One feature of my new generative book GOAT: Who is the Greatest Economist of All Time and Why Does It Matter? is that almost all of the major contenders (save Hayek) considered India and wrote about India.  I compare and contrast the different treatments, as this is one test of how good an economist you are: can you make sense of a very new and different environment?

From the text, written by me, here is Milton Friedman on India:

Let’s consider Milton Friedman’s 1955 memo written to the government of India, based upon his first trip there. No one ever has suggested that Friedman was an expert on India, or even an expert on developing nations, a topic that barely came up in his published research (he does discuss Hong Kong and the other Asian tigers in some of his more popular writings).

Friedman starts the memo by noting that a five percent rate of economic growth should be possible for India, reflecting of course his interest in economic progress. That was during a time when Indian growth rates were more in the range of two percent, and the prevailing approach was to refer to “the Hindu rate of growth” in a pessimistic manner. Friedman also suggests that Indian growth will be “catch-up growth,” drawing upon the “technical and scientific knowledge” of the world. Early on in the memo, Friedman also argues for a moderately expansionary monetary policy, much better education and training, and better infrastructure.

So far Friedman is on track.

He presents further specifics when confronting other views. For instance, he argued that the prevailing development literature put too much emphasis on aggregate investment and the capital to output ratio. Friedman worried about the possibility of malinvestment, and that the Indian government would favor “heavy industry…and handicrafts” too much, at the expense of small and medium-size enterprises.  Furthermore, he saw that India should focus more on human capital.

Friedman also insists that the Indian government should not excessively expand the public sector. He criticized “nationalization and detailed state control over economic activity,” hardly a surprising view from Milton Friedman. You might see this point as overlooking the possibility of East Asian-style industrial policy, but Indian government interventions, during this period and afterwards, did turn out relatively badly, and furthermore the East Asian successes were hardly apparent or even existing at the time. So Friedman’s analysis may be imperfect in hindsight, but overall it was defensible. Nonetheless Friedman could have raised the importance of an economy having sectors with increasing returns, learning effects, and higher growth potential, but he did not. Most of all, he was appropriately critical of the efforts of the Indian government to protect inefficient industries, and he attacked licensing requirements and the general stifling of progress through excess regulation and favoritism.

Friedman also called for India to have money supply growth of 4 to 6 percent a year, and he placed special stress on this recommendation. My view is a little different, having observed that South Korea often had high double-digit inflation during its economic miracle, but still this was sound enough advice, even if he overly prioritized the point.

On the tax side, Friedman called for a broader tax base for India with a greater scope for direct income taxation. Excise taxes, in turn, should be cut back. These recommendations also have held up well, and furthermore they belie the view of Friedman as a mindless tax cutter.

In his notes on Indian economic planning, Friedman expressed concern that the distribution of income in India was widening rather than narrowing. He also takes pains to rebut the view that India is culturally or religiously unsuited for economic growth, and he blames poor Indian economic policy for India’s poverty, not the Indian people. To the current reader, this sharp distinction between culture and ideas about policy may sound naïve, especially since Friedman complains about both corruption and the fondness of Indian intellectuals for socialist ideology. Do those two factors truly have nothing to do with the culture of a country or region? In any case Friedman saw the very great potential in India.

He also criticized India’s system of foreign exchange allocation and called for a freeing up of capital markets and exchange rates. Arguably the verdict on this recommendation is still out, as India still controls capital flows and thus its exchange rate to some extent. Some defenders of this policy will argue it is why India has avoided a major financial crisis, namely that international capital flows in and out of the country never have been so volatile. Again, while I tend to agree with Friedman here (there is evidence that foreign capital significantly boosts Indian productivity), I would acknowledge this as a possible point of criticism. At the very least it is not obvious that Friedman was correct in this segment of his recommendations.

Finally, Friedman closes the memo by noting he has focused so much on monetary and financial affairs because that is his area of expertise. He also notes a few times that he is no expert on the economic affairs of India.

In sum, this memo is not perfect…but it basically hits the mark, has held up well, and Milton Friedman passes the test of giving good policy advice into a broadly unfamiliar situation.

You will find the endnotes in the core text.  Of course Smith, Malthus, Mill, and Keynes also dealt with India, with varying degrees of success.  The import of India for the history of political economy remains a wee bit underrated.

This paper combines administrative tax data and a model of global investment behavior to evaluate the investment and firm valuation effects of the Tax Cuts and Jobs Act (TCJA) of 2017, the largest corporate tax reduction in the history of the United States. We extend the canonical model of Hall and Jorgenson (1967) to a multinational setting in which a firm produces in domestic and international locations. We use the model to characterize and measure four determinants of domestic investment: domestic and foreign marginal tax rates and cost-of-capital subsidies. We estimate elasticities of domestic investment with respect to each and use them to identify the structural parameters of our model, to quantify which parts of the reform mattered most to investment, and to conduct policy counterfactuals. We have five main findings. First, the TCJA caused domestic investment of firms with the mean tax change to increase by roughly 20% relative to firms experiencing no tax change. Second, the TCJA created large incentives for some U.S. multinationals to increase foreign capital, which rose substantially following the law change. Third, domestic investment also increases in response to foreign incentives, indicating complementarity between domestic and foreign capital in production. Fourth, the general equilibrium long-run effects of the TCJA on the domestic and total capital of U.S. firms are around 6% and 9%, respectively. Finally, in our model, the dynamic labor and corporate tax revenue feedback in the first 10 years is less than 2% of baseline corporate revenue, as investment growth causes both higher labor tax revenues from wage growth and offsetting corporate revenue declines from more depreciation deductions. Consequently, the fall in total corporate tax revenue from the tax cut is close to the static effect.

That is from a new NBER paper by Gabriel Chodorow-Reich, Matthew Smith, Owen Zidar, and Eric Zwick.  How many times has the NYT told you otherwise?  As I’ve noted in blog posts over the last six years or so, the standard literature already was indicating that such tax cuts are relatively effective (though no panaceas).  I hope this settles the matter, though I fear it will not…

Via Jason Furman, who also reproduces some nice pictures from the piece.