Tape 78 - Mr. Nixon's Policy, Unemployment, Effect of Monetary Changes, Inflation Potential / Paul A. Samuelson papers, 1933-2010 and undated / Duke Digital Repository

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Hello, this is Rose Friedman,

0:02

inviting you on behalf of Instructional Dynamics,

0:04

to another of our bi-weekly interviews

0:07

with Dr. Milton Friedman, Professor of Economics

0:09

at the University of Chicago.

0:12

We are taping this interview on Wednesday, July 14, 1971.

0:13

There have been two, rather significant, announcements

0:20

in the past two weeks since we taped our last tape.

0:23

One, the president's announcement by Secretary Connally

0:27

of no new action on the economic front.

0:30

And second, the drop in the unemployment rate to 5.6%.

0:34

Would you care to comment on both of these?

0:39

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Well, the first of those is fascinating

0:42

because it is obviously the outcome

0:44

of an internal difference of opinion

0:46

within the administration.

0:47

After a weekend meeting at Camp David,

0:49

it's clear that one side clearly came out ahead.

0:52

As I understand the situation,

0:56

there were some in the administration

0:59

and outside the administration who concerned about

1:01

what they regarded as the slowness of the expansion

1:04

and what is more depressing

1:07

and more, clearly more justified,

1:10

the slowness of the tapering off of inflation.

1:14

There were some who argued that, strong action was needed

1:17

on both of these fronts.

1:21

And as I understand it, the proposals that

1:22

were being made by people on that side,

1:25

were the first, in order to speed up the economy,

1:27

the tax reductions that are now scheduled to go into effect

1:32

in 1972 and later, should be moved forward

1:36

and go into effect immediately and so, reduce taxes.

1:39

Second, that spending programs which are now being held

1:42

in the bands for later on should be pulled forward

1:46

both of which would produce an even larger deficit,

1:48

in the budget.

1:51

Those were the proposals on the fiscal side.

1:54

So far as prices is concerned, the proposals were first,

1:57

that there be a wage price board, review board.

2:02

This is a favorite proposal

2:06

that Arthur Burns, Chairman of the Federal Reserve System,

2:07

has been making now for something over a year.

2:10

And second, a more radical proposal that there be a freeze

2:14

on prices and wages for six months.

2:17

This is a proposal that was made by John Kenneth Galbraith

2:20

in its most extreme form, but which has been picked up

2:24

by quite a number of other people

2:27

from both the Republican and the Democratic camps.

2:28

The striking thing about the statement,

2:32

made by Secretary Connally on behalf of the President,

2:34

was how tightly and firmly the doors were closed

2:37

on all of these.

2:40

I happen to have in front of me, his statement

2:42

and it is really striking.

2:45

He concluded it by saying, referring to the president,

2:47

he's not going to institute a wage price board.

2:50

Number two, that he's not going to impose

2:53

mandatory wage and price controls.

2:55

Number three, that he's not going to ask the Congress

2:58

for a tax reduction.

3:00

And number four, that he's not going to engage

3:02

in further spending,

3:04

provided that it is not directly related

3:05

to the immediate reduction of the unemployed.

3:07

Well, that certainly was a far more unambiguous statement

3:10

than one usually gets.

3:13

Another interesting aspect of Secretary Connally's comment,

3:14

was that he presented clearly and very correctly,

3:18

the arguments against the courses of action

3:24

that were rejected.

3:27

He said in part of his statement, there's not very,

3:29

there's not any question but what there has been

3:34

a very very substantial fiscal stimulant added

3:35

to this economy.

3:38

I think it is fair to say to you,

3:40

that the deficit is going to run substantially

3:41

in excess of the $18 billion that had been anticipated.

3:43

No figures have yet come out, but it now looks as if

3:47

the deficit for the fiscal year 1971,

3:50

that is a fiscal year ending June 30th,

3:53

that just closed, will be somewhere in the order of

3:55

23 to 24 billion dollars, which is certainly substantially

3:59

beyond the 18 billion dollars.

4:02

He also said there's not any question

4:04

but what we have had

4:06

a very substantial increase in money supply during

4:07

the first six months of this year, running at

4:09

almost 11 percent on the average and in

4:11

May it was very much higher than that.

4:13

So on two fronts he said, whether you're a monetarist

4:15

or whether you're a fiscalist in terms of economic theory,

4:19

there has been enormous monetary expansion,

4:22

there has been enormous fiscal stimulation of the economy.

4:25

Then he went on to say, and this is a thing that

4:29

I found most interesting.

4:31

Now everyone will also agree that in each of these cases

4:32

that there is a time lag, of perhaps at least six months

4:35

before the full impact of a monetary policy

4:39

or a fiscal policy can be effective.

4:41

This being true, the president very strongly feels

4:44

that these things have been set in motion,

4:47

both a monetary expansion and the fiscal stimulation,

4:49

and that they must be permitted to have time to work.

4:52

Now I think that's an extraordinarily good statement.

4:55

We very seldom have secretaries of the Treasury,

4:59

who state, what I regard is a basic economic relations,

5:02

as succinctly and as unambiguously as that,

5:10

and of course it is fascinating that secretary Connally

5:12

is a Democrat not a Republican,

5:16

but nonetheless was asked by President Nixon

5:18

to act as his chief economic spokesman on this occasion

5:21

Now personally, needless to say,

5:24

I welcome very strongly this statement.

5:27

News but many newspapers, many commentators, refer to it

5:29

as a negative statement.

5:34

There's a certain sense obviously in which it is negative.

5:35

It was saying what he was not going to do.

5:38

But fundamentally, it's a very positive statement,

5:40

because what it means, is that President Nixon,

5:43

is reaffirming again his commitment, to a steady policy.

5:46

My Newsweek column this week I labeled "steady as you go",

5:51

commenting on this phenomenon.

5:54

Taking that from a very important speech,

5:56

that George Shultz made some months ago, in Chicago.

6:00

A speech that was very little picked up by the newspapers.

6:03

I don't know whether that's because of

6:06

the general liberal bias of the newspapers,

6:08

and their failure to pick up things like that.

6:10

More likely, i think it's a much simpler reason.

6:12

It's because the speech was given in Chicago,

6:15

and it's very hard for people in New York and Washington,

6:17

to recognize that anything might be said in Chicago,

6:20

that it's worth reporting on in the in the eastern centers.

6:23

In any event, what Mr. Nixon was saying through Mr.Connally,

6:27

is that he is sticking to a long range steady policy,

6:32

of trying to keep going and things going as they are.

6:35

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Do you think the striking drop in unemployment to 5.6%

6:39

has anything to do with the president's decision?

6:43

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Well, that drop of course was announced, two days,

6:46

two or three days after.

6:49

The president statement, it came as sort of a confirmation,

6:51

of the economic analysis embedded in his statement,

6:56

as a way of suggesting, that in fact the economic recovery,

6:59

was extremely strong.

7:03

As you know, I have myself, been on the side of those,

7:06

who believe that the economic recovery is definite

7:11

and strong, and thus again I would regard this

7:14

unemployment figure, as confirmation of that view.

7:18

However, as I have repeatedly emphasized,

7:22

it's absurd to make very much of a single figure

7:26

for a single month.

7:29

These numbers all have a large margin of error,

7:30

that's particularly true of the unemployment figure.

7:32

The unemployment figure,

7:35

is the difference between two very large numbers.

7:36

One number, is the number of people in the labor force,

7:39

the other number, is the number of people who are at work.

7:42

That difference, is about five at the moment,

7:45

somewhere around 5.66% of the total.

7:48

And you can see that rather small errors

7:51

and either of the two parts might make a big difference,

7:53

to the difference between them.

7:56

In addition, you have a tricky problem

7:59

of seasonal adjustment.

8:02

So it may well be as many people have argued,

8:03

that the 5.66% figure was something of a fluke.

8:06

what's not clear, is just exactly where the fluke was.

8:10

It's clear, that the shift from 6.2% the week a month

8:14

before to 5.6% that six-tenths of a percent decline,

8:18

very probably overstates what happened during that month,

8:22

in the improvement of employment.

8:26

And it may overstate it because of the defects,

8:28

in the seasonal adjustment and the fact that,

8:32

the sample was taken earlier in June than usual,

8:34

so that it didn't show the teenagers entering

8:38

the labor market.

8:41

However, that's a little too easy a dismissal of the number.

8:42

It turns out if you're looking more to tell into the figure,

8:46

that almost every separate category of employees

8:48

of persons showed an improvement.

8:52

Whether you looked at married men,

8:56

whether you look at married women,

8:58

whether you look at male, at blacks or whites,

8:59

teenagers or non teenagers.

9:03

In each separate category, there seemed to have been

9:06

an improvement.

9:08

Another explanation I have heard is, that the fluke

9:10

is not with the 5.6% figure, but with the earlier figures.

9:11

That the earlier figures of 6.2%, was overstated,

9:16

that in fact, we have been having a steady decline

9:21

in the level of unemployment throughout the first three

9:24

or four months of the year.

9:27

That the 5.6% may be right about the level,

9:29

but that it did overstate the decline

9:32

because the earlier figures were overstated.

9:35

Well, now that's going to be very hard to say

9:37

until we have a few more months experience

9:39

and we can see what the real trend is, and personally,

9:41

I would not want to put too much emphasis

9:44

on this particular 5.6% figure.

9:46

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Well, what's happened on the inflation front?

9:49

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Well, unfortunately, that doesn't look so encouraging.

9:52

If you look at the various index numbers of prices,

9:58

they tell us somewhat different story.

10:01

The cost-of-living index number,

10:03

the one that has paid most attention to that enters into

10:06

the escort most escalator clauses in wage contracts

10:09

and so on, has been encouraging.

10:12

True, it went up for one month, last month,

10:15

but that was largely, because of the particular way in which

10:18

that index treats mortgage interest.

10:22

And even if we eliminate that effect,

10:24

you will find, that there has been a definite

10:26

and consistent tapering off in-consumer prices,

10:30

as measured by the Consumer Price Index, over the past year.

10:33

Not by as much as most of us would have desired,

10:37

or even expected, but significant.

10:40

If you look at the wholesale price index,

10:43

there was a very very definite and clear tapering off,

10:45

up until the early part of this year.

10:48

The wholesale price index if you took prices this year,

10:51

over prices twelve months earlier,

10:54

that is if you took a 12 months change, a year's change.

10:56

That was at its peak around, the end of 1969,

11:00

and came down steadily throughout 1970,

11:06

but unfortunately, in the first six months of this year,

11:08

it has gone the other way.

11:11

That's particularly disturbing

11:12

because historically, wholesale prices have moved earlier

11:14

than retail prices, and thus,

11:17

if you took that wholesale price index seriously,

11:19

it would suggest that rises and retail prices are in store.

11:22

If you look at broader indexes,

11:26

such as the index used to deflate GNP,

11:27

that shows a slightly lower level than at its very peak,

11:30

but almost the best way to describe it is,

11:34

that it's been roughly stationary for the last year.

11:36

So that I think one has to say, that the evidence

11:40

on the inflation front is mixed

11:43

that there has been something of a tapering off,

11:45

but it's been mild, and that there are some signs

11:48

that tapering off may come to an end.

11:52

It may be coming to an end,

11:54

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That brings us right to a very interesting,

11:57

interesting question that we've received.

12:00

One a subscriber says, "my question concerns the future

12:03

of our economy for the next 12 months, the rapid increase

12:08

in the money supply over the last six months,

12:12

indicates an increase in business activity,

12:14

by the end of 1971, a continuation of this policy will renew

12:17

the inflation we were just beginning to control.

12:22

If the Fed reduces the money supply to 5%,

12:25

for the next six months, will this drastic change,

12:28

again bring the economy into another

12:31

mini recession, approximately nine months hence?

12:33

This certainly would have very adverse effects

12:37

for the administration in an election year,

12:39

and the subscriber goes on, on the other hand,

12:42

if the Fed reduces the money supply by only a few points,

12:45

to let us say, seven and a half percent increase

12:48

for the next six months, does this excessive increase

12:51

in the money supply mean a continuation of the inflation

12:54

that the Fed is are trying to control?

12:56

Will you comment on the economic

12:59

and political possibilities?"

13:00

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Well, that is of course, a very sophisticated

13:02

and pertinent and important question.

13:05

In answering it, I'd like to preface an answer,

13:11

by a general comment.

13:14

I think there's a real problem

13:19

in trying to, pin too precise, too close, too rigid,

13:21

a connection between money supply changes

13:28

in economic activity changes.

13:31

Goodness knows I have no doubt whatsoever,

13:34

the changes in the quantity of money

13:38

have an enormous influence on economic activity.

13:40

But as I have stressed time and again,

13:43

that isn't a perfect rigid mechanical relationship

13:46

so you can go from the one to the other,

13:50

with perfect assurance over brief periods of time

13:51

On the contrary, what you have, is a relationship that holds

13:55

very well on the average,

14:00

but with considerable variation from time to time.

14:02

If we look our back over past experience,

14:05

the change in economic activity is sometimes followed

14:08

the change in money supply, by five or six months,

14:11

sometimes by nine months, sometimes by 12 months.

14:16

Indeed, it is precisely this looseness of the relation

14:20

between money supply and economic activity,

14:25

that explains why I have been opposed to attempts

14:27

to fine-tune the economy through the use of money.

14:29

There is a great deal of misunderstanding on this account.

14:33

Many of the people, who are opposed to monetarism,

14:37

for example, to cite a very prominent example,

14:41

President Al Hayes of the New York Federal Reserve Bank.

14:44

Once a in a speech, identified monetarism

14:47

with the view that there was a rigid mechanical connection

14:52

between changes of the money supply and changes in income,

14:56

and that therefore, said he, monetarists

14:59

were in favor of the study monetary growth.

15:02

Well he has a thing just upside down,

15:05

if I thought there were a rigid mechanical connection,

15:07

which I knew about.

15:10

If I thought I could foresee what other forces

15:12

were going to do, then there would be no reason

15:15

not to use money supply, as a fine-tuning device,

15:17

to offset other factors.

15:20

The situation is the reverse,

15:22

because I believe that there is so much leeway,

15:25

between changes and one and changes in the other,

15:28

and because I believe we know too little about when

15:31

the time lag is long, when it's short,

15:35

when the reaction will be strong, when it'll be weak.

15:37

It's precisely for that reason that I believe,

15:40

the best thing you can do,

15:42

is to have a steady rate of monetary growth,

15:44

in order to prevent fluctuations

15:47

in the rate of monetary growth from themselves

15:49

being a disturbing factor, in the economy

15:51

I preface my answer to this very interesting question,

15:55

with this comment,

15:59

because I want to say that I am very hesitant,

16:00

about making such fine predictions

16:04

as a subscriber is making.

16:07

In general, when I have tried in the past,

16:09

to predict the future course of events from

16:12

the money supply changes.

16:15

I have tried to make such predictions only

16:18

when the money supply changes were very substantial,

16:20

on the one hand, and fairly long continued on the other.

16:23

Thus, in late 1969, we have had almost a year,

16:28

of a very substantial deceleration of the money supply

16:33

and therefore, it seemed reasonably clear,

16:36

that you were going to be having an impact on the economy.

16:39

If we look back over the past 18 months,

16:43

we have had been having,

16:47

if we take that 18 months as a whole,

16:49

let us say from February 1971 to date,

16:50

we have had certainly a very expensive money supply

16:55

and that's why I have been very confident,

16:57

that we would be having a substantial expansion

17:00

in the economy.

17:02

And that there was real danger of inflation re-emerging.

17:04

I haven't the slightest doubt,

17:08

that the very extreme monetary explosion

17:09

of the past six months, strengthens those dangers,

17:11

and makes it more extreme.

17:15

And in this respect, I certainly agree with the subscriber,

17:17

that the rapid increase in the money supply

17:21

over the last six months indicates an increase

17:24

in business activity by the end of 1971,

17:26

and it indicates more than that,

17:29

it comes after a 12-month period,

17:30

a fairly rapid increase and therefore,

17:34

it does and underlies my own predictions

17:36

and we are in an expansion and expansion that is solid

17:39

and significant and will be very definite.

17:42

It underlies my rejection of the council's of Doom

17:45

who say nothing is happening,

17:49

we're just gonna get worse and worse.

17:50

But it's when we come to what happens with,

17:53

whether there's an important distinction

17:57

between the Fed coming back down to 5% or the Fed coming

17:58

back down to a seven and a half percent increase for the

18:02

next six months, that I have great difficulty.

18:04

And indeed I'm not sure those are the two

18:08

most likely alternatives, I think there is a good deal

18:10

to be said for the Fed coming down still lower,

18:14

not from 5% but to something like 2 or 3 percent,

18:16

for the next six months to average out, the extreme rise

18:19

in the first six months.

18:23

Will they do that?

18:24

I doubt it, there's not much sign yet.

18:25

Athough, there is a little bit,

18:28

the last month the money supply has been nearly horizontal.

18:29

Whether it'll continue that way I don't know.

18:33

so let me take the subscribers question

18:38

and make it in a little bit more extreme form.

18:41

Let me take the two real alternatives.

18:43

One alternative, is that they will come down to something

18:44

like a two or three percent rate of monetary growth,

18:47

for the next six months to average out.

18:50

Now if they did that, then I think there is

18:53

a very real possibility that sometime around the middle

18:57

of 1972, six or nine months from the time this shift made,

19:00

this would start to have a depressing effect on the ball.

19:06

That it would show up in unemployment,

19:10

which would have been declining fairly rapidly

19:13

to that point stopping declining and maybe starting to rise.

19:15

Let me turn to the other possibility.

19:18

The other possibility, is a continuation of a fairly

19:20

high rate of monetary growth, of let us say

19:23

the subscribers suggestion of a seven and

19:27

a half percent increase for the next six months.

19:29

Suppose a Fed did that, then I believe,

19:31

the prognosis would very clearly be for clear

19:36

and sharp resumption of inflation.

19:42

For inflation moving, from a slowing down,

19:45

such as I discussed earlier, to a clear acceleration.

19:52

With prices perhaps go rising not at the four,

19:59

four and a half percent that they have been rising in

20:03

the past few months, but maybe going back up to

20:05

a five or six or seven percent, rate of rise

20:07

by the late fall.

20:10

Now, the subscriber has both political implications

20:13

of that, and economic implications.

20:16

Let me look at the political implications

20:19

of these two alternatives.

20:21

Neither one is very good politically,

20:24

the first would mean,

20:26

that the boom would be somewhat less booming.

20:28

On real terms there would be objections,

20:36

but at least it would have the advantage,

20:39

from the president's point of view.

20:41

That while inflation might not be continuing to taper off

20:43

as much as it is right now, or has been,

20:46

at least it would not be starting to accelerate.

20:49

The second alternative,

20:53

would not have the disadvantage on the unemployment side,

20:56

but would have the disadvantage on the price side.

20:59

Now it is often said, and indeed Mr.Nixon himself

21:02

has reported to us saying,

21:06

that nobody ever lost an election because of inflation,

21:08

while many people lost it because of unemployment,

21:10

and he is very sensitive himself to the fact,

21:13

that he probably lost 1960 election

21:15

by the increasing unemployment then.

21:17

But I don't believe this case is a typical case.

21:20

I think that Mr.Nixon is the exception,

21:23

that he is particularly sensitive.

21:26

From a political point of view to a

21:28

reawakening of inflation.

21:29

And the reason he is, is because,

21:31

he deliberately adopted a policy of slowing down

21:35

the economy in order to stop inflation,

21:38

and it seems to me if inflation is

21:41

back up at 6 or 7 percent, before the election,

21:42

Mr.Nixon has no answer, to the charge,

21:45

what did you put us through a recession for?

21:48

And consequently I would myself be inclined to believe that,

21:51

of the two alternatives I've described,

21:54

the one which would slow down the boom,

21:56

would be less adverse to Mr. Nixon, than the one which would

21:59

cause a resumption of inflation.

22:04

Now I hasten to add, that I do not believe

22:07

the Federal Reserve will adopt the one course of action

22:10

or the other, out of any kind of a political calculation

22:13

of this kind.

22:16

The Federal Reserve is an independent agency,

22:18

so far as its political composition is concerned,

22:21

it's worth noting,

22:25

though I don't think it's relevant to their policy.

22:26

Its six members of the board are Democrats,

22:28

only one Mr. burns is a Republican,

22:30

of course Mr. burns is not just one among seven,

22:33

he is more powerful, but neither is he seven among seven.

22:36

So I think that it, which of these policies,

22:39

the feds adopts will depend much more,

22:41

on the internal dispute that is going on within the board,

22:45

as to the emphasis to be placed on interest rates

22:48

on the one hand is on monetary aggregates on the other,

22:50

rather than to these political considerations.

22:53

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We have another question from a subscriber.

22:57

Should we expect the same inflationary potential now,

23:00

with the economy having

23:03

so many unemployed productive resources,

23:04

from a given rate of money supply change, as we experienced

23:08

in the money supply expansions, in the late 1960s,

23:11

when the economy was operating at full employment?

23:14

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Now that's another very very perceptive,

23:17

and important question, and one that does not admit,

23:19

of a brief yes or no answer.

23:24

For two reasons, the first is,

23:26

that it is somewhat ambiguous,

23:30

how many unemployed productive resources we have.

23:31

The second is, because the inflationary potential

23:35

from a given rate of money supply change,

23:39

depends on two factors.

23:42

One is the extent of unemployment,

23:44

that the subscriber refers to.

23:46

But the other is, the expectations that people have,

23:49

about the future course of prices,

23:53

inflationary expectations.

23:55

Now let me discuss those two points separately.

23:57

Go back to the first.

23:59

How should we interpret an unemployment rate of 6.2%

24:01

as it was a month ago or 5.6 percent the latest figure?

24:06

And how shall we interpret it relative

24:11

to similar unemployment levels,

24:14

let us say in 1960 or in 1950.

24:16

And here there is very very considerable evidence

24:20

to suggest, that 6% unemployment

24:24

to take a number in between these two,

24:26

implies a much tighter labor market today,

24:30

than 6% unemployment, would have implied 10 years ago,

24:34

or did imply 10 years ago.

24:39

And this for three reasons.

24:41

The first reason, has to do with the agent sex composition

24:44

of the laboring force, there has been a

24:48

very substantial increase in the proportion

24:50

in the fraction of the labor force,

24:53

which is either female or young.

24:55

The unemployment rate is higher among the young,

25:01

and among various subcategories of the females

25:05

than it is among other categories,

25:07

in general that is to say.

25:09

We have had an increase in those parts of the labor force,

25:11

which ordinarily have high unemployment rates.

25:14

If you were to take the unemployment rate,

25:19

for each subsection of the labor force separately,

25:21

and weight it, by the fraction of the labor force in

25:25

those categories in 1960, you would come out

25:28

with an unemployment percentage about

25:32

a half percentage point lower

25:34

than our present unemployment percentage,

25:36

that is instead of six percent, you would get five

25:38

and a half percent.

25:41

The second factor,

25:43

which makes a given unemployment percentage indicative

25:44

of a tighter labor market today than ten years ago,

25:48

is the greater geographical inequality of unemployment,

25:53

because of the concentration of unemployment

25:58

in the defense and aerospace industries concentration

26:00

of a reduction in demand in those industries,

26:03

and because those are very very geographically concentrated.

26:06

You'll have unemployment geographically

26:11

more differentiated than it was then, that is the difference

26:13

between the unemployment rate in California

26:15

and on the average, is greater than it was in 1960,

26:18

and while of course you always have

26:22

some geographical differentials and unemployment

26:23

they are higher now than they were there before,

26:28

and that means that as demand expands you reach bottlenecks

26:31

in particular geographical areas sooner.

26:34

So that probably on those two grounds,

26:38

a six percent unemployment figure now is indicative

26:40

of no more tighter market than something like

26:43

a five percent unemployment rate would have been,

26:45

ten years ago.

26:48

The third factor , which I haven't mentioned before,

26:49

and which has been increasingly brought home to me,

26:54

by some people I've been talking about,

26:56

is the effect on the unemployment percentage,

26:58

of the much more liberal and widespread welfare provisions,

27:01

that we now have.

27:04

Given that you have a much easier access

27:05

to welfare, including food stamps and other things.

27:07

Given unemployment percentage involves less pressure

27:11

on the wage rate, than it would have in an earlier time.

27:14

So on all these grounds, we probably do not have anything

27:17

like the degree of unemployed resources,

27:23

than one might gather simply by looking at these figures.

27:27

Now the second main point why it's hard to answer

27:29

the subscriber's question is that,

27:33

it is the question of inflationary expectations.

27:36

If everybody around is persuaded, as people were,

27:40

by the mid 60s, that the course of events in the future

27:46

is likely to be fairly stable prices.

27:49

And they are persuaded of this because of actual experience

27:51

because of the fact that a punitive inflation in the 50s,

27:55

was cut short by the heavy unemployment

27:58

for a considerable period and '58, nine and '60, '61,

28:01

and because you had stable, for relatively stable prices for

28:06

from about the '61 to '64.

28:09

If people get persuaded that the future looks

28:12

like a future of stable prices,

28:15

then they will make commitments with respect

28:16

to the prices they issue for future years

28:19

the contracts they enter into and so on.

28:21

Which will mean that a very large fraction

28:23

of any increase in income will take the form

28:25

of output rather than a price.

28:27

On the other hand, if as now is a case,

28:30

everybody believes that we are in an inflationary era.

28:33

That the future is likely to mean more inflation,

28:36

and the only difference of opinion is whether,

28:39

the inflation over the next ten years

28:41

will be 4%, 5%, or 8%.

28:42

Under those circumstances, in that environment given rate

28:46

of monetary increase, has more inflationary potential

28:49

than it did before.

28:52

Because it means that any chance to increase sales,

28:53

is likely to be taken up more in prices and less an output.

28:57

So taken as a whole, putting these two together,

29:01

my own judgment is, that right now we are subject

29:04

to more inflationary potential,

29:09

not less than we were in the 60s.

29:10

That the anticipations about future inflation

29:13

make it's particularly sensitive to that.

29:16

I think this has another effect,

29:18

that I've been impressed with.

29:20

I believe that you have an asymmetry,

29:22

that it will take a lot more evidence to persuade people

29:25

that inflation is tapering off,

29:28

than it will take to persuade them that inflation

29:29

is tapering, is speeding up.

29:32

And as a result, I believe,

29:35

the lag between downward pressure,

29:37

and its effect on prices is likely to be longer,

29:40

than the lag between upward pressure

29:43

and its effect on prices.

29:44

And that's while in the ordinary course of events,

29:46

you would think that something like twelve

29:49

to eighteen months would elapse.

29:51

Between a speeding up on the rate of monetary growth

29:54

of the kind we had in the first six months,

29:56

and a speeding up of inflation,

29:58

under present circumstances I would not

30:00

be at all surprised if that lag were much shorter,

30:02

and if we saw the effect on prices much sooner,

30:06

than we typically would.

30:09

-

I'm afraid time has caught up with us.

30:10

Thank you very much.

30:13

Remember subscribers,

30:14

if you have any questions or comments,

30:16

for topics you would like to hear discussed

30:18

in this series, please send them

30:20

to Instructional Dynamics Incorporated 166,

30:22

each Superior Street, Chicago Illinois 60611.

30:25

we shall be visiting with you again in two weeks.

30:31

Tape 78 - Mr. Nixon's Policy, Unemployment, Effect of Monetary Changes, Inflation Potential

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