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Milton Friedman Isn’t Running the Show Anymore…Too Bad, Isn’t It?

The opinions expressed by columnists are their own and do not necessarily represent the views of
AP Photo/Mark Lennihan

This piece was co-authored by Mr. James Hop and Mr. Jared La Rue. 

Milton Friedman determined the root cause of inflation to be government monetary policy and famously opined: "inflation is always and everywhere a monetary phenomenon that is produced only by a more rapid increase in the quantity of money than output (goods, services, and/or assets).”


A 1976 Nobel Prize winner in Economics for his pioneering work on monetary policy, inflation, and the business cycle, Friedman established a strong correlation between excessive government spending and monetary policy, its over-stimulation of the U.S. economy and the economic contractions that followed. 

Unfortunately, the Biden Administration has lived by then-candidate Biden’s statements regarding the economics of Dr. Friedman.  Recall, in late April 2020, Biden declared in an interview with Politico, “Milton Friedman isn’t running the show anymore.”  Even earlier, during a fundraiser in September 2019 Biden asked a group of reporters “When did Milton Friedman die and become king.”

In our opinion, it is a shame that the Biden Administration has failed to show knowledge of and respect for the scholarship of Milton Friedman.  Current U.S. monetary policy has taken consumer price inflation from 1.4% on an annualized basis in January 2021 when President Biden took office to 8.5% on an annualized basis at the end of March 2022. If you extrapolate the March monthly consumer inflation rate of 1.2% over 12 months, the yearly consumer inflation rate is 14.4%.  Historically, inflation rates at this level have only been brought under control by economic recession or depression.

We believe a small portion of our current 14.4% annualized inflation rate can be attributed to global supply chain bottlenecks and the war in Ukraine.  Most of it is directly attributable to the roughly $6.5 trillion the Trump and Biden Administrations spent in the name of COVID relief and the dramatic increase in the U. S. money supply as measured by the expansion of the Federal Reserve’s balance sheet (FED).  The FEDs balance sheet stood at $0.9 trillion at the end of January 2008, and today is at $9 trillion at the end of March 2022.  


Recent fiscal and monetary policy, along with the following five predictive indicators lead us to believe a recession is on the horizon for the U.S. economy over the next 12 to 18 months.

1. Inverted Yield Curve

Since 1955, an inverted yield curve preceded every recession, except one. Within the last month, the two-year treasury rate inverted to the ten-year treasury rate, while the five-year treasury rate inverted to the 30-year treasury rate. The FED is raising short-term interest rates to curb inflation – a move that could push the country toward recession.

2. The “Rule of 4%”

Former U.S. Treasury Secretary Larry Summers has argued for more than a year that inflation is non-transitory and is caused largely by excessive government spending and expansionary monetary policy.  Summers also proved that since 1945 when the U.S. Consumer Inflation Rate rises above 4% and the U.S. Unemployment Rate falls below 4%, the over-stimulation of the U.S. economy results and leads to a recession within two years. The “Rule of 4%” recently took place when the U.S. Unemployment Rate dipped below 4% in December 2021 with inflation above 4% simultaneously.

3. Used Car Prices as a leading indicator of recession

Former U.S. Federal Reserve chairman Alan Greenspan argued falling U.S. used car prices would directly or shortly thereafter be accompanied by reduced sales of used cars.  He noted this correlation would take place when inflation increased at a faster pace than wages resulting in a decline in real incomes leaving consumers with reduced purchasing power.  A slowing economy follows leading to a recession or depression. Prior to March, U.S. used car prices were up roughly 40% on an annualized basis.  However, in March 2022, used car prices were down 3.8% according to the U.S. Bureau of Labor Statistics, while sales of used cars less than 10 years old were down 27% when compared to March 2021.  Buyers of used cars are now taking 171 days to shop compared with 89 days in March 2021.


The recent FED policy change to raising interest rates will have multiple impacts on the economy.  Higher interest rates should slow down the economy as the cost of financing homes, automobiles and other large ticket items will be more costly.  This is evident as noted in the slowing of used car sales and the sharp increase in mortgage rates from below 3% for 30-year mortgages in late 2021 to reaching 5.11% on April 21st.  

4. Real Wages and Corporate Earnings

In the recently released March Consumer Price Index (CPI) report, nominal wages were up an impressive 5.6%. However, when discounting for the 8.5% overall CPI, real wages for the month were down 2.9%.   Declining real wages are a leading indicator of recession.  Declining real wages also puts pressure on employers to increase wages which drives corporate earnings down signaling an economy in decline.  We believe U. S. corporate earnings will begin to decline in the 2nd or 3rd quarter of 2022 and continue in Q4 2022 and Q1 2023.

5. Losing Voter Confidence

Recent polls show President Biden is losing voter confidence with polls at historically low levels for a president entering his second year in office.  CBS News/YouGOV has President Biden’s job approval at 42%, Ipsos/Reuters places the president’s job approval at 41%, Heart/NBC and CNBC report the president’s job approval at 38%, while Quinnipiac University calculated the president’s job approval at 33% and his approval handling the economy at 35%.  Collectively, the polls show Americans are losing faith in the president and the U.S. economy. 



In addition to the above-noted data, the Atlanta Federal Reserve Bank’s GDP Now estimator is calling for a GDP growth rate of only 1.3% for the U.S. economy in the first quarter of 2022, which is much more optimistic than Goldman Sachs prediction of only 0.5% growth in Q1 2022.  Former Trump Administration chair of the President’s council of economic advisors, Kevin Hassett, using similar analysis to Alan Greenspan’s on declining new and used car sales in March, believes the U.S. economy may already be in recession or certainly heading in that direction.  Therefore, we are holding to our earlier prediction that there is a 60% chance the U.S. economy will be in recession by the end of the summer of 2023, if not sooner.

Finally, we believe the American economy would be a much healthier and stable place if Milton Friedman were alive and in charge of the U.S. Federal Reserve Bank. 

About the authors:

Dr Timothy G. Nash is director of the McNair Center at Northwood University.

Mr. James Hop is chair of the Entrepreneurship Department and a McNair Fellow at Northwood University. 

Mr. Jared La Rue is a DeVos Graduate School Student and a McNair Center Scholar at Northwood University.

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