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THE CHAIRMAN OF THE
COUNCIL OF ECONOMIC ADVISERS
WA SH I N GT ON

January 17, 1979

MEMORANDUM FOR JERRY RAFSHOON
From:

Charlie Schultze

Subject:

State of the Union Speech

On reading the draft I thought that the anti-inflation
theme didn't come through strong enough or with enough
substance. Rather than try to write alternative language,
I tried to set down in the attached note the themes of
policy that we are actually following.
Attachment




On the economic front what we are trying to accomplish
is the very difficult task of cooling off a stubborn 12 year
old inflation without (i) a recession; (ii) mandatory
controls, or (iii) dismantling our assistance to those who
really need it. That job has been made more difficult by:
o

the recent speedup in inflation

o

the recent sharp slowdown in productivity growth

o

the strong inertia behind a long-standing inflation
— it can't be licked unless our policies are
capable of being pursued for a long time.
It isn't just one year of austerity.

Therefore, the actual themes we are following in our
policies are:




Balance. We want fiscal and monetary restraint
to cool the economy — but policies that are not
so tight as to lead to recession.
We have to influence private wage and price
decisions through voluntary standards, to break
the inertia of inflation — but not with the
straightjacket of mandatory controls.
Restraint through fiscal and monetary policies, and
the pay and price standards are designed to work
together. Fiscal and monetary restraint prevents
economic overheating.
In this climate, the pay
and price standards help us unwind the inflation
more quickly.
2.

Persistence. High inflation has been with us for
10-12 years. We have tried to break it with
extreme medicine in two different ways — the
recession method (1970, and 1974-75); and
mandatory wage and price controls (1971-73).
Neither method worked. One reason the extremes •
didn't work is because no democratic nation can
stick with such policies long enough to do th
job. Controls break down — the economy is
too complex for a bureaucratic straightjacket

-2-

and political pressures to dismantle controls
become irresistible. Sharp recessions inevitably
lead to renewed pressures for large-scale stimulus
and there go the anti-inflation policies.
Only with a balanced program, therefore, can we
hope to persist long enough to do the job.
3.

Competence and compassion. Since we must have a
prolonged period of restraint and austerity,
o

o

4.

getting the most for every dollar of cost —
in both budget programs and regulations — is
more important than ever?
setting the "right" priorities — where to cut
and where to restrain and where to use the
very limited bucks for new ventures — is
critical.

Concern with structural unemployment. We haven't
lost sight of the need to reduce structural
unemployment, particularly among minorities.
There are still many people who cannot find jobs
even in a high-employment economy.
—

We are still devoting substantial budget
resources to this effort, and managing
those resources better.

—

Our new programs in this area stress jobs
and training in the private sector.

In addition to these points there are sub themes which
could be used:




1.

As a nation our productivity growth has slowed
almost to a halt. The pie (per capita) isn't getting
any bigger, and until productivity growth speeds up
we cannot increase our claims on the economy.
o

either through rapidly expanding government
budgets,

o

or through large wage and other income increases.

o

If we ignore the fact of a slowly growing pie
we will worsen inflation by placing too many
claims on the economy.




-3-

2.

In the last 15 years the nation has sharply increased
the share of its resources devoted to social programs:
o

in 1963, Federal budget spending outside of
defense and payments for past wars (veterans'
benefits and interest on the debt) took up
8 percent of GNP.

o

in 1978, those same nondefense programs took
up 14 percent of our GNP.

o

we have almost doubled the share.
be checked)

o

the hallmark of a competent and compassionate
government is no longer how many new ways it
can find to expand budget resources for
social programs, but, its success in managing
existing programs better, concentrating them
where they are really needed, and applying
careful but compassionate judgment as to where
to put the modest increment of additional
resources that become available each year.

(Figures to

There are several specific points:
1.
Whatever we say about national health insurance,
or catastrophic coverage should,not be right in the middle
of the anti-inflation section, for obvious reasons.
2.
We need at least a sentence or two on the "defense
of the dollar".
I will provide suggested text shortly.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102