Reconsidering Milton Friedman and the negative income tax

Jennifer Burns' brilliant biography comes just in time: As we reckon with the neoliberal legacy, the moment is also ripe for serious debate over the NIT.

In his book Poverty, By America (2023), the sociologist Matthew Desmond lays out a broad agenda for achieving what he terms “poverty abolition.” Under the heading of “rebalancing our social safety net,” he advocates trimming those parts of the U.S. welfare state that benefit wealthier Americans, such as tax-exempt college savings plans and mortgage interest deductions, and significantly expanding aid to the poor with cash transfers not tied to work requirements, housing vouchers, healthcare subsidies, and the like. He urges us to “empower the poor by reining in exploitation” through policies that would raise the minimum wage, cap rising rent costs, strengthen labor unions, and ban predatory lending; and he encourages us to “invest in broad prosperity by turning away from segregation,” principally by repealing local zoning ordinances that restrict the housing supply. Although some of these measures might increase government revenue, others would be expensive. Desmond estimates the total cost of eliminating poverty in the US to be around $177 billion per year, or under 1 percent of GDP. He argues it would be worth it for the lives to be improved or saved, and so that we can all be free from the burden of “knowing that our abundance causes others’ misery.”

Poverty, By America struck a chord with the reading public, reaching #1 on the New York Times bestseller list, a remarkable achievement for a policy book. Future sociologists of ideas will no doubt have much to say about the book’s success. One thing I found notable was an absence: any mention by Desmond of the negative income tax (NIT), arguably the simplest and most cost-effective means we have at our disposal to create an income floor below which no American could fall. The economist Milton Friedman was the most famous proponent of such a tax, and in my contribution to this symposium I want to use Jennifer Burns’s new biography of Friedman as an occasion to consider not only Desmond’s silence on the topic but general neglect of the NIT in current conversations on poverty reduction.¹

A rich portrait

I enjoyed Milton Friedman: The Last Conservative (2023) immensely. All intellectual history is a delicate balancing act between present interest in a thinker’s ideas (the usual draw for readers) and the responsibility to faithfully render the historical context in which those ideas developed. Tip too far toward presentism and your account will be anachronistic; too much context and you risk boring anyone who isn’t a historian. 

Burns’ handling of these competing pressures is exemplary. We’re at a moment of great critical interest in what some have called “market fundamentalism.” Mounting economic discontent in the world’s wealthy democracies, particularly among the working class, has fueled populist movements of the right and left. Ruling parties or coalitions are beating a retreat from key aspects of neoliberalism, ramping up trade protections, backing robust industrial policy, leaning into deficit spending, and seeking to inject distributional considerations into monetary policy. Although some of these developments are also linked to concerns over national security, anxieties around international migration, and the need to address a warming climate, the question naturally arises as to what we might be gaining or losing economically from such a change of course. Any answer requires a sober look back at the era when neoliberalism came to the fore. Separately, intellectuals in the last generation have produced a spate of analyses attempting to understand how and why neoliberal thinking came to dominate the economics profession, and from there, global policymaking, with ostensibly disastrous consequences. But puzzles remain. The time is thus right for a book about Friedman.

Carried along by present motivations, a lesser author might have given us a one-dimensional depiction of the economist. Instead, Burns treats us to rich reconstructions of the intellectual, institutional, political, and social worlds in which Friedman lived and worked. We learn of his time as an undergraduate at Rutgers, where a fatherless young man with strong math skills came under the influence of the suave economist Arthur Burns (no relation to Jennifer Burns.) Four decades later, Arthur Burns’ institutionalist leanings would cause a rift between the two men, when Burns was appointed chairman of the Federal Reserve by Richard Nixon. In that position, Burns rejected Friedman’s theory that inflation is a function of monetary expansion, backing in its place a so-called “incomes policy,” centered on the publication of wage and price “guideposts.” Yet Burns, as a teacher at Rutgers, also introduced Friedman to Alfred Marshall, a key figure in neoclassical economics. Burns thus prepared his student for a seamless transition to graduate study at the University of Chicago, where price theory, an elaboration of neoclassical ideas, ruled the roost in the 1930s. 

Where critics of neoliberalism sometimes depict Friedman as championing an entirely unrealistic theory of the market, Jennifer Burns reveals an empiricist who objected strongly to modeling exercises not tied to data.

After the war, Friedman returned to Hyde Park with government service under his belt, along with a PhD from Columbia. Burns gives us an inside look at the academic fight that broke out there between Friedman and economists associated with the Cowles Commission, a research group dedicated to econometric modeling. Where critics of neoliberalism sometimes depict Friedman as championing an entirely unrealistic theory of the market, Burns’ Friedman is an empiricist who objected strongly to modeling exercises not tied to data. Who but an empiricist could have produced, with Anna Schwartz, A Monetary History of the United States (1963), a book brimming with data and demonstrating that the trigger for the Great Depression was a mishandled liquidity crisis? Counter to the econometricians, Friedman also believed that attempts to represent the macroeconomy with overly complex simultaneous equations were doomed to fail. Friedman eventually prevailed in his fight with the Cowles group, which moved to Yale. 

To give one more example, from much later in Friedman’s life, Burns offers an insightful account of the economist’s controversial trip to Chile in 1975. Friedman’s theory of inflation spoke to the “Chicago Boys,” a cadre of Chilean economists who’d studied at the University of Chicago and who were advising General Augusto Pinochet, the dictator who had seized power in 1973. Friedman, invited to Santiago so that he could get a first-hand look at surging Chilean hyperinflation and suggest a remedy, was accused of legitimating Pinochet’s rule, a criticism that stung. But Burns also delves into debates that occurred six years later at a meeting of the Mont Pelerin Society on the Chilean coast. By this time, Friedman had come to recognize that he’d been wrong to ignore the brutality of the regime. He’d also changed his mind on a central aspect of the political philosophy he’d been developing alongside his economic research. Distancing himself from the Society’s other leading light, Friedrich Hayek, he now insisted that “economic freedom” — reliance on the market mechanism, which Chile had come to embrace (save for its unwillingness to float the peso against the dollar) — couldn’t guarantee “political freedom.” In fact, Friedman argued, the latter was a prerequisite for the former.

This is no stick-figure Milton Friedman. And the narrative compels throughout, not least when Burns considers Friedman’s failings, including his inexcusable unwillingness to support the Civil Rights Act.

Friedman on poverty

I read Burns’ book not long after teaching Poverty, By America, juxtaposed with Friedman’s Capitalism and Freedom (1962). Burns’ discussion of Friedman on poverty is as deeply contextual as the rest of her study. What stood out to me here was her insistence that the NIT wasn’t an add-on to Friedman’s broader advocacy of neoliberal policies and ideals, but fundamental.

On her telling, Friedman first got the idea for a guaranteed income floor at the end of the 1930s, after a “long weekend conversation” with Gunnar Myrdal. Friedman’s proposal at that point wasn’t for an NIT; in an unpublished paper the fledgling scholar argued more abstractly for cash transfers pegged to a scientifically determined “minimum standard of living.” Some have interpreted Friedman’s applied economics work from this period as indicative of his youthful support for New Deal liberalism, and the minimum income proposal might be seen as consistent with such support. But Burns convincingly argues that Friedman was never an enthusiastic New Dealer, even though in Washington he worked for a New Deal federal agency charged with economic planning, the National Resources Committee, where he labored on a large-scale study of consumption. (It turns out he was more interested in the research side of things than in planning, inventing while at the agency a novel statistical procedure for analyzing between-group variation in ranks.) Friedman voted for Roosevelt in 1936, but Burns suggests this was principally because FDR was seen as a friend to the Jewish community. Friedman’s continued commitment to price theory as he’d learned it at Chicago was evident in the daylight between him and Myrdal. Where Friedman saw value in giving poor people cash that they could use however they saw fit, Myrdal favored an expansive welfare regime, and in places like South Asia, a developmental state.

Friedman returned to the income floor idea in the 1960s. By this time, he was one of the most prominent economists in the world. Burns notes that others in the policy community were also talking about a guaranteed income, often in the form of “job guarantees and higher welfare payments.” Friedman’s elaboration of his earlier proposal, presented as a chapter in Capitalism and Freedom, stood in sharp contrast.

Friedman argued that industrial capitalism had dramatically increased human productivity and wealth, reducing absolute poverty. But relative poverty remained, its rate and distribution determined by factors as varied as the business cycle, the age structure of society, and patterns of discrimination. Poverty must be addressed on moral grounds, Friedman felt. Eager to restrict the scope of state action and to preserve people’s freedom to do with their money what they choose, he preferred that the problem of poverty be solved through private charity. Yet he recognized the collective action challenge. “We might all of us,” he wrote, “be willing to contribute to the relief of poverty, provided everyone else did. We might not be willing to contribute the same amount without such assurance.” So some form of government involvement is necessary.

Friedman saw numerous advantages to a negative tax model. The NIT directly targets anyone and everyone who is poor. It gives poor people cash, allowing them to make choices about how to spend that cash, maximizing their liberty and autonomy. Relatively easy to administer through the existing tax system, the NIT eliminates the need for a wide range of other welfare programs, saving on overhead costs. Finally, Friedman argued, compared to poverty alleviation measures such as minimum wage increases or labor relations policies favorable to unions, the NIT does less to distort the workings of the market. In Burns’ portrayal, the NIT thus fit entirely with Friedman’s overall theoretical approach and worldview. Or, as Friedman himself put it, the NIT was “an arrangement that recommends itself on purely mechanical grounds.”

A new perspective on neoliberalism?

Before considering the fate of the NIT as Friedman conceived it, it’s worth briefly pondering the implications of Burns’ claim that a poverty floor was a key part of Friedman’s program.

My discipline, sociology, has generally understood neoliberalism to entail a push toward the market in all aspects of political-economic governance. As Miguel Centeno and Joseph Cohen noted in an influential 2012 article, in terms of policy neoliberalism entails “the elimination of institutionalized post-Depression and post–World War II policy conventions, such as redistributive taxation and deficit spending, controls on international exchange, economic regulation, public goods and service provisions, and active fiscal and monetary policies.” (The claim about monetary policy is surprising in light of the very active Fed tenures of Paul Volcker and Ben Bernanke, but leave that aside.) Neoliberalism “opposed such policies because they infused noneconomic or political considerations into economic activity, while the rule of markets was viewed as conforming to essentialist and universal principles.” While sociologists sometimes fail to acknowledge the gains in prosperity that some of these changes ushered in — except to point out that the paradigm of neoliberalism was born out of the social and economic crises of the 1960s and 1970s and offered temporary respite — they are quick to note that neoliberal policymaking exacerbated inequality.

What would the 1980s and 1990s (and subsequent decades) have looked like to sociological observers if actually-existing neoliberalism had been closer to Friedman’s vision?

What would the 1980s and 1990s (and subsequent decades) have looked like to sociological observers, however, if actually-existing neoliberalism had been closer to Friedman’s vision for it, i.e., if it had included an NIT to address poverty? In this scenario the U.S. would, of course, still be a liberal as opposed to a coordinated market economy, to invoke the taxonomy of Peter Hall and David Soskice; it would remain dynamic in product innovation, the organizational ecology of firms, and labor markets. But since one of the main comparative advantages of a coordinated system is poverty reduction, as Lane Kenworthy argues in his analysis of Nordic-style capitalism, the relative merits of each might be seen rather differently. (In a paper published not long after the welfare reforms of the mid 1990s, Fred Block and Jeff Manza argued that an NIT set up as Friedman himself preferred wouldn’t have gone very far toward alleviating poverty, serving mostly to subsidize employers who offered low wages, so my counterfactual here is a more generous scheme.) An income floor through negative taxation could function for a highly marketized economy much like the legal system: as part of the infrastructure needed to keep things running well. Such a floor would generate positive knock-on effects in a range of areas, from health to education to public safety.

The NIT runs aground

Why weren’t Friedman’s proposals for an NIT accepted? The best answer I’ve seen comes from the sociologist Brian Steensland. While it’s certainly correct, as Burns argues, that Friedman’s elaboration of his earlier proposal occurred around the time that Johnson launched his war on poverty, that makes its failure to gain traction all the more surprising — since there was so much talk then about the need for a guaranteed income. Some in the Kennedy administration had initially assumed that the affluence of the Eisenhower era would carry forward and lift incomes at the bottom, but a recession in 1960 that produced a spike in unemployment called this assumption into question. In any case, it was increasingly recognized that full employment was inflationary and therefore off the table. Meanwhile, officials and policy wonks worried that growing automation would take a toll on the incomes of lower-skill workers, while racial discrimination — highlighted by the Civil Rights Movement — meant that affluence wouldn’t flow to everyone. These themes were picked up by Michael Harrington in The Other America (1962), and a powerful New Yorker essay on that book by Dwight Macdonald —”read widely by the public and within the Kennedy administration, including by the president himself,” Steensland writes — asserted that the only way around these challenges, often lumped together under the heading of “structural poverty,” was through some kind of guaranteed income plan that would establish income security as a basic right of all Americans.

When Friedman advanced his proposal for an NIT in Capitalism and Freedom, people listened, but not because it was seen as fringe. In fact, according to Steensland, the negative income tax was viewed as fairly mainstream by the time Johnson took office following Kennedy’s assassination. In a debate on the topic held at the U.S. Chamber of Commerce, Friedman argued that the NIT was a neutral administrative mechanism, its political valence dependent on the level of income support it was set up to achieve and who it would target as its beneficiaries. Many conservative business leaders, especially in the Northeast, found a broadly targeted NIT compatible with their interests and ideology, reasoning that it could help stem disruptive urban unrest without requiring that they raise wages. The economics profession was also on board. Steensland reports that 1,200 leading economists, including well-known backers of the NIT, signed a statement of support for the general idea of a guaranteed annual income.

Yet the NIT wasn’t included among the broad spectrum of measures packaged into Johnson’s 1964 Economic Opportunity Act. Why? In part, Steensland says, it was because liberal special-interest groups associated with the welfare bureaucracy rightly perceived that the NIT (Friedman’s version of it, at least) was meant to be a cash-based alternative to the provision-of-services paradigm in which they were heavily invested. Another part of the story, as Joshua Zeitz argues in his book on the Johnson administration, is that LBJ wasn’t nearly as supportive of cash transfers as we tend to think today. “No doles,” Zeitz quotes Johnson as telling an aide. On these grounds alone the NIT didn’t stand much of a chance.

Richard Nixon’s Family Assistance Plan cast aside the distinction between the working and nonworking poor. That would be its downfall.

It took Richard Nixon, of all people, to bring a guaranteed income proposal before Congress. Steensland explains this development by pointing to pressures on the Nixon administration. EOA measures were beginning to chip away at poverty, but at the cost of an expansion of welfare rolls (officially Aid to Families with Dependent Children.) Given the structure of welfare funding at the time, states had to pay for much of this expansion, and Nixon was getting grief from governors. A federal guaranteed income would alleviate the burden on states, making this a rare instance, Steensland notes, where “federalism” promoted rather than “inhibit[ed] welfare state growth.” In addition, many conservatives, especially in the South, resented AFDC expansion, and if Nixon could find a way to trim or abolish the program, he’d be able to draw more of them into the Republican Party. Finally, the problems of poverty, Black poverty in particular, were increasingly seen as tied to changes in family structure. Daniel Patrick Moynihan, who had the ear of the president, was a longtime advocate of “family allowance” plans that would guarantee incomes to poor families based on size; he thought such plans would promote marriage and family stability.

There was dissent within the Nixon administration, to be sure. One voice arguing against guaranteed income proposals was Friedman’s old teacher Arthur Burns (not yet installed at the Fed) who worried about inflationary effects as well as the prospects of mass welfare dependency. But the Family Assistance Plan was rolled out anyway. The FAP wasn’t an across-the-board negative income tax for the poor as Friedman had envisioned. Yet, as Steensland explains, it “provided benefits to two-parent families,” “guaranteed all families a minimum income,” and — while imposing work requirements — “provided benefits to the unemployed and employed poor within the same program, thereby erasing the existing distinctions between different categories of poor people.”

That would be its downfall. At the core of Steensland’s book is the claim that culture matters in the development of the American welfare state; it shapes the perceived economic interests and moral commitments of the groups involved in policy making. Building on this premise, he argues that “the distinctions between ‘deserving’ and ‘undeserving’ constitute the cultural foundation of American social provision dating back to the colonial era.” While special interests fought back once FAP legislation passed the House in 1971, the major sticking point in the Senate debates that followed, Steensland shows, was that Nixon and the people around him were unable to successfully articulate a “new schema… that provided an alternative basis of worthiness that did not depend solely on labor market participation.”

Echoing their constituents, many conservative policymakers grudgingly acknowledged that if you were working and still couldn’t make ends meet, then yes, the government should help you out. But if you were able-bodied and not working when jobs were available, why should taxpayers foot the bill for your laziness? Wouldn’t the FAP inevitably encourage more of this behavior — its work stipulations notwithstanding — reducing labor force participation? The racialization of the poverty debate meant that racial stereotypes and concerns about preserving the racial order came to be interleaved with these conceptions of worth. Liberals objected on different grounds: They thought FAP benefit levels were too stingy. Because the Earned Income Tax Credit (a different kind of negative income tax offered only to working adults) fit more easily with American cultural schemas of deservingness, Congress had far less difficulty passing it in 1975.

Time for a new debate

But why isn’t a Friedman-esque NIT getting more attention today? Some would say it is. The last few years have seen a burst of interest in the idea of a Universal Basic Income, and Friedman’s NIT and the Family Assistance Plan it helped inspire are often described as forerunners. As was true in the 1960s, some of the interest in an income floor is rooted in worries about automation and job loss. Class inequality has been another major concern of late, and UBI proposals are touted as a response. Andrew Yang proposed a UBI during his campaign for the Democratic nomination in 2020. Several cities have been experimenting with small-scale targeted basic income programs, including Denver, Colorado, and Stockton, California. There is also a growing body of research on the likely effects of nationwide UBIs.

But there are differences between a UBI and an NIT. Friedman’s NIT was directed exclusively toward those who fell below a poverty cutoff; the only thing universal about it was that everyone below that cutoff would be eligible. What’s more, the NIT was intended to replace most, if not all, other income security programs, from AFDC to Social Security, yielding net savings, where many contemporary advocates of a UBI or other basic income plans see them as additional layers of social provision, such that their enactment would add greatly to the federal deficit and risk runaway inflation. The NIT that Friedman proposed would also preserve the incentive to work by setting benefit levels at less than 100 percent of the difference between earned income and a specified phase-out point.² (Some — not all — UBI proposals do the same.) The NIT would further encourage attachment to the formal labor market by making tax filing the vehicle for benefit delivery.

It’s not as though no one in the world of poverty scholarship and policy is calling for a negative income tax these days. In an important 2015 paper, researchers Jessica Wiederspan, Elizabeth Rhodes, and H. Luke Shaefer argued that the various antipoverty programs that exist at the federal, state, and local levels together constitute a patchwork that can be confusing for recipients to navigate, reducing the programs’ efficacy while leaving significant coverage gaps for vulnerable populations. A negative income tax would be a much more straightforward means of getting relief to the poor. As for cost, the authors ran simulations using data from 2004. They found that with an NIT that set an income floor at 75 percent of the poverty line and imposed marginal tax rates of either 50 or 33 percent, the country could reduce poverty dramatically “with a level of expenditures comparable to existing means-tested programs” — programs the NIT would render obsolete.

The Wiederspan, Rhodes, and Shaefer paper got some attention when it was published, but not much. Desmond makes no reference to it in his book. When asked about an NIT in an interview with Ezra Klein, Desmond said that he thought some kind of “guaranteed basic investment in families” would be “an amazing first step” toward ending poverty — before quickly moving on. Elsewhere in the interview, when Klein brought up the NIT, Desmond suggested that unless we reduce rent-seeking and exploitation of the poor, any benefits increase will likely yield diminishing returns.

This comment may offer a clue as to why the NIT doesn’t have more support in the (progressive) anti-poverty community. Some of this is surely an anticipation of special interest opposition, as was the case during the Johnson era. Wiederspan, Rhodes, and Shaefer argue that in the wake of the 1996 welfare reform that slashed benefits and reduced eligibility, few people are wedded to the current system. But a whole array of public and nonprofit private institutions work to help poor people access that system and have at least some interest in its preservation. There is also concern that an NIT, like any means-tested program, might stigmatize recipients, and hence be less desirable than something broadly applicable like the (now expired) expanded Child Tax Credit.

More important, I think, is that the NIT (as opposed to the UBI) has been stamped in the collective imagination of scholars and antipoverty reformers as a neoliberal, free market initiative; and the general feeling is that markets are not to be trusted to solve enduring social problems like poverty. Better to do so through the active involvement of the state, its employees, and their proxies. (Desmond, for his part, sometimes seems favorable to market-based solutions, like opening up the housing supply, but his focus on exploitation implies an underlying skepticism.)

An NIT may or may not be worth pursuing. But we shouldn’t dismiss the idea out of hand on what are essentially philosophical grounds. I’d love to see a vigorous scholarly debate about the potential merits and drawbacks of an NIT as proposed by Friedman or Wiederspan and her colleagues, informed by the relevant research and modeling. I don’t agree with another major premise of Desmond’s book, that we haven’t made progress fighting poverty since the 1960s, but there’s no question that we have a long way to go. If Burns’s brilliant Friedman biography can ignite a discussion about a potentially better way to proceed, it will be that much more of an accomplishment.

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Neil Gross is Charles A. Dana Professor of Sociology at Colby College, a senior fellow at the Niskanen Center, and the author, most recently, of Walk the Walk: How Three Police Chiefs Defied the Odds and Changed Cop Culture (Metropolitan/Holt, 2023).

1. I am grateful to David Dagan, Lucien Gross, Luke Shaefer, and Brian Steensland for perceptive comments and suggestions.

2. The late 1960s and early 1970s saw some fascinating randomized controlled trials of pilot NIT plans; negative labor force participation effects were small.