Tape 42 - Nixon Reaction to Recession, Wage Settlements and Unemployment
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Transcript
Transcripts may contain inaccuracies.
- | Hello, this is William Clark | 0:02 |
of the Chicago Tribune inviting you to another visit | 0:03 | |
with the distinguished economist, Dr. Milton Friedman | 0:06 | |
of the University of Chicago. | 0:09 | |
Dr. Friedman, I though it might be time to check | 0:11 | |
and see what's been happening to the money stock. | 0:14 | |
- | Well, it's been behaving in a most peculiar way, | 0:17 |
and it raises a real question | 0:21 | |
about what's happening underneath it. | 0:23 | |
On the whole, I am inclined to believe | 0:26 | |
that a number of different pieces of evidence suggest | 0:30 | |
that there has been something of a shift | 0:34 | |
in the stance of the Federal Reserve System. | 0:38 | |
That they are for the first time | 0:40 | |
really taking their foot a little bit off the brake, | 0:42 | |
maybe a little bit, maybe a lot. | 0:45 | |
That's not easy to say. | 0:48 | |
- | Perhaps I should date our discussion | 0:50 |
before you go on with that. | 0:52 | |
We're talking on Friday, January 30th. | 0:53 | |
- | Yes, that is a good date | 0:58 |
because it so happens that tomorrow, which is January 31st, | 0:59 | |
is the day on which Arthur Burns takes over | 1:03 | |
as chairman of the Federal Reserve. | 1:05 | |
So, this is the last BB report | 1:07 | |
on the money stock, Before Burns. | 1:13 | |
After this, it'll be AB. | 1:15 | |
That's not bad because his name is Arthur Burns. | 1:18 | |
- | Arthur Burns (laughs), that's right. | 1:21 |
- | In reaching this judgment, | 1:24 |
which as I say is still very tentative, | 1:26 | |
there are three different factors | 1:29 | |
that I would add together to get to this conclusion. | 1:31 | |
The first is the behavior of the money stock itself. | 1:35 | |
It is about as hard to read at the moment | 1:37 | |
as at any time in the past year | 1:41 | |
because of the very peculiar behavior | 1:43 | |
around the turn of the year and for the last four weeks. | 1:45 | |
The money stock has been varying | 1:49 | |
between a low of about $198 billion | 1:53 | |
and a high of about $200 billion for M1, | 1:57 | |
the narrow money stock, ever since May. | 2:00 | |
It hasn't been outside of that range | 2:02 | |
of roughly $2 billion above or below. | 2:04 | |
It's been extraordinarily stable within that range. | 2:07 | |
Suddenly, in the last week of December, | 2:10 | |
in one week, it jumped by $5 billion | 2:13 | |
or 2 1/2 times as much as a whole range | 2:17 | |
of variation in the prior six or seven months. | 2:19 | |
Well, to begin with, the experts at the, | 2:22 | |
board and so on were saying | 2:25 | |
that this was a purely erratic, statistical accident. | 2:27 | |
I'll come back to the kind of thing | 2:31 | |
they were attributing it to | 2:32 | |
and that would probably come right back again. | 2:34 | |
But then as I've been watching this week after week, | 2:36 | |
we have three more weeks since then, | 2:38 | |
and the money stock has stayed up | 2:41 | |
in a range outside the whole range | 2:43 | |
of behavior of the earlier period. | 2:45 | |
Now, I am still inclined to believe that this is | 2:47 | |
in considerable part a statistical aberration, | 2:49 | |
that it will come back down again. | 2:52 | |
But at least the fact that it has been up so high | 2:54 | |
and has stayed there is consistent | 2:56 | |
with the view that there may have been a slight change, | 3:00 | |
if there hasn't at least been great pressure, | 3:03 | |
to keep it from going up a little. | 3:05 | |
Now, before I go on to the other two factors, | 3:07 | |
I might comment a bit about | 3:09 | |
what are these statistical problems. | 3:11 | |
Some of these statistical problems | 3:14 | |
are not inevitable problems. | 3:16 | |
They are partly a result of the fact | 3:18 | |
that for so many years the Federal Reserve System | 3:20 | |
has regarded the money supply as a kind of a side show | 3:23 | |
and is a number to be computed | 3:25 | |
for anybody who wanted to look at it | 3:28 | |
but not the magnitude | 3:31 | |
on which they were concentrating their primary emphasis. | 3:34 | |
And as a result, they have been fairly sloppy | 3:36 | |
on some of the details, which on occasion, | 3:38 | |
none of these matter if you're going to average out two | 3:41 | |
or three months or you're gonna look at a quarter. | 3:44 | |
But if you're trying to look at it from a month-to-month | 3:46 | |
or a week-to-week basis, these items can be important. | 3:49 | |
One of the major items that messes things up | 3:54 | |
and which is alleged to have had some effect | 3:58 | |
over the year end is something called items | 4:00 | |
in the process of collection. | 4:04 | |
Now what that means is that when you deposit, | 4:06 | |
when you deposit a check at your bank, | 4:09 | |
your bank gives you credit for it, | 4:13 | |
and you count that as part of your deposits. | 4:14 | |
But it takes some time before it is transferred | 4:17 | |
to the bank on which it is drawn. | 4:20 | |
Let's suppose that you deposit a check | 4:22 | |
in a Chicago bank which is drawn on a New York bank. | 4:25 | |
Until the New York bank gets that check | 4:28 | |
and debits its accounts, | 4:31 | |
that sum of money is being counted twice. | 4:34 | |
You are counting it once in your deposits. | 4:37 | |
The man who gave it to you still has it recorded | 4:40 | |
on the books of the banks in his deposits. | 4:43 | |
And so in calculating the money stock, | 4:45 | |
the total money stock, the typical practice | 4:48 | |
is to take the sum of all the deposits | 4:50 | |
as recorded on the books of the banks | 4:53 | |
and to subtract out these checks | 4:55 | |
in the process of collection. | 4:57 | |
- | I see. | |
- | Now, it's by no means obvious | 4:59 |
that that's the right way to do it I should say | 5:00 | |
because I think there is hardly any one of us | 5:03 | |
who when he writes a check and sends it to somebody else | 5:06 | |
doesn't allow for a fact that it won't be presented | 5:10 | |
at our bank for payment the next instance. | 5:13 | |
And I think this is a practice of kiting a checks | 5:16 | |
as the banks like to call it or insufficient fund, | 5:19 | |
but it's a perfectly proper procedure. | 5:23 | |
Businesses take account of the fact | 5:26 | |
in deciding how much bank balances they need. | 5:28 | |
They take account of the fact | 5:30 | |
that there will always be a certain amount | 5:32 | |
of checks in the mail | 5:33 | |
and a certain amount of checks being collected | 5:34 | |
so that this float as it's called will not, | 5:36 | |
call for a cash need. | 5:42 | |
But leave aside the question | 5:43 | |
of whether it should or should not be deducted. | 5:45 | |
The immediate technical point is a very different one. | 5:47 | |
And that is that these items in process | 5:50 | |
of collection are of two kinds. | 5:51 | |
They are items which are going to be credited | 5:54 | |
to individual deposits, | 5:58 | |
to deposits of persons or businesses, | 5:59 | |
and then there are interbank checks. | 6:02 | |
Now, in calculating total money stock, | 6:06 | |
we leave out bank deposits. | 6:08 | |
If the First National Bank of Chicago has a deposit | 6:10 | |
at let's say the First National Bank of New York | 6:14 | |
in order for clearing check purposes or for other purposes. | 6:17 | |
In calculating the total money stock | 6:21 | |
that's left out of the account, | 6:23 | |
its adjusted demand deposits, | 6:24 | |
its total demand deposits minus interbank deposits, | 6:26 | |
deposits of one bank at another bank. | 6:29 | |
Well, on the same logic, the checks, the interbank checks, | 6:32 | |
a check that one bank draws on another, | 6:37 | |
should also be disregarded. | 6:39 | |
But in point of fact, | 6:41 | |
they are lumped with the individual items | 6:43 | |
in the process of collection, | 6:46 | |
and both the interbank checks | 6:47 | |
and the private checks are deducted | 6:49 | |
in calculating adjusted deposits. | 6:52 | |
Now, ordinarily this doesn't make any difference | 6:55 | |
because this just means it's a whole level of, | 6:58 | |
the figures are a little bit lower | 7:00 | |
than they otherwise would be. | 7:01 | |
I should note that in talking about the items | 7:03 | |
in the process of collection, | 7:05 | |
I am not talking about a negligible unimportant thing. | 7:06 | |
According to the latest figures that I just looked at, | 7:12 | |
for large banks alone, they dominate the picture, | 7:15 | |
but they happen to be the only group of banks | 7:19 | |
for which these figures are regularly available. | 7:20 | |
Items in the process of collection totaled something | 7:22 | |
over 30 billion, between $30 and $35 billion | 7:26 | |
or somewhere between a quarter | 7:30 | |
and fifth of their total demand deposits. | 7:31 | |
So we're talking about something | 7:33 | |
at a very large order of magnitude. | 7:35 | |
You see, what we're concerned with here was a jump | 7:37 | |
in one week of $5 billion | 7:40 | |
in the total amount of currency and deposits | 7:42 | |
so that errors in a figure of 35 billion | 7:44 | |
could well be a significant fraction of that. | 7:49 | |
So that, as I say, this item, | 7:51 | |
ordinarily it doesn't make any difference, | 7:55 | |
but on the year end, there was apparently a peculiar feature | 7:57 | |
that the European banks were closed on a particular day, | 8:02 | |
December 26th, the day after Christmas | 8:07 | |
or something like that, which added into our calculations. | 8:09 | |
And I am told that somehow or other | 8:12 | |
this had an abnormal effect on reducing the items | 8:14 | |
in the process of collection | 8:16 | |
and thus made the figures abnormally high. | 8:18 | |
But that special explanation | 8:20 | |
which was being booted around immediately | 8:22 | |
about the year end has now been accompanied | 8:24 | |
and added to by some of the experts in the area | 8:27 | |
with a number of others having to do | 8:31 | |
with year-end window dressing by banks, | 8:33 | |
having to do with a, | 8:35 | |
possibly not very good seasonal adjustment, | 8:38 | |
having to do with the fact that, | 8:41 | |
there has been a continued decline in time deposits | 8:46 | |
so that if you look at the aggregate figures | 8:52 | |
of not the currency plus demand deposits only | 8:54 | |
but currency plus demand deposits plus time deposits, | 8:57 | |
you still have this abnormal jump. | 9:03 | |
But it's much reduced. | 9:05 | |
And, moreover, it's come back more rapidly. | 9:09 | |
So for the broader money stock, | 9:11 | |
there isn't as large a bump | 9:14 | |
in these four weeks as there was before. | 9:16 | |
Well, let me go back to my main theme which I started at. | 9:19 | |
I've sort of digressed from the question | 9:22 | |
of what are the little bits of evidence | 9:25 | |
that lead me to believe that maybe there are signs | 9:28 | |
of a shift in policy. | 9:30 | |
And I said the first of these is this maintenance | 9:32 | |
of this very high level for the few weeks in December. | 9:34 | |
It may be that that reflects some easing. | 9:40 | |
A second factor is that if you look at the monetary base, | 9:45 | |
that is to say, not at the total money stock | 9:50 | |
as owned by individuals and businesses but at the, | 9:53 | |
what the Fed calls high-powered money, | 10:00 | |
the stuff that you carry around in your pocket, currency, | 10:02 | |
plus the deposits which commercial banks have at the Fed, | 10:05 | |
that is the immediate demand liabilities | 10:08 | |
of the Federal Reserve System, | 10:12 | |
that monetary base which is what the Fed directly controls | 10:14 | |
in its day-to-day operations on the market, | 10:17 | |
it can make that within a dollar of what it wants to. | 10:19 | |
I'm exaggerating a little bit. | 10:22 | |
A dollar is a little close, | 10:23 | |
but within a billion dollars, within $100 million, | 10:24 | |
it can surely make it what it wants to. | 10:27 | |
That base has been going up since about October. | 10:30 | |
It was declining for a while until October, | 10:35 | |
and then it's been going up. | 10:37 | |
Now, a rise in that base does not necessarily mean a rise | 10:39 | |
in the quantity of money | 10:42 | |
because that base is used for currency, | 10:44 | |
which absorbs it dollar for dollar. | 10:48 | |
For deposits in which only a fraction | 10:51 | |
of reserves is required behind each dollar of deposit | 10:54 | |
so that if you have a shift out of deposits into currency, | 10:57 | |
well, then the base has to go up | 11:02 | |
in order to keep the total the same. | 11:04 | |
And again, if you have a shift of deposits | 11:05 | |
from cities with a low reserve requirements | 11:08 | |
to high reserve requirements | 11:11 | |
or from time to demand deposits and so on, | 11:12 | |
you have similar effects. | 11:15 | |
But nonetheless, here is a shift in a magnitude | 11:16 | |
which had been going down | 11:20 | |
and now for about three months has been going up. | 11:22 | |
And this seemed to me to be some indication | 11:25 | |
that maybe the Fed was trying to move away | 11:29 | |
from its earlier posturing, | 11:32 | |
that it was sort of counteracting other forces | 11:34 | |
making for a decline | 11:37 | |
but hadn't done so as much as I might have liked. | 11:38 | |
At any rate, that is the second piece | 11:42 | |
of evidence which is important. | 11:43 | |
I may say that piece of evidence was reinforced | 11:45 | |
by the kind of casual comments | 11:48 | |
that Governor George Mitchell of the Federal Reserve | 11:51 | |
was making during November and December | 11:53 | |
when he was assuring everybody and sundry | 11:55 | |
that the fourth quarter would in fact show | 11:58 | |
that the Fed had eased up some, | 12:00 | |
which, as it turned out in the event, it did not. | 12:01 | |
But it's possible that what happened is that with the Fed, | 12:04 | |
as I've emphasized over and over again in these tapes, | 12:09 | |
the operating techniques which the Fed uses | 12:12 | |
are not well calculated to control the quantity of money. | 12:14 | |
They're calculated to control interest rates | 12:16 | |
and credit (mumbles). | 12:18 | |
The Fed is at the moment working with a blunt instrument | 12:19 | |
which I hope it will reform and modify. | 12:22 | |
But so long as it is working with that, | 12:25 | |
there can be a considerable slip twixt the cup and the lip, | 12:27 | |
twixt the what they're trying to do | 12:31 | |
and what they achieve to do, achieve. | 12:33 | |
So that's the second piece of evidence. | 12:35 | |
The third piece of evidence is of a rather different kind, | 12:37 | |
and this is a report in the papers | 12:40 | |
of the minutes of an Open Market Investment Committee | 12:42 | |
meeting back in October. | 12:46 | |
- | Yeah, I remember that. | 12:48 |
- | As you know, | 12:50 |
the Fed releases these minutes three months after the date. | 12:51 | |
I may say, I think this is an undesirable procedure. | 12:57 | |
I see absolutely no reason | 13:01 | |
why those minutes should not be released | 13:03 | |
to the public on the day on which the meeting is held. | 13:05 | |
There ought to be none of this kind of a drawing a veil | 13:08 | |
between the public and the Fed. | 13:14 | |
There's no reason that I can see | 13:16 | |
why you should have any of this delay. | 13:18 | |
Now, one argument that is sometimes made is | 13:23 | |
that you wanna have the delay | 13:25 | |
in order to avoid speculation and uncertainty. | 13:27 | |
Well, I don't believe there would be much anyway. | 13:31 | |
There's more speculation now | 13:34 | |
about what they did when nobody knows what they did. | 13:35 | |
But if that were a real issue, | 13:37 | |
then the thing to do would be to have the meetings | 13:38 | |
of the Open Market Investment Committee on a Friday, | 13:41 | |
release the minutes on Friday night | 13:44 | |
after the markets have closed, | 13:45 | |
give people two days in which to digest the results, | 13:47 | |
and then there'd be no problem. | 13:50 | |
But it seems to me they oughta be out immediately. | 13:52 | |
I don't like this secrecy problem. | 13:54 | |
But situation now is, it's three month's delay. | 13:55 | |
But three months ago in October, | 13:58 | |
it is recorded in these minutes | 14:00 | |
that a substantial minority expressed the view | 14:03 | |
that the Fed should not try to prevent | 14:07 | |
declines in interest rates. | 14:12 | |
Now, as we know in that period, | 14:14 | |
there haven't been any declines in interest rates. (laughs) | 14:15 | |
They've gone up. | 14:17 | |
But the mere expression of that sentiment | 14:18 | |
by a substantial minority of the group, | 14:20 | |
of the board, | 14:26 | |
and it appears from the minutes | 14:27 | |
that there was no strong objection to this, | 14:29 | |
is the kind of signal that if you've been reading, | 14:32 | |
if you read these minutes regularly, | 14:34 | |
this is the kind of indication of a change | 14:37 | |
in the trend of opinion that you look for. | 14:42 | |
And so I think these three pieces, | 14:45 | |
And that's consistent with the base having started to go up | 14:47 | |
as just about the same time. | 14:49 | |
So putting these three pieces together, | 14:51 | |
I would be inclined to say that as of the moment, | 14:53 | |
there is some evidence of a shift in policy, | 14:56 | |
that there's some evidence | 14:59 | |
that it probably occurred somewhere | 15:00 | |
at the end of December, maybe early January. | 15:02 | |
Now, I wanna stress that that's a very tentative judgment, | 15:06 | |
and I have been wrong so many times before | 15:11 | |
in judging what the Fed was going to do | 15:13 | |
that I maybe wrong again this time. | 15:15 | |
That's the just the best of the judgment I can reach now. | 15:17 | |
- | Well, we'll see what happens when you get | 15:20 |
into your AB here (laughs) at the Fed. | 15:22 | |
Dr. Friedman, on January 21st, | 15:26 | |
just a tiny bit over a week ago, | 15:28 | |
we had a change in regulation Q, | 15:31 | |
an increase in the maximum amount of interest | 15:33 | |
that banks are permitted to pay | 15:36 | |
on passbook savings deposits. | 15:38 | |
I wonder what your appraisal of that is, the effect of that. | 15:40 | |
- | Well, on the whole, as you know, | 15:44 |
the effect of the low ceiling has been an enormous decline | 15:46 | |
in the volume of large certificates of deposits, | 15:52 | |
which have declined to less than half of their initial level | 15:55 | |
and have been replaced largely | 15:59 | |
on the part of the banks by liabilities | 16:01 | |
to their European branches and to foreign banks. | 16:04 | |
Now, up until a short period ago, | 16:10 | |
it looked as if the ordinary savings deposits, | 16:13 | |
the savings deposits of the ordinary person | 16:17 | |
or the man on the street | 16:19 | |
were not being much affected by this. | 16:20 | |
Now, this is really amazing. | 16:22 | |
And it is amazing to me now. | 16:24 | |
It's just incredible to me how you can have people | 16:25 | |
in this country, intelligent able people, who are buying, | 16:29 | |
depositing money in savings banks at 4% and 5% | 16:36 | |
or buying certificates of deposit at 5%, 5.5% | 16:39 | |
when you can buy a treasury bill and get 7.5% on it. | 16:42 | |
And the treasury bill is every bit as liquid. | 16:46 | |
In fact, it's more liquid. | 16:49 | |
I was just at a dinner party last night | 16:50 | |
in which I was just astounded at a couple | 16:53 | |
of very intelligent and educated people | 16:55 | |
who had just been impressed | 16:59 | |
by the fact that they could get 5.5% | 17:02 | |
on a certificate of deposit at a bank | 17:04 | |
requiring them to commit themselves for a year | 17:07 | |
and had done so, $1,000 denominations. | 17:10 | |
When, by picking up the phone and calling their broker, | 17:15 | |
any one of these could have bought $1,000 treasury bill | 17:17 | |
at a negligible trading cost | 17:20 | |
and been assured of a 7.5% return | 17:22 | |
and able to sell it any day and any minute. | 17:24 | |
But that is the situation, | 17:26 | |
and from the figures it looks as if the number | 17:29 | |
of people of this kind is very, very large | 17:31 | |
because there has not been a very substantial erosion | 17:34 | |
of these small-scale savings and time deposits. | 17:38 | |
But in recent months, there has for the first time appeared | 17:43 | |
a fairly substantially threat | 17:47 | |
of an erosion of such deposits. | 17:50 | |
The decline in large certificates of deposit slowed down | 17:53 | |
because there weren't any more certificates to go down, | 17:57 | |
and many of those that were left were really out | 17:59 | |
from under the ceilings anyway | 18:02 | |
because certificates held by foreign central banks | 18:03 | |
are not subject to the ceiling. | 18:06 | |
But time deposits had continued to go down | 18:08 | |
apparently as a result of the decline of such deposits. | 18:11 | |
And this, of course, was of serious concern | 18:15 | |
not only in the commercial bank system | 18:17 | |
but also in the mutual savings | 18:19 | |
and the savings and loan from the point of view | 18:21 | |
of funds available supposedly for housing. | 18:23 | |
Well, this pressure apparently finally prevailed | 18:25 | |
on the board, and they finally at long last, far too late, | 18:30 | |
have raised them and then only raised them very moderately. | 18:35 | |
Indeed, in many ways what they have done, | 18:37 | |
if you look at the actual pattern of their rises, | 18:40 | |
what they have done has been to, | 18:43 | |
if they take these numbers seriously, | 18:45 | |
they have increased the inequity of their policy. | 18:48 | |
Here is a situation where a governmental agency says | 18:52 | |
to a small man who has $100 on deposit at your bank, | 18:56 | |
the most you're permitted to pay him is 4%. | 19:00 | |
But to a fellow who can bring in $100,000 for a year, | 19:03 | |
you're permitted to pay him 6.25%. | 19:05 | |
I think it's one of the most disgraceful things. | 19:07 | |
The only reason why it isn't so serious | 19:09 | |
is because it isn't really effective. | 19:12 | |
But if it were effective, | 19:15 | |
it would be absolutely disgraceful. | 19:16 | |
Well, now what have they said? | 19:18 | |
They said we're gonna raise that small fellow's 4% to 4.5%, | 19:20 | |
but we're gonna raise that big $100,000 figure | 19:24 | |
from 6.25% to 7.5%. | 19:26 | |
So we're gonna make the differential | 19:29 | |
larger than it was before. | 19:31 | |
Well, that's on an equity side. | 19:34 | |
On a side which were more interested in, | 19:36 | |
what will be the effects of this? | 19:38 | |
Well, I think that this will have some effect unquestionably | 19:40 | |
in slowing the exodus of savings deposits, time deposits. | 19:45 | |
But I think its major, | 19:49 | |
the way to look at it in the main, | 19:52 | |
is that it may well be a step by the board | 19:55 | |
in the direction of being able to get out | 19:59 | |
from under this terrible regulation Q. | 20:01 | |
See, now when interest rates in general are high, | 20:04 | |
are very high, extremely high, the board can raise these | 20:07 | |
without seeming to have very much impact | 20:11 | |
and without arousing a scream of protest | 20:14 | |
about the fact that they are raising interest rates | 20:17 | |
because everybody knows | 20:19 | |
that actual interest rates are much higher. | 20:21 | |
Well then, if we successfully contain inflation, | 20:23 | |
if we are really successful in our policy | 20:26 | |
and get an inflation rate down to 2%, 3%, | 20:28 | |
interest rates have gotta come down. | 20:32 | |
If interest rates come down by enough, | 20:35 | |
they may come down underneath these ceilings. | 20:38 | |
And then though the ceilings will be in existence, | 20:40 | |
they will be ineffective. | 20:42 | |
Whereas by leaving them at the lower level | 20:44 | |
where they were before, | 20:46 | |
it would take a much more extreme move | 20:48 | |
in interest rates to make them ineffective. | 20:51 | |
And so my belief is that the Fed has | 20:53 | |
in considerable part been led to make this move | 20:55 | |
as a device to get the ceilings up to a high enough point | 20:58 | |
where there's at least some chance | 21:02 | |
that later on they may become ineffective. | 21:04 | |
And I thoroughly approve of any move in that direction | 21:06 | |
because I think the ceilings, | 21:09 | |
is they all oughta be abandoned. | 21:10 | |
Now the question that will be raised in that | 21:12 | |
is does this make any more funds available for housing. | 21:14 | |
Will this really be an effective step | 21:17 | |
to provide funds for housing? | 21:18 | |
The argument is that savings and loan | 21:21 | |
and mutual savings will also raise the interest rates | 21:24 | |
they charge, and they may be able to attract a little funds. | 21:26 | |
Well, in so far that it has any effect at all, | 21:29 | |
it will have an effect in that direction. | 21:31 | |
But I think any effects of that kind | 21:34 | |
are going to be very small | 21:36 | |
just because you were in a situation | 21:38 | |
where you had increasing pressure | 21:41 | |
for withdrawals of these fund | 21:43 | |
in order because people were getting to know | 21:46 | |
about treasury bills | 21:48 | |
and about similar other kinds of investments. | 21:49 | |
And as a result, in the absence of some rise in these rates, | 21:51 | |
you would have had a continued erosion. | 21:55 | |
And I think it will be very fortunate indeed | 21:57 | |
if this modest rise in the smaller rates, | 22:00 | |
in the rates that are really relevant | 22:03 | |
to the savings and loan and the mutual savings banks, | 22:05 | |
it will be very fortunate | 22:08 | |
if the rises by the commercial banks, | 22:09 | |
by the mutual savings banks, by the S&Ls, | 22:11 | |
just stop the erosion and keep you where you were before. | 22:15 | |
- | Dr. Friedman, before we started recording this interview, | 22:19 |
you were making some comments on the pollution question, | 22:22 | |
which I think your subscribers would like to hear. | 22:25 | |
- | Well, I have been very much impressed | 22:29 |
with the recent enormous growth | 22:31 | |
in the sudden interest in pollution. | 22:34 | |
The president's state of the union message | 22:38 | |
was largely devoted to the problem of pollution. | 22:40 | |
All of a sudden, this is the latest craze | 22:43 | |
and the latest fad, and we are being told | 22:45 | |
that unless we do something drastic yesterday, | 22:47 | |
why, tomorrow, nobody's gonna be having the air to breathe. | 22:50 | |
There is no doubt | 22:54 | |
that there's a very real problem about pollution. | 22:54 | |
There's no doubt that in this area, | 22:56 | |
there is a very real role of government. | 22:58 | |
But on the whole, what seems to me most needed | 23:00 | |
at this moment is some debunking | 23:03 | |
of the exaggerated emphasis that's being put on it. | 23:06 | |
I think we are in danger otherwise | 23:09 | |
of going through another one of those sequences | 23:12 | |
that we have gone through in the past 30 or 40 years. | 23:14 | |
We have a great public outrage about some particular issue. | 23:18 | |
We have a swell of sentiment. | 23:21 | |
We have a few years in which nobody's paying any attention, | 23:24 | |
much attention to anything except that. | 23:27 | |
And then we adopt big programs, | 23:29 | |
large governmental expenditure programs | 23:32 | |
to do something about it. | 23:34 | |
These don't work. | 23:35 | |
We don't solve the problem. | 23:37 | |
But after a while, everybody gets tired of it. | 23:38 | |
We stop talking about it, | 23:40 | |
but the expenditures role merrily along. | 23:41 | |
This was the case, for example, | 23:44 | |
if I may mention a few of these things, of a housing case. | 23:46 | |
If you go back to the, | 23:49 | |
in the 1930s when there was the enormous drive | 23:51 | |
about improving conditions of housing, | 23:54 | |
we had large-scale public housing projects. | 23:55 | |
A little later, we had urban renewal projects. | 23:57 | |
All of these have done their bit | 24:00 | |
to make housing conditions worse rather than better | 24:02 | |
but also to raise government spending. | 24:05 | |
Then, we've had a similar kinds of fads about civil rights | 24:07 | |
with enormous demonstrations, marches, and so on | 24:15 | |
and some consequences of very great importance. | 24:20 | |
But still, after a while, people got tired of it. | 24:24 | |
There's much less talk about it and so on, | 24:27 | |
and that fad has more or less run its course. | 24:29 | |
And similar things has happened | 24:34 | |
in the field of controlling agriculture, | 24:36 | |
in the field of consumer protection, | 24:38 | |
safety regulations for automobiles, | 24:40 | |
the great controversy and fad on the campuses | 24:43 | |
and elsewhere about the Vietnam War, | 24:48 | |
which has sort of exhausted people and is now kind of out. | 24:53 | |
And in a way, it looks to me | 24:56 | |
as if this pollution thing is, in considerable measure, | 24:57 | |
just another such fad being pushed out. | 25:00 | |
And that would be a shame because it would lead | 25:03 | |
both to a great waste of money | 25:05 | |
and to a failure to deal with a very real problem. | 25:08 | |
Let's turn to that very real problem | 25:11 | |
because there are two main points | 25:13 | |
that I would like to stress there | 25:15 | |
that I think are not stressed in the discussion, | 25:17 | |
in the popular discussion. | 25:21 | |
One of those is that the question | 25:23 | |
is not pollution or no pollution. | 25:24 | |
The question is what is the right amount of pollution. | 25:26 | |
It would be the easiest thing in the world | 25:30 | |
to eliminate all pollution from automobiles. | 25:33 | |
All we have to do is simply to outlaw the automobile, | 25:35 | |
do what the island of Bermuda did for a long time | 25:38 | |
and say there shall be no automobile. | 25:41 | |
But would the American people really prefer to have a world | 25:44 | |
in which there was no pollution | 25:48 | |
from automobile and no automobiles | 25:49 | |
to a world in which there was pollution and automobiles? | 25:51 | |
The problem is that pollution imposes costs on people, | 25:55 | |
but it also involves costs to avoid the pollution. | 26:00 | |
If you think of the simplest case, | 26:06 | |
if you say well now here's a factory belching smoke. | 26:07 | |
It could change its furnace. | 26:11 | |
All right, how much would it cost to change that furnace? | 26:12 | |
How much would it cost to produce the final product | 26:15 | |
without the pollution? | 26:18 | |
And then you have to ask the question, | 26:19 | |
is that cost smaller than or more than | 26:21 | |
the harm that the pollution imposes on other people? | 26:26 | |
And you have a standard economic issue | 26:29 | |
of comparing costs and returns. | 26:32 | |
The only respect in which pollution | 26:34 | |
or the respect in which the pollution issue is different | 26:37 | |
is that in many cases, the people who are harmed | 26:41 | |
by pollution are numerous, widely spread, | 26:43 | |
and are not in a position to get compensated | 26:47 | |
for the pollution that is imposed on them. | 26:50 | |
That is the reason why in such cases, | 26:52 | |
as, for example, when a factory in a large city | 26:54 | |
spreads smoke over a large area | 26:58 | |
affecting lots of people who have to go to the laundry | 27:00 | |
but who cannot trace their laundry bill back | 27:03 | |
to the particular polluter, | 27:05 | |
in such cases there is a justification | 27:07 | |
for a governmental agency trying to make some assessment | 27:10 | |
about what costs are imposed on others by pollution | 27:13 | |
imposing a tax on polluters equal to that amount | 27:16 | |
and using the proceeds to clean up the rest of the town. | 27:19 | |
Now, it oughtn't to be a prohibition of the pollution | 27:24 | |
but a tax sufficient to keep him from polluting. | 27:27 | |
But it is not recognized how often it is | 27:30 | |
that you already may well have | 27:33 | |
the optimum amount of pollution. | 27:36 | |
And again, I'm not going to be able | 27:38 | |
in the time that's available to give a, | 27:40 | |
well, in fact, I can see that I'm not gonna be able | 27:43 | |
to say very much of anything else. | 27:45 | |
We're just about at the end, | 27:46 | |
and so maybe we oughta leave this to later. | 27:48 | |
The two other points I would like to discuss | 27:50 | |
if we discuss this again is a number of cases | 27:52 | |
in which now you already have a balance | 27:54 | |
because the people who pollute have to bear the cost. | 27:56 | |
And secondly, I would like to discuss the other issue | 27:59 | |
that's so much in the news of who pays for it. | 28:02 | |
There's discussion is if somehow or other | 28:06 | |
there's somebody other than the final consumer | 28:09 | |
who can pay for it. | 28:11 | |
But in my opinion, | 28:12 | |
the only person who can ultimately pay for it | 28:13 | |
is a person who consumes a product | 28:15 | |
in which the pollution is involved. | 28:17 | |
- | Thank you very much, Professor Friedman. | 28:19 |
I think we should pick this up another time. | 28:21 | |
Remember, subscribers, if you have any questions | 28:23 | |
or suggestions for topics | 28:26 | |
you would like to hear discussed in this series, | 28:27 | |
send them to Instructional Dynamics | 28:30 | |
166 East Superior Street Chicago, Illinois. | 28:32 | |
This is William Clark. | 28:37 | |
We'll be visiting about two weeks hence | 28:38 | |
with Dr. Friedman of the University of Chicago. | 28:39 |
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