Tape 56 - Income policies

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-	This tape is recorded biweekly	0:02
	for Instructional Dynamics Incorporated of Chicago	0:04
	on the week of August 10, 1970.	0:07
	Professor Samuelson,	0:09
	I understand we have some questions today.	0:10
-	Yes, we have from our subscribers	0:12
	quite a number of questions.	0:14
	Let me just pick out a couple of them for comment.	0:15
	The first one says,	0:19
	"Please explain what you mean by an incomes policy."	0:21
	I'm glad to do so because it's a very poorly named	0:27
	doctrine.	0:33
	By incomes policy, we mean a wage price policy.	0:37
	For example, a wage price freeze	0:42
	or	0:46
	controls on wages and prices	0:48
	of an absolutely mandatory and comprehensive type.	0:51
	That would be one extreme.	0:54
	Or, jawboning for the purpose of	0:56
	putting pressure on business and on unions	1:02
	to keep prices and wages from rising.	1:05
	I can best define it by contrast.	1:09
	By incomes policy,	1:14
	we do not mean macroeconomic policy	1:15
	that the Federal Reserve Board normally follows,	1:19
	namely, restricting the rate of growth of the money supply.	1:22
	By incomes policy,	1:26
	we do not mean running a deliberate budgetary surplus	1:27
	or a smaller deficit	1:32
	in order to put downward pressure on total dollar spending.	1:33
	Those last two policies go under the heading	1:38
	of macroeconomic aggregate demand policy	1:42
	of a monetary policy type or of a fiscal policy type.	1:47
	Incomes policy tries to be a third weapon	1:51
	which cuts across and reinforces	1:55
	macroeconomic aggregated demand policy.	1:59
	One may wonder where the name came from.	2:03
	I think that the name originated in England.	2:07
	One of the post-World War II chancellors of the exchequer	2:11
	diagnosed England's problem at that time	2:16
	as being one in which people tried	2:20
	to get wage rates and prices	2:22
	which would give them an aggregate money income	2:26
	larger than the nation was able to produce	2:29
	at unchanged prices of actual goods.	2:33
	And so he said,	2:37
	"What we've gotta do is to keep incomes down."	2:37
	A better name for it would be a price tag policy,	2:41
	including under the category of price tag,	2:46
	wage tag along with price tag.	2:49
	With the major emphasis upon the big picture,	2:55
	the global aggregate macroeconomic picture,	2:58
	and not, let's say,	3:01
	the problem of the price tag of rubber	3:02
	when rubber is in overabundant supply	3:06
	and the price is very low,	3:08
	as happened in the Great Depression,	3:10
	or not the price tag problem as applied to, say, copper,	3:12
	when the price of copper suddenly,	3:16
	because of a shortage and an increase in demand,	3:19
	triples and quadruples.	3:22
	Those are what economists would call microeconomic	3:23
	price tag problems.	3:29
	This is the macroeconomic price tag problem,	3:31
	is what is referred to by the expression incomes policy.	3:35
	I've talked a good deal about this.	3:39
	Of course, there's been a great deal of talk	3:41
	about incomes policies in the public press	3:43
	and in congressional debate.	3:46
	I talked about it in connection with guideposts,	3:48
	in connection with the so-called Phillips curve problem,	3:52
	which is the relationship between	3:56
	the degree of unemployment	3:59
	and the degree of price instability, or price stability,	4:01
	the so-called short run trade-off problem.	4:06
	That is what's meant by an incomes policy.	4:10
	I should not leave the problem of taxonomy and definition	4:14
	without mentioning that this is one of the great	4:19
	unknown, unsolved areas of modern economics	4:24
	because it is not the case	4:28
	that any mixed economy known to me	4:31
	has successfully found a way	4:35
	of conducting an incomes policy to everybody's satisfaction.	4:38
	I don't mean that	4:45
	nothing good has been accomplished in any period by any,	4:47
	let us say of the 13 to 15 leading industrial nations,	4:52
	of the so-called free world of the West.	4:56
	On the contrary,	4:59
	most of the careful econometric studies that I have seen	5:01
	suggest that after they have allowed	5:06
	for all patterns of market behavior	5:09
	based upon past experience,	5:14
	they do find, in many countries,	5:16
	a little bit of extra moderation on the inflation front,	5:18
	which, these interpreters at least,	5:23
	say may well be due to an incomes policy.	5:27
	This has been done for Britain.	5:31
	This was done in a very widely quoted set of studies	5:34
	of the early 1960s by Professor George Perry,	5:39
	then of the University of Minnesota,	5:44
	now a senior economist at Brookings Institution.	5:45
	In a typical study of that sort,	5:50
	there are some favorable effects of incomes policy	5:52
	detected by those writers.	5:56
	I may say that this is not above controversy	5:58
	and there is more than one way to read the same data,	6:00
	so that I believe that those	6:04
	who are against incomes policy	6:07
	completely	6:13
	have, to their own satisfaction, alternative explanations	6:14
	of the extra degree of moderation which is in that data	6:18
	which they may regard as no moderation at all	6:22
	and as nothing extra at all.	6:24
	Without, on this occasion,	6:28
	going into a full-fledged discussion	6:30
	of the merits and demerits of an incomes policy,	6:33
	the dilemmas for modern political economy	6:36
	involved in this domain,	6:40
	let me simply mention	6:44
	that this is one of the less agreed-upon areas of economics.	6:46
	This leads me to a second question from a subscriber.	6:52
	This subscriber says that he read in a recent article	6:58
	in a publication, he gives the name of the publication,	7:02
	it's one of the well-known weeklies,	7:07
	that inflation has taken on a global look.	7:10
	According to the article which he read,	7:14
	inflation now seems to be in most	7:16
	of the mixed market economies.	7:18
	"But," he says,	7:21
	"There was an omission of the economies	7:23
	"in the collectivist economic camp.	7:27
	"Should I interpret this to mean," he says,	7:31
	"That collectivist economies	7:34
	"are not subject to the virus of inflation,	7:36
	"and that if one draws up a balance sheet	7:40
	"of advantages and disadvantages of a collectivist economy,"	7:44
	and I presume he means there the Russian economy,	7:48
	the Hungarian, the Czech economies, the Romanian economies,	7:52
	all the Eastern European so-called satellite countries,	7:57
	and of course,	8:00
	the similar economies,	8:02
	in a degree similar,	8:05
	of mainland China, North Korea, and so forth.	8:07
	"In drawing up such a balance sheet,	8:11
	"are we to conclude that they at least	8:13
	"have the inflation problem licked?	8:16
	"And so, that's one for their side."	8:19
	Well, that's a very tall question.	8:23
	Let me try to break it down	8:27
	and give you some opinions about it.	8:29
	First, it is true that the	8:32
	major free world economies	8:37
	are to a considerable degree integrated together.	8:40
	Before World War II,	8:44
	the National Bureau of Economic Research	8:46
	under Wesley Mitchell	8:49
	could study the development of business cycles	8:50
	in different countries.	8:54
	It was rather remarkable that for the years,	8:56
	say, 1825 to 1939,	9:00
	how common was the pulse of the business cycle	9:04
	in all the major industrialized countries of the world.	9:09
	We first see the business cycle most clearly	9:14
	in the post-Napoleonic warriors in the UK,	9:16
	England, I suppose, as it would've been called at that time,	9:22
	or the British Isles.	9:24
	At that time, England, of course,	9:26
	was the spearhead of advance.	9:28
	It was the most advanced country of the world,	9:30
	and it was the citadel of developing capitalism.	9:35
	But as the United States developed a nonfarm economy,	9:40
	we began to swing into that same orbit.	9:45
	You see France and England early in the century	9:48
	swinging into the common orbit of the business cycle,	9:51
	and then, by the end of the century,	9:55
	Japan is coming along, no longer isolated,	9:58
	and it too is part of that same orbit.	10:01
	Well, we should not be surprised	10:04
	on the basis of that past history	10:06
	if even today, there should be a integrated world economy.	10:09
	Indeed, if we succeed	10:16
	in reducing tariff barriers	10:18
	and quotas and administrative restrictions	10:21
	so that the world moves more towards a free-trade basis,	10:24
	you would expect an increase in the degree	10:29
	of interdependence and concordance	10:32
	between the major economies of the world.	10:34
	However, the primary statistics	10:39
	that I've been quoting to you up to this moment	10:41
	have been those of pre-World War II.	10:44
	One of the most remarkable phenomena, I think,	10:47
	of the post-World War II period	10:51
	has been that the international business cycle	10:54
	has in some degree been pulverized,	10:58
	so that we have business recessions at different times	11:01
	in different parts of the world.	11:07
	You don't have everything going sour at the same time.	11:09
	I could illustrate that by the fact	11:13
	that in the 1950s,	11:15
	1953, '54, was a year of recession for the United States.	11:18
	If the old Wesley Mitchell 19th century pattern	11:22
	had still been prevailing,	11:25
	one could be pretty sure	11:27
	that you would have	11:29
	had in consequence of that	11:32
	an importation of the infection of the US recession	11:37
	to the major countries	11:41
	of the Common Market of Western Europe.	11:43
	That, however, did not happen.	11:45
	Britain did not have its recession at the same time,	11:47
	and this was a very good thing.	11:51
	Now, why do I say it's a good thing	11:52
	that the international common business cycle	11:54
	has been pulverized into separate business cycles?	11:57
	I suppose because during the early 1930s,	12:00
	we had everything going sour at the same time.	12:06
	The Creditanstalt failed in Austria	12:09
	and this had repercussions not only	12:13
	in Wall Street and Main Street of the United States,	12:16
	but in the Fiji Islands as well.	12:19
	This is, from that viewpoint, a good thing.	12:23
	It's the same as the fact	12:26
	that we prefer being able to speak of rolling readjustments	12:29
	in which the Florida land boom	12:34
	gets corrected during one year,	12:36
	and then during another year,	12:39
	overbuilding in the Northern cities gets corrected,	12:41
	and then in another year,	12:43
	the excesses of wool inventory speculation get liquidated,	12:45
	rather than to have all of these things	12:50
	be part of the common pulse of the business cycle.	12:52
	That's just good diversification for a nation.	12:56
	Well, so for the world,	12:59
	it's better not to have everything happen all at once	13:00
	and be mutually reinforcing.	13:04
	It's also of course better for mobile capital	13:07
	to have a part of the world at all times	13:10
	which is immune from the downswing,	13:13
	because then you can keep your diversified eggs	13:15
	in a diversified basket.	13:19
	Let me turn,	13:23
	before I get back to the problem of the present inflation	13:24
	and whether it's worldwide,	13:29
	let me turn to the question of,	13:31
	how is it possible that in the current era,	13:34
	the different nations of the world	13:40
	seem able to immunize themselves	13:43
	from the common ups and downs of a world business cycle?	13:46
	I think the main reason for that is the new economics.	13:52
	I think the main reason for that	13:58
	is the whole general philosophy	13:59
	that goes with Keynesian economics.	14:04
	I don't have in mind here something technical,	14:06
	such as the difference between national income analysis	14:09
	and older-fashioned quantity theory of money analysis,	14:12
	not at all because what I'm saying	14:16
	could be reinterpreted in terms	14:19
	of a technical belief in either one of those two doctrines,	14:20
	but the fact that we are interventionist,	14:25
	that the government is now activist,	14:29
	that we are not a laissez-faire world.	14:31
	We are not a world in which rules	14:35
	rather than men and committees and legislatures dominate,	14:38
	because if you were following rules,	14:43
	and I don't care what they are.	14:45
	For this purpose,	14:46
	we might take the much maligned, old-fashioned gold standard	14:47
	and we'll assume you're playing the rules of the game	14:50
	of the old-fashioned gold standard.	14:52
	Then, automatically,	14:54
	if there was an inflation in a major country of the world	14:56
	such as the United States,	14:59
	the remaining countries of the world,	15:00
	this time through gold flow specie influences	15:03
	would be importing inflation from the United States,	15:09
	and would be subject to those same effects.	15:11
	Well, before 1914,	15:15
	central banks knew how to offset such effects,	15:18
	but there wasn't in the electorates	15:22
	of the pre-1914 major countries of the world	15:25
	the will to be captains of their own ship,	15:30
	masters of their own fate,	15:34
	and the determination to use	15:36
	their central banking and fiscal policy weapons	15:37
	in order to follow their own star	15:42
	rather than to be chained	15:45
	to the international business cycle.	15:46
	Now,	15:49
	the major reason, then, for the change	15:53
	is the fact that	15:55
	all the major industrial nations of the world	15:58
	now, like the United States,	16:01
	follow a full employment policy.	16:04
	They do not play the rules of the game.	16:07
	This of course creates some new problems	16:10
	for the foreign exchange mechanism in international trade,	16:12
	because if everybody in the world was on a common currency,	16:16
	and let's suppose we all use gold coins	16:19
	as our unit of account	16:21
	and as our medium of exchange,	16:25
	and it wouldn't matter from this point, standpoint,	16:26
	whether the gold coins have the picture	16:29
	of a local king or queen on them,	16:31
	or whether they simply are a certificate	16:34
	of one ounce gold coin.	16:36
	That in such a world,	16:39
	there isn't any room for the local legislature,	16:41
	for the local prime minister	16:44
	or chancellor of the exchequer	16:47
	or congressional committee	16:48
	to influence events very much.	16:50
	Well, that world is gone.	16:53
	Actually, before World War II,	16:55
	we already had in hand the economic theory	16:59
	needed for understanding	17:03
	a world in which nations were not connected	17:06
	by a common currency	17:10
	and by a common business cycle pulse.	17:12
	The late Frank William Taussig,	17:15
	dean of international trade economists	17:17
	who for many years was a professor at Harvard,	17:19
	in his book, oh, going back to the 1920s,	17:22
	devoted whole chapters and sections	17:28
	to inconvertible paper money.	17:31
	And in that model,	17:34
	each country determined its own supply of money	17:37
	and the total supply of its money	17:41
	determined in Taussig's view,	17:44
	'cause he was a classical and a neoclassical economist,	17:47
	determined its price level.	17:50
	This was determined independently in different countries.	17:52
	How, then, was there a synthesis	17:55
	of trade throughout the world?	17:58
	Well, it took place, according to Taussig,	17:59
	when you had inconvertible money,	18:01
	by means of having the exchange rate be flexible.	18:03
	And so, if Argentina insisted upon tripling its price level	18:07
	because they tripled the supply of money,	18:11
	and the United States did not increase	18:15
	its supply of money at all	18:16
	and we kept a steady price level,	18:17
	each one of us masters of our own fate,	18:19
	then all you had to do was change the gear ratio,	18:21
	the foreign exchange rate,	18:24
	between the Argentinian, I can't remember,	18:26
	peso, let us call it, and the dollar.	18:29
	According, actually, to a very famous doctrine	18:33
	called the purchasing power parity doctrine	18:36
	of a great Swedish economist of the past, Gustav Cassel,	18:39
	the Argentinian exchange rate vis-a-vis the dollar	18:43
	would go down to exactly 1/3.	18:47
	Now, the purchasing power parity doctrine	18:50
	is not an exact doctrine.	18:52
	It was often misused,	18:53
	but it has a very important kernel of truth in it,	18:55
	as important a kernel of truth as the truth	18:58
	that underlies the quantity theory of money.	19:01
	Returning to the post-World War II world,	19:04
	we have all the countries determined	19:09
	to pursue their own policies,	19:13
	but they're not willing in the Taussigian fashion	19:18
	to have freely-floating exchange rates.	19:21
	Of course, this makes for trouble.	19:24
	A lot of our disequilibria in international trade,	19:27
	in my judgment,	19:30
	have been traceable precisely	19:31
	to this independence of action.	19:35
	At least under the old-fashioned gold standard,	19:37
	you got a small discrepancy,	19:39
	and immediately, it began to be corrected.	19:41
	But in the present world, you get a discrepancy,	19:45
	each country follows its own star.	19:48
	That discrepancy is not corrected.	19:51
	It is not on its way to being corrected.	19:54
	There is a cumulative strain,	19:57
	and events are allowed to proceed	19:59
	in this disequilibrium manner so long until finally,	20:01
	somebody has run out of gold or IOUs	20:04
	or the patience of foreign governments and speculators,	20:07
	and something has to give.	20:11
	And so, you have a cataclysmic	20:12
	perforce devaluation of an exchange,	20:15
	or you have a regime of autarky	20:19
	in which exchange controls and mandatory capital controls	20:22
	are put into effect.	20:27
	I would like to have the best of both possible worlds.	20:30
	Again and again,	20:34
	I publicly favor a full employment policy in each country,	20:36
	but a policy in which there is some flexibility	20:42
	in terms of foreign exchange rates,	20:47
	so that if different countries are pursuing	20:50
	different rates of increase of their price level,	20:52
	for example,	20:55
	that will be compatible with long-run equilibrium.	20:56
	I don't care for the present purpose	21:00
	to argue in favor of a sliding peg	21:02
	which does this gradually,	21:05
	or in favor of a freely-floating exchange rate	21:07
	which, from day to day,	21:10
	gets set in from moment to moment	21:11
	by the actions of speculators and counter-speculators	21:13
	with or without some stabilization efforts by government.	21:17
	That is not of a great deal of importance	21:21
	from this viewpoint.	21:24
	Well, now, let's take this mixed world	21:25
	with its disequilibrium, such as we have,	21:27
	and ask ourselves, where do we stand?	21:30
	The United States after the Vietnam War period	21:34
	had a very considerable inflation.	21:37
	That inflation is just beginning	21:39
	to get under control, in my judgment,	21:41
	and we are having a slowdown and a recession.	21:44
	As is typically the case,	21:47
	this somewhat improves our trade balance.	21:49
	I've noticed in the recent statistics	21:52
	that our current accounts,	21:55
	export surplus has gone up a little bit	21:58
	because our exports have continued	22:00
	to grow a little bit faster	22:02
	than our imports have grown,	22:03
	the imports languishing just a bit	22:05
	because of the inventory	22:08
	and other slowdown within the country.	22:10
	Nonetheless,	22:14
	the rest of the world belatedly,	22:17
	not in 1965 or 1966, 1967, but just in recent years,	22:20
	has itself been on a expansionary period,	22:24
	Western Germany being a very good example of that,	22:29
	so that,	22:33
	inasmuch as they have not sealed them off,	22:35
	themselves off from us and from our inflation	22:38
	by letting the exchange rates fluctuate	22:42
	rather substantially,	22:45
	they have been importing some inflation	22:46
	from the United States.	22:49
	They complained bitterly	22:50
	at international meetings in the past	22:52
	that the United States was exporting part of its inflation.	22:54
	My answer to that is, true.	22:57
	We are guilty as charged.	23:00
	We have been exporting some of our inflation.	23:02
	However, there is a very easy solution to that problem	23:05
	from the standpoint of the German government,	23:08
	to take an example.	23:11
	If they don't want to import our inflation,	23:12
	they don't have to.	23:14
	They can appreciate the mark.	23:16
	This was politically unpopular in the days	23:19
	of the Adenauer government.	23:21
	It was politically unpopular	23:24
	in the days of the Erhard government,	23:25
	although Ludwig Erhard himself is, to my understanding,	23:26
	was in favor of such an appreciation.	23:30
	But there was a political impasse,	23:32
	and it was only when the new Social Democratic government	23:34
	of Brandt came in	23:37
	with Karl Schiller as the economics minister	23:39
	that you got such an appreciation.	23:42
	Now, before my time is out,	23:46
	I'd like to comment on the other part of the question,	23:49
	which is, do the collectivist economies	23:51
	have no problem with inflation?	23:55
	The answer to that is that they are not immune	23:58
	to the laws of economics.	24:00
	For many, many years in Russia,	24:02
	there was under their planning a tendency	24:05
	for too many rubles to be paid out to people	24:08
	in comparison with the goods that were available.	24:10
	As would tend to happen under those circumstances,	24:14
	any price which could be freely bid up would be bid up.	24:16
	Of course, in those days,	24:20
	there weren't very many prices	24:22
	that were subject simply to supply and demand,	24:23
	which could be simply bid up	24:25
	so as to ration off the excess demand,	24:27
	with the result that you had very long queues.	24:29
	You had long lines.	24:31
	You got discrepancies between supply and demand,	24:33
	and these became larger and larger.	24:36
	It was for this reason	24:38
	that the Russians used fiscal policy.	24:39
	They introduced some very heavy turnover taxes	24:42
	which sopped up a great deal of purchasing power	24:45
	so as to get it better aligned	24:48
	between total supply and total demand.	24:49
	Nevertheless, when all is said and done,	24:52
	because the collectivist countries	24:54
	can have a more ruthless manpower policy	24:56
	and a more ruthless policy of rationing and allocation,	24:59
	it certainly is easier for them	25:03
	to have price stability and high employment	25:05
	than it is for a free economy.	25:08
	Let's remember that the essence of the problem,	25:11
	the incomes policy problem,	25:14
	the Phillips curve problem that we are worrying about,	25:15
	is the problem of reconciling freedom	25:18
	and full employment and price stability.	25:21
	It's no trick at all to sacrifice one of that triad,	25:25
	but the big challenge for us in our mixed economy	25:30
	is to try to be able to get all three at once.	25:34
	It's that incomes policy problem	25:37
	which has not yet been solved anywhere in the free world.	25:39
-	If you have any questions or comments	25:42
	for Professor Samuelson,	25:43
	address them to Instructional Dynamics Incorporated,	25:44
	166 East Superior Street, Chicago, Illinois, 60611.	25:47

Item Info

Title:

Tape 56 - Income policies

Date:

circa 1970 to circa 1971

Contributor:

Samuelson, Paul A. (Paul Anthony), 1915-2009

Subject:

Format:

audiocassettes

Language:

English

Digital Collection:

Paul A. Samuelson papers, 1933-2010 and undated

Source Collection:

Paul A. Samuelson papers, 1933-2010

Series:

Economics Cassette Series: Paul Samuelson

Rights:

Limited Re-Use

CC BY-NC 4.0

Rights Note:

This material is made available for research, scholarship, and private study. Copyright in this material has not been transferred to Duke University. For reuses of this material beyond those permitted by fair use or otherwise allowed under the Copyright Act, please see our page on copyright and citations: https://library.duke.edu/rubenstein/research/citations-and-permissions.

Identifier:

RL10082-CS-0056
ref2251_m0b
samuelsonpaul
duke:325079
pstau001056
ark:/87924/r4862bt65
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Tape 56 - Income policies

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Economists' Papers Archive

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