Milton Friedman - The Outlook for the Economy and the Dollar

Grants | NHPRC | Programs | Midday | Topics | Education | Types | Speeches | Economy | Legacy Amendment Digitization (2018-2019) |
Listen: 25483.wav
0:00

Dr. Milton Friedman, noted economist from the University of Chicago, speaking to the Economic Education Winter Institute at St. Cloud State University. Friedman’s address was titled, "The Outlook for the Economy and the Dollar." Following speech, Friedman answered listener questions.

Milton Friedman is a member of the research staff of the National Bureau of Economic Research and is a columnist and contributing editor for Newsweek magazine.

Read the Text Transcription of the Audio.

(00:00:00) Today we present an address given in mid-February by the noted Economist from the University of Chicago. Dr. Milton Friedman Friedman spoke at st. Cloud State University. Milton. Friedman is a member of the research staff of the National Bureau of economic research and as a columnist and contributing editor for Newsweek magazine. The title of the address is the outlook for the economy and the dollar now here is dr. Milton Friedman (00:00:24) with respect to the domestic Outlook. We can examine that from the point of view of the immediate foreseeable future and of the somewhat longer foreseeable future and I shall try to make some comments on both levels here. Whether a button as a background for doing so I think it is interesting to cast your eye back on 1975 and say what is interesting in retrospect about 1975. What features does it have that might cause an economic historian looking back upon it to note some differences from comparable (00:01:08) periods. (00:01:10) One of the things that I think is most interesting about 1975 is a sharp difference. Which is revealed by different economic indicators about the recession from 1973 to 1975 by now there is widespread agreement that our recession set in sometime in the fall of 1973 and that it came to an end roughly about April 1975 in terms of length. That was one of the longest of the post-war recessions in terms of severity. You get a very different picture according to the particular measure of severity that you look at by unemployment figures which are the most prominent and dominant figures which are the figures to which most attention is are paid. most attention is paid it appears to be by All Odds the most severe post-war recession both in terms of the increase in unemployment and of the absolute level which unemployment reached on the other hand, if you look at other indicators, if you look at the donut rather than the whole for example, if you look at employment rather than unemployment, if you look at what happened to the ratio of employment to the total population over 14 years of age you get a very different picture by that measure the recession was the third mildest of the post-war period If you look at figures on output here depends on whether you look at the figures, the original figures are the figure since they have recently been revised by the by the Department of Commerce. You know, it's the old story. We don't know where we've been until somebody tells us and we don't know what's happened until the Department of Commerce issues its figures and then we may discover a year later that we weren't where we thought we were at any rate. If you look at the more recently revised figures of the Department of Commerce the severity of the recession in terms of output Was also rather with much milder, it was relatively severe but much milder than you would gather from the employment figures and I think I from the unemployment figures. I'm sorry, and I think that the real conclusion you have to come to the conclusion that is Justified. Is that the popular impression of the severity of the 1973 275 recession grossly overstated severity for a very simple reason. In the past five or six years we have made and we have taken measures of one kind and another they may be good. They may be bad for the moment. I'm not worrying about that which have made unemployment a more attractive status than it was before now. There's one fundamental law of Economics, which I guarantee you will work under all circumstances if you increase the demand for anything Supply will increase in response to it. And if you increase the demand for people to be labeled unemployed, the supply will increase to meet the demand. Now you may think that that's a very hard-hearted thing to say, but it isn't it's a straight fact and let me illustrate the kind of thing. I have in mind to show you that it's more than a question of heart. It has a little to do with your head as (00:05:02) well. (00:05:05) Consider a woman who has been employed is married and would like to leave her job to go home to have a baby and raise a family ten years ago. She would have quit her job and gone home today. She will arrange to get discharged in such a way that she will be eligible for unemployment insurance. In order to be eligible for unemployment insurance you have to be able to say that you are looking for work. So when the census investigator comes around to explore unemployment and asks her are you looking for work? She says yes, and she is counted as unemployed workers 10 years ago. She would have been counted at it out of the labor force. That's a purely statistical artifact. It doesn't correspond to any economic reality in the same way in many states in the United States teachers who are on a nine month contract can register as unemployed during the other three months and collect unemployment insurance. They are recorded in the statistics is unemployed in addition and more fundamentally. And as I say, I'm not arguing whether this is a good thing or a bad thing. But only that it ought to give you pause before you assume that a figure of seven percent unemployed in 1976 has the same meaning as a figure of seven percent unemployed had in 1966 again because of the increases in unemployment insurance benefits and the emergence of supplementary on insurance benefits and the like many a worker will be able to have a take-home pay available for consumption. In the status of unemployed, which is close to maybe a little bit less but not much less than what he can earn when he is fully employed. His unemployment insurance is not subject to income tax or Social Security tax. His payrolls are subject to Social Security tax and income tax. He doesn't have to have the expenses of going back and forth to work and so on well now if you are in that position and you have been laid off from a job and you think maybe six or nine months later, you're going to be able to get it back again the pressure on you to go hunting for a job or to take one that is less satisfactory is surely much less than it otherwise would have been again. I'm don't misunderstand me. I'm not blaming any people for doing this people are human and they are going to take advantages of the array of the Alternatives open. All I'm saying is that from this point of view. I believe the unemployment figures over this recent period have been grossly overstating the fundamental problem of unemployment and the extent of potential expansion there is Another interesting question about that recession is the extent to which the sources of it have been misunderstood. There was a great deal of talk about the effect of the oil embargo and September 1973. But of course that's a question of passing the buck the oil embargo involved a quadrupling of the price of oil did impose a heavy cost on the United States and other countries. We had to pay more for oil. We were poorer the OPEC countries were Richard but it did not play a major role in my opinion in producing or a recession or in promoting inflation. The inflation that came on through 1973 and on into 1974 to the end of 74. Was primarily a reaction on the one hand to the release of the price controls which prevailed from 1971 to 73 so that the price index is again were understating inflation from 71 to 73 and overstating them from 73 to 75 and on the other hand a reaction to the extraordinarily expensive monetary policies that had been followed in earlier years the fundamental source of the recession in my opinion. Was the fact that fortunately in 1973 the Federal Reserve System did start to slow down the rate of monetary growth. We were off on an inflationary path that was heading toward an into art an untenable long-range situation. It was essential that that be slowed down. There was no doubt no way of slowing it down without a Slowdown in the rate of monetary growth and in the middle of 1973 the FED did move that direction unfortunately. It did in 1974 what it has done so many times before in when it goes from one extreme to the other. It goes too far to one side from one side of the road to the other side of the road and in the middle of 1974 it again stepped on the brake very sharply. and converted what had been an extremely mild recession into a somewhat more severe though still not catastrophic recession. I say that now. Partly to warn you against taking too seriously any predictions in anybody makes because if you go back to early 1970 if you can put your mind back to early 1975 or two late 1974 and recall the predictions of Doom and Gloom that were spread about the land about the danger that we were really back in 1929 to 33 that the world was going to collapse under us that we were heading for a Great Depression. It seems kind of silly now and the truth of the matter is it was silly then but it didn't seem so A second Factor about 1975 that I find interesting and to some extent puzzling. Is the fact that the expansion the beginning of the expansion which started in April by most accounts came sooner than most of us expected and came sooner than you could have expected from the change that had taken place in monetary policy typically and expansion comes from six to nine months after you have a shift from a low rate of monetary growth to a higher rate of monetary growth in this case. That shift came in January 1975. and the expansion came just three months later, which is the shortest delay in the record for the post-war period or for a much longer period as a (00:11:57) matter of fact (00:12:00) I have no good explanation for that. I only record the fact that we were very fortunate and very lucky and we got an expansion a lot sooner than we might ordinarily have expected. Another aspect of the expansion that I think is interesting and important from the point of view of what it tells us is that difference in the character of this expansion since April and the character of most expansions. Most expansions have been initiated by housing. And housing and investment expenditures have played a particularly large role in this expansion. The major factor that has been expanding has been consumption housing has continued extremely weak. Capital investment and formation has been extremely weak. And the main moving force in the expansion has really been consumption. I believe the reason for this. Has been the fiscal policy that was accepted as you know there remain a number of benighted Souls. Who believe that increasing a government expenditures or reducing Government taxes is the Magic Machine that will enable you to control the movements of income and of employment that if Government spends more and takes in in the form of things that are called taxes less that that somehow or other has an expansionary effect on the economy. Now it's a it's not it's a at first glance. It seems very reasonable after all the government spending more doesn't that produce employment doesn't that'll put people back to work. It is reasonable until you look at the next step and ask yourself the question. Where does the government get the money? If the government gets the money to increase its spending. By imposing taxes on people. Well, then obviously the taxpayers spend less and the government spends more. There's no net stimulus. but of course those who believe in fiscal policy as a major tool to guide the economy would immediately answer of course, but we have to have a deficit we mustn't raise the taxes very well. How does the government Finance the deficit? If it borrows on the open market as it has this past year to the tune of some 70 billion dollars. Well, then the people who lend the money to the government have less to spend or less to lend to others if people are lending money to the government. They can simultaneously be lending it on mortgages if they are lending money to the government. They can simultaneously be lending it to businesses to build factories. So if the government finances its deficit by borrowing from the public at large the effect of that is simply that the government spends the money instead of people spending the money on housing capital goods in the leg. This affects strikingly the character of the economic movement, but it doesn't affect its (00:15:29) Pace. (00:15:31) It's this fact in my opinion which accounts for the fact that the 1975 expansion has been predominantly a consumption oriented expansion because government spending and reductions in explicit taxes have mostly added to the incomes of consumers. It's gone either in the form of transfer expenditures or tax reductions to people who are going to spend the money on consumption, but it's been taken from the Capital Market where if the government hadn't borrowed it would have gone into housing or Capital formation. And that's why this economy this expansion has been predominantly oriented toward consumption. The other way in which The Government Can it can Finance its expenditures is by printing money. The printing press and that way of course, it is true. You have a government spending more and nobody else spending less. You have the magic of money creation. Whereby green paper dollars are printed and some government has money to spend and nobody appears to have less. However, that's monetary policy. That's not fiscal policy. You can have a perfectly balanced budget and increase the quantity of money rapidly or slowly or you can have a budget deficit Surplus either way. So that the fundamentally in my opinion fiscal policy has a trivial role to play in determining the movements of the economy as a whole. Although it has a very important role to play in determining the character of it. Let me digress for a moment on one thing that I think is greatly misunderstood. I think one of the greatest Shell Games in history is a business of going around and telling the public at large. We're going to increase government spending and work in a reduce taxes. How do you do that? Let us suppose to follow with President Ford's proposed budget for next year just to have some numbers. Let's suppose it's effective. Let's suppose government spends three hundred and ninety five billion dollars and it takes in in taxes 350 billion dollars. Where do you suppose the other forty five billion dollars come from do you suppose the Arab sheiks pay for that difference you pay for it. There's no place else that can come from the real cost of government is what government spends this big argument about the deficit is not an argument about who about taxes. It's an argument about the form of Taxation. If the government instead of paying for its goods and services by explicit taxes pays for it by printing money. Then you're going to be subject to the tax and inflation tax. That's a different form of Taxation. It's a concealed form of Taxation that no Congressman has to vote for but it's a very effective form of Taxation on the list if the government finances it by borrowing then you and I have now accumulated an obligation to pay higher taxes in the future to pay the interest on that Bond those bonds and the dead that's a indirect and implicit form of Taxation. There are really three forms of Taxation explicit taxation the kind of thing you write a check for in know about Inflation Taxation and the implicit tax on wealth which is takes the form of borrowing and that's what the argument is about not about taxes as I say that's something of a digression. The other hand another interesting phenomenon about 1975 and it will really lead me into the outlook for 1976 was a behavior of interest rates. In the post-war period interest rates short and long have tended to move along with the business cycle. They have tended root to rise during periods of expansion and to fall during periods of contraction in this year interest rate started out along that pattern beginning in April interest rates did start to rise and Rose fairly rapidly for a few months, but then along a little after the middle of the year around July or August interest rate started to weaken and in the last couple of months, they've come down substantially both at the short range and the long range that is a very abnormal unusual pattern for a cyclical expansion and it is leaves in my opinion a major puzzle for explaining the perspective for 1976. But before I leave 1975, I might say a further word about monetary performance the performance of our monetary authorities versus the rhetoric of the monetary authorities. The monetary authorities in 1975 as they have for 60 years. Profess to have been following a policy of moderation and steadiness. In fact they have as again they have for 60 years. I've been following a policy of erratic performance. Having having deepened the recession by essentially zero monetary growth from June of 1974 to January of 1975. They launched into an explosion from January of 75 to June of 75. They reacted and they overdid it monetary growth was abnormally rapid and then since June at least until January of this year and maybe on through the February. Monetary growth has been extremely slow. You get a little difference depending on which of the various monetary Aggregates you look at but not much for the first time in its history as a result of a concurrent house reckon current Congressional resolution. The Federal Reserve has been required to State its plans before Congress once a quarter. I can only tell you that any relationship between its stated objectives and it's actual performance is purely coincidental. And unfortunately, it has been very effective in choosing the form of statement of its objectives in such a way as to make it very difficult to keep it accountable because it's been revising them every quarter and starting over again a new although the resolution required it to specify its goals for a year ahead. It has in fact been stating them for a quarter ahead and changing them every quarter and as a result it's difficult to account for it. But in fact there is very little relationship even on that quarter to quarter basis between its announced objectives and it's actual performance. This is a technical matter that I won't go into I only tell you as an assertion and you will just have to take this at the moment on the faith. And in my opinion this does not result from any inability on their part to control the monetary growth, but rather from a continued use of obsolete. Techniques for doing so and the continued infatuation with fooling around with interest rates rather than concentrating on monetary growth. Now, what's a perspective for 1976. I remember a year and a half ago when we were all at a summit meeting that President Ford had in Washington on the problem of inflation. It's hard to remember that at that time. That was a major problem it that there were various forecasts for 1975 at that time and Paul Samuelson commented that you could cover all of them with with. No, I guess it was George Shultz who commented that you could cover all of them with a hat. Well, if you take the various forecasts for 1976, you can cover all of them with the dime. They are incredibly homogeneous every forecaster for 1976 says exactly the same thing. He tells you GNP and nominal terms is going to go up 12 percent six percent output six percent price. Now, there are minor variations some it's five and seven six and five five and five, but essentially that is the the forecast. Now I want you want to recognize that this closeness of the forecast tells you more about the forecasters than it does about the economy. 1976 ought to be a very easy year to forecast we have a historical record in which you tend to have business Cycles you go up and you come down and you go up and typically the easiest time to forecast is after you've passed the bottom when you're in the early stages of the expansion and all you have to do is extrapolate and say you're going to go on and that's why everybody has this same same result because we've come out it's clear because he the turnaround came in April. It's clear to everybody that we've come out of the recession. It's clear that were embarked on an expansion when you're going to keep on going pretty much as you've been going for a year and ordinarily the real problem would not come until 1977 or (00:25:25) so. (00:25:27) Now on the whole I think that the those forecasts are sort of probably in the right area, but I think there is at the moment enormous uncertainty. In fact about what the actual performance of the economy will be over the next six to nine months. And I I may say I am one of the forecasters who has been making these Caillou earlier kind of were cast. In fact, I published a forecast for 1976 of this kind in January 1975. So I have no reason to sneer at the consensus forecast being one of them myself. However, there has been a change in the circumstances which has introduced in my mind at a great deal of uncertainty. I mentioned the part of the problem a moment ago. The decline in interest rates in recent months. Another part of the problem is that you have been having as I mentioned also a very slow rate of monetary growth since June. now typically as I said before on the average, it takes them six to nine months before a change in the rate of monetary growth has its effect on the economy. We hold money as a shock absorber and for a time we don't react to what goes on you have to have a cumulative discrepancy before it has a real effect. Now if therefore that slowdown is going to have its effect of the kind is it has it has had in the past then you want to expect a distinct tapering off in the rate of monetary expansion beginning about now and you ought to have not necessarily A relapses into recession, but at least a very distinct pause in the expansion the way of had some episodes like this before the there was a article once written called the pause that refreshes which dealt with a similar pause in 1962 after exactly a similar slow down and monetary growth. Whether this will happen or not is not certain. There is a lot of random element in the economy. There are forces other than monetary forces at work. You do have the momentum of the expansion and expansion once it gets underway creates a lot of inertia and a lot of momentum. So I am by no means certain that this is going to happen. I only warn you that I think that there is a very substantial possibility that instead of proceeding along this smooth line of something like a 6% rate of growth of real output in a 6% rate of growth of prices. We will move in the next six months to a much more nearly a sidewise movement in output As to inflation we have come down sharply in the rate of inflation. Let me digress again to show how easily we change our views and adjust ourselves to the mediocrity of our circumstance in 1971 when Richard Nixon felt impelled. I am sorry to say to impose price and wage controls in order to stop an intolerable inflation. The rate of inflation was running at four and a half percent a year. Today, we are all congratulating ourselves on having whipped inflation because it's down to a mere 6% or 7% a year. At any rate the decline from something like 12 to 6 or 7 has undoubtedly played a role in a decline in interest rates, but it's a real puzzle as to how to combine. That decline in the interest rates with a continuation of expansion and with a slow rate of monetary growth and thus arising velocity. There are two possible interpretations and two possible scenarios one is that this is a temporary phenomenon that it's an aberration. And that we're going to write over it. Now, that's possible. There's as I say fortunately this is not a world of certainty and so world of great uncertainty and there are lots of random elements in this and there's more at work than anyone series or one magnitude. So it may be that we will write over it in the expansion will continue especially this would be likely if the Federal Reserve were to be changing its policy and to start expanding the money supply at a more rapid rate and there are some signs that it may be doing that in the past month month and a half. There has been a little sign of a move in that direction alternatively as I say, we will not be lucky and then we will have a slow down the economy will slow down output will grow it 012 percent for the next six months unemployment instead of continuing its downward March will turn around and start to go up recorded unemployment. And in that case, I think that raises extraordinarily serious problems, not for 1976 alone, but most for 1977 and 78 and that brings me to my longer-term perspective. This is an election year as I need not remind you. There is already a congress which is champing at the bit to enact measures which can be which can be labeled as promoting employment. I have said that carefully and this home state of Senator Humphrey. Be of God God because of course one of the leading measures of this kind is a humphrey-hawkins bill which in my opinion would be utter disaster. I say it is labeled as promoting employment because it does no such thing. It is a bill to create public jobs government not public governmental jobs. But again, it's the same thing as what we were talking about earlier. If you look at the surface of it you create jobs, but if you look behind it, where do you get the money to create those jobs? If you take it from taxpayers and tax payers throw the same number of people out of work if you take it by borrowing on the market. Well, then you employ people in government jobs, instead of employing them building houses and factories. If you print the money well, then you in flight and then you could do that without all of this folderol. The appeal of all such measures is the same. It's that under such a measure the people who get new jobs know that they owe him to the measure while the people who lose the jobs do not know that that's the reason they lose him. At any rate as I say congress is champing at the bit for this so long as unemployment declines as the economy is in a expansion. Given also the changed mood of the public at large. I believe that that will not those measures will not really pass or command but let us suppose that you had a Slowdown in the economy that unemployment started to rise again in the midst of this election year. I think the pressure for measures of that kind would be irresistible and you would end up with a flood of spending measures on the part of Congress and you would end up with enormous pressure on the Federal Reserve to finance a goodly fraction of them by printing money. And I think the result would not be manifest in 76 these things take a long time to express themselves. The results would be manifest in 77 or 78 in the new burst of inflation having come down to something like six six and a half percent which is where we are now and where we're likely to stay at the moment 476 you would then find that by end of 77 or early 78 you were back in the 12 or 15? Eighteen percent range with respect to inflation and you will once again be up against the Dilemma we faced in 73 and 74. We may not be able to avoid that in any event. If you look at our longer-term experience in the post-war (00:34:05) period (00:34:07) that period has been a roller (00:34:08) coaster. (00:34:12) For a variety of reasons the typical path has been that we engage in an expansion in the course of the expansion inflation heats up a little this leads to pressure to do something about the inflation. One way or another we step on the brake and try to stop the expand inflation. Create something of a recession. After the recession the rate of inflation slows down there is then great pressure by God, you've got to pour in the money. You've got a poor in the fuel to do something about the recession and we react much more quickly to the recession than we had formerly to the inflation and you're off again on another uptick and the characteristic feature of each of these are episodes has been first that the inflation rates at each bottom or higher than at the preceding bottom. The inflation rates at the top are higher than at the preceding top. So it's a roller coaster, but it's going up a slope. Now that's been the experience not only in the United States. I may say but in many other countries around the world. another characteristic feature is that although in the short run from the point of view of a year or two the movements in prices and inflation and an unemployment have been an opposite direction although over the short period Arise in the rate of inflation has been accompanied by a decline in unemployment over the period as a home. The rising average level of inflation has been accompanied by a rising average level of unemployment the widespread belief that somehow or other you have a choice between inflation and unemployment is false. You have for a very short period and that brings us back to a still longer-term Outlook. The fundamental developments in this country show a distinct break in the early 1930s. Corresponding to a change in the philosophy of the citizens of this country about the role of government from a belief that government is a referee and umpire and that people individually are responsible for themselves to the belief that government is big brother and that people are not responsible for themselves. But Society is responsible. This is dramatically reflected and what's happened to government spending as a simple index for the hundred and fifty years before 1929 total government spending in the United States. Never exceed a 10 percent of the national income. And only one third of that was Federal 2/3 with state and local total federal spending in 1929 was 3 percent of the national income. Today total government spending is something like forty percent of the national income and two-thirds of it is federal 25 percent Federal roughly 15% state and local that's a tremendous shift over a period of 40 45 years and it is the underlying factor that really underlies this whole pattern of expansion. It is tended to force higher and higher rates of inflation for two reasons. First for the one I've already implied the responsibility which government has assumed for maintaining a high level of employment the tendency to react more rapidly to unemployment into inflation has led to this roller coaster but second. The more the larger the expenditures of government the more resistance there is on the part of the public to paying openly and above board for the taxes of government for government taxes. And therefore the more pressure there has been to resort to inflation to an indirect means of financing it. Inflation finances government in three different ways in the first place. It raises ordinary taxes. It pushes people up into higher tax (00:38:45) brackets (00:38:47) the level of personal income taxes today. In real terms is at a level that no member of Congress would explicitly have voted for it. But it's gotten there not because people voted for it. But because you could you had inflation which pushed people up into those brackets. I was very much interested by a suit that 44 judges have just filed that their pay has been unconstitutionally reduced despite the Constitutional provision against reducing the pay of judges because their pay is stated in dollars and prices have been rising and therefore their real pay has gone down now, they are a hundred percent. Right but we as taxpayers have the same suit our taxes have gone up according to the Constitution only Congress May enact taxes. But the present level of taxes have not been enacted by congress. Not at all. They have been imposed on us by the fact that a dollar is not a dollar. It's the amount what you can buy with and in the amount you can buy with it as shrunk inflation in the second place leads to revenue simply by the printing of money, which gives you revenue and in the third place it leads to revenue by paying off debt IE by imposing a tax on anybody who was so foolish as to lend to the federal government. There is no bucket shop operation in my opinion that is more reprehensible than the way in which the US government has sold savings bonds in the past 30 years. They are. The bonds are offered for sale with the promise that they will enable you to provide for your future that you will earn income on them. The fact is that the interest you have received on it has been less than the rise in prices over the interim so that the buying power of what you got back as in the main been less and the buying power of what you spent for it and to add insult to injury you've had to pay taxes on this false interest. At any rate. I'm getting away from my main point, which is that that's the direction we've been moving and that's the real threat from the long-run point of view. If we continue in that room on that route. It is clear that the outcome will on the one hand be Financial catastrophe and on the other hand a loss of freedom. Well, I've stayed longer on this long-term out on this Outlook than I had intended. So let me just say a few words before I close to make my title and honest title about the outlook for the dollar abroad. The most important thing to say there is that since 1973. We have had a fundamental change in the International Financial Arrangements a changed that occurred as I say intermittently from 1971 to 73 but has finally been ratified formally just this past month in Jamaica at the meeting of the international monetary fund that change has been from a system of exchange rates under the IMF and the Bretton Woods agreement a system of exchange rates, which were supposed to be held rigid fixed price fixed so that there was a stated official price of the dollar in terms of the pound sterling of the dollar in terms of the mark of the dollar in terms of the Frank and so on that was a Bretton Woods system and that system is finished. Fortunately, we now have a system of floating exchange rates a system in which the price of the dollar in terms of various currencies. Can move from day to day or week to week or month to month in accordance with Market changes? Unfortunately, it is not a completely freely floating system. now under this system You cannot talk about what is the future of the dollar? In any single way. It depends on what country you compare it with. Are you going to talk about the dollar vis-à-vis Germany? Well, then the price of the dollar in terms of March will tend to go up because Germany is engaging in a lower rate of inflation in the United States. Are you going to talk about the price of the dollar in terms of the yen? Then the price of the yen is going to go up in terms of the dollar because Japan of all countries has done the best job of bringing its inflation under control and of getting its monetary system in order. It's done a remarkable job for it made bad mistakes in 1971 two and three which led into a large inflation and inflation that ran up above 20 odd percent and it's now brought it back down to its stance typical level in which wholesale prices are zero and cost of living prices are about six or seven percent. Why are you going to talk about the price of the dollar values vis-à-vis the pound sterling? Well in the dollar is going to price of the dollar is going to get more and more expensive in terms of the pound sterling that is a pound sterling is going to be cheaper. The pound sterling is going to depreciate why because Britain has had a very much more rapid rate of inflation in the United States the rate of inflation and Britain was up to 25% It's now down in the 10 12 percent range, but that's almost surely a temporary phenomenon a year from now and we'll be back up in the 15-20 percent range. The United States inflation may go up but it will still be lower than the then the British. over any long period as this portrayal shows the price of the dollar in terms of foreign currencies is going to depend critically on relative rates of inflation those countries which inflate more than the us will have currencies that will depreciate relative to the dollar. The lira is a good example recently. The pound sterling has been a good example over the past year those countries which inflate less rapidly than the us will have a price of their currency that will rise in in in terms of the dollar that's the case has been the case of Germany and Switzerland in short what I am saying to you that is in the world of floating exchange rates. It's not very meaningful to talk about the future of the dollar unless you do it in respect of a particular currency. Well, I've talked longer than I intended. I want to have a little time for some comment and reaction from the audience and let me end here. Thank you. (00:46:01) Dr. Milton Friedman in an address at st. Cloud State University in a question and answer session following the address. Dr. Friedman was asked if excessive wage demands by labor didn't push costs up in the early 70s leading to the high inflation of 1973 and 74 (00:46:18) why inflation is made in one place and one place only and that's Washington. It's made nowhere else. But of course nobody is willing to take responsibility for the bad things. He does and Washington will tell you know inflation is not made in Washington. It's made by the greedy trade unions or by the grasping consumers or by the selfish businessman. Now, there's no doubt the trade unions are greedy. There's no doubt that consumers are grasping. There's no doubt that business men are selfish. So are we all but no one of them has a printing press. What you have is an appearance of cost-push and let's look at the appearance. Of course push a little is he part of the reason I realize how difficult it is to persuade you of this because there is no business man. I have ever met who isn't persuaded that the source of inflation is to be found in increases in wages. No businessman who has ever thought otherwise and the reason is very simple and he is right from his point of view, but he's wrong from a national point of view. The point is that all of the interesting propositions in economics have the following characteristic that what's true for the individual is the opposite of what's true for everybody together. Now that's a very general phenomenon. If one person in this room tried to get out of the room in two seconds, he would have no difficulty but suppose everybody together try to get out. You would have an awful mess now go back to the wage push here. You're a businessman from your point of view. Why do you have to raise prices? Because your costs go up. Of course, you don't want to raise prices. You'd rather sell more Goods. If your costs could be kept down. So from your point of view as a businessman you have an increase in wages. You have an increase in materials cost you have to raise prices. That's true. But you have to ask yourself. Where does the rise in prices? Why do why do wages go up? Where does that come from and from a national point of view? The reason why you have to pay higher wages is because somebody is trying to hire your workers away from you. Somebody is trying to buy more materials and that's comes to you in the form of a rise in cost. And that's the way the overall pressure is transmitted. Now the exception you get to that is during a period such as 1974 5 when you have a carry over a hangover from an earlier period of Of excessive demand you have excessive demand. It tends to pull up the prices of many things faster than it pulls up wages and cost you have long-term contracts. The Trade union has a three-year contract and what tends to happen is that whenever an inflation gets started. These cost prices are wages tend to lag behind. And then of course there is great pressure for him to catch (00:49:36) up (00:49:39) and this carries over into the period beyond the period of the excess of demand. So you have the characteristic feature that the inflation and both wages and prices always continues on into a period of recession. and it looks as if it's cost-push, but what it really is is the delayed effect of the earlier period of demand expansion if you look at the statistical facts, you will find That if you compare the wage rates of the let me emphasize I am no friend to trade unions. I think trade unions do an enormous amount of harm. I think they have done an enormous amount of harm to workers. I think they are a major source of a denial of opportunities to low-skilled workers to get jobs. The Construction Industries are an extreme example, but one thing they are not responsible for his inflation in that they are simply the reactors they are reacting to what's going on. If you compare the wages of organized labor with not organized labor, you will find that in the early stages of inflation the wages of organized labor rise less rapidly than the wages of unorganized labor they fall behind and then as they discover what's happening, they catch up and during this catch-up period it looks as if there is a source of inflation is if you had caused push (00:51:13) It won't wash (00:51:14) there is no way whatsoever in which you can explain inflation in general as a result of (00:51:19) cost-push Professor Friedman was asked to elaborate on his idea that some payments be indexed that is related directly to the rate of inflation (00:51:29) the place where I have always been most concerned and most desirous of seeing indexing enacted is in case on the one hand of governmental Taxation and on the other hand of governmental borrowing. I think that it is there is an enormously strong argument for saying that our personal income tax system and our corporate tax should be adjusted. So that inflation does not automatically increase the tax rate. The present situation is that if prices rise by 10% and if your income just matches at if it goes up by 10 Your personal income tax will on the average go up by 15% and that's because you're driven up into higher brackets and your personal exemptions are were worth a smaller amount similarly on the corporate tax corporations are permitted the duct as depreciation. only the original cost in dollars, but that won't enable them to replace that Capital currently at present prices and the basis for depreciation allowances ought to be adjusted for inflation again, if you bought a house For $10,000 10 years ago and sell it now for $20,000. You haven't made a thing because prices have doubled over that period And yet under the income tax law you will be regarded as having a capital gain of ten thousand dollars. So the base for capital gains ought to be (00:53:10) indexed (00:53:13) now similarly. I believe that the government borrowing should be indexed in such a way that you are when the government borrows from you. You are sure of getting back at least the same purchasing power that you loan. Those are the two most important places in the two places where I would have compulsory indexing it's worth noting that you now have indexing in a good number of cases in particular. For example, I was amused to discover that the Congress which knows where its own bread is buttered. Indexed the indexed the amounts that were to be provided under the cup under the campaign financing act. Those are adjusted for inflation automatically. So you have indexing now Social Security payments are indexed and they should be there's nothing wrong the present method of indexing Social Security payments is technically fallacious. It indexes twice. It makes an overcorrection, but you should have correct indexing in general. I think all governmental transaction should be index now a special reason for that is because government produces inflation and therefore it ought of all people to be required index its obligations beyond that. I think it would be highly desirable to have a spread of indexed mortgages particularly in the housing and Thrift industry. I think it's very important to have this wherever you have long-term contracts. I think it would be desirable to have indexing but there I would have a strictly voluntary not compulsory. (00:54:48) And finally Friedman was asked to comment on the charge that the United States is consuming far more than its share of World Resources and is exploiting underdeveloped Nations. (00:54:57) The United States growth has not been at the expense of the rest of the world on the contrary. It has promoted the growth of the rest of the world. I do not have any Obsession for growth in the United States because on the home individuals in the United States have been free to do what they more or less wish. But if I were an economist in India, I very likely would have an obsession with growth. I think that the people of India would like to have a higher standard of living than they now do and they are prevented from having a higher standard of living than they now do by the fact that their government in New Delhi has controlled them has put them in Chains has prevented a tremendous potential for growth. For a higher standard of living from emerging in India now has the United States through its growth kept Indian down nonsense absolute absurdity the effect of the growth of the United States and other Western countries has been invariably to provide technology and capital doing nabal the Carrera the underdeveloped countries of the world to grow the places. If you look around the underdeveloped countries of the world, they have all benefited from contact with the West not the reverse. There are parts of Africa where the wheel was had not been invented in the 1890s and in every single case of every country you can look at which is come into contact with the growing West the standard of life and the level of living of the people in that country have improved the great obstacle to the Improvement in their well-being has not been the growth of the West. It has been the spread of ideas such as those you're expressing to those Trees that's been the great obstacle. It's been the belief in the spread of ideas from the West that those countries are to engage in central planning and central control rather than allowing individuals freely and voluntarily to express the to exploit their own capacities that has been an obstacle in my opinion to the growth of those countries. You are saying go ahead. percentage of the world's resources we are using right now the percentage of the world resources that we are using is Zero we are not using World Resources. We're producing where recombining user you World Resources this kind of foolish notion that somehow or other there is a limited amount of food in the world. And if the American farmers grow more somebody else is eating less. That's absurd the situation is we grow more in not only do we grow for ourselves, but we feed half the world if you come to such things as oil minerals and the like (00:58:00) those (00:58:02) are useless unless they are found and discovered and exploited. We the United States has been a very efficient has been a very prosperous a very effective country because we have relied primarily on free enterprise and we have exploited a great deal of the resources in this country and elsewhere in those countries where we have discovered their resources. They have benefited from our discovery of it the idea that somehow or other the world is going Brought to a halt because there isn't going to be enough iron or enough oil and so on is really not very good economics suppose for a moment. The first of all people have a gross misconception about the role of Natural Resources per se of the United States total national income less than ten percent represents the value of raw materials the great bulk of our income represents the value of people of ability of productivity of manufacturer in the second place and so far as any resource tends to become scarce the effect of that is its price tends to rise and that provides an incentive for people to a to discover Alternatives and be to recycle the existing stock almost all of the major resources, like iron steel aluminum are destroyed their changed in form and they are capable of being Recycling and given the appropriate economic incentive. They will be recycled. So far as time will tell within the next decade who is right in terms of this. You are quite right. (00:59:54) Dr. Milton Friedman professor of Economics at the University of Chicago in a recent appearance at st. Cloud State University.

Funders

Digitization made possible by the National Historical Publications & Records Commission.

This Story Appears in the Following Collections

Views and opinions expressed in the content do not represent the opinions of APMG. APMG is not responsible for objectionable content and language represented on the site. Please use the "Contact Us" button if you'd like to report a piece of content. Thank you.

Transcriptions provided are machine generated, and while APMG makes the best effort for accuracy, mistakes will happen. Please excuse these errors and use the "Contact Us" button if you'd like to report an error. Thank you.

< path d="M23.5-64c0 0.1 0 0.1 0 0.2 -0.1 0.1-0.1 0.1-0.2 0.1 -0.1 0.1-0.1 0.3-0.1 0.4 -0.2 0.1 0 0.2 0 0.3 0 0 0 0.1 0 0.2 0 0.1 0 0.3 0.1 0.4 0.1 0.2 0.3 0.4 0.4 0.5 0.2 0.1 0.4 0.6 0.6 0.6 0.2 0 0.4-0.1 0.5-0.1 0.2 0 0.4 0 0.6-0.1 0.2-0.1 0.1-0.3 0.3-0.5 0.1-0.1 0.3 0 0.4-0.1 0.2-0.1 0.3-0.3 0.4-0.5 0-0.1 0-0.1 0-0.2 0-0.1 0.1-0.2 0.1-0.3 0-0.1-0.1-0.1-0.1-0.2 0-0.1 0-0.2 0-0.3 0-0.2 0-0.4-0.1-0.5 -0.4-0.7-1.2-0.9-2-0.8 -0.2 0-0.3 0.1-0.4 0.2 -0.2 0.1-0.1 0.2-0.3 0.2 -0.1 0-0.2 0.1-0.2 0.2C23.5-64 23.5-64.1 23.5-64 23.5-64 23.5-64 23.5-64"/>