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I.

Introduction
Mr. Milton Friedman is a renowned economist who examines the causes
of inflation and how it might be cured. Firstly, he started explaining
how retaining of rent control by the New York authorities after the world
war failed. It all started with good intentions to help the poor citizens
in the Bronx which is one of the boroughs of New York City. But by the
50s the same people were being taxed. He stated that not only Bronx but
also people living beyond East river were being taxed to subsidize Public
housing. It was a good idea but poor people were paying for this
subsidized apartments for wealthy. Its strange that the government is
spending our own money to help us.

The idea of protecting citizens by the government was accepted


during the terrible years of depression. It was a time when capitalism
was failed and politicians were looking for new ways to deal with
depression.

He summarizes that inflation can be controlled if the government


stops printing too much money. The control of wage, price etc. are not
the problem. But politicians would not allow to stop printing money
because of their political interests.
II. Practice of welfare schemes

As a governor of New York State and also the candidate for


presidency, Franklin Delano Roosevelt met his friends and colleagues
repeatedly to find solutions to come out of Depression. The government
actions and government spending at the time was believed to be one of
the way to solve problems. He and his associates were discussing measures
based on their past experiences and also measures taken by Germany during
Bismarck time at the end of 19th century. Just for the record, it was
Germany the first modern state to institute welfare schemes like age old
pensions on the part of government. By the 20th Century Great Britain
under Churchill and Lloyd George followed suit.

The practice of welfare schemes by other countries had little


impact on United States. But this had a great effect on the intellectuals
and advisors of Franklin Delano Roosevelt. Even though they lack
experience in tackling horrors of depression, they were optimistic of
finding a solution. By sitting long hours around a fireplace, they tried
to design programs to counter the problems faced by what is called worst
depression in the history of United States. Of course, they were entirely
depend on the ideas prevalent at the time. The intellectuals believed
that it is the government that has to play crucial role to solve issues
in providing what is called later Security from Cradle to Grave.

After the elections are over, Franklin Delano Roosevelt gave


priority to deal with unemployment by introducing several new schemes.
Public works program was started under which the government started
financing building dams, bridges and highways. To revitalize industry,
he started the National Recovery Administration. The social security act
was passed and measures were taken to give unemployment benefits, to
distribute surplus food. With benefits also came rules and regulations,
red tape and the bureaucracy started growing ever since.

Finally, Mr. Milton Friedman argues that it is small security


empire. People working here are dispensing money with good intentions
but at the cost of controlling our lives and income by the government.
The bureaucrats working for us in the government cost billions of dollars
of taxpayers money. And sometimes these benefits doesnt help the needy.

1. Medical Aid

In the film, Milton summarizes how welfare scheme like Medical aid
supposedly designed to benefit all the needy doesnt work in some cases.
He speaks to Mr. Richard Brown who works at a local hospital. Mr. Brown
Daughter has been diagnosed with throat infection. He is not eligible
for the medical aid just because he earns a little more than qualified.
But in reality, with the salary he makes he cannot really afford a life,
forget about savings. His family actually live on payday to payday salary.
Whom to blame for this injustice?

Irony is, if Mr. Brown gives up his job he would be eligible for
the medical aid and he can treat his daughter. But at what cost? He has
to lose his dignity and has to abide by the rules and regulations of the
government. Thats how the welfare schemes destroy ones independence.
He is proud of his work but he will not be eligible .But he is determined
to resist the pressure exerted by the schemes. In case if he applies for
welfare scheme, he has to submit saving bonds. He finds it unworthy for
small amount.

Mr. Brown states that he and his friends are better off financially
without working. Even though lot of people are willing to work and are
capable of working, they are just trapped in the setup. And the mother
and children are better off if the husband is not around .So breakups
have become normal in poor families. Thats how the system has been
designed. Eventually, many children who are on welfare schemes end up
in this trap when they grownup.

Mr. Brown wants to stay away from these things because he believes
people on welfare lose their independence and dignity. People become
slaves under dictatorship. Welfare supervisors dictates what to do, what
not to do, whether people can put telephone in house. He dont want to
be treated like children and dont want to be trapped in this system.
He looks for a job which is better than welfare scheme but afraid he may
lose job after six or eight months and end up again on welfare. It has
become a loop and sorry state of affairs.

2. Public Housing Project

Mr. Milton also gave insights into how public housing project
failed in England. He spoke to resident named Mr.Ramsay. Mr.Ramsay argues
that state has failed in providing job incentives to people so that they
can take care of their own family instead of somebody else is taking
care of them. He had to collect what is called in Britain as Social
security. That makes him irresponsible and he had to buy clothes or other
things on government support. The government takes care of him and his
family even though he is capable enough .Where does the system fail?

Mrs.Ramsay also join in supporting her husband. She states that


she can find a job but she should report to the government. Instead she
wanted to stay in the home thinking social security would be taking care
of her. Even if she works for 45 pound a week, she only gets 29 pound
by hand deducting all the taxes and she needed to get a stamp from the
doctor. Why this nonsense? It does not make any sense to her. She can
enjoy the same comfort without working, why to work?

Finally Mr.Ramsay concludes that accepting welfare payments means


accepting the rules laid out by those who handover payments. But he dont
have any reason to work as long as he enjoys the benefits of welfare
system.

Mr. Milton thinks Mr.Ramsay is right and his family acting very
intelligently and sensibly. It may not do any good to his family if he
works. Its the fault of the system thats why Mrs.Ramsay was reluctant
to blame those who are on welfare schemes.
Mr. Milton also explains what would happen if welfare schemes are
cut off overnight though he dont believe it happens. People would find
a job at some wage, at some level whether desirable or not. They may
depend on charity but he has a little doubt that people would find a job
for living. So he proposes not to appease people beyond limit.

3. Misuse of welfare scheme

Mr. Milton insists that the results of welfare scheme programs are
disappointing. The basic reason is hard to achieve good objective by bad
means. He spoke about this in the context when government tried to break
away from welfare trend. To get insights into the results he spoke to
Mr. Lawrence Davenport who works for the government.

Mr. Lawrence Davenport says that National welfare system is


opposite to what America believes in .He wants everyone to uphold work
ethic and its the right of everybody to have a job as America was
founded on work ethic and practiced work ethic. He says job is American
way of life and he will help finding a job for unemployed. So that people
can pay taxes and enjoy a piece of pie to become a part of American
dream. He wants to provide an opportunity for everybody to hold a job.

But Mr. Milton argues that people are unemployed and are being
trained with taxpayers money. And there is no certainty that it would
lead to real job to meet the American dream. The schemes like
Comprehensive Education Training Act (CETA) have high dropout rate and
many trainees end up again on welfare. The men and women who administer
programs like these are highly motivated and dedicated but their
achievements are not good.

One of prime reason for failure of this schemes is some people are
spending other peoples money on third party objectives. He implies
people (government) are not careful enough to spend others money
(taxpayers) on welfare scheme beneficiary. And also it instills Godlike
felling on the part of administration .For those who benefits from
welfare have a feeling of childlike dependence. There is large part of
misuse which causes society to divide.

To make his point Mr. Milton spoke to investigation team where he


found out that $7.5 billion was misused in the name of reducing
unnecessary beds, doctors, contractors, hospitals, schools etc. He hints
that it was inevitable because taxpayers money was all in the hands of
others to spend as much as they want. For example in New York City
somebody put up a case for spending taxpayers money on subsidizing
apartments. Those people occupying apartments were paying $200 less than
the market rent. This subsidy come from taxpayer and many of whom are
much poorer than who live in apartments. Why should they pay for wealthy?
Its normal when government tries to do good with our money. There are
areas in the same city which are poor, overcrowded .All these years those
live in slums were paying for those living in apartments.

3.1 Urban renewal program

In the 50s the government planned to pull down large slum areas
and rebuild using government funds under urban renewal program. It
started with a desire to integrate blighted areas with others. Taxpayers
money was used to tear down the area that caused damage to local shops
and business with low income. But once the area was cleared, private
money poured to build shopping complexes, apartments and townhouses.
They cleared the blighted area here but it shifted to elsewhere.

It shows that the government funds has been largely diverted and
does not reach directly to the people. In this case it ended up in the
hands of Woodlawn organization. They used these funds to build the houses
however they want. The intention of the government was good but
government money is always corrupt. They built houses for middle class
with high level of security systems .All at the expense of taxpayers
money. Who is responsible?
Mr. Milton speaks to Mr. Robert Foster who takes care of
construction. Mr. Robert tells Mr. Milton that he was building this site
form the past few months .He would bring people who are unemployed and
give them an apartment at taxpayers money .These people would take of
the area around and give job as a worker to build the remaining areas .So
that they can drop welfare. Its very in efficient way of use of money.
But its the government which decides what to do.

He concludes that its not the ideal system which we might have
liked to get into. It is the system where we dont have fear of losing
jobs because anytime we get onto welfare. It is a system which divides
the social fabric of togetherness. It is system where there is no account
of those who pay and those who are paid rightfully. He hopes it would
be a system which give all of us equal right to improve the lives and
enable us to work ourselves. He believes people have become largely
dependent on government. Much of the spending has been wasted as we
surrendered power to the government. The government policy of doing good
with others has simply not worked.

4. Proposal for good use of welfare schemes

Mr. Milton points that government intervention would only increase


our tax burden tremendously. Having looked into musky depths of
government spending, he considers why noble programs have been failures.
He proposes in simple and convincing way that welfare programs involve
either spending someone elses money on oneself or on someone else.
Legislators feel that they are spending someone else money, that somebody
is footing for welfare bill. And bureaucrats administrating the programs
are also spending someone elses money. There is a little honesty and
efficiency. Poor people lack the skills necessary to grab the opportunity
provided through schemes. The net gain is far less than the transferred
through the schemes. He believes that most of those schemes should not
be established. As they are deeply rooted into the society they cannot
be abolished overnight. He proposes to replace the existing schemes with
one method of income supplements: negative income tax. His proposal
includes allowing certain amount of income without tax. It varies with
family to family depending on the income and expenses. If the person
expenses are less than income, he would be eligible for taxation. Such
a program ensures everybody with certain amount for living.

He also recognizes there proposals are not acceptable to liberals


as they demand high level of subsidy and relief payments. As the time
goes on more intelligent ideas could replace the system and hopefully
political climate also conducive for adjustments.

5. How to cure inflation

5.1 Inflation

Inflation can be defined as increase in the level of prices


of goods and services in a country causing the fall of value of money.
There is no specific universally accepted theory for the cause of
inflation. But Mr. Milton believes oversupply of money into the economy
causes inflation.

While many people have an idea of inflation but they do not


understand the fundamental cause that is exclusive control of money by
the government. And the people on power know how to stop it. But they
would not do it for their political interests. In fact, government is
the biggest beneficiary of inflation as they can push families into high
income tax brackets. So that the government can increase their revenues.
Only way to cure inflation is slowing down printing money. But he also
cautions that cure produces painful side effects like unemployment and
reduced economy growth.
5.2 Background

Mr. Milton started explaining how use of money for raw materials
caused inflation in Sierra Nevada in California. In the beginning very
less amount of people were living in that area. But people started
pouring in once the discovery of gold in the region. It was filled with
prostitutes and gamblers over time. People used to pay with gold for
almost everything. There was no real value for gold as there was abundant
of gold available to everybody. They built their houses with gold and
became rich very quickly. But once gold exhausted, the same cities become
ghost cities .whats the reason? People are unaware that prices of goods
and services overtime has been increased relatively to gold. People
cannot eat gold .isnt it?

With many sacrifices, the gold was transported to other places only
to bury again in the bank lockers underground .Thats means scaling of
raw materials like gold with money has failed in the beginning. Not only
gold, rock salt in African countries, Crocodile money in
malaria .Everything has been used as money.

He took an example of tobacco causing inflation in Virginia.


Initially, tobacco was used to buy clothes, food and housing. Tobacco
was a common money .It can be used to pay taxes legally. This caused to
produce more tobacco. As tobacco production increased, money increased.
When there is more money, price increases causing inflation. By the time
legislators realized, prices of goods and services went up to 40% in
terms of tobacco. Whom to blame? Legislators prohibited in some places
production of tobacco to take control of the situation. But it was too
late. Many people took control and started destroying others tobacco
fields. Local government has to take extreme steps of punishing people
with capital punishment if one destroys other fields. He explains that
early stages of inflation is attractive. There will be plenty of jobs
and money. But once prices started increasing gradually, people lose
jobs and party comes to end.
5.3 Is there any Cure?

So what can we do about inflation? As too much money caused


inflation, right amount will cure it .It is simple but effective way to
tackle inflation. Germany after World War II is one example of what a
hyperinflation can do to the society. They imposed strict control on
almost everything .Money value has fallen down. Unemployment increased.
People used things like pen, camera for buying goods. Countries economic
order changed. A currency reform plan was secretly planned and initiated.
A new currency Deutsche Mark was created and most of the existing coins
replaced.

Today they transformed into a society where everybody likes to live.


When you stop printing money, bad effects come first and good things
come only later.

Fig: Unemployment chart

He ends by summing up into truths: inflation is caused by pumping


more money into the economy than needed; only cure to inflation is lower
monetary growth; it takes time to inflation to develop; the side effects
are unavoidable.

6 Welfare system in Germany


Today we live in a society which is highly advanced not only on
scientific level but also on technological level. Germany welfare system
is based on equality, equal distribution of wealth and public
responsibility with provisions for good life. This involves transfer of
government funds directly to individuals through redistribution taxation
or mixed economy. It transfers income and wealth to individuals through
a social mechanism like charity, taxation, public services etc. Post war
social institutions were restored by the center-right government led by
Christian Democratic Party increasingly backed by social democratic
opposition. Constructing houses, integrating migrants into the system
were the steps taken towards building a welfare state.

Modernizing the welfare system with high hopes of social planning


and active policies were critical in success of welfare schemes in
Germany. Introduction of Keynesian economic policy and reforms in
education played a crucial role.

Why it works?

As the fourth largest economy in the world, Germany has


thrived on principles. The secret of their success is little debt,
intense focus on high production, extensive social services and low
inflation. The success of Germanys system has to do with the job
training system and high subsidies for university education. This
practice has been the reason why Germany has one of the lowest employment
rate for the age group 15-24.The standard of living of Germans is higher
than that of Americans despite Americans high income. Government policy
offers jobs to people who dont go to colleges through internship
programs run by public-private partnerships.

Germany has an elaborate social security system that sees to


it that its citizens live comfortably even if they're sick, disabled,
unemployed or retired. Germanys social security system is mainly funded
through contributions paid by both working people and their employers.
People with jobs must, as a rule, make payments to four parts of the
system.

Arbeitslosenversicherung (Unemployment insurance): 3.0 percent split


equally between employee and employer.

Krankenversicherung (Health insurance), includes maternity, paternity,


and child allowances: 14.6 percent 7.3 percent paid each by the
employee and employer; if your insurer charges a supplement fee, the
amount totals 15.5 percent, raising the employee's contribution to 8.2
percent.

Pflegeversicherung (Nursing care insurance): 2.35 percent split


equally at 1.175 percent; childless employees above 23 years pay an
extra 0.25 percent nursing care insurance.

Rentenversicherung (Pension insurance): 18.7 percent split equally


at 9.35 percent.

Accident insurance: No contribution required by employees; employers


pay around 1.2 percent.

Inflation aversion policy

There is historical evidence supporting higher rates of inflation


aversion in Germany had a role in Bundesbank policy. According to
Bundesbank policy main objective of monetary policy is to safeguard the
currency. The first step in the transmission mechanism was to control
over money market interest rate.

Germanys monetary targeting regime did not follow Mr. Milton


Friedmans rule of constant growth monetary aggregate. In favor of being
flexible and responsive to fluctuations in economic output and exchange
rates, Bundesbank often misses monetary aggregate targets. The monetary
targeting can achieve low inflation and with that price stability at the
cost of often missing monetary aggregate targets. This strategy is
forward looking, independent, flexible and transparent but sometimes
miss accountability.

7 Strategies for controlling inflation

Controlling inflation forms a significant part of the economic


activities of a nation. Controlling inflation is important as
unrestrained increase of the prices may culminate in Hyperinflation, and
an excessive fall in the prices may lead to Deflation. Both the
situations are not healthy and sound for the overall growth and
development of a country's economy.

In fact, keeping a strong control over Inflation has turned out to


be one of the primary objectives of the governments of different
countries across the globe. To this effect, efficacious economic policies
are being formulated, which mainly concentrate on the fundamental causes
of inflation in an economy, and try to improvise methods to keep the
inflationary conditions under control. There are some strategies central
banks are used to control the inflation to large extent.

Exchange rate pegging:

This is the most common method used. Pegging the value of currency
to low inflation country. Sometimes pegging the exchange rate at a fixed
value of that of other country make the inflation rate to gravitate to
other country. Allowing the currency to depreciate at a steady rate with
other country makes inflation rate higher than other country.

This strategy prevents time-inconsistence problem. Time-inconsistence


problem is caused by the policy maker who wants to pursue expansionary
policy in order to create jobs in short term and create jobs in short
term. If there is policy bounded by rule that prevents policymaker from
playing accordingly, time-inconsistence problem can be avoided. The
exchange-rate peg implies an automatic monetary policy rule that forces
a tightening of monetary policy when there is a tendency for domestic
currency to depreciate or loosening of policy when there is a tendency
for domestic currency to appreciate. The central bank cannot pursue
expansionary policy to obtain output gains which leads to time-
inconsistency. It is simple and clear strategy and can be understood by
public.

More than a dozen countries outside the European Union have their
currencies pegged to the euro and enjoy financial stability in terms of
predictable exchange rate fluctuations while the euro provides shelter
against unexpected drops of their national currencies. Bosnia has pegged
its currency to a fixed rate with German mark. In 1987 France inflation
rate was higher than Germany inflation rate. But by tying its currency
closely with German mark, it has been successfully reduced inflation.
By 1992, both Germany and France has almost same inflation rate.

Fiscal policies

This is the means by which government can monitor and influence


the national economy with the adjustments in spending .German fiscal
policy is contributing to positive trends and stability in Europe. The
German economy is posting solid growth and domestic economy is robust.
Growth friendly policies has increased the trust of business community
and boosted consumer and business confidence. This is the result of high
foreign direct investment in Germany. They decreased government expenses
and stopped borrowing money. Because of these policies Germany succeeded
in generating government surplus of 0.7% of GDP in 2015.However, further
decisive reforms are necessary to ensure the long-term stability of
public budgets.

Monetary targeting

One way of pursuing monetary targeting is to follow Milton Friedmans


suggestion of constant money growth rate rule. It enables a central bank
to adjust its monetary policy to cope with domestic considerations. It
allows central bank to choose goals for inflation and respond to output
fluctuations. By this, information on whether the central bank is
achieving its target is known almost immediately. Its accountability
keeps inflation low and avoids falling into the trap of time-
inconsistency. The key feature of German monetary targeting framework
is the strong commitment to transparency and communication of policy to
public. The Bundesbank put on tremendous efforts in communicating with
public what they are trying to achieve. It has been quite successful in
producing low inflation.

Inflation targeting

In which, there is public announcement of medium-term numerical targets


for inflation. It has a clear commitment to price stability. Inflation
target allows use of all available information and not just one variable
to determine best policy. It take accounts of uncertainties and time
lags in the monetary transmission process by observing a range of data.
But Mr. Milton Friedman has criticized inflation targeting because he
believes that it imposes a rigid rule on monetary policy makers. Main
criticism of inflation targeting is that a sole focus on inflation may
lead to output fluctuations.

The strategies discussed above may or may not work for all the
countries around .But it make sense to have a brief idea of mechanisms
that has been used by some countries which believe in those strategies.
Many of the German monetary target regime policies are key elements in
other countries.