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H e r b e r t Stein D e c e m b e r 11, 1970 ' Notes for Discussion with A F B 1. T h e m a i n point is to convey an understanding of the Administra tion's goals and determination. In 1959-60 the Administration m a d e what Samuels on later called an "investment in sadism. " It squeezed d o w n the recovery and tolerated a recession in order to slow d o w n the inflation. It also handed over to J. F. Ke n n e d y an e c o n o m y with the inflation expectation removed, and nowhere to go but up. f r o m AFB). W e do not propose to do that again. (See attached quotation W e intend to get a strong recovery of the e c o n o m y and believe that a strong recovery can be achieved while continuing to m a k e progress on the inflation front. We recognize and accept the risk that the progress m a y be small, but think it unlikely that there would not be s o m e progress during a two-and-a-half year period of economic slack. W e do not think that the risks include an inflation rate above our recent experience. T h e risks of an expansive policy depend in part on public expectations. T h e risk is increased if respected figures in the economic world frighten the public, without firm evidence, about the inflationary consequences of an expansive policy. 2. W e should not confuse a discussion of m o n e t a r y policy with a discussion of "incomes policy. " Neither A F B nor anyone else has an - 2 - "incomes policy" short of mandatory controls that would m a k e a significant difference in the rate of inflation in the next two years. Whether any particular m e a s u r e of incomes policy should be adopted is a discussable question. However, the m o n e t a r y expansion that is needed or safe does not depend on what is done in the incomes policy field. 3. Of the eleven items in A F B ' s "income policy, " ten would have appeared in almost any economist's list of good things to do, inflation or no inflation, and would not until recently been called part of an incomes policy. Four of these ten points could scarely have any effect in the next two years: m o r e vigorous enforcement of antitrust laws, increased job training, establishment of local productivity councils and liberalization of depreciation allowances. M a n y of the others would encounter fierce resistance, which is to say not that they should not be tried but that they cannot be counted on: liberalization of import quotas, Davis-Bacon suspension, modification of the m i n i m u m w a g e laws, establishment of national building codes, compulsory arbitration. W e are not opposed to all this. It is simply irrelevant to our relations with the Federal Reserve. 4. T h e suggestion in A F B ' s speech that has received m o s t attention is all contained in one sentence: " W e might bring under an incomes policy, also, the establishment of a high-level price and w a g e review board which, while lacking enforcement power, would have broad authority to investigate, advise, and r e c o m m e n d on price and w a g e changes. " - 3 - This proposal bypasses all the hard questions. S o m e idea of its possible value m a y be obtained by trying to think of five people of sufficiently high level that their advice would have kept the railroad workers f r o m getting a 13-1/2 percent w a g e increase. 5. W e should ask A F B to stop contributing to the c o m m o n idea that there is a simple w a y out of our economic difficulties which the Administration for s o m e mysterious reason refuses to take. This idea is one reason for the impatience which is the great e n e m y of the disinflation w e all want. 6 . O n the proper subject of m o n e t a r y policy w e should emphasize the importance of every day that is n o w passing. T h e combined effects of the ending of the auto strike and the expectation of a steel strike m a y stimulate the e c o n o m y strongly in the first half of 1971. Whether there is a let-down afterwards will depend in part on h o w m u c h m o n e t a r y expansion w e get beginning right now. W e consider it important not to have a decline in the second half of 1971 f r o m which w e then have to m a k e another strenuous effort to climb back.
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