Tape 48 - Income Tax, Economic Models, Canada vs. US in Cost Depression, Pollution / Paul A. Samuelson papers, 1933-2010 and undated / Duke Digital Repository

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The Chicago Tribune, welcoming you again

0:02

on behalf of Instructional Dynamics,

0:04

to another visit with the distinguished economist,

0:06

professor Milton Friedman of the University of Chicago.

0:09

And Dr. Friedman and I are recording this interview

0:12

on April 15th, which of course is a significant date

0:15

in this country with it's income tax connotations.

0:20

Dr. Friedman, you have some interesting thoughts

0:23

on the income tax, which you express many times.

0:25

But, I wonder if you would bring us up to date

0:28

on your thinking.

0:30

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Well the main thing that impresses me

0:32

about the income tax as it now exists,

0:34

is that I just wrote a column for Newsweek

0:38

on it in which the last sentence

0:42

expresses a point I want to make now.

0:44

The last sentence says, "this is an exercise

0:46

"in mass masochism, with few parallels

0:49

"in the annals of mankind."

0:53

And what I have in mind by that is

0:54

that we all of us struggle for the past few weeks

0:56

with this incredibly complicated tax.

0:59

We have an army of people filling out returns,

1:01

an army of lawyers and accountants advising us

1:04

how to reduce our taxes, and so on.

1:07

We have an army of people in the Internal Revenue office.

1:09

And the question is, why?

1:13

For what are we imposing this on ourselves?

1:14

Why are we torturing ourselves?

1:16

And the answer will come back, of course, and not evilly.

1:18

Well we're doing it either in order to have equity

1:21

in the burdens on people,

1:24

or to raise revenue for Government.

1:26

But the fact is, that the most incredible complexities

1:28

of our present income tax do not in fact

1:33

either produce equity or revenue.

1:35

They are simply a relic of something

1:37

that grew like Topsy over time.

1:40

If you look at this, what you have

1:43

is a combination of tax rates

1:45

that are very high on paper, going from 14 to 70%.

1:47

And then in order to assure that those

1:51

high tax rates don't really bite too hard

1:53

or destroy incentive too much, you'll have

1:57

a mass of loopholes, special treatments

1:59

of tax exemptions, and so on.

2:01

And the combination offset one another,

2:03

both with respect to equity, and with respect to revenue.

2:06

That is, people who get exactly the same income

2:09

but one gets it let's say from wages,

2:12

and the other gets it in a form in which

2:15

he can convert it into capital gains,

2:16

will pay vastly different taxes.

2:19

And if you look across income levels,

2:20

the statistics of income make it clear

2:22

that the high rates yield no revenue,

2:24

but the average rate of tax paid is highest

2:26

in the middle income classes.

2:29

I don't mean middle in the sense of 5,000.00.

2:30

I mean middle in the sense of 40 or 50,000.00.

2:32

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Yes.

2:34

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And then go down, as you get

2:35

up into the very much higher classes.

2:36

And indeed I made an interesting calculation

2:38

in preparation for this Newsweek column

2:41

that brings out my point very clearly.

2:43

And that is, the latest figures

2:45

that are available are for the year 1967.

2:47

If you in that year had replaced all rates

2:51

above 25%, with a top rate of 25%,

2:54

So you left the tax schedule,

2:58

the marginal rate schedule, as it was,

3:00

except wherever you had a number

3:03

higher than 25, you put in 25.

3:04

Suppose you had done that.

3:06

And suppose every tax payer had reported

3:08

exactly the same amount of income

3:10

that he actually did report.

3:12

There was no other change.

3:13

Well then it turns out that this

3:15

would have reduced total revenue by 8%.

3:16

Well now that's a gross exaggeration,

3:20

because as all of us subscribers recognize

3:23

if the top rate were 25%, then it

3:26

would pay people to report more income, that is to say.

3:29

There's no use suspending 40 cents,

3:33

to reduce your taxable income by a dollar,

3:35

if that's only going to save you 25 cents in revenue,

3:38

while there is a great deal of sense

3:40

in spending 40 cents if that's going to

3:42

save you 50 cents, or 70 cents in revenue,

3:44

the tax that is it presently.

3:47

As a result, it would be in the interest

3:49

of tax payers to report a larger income.

3:51

And that would make up some of the revenue.

3:53

Indeed, it's not at all impossible.

3:55

If you left the law exactly as it is,

3:58

and simply put 25% rate for all the higher rates,

4:01

you'd raise as much revenue as you now do.

4:05

It turns out that in order for that to happen,

4:07

the people who now pay rates higher than 25%,

4:10

leaving out the people at the bottom,

4:14

would have to report 33% more income

4:15

than they now report, taxable income,

4:19

that is not gross income, but taxable income.

4:22

And it seems to me, that's not at all

4:24

unreasonable that they would do that.

4:26

Well, another illustration of this kind of thing

4:28

is a calculation I made some years ago,

4:30

that in 1929, when the top rate was 25%,

4:32

you had adjusting for the difference

4:37

in income between then and now,

4:40

adjusting for the change in population,

4:43

you had 10 times more people reporting incomes

4:45

of the equivalent today of over a million dollars a year.

4:48

Now you cannot tell me that the actual

4:51

income distribution has changed that much.

4:53

The main reason is, that people are ingenious

4:55

and they have found ways of not reporting those incomes.

4:58

So my own belief is that those high rates

5:01

yield neither equity nor revenue,

5:04

and that everybody would be better off

5:06

if we made a deal in which we eliminated the high rates,

5:08

and also eliminated the loopholes

5:13

and the special deductions and the special treatment.

5:15

If you did that, if you for example

5:18

thought of having what I would prefer,

5:20

which is a tax on income above exemptions

5:22

with no special treatment, except for

5:26

strict occupational expenses,

5:28

I have no doubt whatsoever that you could

5:30

double present exemptions.

5:32

You could have a flat rate of not more than 20%,

5:34

and raise as much revenue as you now raise

5:37

without all of this fuss, without all

5:39

of this business of enormous complications.

5:40

Now the people would really be hurt by this temporarily,

5:43

pardon the lawyers and accountants.

5:46

However, it's not even clear they would be hurt,

5:50

because first of all their own taxes would

5:52

be adjusted more reasonably.

5:54

They would waste less of their income

5:56

in getting tax evasion gimmicks.

5:58

And in the second place,

6:00

these are very clever intelligent able people,

6:01

and I don't think they'd have much trouble

6:03

fitting into our economy and getting themselves

6:06

a good job somewhere else.

6:08

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It's extremely interesting, and it sounds so sensible.

6:10

Do you think there is any chance that such a revision

6:13

in our income taxes that you suggest

6:16

might someday be adopted?

6:18

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There is a chance, but unfortunately it's not very great.

6:19

The reason is, a political one.

6:22

See there is a potential deal between

6:24

what you might call the left and the right.

6:28

What you would call what people, I don't like those terms

6:31

because they are very undescriptive,

6:34

but it will help us to use them.

6:35

The people whom you would regard on the right

6:36

would be willing to give up the loopholes

6:39

and the special deductions, in return for getting

6:42

a low level of less steeply graduated rates.

6:45

On the other hand, the people you would call the left,

6:50

would be willing to give up the highly graduated rates,

6:52

if they could get an elimination

6:56

of the loopholes and the deductions.

6:57

So you would think that there was a deal

6:59

to be made between the two groups.

7:01

The problem is, that neither group trusts the other.

7:03

And both groups are right.

7:06

The people on the right would say,

7:08

well we'll give up our loopholes and deductions

7:10

for lower rates, but the next thing we know is

7:12

that those rates will start creeping up again.

7:14

And the people on the left say,

7:17

we'll give up the higher rates

7:18

for those loopholes and deductions

7:19

and the next thing we know the loopholes

7:21

and deductions will start creeping in.

7:22

And both sides, I think, are right.

7:24

That is what would happen.

7:26

That's how we got into our present situation.

7:27

And therefore I have for long believed

7:29

that the only really feasible way

7:31

of getting a fundamental reform

7:34

would be through the very difficult course

7:37

of amending the constitution.

7:40

If you change the income tax amendment,

7:42

something as follows which said,

7:44

congress may enact an income tax provided first,

7:47

that the base of the tax allows only occupational expenses,

7:51

plus the personal exemption as a deduction.

7:56

And second, that the maximum rate imposed

7:58

is not more than twice the minimum rate.

8:01

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You don't even have to require

8:04

to be a flat rate, but something.

8:06

But now an income tax amendment along those lines,

8:08

would as it were guarantee both sides,

8:11

that the other side wouldn't renege on the deal.

8:12

And in principal, it seems to me there is

8:15

a possible backing for that kind of an amendment.

8:18

But as a piratical political matter,

8:22

it's very had to see where the pressure group

8:24

will come from that will go after that amendment.

8:27

And that's the real problem in politics,

8:32

is you have to have a pressure group

8:33

in order to get something done.

8:35

And unfortunately each one of us

8:36

yells and screams and tears our hair

8:38

between April 10th and April 15th.

8:40

Then we breathe a sigh of relief and go about our business.

8:42

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Very interesting comments on the subject

8:46

much on our mind today, April 15th.

8:48

Dr. Friedman, we have some interesting

8:51

questions sent in by subscribers.

8:53

Shall we get into some of those at this time?

8:55

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Fine.

8:57

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May I read this one?

8:58

The question reads as follows, "Governor Sherman Maisel,"

9:01

and he's talking to a member of the board of governors

9:04

at the Federal reserve system,

9:06

"said to me on March 12th, 1970,

9:07

"that you, Dr. Friedman, have never made

9:10

"a correct economic forecast, and that any

9:14

"econometric model is a more reliable guide

9:17

"than you're projections."

9:20

In particular, he said, "your forecast

9:22

"for the rate of inflation in 1969

9:25

"was much lower than the rate which occurred.

9:29

"Please comment on your relative success

9:32

"in economic forecasting and the relative merits

9:34

"of econometric models."

9:37

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Well that's a straight forward direct question.

9:39

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That's a good challenge.

9:41

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Yes, I hope Sherman Maisel is little bit more careful

9:42

in the comments and suggestions he makes

9:46

for Federal reserve policy than he is

9:48

in these off-hand comments.

9:50

There are two different parts of it.

9:52

One is about my own record,

9:53

and the other is about econometric models.

9:54

I don't really want to spend much time

9:57

on the first half of those.

9:59

I can only say that the real test

10:00

to that is not what people say,

10:02

but to look at the record in print.

10:05

In the book I published a couple of years ago,

10:07

Dollars and Deficits, I reprinted quite

10:11

a number of memos, including some memos

10:13

that I had written for the Federal Reserve board

10:16

in meetings and consulting meetings,

10:18

in which I did have predictions in print.

10:20

And in each case I tried to add a footnote

10:23

indicating that what actually happened in reality

10:26

to compare with the forecast.

10:30

Anybody who is interested in checking up on me,

10:32

I suggest that he go and look at the book,

10:34

and those footnotes, and make his own judgment.

10:36

And as to the more recent record,

10:39

I might just refer to a Newsweek column

10:41

I had on August 18th, 1969, entitled Monetary Overkill.

10:43

Now the burden of that Newsweek column

10:49

was that the Fed was engaging in two tight a policy,

10:52

and if it continue we were going

10:55

to have a serious economic problem.

10:57

And I might quote a few sentences from it.

10:59

"Let the Fed continue on its present course

11:02

"much longer however, and the economic

11:04

"consequences are sure to be serious."

11:06

Well now I think almost everybody would agree,

11:12

first that the Fed did continue on that course,

11:15

until the end of 1969, and second, that the recession

11:19

we are now in are the serious economic consequences

11:23

that I was speaking of.

11:26

And that as of that time in August,

11:27

there were not very many people

11:29

who were concerned about the fact

11:30

that we were going into a recession.

11:32

But let me go on.

11:34

I said, "inflation has an inertia of its own."

11:35

This is getting directly to Sherman's question

11:38

about the price rise.

11:40

"Many prices and wages are determined

11:42

"long in advance, and will continue to rise

11:44

"even after the pull of demand has eased.

11:46

"We shall be doing well, if by early 1970

11:49

"the price rise is brought down to 4% a year."

11:53

Well now, by early 1970 the price rise

11:57

has not come down to 4% a year.

12:00

The rate or price rise has, in my opinion, come down some.

12:02

It hasn't come down as much as I expected,

12:05

and I will plead guilty to having thought

12:07

that we would have a sharper decline

12:10

in the rate of price rise.

12:12

Let me continue.

12:16

"Some retardation in grown, and some increase

12:17

"in unemployment is inevitable upon welcome

12:19

"byproduct of stopping inflation."

12:21

"But there is no need and every reason

12:23

"to avoid a retardation of the severity

12:26

"that will be produced by continuation

12:28

"of the Feds present monetary overkill."

12:30

Well, I'm perfectly willing to stand on that record.

12:33

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I sure hope so.

12:38

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And I think if anyone is interested in checking further,

12:40

he can check the other ones in my Newsweek column,

12:42

where I am in print.

12:44

Now, I may say incidentally on this score,

12:47

that so far as the Federal Reserve board

12:50

is concerned, over the past 10 years,

12:51

its record on economic forecasting is not bad.

12:53

The problem with monetary policy

12:56

has not been that their forecast has been bad,

12:58

it's been that their policy has been bad

13:01

and the life of the forecast.

13:02

They have made mistakes and subjected us

13:04

to unnecessary ups and downs,

13:07

because they have insisted on looking

13:09

at the wrong target, namely the interest rates,

13:11

rather than the quantity of money.

13:12

And that's been the fundamental source of their problem.

13:14

They've been no worse than forecasting than anybody else.

13:16

But let me talk, and what I really want to talk about

13:19

are the econometric models.

13:21

There's been a lot of misunderstanding about them.

13:23

In the first place, you should realize

13:25

that econometric models really go back over 30 years now.

13:27

The first substantial econometric models

13:33

were constructed in the late 1930s by Tim Burgen,

13:36

in Geneva where he was working for

13:41

the League of Nations by gardener means

13:43

and some associates at the national resources

13:45

planning board in Washington.

13:48

Then you had quite a number of econometric models

13:51

constructed in the immediate postwar period.

13:55

And we've had one after another ever since.

13:58

Now the fact that will shock you,

14:01

but this is an observed and documented fact,

14:04

is that so far there has not be a single econometric model

14:09

that has been successful in making forecasts

14:13

as well as very very simple naive models.

14:16

Most models have done worse.

14:20

For example, in simply saying that next quarter

14:24

will be the same as this quarter

14:27

plus the average rate of change over past years.

14:28

Every model has done worse than simple

14:31

single equation models relating changes

14:35

in income to changes to money for example.

14:39

Now I'm not saying anything that will not

14:42

be agreed to by the makers of the models.

14:45

We have had over and over again studies

14:47

of the forecasting ability.

14:51

The first extensive study was about 15 or 20 years ago

14:52

when the National Bureau of Economic research

14:58

had a conference dealing the the ability

15:00

of econometric models to forecast.

15:03

I wrote a comment on a paper at that time,

15:05

in which I said at that time,

15:09

this was about 15 or 20 years ago,

15:10

that I was very dubious that they would succeed.

15:12

Now, we're in the future and such econometric models,

15:16

and having very good forecast.

15:18

And as of that time, professor Carl Christ,

15:20

who is now professor at Johns Hopkins University,

15:23

made a detailed retrospective examination

15:25

of a model which had been constructed primarily

15:28

by Lawrence cline, by people at the Cowles commission,

15:31

in which he came to the conclusion

15:33

that had had essentially a zero success

15:35

so far as forecasting the future was concerned.

15:38

Now since then, each of the various models

15:40

that has been constructed, has been subjected

15:42

as similar kinds of tests.

15:45

There's a new book coming out by the National Bureau

15:46

under the authorship of Victor Zarnowitz

15:50

of which again examines the forecasting ability

15:52

of econometric models and also of various other

15:55

forecasters and individual forecasters.

15:57

And without putting too fine a point on it,

16:00

without getting into detail, the fundamental thing is

16:02

that none of them as yet have any

16:05

very good record of successful forecast.

16:07

Now this tends to be concealed by the fact

16:11

that the people who use the forecast econometric models

16:14

and issue forecast, almost never

16:17

issue them straight and unvarnished.

16:20

There's an awful lot of judgment

16:22

that goes into them as it were,

16:23

improve them by introducing, for example,

16:26

modifications where they think the model is going haywire.

16:30

In order really to judge an econometric model,

16:34

you have to let it ride completely mechanically

16:37

without introducing any judgment.

16:40

And the statements I've been making

16:42

about their lack of success comes

16:43

from various experiments and tests

16:45

that have let them run.

16:47

Now the latest of these big models is the MIT FRB model.

16:48

And as yet, it doesn't have a very good record.

16:52

Recently one of my collogues here did a paper,

16:55

comparing its forecast with that of

16:58

a very simple monetary one equation model.

17:00

And it did not do as well.

17:06

I'm not saying that anybody has a magic philosopher stone

17:08

which will enable them to make a forecast.

17:12

I'm only saying that I think that there are

17:13

few areas in which there has been more smoke

17:15

with less fire, more puffing with less basis,

17:18

then the area of the advertising about econometric models.

17:23

Now again, I'm not anti econometric models.

17:26

I think we need investigation

17:29

in a lot of different areas.

17:32

I think we never know in advance

17:34

which way you're going to get real results.

17:36

And I applaud those people who are interested

17:39

in the econometric models.

17:41

More power to them.

17:42

Let them develop.

17:43

But let's not overstate their present state of performance.

17:44

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That's interesting.

17:48

Now here is an inquiry which goes directly

17:50

to your February 12th tape.

17:53

Reads as follows, "in Dr. Friedman's February 12th tape,

17:56

"he described the situation with banks

17:59

"in the United States and Canada,

18:01

"during the 1930, 33 depression.

18:03

"Dr. Friedman stated that the seriousness

18:06

"of the depression in the United States

18:08

"was the result of contraction of the money supply

18:10

"due to withdrawals from the banking system

18:13

"and failure of banks in the United States.

18:16

"You also stated that Canada did not suffer bank failures

18:19

"because of a more enlightened central banking system.

18:21

"You also stated, however, that the Canadian depression

18:24

"was as severe as was the depression in the United States.

18:27

"The question is then, does this disprove

18:30

"the theory of money supply, since

18:33

"the Canadian depression took place,

18:35

"even though the money supply did not contract

18:37

"as it did in the United States?"

18:39

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That's a very good question.

18:42

And it's based on the carelessness,

18:43

I think, with which I stated the facts.

18:46

Because if the facts were, as this gentleman stated,

18:49

it would raise very real questions.

18:52

But the facts are not that way, and let me explain.

18:54

In the first place, I did not mean to suggest

18:57

that Canada had a more enlightened central banking system,

19:01

in fact they did not have a central banking system,

19:04

at the time really.

19:06

What it was, was it had a more enlightened,

19:07

or differently structured commercial banking system.

19:10

Canada had a commercial banking system

19:14

under which there are a small number

19:16

of large banks spread throughout the nation

19:18

with many branches all over the country.

19:21

And consequently it did not have

19:23

a large number of independent banks.

19:25

It did not have many bank failures.

19:27

But although it did not have bank failures,

19:29

it did have a very large decline in the quantity of money.

19:31

The only thing is that that decline

19:35

and the quantity of money took place without bank failures.

19:36

While in the United States,

19:40

it took place through bank failures.

19:41

So in both cases you had a large decline.

19:43

Now the decline in the quantity of money

19:46

was greater in the United States than it was in Canada.

19:47

And the economic depression was about the same.

19:52

How do we explain that?

19:56

Well that's perfectly consistent with

19:58

the theory of money supply,

20:00

because the failures of banks made cash

20:01

a less desirable asset to hold in the United States,

20:05

than it otherwise would have been.

20:08

It reduced the demand for money,

20:10

compared to that in Canada.

20:13

And this showed up in the fact that..

20:14

you had a slightly different relationship between

20:19

the decline in money and the decline in income

20:23

in the United states, then you did in Canada.

20:25

I may say that this particular question

20:27

is discussed in detail in the book

20:29

by Anna Schwartz and myself, on

20:31

A Monetary History of the United States,

20:32

in which we take up precisely the point

20:34

that this gentleman quite properly writes,

20:36

and ask ourselves whether the difference

20:38

in the behavior of the two countries

20:40

contradicts the hypothesis that we are there presenting.

20:42

And in the brief, the answer is, no it is not.

20:45

And let me emphasize again, as I have over and over again,

20:50

I do not want to leave anybody with the impression

20:53

that I think there is a perfect precise mechanical

20:55

relation ship between changes in the quantity

20:58

of money, and changes in income.

21:00

There is a close relationship,

21:02

but it varies from time to time.

21:03

It has a good deal of noise, and it has lots

21:05

of room for the small kinds of differences

21:08

that there were between Canada

21:10

and the United States at that time.

21:11

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Dr. Friedman, a few interviews ago

21:14

you commented on the subject of pollution,

21:17

time didn't permit you to talk for very long on it,

21:20

and we've had number of subscribers

21:23

who have asked if you wouldn't sometime elaborate

21:25

on those comments on pollution.

21:28

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Well I would be very glad to do so.

21:30

It's fascinating how these fads arise,

21:33

and pollution is one those topics

21:36

on which there is an enormous fad.

21:38

That the amount of tension it's getting

21:40

has a number of features that I think

21:43

are king of disturbing.

21:44

The discussion is hysterical rather than rational.

21:46

It tends to proceed as if the choice were

21:51

between zero pollution and all pollution.

21:55

On the one hand, it seems to me it has

21:58

two characteristics that are disturbing.

22:00

One is, to try to make it into a black or white question,

22:01

pollution versus no pollution.

22:05

And the second is, to try to make it into a devil question,

22:08

a question of devils versus good people.

22:12

There are some bad manufactures and industrialists

22:14

who out of the blackness of their hearts

22:17

are pouring pollutants into the air

22:19

to destroy the rest of us.

22:21

And if only the good people will arise

22:22

in their righteous wrath, and step on the bad people,

22:24

everything can be alright.

22:28

Well this is an absurd picture in the first place.

22:29

The real problem is, what's the right amount of pollution?

22:33

Not, zero pollution.

22:36

Only an utter fool would argue that

22:38

the right amount of pollution is zero pollution.

22:41

You have to ask, at what costs, and for what purpose?

22:44

It costs something to reduce, what we call pollution.

22:49

Are we willing to pay that cost?

22:54

You could stop the pollution from automobiles immediately

22:56

by outlawing the automobile.

22:58

Would we be willing to go without the automobile?

23:00

You'd condemn a 100 million people to death

23:03

because you couldn't produce the food.

23:05

Or to take a simpler example,

23:06

one of the major pollutants is carbon dioxide.

23:08

And one of the problems ecologists worry about

23:10

is the rising carbon dioxide content of the air.

23:13

Well every time you or I exhale, we exhale carbon dioxide.

23:16

We could stop that pollution by stopping breathing.

23:19

Would that make sense?

23:22

Not at all.

23:23

What you have here is a straight forward economic question.

23:24

The economic question is that what's called pollution

23:28

is part of the consequences of your productive activity.

23:32

In order to produce steel, you put smoke into the air.

23:35

Now, what you have here is scarce resources.

23:39

You can use those scarce resources

23:43

to produce steel or to produce clean air.

23:45

Clean ais is one of the products we want to buy.

23:47

And as always, you want to spend part

23:50

of your income on clean air, but you don't want

23:52

to spend all of your income on clean air.

23:54

You don't want to carry the clean air up to the point

23:56

where you go without clothes and shirts and so on.

23:58

So the key problem is a problem of,

24:01

what is the right balance between

24:04

the cost involved in reducing pollution,

24:07

and the productive gains involved in having some pollution?

24:10

And that's a standard economic question,

24:13

and arises only because it is difficult

24:15

in the case of pollution, to assess the costs

24:18

on the person responsible.

24:21

In the ordinary case this problem

24:23

is solved automatically because

24:25

a man who produces steel, pays a cost of producing steel.

24:26

And he has no incentive to pay those costs,

24:30

unless the purchaser of steel

24:33

is willing to pay him that much.

24:34

Well if the costs imposed on others by polluting the air

24:36

were included in the cost of steel,

24:41

this solution would be solved in the same way,

24:44

by the fact that the purchaser of steel

24:47

would be paying those costs,

24:50

and you would produce the steel only if

24:52

the benefits were greater than the cost.

24:54

But the problem arises that the pollution

24:56

is often widespread.

24:58

A steel company in Gary pollutes the air

24:59

and that comes down on Chicago.

25:01

And the Gary US Steel doesn't take into account.

25:04

I may say with respect to the pollution

25:06

in Gary itself, there is no problem.

25:08

Because that pollution forces US Steel

25:11

to pay higher wages in order to keep people

25:15

working for it in Gary.

25:16

If it were cheaper to clean up the air,

25:18

then the amount that the workers demanded

25:20

in higher pay, undoubtedly that would be

25:22

in US Steel's own interest.

25:24

The real source of pollution, is the consumer

25:29

who demands the products from which pollution comes.

25:31

To this argument, to put it...

25:34

in a rather extreme way,

25:40

the argument that it's the manufactures rather

25:42

than the consumers who are responsible for pollution.

25:46

It's sort of like blaming the obstetrician for the baby.

25:49

It's the people who drink the beer,

25:54

who demand the beer in bottles which are nonreturnable.

25:56

They are the ones.

26:00

Producers, manufacturers are willing

26:02

to provide consumers with what they want.

26:03

If consumers wanna buy clean air,

26:05

the manufacturers will sell clean air.

26:06

The social problem is how do we construct

26:08

arrangements in such a way as to enable

26:11

the demand for clean air to be effective,

26:15

to enable people to buy clean air.

26:17

In view of the fact, and this is the only

26:20

distinctive feature about pollution,

26:22

that it is very hard to identify

26:24

the particular persons who are affected.

26:26

Now ultimately the only people

26:31

who can pay are the consumers.

26:32

And the question is only,

26:34

how do you impose the cost on them?

26:35

Of the various modes of doing so,

26:37

the least bad, there isn't a good way.

26:39

If there were a good way,

26:41

you wouldn't have a problem at all.

26:42

The problem arises because it is so hard

26:43

to identify the cost and the return.

26:45

Of the various ways, I think the best way

26:48

is by imposing taxes on manufactures

26:50

in accordance with the amount of pollution they emit.

26:54

That is to say, so many cents per

26:57

so many units of sulfur dioxide.

27:00

Or so many cents per so many units

27:02

of effluent issued into the water.

27:05

Because if you try to estimate that tax,

27:08

and what it is worth to the consumers to get that reduced.

27:11

Then you give the manufacturers and the producers

27:15

the right incentives to reduce it.

27:18

You don't want them to reduce it

27:20

if it costs more than that.

27:21

You'd rather have the money.

27:22

On the other hand, you do want them to spend

27:24

up to that amount to reduce.

27:25

And more over, the idea that you should have

27:27

an extensive governmental agency

27:29

which will decide exactly what factory one,

27:31

two, and three shall do, is absurd,

27:33

because you'll never be able to do it,

27:35

and you're far better off by doing it in this indirect way.

27:37

-

Thank you very much Dr. Friedman.

27:41

We've been visiting with Dr. Milton Friedman

27:44

in the University of Chicago.

27:46

If you have questions or subjects

27:47

you would like to hear the doctor discuss

27:49

on future tapes, please send your suggestions

27:52

in to Instructional Dynamics Inc.

27:54

166 East Superior Street, Chicago Illinois 60611.

27:57

This is William Clark of the Chicago Tribune.

28:03

We'll be visiting with Dr. Friedman

28:05

a couple of weeks hence.

28:07

Tape 48 - Income Tax, Economic Models, Canada vs. US in Cost Depression, Pollution

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