Interview. "Milton Friedman Speaks Out: An Exclusive Expo Interview with America's Best-Known Economist." Interviewed by Vivian Grey. Expo Magazine, Summer 1979, pp. 16-20, 112. On Energy VIVIAN GREY: What do you think of President Carter s energy program? MILTON FRIEDMAN: Obviously, I welcome the decontrols, but all the rest of it is a disaster! Including the gradual, three step way decontrols will be implemented. To really work, the program should call for immediate, complete decontrols. And the immediate abolition of the Department of Energy. There is no problem in the fuel area that would not be solved by abolishing the Federal Department of Energy and eliminating all government regulations on the pricing, distribution and production of fuel. VG: But how would immediate, one-step decontrols impact the petroleum industry? MF: First of all, you have to understand what price controls have done to the consumer. The government, through those controls, has discriminated for years against the domestic production of oil, in effect, government subsidized the price of foreign oil. So how was the consumer getting cheaper oil by paying part of the price through taxes and part of the price the other way? What is the government doing for the consumer in the oil business? Immediate decontrols would provide America s petroleum industry with a big production incentive. They would eliminate a major element of uncertainly in the whole area of how much to invest in energy production... and where to invest it. VG: But what effect do you think immediate decontrols would have on inflation? MF: In the initial stages, they would have no effect whatever. Ultimately, they would reduce inflation. Inflation is not produced by high oil prices; high oil prices simply mean that other prices are lower than they otherwise would be. Why is it that nobody ever writes about how deflation is produced? By the declining prices of computers, electronics goods and so on.
It s a gross confusion between relative prices of different things and the absolute level of prices. But in the longer run, decontrols would reduce inflation, to a limited extent. Again, this is not a major factor in inflation, one way or the other. Insofar as oil prices have any longer-run effect, they would make possible the production of more energy, thereby permitting the country s total output to increase. VG: Do you see Carter s program as coming out of deep economic study and/or study of energy potential... or political expediency? MF: The overall program is an economic monstrosity which cannot be justified in any economic terms only by narrow political considerations. Any positive ultimate effect of decontrols will be offset considerably by the negative measures and negative elements that accompany it. In the first place, the windfall profits tax, if enacted, would remove the incentive to find new oil and would make the whole package a conservation program and not at all a production program. In the second place, the various special detailed proposals for regulating this, that and the other thing will simply result in causing less efficient use of energy. VG: Do you see anything positive in the President s call for voluntary energy-use controls and the threat of legislation if the voluntary approach fails? MF: Pure rhetoric! And I believe the talk about windfall profits tax on oil is pure demagoguery. MG: You don t see any teeth being put in that? MF: Oh no, no. Maybe it ll be passed. The Congress is a bunch of demagogues, too. I m only saying that Mr. Carter s call for the tax is pure demagoguery. There is no justification, on any ethical or economic grounds. VG: How would you have approached the problem? MF: By completely eliminating the control on prices and wages and the price of energy... and taxing any income corporations the same way everybody else is taxed. VG: How do you feel about the tax rebate component of the program? 2
MF: It makes no sense. We ought not to decide on the taxes people pay or the benefits they get from government on the basis of the price of a particular product. It s just mixing horses and apples. If we believe that people below a certain income ought to be helped, we ought to help people below that income. Whether they spend their money on oil or something else. VG: Do you see anything in the program encouraging the development of alternate oil sources? MF: No. Well, I shouldn t say that. The decontrol of the price of energy, when and if it occurs note one thing; it s by no means certain that it will occur. All you re going to get is the first step. Whether you ll get the last step, no one knows. But that s the only element in the whole program which encourages the development of alternative energy sources. The important thing to remember is that we had no fuel problems or shortages until government got into the oil business, from 1800 all the way until 1973. There is no shortage of natural gas in the world. There s lots of it. There s no shortage of gas extraction equipment. But there is a surplus of government intervention. It s no accident that as long as the government was keeping its cotton-pickin hands out off the thing, we had no problem! The beginnings of our fuel problems start from the imposition of price ceilings on natural gas back in the 1950s. Somehow or other, the idea that the people who run the post office can do a better job of running the oil industry than the people who run Exxon or Texaco or any of the major oil companies is an idea whose logic eludes me. The present system of oil regulation involves a federal bureaucracy of something like 20,000 people spending $11 billion a year. Now, who s paying the salaries of those people? Is it some Arab sheikh or is it the consumer? The consumer is paying more for oil an having it less readily available because the government has gotten involved. VG: Given what you call the rhetoric of Carter s whole energy program and the recent mounting concern about nuclear energy safety how do you see those two forces interacting? 3
MF: Well, they obviously reinforce one another, in making it more expensive and more difficult to produce energy and contributing to its wasteful use. Both of them will make energy more costly than it otherwise would be. Now don t misunderstand me. There is a real safety issue about nuclear energy, but I don t think it s the issue which is being discussed. The fundamental concern is nuclear waste disposal, and that s a valid problem. But once again, many so-called nuclear problems arise from unwise government intervention. In the first place, government has limited the liability of any one nuclear plant for waste safety violations. In the second place, government is undertaking responsibility for nuclear waste disposal. The right procedure, in my opinion, would be to have a much freer environment in the production of nuclear plants, provided those plants (a) have unlimited liability for any damages they impose and (b) are required to demonstrate full responsibility for the disposal of nuclear waste. If you had followed that policy, you would have had some research on an effective way of getting rid of nuclear waste. And we wouldn t be in the box we are in now. VG: Let me ask you a very Utopian question. Do you see any possibility for a sane, well-directed public outcry that would affect government policy in either energy policy or safeguards? MF: Do I see any hope for it? No. Unfortunately, in both those areas, demagoguery is riding high. On Israel VG: How do you see the peace between Israel and Egypt affecting Israel s economic situation? MF: First, I believe that the economic problems of Israel are not fundamentally related to its military needs and situation, but are the outcome of bad domestic policies. Number two, insofar as the peace agreement affects Israel s economic potential, it will change very little, in the short run. But it offers great long-term opportunities: the possibilities of entering into a large market and increased economic productivity. Also, in the short run, it will impose extra costs for which the U.S. will supposedly pick up the tab. 4
VG: Let s take the scenario a bit further. Let s assume a continuation of the peace process which would remove low-cost West Bank Arab labor from Israel s economy and add the possibility of getting similar lowcost labor, albeit within a different framework, from Egypt. MF: There is a very important economic proposition that the trade in goods is a substitute for movements of people. So I think that the changes you re suggesting would have more effect on the character of the economic developments than on their possibilities. If West Bank cheap labor is eliminated, it would be a disadvantage... temporarily. However, if you could really open up a broader market for Israeli goods and for Israeli investments and technology through the Egyptian economy in principals that could far more than make up for it. Whether it will or not is a different question. Because as you and I know, this is a very fragile peace arrangement, and there is no certainty that it will end up with a really free economic market between Egypt and Israel. VG: Do you perceive a free market situation as manifestly aiding Egypt s economic situation? MF: It could. Whether or not it will depends on how it develops. Peace and open borders can certainly be a great help to Egypt but they will be a great help to Israel, too. Obviously, the two countries have a common interest. That s the reason they made the peace. 5