Regional President Speech

SK DRAFT (1) SILAS KEEHN REMARKS DETROIT CHAPTER OF THE FINANCIAL EXECUTIVES INSTITUTE DETROIT1 MICHIGAN APRIL 30, 1984 1. INTRODUCTION A. WARM WORDS OF WELCOME/GRACIOUS INTRODUCTIO~_ .. ~~- ~~I', (jle.,~ ~. B. A PLEASURE TO BE WITH YOU PARTICULARLY UNDER CURRENT 1. MY HUNCH IS THAT HAD I BEEN HERE1 SAY1 TWO YEARS AGO -- MY RECEPTION MIGHT NOT HAVE BEEN SO FRIENDLY .S. ECONOMY AS A WHOLE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/27/84 PAGE 2 B. DETROIT AND THIS CHAPTER OF FINANCIAL EXECUTIVES /o..t INSTITUTE IMPORTANT TO OUF{ B.A~ . : ;-_ ~. .r ~ ~ "°""""'·,~~~ \\~ ~~ ~ J),_sv,---, 1. DETROIT BRANCH r d--J,·--.J~ 2, BOB BREWER1 EXECUTIVE VICE PRESIDENT-FINANCE K r~RT1 ON BOARD OF DETROIT BRANCH 3, JOHN SAGAN1 VICE PRESIDENT-TREASURER FORD MOTOR COMPANY1 ON BOARD OF DETROIT BRANCH FIRST1 THEN ON CHICAGO BOARD1 -SERVED ~S DISTINGUISHED CHAIRMAN 4. IPEt--tOl~B/fRED DOMINICK <.).p, - ~ ~ 0-- t ~ 5. DETROIT IMPORTANT TO OUR BANK AND I HOPE WE ARE IMPORTANT TO YOU 11. LET ME START WITH QUICK LOOK AT ECONOMY IN A BROAD SENSE A. Now IN SIXTH QUARTER OF REAL GNP GROWTH SINCE LOW IN LAST QUARTER OF 1982 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/27/84 PAGE 3 1. ALTHOUGH GROWTH BEGAN'SLOWLY., IT HAS AVERAGED ALMOST 6-1/2~{/4% BETTER THAN FOR THE DECADE OF THE 1970S 2. AND THOUGH THE ECONOMIC DEVELOPMENT MAY STILL PERHAPS BE SOMEWHAT UNEVEN., VIRTUALLY ALL SECTORS DOING BETTER THIS YEAR THAN LAST A. Nor AS WELL AS PREVIOUS PEAKS B. BUT STILL BETTER 3. VAST MAJORITY OF OPINION ANTICIPATES THE GROWTH RATE TO CONTINUE STRONG THROUGH THE END OF THIS YEAR AND INTO 1985 A, I WOULD AGREE~ HITH SOME CAVEATS WILL COVER IN A MOMENT B. THE NARROWER INDICATORS OF ECONOMIC ACTIVITY VERIFY THE STRONG SHOWING OF THE GNP MEASURE 1. INDUSTRIAL PRODUCTION IS 19% ABOVE ITS LOW POINT - 4% ABOVE ITS PREVIOUS HIGH 2, EMPLOYMENT IS 5% ABOVE THE DECEMBER '82 LOW - 3% ABOVE THE PREVIOUS PEAK Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/27/84 PAGE 4 3. HOUSING STARTS AT THE 1,7 MILLION LEVEL, WHILE BELOW EARLIER RECORDS, ARE STILL ABOVE MOST FORECASTS FOR 1984 4, MOST OTHER INDICATORS STRONG -- SIGNALING CONTINUED STRENGTH AT LEAST FOR THE FORESEEABLE ~ ~ y1~R~ ~- C. ECONOMY CHANGING CHARACTER 1. RECOVERY PHASE BEHIND US A, WE HAVE MOVED INTO THE EXPANSION 2, EXTENDED PERIOD OF EXPANSION SIMILAR TO 1961-69, 1975-60 WITHIN OUR GRASP A, INFLATION, NOT IDEAL/ LONG-TERM GOAL -- STILL ZERO INFLATION B, REMIND ABOUT VERY SIGNIFICANT PROGRESS 1979-80 TO 1983 (1) 1979-80 ANNUAL RATES 13--13-1/2% ~ 6' ~ i) ...... ( 2) QUARTERLY O't-l ,/J-, -c...-r, Hi {3) 1983 - 3.2% Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/27/84 PAGE 5 E. DESPITE THE GOOD NEWS1 SOME RISKS OF A NATURE AND MAGNITUDE THAT WE HAVE NOT FACED BEFORE: 1, RETURN TO INFLATIONARY ENVIRONMENT A, WAGES -- CONTRACTS 19831 3 - 4% -- (1) MAY DRIFT UPWARD B, CRITICAL IMPORTANCE OF CONTRACT NEGOTIATED HERE IN DETROIT THIS SUMMER r ( (1 ~ ) > WILL jET A PATTERN ~- _ ~~ cl> - ,6._~ " ,... ~ ~ ~ '1v ~ ~ ~ , , .J.!v ~ b (cti'c.t &. - - • ,- C, PRICE -- CAPACITY UTILIZATION INDEX ALMOST 81% .. (1) SOME INDUSTRIES FLAT OUT -- PAPER1 PAPERBOARD1 CONSTRUCTION MATERIALS1 PRIMARY ALUMINUM1 COMPUTER1 COMMUNICATIONS (2) OPPORTUNITY FOR PRICE INCREASES (3) GROWING RISK 2, INTERNATIONAL DEBT PROBLEMS 3, THE CURRENT LARGE SIZE OF THE FEDERAL DEFICIT AND THE LIKELIHOOD OF ITS CONTINUATION FOR THE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/27/24 PAGE 6 INDEFINITE FUTURE, THIS PROBLEM IS ONE THAT OUR COUNTRY HAS FACED BEFORE AND HAS SOLVED A, THOUGH LARGE, IT CERTAINLY IS A SITUATION THAT IS WITHIN OUR ABILITY TO CORRECT B, THE MAJOR RISK TO THE CONTINUED EXPANSION .. C, ONE I'D LIKE TO FOCUS ON TONIGHT w-·s ,,a..·~,·,., r.. ~ ~ ~ IHI GoVERblW=wT SPEP4DIN ND IA DEFICIT •t- ...+--: • L·~ c...J k g ;.( "V""? 'J'~ A. How BIG IS lJIE DEFICIT? J\ l, ROUGHLY, THE CONSENSUS IS ABOUT $200 BILLION A YEAR AS FAR INTO THE FUTURE AS ONE CAN FORESEE, . . UNLESS CORRECTIVE ACTION IS TAKEN 2, ALL THESE FORECASTS MAKE A LOT OF ASSUMPTIONS - - A, GNP GROWTH - ~ ~ ~ ' r ~ ~U"'t.... ~.1t:._E OF MILITARY OUTLAYS a_.{ C, INFLAliON ~ ~ r:1'----~ .I 3, OPTIMISTS SEE SOME DECLINE, THE PESSIMISTS SEE GROWING LEVELS OF DEFICITS -- ALL AGREE THE NUMBERS ARE MASSIVE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/27/64 PAGE 7 A, ABSOLUTELY UNACCEPTABLY HIGH (1) BUT VERY FEW CONSTRUCTIVE SUGGESTIONS B. WOULD LIKE TO START YOU THINKING IN ANOTHER FRAMEWORK 1. WHETHER THE NUMBER IS $20Q BILLION IN 1989 OR $30Q BILLION IS NOT THE KEY 2. WHAT MATTERS IS HOW ALL.THE NUMBERS -- TOTAL GOVERNMENT DEBT, BORROWING, SPENDING AND TAXES COMPARE WITH GNP, OUR TOTAL OUTPUT A, THIS IS THE CRITICAL RELATIONSHIP - 3,. ... ALSO IMPORTANT, THE SHAR,i +MAT ·G&\'ERNMeN+ -BORROWING TAKES OUT OE TIIE TOIAI POOL OF INVESIAAI E EJJNDS %.. ~--A._~ Gr ffiWD I NG OU I - I f lS"-GtCUI~~-IN~ • _ , .c/v-·~--~·"-~ # ___. c;_ \I -- l""-t .V'-"'l -~ ------·---c, LET ME GO BACK AND PUT ALL OF THIS IN SOME HISTORICAL PERSPECTIVE -- STARTING WITH THE FOUNDING OF OUR COUNTRY 1. FOLLOWING THE REVOLUTION AND THE ESTABLISHMENT OF THE CONSTITUTION, THE GOVERNMENT GENERALLY RAN SURPLUSES UNTIL THE WAR OF 1812. THE DEBT CARRIED FORWARD FROM THE REVOLUTION AND THE PERIOD OF THE .. ·- CONFEDERACY WAS ALMOST HALVED DURING THAT TIME Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis /84 . 1/ 2. AFTER THE WAR OF 18121 WHICH WAS FINANCED ALMOST ENTIRELY BY BORROWING1 THERE WAS AN UNBROKEN STRING OF SURPLUSES. THE NATIONAL DEBT WAS ELIMINATED AND SURPLUSES WERE GIVEN TO THE STATE GOVERNMENTS IN 1835 AND 1836 3. THIS WAS IMMEDIATELY FOLLOWED BY LARGE DEFICITS DURING THE PANIC OF 1837-38 AND DURING THE WAR WITH MEXICO, HOWEVER1 THE GOVERNMENT GENERALLY HAD ~~~---- . SUR?L~Sf_S IN ALL OTHER YEARS UP TO THE CIVIL WAR, ~~ (/,_ ~ THE END OF 18601 TIIE FEflEl'(AL nEB I WAS BELOW ~ $- ~--aea·M 0\. - THAT OF 1--850 . ~ ..6J._ ~~ 4, LIKE EARLIER WARS1 THE CIVIL WAR WAS ALMOST ENTIRELY DEBT-FINANCED, IN THIS PERIOD "BILLIONS" FIRST ENTERED THE VOCABULARY OF FEDERAL FINANCE, 1865 OUTLAYS EXCEEDED $1-1/4 BILLION1 THE DEBT PEAKED AT $2.75 BILLION IN 1866 5, BEGINNING IN 18661 THE GOVERNMENT HAD A SURPLUS IN EVERY YEAR UNTIL 189g1 AND THE DEBT WAS LOWERED BY 65% TO JUST BELOW A BILLION DOLLARS, AFTER THAT1 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis THROUGH 19151 THERE WERE 14 DEFICITS1 IN 23 YEARS DEBT GREW ON AVERAGE BY ABOUT 1% A YEAR 6. WORLD WAR I WAS ANOTHER WAR FINANCED MAINLY BY BORROWING. TOTAL DEBT GREW FROM $1 BILLION IN 1916 TO $25 BILLION AT THE END OF 1919 7, FROM 1920 THROUGH 1930 AN UNBROKEN STRING OF SURPLUSES RESULTED IN REDUCING THE DEBT BY OVER A THIRD TO ABOUT $16 BILLION, THIS WAS REVERSED IN 1931 WITH A LONG SERIES OF DEFICITS UNTIL 1947, WHILE MORE OF THE OUTLAYS FOR WORLD WAR II WERE COVERED BY TAXES THAN IN ANY PREVIOUS WAR1 THE INCREASE IN DEBT IN 1942 THROUGH 1946 WAS ABOUT EQUAL TO TOTAL ~ RECEIPTS IN THAT PERIODJ_ THE DEBT REACHED $270 BILLION 8, IN THE 14 YEARS FROM 19;.JROUGH 1960, THERE WERE 7 DEFICITS, 7 SURPLUSE~ TOTAL DEBT CLIMBED TO ALMOST $308 BILLION,Ll.SINCE 1960 THERE HAS BEEN ONLY ONE SURPLUS YEAR1 19691 AND THAT WAS ONLY $3 BILLION Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • .. ~ .... / 4/27 /84 ' / PAGE 10 / ' \ /' 9, OF COURSE, ALL OF THE FOREGOING NUMBERS HAVE"--B£.EN'_.., EXPRESSED IN CURRENT DOLLARS -- IT WOULD BE VERY DIFFICULT TO ADJUST FOR INFLATION OVER THIS VERY LONG PERIOD -- BUT, NONETHELESS, I THINK THE cr(,-v TRENDS ARE CLEAR _ 1~ 10, MY REASON FOR GOING THROUGH THIS HISTORY IS SIMPLY THAT OVER THIS LONG SPAN OF YEARS A, THERE IS AN HISTORICAL RECORD (1) As A NATION, WE HAVE RUN BUDGETARY SURPLUSES-- IT CAN BE DONE (2) WE HAVE BEEN ABLE TO REDUCE THE LEVEL OF OUTSTANDING DEBT -- THERE ARE FREQUENT EXAMPLES AS. l'V~ (3) THIS HISTORICAL PRECE-PT GIVES ME SOME CONFIDENCE -- THOUGH THE MAGNITUDE OF THE PRESENT PROBLEM SEEMS COMPARATIVELY LARGE (4) THE FACTS ARE WE HAVE REVERSED BUDGETARY DEFICITS WITH SURPLUSES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/27/84 PAGE 11 ------......_ ____ ... -----·-· 11. DEFICITS RESULT IN DEBT) AS YOU KNOW, THE NUMBERS HAVE GOTTEN VERY LARGE A, FROM FOUNDING OF NATION UNTIL WORLD WAR II OUTSTANDING DEBT WAS REALLY RATHER MODEST B, FROM THE END OF WORLD WAR II THROUGH 1970, THE OUTSTANDING DEBT RAN $300 TO $400 BILLION INCREASING DURING THE PERIOD (1) FROM THAT .TIME ON, THE OUTSTANDING DEBT BEGAN TO RISE INEXORABLY AND RAPIDLY (2) AVERAGE ANNUAL INCREASES IN FIRST HALF OF '70s, $27 BILLION (3) AVERAGE ANNUAL INCREASE IN SECOND HALF OF '70s, TO ALMOST $6J BILLION J~ (4) As OF LAST WEEK, OUTSTANDING DEBT ~ /'J /, $1,486 BILLION RISING BY $4,6 BILLION PER WEEK (II) OR $900 MILLION PER WORKING DAY (5) IT TOOK OUR COUNTRY 200 YEARS TO REACH A DEBT LEVEL OF $500 BILLION Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis t y (I) JUST FIVE MORE YEARS TO DOUBLE THAT TO $1 TRILLION (II) AND NOW1 NOT YET MIDWAY IN THE CURRENT DECADE1 WE'VE ADDED ANOTHER $500 BILLION TO REACH THE $1-1/2 ~-io-->i ~;-¾--~:~~~-e==.. r T~R _I_L _L_Io _N_ _LE _V_E_L ____ ~::i, _______ 12, GIVEN THE SIGNIFICANT INCREASES IN OUR OVERALL ECON~EVELOPED OVER THE YEARS A, ANDJ\INFLATION HAS PLAYED AN UNFORTUNATE PART ~~ IN "ftttS2.'2-1</>~l~ B, IMPORTANT TO PUT THE NUMBERS IN A CURRENT PERSPECTIVE C, NOTED EARLIER THAT THE DEFICIT AND DEBT NEED r TO BE RELATED TO OUR GNP - ~ ~~ d;::x ~d,s ~ ~ ~ D, FROM 1966 THROUGH 1981 (1) THE DEFICITS AVERAGED ABOUT 2% OF GNP E, BEGINNING IN 19821 A SHIFT OCCURRED AND WE MOVED UP A RUNG ON THE LADDER (1) INCREASED TO 4% Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis F. IN 19831 INCREASED TO 6i G. SHOULD DECLINE A BIT THIS YEAR (1) BUT EVEN WITH OUR GOOD ECONOMIC EXPERIENCE1 NOT SIGNIFICANTLY BELOW THE 6% LEVEL 13. MEANWHILE1 LEVEL OF OUTSTANDING DEBT WHICH WAS ABOUT 45% OF GNP IN 1966 MOVED DOWNWARDS TO 35% OF GNP IN 1981 A. THEN SHARPLY REVERSED AND WILL BE BACK TO 45% OF GNP THIS YEAR 14. NET INTEREST COSTS HAVE ACCELERATED RAPIDLY A. THE SHARE OF GNP GOING TO INTEREST PAYMENTS GREW ERRATICALLY FROM JUST OVER 1% FROM 1966 (1) To,3% THIS YEAR B. FROM A BUDGETARY POINT OF VIEW (1) INTEREST PAYMENTS AS A PERCENTAGE OF OUR TOTAL BUDGET HAVE INCREASED FROM 7% IN 1975 TO ALMOST 12-1/2% IN 1984 (2) GROSS INTEREST PAYMENTS ON THE OUTSTANDING Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis DEBT THIS YEAR WILL TOTAL SOME BILLION _(;f (3) MAY RE-LEARN THE EFFECT OF COMPOUND INTEREST ~ ~ ~-~- t,u,.,, c~ ~t) 1~. (How DO WE PAY FOR DEFICIT FROM PRIVATE SAVINGS~ , ~ THE FUNDS RAISED BY NONF-INANCIAL SECTOR- (PJ_ ,J.f.~,..J ()oo f INVESTMENT CAP~ EXCEPT PURELY -.........._ •SACTIONS a; ~ cv tG 1o ·r B, F8.0l4---l9rfl=81, THE FEDERAL GOVERNMENT TOOK ABOUT ONE-SIXTH OF THIS POOL OF INVESTABLE FUNDS TO FINANCE THE DEFICIT C, STATE AND LOCAL GOVERNMENTS TAKE A SMALL PART .. D, MOST OF THE BALANC~, SAY 75%, USED TO FINANCE NEW PLANT AND EQUIPMENT, HOUSING AND CONSUMER BORROWING (1) THE ESSENTIAL ELEMENTS OF ECONOMIC GROWTH I_,/ ~~) E, THIS YEAR THE FEDERAL GOVERNMENT WILL TAKE 40), OF THIS POOL OF FUNDS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/27/84 PAGE 15 -~~ ~J}-t-- ?0i (1) RESULT -- 44,MSST REDUCTION lN POOL o>,/ H-~-Fl~~.!:-IVATE USE ~~µ_,,,_,~ (2) f-EWeR ~ONDS AVAILABLE FOR CRITICALLY IMPORTANT INVESTMENTS F, UNLESS SUBSTANTIAL REDUCTIONS IN FUTURE DEFICITS ARE MADE, THIS SHORTFALL IN FUNDS FOR PRIVATE ~&.. - B ? RROWING WILL PERSISTU,lDE':_!!!!I~.hY--------/ ~--~ ,:,J.""~ ~ l:J:;;_6-ts~~""·r- ~ ~ ~i-o 'a,,tt. 16. How we er ~ DID s~T 1A10 TRIS STAYE AFFA1-11s? ~ A, LARGE INCREASES IN EXPENDITURES T -, vl-) (1) PLANNED -- DEFENSE (2) AUTOMATIC -- SOCIAL SECURITY INFLATION ADJUSTMENT ~ (3) INB~eE-D BY EVENTS ( r,----+Ir.rNtnE~R"E'.ES;;-;;Tr-::---~RiiiA;-,TE'S ANJL.S I IE-OF -------------- ~ T (II) UNEMPLOYMENT INSURANCE -- THE RECESSION (III) FARM SUPPORT -- SEVERE DROUGHT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/27/84 PAGE 16 ("'4) < .'\t>DED OUTLAYS OFF SE I PA~TLY fJ{ SOP1E » RiYIO'.[IONS IN OTHER SPE6UJ~G B, REDUCED REVENUES FROM TAXATION (1) TAX CUTS (2) RECESSION IMPACT ON NEARLY ALL SOURCES - (:7J IMPACI ON RECEIPTS ABOUT EQUAL FOR CUTS A~J2._ BFGiOiI0N C. OF TOTAL INCREASE IN DEFICIT~ 3/4 RECESSION AND OTHER EVENTS~ 1/4 PLANNED CHANGES IN TAXES AND SPENDING 17, IMPLICATIONS OF CONTINUED DEFICITS IN RANGE OF v~ ~--~ 4-5% OF GNP O,..,,ll..tc__ ~~ A, PF.I~f4PAe-f - - ~O N FUNDS FOR b FINANCING (1) CAPITAL INVESTMENT (2) MAJOR CONSUMER PURCHASES - l ~ ~ ~ B, CONSEQUENCES lA,,..-l -,. (1) HIGHER INTEREST RATES TO ATlON AVAILABLE FUNDS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/27/84 PAGE 17 (2) SLOWER GROWTH OF ECONOMY AS CAPITAL BASE IS ERODED C, SITlJATIQN UNSTABLE 6ROWING LEVib OF D&BT AS SMARE OF GNP LEADS TO EVEN FASTER GROWTM r O _ ,.._ .,, . O► 1N TERE~T cosJ:i.?'~LfRATI~G DEF 1e ITS bA ~ ~ ~ ~ ~ ~ LUC---~ "- "~ ,'~S ~.1 IV, ~CISIQ~IS TO BE TAKEN -- DEFICITS MUST BE RAPIDLY REDUCED TO THE POINT WHERE DEBT1 AS SHARE OF GNP1 IS AT LEAST -·( I ,_:,..;, STABLE1 PREFERABLY DECLINING1 B~~ / ~ ~ ScnA'l:-{/ pcH,h~ A, SOCIO-POLITly~DECISION MUST BE MADE1 ECONOMICS How CANNOT HELP, LARGE A SHARE OF ECONOMY DO WE WANT TO FLOW THROUGH FEDERAL GOVERNMENT? 1, IF ANSWER IS 25% LIKE 1983-841 THEN WE MUST BE PREPARED TO CLOSE THE BUDGET GAP BY RAISING TAXES ~07.. 2, IF ANSWER IS THE 2-1. 22% OF THE 1970S1 THE PRIMARY ATTACK MUST BE SPENDING REDUCTION B. ONE OTHER WAY OUT1 ALTHOUGH IT SEEMS AN UNLIKELY CHANGE IN OUR BEHAVIOR1 A MAJOR INCREASE IN OUR SAVINGS RATE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/27/84 PAGE 18 l, BUT£~ TO CONTINUE PRESENT DEFICIT LEVELS Effl' WITHOUT SLOWING INVESTMENT WOULD REQUIRE DOUBLING OUR PRESENT SAVINGS RATE V, SUPPOSING THE SOLUTION IS SPENDING CUTS -- WHERE CAN THEY BE MADE? A, ll" IS PQOBABl;Y Nt=CE:SSA"'f TO SAY THE OBVIOUS,-. BIG ~ CUTS ARE NEEDED:!\. THEY MUST BE FOCUSED ON WHERE SPENDING GROWTH IS LARGE AND CONTINUING ~ ~ ~p.P\..J'_tl_r, C f 1. I).ijRIN6 1980-83 PERIOD~ LARGE INCREASES FOUND IN THE FOLLOWING: c(l14 ORDER-or~ NATIONAL DEFENSE INTEREST SOCIAL SECURITY AGRICULTURE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/27/84 PAGE 19 INCOME SECURITY MEDICARE A, THESE SIX AREAS ARE 81: OF 1983 SPENDING ~~ B, TOTAL OF ALL REMAINING nmeTIOU5 DECLINED ~~'r DURING '-80-~1 BOTH AS SHARE OF GNP AND IN ACTUAL TOTAL DOLLARS 2, INCREASE IN TWO AREAS1 AGRICULTURE AND INCOME S:~-'t.-.J..1 SECURITY1 WERE PR-GFOUNDLY AFFECTED BY THE DROUGHT AND THE RECESSION 3, OTHER FOUR EXPECTED TO CONTINUE UPWARD INTO 1984 AND BEYOND 4, SINCE THE INTEREST COST IS INDIRECTLY DETERMINED BY WHAT HAPPENS TO EVERYTHING ELSE1 THE PRIMARY AREAS OF FOCUS MUST BE DEFENSE1 SOCIAL SECURITY AND MEDICARE 5, I AM NO EXPERT ON DEFENSE NEEDS -- I AM AWARE THAT flJlAlr.&, ... ~ WE HAVE JUST BEEN THROUGH A MAJOR R-E:eASTING OF SOCIAL SECURITY AND I AM AWARE OF THE PROBLEMS1 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/27/84 PAGE 20 POLITICAL AND DEMOGRAPHIC, OF ALTERING MEDICARE, ~ ::r ~ ~y. ~ (2D. _., ~·~ ,·,~ ~ J-;::.,, , BUT I CAN .. ADD UP THE NUMBERS - ~ ~ . ,,.._, a:;- P'f ,-;;---1 ";-- ~ ( \ ~A .fl.a~ A..... VI. TAX INCREASES AS A SOLUTION }LL,tJp_/$_ • ~1,::,-e~·~ A, -- IF THE DEFICIT IS TO BE WHITTLED DOWN TO ~ MANAGEABLE SIZE PRIMARILY BY TAX INCREASES, WE ARE GOING TO NEED CLOSE TO A 20% INCREASE IN REVENUE 1, THIS WOULD BE THE HIGHEST TAX LEVEL IN OUR HISTORY A, WELL ABOVE THE 20,,% OF GNP THAT HAS VIRTUALLY GUARANTEED A CUT IN THE PAST (1) As A SOCIETY, HAVE BEEN UNWILLING TO LIVE WITH TAX RATES THAT HIGH OVER CONTINUING PERIOD ::r.-1..~~"t-~~-~- r'r..e..s u B. T~x ~~eME GE:NE:RAL lf)EAS 1, MAJOR ACCOMPLISHMENTS OF RECENT TAX CHANGES v-./~ ~ ~ ~ A, WOULD BE RELUCTANT TO SEE A REV~RSAb QF THESE IM~Q¥EMEN1s .. B, CERTAINLY HAVE AT LONG LAST ENCOURAGED SAVING Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/27/84 PAGE 21 Cl) IRA' s (2) IMPROVED KEOUGH, DEFERRED INCOME 2, NEVERTHELESS -- PERCEPTION PERSISTS THAT TAX STRUCTURE IS A, Too COMPLICATED (1) NEW TAX REGULATIONS BEING CONSIDERED BY CONGRESS EXTREMELY COMPLEX 3, I THINK GROWINGLY APPARENT THAT TIME HAS COME FOR MAJOR REVISION TO WHOLE APPROACH IN METHOD OF TAXATION FUNDAMENTAL DEFICIT A. PARTIES) NOW 1. CONGRESS 2. SPENDING., HI/ TAXES THAN THE PRESIDENT PROPOSAL /. PROBABLY WILL INSURE CONTINUATION OF DEFICIT REDUCTION MEASURES INTO 1986-87 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/27/84 PAGE 22 3. A LEADING B, THE 1984 DEFICI OFFICIAL ESTIMATE 1. PRESSURE ON THE CREDIT MARKETS AT A LITTLE VIII, CONCLUSION A, LONG RUN GROWTH AND STRENGTH OF OUR ECONOMY DEPEND~ ON INVESTMENT 1, REPLACE OBSOLESCING PLANTS 2, PROVIDE NEW CAPACITY FOR GROWTH 3, R&D TO CREATE NEW TECHNOLOGY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/27/84 PAGE 23 B. INVESTMENT FUNDS WILL NOT BE AVAILABLE IF TAKEN BY GOVERNMENT AND, THEREFORE, DIVERTED TO CURRENT CONSUMPTION C, ~,.J_ ~ . SOME DAMAGE HAS ALREADY BEEN ~ON~ \_~ vVGw/>., 1, CAN BE LI MI TED IF WE -~ARI DW... A-S_JtY.Pf OF---SNP., k BACK DOWN sooN .. _:·c r l-k ~ ·s , - t s:: bt ~ ~ S, c{)~ S ~ I VD -., D. Q.io:w;E Of JMls,ANCE OF QPTIQNS, POLITICAL AND SOCIAL, NOT ECONOMIC 1. Bur ECONOMICS STERNLY DICTATES WE MUST DO SOMETHING F. . IN,-t,1AKING CHOICES WE.MUST REALIZE -A-,u., ~ . tA.,,tJJ ~ °'- ~. 'AJ'f- ~ ~ ~ 1"-1 1, RAISING TAXES WILL LOWER PRIVATE CONSUMPTION AND ~~ MAY N.QT E~ICOURAGE INVESTMENT V~Y QIIICKI..~ 2. INCREASING SAVINGS (NOT SOMETHING WE KNOW HOW TO INDUCE BY POLICY CHANGES) WILL LOWER PRIVATE CONSUMPTION,~ ENCOURl\6E IN\'ESTP4ENT-, BETTeR TMMI ANY OTI IE~ CHA[qGE ~ 3, LOWERING SPENDING WILL LOWER PRIVATE CONSUMPTION .;'\. A, TRANSFER PAYMENTS, BIGGEST USE OF GOVERNMENT FUNDS, MOSTLY END UP AS PRIVATE CONSUMPTION Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/27/84 PAGE 24 G, THUS1 HOWEVER WE ATTACK PROBLEM1 GNP GROWTH DURING THE CORRECTION PERIOD WILL BE SLOWER THAN IT OTHERWISE WOULD BE THE INITIAL STEPS WE APPEAR TO BE TAKING AUGUR A 1, OF TAX STRUCTURES TO BE MORE NEUTRAL TOWARD THE INVESTMENT CONSUMPTION CHOICE I. WE BOTH CAN AND MUST SOLVE THE PROBLEM NOW, ~ I .. .,Ggows --tNCliEASIW~tY'-" MO~E ___ lffif1A6ING WJTH DELAY - .£6 ~ ~ ,. -:r .JG. p, MONETARY POLICY ~ ;:z;. 1, DEVELOPMENT OF MONETARY P:~~RIATE TO ECONOMIC CIRCUMSTANCE A, PRE-SUPPOSES REASONABLE BALANCE IN FISCAL POLICY B, JUST THE OPPOSITE HAS BEEN THE CASE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/27/84 PAGE 25 C. ADDS A CONSIDERABLE COMPLEXITY TO OUR JOB 2. As NOTED EARLIER1 HAVE ACCOMPLISHED GREAT DEAL IN REDUCING THE LEVEL OF INFLATION A, BUT AT ENORMOUS COST B, FEEL VERY DEEPLY HERE IN DETROIT C, DESPITE THE IMPROVEMENT1 THERE IS MUCH MORE TO BE DONE D, INFLATION IS STILL AT UNACCEPTABLY HIGH LEVELS 3, I THINK WE HAVE BEEN LOUD AND CLEAR IN OUR POLICY OBJECTIVES A, OUR ULTIMATE GOAL1 OUR OVERRIDING MONETARY POLICY OBJECTIVE B, RETURN TO AN ECONOMIC ENVIRONMENT OF REASONABLE PRICE STABILITY OVER LONGER PERIODS OF TIME 4. WE HAVE ESTABLISHED THE GROWTH RANGES FOR MONETARY AGGREGATES FOR 1984 A, WE INTEND TO ADHERE TO THEM Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/27/84 PAGE 26 B, So FAR WE'VE BEEN SUCCESSFUL -- ALL THREE MONETARY AGGREGATES THROUGH MARCH WERE WITHIN THEIR RANGES 5, THIS IS ANOTHER WAY OF SAYING THAT ATTEMPTING TO DEAL WITH THE FISCAL DEFICIT ISSUE BY MONETIZING THE DEBT IS JUST NOT ACCEPTABLE A, AND IT JUST WON'T WORK B, THE END RESULT IS MORE INFLATION AND HIGH INTEREST RATES C, WHICH WOULD JEOPARDIZE ALL THAT WE HAVE GAINED D, As A PARTICIPANT IN THE DEVELOPMENT OF OUR NATION'S MONETARY POLICY (1) FEEL VERY STRONGLY THAT THE HARD CHOICES MUST BE MADE IN DEALING WITH THE BUDGET ISSUES (2) AND THAT MONETARY POLICY CANNOT~ MUST NOT~ °'- ' ~ BE USED AS ALIATIVE FOR THIS PROBLEM Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/27/84 PAGE 27 K, I THINK THAT WE ARE TALKING ABOUT MORE THAN JUST AN ECONOMIC OR FISCAL ISSUE 1, INDEED, IT IS A QUESTION WITH VERY BROAD SOCIAL AND POLITICAL IMPLICATIONS 2, As A SOCIETY, WILL WE BE WILLING TO EXERT THE SELF-~ISCIPLINE THAT WILL BE SO VERY NECESSARY TO ~~d~~ SURVIVE AS A NATION A, CAN WE MAKE THE CRITICAL CHOICES . "--~ ~~,r'l,4r v,~ 3, I'M AN OPTIMIST AND--rtdEREFORE THIN THAT WE WILL SUCCESSFULLY RESOLVE THESE DIFFICULT ISSUES 3:(, ':t'~,.A,l~ A, WE MAY WELL HAVE ENTERED A NEWr-~ EXCITING, ~ VERY REWARDING, PHASE.IN OUR NATION'S HISTORY Qsi.Jt-~ 4, ON THAT OPTIMISTIC NOTE '--C~-c..A.-IL-1..-J~~ ~~~ • ~~ f'L ~ ' ;a;:::, THANK YOU cyyt~~ ~~ ~c;u"~ ,+-(~ J2.,v-A..-I--' • '-,J-e.. • * * •• ' Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1984, April 29). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19840430_silas_keehn

@misc{wtfs_regional_speeche_19840430_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1984},
  month = {Apr},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19840430_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}