Infinite Diversity in Infinite Combinations

Krugman writes:

The eurozone looks like the United States — there is no good reason to raise rates. To be fair, on the labor side things look a bit different: there are actual labor shortages in some parts of Europe, reflecting both low labor mobility and the extreme asymmetry of the European shock. But raising rates for all of Europe because parts of Germany are doing well is, as I’ve written before, worse than the one-size-fits-all policy euroskeptics warned about; it’s one size fits one.

Mmmm...

The 'one size fits one' link brings up a graph that shows Germany doing far better than Spain with respect to employment. Krugman's point seems to be that we need different policies for different conditions, even if those conditions occur at the same time.

Well, they could break up the European Union. As an American I rather like that approach. Why should anybody else in the world be as big as the U.S.A.?

But I have a better way to solve the problem. Below is an excerpt from mine of 23 July '09. What it says is we should stop jacking up interest rates to fight inflation. It says we should remember that the money that causes inflation is created by borrowing.

It says we should fight inflation by un-doing the thing that creates inflation: by paying off the debt that results from the borrowing that creates the money that causes prices to increase.

It says the biggest borrowers should pay the highest rate of taxes. It says the tax rate should come down if the borrower accelerates repayment of the loan.

It is a plan to reduce debt by fighting inflation and to fight inflation by reducing debt.

It is the sort of solution that Krugman is looking for but has not found.

From my old post:

I'm not big on making proposals. My interest is to understand the past or, rather, to understand the process. If we understand *how* the economy works, solutions will present themselves. However...

#1. The use of credit adds to the quantity of money in circulation. Therefore, the repayment of debt is a way to fight inflation. I would set up tax incentives to encourage people (and businesses) to pay off their debt a little faster than we have done since the 1970s say. Accelerated repayment of debt would fight inflation and reduce debt at the same time. Sweet.

#2. Taking that a step further, I would change the income tax. (I'm not talking about the LEVEL of taxation, but the EFFECT of it.) When a person (or business) borrows, his/her debt-to-income ratio increases. I would make the TAX RATE vary with the debt-to-income ratio. Your tax rate would become variable, like the rate of interest. And at a comparable percentage as well, I imagine. You could reduce your taxes by reducing your debt!

#3. The variable rate of taxation would *replace* the variable rate of interest in our economy. And the Federal Reserve would therefore be able to keep interest rates permanently low. This would be beneficial for economic growth.

#4. In the long view, I foresee that the "credit cycle" would become a thing of the past. Indeed, everyone would have his own credit cycle. But the economy as a whole would see no cyclic pattern. Thus, the major force that drives the business cycle would be eliminated. Economic growth would be driven by low interest rates and other factors, but there would never be an accumulation of debt that leads to recession or depression. Long view, of course.