NOBEL PRIZE-WINNING economist Milton Friedman rockets into San Francisco's traffic in his Cadillac Allante convertible, wearing a jaunty baseball cap that reads AYAU PRESIDENTE, the souvenir of a Guatemalan ally's election campaign. Can this man really have turned 80 last month? Well, he's just published his 24th book, Money Mischief: Episodes in Monetary History  (Harcourt Brace). After a brisk morning spent terrorizing a Mexican TV crew, massacring opponents of drug decriminalization over a long distance hookup and lunching knowledgeably on dim sum, Friedman talked to FORBES in his Russian Hill apartment with its magnificent views over the Golden Gate. Despite his exuberance, his outlook has darkened considerably since our last chat (FORBES, Dec. 12, 1988). .

Forbes, August 17, 1992

FORBES: How's the economy?

Friedman: If you look closely, and pay attention to the short-term money supply movement, it looks very scary.

President Bush has a policy I've been calling reverse Reaganism. It promises slow growth in the 1990s. Now, on top of that, the short-term cycle came down sharply, then started to go up, but has been severely retarded by slow monetary growth. It may indeed turn into a renewed recession.

[Federal Reserve Chairman Alan] Greenspan has been more successful than Volcker in avoiding excessive volatility in the money supply. But while I share his objective of long-run zero inflation, in the short run the money supply has grown much too slowly.

The Fed insists on operating through the Fed funds rate, and that's inefficient. It should forget about the Fed funds rate and act directly to expand the monetary base, through preannounced purchases of government securities.

The Fed is following a policy which may well precipitate political interference and destroy it as an effective institution. If it could at least keep the recovery going and not turn around and head toward high inflation, the Fed might be able to institutionalize the avoidance of fine-tuning as a long-range policy. But I'm afraid that may not happen. I think there is a danger that we are going to have another recession.

And if we do, the pressure to inflate is going to be irresistible. Certainly Greenspan would not be reappointed. And five years down the line, we could have a very substantial inflation.

Aren't the markets now supposed to discipline central banks?

Oh, there's no doubt that the market has made inflation less profitable than it was before, first by forcing the government to move to short-term securities and second by reacting more rapidly to an inflationary monetary policy, so that the long-term rates go up more quickly. But as a technical matter, that wouldn't prevent an inflation. On the contrary, it means inflation would occur more rapidly. The Fed could flood the country with money and nominal rates would shoot up, just like the 1970s. Unlike the 1970s, the markets would be able to prevent real rates going negative. But that just means nominal rates—and inflation—would be worse.

Four years ago, when we interviewed you, our cover line was “Why liberalism”—in the American sense of interventionist government—“is obsolete.” Well, if liberalism is dead, why won't it lie down?

There are too many good jobs at stake. You have this enormous bureaucracy in Washington, and also in every city and state, all dependent upon the continuation of New Deal and Great Society kinds of programs.

Instead of Lincoln's government of the people, by the people, for the people, we have government of the people, by the bureaucrats, for the bureaucrats—including among the bureaucrats the elected bureaucrats.

If you're going to have term limits, they ought to apply to the bureaucrats as well as to elected officials. The Progressive Era reformers designed the “merit principle” for the civil service to end the spoils system. Who could oppose it? And yet it's had terrible effects.

See, look at the reaction in the U.S. to the collapse of the Berlin Wall. You'd think it would be: “Well, you see, that just shows what happens when government's too powerful.” But instead I believe the reaction has been: “Hmm. You see, we must be doing everything right, because they're trying to imitate us.”

There weren't any summit meetings in Washington about how to cut down the size of government. What was there a summit meeting about? How to increase government spending. What was the supposedly right-wing President, Mr. Bush, doing? Presiding over enormous increases in paternalism—the Clean Air Act and the Americans with Disabilities Act, the so-called Civil Rights quota bill.

Indeed, right now it looks as if the East European countries are trying to move to where we were 50 years ago, while we are trying to move to where they were 50 years ago.

And not only Eastern European countries. Look at Latin American countries. Fifteen years ago or so I was being picketed and harassed for supposedly running Chile from my office at the University of Chicago. Today Chile is a great success story. You've got a politically free as well as an economically free country. Mexico is trying to follow. Argentina, too.

In the Far East you have the four “Little Tigers.” Hong Kong is the purest case of the free market approach. Taiwan, Singapore and South Korea have large elements of authoritarian paternalism. But all of them stress the market as opposed to detailed central planning. The same thing is now happening in Indonesia. It's certainly happening in Malaysia. It's happening all over the place.

Does this mean that you're disappointed in Bush?

[Laughs.] Disappointed is putting it very mildly. I believe the Bush presidency has been very close to a disaster.

Reagan when he came into office had four basic points: one, reduce marginal taxes; two, reduce regulation; three, restrain government spending; and four, have a stable and noninflationary monetary policy. And while he did not achieve them to the extent to which I would have liked, he did achieve a great many of them.

Now comes Mr. Bush into office, and what happens with respect to these four planks? He presided over the summit, which ended up with an increase in marginal tax rates. Not very large. But it's opening the door to future increases. As long as you had a firm policy, “Read my lips,” that possibility was simply ruled out.

On regulation: an enormous increase in control over the citizens. The number of people employed by the regulatory agencies has now gone up under Bush more than it went down under Reagan.

He reversed Reagan on policy number three as well, spending. Government spending has been going up more rapidly under Mr. Bush than—you have to go back a very long time to find a comparable period.

On inflation: He hasn't been able to dominate the Federal Reserve Board. However, he did try to interfere. He waited until the last minute to reappoint Alan Greenspan. He and Secretary of the Treasury Brady have been jawboning the Fed. I'm not going to defend the Fed's policy. I'm just contrasting the situation.

How do you explain Bush? Because it's not as if the Reagan policies were unsuccessful.

They were successful. My answer to that is that principles matter a great deal even in politics. Mr. Reagan had very strong principles. Mr. Bush has some strong principles, but not about the domestic economy.

People don't change. What is Bush? He is a product of East Coast country club Republicanism. As such, he views his role as administering a governmental system, not leading it.

Now, the eastern establishment has always been strong on foreign policy. And again, Bush has been very strong on foreign policy. He can be criticized for what happened in Iraq both before the war and afterwards. But you can't criticize him in foreign policy the way you can in domestic policy. He's tried to lead.

In domestic policy, all of his natural instincts came to the fore, that what you try to do as a proper eastern Republican gentleman is conciliate, cooperate, compromise.

During the Reagan Administration, I was a member of the President's Economic Policy Advisory Board, which was composed of people on the outside of the government who were willing to say “no.” We met with Reagan, it must have been half a dozen times a year on average. Mr. Bush attended every such meeting. I never heard him say a word except “Hello,” “Good-bye” or some pleasantry. At various times there were vigorous discussions. He never entered into any of them.

Was he awake?

Yes. I think it was just that he had decided his role as the Vice President was to listen and not speak.

Look at his economic advisers. Not a single member of the group who advised Mr. Reagan has been approached by the White House.

Will Bush be reelected?

I think it's very dubious.

Do you care?

There is only one important reason I really care, and that is I have more confidence in whom Bush will choose for the courts. As between the two, I undoubtedly will vote for Bush, but without any great enthusiasm.

Don't misunderstand me. Bush's nominations have not been the best. But I'm not sure I would like to see Laurence Tribe on the Supreme Court. Although, at least he and Scalia could have a decent argument!

But you don't expect much difference in economic policy?

No. In fact, in some ways I think you might have better economic policy with Clinton. If I look around the world and ask what characterizes the places where you have had free market reforms, most came from left-wing governments. The exceptions are Britain and the U.S., Thatcher and Reagan, who were sports, very unusual people in politics.

That was true in Australia, it was true most extremely in New Zealand, in France where Mitterrand made a 180-degree U-turn, Spain. . . . On the other hand, in Germany, which is under supposedly right-wing control, the movement is toward more statism and a bigger role for government.

With a Democratic candidate, the people to the left of him have no place else to go. If he wants to broaden his appeal, he's got to move to the right.

Unless there's a Great Society wave of legislation—the same faction will control both branches of government, as after the Goldwater debacle.

With a more than billion deficit, it's not going to be easy to move in a Great Society direction.

See, you were able to get the Great Society because of the tax dividend that resulted from “bracket creep”—inflation was forcing people into higher tax brackets without increasing their spending power. Tax receipts were going up sharply without any increase in tax rates. Today the large-scale indexing of the tax system has taken that possibility away.

But now Congress passes laws mandating benefits and compelling business to absorb the cost.

It's true. Yes. But business is starting to react. And it's much harder than to spend money directly.

You finished your first degree in the Depression —

In 1932, when I was 19.

Your life's work, to some extent, has been demonstrating that Roosevelt's economic policies were actually perverse in that they probably exacerbated the Depression. But politically, Roosevelt's policies were immensely successful.

I agree. The government's failure in managing the economy from 1929 to 1933 produced, ironically, the public perception that only the government could manage the economy. The long-run political effects of the Depression were far more severe than the economic effects.

So could the Eighties go down as an era of failure despite its success?

In the public memory, there's no doubt, it will be—unless Bob Bartley's new book, The Seven Fat Years [The Free Press], is more successful than I expect. It's a very good book, although I don't agree with his support for fixed exchange rates.

It's a question of the perception of the economic facts. You've got a third party involved here that you didn't have at the earlier date: the media. I don't understand why media people were so universally adverse to Reagan.

What bothers me is not so much the historical debate, but what's ahead. The combination of political and technological change opens up a vast amount of low-cost labor. There may be half a billion to a billion potential workers in China, Eastern Europe and Latin America. And that constitutes a real revolution in possible cooperation between capital-rich countries and labor-rich countries. It could give us the equivalent of another Industrial Revolution.

You know, there's been a lot of talk about rising inequality in the U.S. Most of the evidence concerns widening skill differentiation. But surely the reason for it is the enormous increase in available low-cost labor. There's no doubt that it has a negative effect on the low-skilled labor substitutes in the high-income countries.

Moreover, there's been a lot of talk about high real interest rates. Real interest rates for longer-term money are very high by historical standards.

There are two possible explanations. One is that inflation is going to speed up in the future, which is very possible. And the other is that an epochal change like this is bound to raise world real interest rates. Labor has become more plentiful relative to capital, which would tend to raise the rate of return on capital. And many capital-rich countries are running deficits, reducing the supply of capital.

But what bothers me is this: Not only the U.S. but other countries seem to be missing this enormous opportunity. The capital-rich countries are going in a protectionist direction, building walls around their blocs. Fortress Europe. The U.S. with Canada and Mexico.

Don't misunderstand me. I'm not opposed to the U.S.-Mexico-Canada Free Trade Agreement. But I think what's called bloc free trade is often managed trade. I would prefer unilateral, multilateral free trade.

So why so cheerful?

[Laughs.] Personally, I have a very good life. [Waves at view.] Why shouldn't I be cheerful?

Besides, I have a great deal of confidence in the American people. And while I am not very optimistic right now, I think sooner or later they're going to wake up and get on their high horse and do something.