordable, had set a maximum price that could be charged?

RK: I'm not sure I agree with the analogy&.

MF: My analogy is very straightforward. Parents should be able to spend extra money on their children, if they can and want to. That's is the way we get the funds for experiments. Rich people do play a role. Income inequality in some sense plays a very positive role in the dynamic of a society. They provide the funds for innovation.

RK: Let me ask about one other area where a lot of people argue that markets don't quite get you where you need to go, and that's the case of the environment. What does a free marketeer do about the whole problem?

MF: A group in Montana of free-market environmentalists have gone into that extensively. Obviously there are externalities. There is a role for government and the question is what are the means that you use. And the answers of a free market environmentalist is you use market mechanisms. Instead of setting quantitative limits on pollution, you impose a tax.

RK: So why should there be a necessary role for government at all, in the area of the environment?

MF: Because of the costs of reaching an agreement. The costs of transactions. Let's say a power plant is emitting smoke which is dirtying my shirt. The ideal solution is that I ought to be able to charge the power plant for dirtying my shirt, and they would pay for it. But on a thing like that, with one party doing business with a hundred thousand individuals far away, it's not feasible to engage in such contracts and therefore the second best alternative is to have the government engaged.

RK: But in a market-like way?

MF: If at all possible in a market-like way. I'm not saying it's never necessary to go beyond the market.

RK: I have one other big question. And that's the area of financial markets, and transparency, and the accuracy of corporate books, and all the things that were the stuff of the scandals&

MF: Sarbanes-Oxley&.

RK: ∧ there are probably going to be many more scandals, now that a more free market kind of guy is going to be the head of the SEC. But where do you draw the line? Where do you think in the area of the honesty of financial markets themselves, markets are adequately self-policing, and where does the need for some kind of regulatory regime come in?

MF: Well I'm not sure that a regulatory regime should be the role of government. Government's job is to prevent fraud or theft. That's the real role of the government, in the financial market and everywhere else.

RK: So how does that translate when you are talking about financial markets, where if the last round of scandals is any indication, insiders just were in a position to fool investors, and it eventually self-corrected, but it did a fair amount of damage in the meantime.

MF: Yes it did and you didn't note that it self corrected before government got involved.
Enron wasn't brought to surface by the government. It was brought to the surface by the market

RK: Well but the whole business of financial advisors also being investment bankers was brought to surface by [New York Attorney General] Eliot Spitzer, so it was some government and some prosecution. It certainly wasn't the SEC. The SEC was asleep at the switch if anything.

MF: Yes, and it has been mostly since.

RK: Right. But one of the paradoxes here is that the law and economics movement seems to be in favor of restricting some rights of private remedy even as its in favor of reducing regulation.

MF: I'm not sure what you are referring to

RK: Well I'm referring to both the writings of some prominent law and economics people, but also the 1995 and 1998 amendments that made it harder for individual investors to bring suits claiming that they were defrauded by the representations of people selling securities and the accountants signing off on offerings, and that sort of thing.

MF: I'm not an expert on that area. I don't know what those amendments were. You've got me out of my depth.

RK: Well, let's come back to the SEC. In general, well, what did you think of Sarbanes-Oxley? Was that overkill? Or was that a reasonable&.

MF: I think Sarbanes-Oxley is a terrible law.

RK: Because&?

MF: Here you say to every CEO in the country: you've got to swear to the accuracy of things you can't possibly know. You're going to make a perjurer of him. And you say to him, for God sakes whatever you do, don't take risks. We've been having something of a slowdown, not in the economy as a whole thanks to the housing boom. But in what I describe as the healthy party of the economy: manufacturing, services, etc., the free market part of the economy. And one of the reasons why I think we've been having this slow down is because Sarbanes-Oxley is saying to CEOs, for god sakes don't take any risks. And yet progress depends on doing risk. You can't make an omelet without breaking some eggs.

RK: But the whole system of independent accounting firms certifying to the accuracy of corporate books came crashing down in the 90's. Do you think the private market was capable of repairing that?

MF: I really have never studied that problem.

RK: Fair enough. One question about the Bush administration: On the one hand, President Bush certainly subscribes to the philosophy of smaller government, but on the other hand he's been willing to take real risk fiscally in order to starve the beast and ratchet down the cost of government. Do you have any difficulties with the magnitude of the deficits?

MF: I have no difficulties with the tax cuts. I have great difficulties with the unnecessary increases in spending. I do believe that there's a lot of government spending that should not have been permitted to happen. But so far these deficits are not large relative to national income, they are not bigger than what we have had in the past and they are getting smaller as the economy is growing. I've always said government will spend whatever taxes will yield plus as much more as it can get away with. And that's what's happening now. And the worst solution for it would be to increase taxes because that would simply increase spending and generate another deficit.

RK: Well that actually brings me to another question I wanted to ask, kind of on the same note. Around the turn of the previous century you probably recall Wagner's Law saying that in a democracy there would be an inexorable tendency to increase government outlay. And in the 1970s, you had both the political left and the political right, for different reasons, coming to the same conclusion that the state was headed for fiscal ruin, with the left arguing that the state was going broke cleaning up after the excesses of capitalism, with the right arguing that it was interest group demands and pandering politicians. But what's interesting to me is that in all of the democracies, public spending, is slightly down in the last couple of decades. So, was Wagner wrong and is democratic government and democratic citizenry capable of restraining this impulse?

MF: I don't think you can say he's wrong. There's always a danger that things will get beyond a certain point. I think what really matters is the fraction of the public that is on the federal payroll -- not necessarily payroll but on federal money -- people who are on welfare. But if you keep that down, I think one way to describe the situation of the past fifty years is that we came out of World War II with a widespread belief in the virtues of planning. That was a combination of the great depression, plus war-time planning. You had full employment and you had the heavy hand of government in planning, not only in the United States but around the world. In Britain it was socialism, in France it was indicative planning, and at the same time the actual structure was primarily free markets. In the United States opinion was socialist and practice was free markets. Then after Wolrd War II, up until 1980, government expanded according to the belief in planning, spending went up, but at the same time peopled started becoming disillusioned with what was happening under government, and so opinion moved in the opposite direction of practice. The two sorts of trends and the conflict came to a head in 1980 with the election of Reagan as president, and all of a sudden the ratio of government spending to total national income stopped rising. From 1980 to now, many countries have moved away from planning.

RK: Right&

MF: At the moment, opinion has shifted a great deal away from the idea of planning. Nobody anymore is a socialist in the dictionary sense, of the ownership and operation of the means of production. Nobody thinks that's the way a country should go. It is widely accepted that private property, private enterprise, and the market are more efficient. But nonetheless, I can see in the case of Germany right now, where the government is spending over 50 percent of national income, where they have very high unemployment that's a place where government is too big.

RK: Consider all of the things that are available to allow people to be healthier and live longer. If you left all that to the free market, people, as happens now with uninsured people, would not get preventive care, their kids would not get preventive care. They would use emergency rooms as basic primary providers, and older people who are at risk of getting sick would be effectively uninsurable, and the best paid employee of the insurance company would be the person who is the smartest at avoiding risks, and a large fraction of the population would be denied available healthcare. I think if you are going to have the benefits of even basic medical care be available to everybody, which I think makes sense both on humanitarian and on positive externality grounds, you just can't get an efficient outcome if the market does it. So I would say health care is different. I would say, education is different, but we can argue whether vouchers are a good idea. I do think there has to be some taxing and some spending in education, even if vouchers are the delivery mechanism. And I certainly don't think that, given the scandals, that we have seen that financial markets are effectively self regulating. It was the self regulatory institutions the American Institute of Certified Public Accountants, the National Association of Securities Dealers, that were charged with keeping the whole thing honest who turned out to be on the take like everybody else. So I think there are areas where you need social transfers, and there are areas where you need regulation. Now sixty, seventy, maybe eighty percent of the economy, in my view, does operate more efficiently as a free market. I don't disagree with you on that.

MF: I think that the sectors you describe are different, not because of their nature, not because they are necessarily different, but because the government does play such a large role. There is no reason whatsoever why government should be producing schooling. You can make an argument for subsidizing schooling, you can make an argument for requiring compulsory schooling, though I think it is weak. Those you can do. But why should government be producing schooling, and not producing automobiles? What is it that makes government a better producer of schooling than private enterprise, and differentiates it from other sectors?

RK: I would divide the question into whether a subsidy is needed as one question, and what the optimal delivery mechanism is, as a separate question. And the difference between automobiles and schools, it seems to me, is less that government should necessarily be put in charge of running schools, than that society ought to be subsidizing the function.

MF: Well but government can subsidize the function without running the schools. Government can give food stamps to people, but it doesn't run grocery stores.

RK: Healthcare is a good case in point where you don't have, except in the military, government doctors. You have doctors who are private entrepreneurs or paid employees and government pays some of the cost. So it doesn't logically follow that just because government subsidizes the function, that government ought to be providing the service. I just think that there are more parts of the society where there is a decent case for taxes and transfers than you probably think.

MF: Well I am sure that's true. But in the case of medicine, I would really like to see, and I wish I were competent myself to do it myself, a comparative study between dentistry and medicine.

RK: But dentistry is peripheral. It's a very small fraction of total health spending.

MF: A very small fraction with exactly the same kind of problems, and I would like to know whether there has been any less technological development in dentistry than there has been in medicine, whether costs have gone up anything like in medicine. They all have the same kind of problems. The key problem of medicine is third party payment. Nobody pays his own bills.

RK: Well but what do you do with the fact that a large fraction of the public could not afford to pay for serious illness.

MF: Those people now pay it through taxes.

MF: I think not only a large fraction, but most people could afford to pay, directly or through insurance for their own medical care. I am old enough to have grown up in a period when there was negligible, government subsidization of medicine. And my family, including me, in the 1920's and 30's were certainly in the lower quartile, probably the lower 10 or 15 percent, certainly at a low level of income. And the difference between the situation then and now, was the contract was between the individual and his doctor, and the doctor had a sliding scale, and was charging people what they could afford

MF: The growth in longevity from 1900 on happened both before and after World War II, before and after government got involved.

RK: Well the big growth in longevity in the early part of this century was through public health, and wiping out epidemics and better sanitation.

MF: That's right.

RK: So you might even say government had a little bit to do with that.

MF: Government did have a role. But it was a very different role than it has had more recently. It has changed the character of medicine all together so that it's all third party payments.

RK: Well, but you could have third party payments via insurance without government playing any kind of role, and you would still have the same problem with the insurer. In fact, as you know, doctors complain about this. The HMO gets between the doctor and the patient probably more than the government does.

MF: Well that depends on what insurance is for. In the case of medical care, insurance has become, very different from insurance in other areas. It has become insurance that covers the day-to-day costs. It as if automobile insurance covered your gas. RAND made a large scale study several years back in which they had a large sample whom they put on different insurance contracts. It turned out that there was little difference in medical performance between those who had zero deductible versus who were essentially on 100 percent deductible, but a big difference in medical cost.

RK: Well, wouldn't that be partly a function of income. In other words, maybe for me there is no difference but for somebody who is making $20,000 a year&.

MF: No, I'm talking about the outcome, they had a sample of people with the same income. They were comparing insurance policies with a high deductible and insurance policies with a zero deductible, and the medical outcomes were relatively identical.

RK: I remember when Eisenhower had his heart attack, and doctors basically had a couple of things they could do. They could prescribe Aspirin and rest and now somebody with heart problems has so many treatment options. You could probably spend half the gross domestic product, if you came up with every marginal outlay that could improve somebody's health. And even for fairly basic stuff, they just have so many more things that they can do to you now. So, do you just ration that on the basis of what people can pay out of pocket, or what do you do?

MF: I think you are confusing cause with consequence. It is because the government is willing to pay for certain things that they are so expensive. They don't have to be so expensive.

RK: But some of this stuff is inherently expensive.

MF: I know it is, I've had two bypass operations

RK: Well, so you don't want someone off the street doing that. You want someone who is highly trained in a good facility.

MF: Everybody wants a highly trained person who has a lot of experience, but you never get people with experience if you don't have some way of paying.

RK: Sure, but I mean that someone who is competent to do a bypass operation is going to be well paid and the facility in which it is done is going to be pricey, and the more stuff they keep inventing, whether the government is paying for it or whether you are paying for it out of pocket&

MF: I think in the market system, if people were paying for it themselves, the salaries of doctors would not be what they are today.

RK: No, but the statistics are that doctors, if your baseline is about 1950, doctors were doing better in real terms than they are now. Doctors' salaries have been held down by HMOs.

MF: The last time I looked at it when I wrote an article in the Public Interest a couple years ago, there are twice as many physicians per capita now as in 1950 and salary went up sharply from 1950 to about 1980. Since then they have come to a complete halt and may be going down., the crucial thing is that all of this started in 1965, when Medicaid and Medicare were enacted, and that's what started the increase in the number of physicians, a rapid increase in their number and their pay.

RK: But, you know, physicians incomes relative to other highly skilled professionals are relatively lower in the western countries that have universal health insurance, so I think it is kind of indeterminate.

MF: We have the worst of all of all worlds on that score

RK: I couldn't agree with you more. We have the worst mix of government and private, I could not agree with you more.

MF: We ought to have much more private or much more government.

RK: Well, to the extent that government is involved at all it ought to be doing a better job than its doing now. I am entirely in agreement.

MF: But there is no formula for doing it. Every area where the government gets involved, whether its education, whether its medicine. If government were to take over the industry of running retail grocery stores, that would be a major problem. The post office is a problem. And if Medicare and Medicaid had never been passed, it may well be, probably would be, that expenditure on health would have gone up, maybe to seven, eight, nine percent of GDP, because as we get to be a richer country, it's a product that people want to have more of. And there is nothing wrong with that. In fact there's nothing wrong with medical spending being 20 percent of national income.

RK: If people want it, sure.

MF: But what happens when the government takes over, spending goes up while the government involvement grows, but when the government takes the whole thing over, then spending goes down. Look at what happened in Great Britain or in Canada, they spend much less, That's because of government rationing. Allen Wallace once wrote an article about the effect of government taking over an activity, and he pointed out that spending goes up while they're taking something over, then it goes down afterwards because that's where they can get money for another venture.

RK: Well, I guess the basic disagreement is that I think there are more sectors of the economy than you do that for a variety reasons aren't either self-regulating in terms of how they operate, or get the right resources.

MF: I think the real difference is that you have more confidence in government than I do.

RK: No, I don't have necessarily have confidence in government, but I think rather than just concluding that the remedy for healthcare not being a good subject for the free market, is just to say well that's too bad, I think you've got to work harder at having the government to do what is has to do better. And I think, ironically enough, the Federal Reserve is one of the proofs of the pudding, because that, after all, is part of the government, and it has learned some things over 70 years.

MF: Wait another 10 or 20 years. I trust the government to behave like a government.

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