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Home Publications Blogs Beat the Press Danger, Danger, Thomas Friedman Is Writing on Economics Again

Danger, Danger, Thomas Friedman Is Writing on Economics Again

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Sunday, 05 September 2010 21:59

That mammoth waterfall of ignorance, Thomas Friedman, is at it again. The NYT allowed him to show his ignorance on economics in his Sunday column.

Friedman tells readers that the United States will be in bad financial shape because of all the money needed to bail ourselves out of the recession and also due to the growth in cost of Medicare, Medicaid, and Social Security.

The first point requires a knowledge of intro econ. It actually costs us zero to bail ourselves out the recession. The government can simply run deficits to boost demand. (Friedman apparently does not understand the problem is too little demand right now -- we can produce more goods and services than people are buying.)

The government can sell the bonds needed to finance the debt to the Fed (which it is already doing to some extent). The Fed then simply holds the bonds indefinitely. This creates zero burden on the government, since the Fed refunds the interest earned on these bonds to the Treasury. My intro econ students all used to understand this -- I guess Friedman never took econ 101 or didn't have a very good teacher.

Friedman then repeats what his "tutor and friend Michael Mandelbaum" told him:

"'In 2008', Mandelbaum notes 'all forms of government-supplied pensions and health care (including Medicaid) constituted about 4 percent of total American output.' At present rates, and with the baby boomers soon starting to draw on Social Security and Medicare, by 2050 'they will account for a full 18 percent of everything the United States produces.'"

Wow -- did Mandelbaum really say this? Did the NYT really allow Friedman to repeat it in its pages? Okay, in the real world, Social Security, Medicare, and Medicaid accounted for 9.4 percent of GDP in 2008. The projections show that the vast majority of the projected increase in costs in these programs is due to health care costs. However, people who want to cut Social Security lump the program in with the health care programs to advance their agenda.

The post health care reform projections actually show a much slower rate of growth for Medicare and Medicaid. Apparently, Mr. Friedman was not aware of the reform. If the U.S. paid per person health care costs that were comparable to those in any other wealthy country, then the country would be looking at huge long-term budget surpluses.

Comments (32)Add Comment
...
written by Erik, September 05, 2010 11:34
Great metaphor.. It's always a pleasure to read Dean's commentary and analysis.

The direction and rate of change toward which this mad bewildered herd takes us is exasperating.
Misconceptions on deficits
written by Jim, September 06, 2010 12:40
The whole debate on deficits is incredibly frustrating as the essential point is missed by almost all. The basic point on 'printing money' that you make here is essential and needs to be repeated ad infinitum in different ways to try to get the point across.

The problem is circulation. Money needs to circulate in order to have prosperity. 75% of all wealth is in the hands of 5% of the population so it's not circulating. It never circulates enough except during bubbles. That's why unemployment and insecurity is almost always an issue. As a democracy of free thinking people, should we permit the continuance of a system in which only 5% of the population determines whether the majority can have enough 'coin' in order to live?

The argument about deficits should be insulting to our own sense of independence. By arguing whether we can borrow, we are accepting the basic premise that 5% of the population should determine whether the rest can live decent lives. We are admitting dependence on a very small number of very wealthy individuals. We are becoming serf like. But we control the currency. We don't need to borrow from the 5% in order to have a decent society. We can spend directly ourselves and there's no reason that it would be inflationary as long as there's unused capacity.

The whole debate on deficits is completely false! Awe, I feel better for a moment.

Jim
commentsongpe.wordpress.com
Good point by Jim.
written by Ralph Musgrave, September 06, 2010 5:13
Good point by Jim above on inequality, but it’s not 100% valid in that even given a high degree of inequality, a government with a brain can always counteract the inequality by boosting Main Street rather than the crooks and fraudsters on Wall Street. Unfortunately governments do not have brains, or if they do, they don’t boost Main Street because of the control exercised by the crooks over governments.

I agree with Dean’s criticism of the “waterfall of ignorance”, Thomas Freidman, bar one point. Dean advocates boosting demand by issuing government bonds. I suggest the latter are a time consuming and pointless paper chase. It is far simpler just to print money, period.
Numerous leading economists have advocated or currently advocate the latter policy. For example see Milton Friedman: http://www.jstor.org/pss/1810624

Or see Warren Mosler (2nd last para): http://www.huffingtonpost.com/...32105.html

Also bonds held by a central bank are counted as part of the national debt, aren’t they? And ignoramuses go berserk at any increase in the national debt. In contrast, they seem relatively unconcerned about increases in the monetary base (particularly as there has been an astronomic and unprecedented increase in the U.S. base over the last two years, which has had no inflationary effect). So why not give ignoramuses whatever keeps them happy?

...
written by Wes, September 06, 2010 6:12
> This creates zero burden on the government...
in this case why do I have to pay taxes?
You are like Cheney - deficits do not matter.
I am really interested in your answer. Thanks.
Link to quote
written by AndrewDover, September 06, 2010 6:59
Yes, Mandelbaum wrote it in

"The Frugal Superpower"
by Michael Mandelbaum, August 2010
"From his new book, Michael Mandelbaum lays out the challenge of the U.S.’s activist foreign policy, including an expensive war on terror, in an age of economic retraction and pending entitlements."

http://www.guernicamag.com/features/1934/mandelbaum_8_1_10/
...
written by izzatzo, September 06, 2010 8:51
From the NYT article, this quote by Friedman:

During most of the post-World War II era, being a leader meant, on balance, giving things away to people. Today, and for the next decade at least, being a leader in America will mean, on balance, taking things away from people.


Chairman Mao of China understood this principle as well. When millions were starving due to his policies, he explained it was necessary so others could live. Mao and Friedman understand basic economics. No free lunch. Get over it.

Stupid liberals.
...
written by issatzomomwho, September 06, 2010 12:21
issatzomom feel so so fine
Deficits don't matter
written by Jim, September 06, 2010 12:30
To Wes,

Deficits don't matter and I wrote an article on this exact subject:

http://commentsongpe.wordpress.com/2010/06/23/deficits-dont-matter-2/

The real important point is that taxes and government borrowing do not provide funds for government spending. It's totally erroneous to think it does since the government can print dollars at will without cost. The only use for taxes and borrowings is to reduce the money supply. It serves no other function. That's a real critical starting point when thinking about how we should move forward as a society.

Jim
commentsongpe.wordpress.com
...
written by Wes, September 06, 2010 1:02
Jim,

I am familiar with your line of thought and I strongly disagree. No, I am not a liberal in the modern sense of the word.
But thanks for the answer.













...
written by Wes, September 06, 2010 1:08
Jim,
btw, this is a strongly ideological statent that you are making. I am sure you know this of course.
> The only use for taxes and borrowings is to reduce the money supply....

I prefer that we reduce the money supply by not printing too much of it in the first place. Hence, the deficits do matter.
Again, I understand that you choose a different position, and this is your right, but please do not present it as fact. this is a political position, nothing else.
...
written by Wes, September 06, 2010 1:36
No doubt that is what Dean Baker is thinking too.
Deficits do not matter - as long as we find enough people to stick with the tax bill,
"to reduce the money supply".
Most people I know do care about their taxes. So I guess deficits and debt do matter after all. Unless you are a bleeding heart liberal of course. Or you belong to 48% of the people in the US who do not pay any income tax. Obviously for them it is a sweet deal - money falling from helicopters.
"tax and spend" Democrats, just like always.
political position
written by Jim, September 06, 2010 1:37
Wes,

I think all positions are at bottom political, yours no less than mine.

You say that my statement "The only use for taxes and borrowings is to reduce the money supply" is strongly ideological. I don't see that as the case. If the government can print dollars at no cost, then it would seem pretty clear that taxes and borrowings are not needed to fund government. They seem to provide just one function - reducing the money supply.

Jim

The trouble with Dean's idea
written by barrythompson, September 06, 2010 1:41
Dean is right, but with two exceptions:

1. Central banks nowadays pay interest on reserves. Reserves increase when central banks monetise debt - so it is not quite debt free, just close to it.

2. There is a political problem with a large deficit, even if there is no real economic problem.

Just 'printing' the money (ie: a central bank helicopter drop to the treasury - a monetary gift) along the lines of Warren Mosler / MMT / Ricardo Caballero is an even better solution than what Dean proposes.
...
written by Wes, September 06, 2010 2:20
Jim wrote:
"If the government can print dollars at no cost, then it would seem pretty clear that taxes and borrowings are not needed to fund government. They seem to provide just one function - reducing the money supply. "

Nice. So first you print money "at no cost", and then you tax people like me "to reduce the money supply".
I have a problem with your approach, Jim. Perhaps you expect to be on the receiving end of all this...
The problem with socialism is that it always runs of other peoples money.
other people's money
written by Jim, September 06, 2010 2:47
Wes,

The approach I favor would eliminate unemployment and poverty as there would never be insufficient purchasing power in society.

My view may not conflict with your interests to a great degree depending on your income level. Since taxes are an operation to drain money supply, I would think there would normally not be a need to tax middle income and below, at least not greatly. 'Tax and Spend' is a mis-characterization of my argument since I'm emphasizing spending and not taxes. Taxes are only needed to the extent the economy is over-heating - (which is a good thing).

If the economy overheats (which doesn't happen too often) then money may have to be drained. I think requiring holders of substantial wealth to deposit reserves at the Fed, similar to commercial banks, is a good way to drain excess money supply.

I don't believe the economic freedom of a few holders of great wealth should trump the needs of the great majority. 80% of the population has only 7% of financial wealth. This is far closer to serfdom than democracy. I don't see how we can justify a continuation of such a structure. I'm not in favor of centralized socialism. Democratic control over the money supply could be decentralized and very democratic.

Jim
...
written by Wes, September 06, 2010 3:13
"I would think there would normally not be a need to tax middle income and below, at least not greatly"
I am not rich, I work for a living, but I have to pay a lot in taxes. This was my original question, remember? Why do I have to pay taxes?

"The approach I favor would eliminate unemployment and poverty..."
You cannot eliminate poverty by printing currency. But you can easily destroy the fabric of society and functioning economy.
Hey, let's print currency and give every one a billion dollars. Hey, let's make it a trillion! Poverty gone!
After all, it worked so well in Zimbabwe. What could possibly go wrong?
I can't figure out whether you are amazingly naive or a political operative promoting a certain agenda.
open mind
written by Jim, September 06, 2010 3:32
Wes,

No sense continuing this since you're obviously set in your political outlook. There's a great deal of strong theory behind the concept going back decades. It's widely accepted that unemployment, recessions, and depressions are caused by insufficient purchasing power. It's the fundamental Keynesian insight.

Talk about a straw man argument! I never proposed giving trillions to everyone. I proposed to generate enough purchasing power so that we don't have unemployment - big difference. There's no reason to think such a plan would be inflationary when there's vast unused resources.

I answered your original question because I thought you were sincerely curious. Sorry.

...
written by Wes, September 06, 2010 4:06
Keynesian insight is a theory, one among many. It was widely considered to be discredited a few decades ago. Hopefully the current generation of Keynesians will help discredit it forever.
...
written by Wes, September 06, 2010 4:28
When you drop money from helicopters some people benefit, but someone always pays - through higher taxes later, and through inflation tax. Mr. Dean Baker surely knows this, but conveniently prefers not to mention this.
I do not think highly of T. Friedman and his columns BTW. But yours is no better.
Peter Orzsag also lumping SS in budget deficit
written by LJM, September 06, 2010 11:23
He thinks the Bush tax cuts should be extended for 2 more years. He thinks SS "should be reformed," and lumps it in with the other budget deficit. Doesn't he understand that SS is not part of the federal budget, but a stand alone insurance program with its own funds?

http://www.nytimes.com/2010/09/07/opinion/07orszag.html?hp
...
written by Daniel Hunt, September 07, 2010 6:54
"The government can sell the bonds needed to finance the debt to the Fed (which it is already doing to some extent). The Fed then simply holds the bonds indefinitely. This creates zero burden on the government, since the Fed refunds the interest earned on these bonds to the Treasury. My intro econ students all used to understand this -- I guess Friedman never took econ 101 or didn't have a very good teacher."

If they government sells the bonds, the buyer holds them and receives the interest. It then place a burden on the government.
...
written by liberal, September 07, 2010 4:01
Wes wrote,
So I guess deficits and debt do matter after all. Unless you are a bleeding heart liberal of course.


That's a peculiar statement. "Bleeding heart liberals" were against the invasion of Iraq, which has cost us the better part of $1T directly, and probably many times that in terms of indirect costs.
...
written by liberal, September 07, 2010 4:17
Jim wrote,
The approach I favor would eliminate unemployment and poverty as there would never be insufficient purchasing power in society.


Wishful thinking.

The main cause of poverty in modern nations is that poor people have to pay landowners money in order to have a place to live or grow crops, even though landowners didn't create the land or the value it represents.
Social Security
written by Mike, September 07, 2010 6:02
Dean or others, one thing I don't understand is that people talk about social security defecits going out to 2075 or so. It seems to this innocent mind that the whole problem with that program as well as Medicare etc. is the Babyboom generation. We seem to be a giant bubble going through the system and after we die things should stabalize.
...
written by Wes, September 07, 2010 7:14
I was against the Iraq invasion too. BTW, I voted for Ron Paul - just to describe my political preferences in a few words.
...
written by Wes, September 07, 2010 7:21
"Bleeding heart liberals" were against the invasion of Iraq...

BTW, not true in every case. Many (including in Congress and, say, NY times) were among the worst warmongers.
Ok, I clearly had a bad econ 101 teacher
written by bxg, September 07, 2010 9:08
Or maybe I was taught in a different country without your magical "Federal Reserve". Your government can sell any amount of bonds, to the Fed, which then have zero interest burden (since the interest is credited back - ?) and can also direct the Fed to hold the indefinitely so there is no principal repayment? I've heard suspicious arguments about the ease of government borrowing now due to very low interest rates, but it doesn't seem your argument depends on this - it's true independent of rate. Are you really saying this? US borrowing of any amount at any rate is free?

I would absolutely love to be pointed an an economics 101 textbook that claimed anything remotely close to your claim. Or an economics 101 professor who'd sign his name to this. Please? I am serious; what you say seems absurd but I'd love to be educated.
The Apology
written by diesel, September 07, 2010 9:39
A number of months ago, I took Thomas Friedman to task in my response to another of Dean's critiques of one of Friedman's columns. The topic then was his insistence (Friedman's) on calling our parents' (we boomers') the greatest generation. I presented a veritable history of our parents' shortcomings and denounced his exaggerated respect as adolescent.

I see now that I was mistaken. He was right. Their's was the greatest generation--or greater than ours at any rate. I'm here now to make a public apology to Thomas. You rock dude.

And what was this generation that was so sublime? In a word, Socialist. A generation that elected Franklin Roosevelt to four consecutive terms. A generation that embraced a president who implemented government policy that reached into every corner of corporate and financial dealings, while winning a two front war. The list of government programs that inhibited elite power and enhanced the quality of life for the middle class is extensive, and there is no point in repeating what historians have thoroughly documented.

In contrast, we have allowed our lives to be derailed by the empty promises issuing from the mouth of an actor, the happy face of American corporate advertising playing the most important role of his life as the congenial persona for the movement that has swindled our generation out of its rights and social inheritance, all in the name of the virility of free markets. Again, capitalism has failed to deliver on its promises. Again, free markets have proven to be an illusion, or rather a cover for manipulation and shenanigans. And we (the first T.V. generation) fell for the ad-man's pitch.

If someone like Friedman choses to rub our face in the fact that we have failed to live up to the socialist dream envisioned by our parents and their parents, I suppose we deserve it. It's a bitter potion, but we must drink the cup to the dregs. Before we can change our lives, we must first acknowledge the truth.
...
written by Jay, September 07, 2010 9:43
What about the impact of interest rates? Wouldn't the government lose when the Fed raises the interest rates? Or perhaps the benefits of the deficit funding would be greater than any potential loss on the bonds? For lack of a better word, it would have a multiplier effect?
To Wes:
written by Ralph Musgrave, September 08, 2010 10:06
Wes: I’m not suggesting that ALL government spending should be funded by a deficit, and nor does anyone suggest that. On the other had SOME deficit is desirable. Indeed, deficits tend to be the rule rather than the exception in most years in most countries. The basic reason for this stems from, 1, the general acceptance that a small amount of inflation is desirable (rather than zero inflation, and 2, economic growth. I’ll explain.

If national debt (ND) and the monetary base (MB) are to stay constant in real terms, then given that they are shrinking in nominal terms because of inflation, governments have to create or print money to top up ND and MB. I.e. deficits are needed to top up ND and MB. Also, where an economy expands in real terms, if ND and MB are to remain constant as a proportion of GDP, the even more “topping up” is required.

And there is yet another good reason for deficits (and surpluses). Given unemployment, a deficit will help boost demand and create jobs. Plus when inflation looms, a surplus will rein in money (and demand) and help contain inflation.
...
written by Wes, September 10, 2010 6:10
To Ralph: this is very self-contradictory statement and circular logic.
"Plus when inflation looms..." And what causes inflation? Deficits and money printing perhaps?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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