Regional President Speech

Part II Remarks Harvard Alumni Group November 1, 1974 I. Nature of Inflation A. Let me now turn to the question about the nature of the inflation ill we're trying to ~ure and the.appropriateness·of the remedy. The main thrust of the Administration ~gains.t inflation is back to· the· "old time religion," ~hat is, balanced budget and tight money._ Critics contend that the old time religion makes sense for the old time ~nflation--ex- cess demand inflation. But they say, ,we don't have·excess demand.in- flation, we have cost-push inflation, food inflation, and Arab inflation. The old time religion approach·won1t ·cure these types of inflation; it· will only cause a housing slump and unemployment. There· is an ounce of truth to this view. The old time religion should be modified, but itS· whole doctrine shouldn't be tossed out in the current fight against in- flation. B. I find it useful to· break inflation into two parts: basic inflation and extraordinary inflation. There is an old truth. in which. econom~cs says that basic inflation cannot be sustained for long periods without· the money to finance it.· Excess demand can't prevail without the money to finance it; cost-push;can1t prevail without the money to finance.it; and so on. Extraordinary inflation, on the other hand, is caused by sharp increases in particular· pr~ces outside the. n~rmal.- wo_rkings of the economy, e.g. crop failures in the mid-west, Arab.oiJ: cartels, et·c. These special events come and go and.have throughout our history. The striking of the current period is that we have so many extraordinary featu~e occu~ Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ... -2- rences at once on top of an already sizable monetary inflation. c.: Some estimates have been made of how much of the·.'double dig~t: inflation .. - - ... \...... ".:" .... is monetary induced; or ·b,&sic, and .how 'much is extraordinary~ A. eru,d e . ' .. 1 I - -- -- - - ------.. ' (guesstimate._ is that abouFh~lf is basic,· and' half is extraor-dinary. -1~:,:_-. ----- ---- - -4 :,._ ------ other words, without the harvest problem and ail problem~·we'd-stil.l have a " .. . / . basic inflation rate of 6 or 7 percent~ Some economists would put ~i-t- .a bit ' ' higher. But the half and half split is probably not a bad guess. D. This kind of analysis tells me, therefore, that we cannot throw out the old tools i;or fi'ghting inflation. We hav~. to modify them, to be sure; but the · ~· fight against inflation, to be must include a program moderating su~cessful, fo~ . the growth in money and keeping the federal deficit within reasonable bonds. II. Strategy Against Stagflation: A. On top of the mixed inflation bag we face, we are also in a reeession, which I've indicated, will probably get worse before it gets better. So, not only do we have to fight basic and extraordinary inflation, we also have to .iight rising unemployment. There may have been a period in our history when we•ve faced these seemingly parad6xical problems simultaneously, but I do not re- call them _from my studies of economic history.· So, we really do have a unique set of problems which are crying for_ a unique set· of. . answers--:indeed, if -such a set exists. We also have to be realistic_in our approach, we can~ot say if we do this·or.that-·we~ll solve our problems-·.in t~~ .. long-run because in the.-:-: .. long-run we're all dead. Mank~nd exists in seri_es of short-runs. So, at a - minimum, we. have to find policies which make sense for the long-run and can. still be lived with :in·. the. ~shart"!'.run, B. Having said that, let me hasten to add I am no oracle--! do not have the final answer to our economic problems, But, there are a few general thoughts I'd like to leave with you. 4r : Digitized for FRASER http://fraser.stlouisfed.org/ ! : Federal Reserve Bank of St. Louis -3- 1. There are no ideal, quick, painless cures. There will have to be trade-offs. 2. The strategy will have·t~ include some lessons from the old economics and some experimentation with "new" economics. 3. Economics and politics are bedfellows, ;·~~r better. or worse, and it makes no sense in the policy.area to talk about one and not the other. 4. Some sort of social compact will have to be st·ruck among the various elements in ou~ society--~abor, business, rich, poor, middle class, etc. C. Let me be more, specific about the ingredients of an anti-stagflation policy. 1. Will have. to increase productive capacity--fro~ oi~ to agriculture to building materials. 2. Restrictive practices which add directly to inflation will have to go--milk prices, artifically high .construction costs on public projects, et~. 3. The will have· to be more insulated from the burdens of disa~vantaged unemployment and inflation. 4. Some kind of wage-price guidelines--less than·. full controls but more than have.to emerge. patriot~c-pronouncements--will · 5. will have· to be slowed very, very gradually over a Growth'i~ mon~y period of several years. 6. Fede~al budget will haye to become ~ore flexible as an ·instrument of micro policy..:.:'7:comin~f to the aid of housing, for example, more force- , fully and quickly than has been the case. Federal budget will also have to become more flexible as an instrument of macro policy- shiftin.g from deficit to surplus or vice versa ,more quickly in order to be more responsive to changes in broad economic condition~. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis "I II• ' l! ~· f ~' ! 1 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -4- III. Wrap Up A. Will we do any or all of these things? ·My guess is we'll do some and. some we won't·.·· The· President~s pregratn .. has··some·of this, but not enough.- ,·I:-thi$ we' 11 be hearing more from him on the economy. B. So, we'll likely muddle.through the next several years--earning some ·high marks from historians and earning some bad ones as well. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

David P. Eastburn (1974, October 31). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19741101_david_p_eastburn

@misc{wtfs_regional_speeche_19741101_david_p_eastburn,
  author = {David P. Eastburn},
  title = {Regional President Speech},
  year = {1974},
  month = {Oct},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19741101_david_p_eastburn},
  note = {Retrieved via When the Fed Speaks corpus}
}