Tape 130 - Phase 3 1/2
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- | Welcome once again as MIT professor Paul Samuelson | 0:02 |
discusses the current economic scene. | 0:05 | |
This program series is produced | 0:07 | |
by Instructional Dynamics Incorporated. | 0:08 | |
This recording was made June 14th. | 0:11 | |
- | Today is Flag Day, | 0:14 |
but there is only one subject we can possibly discuss today | 0:16 | |
because it was last night that the president went on TV | 0:20 | |
and announced his 60-day price freeze. | 0:23 | |
It's been rumored for a long time | 0:28 | |
that the president was about to act. | 0:29 | |
I know that the CBS network | 0:32 | |
has been asking me to stand by to give my comment, | 0:34 | |
not instantaneous replay comment on this matter, | 0:37 | |
and finally, the president made his decision. | 0:42 | |
First was a surprise. | 0:45 | |
It seems to me that any decision less than this | 0:49 | |
would have been anticlimactic. | 0:52 | |
That doesn't mean that the decision that was made | 0:56 | |
was a good thing, necessarily. | 0:59 | |
And one might have had an anticlimactic decision | 1:02 | |
because one didn't believe in controls at all | 1:06 | |
and one was just temporizing and seeking for time, | 1:08 | |
but I believe it's more than in the realm of economics | 1:13 | |
that we must try to understand this. | 1:20 | |
The president, because of Watergate, | 1:24 | |
is a cornered political person, | 1:26 | |
and no doubt, his advisors, | 1:29 | |
I'm thinking primarily of Mr. Connally | 1:31 | |
and Arthur Burns and Mel Laird, | 1:34 | |
have been telling him on the one hand | 1:37 | |
that his political fortunes are at a low ebb, | 1:40 | |
but he must do something. | 1:43 | |
Also no doubt, Herbert Stein and George Shultz | 1:45 | |
have been telling the president just doing something, | 1:50 | |
if it's something which is more bad than good, | 1:53 | |
will not really help your political fortunes permanently. | 1:56 | |
Nevertheless, I must confess I thought that the president | 2:03 | |
would do something like what he has done. | 2:07 | |
I think we have a replay of what happened in August 1971. | 2:10 | |
Prior to the international crisis in August of 1971, | 2:15 | |
the president met again and again with his advisors. | 2:19 | |
Again and again, they were split | 2:23 | |
with almost the same lineup that we're now describing, | 2:24 | |
and the president very regretfully | 2:28 | |
threw away his old game plan, | 2:30 | |
which was more or less benign neglect, | 2:32 | |
let the forces of the market | 2:35 | |
work these things out, be patient, | 2:37 | |
and put in the 90-day price freeze. | 2:40 | |
The 90-day price freeze worked pretty well | 2:42 | |
and it was also politically popular. | 2:44 | |
Phase two began working pretty well | 2:46 | |
and began at least being pretty popular. | 2:49 | |
And so we've had a replay. | 2:53 | |
It's a replay occasioned | 2:55 | |
by two to three major forces. | 2:57 | |
First there was the gamble on January 11th | 3:02 | |
to get rid of phase two. | 3:05 | |
Everybody I think believes that that gamble | 3:08 | |
has not worked out. | 3:11 | |
George Shultz said as much on TV | 3:13 | |
within the last 12 hours. | 3:17 | |
We've had a lot of bad luck since then | 3:19 | |
and some of that luck is unrelated | 3:22 | |
to the decision made on January 11th. | 3:25 | |
I think I've said this on these tapes | 3:27 | |
that the food price situation, | 3:29 | |
an understanding of it must be found elsewhere | 3:31 | |
than in the suspension of phase two. | 3:34 | |
Phase two did not control raw food prices. | 3:37 | |
Phase three was no change in that regard. | 3:40 | |
And I must say that the present freeze we now have | 3:42 | |
is also a no change. | 3:45 | |
One cannot repeat too often | 3:49 | |
that it is not an alibi cooked up in Washington | 3:50 | |
to explain what's happened to food prices, | 3:54 | |
to say that the upswing in income in the United States | 3:57 | |
has increased the demand for food. | 4:01 | |
The upswing in the income in the United States | 4:03 | |
has been matched and more than matched in percentage terms | 4:05 | |
by an upswing in income all over the globe, | 4:07 | |
in Japan, in Western Europe, in Australia. | 4:11 | |
And when people there have more money income | 4:15 | |
and more real income, they want to buy more red meat. | 4:18 | |
Now in the face of this increase in demand, | 4:22 | |
about which phase two or phase three | 4:25 | |
or a price freeze can do little in the short run, | 4:29 | |
you had, fortuitously, very bad luck | 4:33 | |
on the supply of agriculture front. | 4:36 | |
It is not a made-up story | 4:39 | |
that the Russian snow cover has been bad two years running. | 4:41 | |
It is a fact that we had a corn blight a couple years ago | 4:46 | |
and that the effects of that on hog-corn cycle syndrome | 4:49 | |
has not yet worked itself out completely. | 4:53 | |
In addition, you have had a drought in Asia, | 4:56 | |
you've had a drought in Australia, | 5:01 | |
and last year's harvest period | 5:03 | |
was a bad period for bringing in the corn. | 5:07 | |
If you add to this the game of Russian roulette | 5:10 | |
which the weather has been playing with us | 5:14 | |
in the Mississippi Valley | 5:16 | |
so that large parts of the cotton acreage | 5:18 | |
is still underwater | 5:21 | |
and lots of acreage destined for early planting of corn | 5:23 | |
will never be planted to corn. | 5:28 | |
Some of that acreage will be planted belatedly to corn. | 5:30 | |
And so, | 5:35 | |
there's no need to look for other factors | 5:37 | |
to explain food price. | 5:40 | |
It's important for me to repeat this | 5:42 | |
because if you ask how is the freeze going to work out, | 5:43 | |
it isn't going to have any effect | 5:46 | |
upon this part of the problem. | 5:48 | |
We still are in the lap of the gods | 5:51 | |
and have to do a little crossing of our fingers and praying. | 5:53 | |
Now I don't think it's gonna do any good | 5:58 | |
to have a government official like Dr. Herbert Stein | 6:00 | |
come on TV every time he has the sad duty | 6:03 | |
of announcing an untoward increase | 6:06 | |
in the price of wholesale food | 6:09 | |
to say that autumn is coming and the new crop is coming | 6:13 | |
and probably things gonna be better. | 6:18 | |
It just isn't good public relations. | 6:20 | |
We have to be patient | 6:22 | |
and see whether that will be better or not. | 6:23 | |
And there is a good chance, | 6:26 | |
let's put it at 20% to 25%, | 6:29 | |
that we could have some weather disaster | 6:33 | |
which will impinge now upon a system | 6:37 | |
with very low inventories and stocks. | 6:39 | |
Then you could have some really very high food prices. | 6:41 | |
So it isn't even the case as so many people say | 6:44 | |
that now, food prices are being stabilized at their high, | 6:47 | |
that we are locking the stable door | 6:53 | |
after all the horses have been stolen. | 6:55 | |
We don't know, | 6:58 | |
there could be some bad news on the supply and demand front | 7:00 | |
which would tend to raise prices still more. | 7:04 | |
I may say that that is not a comfort | 7:07 | |
for those who are critical of price controls | 7:09 | |
because they believe that in such a situation, | 7:11 | |
price controls are going to break down, | 7:13 | |
they're going to get spot shortages | 7:16 | |
which will make people desperate. | 7:18 | |
You're going to get black markets | 7:20 | |
and you're gonna have to move on to a new phase, | 7:21 | |
something different from what we've seen, | 7:24 | |
namely to a phase of allocations | 7:26 | |
and to a phase of rationing. | 7:28 | |
Just as the American family goes berserk | 7:32 | |
if it can't get the meat which it thinks it needs, | 7:35 | |
so the American family suffers great trauma | 7:39 | |
if it can't get to gasoline in summertime | 7:42 | |
for the large automobiles which we all insist upon driving. | 7:45 | |
And here too, you may run into a situation, | 7:51 | |
you already are running into this | 7:54 | |
with respect to the share of the independent gas operators | 7:56 | |
in comparison with the big oil chains of gasoline stations. | 8:02 | |
Here too, more than a price freeze is needed, | 8:07 | |
more than treating the symptoms, | 8:12 | |
namely a system of allocations. | 8:14 | |
And eventually, if we have some very bad luck on this front, | 8:17 | |
now it's not all that clear what it would be. | 8:22 | |
Let's say for example that an awful lot of energy | 8:26 | |
has to be used for air conditioning | 8:30 | |
'cause we get a miserably hot summer | 8:31 | |
so that fuel oil | 8:34 | |
subtracts from what are already low inventories | 8:38 | |
of gasoline in many places. | 8:41 | |
Here too, you could get some real fireworks, | 8:43 | |
some real queues, | 8:45 | |
and the mere act of freezing prices | 8:47 | |
will not do much to solve that aspect of the problem. | 8:52 | |
Well now, you may say that since I've enumerated | 8:57 | |
the most dramatic cases where inflation is pinching, | 9:01 | |
at least in the consciousness of the man in the street | 9:06 | |
and the new decision cannot much affect that. | 9:09 | |
Why then go through all this? | 9:13 | |
Well, there are two other phases | 9:16 | |
of prices, of inflation, | 9:19 | |
which have nothing to do with snow cover in Russia, | 9:21 | |
have nothing to do with the meteorological conditions | 9:25 | |
in the Mississippi Valley. | 9:29 | |
We have had since January 11th | 9:31 | |
a tremendous increase in industrial prices, | 9:34 | |
in administered prices. | 9:39 | |
These are prices which will not be rolled back | 9:40 | |
by supply and demand in the simple way | 9:43 | |
that some day the price of soybeans | 9:47 | |
and soybean byproducts will be rolled back. | 9:49 | |
Now the freeze will hit | 9:53 | |
in this area very strongly, | 9:56 | |
will stop price increases in their tracks. | 10:00 | |
Will the freeze hold? | 10:03 | |
This is the second freeze in a couple of years. | 10:05 | |
You can't get the same innocence | 10:07 | |
restored in the American public. | 10:11 | |
A second freeze will not work as well | 10:13 | |
as a first freeze, other things being equal. | 10:16 | |
You've used up this. | 10:19 | |
Nevertheless, other things are not completely equal. | 10:21 | |
For one thing, the last price freeze, | 10:25 | |
I'm referring to the 90-day freeze of phase one | 10:27 | |
after August 15th, 1971, | 10:29 | |
that came as a surprise to people. | 10:32 | |
There had not really been much anticipatory increases | 10:34 | |
in price before the announcement. | 10:37 | |
You can't say that about this price freeze. | 10:41 | |
Some of the untoward increase in industrial prices | 10:44 | |
that has taken place since January 11th | 10:48 | |
is undoubtedly in anticipation | 10:52 | |
of the decision that phase three isn't working | 10:55 | |
and that we're gonna have to move on to phase four, | 10:59 | |
so people jumped the gun and raised the prices even more | 11:01 | |
than they thought the market would bear | 11:05 | |
in terms of just commercial present time considerations. | 11:07 | |
To the degree that that's true, | 11:14 | |
then the price freeze will have a little elbow room, | 11:16 | |
a little leeway within which to work. | 11:20 | |
In any case, | 11:22 | |
although it's the second price freeze within two years, | 11:24 | |
it's only a 60-day price freeze, | 11:26 | |
and a modern democracy is really in a very bad way | 11:29 | |
if it can't make a price freeze work | 11:33 | |
that length of time. | 11:35 | |
The British, as I recall, | 11:37 | |
also with a conservative government, | 11:39 | |
also with a government ideologically opposed | 11:42 | |
to direct controls, | 11:44 | |
also with a government that tried the gamble | 11:46 | |
of doing without them. | 11:49 | |
And also running into bad luck, | 11:51 | |
they, under Prime Minister Heath, | 11:54 | |
reversed their practice, | 11:56 | |
they submerged their philosophy | 11:59 | |
and introduced a price freeze | 12:02 | |
and that was able to work. | 12:05 | |
There's been a price freeze in Finland | 12:07 | |
that has operated not in terms of weeks and months, | 12:09 | |
but in terms of years. | 12:13 | |
You can't make this miracle work indefinitely. | 12:15 | |
That is the fundamental flaw | 12:20 | |
in the utopian thinking of a John Kenneth Galbraith | 12:22 | |
who just is in favor of permanent price wage controls. | 12:25 | |
There's plenty of experience that bears out | 12:30 | |
the fact that his hope is utopian, | 12:33 | |
but it would be saying much | 12:37 | |
for the morale of the American people | 12:39 | |
if this 60-day price freeze couldn't work. | 12:43 | |
And actually, one supposes | 12:46 | |
that in a period as short as that, | 12:49 | |
it will not only hold, | 12:51 | |
but the amount of black market activity, | 12:54 | |
the amount of avoidance, the amount of evasion, | 12:57 | |
although it will be higher in the 59th day | 13:01 | |
than in the second day of the freeze, | 13:04 | |
will still be at a much lower level | 13:07 | |
than we know is possible in a system | 13:12 | |
if you keep these controls for longer a time. | 13:15 | |
Therefore, in the field of industrial prices, | 13:20 | |
this new policy can have an effect. | 13:23 | |
In fact, if I had to be a lawyer | 13:27 | |
with a brief to defend the decision, | 13:30 | |
it would be in that area. | 13:33 | |
Now there's a third area of price inflation. | 13:35 | |
The third area of price inflation | 13:38 | |
is in the cost-push wage area. | 13:40 | |
Actually, from January 11th to the present time, | 13:43 | |
we have had nothing to complain about in that area. | 13:47 | |
That has been miraculously well-behaving. | 13:49 | |
The moderation of the collective bargaining agreements | 13:52 | |
in the face of tightening labor markets, | 13:56 | |
I'm referring to the Goodyear rubber agreement | 13:59 | |
to the Goodrich agreement | 14:02 | |
to the Teamsters' agreement | 14:03 | |
to the agreement a whole year in advance | 14:06 | |
to not have a steel strike next year, | 14:10 | |
but submit the matter if necessary to arbitration. | 14:13 | |
The cement workers agreement, | 14:17 | |
all of these agreements have been much better | 14:20 | |
than one would have expected in terms of free demand | 14:23 | |
and supply analysis pressures on the labor market. | 14:26 | |
But could that kind of luck last? | 14:31 | |
The president mentioned in television | 14:36 | |
last night, on June 13th, | 14:39 | |
that the typical American is 7.5% better in real terms | 14:41 | |
than he was a year ago. | 14:45 | |
And the president said, I say this taking into account | 14:46 | |
his disposable income, | 14:49 | |
that is the increase in his income | 14:51 | |
after allowance is made for price inflation | 14:53 | |
and after allowance is made, as it must be made, | 14:56 | |
for the taxes that he pays. | 14:59 | |
That was a correct statement. | 15:02 | |
However, if the same calculation were made | 15:03 | |
in the middle of 1973 | 15:06 | |
with the first day of 1973, | 15:09 | |
it would be an untrue statement. | 15:12 | |
The real income has gone down, | 15:14 | |
and so, many in the rank and file of organized labor, | 15:15 | |
as well as some of the officials | 15:19 | |
feel that they've been had | 15:21 | |
by the phase three program. | 15:22 | |
So a second reason why a freeze | 15:24 | |
could be defended at this time | 15:30 | |
was in terms of keeping the good behavior | 15:31 | |
on the wage-cost push front. | 15:36 | |
Also, as a matter of equity, | 15:39 | |
since the wage control has worked better | 15:41 | |
in this period than the price control, | 15:44 | |
let's try to atone for that. | 15:47 | |
Now, | 15:53 | |
let me probe a little bit deeper. | 15:56 | |
What is it that direct controls | 16:00 | |
and incomes policy | 16:04 | |
can hope ever to do | 16:07 | |
in the way of a good thing? | 16:09 | |
There is a simpleminded viewpoint, | 16:12 | |
I would say although it's simpleminded, | 16:16 | |
that doesn't mean that it's necessarily wrong, | 16:18 | |
and I would also say that 40% | 16:21 | |
of my contemporary economic colleagues believe in it. | 16:25 | |
According to this theory, | 16:30 | |
every time you control prices or wages, | 16:32 | |
you are only controlling symptoms. | 16:36 | |
You are not one iota changing the underlying scarcities. | 16:39 | |
If you don't let the higher price ration out | 16:44 | |
the scarcity of goods, | 16:47 | |
the discrepancy between the amounts wanted | 16:49 | |
and the amounts which are available to be supplied, | 16:51 | |
then you will have to do it through queues, | 16:55 | |
through a line, through rationing, | 16:58 | |
through payola, through black markets. | 17:01 | |
And really, nothing is accomplished | 17:04 | |
except in a cosmetic way, | 17:06 | |
and they would say what's cosmetic | 17:09 | |
about the picture of queues | 17:12 | |
and rationing and so forth? | 17:16 | |
They go further. | 17:19 | |
They say that for a short period of time, | 17:21 | |
you may seem to have a spurious, substantive effect, | 17:23 | |
but that's only because you're running down stocks, | 17:27 | |
and as those stocks get low, | 17:30 | |
then the trouble which you've avoided now, | 17:34 | |
you buy later. | 17:37 | |
They go further. | 17:41 | |
They say even if it is the case | 17:42 | |
that the price index numbers | 17:45 | |
during the period of tight controls | 17:47 | |
show a moderation over what would otherwise | 17:49 | |
have been the case, | 17:53 | |
and even if some of that is a genuine moderation, | 17:55 | |
much of it, they would say, | 17:59 | |
is just because the meaning of the price index | 18:00 | |
has lost the spirit | 18:02 | |
of what it really is intended to mean. | 18:05 | |
But even if there is some moderation, | 18:08 | |
they say you're only getting it now in order to lose it | 18:10 | |
that day when the controls have to be removed. | 18:14 | |
And since everybody but a very small fringe | 18:18 | |
of the economics profession | 18:22 | |
thinks that controls cannot be held on a permanent basis, | 18:25 | |
that day of judgment is ahead. | 18:29 | |
And so, they say, you've squeezed the balloon, | 18:30 | |
you've kept in the price increase, | 18:33 | |
but when the controls are lifted, | 18:35 | |
when they are eased, | 18:37 | |
then the balloon swells by just as much | 18:38 | |
as it was held in earlier. | 18:42 | |
Sometimes, they even, | 18:46 | |
to make the story a good one, say more. | 18:47 | |
But here is the law of conservation of inflation. | 18:49 | |
The controls simply conceal the amount of inflation | 18:55 | |
and they change the timing, | 18:59 | |
but they have no substantive effect on them. | 19:01 | |
Worse than that, they do have substantive effects, | 19:05 | |
but the substantive effects | 19:07 | |
are of a distorting character. | 19:09 | |
One, you have to support a bureaucracy | 19:12 | |
to enforce the controls. | 19:15 | |
You put a strain on the honesty | 19:17 | |
of government officials | 19:21 | |
and a strain on the whole lobbying, | 19:23 | |
special influence group. | 19:25 | |
But in addition, you get all sorts of unnecessary, | 19:28 | |
circuitous avoidance of the controls. | 19:32 | |
You can't sell lumber in the United States | 19:35 | |
at a certain price. | 19:37 | |
You are allowed to export lumber, | 19:38 | |
so you export the lumber to Canada, | 19:40 | |
and then you import it back. | 19:43 | |
All that cross-haulage | 19:45 | |
is a dead-weight social loss. | 19:47 | |
It's only for the purpose | 19:49 | |
of getting around the rules and regulations, | 19:50 | |
which according to members of this school | 19:55 | |
are not just rules and regulations | 19:57 | |
from the very beginning. | 20:00 | |
And I wanna suggest that there is an alternative model, | 20:03 | |
an alternative hypothesis. | 20:08 | |
Now mind you, it's not possible | 20:09 | |
to prove by analytical methods | 20:12 | |
that the alternative hypothesis | 20:15 | |
that I'm gonna set before you | 20:17 | |
is the correct one, | 20:18 | |
more correct than the one I've just discussed. | 20:20 | |
And it's not possible either | 20:24 | |
to have recourse to any kind of simple experiment | 20:26 | |
which will answer the question. | 20:30 | |
That goes without saying. | 20:31 | |
But I wanna say something more than that. | 20:33 | |
It is also not possible | 20:35 | |
for a jury to look at the pattern of historical experience | 20:37 | |
in a soft field like economics | 20:41 | |
and be able, if they are intelligent, | 20:44 | |
rational men of good will, | 20:47 | |
anxious to weigh evidence objectively, | 20:50 | |
to come out with a crisp answer | 20:54 | |
as to which of the two hypotheses | 20:58 | |
that I'm gonna be discussing | 21:01 | |
is more likely to be the correct one. | 21:02 | |
What I think is important though | 21:07 | |
is to realize and to see | 21:08 | |
that there is an alternative model | 21:11 | |
which is not logically wrong, | 21:13 | |
which on the basis of assumptions, | 21:16 | |
that a goodly number of economists | 21:18 | |
would think not implausible, | 21:21 | |
and on the basis of proper deductive logic, | 21:23 | |
does lead to some good | 21:27 | |
coming in some period | 21:29 | |
for some at least temporary periods of time | 21:31 | |
from a incomes policy and from controls. | 21:35 | |
So by this model and by this hypothesis, | 21:41 | |
we directly contradict the notion | 21:43 | |
that what you gain in the present by controls, | 21:47 | |
you lose fully necessarily in the future | 21:51 | |
when the controls are removed. | 21:54 | |
We start with the fact | 21:58 | |
that there are lots of administered prices. | 22:00 | |
The price of synthetic rubber | 22:04 | |
is not determined from day to day at all | 22:06 | |
in the same way that the price of natural rubber | 22:09 | |
is determined in the Singapore market | 22:12 | |
and in the London market | 22:16 | |
and in the other organized markets of the world. | 22:18 | |
You can see that in the way those prices behave | 22:20 | |
over a whole business cycle. | 22:24 | |
So there is room in the short run | 22:26 | |
for discretionary policy in pricing by business. | 22:28 | |
This does not mean that one producer in an industry | 22:33 | |
has very much unilateral power. | 22:38 | |
Here, Professor Galbraith is again utopianly a romantic. | 22:41 | |
He thinks of the individual large corporation | 22:46 | |
as an absolute monarch, | 22:50 | |
a despot who rules unilaterally. | 22:52 | |
This is not true. | 22:55 | |
But the greatest check and balance | 22:57 | |
upon any one particular large producer in an industry, | 23:00 | |
an industry with administered prices, | 23:05 | |
a quasi-oligopolistic industry, | 23:09 | |
is what the other people in the industry are doing. | 23:11 | |
And a common rule of the road | 23:14 | |
imposed by the coercion of law | 23:16 | |
and enforced by public opinion | 23:19 | |
does mean that in the pricing in the margins | 23:22 | |
which prevail over a period of let's say a year | 23:26 | |
or two years through let's say the upswing | 23:29 | |
in the business cycle | 23:32 | |
through the period of inflection | 23:34 | |
when the rate of real growth | 23:37 | |
is at its maximum in the system, | 23:39 | |
and I'll remind you that just following January 11th, | 23:41 | |
that was this inflection point period in which we were. | 23:45 | |
That was why it was a desperate gamble | 23:50 | |
to have got rid of the phase two protection at that time | 23:52 | |
when we still needed it very desperately. | 23:57 | |
Well, in such a period and for such a period, | 24:01 | |
you can, by force of law, | 24:03 | |
change the amount of margins. | 24:05 | |
By the way, it has to come out somewhere. | 24:07 | |
It may mean simply that the ordinary, normal, | 24:09 | |
cyclical upswing in profits | 24:13 | |
which experienced analysts know is typical | 24:15 | |
in a period of advance in the inflection point phase | 24:18 | |
of the business cycle will be moderated downward, | 24:23 | |
and you may have an opinion | 24:27 | |
about the equity or the inequity of that. | 24:28 | |
Nevertheless, my point is that it can | 24:32 | |
have a substantive effect in such periods of time | 24:34 | |
on the distribution of income. | 24:38 | |
Now more than that, there is no natural price level | 24:41 | |
and wage level for an economic system. | 24:46 | |
This is what the neoclassical economists, | 24:50 | |
Wicksell or John Hicks, | 24:53 | |
call the imperfect stability of the price system. | 24:56 | |
It's just as easy to have an economy | 24:59 | |
that is running with prices twice as high all around | 25:02 | |
as the present level. | 25:06 | |
This, after all, is the fundamental basis | 25:09 | |
of the quantity theory of money. | 25:11 | |
Now I realize that there are strong monetarists | 25:13 | |
who believe that even in the short run, | 25:18 | |
if you could anchor down the supply of money | 25:20 | |
and if you could control the rate of growth | 25:23 | |
of the money supply, | 25:25 | |
doesn't matter for this purpose | 25:26 | |
whether you have M1 currency and demand deposits | 25:28 | |
or whether you have M2 currency, demand deposits, | 25:31 | |
and time deposits, with or without certain adjustments, | 25:35 | |
but even if we agree | 25:39 | |
that there isn't much leeway | 25:43 | |
between what happens to those prices, | 25:45 | |
to those quantities of money and the price level, | 25:48 | |
if you add to the model the fact | 25:53 | |
that there are short-run Phillips curve problems, | 25:56 | |
that there are cost-push elements in the system, | 25:59 | |
just as there in administered prices is leeway | 26:02 | |
on the margins, | 26:06 | |
so in labor markets, there's leeway on the rate | 26:07 | |
at which wages advance | 26:11 | |
when you have differing degrees of tightness | 26:13 | |
in the labor market. | 26:14 | |
I say this without pronouncing at all | 26:16 | |
on the merits of the so-called accelerationist's view, | 26:18 | |
which is that in the longer run, | 26:22 | |
there is no such leeway as that | 26:24 | |
and that if people all get accustomed | 26:25 | |
to a 3% rate of price increase, | 26:28 | |
and if that is anticipated, | 26:30 | |
you will get exactly the same results | 26:32 | |
and you will be subject to the same natural level | 26:34 | |
of unemployment as if you had had stable prices. | 26:37 | |
We don't have to go into that at all. | 26:40 | |
Given all these elements | 26:43 | |
and given finally, populist democracy | 26:44 | |
which says that Arthur Burns | 26:47 | |
and the Federal Reserve Board | 26:51 | |
and the 12 Federal Reserve Banks | 26:54 | |
and the Open Market Committee | 26:57 | |
and the congressional overlords | 26:59 | |
of our central banking system, | 27:02 | |
they are not free to have the money supply | 27:05 | |
which I might want them to have | 27:09 | |
or which they themselves might want to have, | 27:11 | |
because if for cost-push reasons, | 27:14 | |
there is an increase in prices, | 27:19 | |
and if the central bank is tempted | 27:23 | |
for price stability reasons | 27:26 | |
to keep a firm anchor on the money supply, | 27:28 | |
to create some perfect stability | 27:32 | |
in this imperfectly stable price level problem, | 27:33 | |
then you run into the most intense | 27:38 | |
political flak imaginable. | 27:40 | |
And just as Mr. Dooley said, | 27:43 | |
that the Supreme Court follows the election returns, | 27:44 | |
I can assure you that the Federal Reserve | 27:47 | |
is not a free agent. | 27:49 | |
It cannot contrive unemployment | 27:50 | |
in order to curb inflation. | 27:53 | |
I don't meant it can't ever do that, | 27:56 | |
but it is always in jeopardy when it does that. | 27:57 | |
The result is that you get the money increase | 28:01 | |
which is needed | 28:06 | |
to be permissive | 28:08 | |
for the upswing in prices to take place | 28:11 | |
at the rate at which it's going to take place | 28:15 | |
under a laissez-faire no-incomes-policy policy. | 28:17 | |
Now by contrast, suppose by virtue of a freeze | 28:24 | |
which is somewhat uneven in its incidence | 28:30 | |
and which has differing degrees of distorting effects | 28:32 | |
depending upon whether you're in a frozen | 28:36 | |
price that is like lumber | 28:41 | |
and which is close to that of an unprocessed food, | 28:46 | |
or whether you're something like synthetic rubber, | 28:49 | |
if you can slow down the amount of price increase | 28:53 | |
at the same level of unemployment | 28:57 | |
and at the same rate of change of unemployment, | 28:59 | |
then even in terms of monetarists' analysis, | 29:03 | |
you will thereby slow down effectively | 29:07 | |
the amount of money that's going to be created | 29:11 | |
with the result that | 29:13 | |
at the end of the freeze period, | 29:16 | |
at the end of the price control period, | 29:20 | |
you're gonna have a smaller money supply | 29:21 | |
than you had earlier. | 29:23 | |
You're gonna have a lower price level. | 29:24 | |
And then if you get rid of the controls, | 29:26 | |
it is not the case | 29:30 | |
that the ballooning effect at the end | 29:31 | |
wipes out the full favorable effect | 29:34 | |
of the earlier period. | 29:37 | |
And therefore, under the model | 29:39 | |
which I've now outlined to you, | 29:41 | |
there is a case to be made for judicious | 29:43 | |
and temporary price wage controls. | 29:46 | |
Now I don't ask you to choose between those, | 29:49 | |
but if I were the president, | 29:51 | |
hoping for a little luck | 29:53 | |
and having made my decision to freeze, | 29:56 | |
this is the economics that he must look for, | 30:00 | |
this is, this alternative model | 30:03 | |
is the one shred of comfort. | 30:06 | |
Otherwise, you have to think of this | 30:08 | |
as simply a political placebo, | 30:09 | |
just an attempt to buy time | 30:12 | |
in a period when the president, because of Watergate, | 30:16 | |
is a cornered political figure. | 30:19 | |
- | If you have any comments or questions | 30:22 |
for Profession Samuelson, | 30:24 | |
address them to Instructional Dynamics Incorporated, | 30:25 | |
166 East Superior Street, | 30:29 | |
Chicago, Illinois, 60611. | 30:31 |
Item Info
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