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February 9, 1979

Tired O l d Econ omics
"I'm tired of listening to economists."
- Senator Henry Jackson (Washington).
"We need a new, fresh, buoyant
forward-looking economics to replace
the tired old economics telling us we
can't do the things we want to do - the
things we haveto do." - The late
Senator Hubert Humphrey (Minnesota).
What can a tired old economist answer?
The tired old 50- or even 75-minute
lectures about Supply and Demand
won't do, with or without diagrams and
mathematics. Neither will fresh, buoyant jargon about propensities, elasticities,
multipliers, trade-offs, and even rational
expectations. Have we anything better?
Perhaps only in the back-handed senseof
warning against something worse, but let
us see. The best this tired old economist
can do is to outline a few of the most
important economic policy dilemmas
that make pol icy advising as hard as it is,
and confine so many' of us to careers
of "academic irresponsibility" or as
"economic attorneys" and "kept
economists" for some company,
bureau, industry, or union.

No easysolutions
I'll admit in advance my lack of any easy
or painless solution to any of them. (The
policy prescriptions of tired old economists remind me unpleasantly of dentistry and surgery before anesthesia, and
economic anesthesia is still in its
infancy!) But what about the new, fresh,
buoyant, forward-looking economists?
What alternatives do they have to offer?
Income policies, social contracts, and
rational planning, of course. But such

solutions hope for 100 percent agreement, notonlyofthe "statesmen" atthe
top but of the rank and file on the shop
floor or equ ivalent. For example, no
workmen strike for higherthan planned
wages. (Ask the British about that!) No
business man, no farmers, no landlords
evade, violate, or strike against any
planned prices, planned rents, planned
controls, planned rationing systems. If
sufficient agreement about the plan is
not forthcoming, or the rank and file
revolts against "its" leadership, the next
step is a monopoly of the media (press,
radio, TV, wall posters, bumper stickers)
to brainwash objectors into compliance.
If that fails too, bring on the Man on
Horseback (In plane? In tank?) with supporting bureaucracy and police! (We
will not usuallyneed firing squads,
concentration camps, gas chambers, or
Gulag archipelagos!) If that is the fresh
neW econom ics of the social contract; If
success requires unanimity or dictatorship - if liberal democracy means failure or deadlock, British style - give me
the tired old economics of the market
every time, the tireder and older the
better!
But let us return to the policy dilemmas.
Here are three of them, for starters. (Lack
of space prevents my worrying about a
fourth - how willing so many of us·are
to reduce other people's living standards
to conserve energy, save the envi ronment, relieve world hunger - and then
vote against policies that threaten their
own standards too!)

Risingentitlements
Most serious of my three dilemmas, I
think, has been called by the Harvard

(continued'on page 2)

lK\((J)
Opinions expres:::.ed in this nevvs!etter do not
necessarily reflect the vie'vV5 of the managernent of the
Federal Reserve Bank of Sanfrancisco,nor of the Board
oi Governors of the Federal Reserve System.

sociologist Daniel Bell a "revolution of
rising entitlements." The argument is
that everyone is entitled to at least the
average income, without having to work
harder than the average person or under
less pleasant conditions. This appeals, I
am sure, to most people's intuitive
senses of justice and ethics. But justice
and ethics involve us in difficulties of
arithmetic and algebra. Can even Senator
Jackson or the Humphrey-Hawkins Act
put 100 percent of the people into the
top 50 percent of the income or the
wealth distribution? If average American family income is approximately
$15,000, can they bring all the $5,000
and $1 0,000 families up to that level
during one administration without
bringing down not only a few superrich but also the much more numerous
$20,000 - $50,000 middle class?Since
half society's jobs are more dull, unpleasant, or dangerous than the other half, who
is going to do them if everyone has a
$15,000 family income? How much
would a head of lettuce have to cost (in
consumer prices, in taxes, or in the inflation rates) to pay you whatever sum
would induce you and your family to
accept stoop labor ten hours a day under
an Imperial Valley sun?

you, an unemployed worker, had a
choice between a guaranteed job at
$100 a week and a 20 percent chance of
landing a $400 one. With only these
alternatives you wou Id take the povertylevel job fairly soon. A perfectly rational
decision. But now let us change the
rules: One hundred percent chance of
$100 against a 20 percent chance of
$400 plusan 80 percent chance of relief
(or unemployment insurance, or living
off relatives) at a $75 weekly level. Most
of you, perfectly willing to work at the
right job on the right terms, wou Id equally-rationally reject the lousy job and
keep on looking under the new rules.
Most tired old economists -led, however, by the brilliant young Martin
Feldstein of Harvard - think most of our
unemployment is usually "search
unemployment" which would disappear
if relief or equivalents were more unattractive than they are. These economists
go on to doubt that present unemployment rates (about 6 percent) can ever fall
to the levels we want (4 percent) so long
as we continue subsidizing longer job
searches by the unemployed. But are we
really willing to let economic necessity
force the poor into dirty, disagreeable,
dead-end jobs at poverty wages?

Unemployment problem
We can also relate "rising entitlements"
to the unemployment problem. Suppose

This is the dilemma: How can we
combine low measured unemployment
with just (or equitable, or compassionate) treatment of the unemployed? Here
is an impossible assignment to think
about: Find some "politically realistic"
ratio of rei ief level to average wage,
which forces no individual A into what
is called sub-employment and permits
no other individual B, with different
tastes," a lifeofRileyonthedole."
Allor

2

nearly all existing ratios are damned
simultaneously from the political Left as
too hard on A and from the Right as too
-easy on B.

Money and inflation
My third dilemma is about money and
inflation. We all know we would buy
more, or employ more people, at 1939
or1 959 prices or wages than atprospective 1979 ones. But we also know we
buy less - not fewer quarts of milk and
loaves of bread, perhaps, but fewer su its
of clothes, pairs of shoes, or household
appliances - when prices are falling
than when they are rising. (The temptation is to wait for prices to fall further in
the first case, al)d to beat the next price
rise in the second.) And we don't know
how to get lower prices by a combi nation
of monetary and fiscal fine tuning, without first having them fall from "here" to
"there" .
Of course a Great Dictator could force
prices (including wages!) down at once
without warning, and without much
regard for "justice" as between debtors
and creditors, old and young, fixed incomes and variable ones. (But if anyone
wants a dictator, even "Me for Dictator,"
he hesitates to admit it.)
Just as politicians scorn economists' still
small voice of anti-social (?)conscience,
economists worry about politicians
whose idea of political economy is
"never to vote for a tax or against an
appropriation." Madame de Pompadour
said to Louix XV of France, "apres nous,
Ie deluge." The deluge washed the king's
successor (his grandson) away in blood
19 years after his death. Too many of our

3

politicians find that it pays off to say,
"apres I'election, Ie deluge'-' than keep
me entirely happy about either our country's future or democracy as a system.
Can no one rise higher than Dog-Catcher
or County Commissioner who would say
instead, with Henry Clay, "I'd rather be
right than President?" (Henry Clay was
often wrong and never President!)
'\9

And before being too unkind to our
politicians, what about our neighbors, or
ourselves? Did you, by any chance, react
to our worsening energy prospects by
buying yourself a great big
vehicle" to spend your vacation cruising
40 or 50 States at 8 miles per gallon of
OPEC oil? (Maybe your last chance
before dollar gas, lighter cars, rationing,
or whatever lies ahead!) Maybe you are
carrying around a miniature policy
dilemma inside your own skin:
"Apres les vacances, Ie deluge!"

Martin Bronfenbrenner
(The author, Professor of Economics at
Duke University, is Visiting Scholar
at the Federal Reserve Bank of San
Francisco this semester.)

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BANKING DATA-TWELFTH
FEDERAL
RESERVE
DISTRICT
(Dollaramounts millions)
in

Selected
Assets liabilities
and
Large
Commercial
Banks

Amount
Outstanding
1/24/79
120,019
97,924
28,680
34,881
19,848
1,569
7,616
14,479
39,518
29,744
29,912
50,972
41,320
19,104
\t\kekended
1/24/79

Change
from
1/17/79
137
224

Change
from
yearago@
Dollar
Percent
NA
NA

Loans
(gross,
adjusted) investments*
and
Loans
(gross,
adjusted) total#
Commercial industrial
and
10
Realestate
114
+
Loans individuals
to
69
+
Securities
loans
252
U.5;Treasury
securities*
26
Othersecurities*
113
+
Demanddeposits total#
- 2,839
Demand
depositsadjusted
1,505
Savings
deposits total
212
Time deposits total#
130
+
Individuals,
part.& corp.
84
+
(Large
negotiable
CD's)
263
\'kekly Averages
Comparable
Weekended
of Daily Figures
year-ago
period
1/17/79
MemberBankReserve
Position
Excess
Reserves )/Deficiency- )
(+
(
27
14
24
+
+
Borrowings
73
61
12
Net freereserves )/Netborrowed( )
(+
100
47
12
+
Federal
Funds Seven
Large
Banks
Net interbank
transactions
+ 1,243
+ 1,050
+ 1,546
[Purchases )/Sales
(+
(-)]
Net, U.5.Securities
dealertransactions
+ 583
+ 765
+ 445
[Loans
(+)/Borrowings
(-)]
* Excludes
tradingaccount
securities.
# Includes
itemsnotshown
separately.
@ Historical
dataarenot strictlycomparable to changes thereporting
due
in
panel;however,
adjustments
havebeenapplied 1978datato remove muchaspossible effects thechanges coverage.
to
as
the
of
in
In
addition,for some
items,
historical arenotavailable to definitional
data
due
changes.
Editorial
comments beaddressed theeditor(WilliamBurke) to theauthor....
may
to
or
Freecopies this andotherFederal
of
Reserve
publications be obtained callingor writingthePublic
can
by
InformationSection,
Federal
Reserve
Bankof SanFrancisco, Box7702,SanFrancisco
P.O.
94120.
Phone
(415)
544-2184.
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