The Shock Doctrine

Resurrect Erhard

Christian Euler, “Lasst Erhard Auferstehen,” FOCUS, April 7, 2003.

Economics Nobel Prize winner Milton Friedman on the costs of the Iraq War, The Euro and the Economic misery in Germany

FOCUS: Professor Friedman, can the war in Iraq throw back the US economy and, therefore, the economic engine of the whole world?

Friedman: No, it will undoubtedly stimulate the economy, which in any case is in a healthier position than many people suggest.

FOCUS: Stagnant profits, sinking consumer confidence and rising unemployment speak against this thesis.

Friedman: The stock market collapse has distorted the picture. After years of the boom we had one of the mildest recessions ever in 2001. Again: the economy is healthier than many fear.

FOCUS: Name an example for us.

Friedman: Take the US unemployment numbers. The present level of five to six percent used to be a sign for economists of a flourishing economy.

FOCUS: You don’t see any reason to worry, then?

Friedman: The chances of a worldwide recession are extremely small. I don’t see why the economy shouldn’t speed up when the uncertainty over the Iraq conflict has been resolved.

FOCUS: You describe the concentration of power as the greatest threat to freedom – and thus to the economy as well. Many people judge the current war against Iraq very critically for this reason – you as well?

Friedman: A clear no. US President Bush only wanted war because anything else would have threatened the freedom and the prosperity of the USA. Counter-question: Do you recommend that Gerhard Schröder ask the whole world for advice before he engages in foreign policy?

FOCUS: The USA did at least ignore the opinion of the majority of UN members…

Friedman:…Bush is president of the United States and not the world. He didn’t even have to consult the UN at all. The United Nations is an absurd organization anyways. All votes count the same, regardless of whether the country has three or 300 million residents. Furthermore, many nations aren’t democratically legitimized at all.

FOCUS: Many Europeans see that differently. Does this political disagreement threaten a trade war between Europe and America?

Friedman: No, the end justifies the means. As soon as we’re rid of Saddam, the political differences will also disappear again very quickly.

FOCUS: What remains are the immense costs of war. Where is the money supposed to come from?

Friedman: It is a small war – also in comparison to the Gulf War of 1991. Back then we had a troop strength of around 400,000 men, today it’s not even 250,000. America is a big country – in comparison to the state expenditures of three to four trillion dollars a year, the costs for this war are only marginal …

FOCUS: … as long as it doesn’t escalate.

Friedman: I don’t want to speculate about that.

FOCUS: In the meantime, many of your colleagues warn about the danger of deflation. Are these worries about a downward spiral of falling prices and a collapsing economy exaggerated?

Friedman: I see no reason for deflation. There is only one way governments come into money without raising taxes: They increase the money supply and produce inflation. Governments have always succumbed to these attempts.

FOCUS: Would that not further weaken the dollar relative to the Euro?

Friedman: No, because the Euro is, as before, significantly overvalued and will depreciate again over the course of the year.

FOCUS: How do you judge the EURO – Independent of short-term swings – as a currency system?

Friedman: I doubt that it will be a lasting success, since the member countries can hardly react to economic disturbances. Take the European stability pact: It forbids countries from pursuing the domestic policies that would be best for them. That is grotesque.

FOCUS: Do you believe that the system will nevertheless continue to exist?

Friedman: For me the Euro is an experiment for the next ten to 15 years. There has never been such an association with soon 16 different states and one fixed exchange rate. Even Germany would be much better off if it had joined at a lower exchange rate.

FOCUS: The German economy isn’t coming out of the starting gates. How deep is the country stuck in crisis?

Friedman: Germany finds itself in a real structural crisis. It belongs to the counties with the lowest economic growth worldwide. That is attributable above all to the all-powerful state. You see, year after year you work more than six months for the state. That is a modern form of slavery.

FOCUS: What is the way out of this serfdom?

Friedman: All I say is, resurrect the former economic miracle minister Ludwig Erhard. He gave the market free reign, broke up the encrusted structures, dismantled the bureaucracy and made the labor market flexible. With the all-to powerful German unions that is just impossible.

FOCUS: Is the misery really all the unions’ fault?

Friedman: To a meaningful degree. They should compete with each other and enjoy no advantages from the government. Young firms need the chance to hire people without running into the danger of never being able to let them go again.

FOCUS: But in your opinion the all-powerful state obstructs the economy. What is your recommendation for lowering the state’s proportion?

Friedman: The only right way is tax cuts. Then the government is forced to spend less.

FOCUS: But then the gap between high and low wage earners increases.

Friedman: Naturally those with the highest tax rate profit first. But they use their tax savings not only to eat or drink more. No, they invest – and that gets the economy going and helps all citizens in the long term.
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