Tape 174 - Inflation, Federal Debt, Anemic Expansion
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| - | Hello. | 0:02 |
| This is Rose Friedman, inviting you on behalf | 0:03 | |
| of Instructional Dynamics to another | 0:05 | |
| of our biweekly conversations with Milton Friedman, | 0:07 | |
| professor of economics at the University of Chicago. | 0:10 | |
| We are taping these conversations late in August. | 0:13 | |
| The first question on my mind is, | 0:21 | |
| are we off to the inflationary races again? | 0:24 | |
| I heard on the news this morning | 0:26 | |
| that the consumer price index, | 0:28 | |
| which was just released for July, | 0:30 | |
| rose 1.2% for the month, or, on an annual basis, of 14%. | 0:33 | |
| - | Well that certainly is not very pleasant news, | 0:40 |
| and it is a second straight month | 0:43 | |
| in which we have had very rapid price rise. | 0:45 | |
| For the month of June, the rise was 0.8%. | 0:48 | |
| If you put the two months together, | 0:50 | |
| you have a two percentage point rise. | 0:52 | |
| Multiply by six to get on an annual basis | 0:55 | |
| and that's back up to a 12%, | 0:58 | |
| or a double-digit rate, over a two months period. | 1:01 | |
| However, for the prior four or five months, | 1:04 | |
| the annual rate was roughly 6%, which means | 1:07 | |
| that if you were to average out the rate | 1:11 | |
| over the past six months, you would have | 1:12 | |
| something like an 8% rate of inflation. | 1:14 | |
| That's still extremely high. | 1:16 | |
| But, of course, much slower than the rates | 1:18 | |
| that we were observing last year. | 1:20 | |
| My own belief is that this is a temporary bubble. | 1:24 | |
| It's mostly food prices that are doing it. | 1:28 | |
| The industrial prices are much less, | 1:33 | |
| are much less inflation, show much less inflation. | 1:38 | |
| Month to month changes in the cost of living | 1:43 | |
| are very erratic and hop all over the lot, | 1:46 | |
| and I think one does have to take a longer perspective. | 1:48 | |
| So I still remain of the opinion | 1:52 | |
| that the basic rate of inflation | 1:54 | |
| which we are likely to experience | 1:56 | |
| over the next six, nine, 12 months, | 1:58 | |
| is something like 6%, and that this 12% rate over two months | 2:02 | |
| overstates what we can look forward to. | 2:07 | |
| However, as I have commented on an earlier tape, | 2:10 | |
| we are in the midst of a monetary explosion. | 2:13 | |
| And if that should continue, then maybe | 2:15 | |
| we'll have to revise our inflationary forecast. | 2:19 | |
| The Fed has been holding down | 2:23 | |
| the money supply for a month or so. | 2:24 | |
| The figures for the end of July were not very different | 2:28 | |
| from the figures for the beginning of July. | 2:32 | |
| Indeed, for about six weeks, the money supply | 2:34 | |
| has been going about a horizontal line | 2:37 | |
| after having risen extremely rapidly | 2:41 | |
| at a rate of something like, | 2:44 | |
| for the narrow money supply, 11%, | 2:45 | |
| and for the broader money supply, | 2:47 | |
| in the neighborhood of 14%. | 2:50 | |
| Now, as I have emphasized, we have to separate out | 2:59 | |
| the effect of rapid monetary growth | 3:05 | |
| from its effect on nominal income or output, | 3:08 | |
| on the one hand, and its effect on prices. | 3:13 | |
| There's something like a six months lag or a nine months lag | 3:16 | |
| between monetary growth and its effect | 3:19 | |
| on total income or output, but there has been, historically, | 3:22 | |
| a much longer lag ranging up to two years | 3:25 | |
| between the change in the rate | 3:30 | |
| of monetary growth and inflation. | 3:31 | |
| And that would suggest that so far | 3:35 | |
| as the recent monetary explosion, | 3:39 | |
| even if it were continued, is concerned, | 3:40 | |
| it would not be likely to show up in a speedier rate | 3:43 | |
| of inflation until late 1976 or early 1977. | 3:47 | |
| Reinforcing this argument, I just got this morning | 3:53 | |
| in the mail a paper from a friend of mine | 3:56 | |
| who was at the International Monetary Fund, | 3:58 | |
| which is another one of these studies, | 4:00 | |
| comparing world monetary changes | 4:02 | |
| with world rates of inflation. | 4:04 | |
| And he found a relationship implying about an 18 months lag | 4:06 | |
| between the money supply and the changes in prices. | 4:10 | |
| Now that result is interesting. | 4:14 | |
| It's not at all in contradiction with the two year lag, | 4:16 | |
| or the 24 months lag, than we have found | 4:18 | |
| for the United States and Great Britain. | 4:21 | |
| Because most of the other countries | 4:23 | |
| that were included in that compilation | 4:25 | |
| are countries that have experienced | 4:27 | |
| more rapid inflation in the past than we have. | 4:29 | |
| And one of the things that comes out | 4:31 | |
| from the statistics is perfectly clear, | 4:33 | |
| is that any country which has had a considerable experience | 4:35 | |
| with inflation, especially with varying rates of inflation, | 4:38 | |
| sometimes high and sometimes low, | 4:42 | |
| in any such country, the lag tends to be reduced. | 4:44 | |
| So that if you go to countries like Brazil or Chile | 4:48 | |
| or Colombia, in places like that, | 4:50 | |
| places which have really experienced | 4:52 | |
| very rapid and very widely changing rates of inflation, | 4:54 | |
| Argentina, you find that the lag | 4:57 | |
| between the money supply changes and the price changes | 5:00 | |
| shrills and may be as low as six months, four months, | 5:02 | |
| seven months, eight months, something like that. | 5:06 | |
| Well, the same thing may very well be happening here. | 5:08 | |
| There is no doubt that the public | 5:11 | |
| is becoming very inflationary conscious. | 5:13 | |
| There is no doubt even more specifically | 5:15 | |
| that the markets are coming to recognize | 5:17 | |
| the relationship between rapid monetary growth, | 5:19 | |
| on the one hand, and income, interest rate, | 5:21 | |
| and price behavior on the other. | 5:23 | |
| And thus, I have all along been hedging these predictions | 5:25 | |
| by the statement that this two year lag may be something | 5:29 | |
| you cannot count on, that it may be shorter. | 5:32 | |
| I think that lag would be especially likely to shorten | 5:35 | |
| if there were dramatic monetary growth. | 5:39 | |
| And there certainly was dramatic monetary growth | 5:43 | |
| for the period from January to June or July. | 5:46 | |
| So what's going to happen in the future, I think, | 5:51 | |
| depends very critically on whether the Fed | 5:54 | |
| does succeed in bringing back down the rates | 5:57 | |
| of monetary growth somewhere in the range | 6:00 | |
| that it has itself set as a target. | 6:02 | |
| It may do so. | 6:05 | |
| In the past two or three years, | 6:06 | |
| it's an interesting phenomenon | 6:08 | |
| that the rate of monetary growth | 6:09 | |
| has tended to be fairly low in the last half of the year | 6:12 | |
| and fairly high in the first half of the year. | 6:14 | |
| Maybe that's an error in the seasonal adjustment, | 6:16 | |
| but it at least suggests the possibility | 6:21 | |
| that maybe the Fed will succeed in the next few months | 6:24 | |
| in pulling back the rate of monetary growth. | 6:27 | |
| At any rate, I would say that the course of wisdom | 6:30 | |
| is to say that very likely you oughta stick with the idea | 6:34 | |
| that the basic rate of inflation over the next | 6:38 | |
| nine, 12 months will be in the neighborhood of 6%, 7%, | 6:42 | |
| and that this recent burst will prove temporary | 6:45 | |
| and will come back to a more moderate range. | 6:48 | |
| Now. | 6:53 | |
| Any statement of this kind is, of course, | 6:55 | |
| closely connected with your view about | 6:58 | |
| the vigor of the expansion. | 7:01 | |
| If past relationships, the very rapid rate | 7:06 | |
| of monetary growth over the past six months, | 7:10 | |
| a rate of monetary growth for M2, | 7:13 | |
| which, as I say, is between 12% and 15%, | 7:15 | |
| employs that over the next six months, nine months, GNP, | 7:19 | |
| nominal GNP, dollar GNP, will go up at a rate | 7:24 | |
| of something like that at the very least. | 7:27 | |
| I say at the very least because, historically, | 7:30 | |
| the velocity of circulation of money | 7:32 | |
| has tended to rise during recoveries | 7:34 | |
| and to fall during contractions. | 7:36 | |
| That is to say, during a recovery period | 7:38 | |
| such as we are now entering in, | 7:41 | |
| nominal GNP tends to rise more rapidly | 7:43 | |
| than money rises, than M2 rises. | 7:47 | |
| During a period of contraction | 7:51 | |
| such as we have just come out of, | 7:52 | |
| nominal GNP tends to rise less rapidly than money | 7:54 | |
| or to fall more rapidly than money. | 7:58 | |
| This is a pattern that has lasted over 100 years or so, | 8:01 | |
| it's hard to believe it's going to be changed. | 8:04 | |
| So, at the very least, velocity will certainly not fall | 8:06 | |
| over the next six or nine months, | 8:10 | |
| and that means that the minimum rate of GNP growth | 8:12 | |
| over the next six or nine months | 8:16 | |
| oughta be somewhere around 12%, | 8:17 | |
| and more likely, higher than that, 15%, 16%. | 8:19 | |
| Now, if the forecast of a 6%, 7% rate of inflation is right, | 8:23 | |
| that implies an extremely vigorous expansion. | 8:26 | |
| It leaves 6% to 9% for the rate of real growth, | 8:30 | |
| which would mean a very substantial decline | 8:34 | |
| in unemployment over the next six or nine months. | 8:36 | |
| On the other hand, if I am wrong about inflation, | 8:39 | |
| if it turns out that this time the lag | 8:42 | |
| between monetary change and inflation is very short, | 8:44 | |
| then that means that you will have a larger fraction | 8:47 | |
| of the increase in nominal GNP absorbed by the prices | 8:50 | |
| and a smaller fraction left for real growth. | 8:53 | |
| Whichever of these happens, it's worth pointing out | 8:58 | |
| that its implications for interest rates are the same. | 9:01 | |
| Let us suppose that the forecast | 9:06 | |
| I really think to be most likely, | 9:09 | |
| namely a 6% or 7% increase in rate of inflation, | 9:11 | |
| and a vigorous real expansion, let's suppose that occurs. | 9:14 | |
| Then the vigorous real expansion | 9:18 | |
| will raise the demand for credit. | 9:21 | |
| It will mean that enterprises will be seeking more loans, | 9:23 | |
| it will tend to drive up interest rates. | 9:27 | |
| Let us suppose I am wrong. | 9:30 | |
| Let us suppose that we have a much larger proportion | 9:32 | |
| of inflation and a smaller proportion of real output, | 9:34 | |
| then inflationary expectations will be stimulated and rise | 9:37 | |
| and that will tend to drive up interest rates. | 9:40 | |
| So I must say, I am baffled by the forecast I see | 9:43 | |
| from time to time of people who believe | 9:47 | |
| that maybe interest rates are going to be falling | 9:49 | |
| over the next five or six months. | 9:51 | |
| It's hard for me to see any possibility of that happening. | 9:53 | |
| - | We have an interesting question | 9:56 |
| from one of your subscribers | 9:58 | |
| that I think we should take up next. | 10:00 | |
| The subscriber is Robert W. Sherman. | 10:03 | |
| He writes, "Dear Professor Friedman, | 10:06 | |
| "it seems to me that, for certain purposes, | 10:08 | |
| "it would be useful to distinguish | 10:10 | |
| "between the official federal debt | 10:12 | |
| "and the true federal debt. | 10:14 | |
| "For example, I feel that the true federal debt | 10:16 | |
| "should include the net unfunded liability | 10:19 | |
| "of the social security system, paren, $2.4 trillion | 10:22 | |
| "as of June 30th, 1974, end of paren, | 10:27 | |
| "and exclude certain items such as the government securities | 10:30 | |
| "held by the federal reserve system. | 10:34 | |
| "On a recent tape, number 171, you reported that, | 10:37 | |
| "quote, the federal government debt | 10:42 | |
| "has been becoming smaller relative to the total GNP | 10:44 | |
| "rather than larger, end quote. | 10:48 | |
| "My question is threefold. | 10:49 | |
| "One, is the distinction between the official | 10:51 | |
| "and true federal debt a useful one? | 10:54 | |
| "Two, what is your estimate of the true | 10:57 | |
| "federal debt as of June 30th, 1975? | 10:59 | |
| "And three, in recent years, has the true federal debt | 11:03 | |
| "as a proportion of GNP, paren, or maybe, better yet, | 11:06 | |
| "NNP, end paren, been increasing or decreasing?" | 11:10 | |
| - | That is certainly a very intelligent | 11:14 |
| and thoughtful letter, and all of those questions are | 11:16 | |
| interesting and significant questions. | 11:20 | |
| In my comment, I was referring, | 11:25 | |
| as Mr. Sherman says, to the official debt. | 11:28 | |
| But, of course, in referring to the official debt, | 11:32 | |
| I did exclude government securities | 11:35 | |
| held by the federal reserve system. | 11:38 | |
| I was talking about a government debt | 11:40 | |
| held outside of federal agencies | 11:42 | |
| such as trust funds, social security administration, so on, | 11:46 | |
| and outside the federal reserve system as well. | 11:48 | |
| Now, that, the distinction between the official federal debt | 11:51 | |
| and the true federal debt is certainly a very useful one. | 11:56 | |
| First, let's look at the official federal debt. | 11:59 | |
| In 1945, at the end of World War II, | 12:03 | |
| the official federal debt, outside the federal reserve, | 12:07 | |
| was an amount which was greater than total GNP. | 12:11 | |
| It exceeded 100% of GNP. | 12:17 | |
| The numbers, of course, were much smaller | 12:19 | |
| than both for debt and GNP. | 12:20 | |
| About $230 billion for debt, $211 billion dollars for GNP. | 12:23 | |
| By 1948, just in the course of three years, | 12:29 | |
| the percentage had gone down | 12:33 | |
| from over 100% to slightly over 50%. | 12:35 | |
| To a small extent, via the reduction | 12:38 | |
| in the amount of outstanding federal debt, | 12:41 | |
| mostly by purchases through the Fed. | 12:44 | |
| To a larger extent, by a very rapid increase in nominal GNP. | 12:46 | |
| In the next 20 years, by 1968, that percentage went down | 12:51 | |
| to about 30%, and today, it's under 20%. | 12:55 | |
| So the official US federal debt is under 20% of the GNP, | 12:58 | |
| a very low figure relative to the past. | 13:02 | |
| Now, what about the non-official federal debt? | 13:04 | |
| And here I believe you have to make a distinction | 13:08 | |
| between two kinds of things. | 13:09 | |
| In addition to the official federal debt, | 13:12 | |
| you have the debt of federal financial agencies | 13:13 | |
| such as the federal home loan banks | 13:16 | |
| and other federal financial credit agencies. | 13:22 | |
| They were essentially nonexistent | 13:27 | |
| at the end of the war, they really were zero. | 13:30 | |
| As of today, that debt has grown | 13:33 | |
| to something like about $80 billion. | 13:36 | |
| Or it's now almost a third | 13:40 | |
| of the official announced federal debt. | 13:44 | |
| Now, in addition, and in a more ambiguous status, | 13:47 | |
| it's hard to know what to do about federal guarantees. | 13:50 | |
| There is a very large volume of debt | 13:54 | |
| which has been guaranteed by the federal government. | 13:56 | |
| Of course, the largest component of this | 13:59 | |
| is mortgage debt, FHA and VA guarantees. | 14:00 | |
| FHA and VA guaranteed debt amounts to $140 billion. | 14:03 | |
| Now, do you wanna regard that as part | 14:08 | |
| of the federal debt or not? | 14:10 | |
| There are other items which it's harder to get numbers for. | 14:15 | |
| For example, the federal government | 14:19 | |
| has guaranteed the debt a law. | 14:22 | |
| And no doubt there are other things like that, | 14:23 | |
| and I have no figures for that. | 14:26 | |
| If I add together the federal, bonds outstanding, | 14:28 | |
| the federal financial agencies, | 14:32 | |
| and the FHA and VA guaranteed mortgages, | 14:35 | |
| that total comes to $510 billion. | 14:39 | |
| And even that total is a little bit over a third of GNP, | 14:42 | |
| which means that it is about the same size, | 14:47 | |
| a little bit larger, than the official government debt alone | 14:50 | |
| in 1968 relative to GNP, and it is very much smaller | 14:53 | |
| than the official government debt in 1948 or '45. | 14:57 | |
| So that if you stick to sort of the standard | 15:01 | |
| financial instruments, you still | 15:04 | |
| have to come to the conclusion | 15:07 | |
| that the government debt, troublesome though it may be, | 15:08 | |
| is not very high as the percentage of the GNP | 15:12 | |
| compared to historical basis. | 15:15 | |
| The real problem is how you handle the second item, | 15:18 | |
| the other item which Mr. Sherman refers to, | 15:22 | |
| namely the unfunded liabilities of social security, | 15:27 | |
| which do as estimated total $2.4 trillion, | 15:30 | |
| billion, trillion dollars. | 15:35 | |
| Getting mixed up in billions and trillions | 15:38 | |
| when you get to these numbers. | 15:40 | |
| Now let me first note what that $2.4 trillion is. | 15:41 | |
| The social security system was asked by a senator | 15:45 | |
| to make the following calculation. | 15:47 | |
| Let us suppose that no new people | 15:49 | |
| entered into the social security system. | 15:51 | |
| That all people who are now under the social security system | 15:54 | |
| continue to pay the social security taxes | 15:57 | |
| to which they are now liable, that all present recipients | 16:01 | |
| of benefits of pensions continue to receive them, | 16:04 | |
| that all those people who are now paying taxes | 16:09 | |
| under social security went through | 16:11 | |
| and ultimately received their benefits. | 16:14 | |
| On that basis, what is the present value of the excess | 16:17 | |
| of the payments to which the government would be committed | 16:21 | |
| over the receipts from taxes imposed on the existing people? | 16:24 | |
| And that is the $2.4 trillion to which Mr. Sherman refers. | 16:29 | |
| Now, it's hard to know what to make of that, | 16:33 | |
| because, of course, that is | 16:35 | |
| an extremely hypothetical question. | 16:37 | |
| The true resource for the social security | 16:39 | |
| is the fact that new people are gonna come in | 16:42 | |
| and they're gonna be taken to the cleaners, | 16:44 | |
| it's a chain letter, and the chain | 16:46 | |
| still has the time to run. | 16:47 | |
| Nonetheless, I think that $2.4 trillion | 16:51 | |
| is a very meaningful total, and if you add that in, | 16:54 | |
| that's five times as large as even the expanded | 16:57 | |
| official government debt including | 17:01 | |
| government guarantees and financial agencies. | 17:03 | |
| And then that total would certainly be, | 17:06 | |
| would have risen very, very substantially relative to GNP. | 17:09 | |
| But for the purpose for which this whole issue arose, | 17:14 | |
| this whole issue arose, with respect to the ability | 17:18 | |
| of the federal government to finance its activities, | 17:21 | |
| the effect of its borrowing on capital markets | 17:25 | |
| whether you are going to have | 17:29 | |
| great difficulty to finance government borrowing. | 17:32 | |
| From that point of view, it's not easy to see | 17:35 | |
| how to handle the unfunded social security debt. | 17:37 | |
| If, indeed, you ended social security now | 17:42 | |
| along the lines of the hypothetical question of the senator, | 17:47 | |
| something I may say which I would be entirely in favor of, | 17:50 | |
| why then of course, over the course of years, | 17:53 | |
| you would have to borrow in order | 17:56 | |
| to finance that $2.4 billion dollars. | 17:58 | |
| It would not come due now, it would come due | 18:01 | |
| over a long period of time. | 18:03 | |
| On the other hand, if it seems like | 18:05 | |
| the social security continues to operate, | 18:07 | |
| then it is very hard to know | 18:09 | |
| for at least another several decades. | 18:11 | |
| It's almost certain that current receipts | 18:15 | |
| will not fall very far short | 18:20 | |
| of current commitments and current spending. | 18:24 | |
| And hence, it is not clear that the social security | 18:27 | |
| unfunded debt would produce a drain | 18:30 | |
| upon the ordinary capital market. | 18:34 | |
| But that's a superficial answer. | 18:36 | |
| The more fundamental answer has to go to the effect | 18:38 | |
| of the existence of social security | 18:41 | |
| on the savings of the public. | 18:44 | |
| I think I mentioned, in an earlier tape, | 18:46 | |
| the study by Martin Feldstein, | 18:48 | |
| in which he expresses a great concern | 18:51 | |
| that the effect of social security has been to reduce | 18:53 | |
| the amount of savings, of true savings of the nation, | 18:56 | |
| because individuals think they're saving | 18:59 | |
| when they're paying social security taxes | 19:01 | |
| and treat the social security benefits | 19:03 | |
| as if they were assets, whereas, | 19:05 | |
| from the national point of view, | 19:07 | |
| it's only a transfer from one group to another. | 19:08 | |
| Now, I won't go into that issue in full, but only let me say | 19:11 | |
| that it is an extremely complicated issue, | 19:15 | |
| and the evidence is very mixed. | 19:17 | |
| Some studies which have been made of this | 19:19 | |
| suggest that the social security system | 19:21 | |
| has not substantially reduced private savings. | 19:23 | |
| Other studies, such as Mr. Feldstein's | 19:25 | |
| suggests that it had a very large effect on private saving. | 19:27 | |
| It is very hard for me to believe | 19:33 | |
| that the social security system | 19:35 | |
| has not indeed reduced private savings. | 19:36 | |
| But how much? | 19:39 | |
| That's anybody's guess. | 19:40 | |
| So the fundamental answer, I guess, to Mr. Sherman | 19:42 | |
| is that the distinction between the official | 19:46 | |
| and the true federal debt is a useful one, | 19:49 | |
| the true federal debt has been growing, | 19:51 | |
| but I do not believe you can look at that true federal debt | 19:53 | |
| as a valid measure of the problems raised | 19:58 | |
| on the security markets by financing | 20:02 | |
| federal government expenditures. | 20:06 | |
| And I do think it would be highly desirable | 20:08 | |
| if we could have a more reliable fix | 20:11 | |
| on what the actual effect of the social security system | 20:14 | |
| on net savings of the United States as whole has been. | 20:17 | |
| - | There is much talk these days of an anemic expansion. | 20:25 |
| Do you agree? | 20:29 | |
| - | No, as I think I said on my last tape, | 20:30 |
| and as I've already said in some of my comments, | 20:32 | |
| the expansion is going to be a very vigorous one. | 20:35 | |
| It's going to be a very vigorous one | 20:39 | |
| in response to the monetary explosion | 20:40 | |
| and because, historically, on the average, | 20:42 | |
| deep recessions are followed by vigorous recoveries. | 20:45 | |
| I think a more interesting feature to this | 20:49 | |
| is the question why is it that people | 20:50 | |
| think it's going to be anemic? | 20:52 | |
| Here we have all of these sophisticated forecasters, | 20:54 | |
| economic forecasters, and one after another | 20:57 | |
| testifies in Congress, whether it is Arthur Okun | 21:01 | |
| or the Brookings Institution, | 21:04 | |
| or Walter Heller, the former chairman | 21:06 | |
| of the Council of Economic Advisers, | 21:08 | |
| or Franco Modigliani of MIT, | 21:10 | |
| and a whole stream of other names | 21:13 | |
| of the same kind that I can mention, | 21:15 | |
| and they all say, express grave doubts | 21:17 | |
| about how vigorous the expansion is going to be. | 21:19 | |
| Maybe they are right, but the question is | 21:23 | |
| why should they come out one way, | 21:26 | |
| and let's say a person like myself come out another. | 21:27 | |
| I think the answer is very straightforward, | 21:30 | |
| and I think it has some importance for interpreting | 21:32 | |
| what happens in fact over the next six or nine months. | 21:35 | |
| I think the answer is that most of the people | 21:39 | |
| I have been talking about have deeply instilled | 21:42 | |
| in their way of looking at the world the Keynesian idea | 21:46 | |
| that the business cycle is a dance of investment. | 21:51 | |
| And if you wanna know what's gonna happen to the economy, | 21:55 | |
| you look at what Keynes called autonomous expenditures | 21:57 | |
| by which he meant private investment | 22:00 | |
| plus government spending, either total government spending | 22:02 | |
| or government spending in excess | 22:06 | |
| of government receipts, government deficit. | 22:09 | |
| People have defined autonomous expenditures differently. | 22:11 | |
| Now if you take that view, if you think that the cycle | 22:14 | |
| is produced by changes in investment and that expansions | 22:19 | |
| are produced by a burst of autonomous expenditures, | 22:23 | |
| then recessions and depressions are produced | 22:26 | |
| by a collapse of investment expenditures as Keynes argued. | 22:29 | |
| Why then, it's perfectly understandable | 22:34 | |
| that you have grave concern about the present expansion, | 22:36 | |
| because it is perfectly clear that investment expenditures | 22:39 | |
| are not, at the moment, very rosy, | 22:43 | |
| and the prospects are not very rosy. | 22:46 | |
| It is true that the government deficit is rising. | 22:48 | |
| That component of investment expenditures, | 22:51 | |
| of autonomous expenditures is high. | 22:53 | |
| But residential housing and nonresidential housing, | 22:56 | |
| the housing industry in general, | 23:00 | |
| is in the doldrums, it's very low, | 23:02 | |
| although last month did see a very sharp rise, | 23:04 | |
| a 14% rise, very sharp rise in new construction. | 23:07 | |
| But in general, the levels are low. | 23:11 | |
| Business fixed investment is low. | 23:14 | |
| Now, there has been already a swing | 23:17 | |
| from very rapid inventory decumulation | 23:21 | |
| to less rapid inventory decumulation, | 23:23 | |
| and there may be a swing toward inventory accumulation. | 23:26 | |
| But even taking all of these things together, | 23:29 | |
| it looks very much as if autonomous expenditures, | 23:31 | |
| as so defined, and particularly | 23:34 | |
| the private investment component is weak. | 23:36 | |
| And therefore it's natural that you say | 23:38 | |
| this is going to be a weak recovery. | 23:41 | |
| On the other hand, if you take the view as I do, | 23:42 | |
| that autonomous expenditures are a result and not a cause, | 23:47 | |
| that really, if you wanna look at what's going to happen, | 23:51 | |
| you have to go not from investment | 23:54 | |
| and autonomous expenditures up to the total, | 23:56 | |
| but you have to go from the top down. | 23:59 | |
| You have to look at what is happening to total spending | 24:00 | |
| and the major determinant of total spending | 24:03 | |
| will be what has earlier happened to total monetary growth, | 24:05 | |
| and toward the attitudes of the people | 24:08 | |
| about velocity, about the cash balances they wanna hold. | 24:10 | |
| If those are the major forces, | 24:14 | |
| then what determines the rate of expansion | 24:16 | |
| is the rate of growth of the money supply | 24:21 | |
| and the attitudes of the people toward velocity. | 24:23 | |
| And the way in which the growth and the total | 24:26 | |
| is divided between investment spending, on the one hand, | 24:30 | |
| consumption spending, government spending, and so on, | 24:34 | |
| depends on the accidents of the particular episode, | 24:37 | |
| and some episodes an expansion | 24:39 | |
| may be primarily consumption dominated, | 24:42 | |
| in other episodes, it may be investment dominated. | 24:44 | |
| That's a question of the particular circumstances. | 24:47 | |
| Moreover, if that's your view, | 24:49 | |
| you will not be surprised that on this particular episode, | 24:51 | |
| it looks as if it's going to be | 24:56 | |
| a heavily consumption dominated expense. | 24:58 | |
| Why? | 25:00 | |
| Because we have been having a set of governmental policies | 25:01 | |
| which are oriented in that direction. | 25:05 | |
| We're heading toward enormous government deficits. | 25:07 | |
| We've had what the Keynesian economist | 25:10 | |
| would call fiscal stimulus, what I would call | 25:13 | |
| excessive government spending. | 25:18 | |
| Government spending has been going up, | 25:20 | |
| we've had tax cuts, we're heading for deficits | 25:21 | |
| of, $60, $70, $75 billion dollars. | 25:24 | |
| You can pick a number and take your choice. | 25:26 | |
| Now, what's the result of that? | 25:28 | |
| The result of that is that most of that fiscal stimulus | 25:30 | |
| has gone to consumers in the form of tax cuts | 25:34 | |
| or welfare payments or unemployment insurance payments. | 25:38 | |
| On the other hand, the financing of those expenditures | 25:43 | |
| has come out of the capital market. | 25:48 | |
| It's been a deficit that is financed | 25:50 | |
| by selling bonds and securities on the capital market. | 25:52 | |
| Or else it's been financed by printing money. | 25:56 | |
| Either of these has the effect of making, | 25:59 | |
| and particularly the borrowing on the market, | 26:01 | |
| has had the effect of making interest rates | 26:04 | |
| higher than they otherwise would be | 26:06 | |
| and thus discouraging investment. | 26:07 | |
| And so I would say you would expect, as a matter of theory, | 26:10 | |
| that a expansion in which governmental policy shifts heavily | 26:14 | |
| toward what has been called fiscal stimulus | 26:19 | |
| is going to be an expansion which will be dominated | 26:22 | |
| by consumption and which investment spending will be weak. | 26:25 | |
| Conversely, if you had an expansion | 26:29 | |
| in which government maintained a fairly tight fiscal policy, | 26:31 | |
| kept spending down and did not cut taxes, | 26:34 | |
| in which you had an expansionary monetary policy, | 26:37 | |
| why, then I would expect that kind of an expansion | 26:40 | |
| to be dominated by investment | 26:42 | |
| or construction and not by consumption. | 26:44 | |
| And I believe that this difference in the interpretation | 26:47 | |
| of the driving forces in the cycle | 26:50 | |
| accounts for the difference of opinion | 26:52 | |
| of how anemic or how vigorous the expansion is gonna be. | 26:54 | |
| - | Thank you very much. | 26:58 |
| Remember, subscribers, if you have | 27:00 | |
| any questions or comments, please send them | 27:02 | |
| to Instructional Dynamics Incorporated, | 27:04 | |
| 450 East Ohio Street, Chicago, Illinois, 60611. | 27:07 | |
| We shall be visiting with you again in about two weeks. | 27:12 |
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