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Thomas Freidman is a dreamer. Krugman understands.
The primary reason for government operating in debt is to borrow money from the financiers they should be paying in taxes. As I have said I do not trust government very much but I am certain the private sector WILL lie and cheat in order to transfer money from the many to themselves.
One possible solution is to cancel the debt by a massive bankruptcy and start over by having the government operate without debt except for massive capital projects and effectively eliminate private corporate debt except for the same reasons. Then convert most credit cards to debit cards. Consumer debt should be limited to houses and automobiles while everything else is paid for with cash. This would effectively eliminate inflation.
The reduction of debt is a good idea, but the economy grows on debt.
Here is a thought experiment:
You have a really small economy. It has one owner, one worker, one product and the cost of the product is all labor. The worker is the only customer for the product.
In order for the owner to make a profit he has to pay the worker less than the cost of making the product. In order for the worker to be able to buy the product he has to borrow the difference between what he makes and what the owner charges for the product.
The economy has to run on an expanding debt bubble! Every so often the bubble needs to reset. Now we are at the reset point.
In your example the owner and the worker are different people and in order to have his worker afford to buy the product the owner has to loan the worker the differential in cost. Because the loan has to be made from the owner's profit the profit is reduced by the amount of the loan and the price has to continuously rise. This inflation will eventually destroy the system.
A more realistic example requires a third party called the buyer. In this scenario the owner has to charge the customer more than the cost of production in order to make a profit. Unless the owner is involved in the production he is effectively getting something for nothing and is thus stealing from the worker with a low wage and the customer with a high price. The requirement for the uninvolved making a profit is the weakness of this system. This profit also inflates the costs and eventually destroys the value of the currency being used for these transactions. This system is also destroyed by inflation.
In your example the owner and the worker are different people and in order to have his worker afford to buy the product the owner has to loan the worker the differential in cost. Because the loan has to be made from the owner's profit the profit is reduced by the amount of the loan and the price has to continuously rise. This inflation will eventually destroy the system.
A more realistic example requires a third party called the buyer. In this scenario the owner has to charge the customer more than the cost of production in order to make a profit. Unless the owner is involved in the production he is effectively getting something for nothing and is thus stealing from the worker with a low wage and the customer with a high price. The requirement for the uninvolved making a profit is the weakness of this system. This profit also inflates the costs and eventually destroys the value of the currency being used for these transactions. This system is also destroyed by inflation.
GregW, you just concisely exposed the flaw in your thinking. Caterpillar workers have machines and tools and a plant in which to work. FedEx employees have planes and trucks and terminals so they can do their job.
In your simplistic scenario, capital equipment evidently grows on trees, or is provided by the government, or simply shows up when it is needed by magic.
My retirement account includes a percentage ownership interest in a company that employs 2 million people. In your scenario, I'm a thief because I helped to provide a place for 2 million people to work. They have a place to work; I receive a return on the capital investment. Every single one of those two million people are working at the very best job available to them--or they would not show up day after day. I'm happy with the prospects for my investment, or I wouldn't own it. The system is balanced just fine.
Uhhh noo Milton Friedman is not a believer in central banking and the Fed.
Umm. Was that sarcasm?
Central banking is one of the main themes of Milton Friedman's ideas (monetarism). As in the central bank should increase or decrease the monetary supply in response to economic conditions.
The current chairman of the Fed cites Milton Friedman for inspiration. from wikipedia:
Ben Bernake [fed chairman] said "The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost." (He referred to a statement made by Milton Friedman about using a "helicopter drop" of money into the economy to fight deflation.)
Bernanke has cited Milton Friedman and Anna Schwartz in his decision to lower interest rates to zero.
In your example the owner and the worker are different people and in order to have his worker afford to buy the product the owner has to loan the worker the differential in cost. Because the loan has to be made from the owner's profit the profit is reduced by the amount of the loan and the price has to continuously rise. This inflation will eventually destroy the system.
A more realistic example requires a third party called the buyer. In this scenario the owner has to charge the customer more than the cost of production in order to make a profit. Unless the owner is involved in the production he is effectively getting something for nothing and is thus stealing from the worker with a low wage and the customer with a high price. The requirement for the uninvolved making a profit is the weakness of this system. This profit also inflates the costs and eventually destroys the value of the currency being used for these transactions. This system is also destroyed by inflation.
What my thought experiment shows is the nature of the ongoing debt bubble followed by collapse in the economy that’s been going on from when they invented money. You have to loan the workers the profit margin on the stuff they make (or a part of it) in order to be able to afford to make it.
The need for a return on your investment drives inflation. It also drives debt creation.
Krugman specializes in trade analysis between third world nations and other facets of international trade, but that is about it. Friedman was a statistician who put the Chicago school of economics on the map. His theories and polices have not only guided the US since the 70s, but have served as economic blueprints for countries around the world. To even think that Krugman is anywhere near that level is pure insanity.
And what have we seen since the 1970's:
The deindustrialization of the United States, which parts of the Midwest and several cities on the Eastern seaboard have yet to truly recover from.
The stagnation of middle class incomes while upper class income gains have outpaced all the gains of all other income levels to the point the wealth gap in this country is the widest in this nation’s history. The wealth gap totally refutes “Trickle Down Economics”. This also resulted in the middle class using credit as oppose to income to finance purchase which helped created the credit bubble which eventually popped in 2008.
A trade deficit and negative current account balance that has made the United States the largest debtor nation in the world.
What my thought experiment shows is the nature of the ongoing debt bubble followed by collapse in the economy that’s been going on from when they invented money. You have to loan the workers the profit margin on the stuff they make (or a part of it) in order to be able to afford to make it.
The need for a return on your investment drives inflation. It also drives debt creation.
Another one who thinks planes, trains, trucks, tools, factories, stores and offices grow on trees.
What your thought experiment shows is that it is not possible to describe a dynamic economy with a few trite phrases.
IMHO - Eliminating Military conscription along with the progressivity in the Income Tax were two of the greatest mistakes in the late 1970's. I would have revised the conscription by eliminating most of the exemptions including college deferment and most handicaps. It would have been a truly universal draft that you could not escape by buying your way out. I also would have eliminated the deductions and financial manipulations that allow the very top 10% to avoid taxation. Instead I would have applied the Income Tax to all income from all sources above the 90th percentile.
The effect would have been to make war as burdensome on the middle and upper classes as it now is on the less wealthy. We might have had fewer military interventions to protect the international petroleum industry.
The tax reform would have allowed the workers and low level technicians and managers the money to be a consumer without having to use credit cards and home equity. Considering the state of our economy I would implement these, as well as countervailing tariffs, immediately. The result would be a return to a manufacturing economy from our dead-end credit driven financialized economy.
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