Tape 61 - Industrial Production Decline, Monetary Development, Fed Policy, Subscribers Questions

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-	Hello.	0:02
	This is Instructional Dynamics,	0:03
	inviting you to another of our biweekly interviews	0:05
	with Dr. Milton Friedman, professor of economics	0:08
	at the University of Chicago.	0:10
	We are taping this interview on Wednesday, November 18th.	0:12
	Professor Friedman, the papers all report	0:17
	a sharp decline in industrial production for this month.	0:20
	Does this lead you to revise your view	0:24
	about our reaching the bottom of the recession?	0:27
-	No, it doesn't.	0:30
	The month to month figures, as I've stressed before,	0:31
	are always very erratic.	0:34
	This doesn't mean that the economy is that erratic.	0:36
	The erratic element is in very considerable measure	0:39
	in the statistics themselves,	0:43
	rather than in the phenomenon they report.	0:46
	But this month, of course,	0:48
	there is reason for an erratic element.	0:50
	The GM strike, although as I have argued before,	0:52
	will have no long lasting influence on the economy,	0:55
	certainly as a major item in the short-run.	0:58
	It's certainly something that affects this month's figures.	1:01
	The Federal Reserve Board has estimated	1:04
	that the GM strike accounts for roughly half	1:07
	of the 2% decline in the industrial production index.	1:10
	But of course, it's always a very hard thing to estimate	1:15
	precisely what part of a change is due to autos,	1:19
	you can tell, what happens to autos itself,	1:23
	but it's much more difficult to allow for the indirect	1:25
	and secondary affects in other industries,	1:29
	and other activities of the unemployment	1:32
	and the lack of production associated with the GM strike.	1:35
	So, I think the best thing to do so far	1:38
	is just one month's figures, at the moment,	1:41
	is to regard it as a one month aberration.	1:44
	Of course, one of the troubles is that the GM strike	1:46
	will affect the figures, not for one month alone,	1:49
	but for several months.	1:51
	The figures reported this morning	1:53
	are for the month of October.	1:55
	The next figures, which will be reported	1:57
	are for the month of November.	1:59
	Even if the GM settlement is accepted by the workers,	2:01
	as seems highly likely, it is unlikely that GM	2:04
	will be back in full operation before December 1st.	2:08
	It may not even try to go back into operation before then.	2:12
	So that the month of November will be just as much affected	2:15
	by the GM strike as was the month of October.	2:18
	Of course that doesn't mean	2:22
	that the Industrial Production Index will go down again.	2:23
	What it means is that it will tend to stay at the low level,	2:26
	which it reached in October.	2:29
	But then comes December and GM going back and undoubtedly	2:31
	will go back on an overtime basis.	2:35
	This in turn will spread and consequently	2:37
	the production index for December	2:40
	will be irregular in the opposite direction.	2:42
	It will show a much larger rise in industrial production,	2:45
	very likely, than is justified.	2:48
	In short, one thing that seems pretty clear	2:51
	is that figures like industrial production	2:55
	are not going to provide much reliable information	2:58
	about anything for the fourth quarter of this year,	3:01
	for the months of October, November, and December.	3:04
	The effects on GNP, when the GNP figures come out,	3:06
	will be much smaller because, of course,	3:10
	Industrial Production Index refers only	3:12
	to the production of physical goods	3:16
	of manufactured goods in the main.	3:19
	As you know, services and governmental activities	3:23
	account for a larger fraction of the total GNP,	3:26
	than does industrial production itself.	3:29
	And consequently, the impact of the GM strike	3:31
	on industrial production is very much larger	3:34
	than its impact on the economy as a whole.	3:36
	But nonetheless, the fourth quarter figures	3:37
	will be a little difficult to read	3:40
	as a result of the short-term impact of the GM strike.	3:42
	This means if for a really satisfactory new examination	3:45
	of the state of the economy will have to wait	3:49
	until the figures start emerging	3:51
	in the first quarter next year.	3:53
	But with respect to the general direction of movement,	3:56
	I remain persuaded in my earlier view	4:00
	the economy has hit a bottom, that it is on the way up.	4:03
	That this is being concealed for the moment by the GM strike	4:06
	and its erratic element, but that we will continue to see	4:09
	an improvement in economic conditions over the next	4:14
	six, nine, 12 months, perhaps at a fairly slow pace.	4:17
	But a definite improvement nonetheless.	4:21
-	Would you like to comment on the monetary aggregates?	4:25
-	Yes, because this time there is something to say.	4:28
	For some time now, my comments on the monetary aggregates	4:31
	had a detonating repetitiousness.	4:35
	I've been saying, tape after tape,	4:38
	that the monetary aggregates show roughly the same pattern	4:41
	of an increase in the narrow money supply currency	4:44
	and demand deposits at a rate of something	4:47
	like 5% to 6% a year from February in a broader total,	4:48
	including commercial buying time deposits,	4:52
	but excluding CD's of something like 9%.	4:55
	However, it does turn out that in the past two months	4:59
	there has been a definite tapering off in the rate of growth	5:04
	of the monetary aggregates, indeed.	5:07
	The narrow money supply currency and demand deposits	5:10
	for the four weeks ending November 4th is a trifle,	5:14
	just a shade lower than the average	5:20
	for the four weeks ending August 26th, that is.	5:23
	For roughly a two month period.	5:33
	2 1/2 months period, there has been, on the average,	5:35
	no net change in the narrow money supply.	5:38
	The broader total has continued to rise.	5:41
	It has risen over that same 10 week period	5:44
	at an annual rate of close to 7 1/2%.	5:48
	This is a continuation of the process of disintermediation,	5:51
	to use that ugly and unattractive term	5:55
	that was set in motion by the combination	5:58
	of the Fed's raising of the regulation	6:01
	two ceilings on the one hand	6:03
	and the decline in market rates on the other.	6:05
	With the decline in the market rates, time deposits,	6:08
	even aside from certificates in deposits,	6:13
	because I've left out the large certificates	6:15
	of deposits from this total,	6:16
	but other time deposits have become more attractive	6:18
	relative to market instruments.	6:21
	And as a result, what you'll have had	6:23
	is that banks have been buying the market instruments	6:24
	like commercial paper and the public in general	6:27
	has been accepting time deposits.	6:30
	That rate of growth of 7 1/2%	6:33
	is nonetheless distinctly lower than it was prior to August.	6:36
	If we average out for the period	6:41
	I have been concentrating on before,	6:43
	since the four weeks ending February 25th,	6:45
	the rate of growth of the narrow supply among currency	6:50
	and demand deposits, for that period as a whole,	6:54
	now averages 4.6%, which is very much lower	6:57
	than the nearly 6% it averaged	7:02
	at the end of September,	7:06
	or the 6 1/2% it averaged at the end of August.	7:07
	For the broader money supply,	7:11
	the rate of growth over the whole period	7:14
	since February had been much stabler,	7:17
	and it has only come down a little.	7:20
	It's now running at the rate	7:21
	of 8.7% from February through November 4th,	7:23
	which is the latest week	7:27
	for which figures are now available.	7:28
-	Do you interpret this slower growth	7:29
	in the monetary aggregates	7:32
	as a shift in Federal Reserve policy?	7:33
-	No, I do not.	7:36
	I think it's a continuation of their policy.	7:38
	But I think what it reflects is something else.	7:41
	I think the Fed's objective is still in the neighborhood	7:46
	of something like a 5% rated growth and then one.	7:49
	This is what they have announced as their objective	7:51
	and the figures as I've been watching them develop	7:54
	are consistent with this.	7:56
	However, as I have emphasized before,	7:58
	while the Fed has adjusted its objective	8:01
	to monetary aggregates	8:05
	and now states its objectives in those terms,	8:07
	the modes of operation in New York	8:10
	are still the ones that were being followed	8:12
	when the Feds' objectives	8:14
	were interest rates and money market conditions.	8:15
	And I interpret what has been happening	8:18
	for the past two months as a reflection	8:20
	of this anachronistic, out-of-date operating procedure	8:24
	in New York.	8:28
	What has been happening in that period	8:29
	is that partly another one of the effects	8:31
	of the General Motors strike, partly for other reasons,	8:34
	there has been a sharp decline in the demand	8:38
	for bank loans and the demand for short-term funds.	8:40
	As a result, market rates, short-term rates, interest rates	8:43
	have come down very, very rapidly	8:48
	over the past three months.	8:50
	Long-term rates have not moved much.	8:52
	But the decline in short-term rates	8:54
	has really been very extensive.	8:56
	For example, the yield on three month Treasury bills,	8:58
	which is now running in the neighborhood of about 5 1/4%,	9:03
	as recently as August, was up to 6 1/2%.	9:08
	That's a very sizeable decline in short-term rates.	9:14
	And if you look at things like the rate on federal funds,	9:17
	that's the borrowings from among the banks themselves,	9:22
	or on bankers' acceptances or short-term commercial paper,	9:25
	you'll have as dramatic or an even more dramatic decline	9:32
	in the last couple of months.	9:35
	Well under the methods by which the Fed	9:37
	has traditionally operated there was always a tendency	9:39
	for the Federal Reserve in New York	9:41
	to lean against interest rates.	9:43
	When other forces were driving interest rates down,	9:45
	that is when, as in this case,	9:49
	the sharp decline and the demand for loans,	9:51
	partly because of the decline	9:53
	in the demand for consumer finance for automobiles,	9:55
	as tended the lower interest rates	9:58
	the Fed has had a tendency to lean against that.	10:00
	To smooth the interest rate.	10:02
	How does it lean against the interest rates?	10:04
	It leans against the interest rates	10:06
	by pulling money out of the market.	10:07
	That is to say, by selling securities	10:09
	to keep their prices from going up too high.	10:14
	And as a result, I believe, that in these past two months	10:17
	what you have is that this operational pattern	10:20
	of the Fed has led them to increase the money supply	10:23
	by a smaller amount than they really intended to do.	10:25
	As you may recall, I myself have been concerned	10:29
	that prior to this point,	10:33
	the Fed was expending the money supply too rapidly,	10:34
	that the real danger over the next couple of years	10:37
	is likely to be inflation and not recession	10:40
	because of the impatience to get things happening	10:43
	and therefore a tendency to overreact.	10:46
	And that may still be the true case again.	10:49
	I think indeed it will be.	10:52
	So, in a way, I regard this accidental aberration	10:53
	as a very fortunate thing.	10:56
	Something that has led the Fed to be less expansive	10:58
	than they themselves wanted to be.	11:00
	It would become serious	11:02
	only if they permitted it to continue.	11:04
	Because, of course, if they permitted the zero rate	11:06
	of growth of the money supply to continue	11:08
	for more than the last two or 2 1/2 months,	11:09
	that would be capable of checking	11:14
	what I see as an incipient revival in the bud,	11:17
	and turning, deepening the recession.	11:20
	But I cannot believe that that is,	11:23
	in fact, a likely outcome.	11:25
	Given their concern and their attention to aggregates,	11:27
	it seems to me, very likely,	11:33
	that you will see a more rapid rate of growth	11:36
	in the monetary aggregates in the next few months.	11:39
	And that the rate of growth will probably	11:41
	climb back up to something like 5%.	11:44
	However, one wants to be careful in making those statements,	11:46
	and I think these figures will repay keeping watch on	11:49
	because, as I have emphasized time and again,	11:56
	what the Fed says and what it does aren't always the same.	11:59
	A particularly amusing example of that	12:02
	comes out of yesterday's Wall Street Journal.	12:05
	As you know, the Fed has its open market meetings	12:07
	but does not release the results	12:11
	of those open market meetings until three months later.	12:13
	I may say, I have never seen any reason for that secrecy.	12:17
	I do not see why they shouldn't issue their directive	12:20
	and their announcement the night that they have the meeting.	12:23
	It used to be a much longer period than three months,	12:26
	but it has been shortened down to three months	12:29
	as a result of pressure from Congress on that issue.	12:31
	At any rate, in yesterday's paper reporting the directive	12:34
	from August 18th open market committee meeting,	12:40
	the directive at that time was on the side of monetary ease,	12:44
	that is the instructions to New York	12:49
	were that they were to maintain roughly	12:52
	the same rate of growth as the monetary aggregate,	12:54
	but if they made any error, if they erred at all,	12:56
	they were supposed to err on the side	12:59
	of a more rapid rate of growth	13:00
	rather than a less rapid rate of growth.	13:02
	And here this, the period from then to now	13:04
	is precisely the period I've been speaking about	13:07
	when, in face of that directive,	13:09
	they actually erred in the direction	13:12
	of a much slower rate of growth of the quantity of money	13:13
	than the Fed obviously intended.	13:17
	Just another example of how careful	13:19
	you have to be in interpreting these figures	13:21
	and looking at what people do instead of what they say.	13:24
-	Questions from subscribers have been accumulating.	13:29
	Maybe we can take a few minutes now	13:32
	and answer at least some of them.	13:34
	One subscriber writes, could you estimate	13:36
	the unemployment rate for 1971,	13:39
	assuming the money stock grows at 5% per annum from now on?	13:42
-	Well, I think it's tricky, of course,	13:48
	to estimate a numerical figure for the whole of '71	13:50
	and I'm very hesitant to do so.	13:53
	I would rather answer this by more or less repeating	13:55
	my earlier forecast along this line.	13:59
	My expectation is that unemployment will continue to go up	14:02
	for the next months, maybe four months,	14:06
	maybe five months, six months,	14:09
	reaching a peak some time in the first or second,	14:11
	perhaps the second quarter of 1971.	14:14
	As a result of the fact,	14:19
	that while the economy will be growing	14:21
	and output will be expanding,	14:24
	and not be growing and expanding	14:25
	as much as our capacity is expanding.	14:27
	The gap between actual and potential output will be growing.	14:30
	I do not expect the further increase	14:33
	on unemployment to be very much.	14:35
	Because it's coming only	14:37
	from two differential rates of growth,	14:40
	not from a decline in actual output	14:42
	compared to potential output.	14:45
	So my guess is that the present 5.6% unemployment	14:46
	may very well go up	14:50
	to something like six, 6 1/4% at its highest point.	14:51
	I would then expect it to come down.	14:56
	And, again, I would expect the decline	14:58
	in unemployment to be rather slow.	15:00
	If the money stock grows at 5% per annum narrowly defined,	15:02
	and grows broadly defined at seven or eight,	15:06
	maybe 9%, somewhere around that,	15:08
	I would expect GNP to grow at something,	15:11
	that is nominal GNP to grow at something	15:14
	in the order of seven to 9%.	15:18
	Annual rate of seven to 9%,	15:21
	which would mean that the rate of growth,	15:22
	the real GNP would not, on the average over the year,	15:25
	do much to exceed the rate of growth in capacity.	15:29
	On this picture, the answer comes that you would expect,	15:32
	unemployment rate to rise to maybe something	15:35
	like six and 6 1/4, maybe something to that order.	15:37
	And then turn around and start coming down,	15:40
	but come down at a rather slow pace.	15:43
	So that over the year, as a whole,	15:45
	this would imply that it would average	15:47
	somewhere up around 5 1/2%, perhaps,	15:50
	for the year as a whole.	15:52
	Maybe a little higher, maybe a little lower.	15:53
	Let me emphasize that I don't really put these out	15:55
	as predictions in which I have enormous confidence.	15:58
	Unemployment is a hard thing to estimate.	16:01
	It's got a lot of statistical errors	16:04
	aside from everything else.	16:06
	And so it might easily depart.	16:07
	But that, just to indicate the general order of magnitude	16:08
	that seems to me justified by the present picture.	16:11
-	Another subscriber asks two questions.	16:15
	The first one, do Keynesian's think	16:17
	that budget surpluses and deficits,	16:20
	by units of government other than federal,	16:22
	are significant in determining	16:25
	the level of economic activity?	16:27
	You never hear much about this.	16:29
-	That's a very, very good question.	16:31
	Because, of course, from the Keynesian point of view	16:33
	what matters is not particularly	16:36
	the budget surplus or deficit,	16:39
	but the total of what they call autonomous expenditures.	16:41
	That is, those expenditures that are not linked	16:45
	to the current level of income.	16:47
	Now, what precisely empirically should correspond	16:49
	to this concept is not very well defined.	16:52
	Indeed, one of the interesting things	16:56
	out of the scientific work that has been done	16:57
	in the past eight or 10 years,	17:00
	much of which was done in response to an article	17:04
	by a colleague of mine and myself,	17:06
	comparing the predictive accuracy	17:10
	of the Keynesian models with quantity theory model.	17:13
	But one of the interesting things that came	17:16
	out of that article and the subsequent controversy,	17:18
	which is still raging, is that there is no agreement.	17:20
	No real agreement on what is the best way	17:24
	to define autonomous expenditures.	17:26
	But I believe that almost everyone who uses that concept	17:29
	would include, not only the federal government expenditures,	17:34
	but also the expenditures of state and local government.	17:38
	And consequently, they would regard such expenditures	17:41
	as just as significant, dollar for dollar,	17:45
	in determining the level of economic activity,	17:48
	as they would regard the federal government's spending.	17:50
	Now, the subscriber uses the word surpluses or deficits	17:54
	and it should be clear that one of the points of dispute	17:58
	about this is whether the relevant thing	18:01
	to look at is a surplus or deficit,	18:03
	are the total expenditures.	18:05
	Perhaps the more orthodox view among the Keynesians	18:07
	is that what matters for the level of economic activity	18:11
	is not either the federal	18:16
	or the local government's surplus or deficit,	18:19
	but their aggregate expenditures.	18:22
	Because the argument along these lines would be	18:24
	that it is the aggregate expenditures	18:28
	of both the federal and the local governments	18:30
	that are determined independently	18:32
	of current economic activity.	18:33
	Whereas on the other hand,	18:35
	the level of tax receipts is in large part	18:37
	induced by the course of economic activity.	18:39
	That is, if you have a high income	18:44
	you tend to have high tax receipts and vice versa.	18:45
	Now, I should add for fullness	18:48
	that that's less true for state and local governments	18:50
	which operate on property tax basis	18:52
	than it is for the federal government.	18:54
	And so you would have to say that	18:56
	for state and local governments that tax receipts	18:57
	were a mixture of an autonomous and an induced element.	18:59
-	The second question he asks,	19:03
	I believe you have said that government deficits	19:06
	cause interest rates to be higher	19:08
	than they otherwise would be.	19:10
	However, you also point out that government deficits	19:12
	leave more money in the pockets	19:15
	of people who would otherwise pay more taxes.	19:16
	Is it correct to assume that some part of this money	19:19
	finds its way into the bond market	19:22
	and helps offset this tendency toward higher rates?	19:24
-	Yes, it is correct.	19:28
	The analysis is entirely correct.	19:29
	Of course, as the subscriber suggests,	19:35
	not every dollar that is left in the hands	19:40
	in the pockets of people who would otherwise pay taxes	19:43
	would be available for lending in the bond market.	19:45
	As a result there is a residual tendency for interest rates	19:48
	to be somewhat higher than they otherwise would.	19:50
	But it isn't a dollar for dollar effect.	19:52
-	Another subscriber asks a question about gold.	19:57
	What role do you think gold will play	20:01
	in international trade by 1980?	20:02
	How will the industrial demand	20:05
	change the price of gold by 1980?	20:07
-	Well, that's one of the questions that's nice to answer	20:09
	because nobody will remember what I said 10 years from now	20:12
	and so I can speculate.	20:15
	I believe that gold will play about the same role	20:18
	in international trade by 1980 that it plays now.	20:22
	I think over the period between now and then,	20:26
	the industrial demand for gold will rise	20:28
	and therefore I expect the price of gold	20:30
	to be higher in 1980 for industrial uses than it is now.	20:31
	As to how much higher, that depends.	20:35
	Not only on what happens to the supply and demand for gold,	20:39
	but also what happens to inflation in the world in general.	20:43
	If the world goes through a period	20:46
	in the next 10 years of substantial inflation,	20:48
	there's no reason why that should not be transferred	20:51
	over to the price of gold.	20:53
	On the other hand, if the next 10 years	20:54
	are stable price years, by then also gold will rise less.	20:56
	So I do not think it's possible to make a prediction	21:00
	about the price of gold by itself,	21:03
	independently of prices in general.	21:05
-	Thank you very much, Professor Friedman.	21:07
	Remember, subscribers, if you have	21:10
	any questions or comments for topics	21:12
	you would like to hear discussed in this series,	21:14
	please send them to Instructional Dynamics Incorporated.	21:16
	166 East Superior Street, Chicago, Illinois 60611.	21:19
	Dr. Friedman will be visiting with you again in two weeks.	21:25

Item Info

Title:

Tape 61 - Industrial Production Decline, Monetary Development, Fed Policy, Subscribers Questions

Date:

1970

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Friedman, Milton, 1912-2006

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Paul A. Samuelson papers, 1933-2010 and undated

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Paul A. Samuelson papers, 1933-2010

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Economics Cassette Series: Milton Friedman

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Tape 61 - Industrial Production Decline, Monetary Development, Fed Policy, Subscribers Questions

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