Tape 155 - President Ford's Message
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Transcripts may contain inaccuracies.
Rose | Hello. | 0:02 |
This is Rose Freedman inviting you on behalf | 0:03 | |
of Instructional Dynamics to another of our biweekly | 0:05 | |
conversations with Milton Freedman, | 0:08 | |
Professor of Economics at the University of Chicago. | 0:11 | |
We are taping this conversation | 0:14 | |
on Thursday, October 10, 1974. | 0:16 | |
The obvious thing to talk about today | 0:22 | |
is the President's policy as set forth | 0:24 | |
in his message to Congress. | 0:26 | |
What is your general reaction to this? | 0:28 | |
Milton | On the whole, I must say, | 0:31 |
I found it a disappointing performance. | 0:32 | |
It was so much of a grab bag | 0:36 | |
of things intended to provide | 0:39 | |
cosmetic treatment to the problems | 0:42 | |
rather than a well-organized, coherent | 0:44 | |
courageous policy. | 0:52 | |
There are some good things in it, | 0:54 | |
some bad things, some irrelevant things. | 0:56 | |
Taken as a whole, I would say the positive elements | 0:59 | |
outweigh the negative, but on the whole it will, | 1:02 | |
it's in the right direction, but not nearly so much | 1:06 | |
in that direction as I would have wished | 1:10 | |
and there are some omissions that I regret very much. | 1:12 | |
- | In your opinion, what are the good things? | 1:15 |
- | The good things are the stress on holding down | 1:18 |
government spending, although I must say, | 1:20 | |
the target is too high. | 1:23 | |
$300 billion dollars is a lot of money. | 1:26 | |
When it is talked about the great difficulty of reducing | 1:29 | |
the budget from 305 to 300, | 1:32 | |
there is no attention paid to the fact | 1:35 | |
that the $300 billion dollars would represent | 1:37 | |
a $25 billion dollar increase over the prior year. | 1:39 | |
That's hardly a reduction in government spending, | 1:43 | |
it's just not expanding it quite as rapidly. | 1:45 | |
The second things that I found good, | 1:49 | |
the second batch of things I found good | 1:54 | |
were the stresses on eliminating restraints on competition, | 1:55 | |
especially his strong recommendation | 1:58 | |
for the deregulation of natural gas, | 2:01 | |
his stress on using the wage and price council | 2:04 | |
to monitor government policies that are holding up prices, | 2:07 | |
and his proposals for a commission on regulatory matters | 2:13 | |
in order to do something about the | 2:21 | |
extent to which government regulatory agencies | 2:24 | |
are producing inefficiency and high prices. | 2:28 | |
The third element I found very good was his emphasis | 2:31 | |
on reforming the unemployment insurance | 2:35 | |
so as to provide for long-term unemployed in particularly, | 2:37 | |
the stress on the long-term unemployed aspect. | 2:41 | |
And finally, I approved very much his proposal | 2:43 | |
that preferred stock dividends should be permitted | 2:46 | |
to be deducted by corporations. | 2:50 | |
Indeed, that's a step in the right direction, | 2:52 | |
the correct direction in my opinion, is to eliminate | 2:54 | |
corporate taxation altogether, | 2:57 | |
but to attribute the undistributed corporate income | 2:59 | |
to individual stock holders. | 3:03 | |
Right now, corporations have a strong incentive to | 3:05 | |
finance through debt rather than equity | 3:10 | |
because if they finance through debt the interest | 3:12 | |
payments are deductible in computing tax | 3:14 | |
while if they finance through equity they are not. | 3:17 | |
And this is a less extreme step than the ultimate step | 3:20 | |
I would like to see taken would be simply to permit | 3:24 | |
dividends pay to be deductible along with interest. | 3:26 | |
This would go part of the way toward eliminating | 3:28 | |
the bias in favor of bonds. | 3:31 | |
What the President has proposed is a still smaller step | 3:33 | |
to have a particular kind of dividends, | 3:37 | |
preferred stock dividends, be deductible. | 3:38 | |
Now, I hasten to add that in saying these are good things, | 3:42 | |
many of them have very little relationship | 3:49 | |
to the problem of inflation. | 3:51 | |
They are good things, for example, | 3:53 | |
the deregulation of natural gas is a good thing, | 3:55 | |
but in my opinion, the oil, the problem of conserving oil | 3:58 | |
is not a major problem from the point of view of inflation. | 4:02 | |
It's a major problem from other points of view. | 4:05 | |
But from the point of view of inflation, | 4:07 | |
we had inflation before the oil crisis emerged, | 4:09 | |
we will have a problem of inflation | 4:12 | |
after the oil crisis disappears, so that, | 4:14 | |
of the measures I have said are good things, | 4:18 | |
it's hard to see that any of them | 4:21 | |
is highly relevant to the problem of inflation | 4:23 | |
except the stress on holding down government spending. | 4:26 | |
For example, the regulatory commission proposal, | 4:31 | |
while it's a good thing, will certainly not produce | 4:34 | |
any results for several years. | 4:36 | |
It's simply that it moves in the right direction. | 4:38 | |
Moreover, with respect to the monetary measures | 4:41 | |
the one sentence which the President had in his message | 4:47 | |
which was to repeat an assurance from Arthur Burns | 4:51 | |
that the Federal Reserve System would provide | 4:55 | |
expanded quantity of money, was utterly ambiguous | 4:57 | |
in terms of what it implied for inflation. | 5:01 | |
If the increase in the quantity of money | 5:04 | |
is three or four or five percent, well that's very good, | 5:06 | |
that means downward pressure on inflation. | 5:10 | |
On the other hand, if it's 10 or 12% | 5:12 | |
it means a renewal of inflationary pressure. | 5:15 | |
So these are what I would say are the good points. | 5:17 | |
- | And next, what are the bad things? | 5:21 |
- | Well, I suppose of all of the bad things in here, | 5:23 |
from my point of view, the two worst | 5:26 | |
are the proposal to prop up mortgages | 5:28 | |
by pouring some more funds into the mortgage market. | 5:31 | |
It was billed as aid to housing | 5:34 | |
but it is not aid to housing. | 5:36 | |
It is aid to thrift institutions. | 5:38 | |
And it is aid to thrift institutions | 5:41 | |
of the kind we have been having | 5:43 | |
which is simply a band aid, | 5:45 | |
it's simply a palliative to postpone the problem | 5:48 | |
and it does not at all get to the heart of the problem. | 5:52 | |
Simply buying up mortgages at below-market interest rates, | 5:55 | |
subsidizing, that is to say, outstanding mortgages, | 6:00 | |
to enable the thrift institutions to have higher income | 6:04 | |
with which to meet their interest payments, | 6:08 | |
does nothing whatsoever to eliminate the fundamental defect | 6:10 | |
which is, I've stressed in these tapes before, | 6:13 | |
is that fact that the thrift institutions have borrowed, | 6:16 | |
have loaned long and are borrowing short, | 6:19 | |
that they have loaned at lower, at interest rates | 6:22 | |
during lesser inflationary period | 6:26 | |
and therefore lower interest rates, | 6:28 | |
and now it is difficult for them to retain their deposits, | 6:30 | |
because their depositors, naturally, wish to get | 6:33 | |
the higher interest rates that are currently available | 6:37 | |
on short term funds. | 6:39 | |
A fundamental reform would be to link | 6:41 | |
any assistance to the mortgage thrift institutions | 6:44 | |
with a requirement | 6:50 | |
that they alter the form of their mortgages | 6:51 | |
in such a way as to make them variable interest mortgages | 6:55 | |
to make them inflation-proof mortgages, | 6:58 | |
so that you would eliminate the bind into which | 7:01 | |
thrift institutions inevitably are put, | 7:03 | |
when interest rates, when inflation increases | 7:08 | |
and interest rates rise. | 7:12 | |
I must also say that the other proposal | 7:14 | |
for helping unemployed, namely the proposal that we | 7:18 | |
establish a new WPA program, | 7:23 | |
you recall that in the 1930s during the New Deal | 7:28 | |
we had a Public Works Administration | 7:32 | |
and a Works Progress Administration, the WPA. | 7:34 | |
This was a creation of leaf raking jobs | 7:37 | |
in order to provide relief in the form of work relief. | 7:39 | |
Essentially that is what the President proposed. | 7:44 | |
Now he appended to it a provision that was excellent, | 7:46 | |
which was that the jobs could go only to those people | 7:50 | |
who had exhausted unemployment insurance. | 7:53 | |
Which means that it would be targeted at | 7:55 | |
the long-term unemployed. | 7:58 | |
But I would be willing to wager a large sum at heavy odds | 8:00 | |
that if the bill is accepted by Congress, | 8:04 | |
which it undoubtedly will be, | 8:06 | |
that provision will be stripped from it | 8:08 | |
because the political pressures and interests | 8:10 | |
will be to make it simply a | 8:13 | |
bonus to the states and local communities. | 8:17 | |
The third item in his proposal | 8:19 | |
that I found unsatisfactory and that I regret, | 8:22 | |
is a proposal to increase the investment tax credit. | 8:25 | |
I have always been opposed to the investment tax credit. | 8:29 | |
It does nothing whatsoever | 8:32 | |
to increase the supply of savings | 8:34 | |
because it's a | 8:37 | |
it's only effect is to make the cost of capital | 8:39 | |
somewhat lower for a given total volume of savings | 8:43 | |
to some institutions and to others, | 8:51 | |
namely to those institutions that can qualify | 8:53 | |
for the investment tax credit, | 8:56 | |
to those forms of capital expenditure that can | 8:57 | |
qualify for the investment tax credit. | 9:00 | |
Its effect on the total pool of savings only arises insofar | 9:03 | |
as by adding to the bidding for funds, | 9:07 | |
it raises the interest rate received by lenders | 9:11 | |
and thus encourages lenders | 9:14 | |
to save a larger fraction of their income. | 9:16 | |
This is a very indirect effect | 9:19 | |
and offsetting this is that the capital is encouraged | 9:23 | |
to be used more wastefully. | 9:27 | |
Some kinds of projects can qualify for investment tax credit | 9:29 | |
others cannot and consequently there is a tendency | 9:33 | |
to divert investment into the first form | 9:36 | |
at the expense of the second. | 9:39 | |
Of course the investment tax credit is welcomed | 9:42 | |
as a indirect way in which you can cut corporate taxes. | 9:44 | |
But what is given with the left hand | 9:49 | |
is taken away with the right | 9:51 | |
because then it is proposed to put a 5% surtax | 9:52 | |
on corporate taxes. | 9:55 | |
I think it would be better | 9:57 | |
to do neither the one nor the other | 9:58 | |
and far better than either of those, | 10:00 | |
would be to introduce an inflation-proofing, | 10:03 | |
an inflation adjustment | 10:07 | |
for corporate depreciation allowances and inventory change | 10:08 | |
which would achieve the objective | 10:12 | |
intended with the investment tax credit | 10:16 | |
of altering of reducing taxes on corporations | 10:21 | |
but do it in a way that is right for the long run | 10:24 | |
and not merely for the present situation. | 10:28 | |
I guess those are the measures that | 10:32 | |
seem to me to be the least attractive in his catalog. | 10:37 | |
- | You don't mean least attractive, you mean unattractive. | 10:42 |
- | Yes, I mean unattractive, you're right. | 10:44 |
- | And finally, what are the irrelevant things? | 10:47 |
- | Well, the main thing I found irrelevant | 10:49 |
was all the talk calling for voluntary cooperation, | 10:51 | |
calling for the enlisting of public sentiments | 10:56 | |
in a win program. | 11:00 | |
Because I believe this contributes | 11:03 | |
to public misunderstanding and miseducation, | 11:05 | |
aside from the Madison Avenue flavor of it, | 11:07 | |
which I find very unattractive, | 11:10 | |
the more fundamental criticism of it | 11:12 | |
is that it does contribute to miseducation, | 11:14 | |
it gives the impression that somehow or other | 11:16 | |
the ordinary man, the ordinary citizen | 11:19 | |
in his private capacity, | 11:21 | |
has had something to do with inflation. | 11:23 | |
That's utterly false. | 11:25 | |
The ordinary citizen in his private capacity, | 11:26 | |
as I have stressed over and over again, | 11:28 | |
has had nothing to do with inflation. | 11:30 | |
The ordinary citizen has had a great deal to do | 11:33 | |
with inflation but in his public capacity. | 11:35 | |
His contribution to inflation has been to | 11:38 | |
encourage his representatives in Washington | 11:41 | |
to vote big spending programs, | 11:43 | |
to discourage his representatives in Washington | 11:45 | |
from voting taxes to pay for those spending programs | 11:48 | |
and accordingly to put great pressure | 11:51 | |
on the political authorities to finance the spending | 11:52 | |
by the tax on inflation which does not have, | 11:56 | |
the tax of inflation, not the tax on inflation, | 11:59 | |
the tax of inflation, the inflation tax, | 12:03 | |
which is hidden but more important, | 12:05 | |
which does not have to be voted for by the legislature. | 12:08 | |
It seems to me the right message to give to the people is, | 12:11 | |
Go about your private affairs as you wish, | 12:15 | |
that's your business, you spend your money as you can, | 12:18 | |
make as much money and you can and so on, but | 12:20 | |
consider what you're doing in your public capacity. | 12:25 | |
Bring pressure on your congressmen not to spend as much. | 12:27 | |
Bring pressure on them to encourage the Federal Reserve | 12:31 | |
to have a moderate monetary policy. | 12:34 | |
Bring pressure on them to reduce taxes | 12:38 | |
and spending where they can. | 12:40 | |
That's the way in which the ordinary citizen can contribute | 12:42 | |
not through | 12:45 | |
sending in 10 proposals for saving a little fuel, | 12:48 | |
not through heating less and so on, in a voluntary way. | 12:53 | |
- | You have omitted the one item in the President's message | 12:58 |
that has gotten the most attention in the media, | 13:01 | |
the surtax. | 13:04 | |
- | Well, I suppose that's a Freudian slip, | 13:06 |
because it's the one about which | 13:09 | |
I have the most mixed feelings. | 13:11 | |
On the one hand, as a technical economic matter, | 13:13 | |
the surtax is not an effective way to fight inflation. | 13:19 | |
It is not an effective way because I believe | 13:23 | |
the major effect of the surtax would simply be | 13:25 | |
to lead Congress to spend more than they otherwise would. | 13:28 | |
So even from the point of view of anyone who believes | 13:30 | |
that the ratio of government spending to government taxes | 13:34 | |
is an important element in inflation, | 13:39 | |
a fiscalist point of view, | 13:41 | |
I do not think it would get any substantial improvement. | 13:43 | |
But suppose I'm wrong there. | 13:47 | |
Suppose the surtax were imposed | 13:48 | |
and it did not affect government spending. | 13:50 | |
Well then it's effect would be desirable | 13:52 | |
because in that case it would take some of the pressure | 13:55 | |
off the capital markets, | 13:58 | |
it would therefore make for somewhat lower rates of interest | 13:59 | |
and given the schizophrenic attitudes of the Federal Reserve | 14:02 | |
about interest rates as well as monetary growth, | 14:05 | |
it would encourage the Federal Reserve to maintain | 14:07 | |
a relatively slower rate of monetary growth than otherwise. | 14:10 | |
So from that point of view it would be moderately effective. | 14:14 | |
It's notable that the proposal for a surtax | 14:20 | |
is a straight replay of President Johnson's surtax in 1968 | 14:23 | |
under similar circumstances when inflation was heating up. | 14:28 | |
They were not quite similar because at that time | 14:32 | |
you had a boom going and not | 14:34 | |
the kind of a side-wise movement that we've been having, | 14:36 | |
unemployment was going down not up. | 14:39 | |
But nonetheless, in 1968, | 14:42 | |
President Johnson finally got through Congress a 10% surtax. | 14:45 | |
That 10% surtax was imposed, | 14:50 | |
the Federal Reserve heaved a sigh of relief and said, | 14:54 | |
Well now we can forget about inflation, | 14:57 | |
the surtax will take care of it. | 15:00 | |
So they turned two with a will | 15:02 | |
and produced an acceleration of the money supply | 15:04 | |
and the result was an acceleration of inflation | 15:06 | |
and not a slowdown. | 15:09 | |
It was one of the most impressive test cases | 15:10 | |
of the relative influence of fiscal and monetary effects. | 15:14 | |
At any rate, to go back to this surtax, | 15:18 | |
the surtax | 15:21 | |
is, in my view, undesirable because taxes are now too high. | 15:27 | |
I would much rather see government spending cut more | 15:33 | |
rather than taxes raised. | 15:36 | |
And of course, an improvement, a reduction in the deficit | 15:38 | |
or a move to a surplus has exactly the same affect | 15:42 | |
on the credit market, whether it is achieved | 15:45 | |
by a reduction in government spending | 15:47 | |
or by an increase in government tax receipts. | 15:50 | |
But the reduction in government spending | 15:53 | |
has the important result | 15:55 | |
that it leaves more for private people to spend, | 15:56 | |
that it goes against the extraordinary trend we've had | 15:59 | |
toward ever higher levels of government spending. | 16:02 | |
Why then do I say that my reactions are mixed about it? | 16:05 | |
My reactions are mixed about it because | 16:09 | |
it is desirable to bring home to Congress | 16:12 | |
that if Congress is going to legislate spending, | 16:15 | |
it should stand up and legislate explicit taxes | 16:18 | |
and not rely on the hidden tax of inflation. | 16:22 | |
And one can interpret President Ford's request | 16:25 | |
for a surtax in that way. | 16:28 | |
He is essentially saying to Congress, | 16:30 | |
Either impose a surtax | 16:33 | |
or cut government spending by more than I have asked for, | 16:36 | |
more than the $5 billion I have asked for. | 16:40 | |
If interpreted in that way, | 16:42 | |
I have a good deal of sympathy for. | 16:43 | |
I might add one more thing of a technical character. | 16:46 | |
I have been absolutely astounded at the commentary | 16:49 | |
that is erupted about the surtax. | 16:52 | |
The argument that somehow or other | 16:54 | |
it is hitting the middle classes unfairly, | 16:56 | |
that it's a regressive tax and so on. | 16:58 | |
Technically speaking, it's quite the opposite. | 17:00 | |
This was one of the things I objected to | 17:03 | |
most strenuously about President Johnson's surtax in 1968. | 17:05 | |
And the surtax that President Ford has just proposed | 17:10 | |
is far more graduated, far more progressive in that sense, | 17:15 | |
I don't like to use the word progressive | 17:19 | |
because I don't think graduated taxes | 17:21 | |
are really progressive. | 17:23 | |
I think progressive is a really emotive term. | 17:24 | |
I think in the present circumstances, | 17:26 | |
the taxes are too highly graduated and therefore | 17:29 | |
a move to make them still more highly graduated | 17:33 | |
is retrogressive not progressive. | 17:35 | |
But look at the actual technical situation. | 17:38 | |
First of all, the President proposes, | 17:42 | |
for this special purpose, to have an exemption | 17:44 | |
of $15,000 of personal income | 17:47 | |
instead of the much lower exemption that is now available | 17:49 | |
for the income tax. | 17:52 | |
In the second place, it's a surtax on the tax. | 17:54 | |
Somebody in the first bracket who is paying a 14% tax | 17:58 | |
a surtax of 5% on 14% | 18:03 | |
is seven tenths of one percent of income. | 18:08 | |
He has left out of each dollar 86 cents. | 18:11 | |
Therefore the surtax is about | 18:15 | |
three quarters of one percent tax on income after tax. | 18:17 | |
Now consider somebody in a 50% bracket. | 18:21 | |
The 5% surtax is two and a half cents | 18:25 | |
on every dollar of his income | 18:28 | |
and he has left out of that income 50 cents to spend. | 18:30 | |
Therefore, that surtax is really | 18:33 | |
5% of the income left for tax. | 18:35 | |
That's about, what is it? | 18:39 | |
From three quarters of one percent to five percent, | 18:43 | |
that's about seven times as high a rate of tax | 18:47 | |
on a person in a 50% income bracket | 18:52 | |
as on a person in the first bracket. | 18:54 | |
It's very hard to see anyway in which you can | 18:56 | |
describe that as a regressive tax. | 18:58 | |
- | You've been talking about the good things, the bad things, | 19:07 |
and the irrelevant things. | 19:10 | |
But what will be the final result of the whole package | 19:11 | |
if he gets it? | 19:15 | |
- | Well, that if he gets it is a good qualification. | 19:17 |
With respect to the surtax, now speaking not as an economist | 19:20 | |
but as an amateur politician, | 19:24 | |
I think the chances of its actually being imposed | 19:26 | |
are negligible. | 19:29 | |
But the final result of the package as a whole, | 19:31 | |
I think depends very critically | 19:35 | |
on things that are not in the package | 19:38 | |
and over which, in a way, the President has no control. | 19:40 | |
Namely, what does happen to the rate of inflation | 19:44 | |
over the next six or nine months? | 19:47 | |
What's going to happen to the rate of inflation | 19:49 | |
over the next six or nine months depends hardly at all | 19:51 | |
on any thing in this package. | 19:54 | |
Hardly anything in here will come to bear | 19:56 | |
within that time span. | 19:59 | |
Given the lag between the time when something is done | 20:01 | |
and it has its effect, | 20:04 | |
what's going to happen to the rate of inflation is, | 20:06 | |
to a large extent, already determined | 20:09 | |
by what's in the pipeline | 20:12 | |
or by the large random events which will occur | 20:14 | |
over the next six or nine months. | 20:18 | |
But let me sketch one possible scenario | 20:21 | |
which I think is not unlikely, | 20:23 | |
and which may make the net effect | 20:26 | |
of the President's speech | 20:30 | |
much more positive than one might offhand suppose. | 20:33 | |
I think there's good reason to suppose | 20:38 | |
that the rate of inflation may come down fairly sharply | 20:40 | |
within the next six or nine months | 20:44 | |
independently of the President's program. | 20:48 | |
What is the reason for supposing that? | 20:51 | |
In the first place, the actual rate of inflation | 20:53 | |
of something like 11 or 12% in CPI over the past year | 20:58 | |
is very much higher | 21:02 | |
than can possibly be explained by prior monetary growth. | 21:04 | |
Prior monetary growth has been inflationary. | 21:08 | |
It is consistent with something like a six or seven percent | 21:11 | |
rate of inflation, but not a 12% rate of inflation. | 21:14 | |
What explains the difference between those two? | 21:17 | |
Partly, as I've stressed before, | 21:20 | |
I think it is a statistical fiction and error. | 21:21 | |
Partly that 12% includes artificial elements | 21:24 | |
from the unveiling of price increases that had been made | 21:30 | |
in earlier years in concealed form, | 21:33 | |
because they were repressed by price and wage controls. | 21:36 | |
Partly it reflects artificial price increases | 21:39 | |
made for the future | 21:42 | |
with the expectation that wage and price controls | 21:44 | |
may be introduced anew again. | 21:47 | |
If somehow or other you could measure the true, | 21:50 | |
underlying increase in prices, | 21:54 | |
I believe it would be decidedly less than 12%. | 21:57 | |
The real increase in prices over the last year | 22:00 | |
maybe has been 9%, something like that, | 22:02 | |
I'm just pulling that number more or less out of the air. | 22:04 | |
The remainder of the excess of inflation over the rate | 22:08 | |
justified by monetary growth | 22:11 | |
may well be attributable to some of these special factors | 22:13 | |
that have received so much attention. | 22:15 | |
The temporary effect of the oil crisis | 22:17 | |
in reducing the total real output of the community. | 22:22 | |
It is estimated the extra bill for oil is about | 22:26 | |
something like one to one and a half percent | 22:29 | |
of our national income which would mean | 22:31 | |
a once for all rise of one and a half percent | 22:32 | |
in the price index number and if you spread that | 22:35 | |
over a year it would account for one and a half percent. | 22:37 | |
And undoubtedly there have been a large number | 22:40 | |
of other transitory factors of which may be, | 22:42 | |
of which we are ignorant, which have | 22:46 | |
made the actual rate of price increase higher | 22:50 | |
than that which would be justified | 22:53 | |
by the long-term monetary growth. | 22:55 | |
This interpretation is, I think, | 22:59 | |
reinforced by the behavior of interest rates. | 23:01 | |
While interest rates have shot up, have been high, | 23:04 | |
they have not shot up to to the levels | 23:07 | |
that would have been justified | 23:09 | |
if indeed, cost of living was rising at 12% per year. | 23:11 | |
The interest rates seem much more nearly consistent | 23:15 | |
with something like a 9% price rise | 23:17 | |
than with something like a 12% price rise. | 23:20 | |
Now if this interpretation is right, | 23:23 | |
these artificial factors are transitory, | 23:26 | |
and the price, the rate of inflation will drop. | 23:29 | |
Moreover, this tendency will be reinforced by the fact | 23:33 | |
that you have had a very substantial | 23:37 | |
reduction in the rate of monetary growth in recent months. | 23:39 | |
Up until, as I have stressed, up until about four months ago | 23:44 | |
there was no sign whatsoever of any retardation | 23:48 | |
in the rate of growth. | 23:51 | |
But in those four months, the evidence has been very strong. | 23:52 | |
We now have had four months | 23:55 | |
of essentially zero growth in M1, | 23:57 | |
and a very low growth in M2. | 24:01 | |
The figure for the money supply | 24:09 | |
in the last week of September | 24:10 | |
is identical with the figure for the money supply | 24:12 | |
in the middle of June. | 24:15 | |
That's for the narrow money supply for M1. | 24:17 | |
For M2, the rate of growth for the money supply | 24:20 | |
over the last six months has only been at a 6% rate, | 24:24 | |
over the last three months at a 4.6% rate. | 24:29 | |
So for both M1 and M2, you have had a very drastic slowdown | 24:33 | |
in the rate of monetary growth. | 24:37 | |
As I stressed before, I'm very hesitant | 24:39 | |
about predicting that will necessarily continue. | 24:41 | |
The Fed has before gone through such episodes | 24:45 | |
and overreacted going the other way. | 24:48 | |
And indeed, that still seems to me to be a very real danger. | 24:51 | |
But there is no doubt that from the short run point of view | 24:56 | |
these slowdowns in the rate of monetary growth | 25:00 | |
will tend to make for a slower rate of nominal income growth | 25:04 | |
than would otherwise occur. | 25:10 | |
And although the lag between the monetary change | 25:12 | |
and price change is on the average of two years, | 25:15 | |
that doesn't mean that it doesn't have some effect | 25:18 | |
earlier than that. | 25:20 | |
So that at any rate this rapid slowdown in monetary growth | 25:21 | |
will certainly contribute another factor | 25:26 | |
to the ones I've already mentioned. | 25:30 | |
Next, this picture that I've been drawing | 25:33 | |
is not inconsistent with what has been happening | 25:37 | |
either in sensitive, in the markets which record | 25:39 | |
sensitive commodity prices or in the market | 25:44 | |
for short-term funds. | 25:48 | |
Commodity prices, sensitive commodity prices | 25:51 | |
have actually been coming down. | 25:53 | |
Certainly the enormous bubble which took place has burst | 25:55 | |
and this is very often historically a precursor | 26:01 | |
to a slowdown in the rate of growth | 26:04 | |
of wholesale prices more broadly measured | 26:05 | |
and then in consumer prices. | 26:08 | |
So far as interest rates are concerned, | 26:11 | |
short-term interest rates have been coming down | 26:13 | |
fairly substantially in the last month or so. | 26:17 | |
If we look at the rate on | 26:31 | |
commercial paper which is perhaps about as good | 26:36 | |
a free market rate as you could get, | 26:40 | |
although the CD rate is also a very good rate, | 26:43 | |
but the commercial paper rate, | 26:46 | |
which came close to hitting 12% in July, | 26:47 | |
is now down in the range of about 10 and a quarter percent. | 26:52 | |
The Federal Funds rate, which at one point in July | 26:57 | |
went up as high as 13 and a half percent, | 27:00 | |
is now down to 11%. | 27:02 | |
Which ever one of these short term rates you look at | 27:05 | |
there has been a very distinct decline recently. | 27:09 | |
And one way to interpret that decline is that | 27:11 | |
it is a premonition of a decline in the rate of inflation | 27:14 | |
that is coming. | 27:17 | |
Well, suppose this analysis is correct. | 27:19 | |
Suppose that rate of inflation does taper off sharply | 27:21 | |
in the next six or none months, | 27:24 | |
and now we come to the middle of 1975. | 27:26 | |
At this point, the real danger will be | 27:31 | |
that with , that people will breathe a sigh of relief | 27:33 | |
and say, Inflation has come down sharply, | 27:36 | |
now we've gotta turn all our efforts | 27:39 | |
against that old devil unemployment | 27:41 | |
and we've gotta step up government spending, | 27:43 | |
we've gotta encourage the Fed | 27:45 | |
to increase the quantity of money | 27:46 | |
so we can get unemployment under control. | 27:48 | |
If we do that, we're off to the races again | 27:49 | |
and we will be back on another spiral of inflation. | 27:52 | |
But in the case I've described, | 27:55 | |
Mr. Ford's hand would be extremely strong to resist that. | 27:57 | |
Because he could say, Well, you see, | 28:01 | |
I gave you a policy and it worked. | 28:03 | |
We've been getting inflation under control. | 28:05 | |
Now you listen to me, boys. | 28:07 | |
We mustn't go off half-cocked again. | 28:09 | |
This time we've got to stick to our policy of restraint | 28:11 | |
until we really get inflation under control. | 28:14 | |
If that scenario should develop, well then, | 28:17 | |
despite all of the | 28:21 | |
rather lukewarm comments that I've been making | 28:24 | |
about President Ford's program, | 28:27 | |
it make come up smelling like a rose. | 28:30 | |
- | I guess we've come to the end of our time too. | 28:34 |
Thank you very much. | 28:37 | |
Remember subscribers, | 28:38 | |
if you have any questions or comments, | 28:40 | |
please send them to Instructional Dynamics Incorporated. | 28:42 | |
450 Ohio Street, Chicago, Illinois, 60611 | 28:46 | |
We shall be visiting with you again in two weeks. | 28:52 |
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