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Third in the series of Rational Debate Seminars
sponsored by the American Enterprise Institute
held at
The George Washington University
Washington, D. C.


Arthur F. Burns
Paul A. Samuelson

American Enterprise Institute
for Public Policy Research
Washington, D. C.

©Copyright 1967 by the American Enterprise Institute for Public
Policy Research. 120 0 -1 7 th Street, N .W ., Washington, D. C. 20036.
All rights reserved under International and Pan-American Copy­
right Conventions.

Library of Congress Catalog Card Number 67-29783

In this third Rational Debate of the series of four during
the 1966-67 academic year, the American Enterprise
Institute pursues its most fundamental purpose, to bring
before the American public important facts and opin­
ions from which a rational choice can be made between
alternative courses in public policy. Rational debate,
with the emphasis on "rational,” is the keystone of a
free society. AEI was founded on this concept in 1943
and continues to operate on it today. Our purpose is
to help legislators, policymakers, educators, the press, and
the general public to reach informed judgments on ma­
jor issues of public policy. The Institute conducts re­
search, publishes studies, and sponsors seminars and
symposia on these major questions. Statements of the
lecturers and other participants in AEI programs are
their own, of course; the Institute takes no position on
any public policy issue.
The format of AEI’s Rational Debates avoids to a
great extent the repetition of absolutes in arguing alter­
natives in public policy and promotes the give and take
which can generate rational choices. The choices before
us are seldom between the wholly good or the wholly
bad. Professor Burns and Professor Samuelson make
this abundantly clear in the present volume. The same
observation could be made about the other three Rational
Debates in the current series, the first between Arthur
Schlesinger, Jr., and Alfred de Grazia on Congress and

the Presidency: Their Role in Modern Times; the second
featuring Charles E. Whittaker and William Sloane
Coffin, Jr., on Law, Order and Civil Disobedience; and
the fourth on The Balance of Payments: Free Versus
Fixed Exchange Rates, with Milton Friedman and
Robert Y . Roosa.
As I have emphasized in the Forewords to the other
Rational Debate books, the American Enterprise Insti­
tute hopes that these seminars will contribute to wise
policy decisions at all levels of the governments of the
United States, federal, state, and local.
September 20, 1967

William J. Baroody
American Enterprise Institute
for Public Policy Research

In a year when the economic stability of the nation has
been so widely mooted, the American Enterprise Insti­
tute has made an important contribution to the dia­
logue by presenting these two especially distinguished
economists, Professors Arthur F. Burns and Paul A.
Samuelson, in this Rational Debate. They have con­
firmed the suspicions of many that even so complicated
a topic as Full Employment, Guideposts and Economic
Stability can be treated lucidly in this relatively short
discourse without slighting any of the fundamentals
Professors Burns and Samuelson participated in this
three-session debate in April. A select group of govern­
ment officials, academicians, and newsmen attended.
Many queried the principals in the discussion periods
which followed the formal presentations of lectures and
rebuttals. The general public now has an opportunity
to study the illuminating exchanges.
September 19, 1967

G. Warren Nutter
Rational Debate Series




FIRST LECTURE— Arthur F. Burns 1
SECOND LECTU RE— Paul A. Samuelson 43
Arthur F. Burns 69
Paul A. Samuelson 83


First Session 107
Second Session 121
Third Session 141




Since the end of World War II, full employment, rising
productivity, and a stable price level have been major
objectives of economic policy in the United States, as
they have in every other industrial country. All segments
of our society— businessmen and labor leaders, farmers
and urban workers, educators and legislators— now ac­
cept and endorse these objectives, particularly the need
for full employment. Each year the President’s Eco­
nomic Report reaffirms allegiance to the principles of the
Employment Act of 1946. Each year the Joint Eco­
nomic Committee appraises the President’s program for
promoting "maximum employment, production, and
purchasing power,” and prods both the Congress and the
executive to pursue whatever measures seem needed to
achieve or maintain full employment and economic sta­
bility. Each year scores of governmental, business, labor,
and civic groups, besides many hundreds of individual
economists and other intellectuals, join in the continuing
debate on the most appropriate means of achieving the
broad economic objectives on which Americans are so
generally agreed. The present meeting is one of many
such efforts to seek better ways of moving toward our
national objectives.

F u ll E m plo ym en t

The constant attention that we give to public eco­
nomic policies is proof enough, if any were needed, that
the economy rarely performs as well as we think it
should. True, we have made considerable progress toward
full employment and economic stability in our genera­
tion, and we have accomplished this while preserving the
essentials of political and economic freedom. Financial
crises, which frequently disrupted economic life in
earlier times, no longer exacerbate our troubles. Expan­
sions of aggregate economic activity have tended to be­
come longer. Contractions have become both shorter and
milder, and the business cycle has lost much of the terror
that it held for our fathers. Not only that, but the trend
of output per manhour, which is the most vital source of
improvement in the general welfare, has moved upward
faster than in earlier decades of this century. These gains
are impressive when viewed against the background of
past experience. However, the yardsticks that we apply
to the performance of the economy have also tended to
become more exacting, and in any event we have not
escaped our share of disappointments. While the level of
both employment and production has been generally high
and rising during the past 20 years, we have experienced
some troublesome recessions. Even in years of extremely
brisk activity, such as 1956 and 1966, large groups of
people— notably Negroes and teenagers— have continued
to be subject to a higher risk of unemployment than the

F irst L ec tu re


working population at large. And even those workers
who have had the good fortune to hold down steady jobs
at rising wages have found that their improved money
earnings, and also their accumulated savings, are partly
illusory on account of the upward tendency of prices.
Economic instability has not yet vanished in our
country, any more than it has vanished in any other
country that values freedom sufficiently to practice free
enterprise on a major scale. Nor, for that matter, has it
vanished in the Socialist world where economic life is
largely organized on the basis of state edicts. For ex­
ample, Czechoslovakia experienced a recession in 1963,
Communist China suffered a great depression after 1959,
Yugoslavia has found it prudent to encourage many of
her workers to look for jobs in Western Europe, the
Soviet Union has suffered substantial unemployment of
the seasonal and frictional type, and Poland has
struggled for years with the burden of inefficiency re­
sulting from the practice of requiring its industrial en­
terprises to absorb more workers than they need. And
just as it is impossible to find, whether we look West or
East, any final solution to the problem of unemploy­
ment, so also it is difficult to find substantial stability of
the price level anywhere. Indeed, the advance of the
price level of our total output, although it has reduced
the purchasing power of the dollar by about 40 percent
during the past 20 years, still ranks as one of the better
records of the postwar period.
These imperfections of economic achievement, both in


F u ll E m plo ym en t

our own past and in other parts of the world, need to be
recalled at a time when the course of our economy has
again become sluggish. Only two years ago we boasted
that the economic expansion which started early in 1961
had already proved more durable than any of its prede­
cessors under peacetime conditions. Now, despite a tre­
mendous upsurge of federal expenditure, which is bound
to continue for some time on account of the war in
Vietnam, many economists are concerned that our nation
may once again be on the brink of recession. Only a short
time ago the view was spreading in business and govern­
mental circles that monetary and fiscal policies would
henceforth adjust the aggregate demand for goods and
services so closely to what the economy can produce at
full employment that the danger of recession need no
longer be taken seriously. Now, many economists are
questioning the skill of governmental policymakers and
some are even suggesting that governmental policies have
a chronic tendency to destabilize the economy. Any such
sweeping generalization can hardly be justified. Never­
theless, in view of recent shifts of fortune and opinion,
it may be useful to stop and consider some of the diffi­
culties in the management of prosperity; in particular,
how public policy drove the economy forward after
1960, why rapid expansion has temporarily given way
to sluggishness, and what guidance can be derived from
these experiences for the future. That is my purpose in
this evening’s lecture.

F irst L ec tu re

The main source of our national prosperity has always
been the hopefulness, initiative, skill, and energy of the
American people. By and large, we have also been blessed
with good government and with public policies that have
left large scope for the expression of these qualities. The
increasing attention of government to the problem of
full employment and economic stability has led in our
generation to ever-changing permutations of policy and
they too have left their mark on the character and rate
of economic progress. This has been singularly true of
the years since 1960 which have been characterized by
much boldness and innovation of governmental policy in
the economic sphere. History, however, does not divide
itself neatly into stages or periods. What happened after
1960 was conditioned by developments in the immedi­
ately preceding years.
Taken as a whole, the decade of the 1950s experienced
substantial advances in production, employment, and
living standards. The later years of the decade, however,
brought difficulties in quick succession. The recession
following the Korean War came to an early end under
the impetus of stimulative governmental policies. But as
so often happens in a modern economy, the confidence
of the business community soon spilled over into exces­
sive exuberance. During 1956, business construction and
the machinery and equipment industries forged ahead at
an extremely rapid rate, while the output of the con­


F u l l E m p lo y m e n t

sumer goods trades became sluggish and homebuilding
actually slumped. The average level of prices advanced
swiftly in wholesale markets, but costs of production rose
faster still and profit margins shrank. These and other
imbalances gradually undermined the process of expan­
sion. In July, 1957, a recession got under way; and al­
though it proved to be brief, it was the sharpest decline
of aggregate activity in the period since World War II.
The recovery that followed was strong at the outset, but
it soon faltered and it did not return the nation to full
prosperity. In the spring of 1960, when the unemploy­
ment rate was still 5 percent, the economy again lapsed
into recession. During this decline of activity, total out­
put held up exceptionally well. But when the labor force
and productivity keep increasing, the mere cessation of
growth in physical output suffices to create trouble. Un­
employment mounted during 1960 and reached 7 per­
cent in the spring of 1961.
The unsatisfactory performance of the economy in
the late 1950s can be blamed in part on governmental
timidity or excessive concern over inflation. There were,
however, good reasons for concern and caution. The in­
flation of 1956-57 was fresh in people’s memories. Presi­
dent Eisenhower and other high officials realized that the
advance of prices would have been smaller if they had
moved as promptly and as energetically to curb the
excesses of the boom as they had previously moved to
check the post-Korean recession. It was only natural that
men in authority were resolved not to repeat the mis­

F irst L ec tu re


take. But once the recession started in 1957, the govern­
ment could not very well remain aloof. Some prominent
officials and many private citizens urged a prompt re­
duction of personal and corporate income tax rates. They
pointed out that the nation was still functioning with
a tax system that had developed under wartime condi­
tions, and they argued that a lightening of the tax bur­
den would strengthen incentives, enlarge economic hori­
zons, and thereby release fresh and enduring forces of
expansion. This compelling plea went unheeded be­
cause of fear of budgetary consequences. Instead, credit
conditions were eased and federal spending was allowed
to expand. The decisions to increase spending did not
come at once; they came in a long series, sometimes
grudgingly, and thus spread out over months. But when
the successive small accretions were finally added up in
late 1958, it was discovered that they came to a much
larger total than our fiscal authorities had either planned
or advocated— indeed, that they made a larger dent in the
budget than, say, the $5 billion tax cut that was then
being urged would have entailed.
The main impact of the new federal spending pro­
grams came after the economy began recovering. A cash
deficit of $13 billion, which still stands as the largest
annual deficit since 1946, piled up in the fiscal year end­
ing in June, 1959— a year of continuous business expan­
sion. This emergence of a huge deficit at a time of rather
rapid economic advance was merely the most dramatic
of a series of developments that cast doubt on the finan­


F u l l E m p lo y m e n t

cial policy of the government. Over a long stretch of
history, it had been characteristic of the level of whole­
sale prices to fall during contractions of aggregate ac­
tivity, thereby erasing all or part of the advance that had
occurred during the expansion phase. In the recession of
1957-58 wholesale prices departed from rule, actually
rose, and thus gave fresh support to the widely held
theory that we are living in an age of inflation. This
sombre view about the future was reinforced by the de­
terioration in the balance of payments. During 1958,
imports rose sharply, exports fell, and our stocks of gold
were cut by two billion dollars. More ominous still, for­
eign financiers, who hitherto appeared to have un­
bounded faith in American finances, began to whisper
serious doubts whether the integrity of the dollar could
be counted on in the future.
Financial developments during 1958 and the fears
which they engendered thus strengthened the determina­
tion of governmental authorities to try to prevent, now
that the economy was again advancing, the sort of ex­
cesses that had led to an inflationary boom during 195657. Both our international political position and the
interests of the domestic economy clearly required better
management of prosperity. Having moved too slowly
to restrain the preceding expansion, they were ready to
move with all necessary speed this time. Still embarrassed
by the increase of the discount rate in August, 1957,
which came when the boom was already turning into
recession, the monetary authorities now took steps to re­

F ir s t L e c t u r e


strain the expansion of credit almost as soon as the first
blush of economic recovery was recognized. Before 1958
ended, free reserves of the commercial banks were al­
ready wiped out. Pressure on reserves was sharply inten­
sified during 1959. In consequence, the money supply
began to decline and interest rates moved up with ex­
traordinary speed. Meanwhile, the budgetary authorities
brought the expansion of federal spending to an abrupt
halt. Since tax revenues continued to pile up as eco­
nomic activity grew, the budget moved from an
enormous deficit in early 1959 to a sizable surplus 12
months later. Taken together, these fiscal and monetary
measures accomplished one of the most violent shifts on
record from a policy of stimulation to a policy of re­
The abrupt shift of policy proved more restrictive
than government officials planned or expected. Largely
as a result of their actions, the economic expansion that
started in April, 1958, came to a premature end and
unemployment rose at a time when it was already ex­
cessive. These unhappy consequences, however, had their
redeeming side. The very abruptness and magnitude of
the policy shift routed an inflationary psychology, dem­
onstrated that ours need not be an age of inflation,
forced businessmen to reduce waste and improve effi­
ciency, created sufficient slack in the labor market to
impede substantial wage increases, and thus re-established
stability in costs and prices. That these conditions were
produced without causing a collapse in the state of con­


F u l l E m plo y m e n t

fidence was an accomplishment of no small significance.
The aggregate demand of final buyers, both domestic and
foreign, kept growing throughout the recession of 196061. Fortunately, the monetary authorities reduced the
discount rate one month after the recession started in
1960, instead of raising it one month later as in 1957.
The easing of credit helped to maintain aggregate de­
mand and thereby hastened the end of the inventory ad­
justment. Fiscal policy, in the meantime, remained stub­
bornly quiescent. Governmental authorities were in no
mood to tolerate larger expenditures, nor would they
countenance a tax cut which was again being urged by
capable and disinterested citizens. In February, 1961,
economic expansion resumed and the administration’s
expectation of an early upturn was vindicated; but
before this happened, the nation’s electorate decided in
a close presidential election to entrust power to the
Democratic party.
In the course of the campaign of 1960, John F. Ken­
nedy promised that if he were elected president, America
would get moving again. He lost no time in giving a
new and bolder twist to economic policy. Although his
administration can hardly be credited with initiating eco­
nomic recovery in 1961, it did assume at once a very
active role in nursing the recovery and in turning what
might have been an ordinary expansion into a remark­
able upsurge of the economy. Both political and eco­

F irst L ec tu r e


nomic circumstances favored an expansionist policy. On
the one hand, the danger of inflation seemed quite re­
mote after three years of stability in average wholesale
prices and in unit costs of production in manufacturing.
On the other hand, the persistence of slack in industrial
capacity and in the labor market created a sense of im­
patience with conservative financial policies. Something
new was expected of the new administration. The merits
of an expansionist fiscal policy— particularly the advan­
tages of a reduction of income taxes over an increase of
governmental expenditures— had been extensively de­
bated since 1957, and the nation was in a mood to try
some fiscal experiments.
In the first year of his administration, President Ken­
nedy chose to move cautiously. By and large, he left it
to his advisers to popularize the teachings of the "new
economics,5 to give a scholarly dress to the theory of
using fiscal devices to close the gap between actual and
potential output, to create a vision of an economy that
might soon be recession-proof, to demonstrate that the
full-employment surplus (or deficit) is a better index of
the degree of fiscal stimulation than the actual deficit,
to show that the quest for actual budgetary balance
could be self-defeating, and to quiet any lurking fears
of inflation by suggesting guidelines for the proper be­
havior of prices and wages. The President himself was
more concerned with advancing specific policies for
which the public was prepared— such as speeding of pro­
curement and construction in the interests of recovery,


F u l l E m plo y m e n t

raising agricultural price supports, liberalizing social
security, lifting the minimum wage, extending govern­
mental programs for education, and introducing health
insurance for the aged. To be sure, the President did rec­
ommend an investment tax credit, but he coupled it with
tax increases that would prevent any loss of revenue to
the Treasury. He also suggested legislation for stand-by
authority under which the President could temporarily
reduce individual income tax rates and accelerate spend­
ing on public works; but he was much too wise about
political matters to expect these measures to win con­
gressional approval in any near future. President Ken­
nedy’s caution was plainly reflected in his Budget Message
of January, 1962, which called for a small surplus in the
next fiscal year.
Even at the outset, however, the budgetary practice of
the new administration was less orthodox than the Presi­
dent’s rhetoric. Plans for federal spending were repeat­
edly revised upward during 1961, and actual expendi­
tures followed suit. A surplus in the cash budget of $3.6
billion in 1960 was followed by a deficit of $6.8 billion
in 1961— the first of an unbroken series of deficits that
is still continuing. Monetary policy also eased and gave
strong support to the liberal expenditure policy. As ex­
pected, consumer spending responded to these stimuli
and so too did investment in inventories. Business invest­
ment in plant and equipment failed, however, to develop
the vigor that is characteristic of the recovery stage of
the business cycle. By the first quarter of 1962, new

F irst L ec tu re


orders and contracts for plant and equipment were
merely 13 percent higher than a year earlier, in contrast
to increases of 86 percent, 43 percent, and 31 percent
during the corresponding stage of the three preceding
expansions. Unemployment diminished, but its rate of
decline was abnormally slow. Evidently, the recovery was
not proceeding as well as had been hoped, despite the
large fiscal and monetary stimuli.
The weak link in the chain of economic recovery was
business investment in fixed capital. In popular discus­
sions, this was generally attributed to the existence of
excess industrial capacity. However, a good deal of idle
capacity always develops in the course of a business
slump, and yet this condition has never been a bar to
brisk expansion of investment once confidence recovers.
New firms are then established in larger numbers; exist­
ing firms in turn speed investments associated with inno­
vation; firms that have done well despite the slump en­
large their capacity in anticipation of stronger markets;
while many of the firms that have fallen behind in the
competitive race finally embark on substantial programs
of modernization. If these responses were not strongly
felt in 1961, the reason was a want of sufficient confi­
dence. Overinvestment in 1956-57, the steadily rising
trend of wages, the tendency of profit margins to shrink
during the past dozen years, the sharply reduced rate of
economic growth during the past three or four years—
all these factors contributed to business caution, and so
too did the coming of a new administration whose eco­


F u l l E m plo y m e n t

nom ic policies could n ot as yet be fairly assessed. Many
businessmen were concerned th at trade unions, w hich had
contributed to the victo ry o f the D em o cratic party at
the polls, would soon become bolder in their demands for
higher wages and larger fringe benefits. Some feared that
larger governm ental spending, however favorable to m ar­
kets in the short run, would in due course be followed by
higher taxes. Others feared th at direct controls o f prices
m ight eventually be undertaken by the governm ent in
order to check the inflationary pressures th at would re­
sult fro m its fiscal and m onetary policies, and still others
were concerned on all these grounds.

The uneasiness of the business community reached a
climax in April, 1962, when President Kennedy moved
sternly to force the steel companies to rescind the price
increase that they had just posted. This action by the
President had no clear sanction in law and it caused con­
sternation in business circles. Men reasoned that if the
government could coerce or punish the steel industry
today, it might move next against the automobile in­
dustry or the aluminum industry or any other. Since the
beginning of 1962 economic recovery had shown some
signs of hesitation. Now, with confidence shaken and a
large inventory adjustment in the steel industry un­
avoidable, the continuance of business expansion became
more doubtful. The stock market reflected the mood
of the time by experiencing its sharpest break of the en­
tire postwar period. Orders for machinery and equip­
ment were cut back here and there. Private borrowing

F irst L ec tu r e


stopped rising, raw materials prices softened, profit mar­
gins narrowed, and unemployment stopped declining.
The curve of industrial production, which had risen
smartly until April, 1962, flattened out for the rest of
the year.
Fortunately, an imminent recession was forestalled.
Recognizing that the government’s handling of the steel
price problem had disturbed the business community,
President Kennedy turned at once to the difficult task of
rebuilding confidence. In one address after another, he
and his lieutenants now stressed the dependence of our
national prosperity on free markets, higher profits, and
larger investment in fixed capital. These reassurances
were soon followed by measures to reduce the tax burden
borne by the business community. In July, 1962, the
Treasury announced that business firms could hence­
forth reckon their income taxes on the basis of shorter
and more realistic estimates of the life of depreciable fa­
cilities. This basic tax reform was long overdue and it
was welcomed by businessmen. With the President’s
prodding, the Congress enacted later in the year an in­
vestment tax credit which had already been proposed in
1961, but which was now substantially modified to make
it more acceptable to the business community.
In the late summer of 1962 the President made his
boldest move. His studies of the tax policies of other
countries had convinced him that our tax system was a
heavy drag on enterprise and investment. In view of the
slowdown of the economy, a "quick” temporary tax cut


F u l l E m p lo y m e n t

had its appeal, but the Ways and Means Committee of
the House of Representatives was more interested in
permanent reform and legislation of this character could
not be adopted quickly. In the circumstances, the Pres­
ident concluded that the time was right to announce his
intention to request the Congress at the beginning of the
next session to adopt a sweeping reform of the income
tax, the main thrust of which would be a massive reduc­
tion of tax rates for corporations and for individuals in
every income bracket. This tax proposal marked a radi­
cal departure in economic policymaking. In 1958 and
again in 1960, when the country was experiencing re­
cession, a tax cut had been repeatedly urged as a recovery
measure that promised prompt results. Now, the pur­
pose was to remove the fiscal drag on an expansion which
was still under way, to extend thereby the advance of
prosperity, and to risk fiscal deficits for an indefinite
period to realize this objective.
The new tax policies and the new tone of govern­
mental pronouncements had the desired effect on busi­
ness and investor sentiment. Fears of hostile governmen­
tal intervention in the day-by-day activities of business
firms subsided. Although many businessmen did not like
the budgetary implications of a massive tax cut at a time
when a deficit was already in the making, they also were
quick to see that stimulation of the economy through
tax reduction would serve to strengthen the private sec­
tor of the economy. In any event, the policy of favoring
investment was a significant departure from the tradi­

F irst L ec tu r e


tional policy of the Democratic party, and this fact was
not lost on the business community. With optimism re­
viving and the state of inventories in better shape, eco­
nomic conditions in late 1962 were ripe for a new wave
of expansion. By the end of the year, business commit­
ments for investment in fixed capital began rising again,
and fears of an early recession soon vanished.
In all, about a year and a half elapsed between Presi­
dent Kennedy’s announcement of his plan for tax reduc­
tion and its actual enactment. There were two major
reasons for the long delay. First, the President’s fiscal pro­
gram, as presented to the Congress early in 1963, called
for numerous revisions in the tax laws as well as a gen­
eral tax reduction; and while the latter was welcomed
widely, the former evoked powerful opposition. Second,
the President projected an increase of budget expendi­
tures of $4.5 billion for the next fiscal year besides a net
tax reduction of over $10 billion. Many influential citi­
zens who supported a reduction of taxes were sharply
opposed to a simultaneous increase of expenditure on the
ground that such a fiscal policy would entail a protracted
series of deficits. The fate of the President’s program
therefore seemed very uncertain for a time. But as the
issues surrounding the program were debated within and
outside the halls of Congress, it became increasingly ap­
parent that the President’s main objective was the tax re­
duction, and that he would yield ground to his oppo­
nents on other parts of the fiscal package. More and more
citizens therefore came to feel that they would not need


F u l l E m plo y m e n t

to wait much longer for a reduction in taxes. Finally, in
March, 1964, when Lyndon Johnson was already carry­
ing the burdens of the presidency, the tax cut became law.
But months before that, the growing expectation of its
adoption stimulated individuals and business firms to
plan and spend more daringly. The expansion of eco­
nomic activity, which was gradually cumulating of its
own momentum, thus moved ahead on a wave of increas­
ing confidence. The gross national product, expressed in
real terms, rose 4 percent between 1962 and 1963 and
well over 5 percent between 1963 and 1964.
By early 1964, the expansion of economic activity had
already lasted longer than the average duration of a business-cycle expansion. Nevertheless, the economy gave
every indication that the advance would continue.
Throughout 1964, as production and employment con­
tinued to rise, the structure of economic activity re­
mained well balanced. A much faster pace in the output
of business capital goods than in the output of consumer
goods was only beginning. The ratio of inventories to
sales in major branches of production and trade remained
low or moved still lower. The wholesale price level was
substantially steady. Although consumer prices kept ris­
ing, the advance was gentle. Although wages kept in­
creasing, they advanced at nearly the same rate as the
overall improvement in productivity, so that unit costs
of production remained quite stable. Profits grew with

F irst L ec tu re


the volume of business, besides benefiting from revisions
in the tax laws— among them, a reduction of income tax
rates which became effective during the year. Stock prices
moved up, but no faster than corporate earnings. With
prices in our wholesale markets steady, while much of
the rest of the world practiced inflation, exports rose
sharply and a larger surplus on merchandise trade piled
up than in any year since 1947. Meanwhile, interest rates
remained fairly steady. In view of the still precarious
state of the balance of payments, the monetary authori­
ties sanctioned a moderate rise of short-term market rates
of interest; but the interest rates of largest significance to
businessmen— customer rates on bank loans, bond yields,
and mortgage yields— remained at or below the level
reached at the bottom of the recession in 1961.
Moreover, while federal revenues in 1964 continued
to fall short of expenditures, the deficit now reflected
lower tax rates rather than any further increase of spend­
ing. In the debates that preceded the Revenue Act of
1964, some citizens had urged larger federal spending as
the best way to stimulate the economy, others argued for
tax reduction, and still others felt that it would be well to
travel both roads at the same time. President Kennedy
was favorably inclined to the mixed approach, but he put
much the heavier emphasis on tax reduction. Even so, the
Congress balked. The preamble to the House bill ex­
plicitly assigned top fiscal priority to tax reduction, with
debt reduction next. This meant, as Congressman Wilbur
Mills explained to the House, that the nation was choos­


F u ll E m plo y m e n t

ing tax reduction, and rejecting larger spending, as its
"road to a bigger, more progressive economy.” In order
to assure adoption of the tax cut, President Kennedy as­
sented to the preamble and President Johnson did likewise
a little later. Indeed, in his first Budget Message, presented
in January, 1964, President Johnson called for smaller
expenditures under the administrative budget in fiscal
1965 than in fiscal 1964. With this much assured, the
Senate promptly passed the House bill with only minor
revisions. And in line with the new fiscal policy, federal
spending actually stopped rising for a time. From the
third quarter of 1963 to the first quarter of 1965, cash
expenditures remained virtually constant. Thus, private
enterprise and private demand once again became the
great energizing force of the economy.
At the end of 1964, economic activity had already
been advancing for almost four years. The expansion was
proving remarkably durable, but it was not yet excep­
tionally rapid or intense. This very fact, no less than
the deliberate economic planning of the time, contrib­
uted to the prolongation of the advance. If the invest­
ment in plant and equipment was sluggish at the start,
this facilitated more vigorous activity later. If the invest­
ment in fixed capital and in inventories was checked in
1962, that too contributed to greater activity later. If the
shift toward public policies that were more mindful of
business interests took place gradually, that in its turn
helped to keep business optimism within moderate
bounds. The expansion was thus the product of many

F irst L ec tu re


causes, and not the least among them was the inheritance
of price and cost stability. As late as 1964 there was still
a fair amount of slack in the economy, and this condition
continued to exercise a restraining influence on the
market behavior of both businessmen and labor leaders.
The fact, moreover, that productivity improved some­
what faster after 1960 than in the preceding quinquen­
nium made it easier for business firms to pay higher
wages without incurring higher costs per unit of output.
In the environment of rough stability of costs and prices
that ruled until 1964, there was little reason to accumu­
late inventories as a hedge against inflation. Nor was
there any need to rush investments in fixed capital on
the ground that costs were likely to be appreciably higher
next year than now.
Thus, our economy in 1964 had the qualities of order
and balance, besides considerable momentum from
within the private sector. To be sure, signs were not lack­
ing that the vigor of expansion was rapidly reducing the
slack in productive capacity. Prices of sensitive raw ma­
terials had begun rising in spirited fashion as early as the
fall of 1963. By the late summer of 1964 a significant
increase had already occurred in the number of business
firms reporting slower deliveries of merchandise. In the
closing months of 1964, price increases in wholesale mar­
kets— while usually quite small— had become rather
widespread. Toward the end of 1964 the unemployment
rate for married men— who constitute, of course, the
more skilled and experienced part of the labor force—


F u ll E m plo ym en t

had dropped to the level that ruled during the boom of
1956-57. By the end of the year, the length of the aver­
age workweek in manufacturing was already at the
level reached during the Korean War. However, in the
exhilarating economic and political atmosphere that
ruled in the closing months of 1964, it was easy to over­
look these and other indications of increasing pressure
on the nation’s available resources.
Clearly, no small part of the economic improvement
was due to the government’s tax policy combined with
monetary ease. With the unemployment rate still close
to 5 percent at the beginning of 1965, it seemed only
fitting and proper to the managers of our national pros­
perity to press harder the general policy of economic
stimulation that had proved so dramatically successful.
The second installment of the income tax reduction for
corporations and individuals became effective in Jan­
uary, but that was deemed insufficient. The President
urged in addition a reduction of excise taxes, and this
proposal evoked such enthusiasm in the Congress that
only 34 days elapsed between the introduction of the
excise bill and the President’s signature. The new law
aimed to reduce excises by $2.2 billion in the fiscal year
beginning July, 1965, and by nearly $5 billion on a fullyear basis when all the reductions would take effect.
These tax reductions were not yet the whole of the fiscal
stimulus applied in 1965. With the war in Vietnam in­

F irst L ec tu r e


tensifying and new civilian programs clamoring for gov­
ernmental favor, the fiscal philosophy enunciated in the
preamble of the Revenue Act of 1964 was quickly for­
gotten. By the last quarter of 1965, the annual rate of
federal cash expenditure was already $ 12 billion higher
than in the first quarter.
These fiscal expedients imparted, of course, a fresh
stimulus to economic expansion. Since the economy was
now booming, governmental revenues rose despite the
new tax reductions. Nevertheless, the deficit increased
during 1965, and this need for finance was reinforced by
a tremendous upsurge of borrowing by business firms
and consumers. On their part, the monetary authorities
made sure that the growing demands for credit would
be met. In fact, they supplied the commercial banks with
reserves so generously that the banks were able to add
to their investments in securities, besides adding abun­
dantly to their loans. Indebtedness to commercial banks
rose by $25 billion during 1965, in contrast to $16 billion
during 1963 and $18 billion during 1964. Total debt,
both public and private, grew by $96 billion during
1965, in contrast to about $77 billion during each of the
two preceding years. With credit expanding all around,
the money supply could not stand still. The nation’s
stock of money, which had grown at an average annual
rate of less than 3 percent between mid-1960 and mid1964, rose at a rate of over 4 percent between June, 1964,
and April, 1965, and at a rate of nearly 6 percent the
rest of 1965. Thus, as the economy approached full em­


F ull E m plo ym en t

ployment, monetary policy became increasingly expan­
sionist. And so, too, did fiscal policy. The full-employment surplus, which had become the official measure
of fiscal stimulus, moved irregularly between 1961 and
1963, fell in 1964, and was nearly wiped out by the
end of 1965.
The accelerating use of monetary and fiscal stimuli
served to narrow very quickly the remaining gap, as the
Council of Economic Advisers reckoned it, between the
nation’s actual and potential output. As 1965 drew to a
close, the nation could rejoice that the unemployment
rate was finally down to 4 percent— the level which the
Council had previously adopted as a reasonable target for
full utilization of resources. But the widespread upsurge
of public and private spending produced also other and
less welcome results— in wholesale markets, prices that
were 4 percent higher than in mid-1964; in consumer
markets, prices that were nearly 3 percent higher; in the
labor market, wages that were beginning to rise at an
increasing rate; and in the money and capital market,
interest rates that were moving up sharply, despite an
enormous expansion in the supply of credit. These evi­
dences of strain on the economy’s resources became
stronger during 1966. By the fall of the year, wholesale
prices rose another 2.5 percent, consumer prices over
3.5 percent, while interest rates reached their highest
level in about 40 years.
Worse still, the economy became seriously distorted
by 1966. In the first place, as bottlenecks on the supply

F irst L ec tu r e


side became widespread, the hectic advance of physical
production could not continue. Crosscurrents in the
economy therefore multiplied and the high expectations
of many businessmen were frustrated. Second, a large
gap between the rate of growth of business investment in
fixed capital and the rate of growth of consumer spend­
ing had already lasted three years, and this imbalance in
the structure of production could also not long continue.
Third, concern over possible shortages and slow deliver­
ies caused inventories to rise faster than sales in the early
months of 1966. Later in the year, as the growth of sales
weakened, inventories began to pile up involuntarily.
Fourth, profits became vulnerable as a result of the
divergent movements of prices and wages. The advance
of wholesale prices abated after mid-1966, mainly be­
cause of weakness in farm and industrial materials prices,
while the rise of consumer prices quickened. With profits
high, the demand for labor strong, and the consumer
price level rising at a disconcerting rate, the upward push
of wages accelerated. Meanwhile, numerous factors
slowed down the advance of productivity— among them,
the poorer quality of newly hired labor, more rapid labor
turnover, lesser diligence of employees, accumulating
fatigue of workers and their managers, slower and less
dependable delivery of materials and equipment, the need
to keep much high-cost equipment in use, and the need
here and there to bring obsolete equipment back into
use. The net result was that the rate of increase of out­
put per manhour not only slackened, but fell below the


F u ll E m plo ym en t

rate of increase of wages per hour. With demand pres­
sures, particularly in the consumer sector, beginning to
wane, while unit labor costs were rising all around, a
cost-price squeeze developed in the world of business.
These forces internal to the boom, which were now
causing readjustments in the economy, were heavily in­
fluenced, but in conflicting directions, by governmental
policy. Federal cash expenditures moved up with ex­
traordinary rapidity, and reached an annual rate of $156
billion in the second half of 1966, in contrast to a rate
of $130 billion a year earlier. Tax revenues also rose
rapidly in 1966, largely but by no means entirely as a
result of the boom. Higher social security taxes that had
previously been legislated went into effect at the begin­
ning of the year. A little later, some excises were raised
and a speedup of tax payments was ordered. In the fall
the investment tax credit was suspended. Nevertheless,
as estimates of the full-employment surplus indicate,
fiscal policy taken as a whole became even more expan­
sionist in 1966 than in 1965.
But if fiscal policy was still highly stimulative, mone­
tary policy became severely restrictive. As signs of in­
flation multiplied in 1965, the monetary authorities
became concerned that their policy of active credit ease
was being carried too far. They were troubled by the
deterioration in the basic condition of the balance of pay­
ments as well as by domestic developments. As character­
istically happens during a boom, imports were now rising
much more swiftly than exports. Besides, the war in

F irst L ec tu re


Vietnam was causing large and increasing foreign ex­
change costs. In December, 1965, the monetary author­
ities finally overcame their hesitation and raised the dis­
count rate, despite strong opposition from the White
House; but they continued for another few months to
allow bank credit to grow at practically the same rate
as before. By the spring of 1966, when it became ap­
parent that the stimulative thrust of fiscal policy was
not abating, they shifted bluntly to a policy of credit
restriction, thus repeating a familiar pattern. Many busi­
nesses, even large and well established corporations, that
sought to borrow from their commercial banks, now
discovered that they would have to get along with less
credit or try to find credit elsewhere. But other financial
institutions— life insurance companies, mutual savings
banks, and particularly the savings and loan associations
— could not extend significant relief, since they were
even more hard pressed than the commercial banks. In
this constricted environment of finance, not only did in­
terest rates move up rapidly from a level that was already
abnormally high, but the public market for debt instru­
ments became disorganized for a while, and total private
borrowing in the final quarter fell to the lowest level for
that season since 1962.
The credit squeeze reinforced the gathering forces of
readjustment in the economy. The homebuilding indus­
try, which is peculiarly dependent on credit, became the
outstanding casualty of financial stringency. Many real
estate firms and small businesses in other lines of activity


F u ll E m plo y m e n t

were injured. Moreover, the high interest rates brought
depression to the bond market, and became a major
negative influence on the stock market as well. Tight
money, however, was not the only factor now disciplin­
ing the boom. With the scope of economic expansion
narrowing, labor costs rising, profit margins shrinking,
construction costs running well above investors5 esti­
mates, uncertainty about the course of federal finances
growing, and the business mood gradually becoming less
exuberant, powerful forces besides tight money operated
to bring the investment boom to a close. Consumer mar­
kets also lost their vigor as many families began practic­
ing stricter economies in order to cope with the rising
cost of living. In the meantime, inventories soared and
the need to bring them into closer relation to sales cast a
cloud on the economic outlook for the months immedi­
ately ahead.
The recent sluggishness of the economy has inevitably
led to much questioning of governmental policy. In par­
ticular, the monetary authorities have been blamed for
bringing on a damaging credit shortage and unacceptably
high interest rates last year. The critics are undoubtedly
right if they mean that the shift from easy to tight
money need not have been so blunt. But the complaint
of some goes deeper; namely, that the government should
have seen to it that interest rates remained at the mod­
erate level that ruled until mid-1965. It is doubtful
whether such a result could have been achieved. If the

F ir s t L e c t u r e


monetary authorities had attempted to peg interest rates,
the boom would have become still more intense and the
demand for credit would have risen still faster. The re­
sulting open inflation, quite apart from other grave con­
sequences, could have made interest rates rise eventually
even more than they did. After all, when the price level
is going up fast and constantly, lenders will in the end
seek to be compensated for the depreciation of money
during the period of the loan, and no central bank can
force lenders to do anything else. As it was, the advance
of interest rates before April, 1966, merely reflected the
fact that the demand for credit had become so intense
that it rose even faster than the extraordinary rise in the
supply of credit. It was only then that the authorities
stepped bluntly on the credit brake.
The fiscal authorities also have not escaped criticism.
In view of the scale of federal spending and the escala­
tion of the war in Vietnam, they have been repeatedly
blamed for not raising income tax rates early in 1966.
It seems likely that if defense costs had not been greatly
underestimated, income taxes would actually have gone
up. In that event, monetary policy would probably have
been less restrictive, the homebuilding industry would
have fared better, and some of the gyrations in financial
markets would have been avoided. On the other hand,
since retail trade was already beginning to display some
signs of sluggishness, higher income taxes on individuals
might well have accentuated the slackening rate of ex­
pansion. The case was perhaps stronger for a temporary


F ull E m plo ym en t

increase in the corporate income tax or a suspension of
the investment tax credit; but any such measure would
also have come at an inconvenient time— that is, when
profit margins were already beginning to recede. As
things happened, the suspension of the investment tax
credit did not become law until November, the very
month when the Federal Reserve authorities had already
begun relaxing the credit restraints.
The fact is that prompt or really good solutions are
rarely, if ever, available for the imbalances generated by
inflation. Once forces of inflation have been released, it
becomes very difficult to bring them under control with­
out some sizable readjustments in the economy. Mistakes
in economic policy were undoubtedly made in 1966 as in
every year; but they largely derived from the fateful
policies of 1965 when, despite the larger spending on
defense, practically every weapon in the arsenal of eco­
nomic stimulation was brought into use— greater mon­
etary ease, lower income tax rates for individuals, lower
income tax rates for corporations, lower excise taxes,
and larger spending on programs of the Great Society.
All this happened when moderate measures of restraint
rather than accelerated stimuli were needed, so that the
expanding economy could retain its balance. And so we
finally come to the agonizing question: why did the na­
tion’s policymakers, who for years had succeeded so
well in monitoring a business expansion under difficult
conditions, finally unleash the forces of inflation? Why
did men who showed the ability to profit from experi­

F irst L ec tu re


ence succumb to one of the oldest weaknesses of govern­
mental practice?
One reason, I think, is that they were misled by the
very success that for a time attended their efforts. Eco­
nomic expansion was continuing, and the level of costs
and prices was remaining steady. Even the disequilibrium
in the balance of payments no longer seemed so formid­
able. The export surplus had risen steadily since 1962
and, disagreeable though it would be to do so, the adverse
capital movement could be handled by special measures
— such as the interest equalization tax of 1963 or new
guidelines for foreign loans and investments. With pro­
duction, employment, personal incomes, and corporate
profits going up steadily, and the consumer price level
rising less rapidly than in earlier years, the nation’s elec­
torate returned the administration to power with an
overwhelming vote of confidence in November, 1964.
Economic policies for and during 1965 were shaped in
this atmosphere of success, to which the Council of Eco­
nomic Advisers had made a very notable contribution.
The massive tax cut was its bold conception, and the en­
actment of such a measure at a time when the economy
was advancing smoothly was a triumph of the "new
The central doctrine of this school is that the stage
of the business cycle has little relevance to sound eco­
nomic policy; that policy should be growth-oriented in­
stead of cycle-oriented; that the vital matter is whether
a gap exists between actual and potential output; that


F u l l E m plo y m e n t

fiscal deficits and monetary tools need to be used to
promote expansion when a gap exists; and that the
stimuli should be sufficient to close the gap— provided
significant inflationary pressures are not whipped up in
the process. The magnitude of the stimulus to be applied
in any particular case involves, of course, difficult esti­
mating and forecasting, but the Council’s forecasts were
apparently improving. Its economic forecast for 1962
was wide of the mark; it was better for 1963 and it was
nearly perfect for 1964. In judging economic prospects
for 1965, the diminished slack in the economy could not
be ignored. But if the margin for expansionist policies
appeared smaller on this account, the guidelines for
prices and wages could increase it. That, indeed, was
their basic purpose. Originally presented as a contribu­
tion to public discussion, they had by now been shaped
into crisp rules that might lead to censure of violators or
worse. With the price level nearly steady and unemploy­
ment still well above 4 percent, it thus seemed tolerably
safe as well as desirable to resort to fiscal and monetary
stimuli on a larger scale than before. But as later experi­
ence demonstrated, neither trade unions nor business
firms will act often or long in a manner that is contrary
to their economic interests. Once slack in the economy
was significantly reduced, expectations of stable prices
began to fade, inflationary pressures reappeared, and their
initial symptoms were already visible in 1964, as I pre­
viously noted.
The policymakers paid slight attention to these cycli-

F irst L ec tu re


cal symptoms, for their thinking was focused on bringing
down the rate of unemployment— an objective to which
the government was rightly committed. An unemploy­
ment rate of 4 percent, or possibly somewhat less, had
always been the objective of the administrators of the
Employment Act. But in 1961 the figure of 4 percent
became official for the first time, and this inevitably
added to public pressure for its prompt realization. How­
ever, the economic significance of any particular figure
of unemployment does not stay fixed in a dynamic en­
vironment. In recent times, the labor market has changed
profoundly as the numbers working part-time or inter­
mittently grew relative to the stable full-time labor
force, as voluntary unemployment became a larger fac­
tor in the total, and as job opportunities for the un­
skilled declined. These structural changes in the labor
market tended to make it harder to reach an unemploy­
ment rate of 4 percent merely by stimulating aggregate
demand. But if this was the case, it was desirable by 1965
to shift the emphasis of economic policy from expanding
aggregate demand to the correction of structural mal­
adjustments. The administration read the evidence dif­
ferently, and it did so in part because of the theoretical
apparatus of the Council of Economic Advisers. Since
the Council identified an unemployment rate of 4 per­
cent with a condition of practically full employment,
this figure served as a constant in the equation for com­
puting the potential output. The gap between actual
and potential output, in turn, was attributed to a defi­


F u l l E m plo y m e n t

ciency of aggregate demand; so that, in effect, any un­
employment in excess of 4 percent called for correction
of an alleged demand shortage. This was a dangerous
shortcut in analysis, since the gap could obviously arise,
in whole or in part, from obstacles on the side of supply
or from a failure of the constituent parts of demand and
supply to adjust sufficiently to one another. To analyze
the labor market on these principles, the Council would
have needed comprehensive statistics on job vacancies.
Unfortunately, such statistics did not— and still do not
— exist.
Faulty statistics compounded the difficulties of the
policymakers. When industrial markets tighten, list
prices for a time are apt to remain unchanged, while
effective prices are raised by reducing special concessions
or charging a premium. Since these common departures
from list prices are largely ignored in the official index
of wholesale prices, the rise that it registered in 1964
and 1965 undoubtedly understated the actual rise. An­
other statistical deficiency was still more mischievous.
As originally calculated by the Department of Com­
merce, the annual rate of increase in the gross national
product during 1965 was consistently too low, quarter
after quarter, by amounts varying from about $2 to $5
billion. This cumulation of errors left its mark on eco­
nomic thinking by underestimating the growth that was
taking place, and therefore also exaggerating whatever
gap may have still existed between actual and potential

F irst L ec tu re


Thus, the psychology of success, the novel guidelines
for prices and wages, technical economic analysis, and
its statistical accoutrements, all played their role in mov­
ing the nation to a more expansionist economic policy
during 1965. But the role of philosophic views and po­
litical factors, which are always and inevitably present,
may well have exceeded everything else. The main drive
for an expansionist policy came from the executive es­
tablishment. The Congress generally acquiesced, and so
too for a while did the Federal Reserve Board which still
had some misgivings about the degree of caution that it
had exercised in the past. Nowadays, the view is widely
held in economic and political circles that a little infla
tion is tolerable because it can lead to a reduction of
unemployment and some alleviation of poverty. The
longer-run relations of inflation, unemployment, and
poverty are less well understood. Thus, with prosperity
increasing, it seemed only proper to the President and
his advisers to take bolder steps in behalf of the sectors
of the economy that had been left behind by the march
of progress. With income taxes already lowered, it
seemed only just to reduce excises and thus aid both
merchant and consumer, whether rich or poor. The
growing involvement in Vietnam came gradually and
it was not expected to be a major factor financially. As
the year advanced, it became evident even to many of
those who supported the guidelines policy that trade
unions and business corporations either would not or
could not discharge adequately the responsibility of hold­


F u ll E m plo y m e n t

ing back the tide of inflation which the government, in
effect, had asked them to assume. Indeed, by mid-1965,
the Federal Reserve authorities had already become
gravely concerned about the course of events; but they
were reluctant to take immediate measures that would
run counter to the policy of the executive— the main
source of governmental power. Time is always needed to
carry out a significant shift of policy by a far-flung gov­
ernment of divided powers, particularly when the move
requires restraints on expansion. In this instance, the
difficulty was magnified by the political cost of returning
to orthodox policies for fighting inflation.
Theories have a power that administrators, no matter
how able, cannot fully control. By and large, economic
policy during 1965 was still governed by the theory that
stimulation of activity was reasonably safe as long as
a gap existed between actual and potential output, no
matter how small the gap was becoming or how rapidly
it was being closed. When small inflationary signs ap­
peared, they were at first not believed or dismissed as
trivial. By the time a change in policy was attempted,
it had already been pushed into greater stimulation than
was intended. Thus, deliberately expansionist measures
were carried along passively for a time as the desirability
of a shift in policy and how it might best be executed
were being pondered by the managers of our prosperity.
The course of economic policy in the United States in

F irst L ec tu r e


recent years, despite some disturbing misadventures, re­
mains impressive. Since 1960 we surely have made prog­
ress in moving toward our national objectives. Produc­
tion and employment rose substantially, the advance of
prosperity became widely diffused, full employment was
re-established, and new doors of economic opportunity
were opened up to underprivileged citizens. The govern­
ment played a vital part in bringing about these gains by
its imaginative, and yet pragmatic, approach to the na­
tion’s problems. When increases of federal spending
failed to produce desired results, it shifted boldly to
tax reduction, and thus made the psychology of confi­
dence its ally in the quest for economic improvement.
When structural maladjustments in the labor market
became clearer, it proceeded to build on the modest be­
ginnings of the Manpower Development and Training
Act. And when inflation broke loose, it finally recognized
that orthodox financial measures were better suited to
our nation’s genius than legal props for the badly
bruised wage and price guidelines.
However, this willingness to learn from experience
came much too slowly at times, and in any event recent
years have brought disappointments as well as successes.
Certainly, extensive unemployment lasted much too long,
the disequilibrium in the balance of payments escaped
correction, the federal government continued to run a
deficit even when full employment was re-established,
the nation experienced another round of inflation and
this, together with the large fluctuations in financial


F u l l E m plo y m e n t

markets, resulted in a redistribution of wealth that in­
jured many defenseless citizens. Economic policy cannot
escape a part of the responsibility for these failures, some
of which may yet haunt us in the future.
Thus, governmental policies for dealing with the
problem of full employment and economic stability have
moved along a rocky road in recent years as in the past.
Since the 1930s, economic policymakers have indeed
demonstrated a capacity to learn from past mistakes.
Too often, however, their memories have grown dim
with the passage of time. Economic generals, not unlike
their military counterparts, sometimes forget which war
they are fighting, nor do they always know which war
to fight. Nevertheless, significant progress has been made
and we must try to extend it.
The needs are many, and so too are the opportunities.
We need to become better aware of the limitations of the
art of economic forecasting even as we try to improve
it. We need to develop comprehensive data on job va­
cancies, so that it will no longer be necessary to guess
whether or when a deficiency in aggregate demand ex­
ists. We need to improve our measures of prices ana
costs, so that inflationary pressures can be recognized
more promptly. We need to develop quarterly projec­
tions of federal revenues and expenditures, similar to
the information now compiled by the government on
business sales expectations and investment intentions, so
that the changing requirements of fiscal policy can be
better evaluated than in the past or at present. We need

F ir s t L e c t u r e


to learn more about the subtle forces that shape the
state of confidence. We need to develop policies for deal­
ing with seasonal unemployment— a problem that we
have largely ignored since the 1920s. We need to con­
centrate more heavily on labor market policies, includ­
ing a reform of the minimurn wage, so that we will be
less tempted to seek through expansionist policies what
can be achieved at lower cost and with more lasting
effect by attending to structural causes of unemploy­
ment. We need to strengthen the existing automatic
stabilizers and try to devise sensible new ones, so that
the burdens of discretionary policy may be somewhat
lighter. We need to learn to act, at a time when the
economy is threatened by inflation, with something of
the sense of urgency that we have so well developed in
dealing with the ihreat of recession. We need to learn
to make necessary shifts of economic policy more
promptly, so that they may be gradual instead of abrupt.
And most important of all, we need to learn better than
we yet have the basic truth that, while stability of the
general price level will not of itself bring prosperity in
the years ahead, we cannot very well maintain interna­
tional confidence in the dollar or have sustained prosper­
ity without it.




I realize that this is a debate whose title might crudely be
put— "Resolved: Wage-Price Guideposts are Obnoxious,
Harmful if Effective but Inevitably Ineffective.5 Pro­
fessor Burns is the speaker for the affirmative, and I have
the not completely enviable task of being speaker for the
It reminds me of a debate I engaged in during the war.
It appeared in a businessman's magazine and had as its
title— "Resolved: Easy Money is a Bad Thing for the
Country.5 The public-spirited banker Hans Christian
Sonne upheld the affirmative, and I had to develop the
case for easy money. As was the custom, readers were
polled to see who had won the debate. When the final
score was counted, I was behind 75 percent to 25 percent;
but the kind editor wrote me saying that, before his audi­
ence and on such a subject, I had done so well that I was
to be congratulated.
Actually, I propose to treat this as a seminar, adhering
literally to the title of this series. For one thing I am not
a wholehearted enthusiast for guideposts; if uncritical
enthusiasm were desired, one would have to go elsewhere.
Many aspects of guideposts I do admire, but at points I


F u l l E m plo y m e n t

shall have to be the devil's advocate in an adversary
procedure designed to bring out truth and balance.
One final note of introduction. My title is "WagePrice Guideposts and the Need for Informal Controls in
a Mixed Economy.” The words are selected so that our
discussion can fruitfully go beyond the wage and price
issues raised by Kennedy-Johnson doctrines to the more
general issues that confront the American economy.
Are informal controls over bank lending abroad a
good or bad thing: What about the so-called voluntary
program by American corporations to limit direct for­
eign investments which worsen our balance of payments?
Many of the same issues, philosophical and technical,
are raised by this problem as by that of the guideposts.
What are we to think of the familiar Federal Reserve
weapon called "moral suasion” ? Only last year the Fed­
eral Reserve went out of its way to issue a formal letter
cautioning banks against excessive lending, but assuring
them that banks which perform in the public interest
would receive favorable treatment at the discount win­
dow. And, of course, earlier this year when the economy
proved to be turning soft, the Federal Reserve ostenta­
tiously issued a letter revoking the previous letter of
Although my examples are current and American,
these are lasting issues for debate in every modern mixed
economy. The Dutch do not have a President, but the
Netherlands government has been struggling for a decade
with the problem of "an incomes policy.” France does

Second L ec tu re


have a strong head of state and a plan, but it too must
try to reconcile the dilemma of full employment and
price stability. Before this audience I don’t suppose I have
to add to the praises of the West German miracle. Close
study of that experience shows that the West German
Republic is a far cry from a laissez-faire economy. At
the same time that Ludwig Erhard was writing fine
words about the free market, he was turning on the
spigot of residential construction by ad hoc tax con­
cessions; and whenever this or that export trade showed
signs of flagging, some new measure was cooked up in
Bonn that would have been the admiration of Sidney
Webb and the despair of Frederick Bastiat or Friedrich
Hayek. But my point in this connection is that the Ger­
man economy, like every present-day mixed economy, is
still far from approaching a solution to the problem of
creeping inflation.
We may with fine rhetoric or telling syllogism slay the
presidential guideposts a dozen times; but still, in the
opinion of the vast majority of economic experts, we
shall be left with the vexing dilemma that free markets
do not give us a stable consumers price index at the same
time that the rate of unemployment stays down to a
socially desirable minimum.

During the great slump of the 1930s economists
learned that expansionary fiscal and monetary policies
could bring a depressed economic system toward full


F u l l E m plo y m e n t

employment. You might call these the days of happy
and simple Keynesianism.
However, by the end of World War II when full em­
ployment had long been a reality, the honeymoon was
over. The issue of price instability at full employment
stared economists in the face. I suppose the famous
Beveridge Report of the mid-1940s in England was the
first to state forcefully this dilemma. (Parenthetically,
our own Employment A ct of 1946 tactfully avoided
noticing the problem.)
Then there was a dramatic series of unsigned articles
in the Economist predictive that ours would be an age
of inflation. These articles asked the question:
Can any modern mixed economy simultaneously enjoy
1) full employment
2) stability of the general price index
3) free commodity and collective bargaining
markets uncontrolled by government fiats?
The author, who I believe was Peter Wiles, then a
young scholar at Oxford, answered his own question in
the negative. Either you must give up full employment,
or stand some creeping inflation. If you can’t tolerate
unemployment, and if you insist upon reasonable price
stability, there is nothing to do but bring government
into the act, invoking formal or informal price-wage
Two decades have passed and one must admit that the
prophet’s pessimism was amply justified. Indeed, he may
not have been pessimistic enough. Perhaps even with

Second L ec tu re


government intervention, we cannot long enjoy both
high employment and reasonable price stability. That is
the basic issue we face here tonight.
Since I have quoted one prophet and am here perform­
ing the role of the devil’s advocate, let me now quote
another prophet, John Kenneth Galbraith. Not content
with the fame and affluence from his earlier works, Gal­
braith has brought forth a new classic, The N ew Indus­
trial State. From it we can learn his views on the subject
of guideposts.
At any reasonably high level of demand, prices
and wages in the industrial system are inherently un­
stable. . .. The . . . remedy for the wage-price spiral
is to regulate prices and wages by public authority.
. . . In World War II and the Korean War . . . the
wage-price spiral was successfully contained by con­
trols. . . . [and] there was nothing unique about the
war-time situation. Economic institutions and be­
havior are not drastically altered either by declared
or undeclared war. . . .
This initiative [of guideposts] was, perhaps, the
most important innovation in economic policy of
the administration of President John F. Kennedy.
. . . Thereafter for several years the wage guideposts, as they came to be called, and the counterpart
price behavior were a reasonably accepted feature of
government policy. Wage negotiations were closely
consistent with the guidelines. Prices of manufac­
tured goods were stable.
Let me quote another modern prophet, Milton Fried­
man, whose palette holds different paint:
Inflation is always and everywhere a monetary

F u ll E m plo ym en t


phenomenon. . . . It follows that the only effective
way to stop inflation is to restrain the rate of growth
of the quantity of money. . . . Compliance with the
guideposts is harmful because it encourages delay in
taking effective measures to stem inflation, distorts
production and distribution, and encourages restric­
tions on personal freedom . . . guidelines threaten
the censensus of shared values which is the moral
basis of a free society.2
I suppose it will be argued by many that Professors
Galbraith and Friedman are not middle-of-the-road
men. Let me, therefore, demonstrate the capacity of our
subject for arousing strong opinion by quoting Arthur
F. Burns:
The fundamental point of the preceding analysis
is that general observance of the guideposts would
throttle the forces of competition no less effectively
than those of monopoly. . . . Since free competitive
markets would virtually cease to exist in an econ­
omy that observed the guidelines, this transforma­
tion of the economy merits serious reflection.3
Let us begin by clearing up one inexcusable misunder­
standing of the wage guideposts. After President Ken­
nedy issued his 1962 recommendation that wage rates be
increased only by the 3.2 percent increase in labor pro­
ductivity, financial columnists and corporate executives
repeatedly stated in an arithmetical falsity:
If labor productivity grows by 3.2 percent and
wages rise by 3.2 percent, then there is zero percent
left over of the fruits of technological progress to
go to profit. And yet much, probably most, of the
improvement in labor productivity is in fact attrib-

Second L ec tu re


utable to better capital tools, better management
methods, and improved scientific know-how.
Indeed it would be unfair and unworkable if all the
fruits of progress were to go to labor alone. The guide­
lines could be rejected out of hand were this their purpose
and effect. But critics who use this argument have failed
in their elementary arithmetic. The truth is that a 3
percent increase in labor productivity matched by a 3
percent increase in wages entails exactly a 3 percent in­
crease in profits. To clinch this, suppose we begin with
700 of wages and 300 of profit, or 1,000 in all. Let pro­
ductivity grow by 3 percent, so that we now have 1,030
to divide. A 3 percent increase in wages does not use up
the whole of the extra 30, but rather .03 X 700 = 21,
with 9 left over the profit. But what is this 9? It is
exactly .03 X profit’s original 30. Those financial col­
umnists who wept crocodile tears for euthanaesia of the
profit class engendered by guidelines could have been
saved from error if the presidential directive had been
enunciated as a 3.2 percent increase in profits and wages.
In economic argumentation, when you gain one friend
you lose another. Precisely because the guidelines allow
for an equal percentage increase in all factor-of-production shares, they have been criticized as "freezing the
status quo distribution of productive incomes.” I must
confess that this was my initial reaction against them.
What is so sacred about the existing distribution of
income that it should be frozen forever? For one thing,
why should organized labor agree in perpetuity to desist


F u l l E m plo y m e n t

from trying to raise the share of the social pie going to
workers? And, if you believe that it is the purely com­
petitive forces of the marketplace which determine the
distribution of income shares, what a coincidence it
would be for changes in technology and tastes to be
such as lead exactly to perpetuation of any base-period
sharing of the national income?
My qualms in this matter, and those of any critic,
seem to be best answered by quoting the analysis of
Professor Robert Solow, one of the formulators of the
Kennedy guideposts.
It seems to me that this argument has no practi­
cal weight at all. It is rendered trivial by two facts.
The first is that the division of the national income
between labor and property incomes is among the
slower-changing characteristics of our economy, or
of any Western economy. The second is that neither
the guideposts nor any other such quantitative pre­
scription can be satisfied exactly. Suppose that wage
rates do follow the guideposts exactly. Then if the
price level, instead of remaining constant, goes up
by, say, 1 percent in a year, the share of wages in
national income will fall by 1 percent— that is, by
about % of 1 percentage point. If, on the other
hand, the price level should fall by 1 percent, the
share of wages in national income would rise by %
of 1 percentage point. That may not sfcem like
much, but actually it is quite a lot, more than
enough to provide all the flexibility that our eco­
nomic system is likely to need.
In the twenty years since the end of the war, the
proportion of "compensation of employees” to na­
tional income has moved about within a narrow

Second L ectu re


range, say from 65 percent to 71 percent. There is
no reason to suppose that market forces will always
want to keep the figure within those bounds, but
there is every reason to believe that market forces
will never, or hardly ever, want to move the pro­
portional distribution of income very rapidly. As
the numerical example shows, if wages adhered to
the guidelines, the distribution of income could get
from one end of its postwar range to the other in
about eight years, with an annual rate of inflation
or deflation never exceeding 1 percent.4
Since this is a seminar, I trust I shall be forgiven for
writing down a few simple equations or arithmetical
identities. The value of total product is equaj, to dollarprice times quantity sold; and this can be broken up into
wage-cost alone plus the remainder, which is the share of
P X Q = W X L + Profit
Now let us write the ratio depicting the relative
share of profits to wages as r. Then arithmetic multipli­
cation and division and a little rearrangement of terms
will convert our equation into the guidepost form.

This says that, if the price level is to be stable and rela­
tive factor shares are not to be disturbed, wage rates
can rise only in the same proportion as physical-labor
productivity rises. I warn that this is a mere tautology
of arithmetic. In any inflation, even that of purest de­


F u ll E m plo ym en t

mand pull, wage rates and money profits rise at a faster
pace than physical productivity.
The above formulation permits me to concede at once
certain valid objections to any one frozen guidepost
target number such as 3.2 percent. If business is to be
subject to higher tax rates— as for example in the 1965
step-up in social security payroll tax rates— then per­
mitting labor a wage-rate increase fully equal to the
productivity increase would be in effect to say: "Labor
is to bear none of the burden of the extra social security
benefits voted by Congress.” I agree that that would
be unfair, but add the reminder that this is a two-way
street. When Congress reduces business taxes— as in the
investment tax credit— labor gets none of the benefits
under frozen guidepost numbers.
The same problem arises from changes in prices of
nonindustrial materials. When 1965 copper and oil
prices rise, any firm experiencing only a 3.2 increase in
the productivity of its own laborers can afford to raise
its workers’ wages by 3.2 percent only by suffering a
deterioration of relative profit share.
Because the guideposts were promulgated in a period
that proved to be an exceptionally long economic ex­
pansion, with productivity and volume continuing to
grow for an exceptionally long time, one could not prior
to 1967 weep for the plight of the profit receiver. Profits
in the 1960s have done very well. But I must point out
that in the course of the business cycle there is a char­
acteristic fluctuation of the wage-profit share: the profit

Second L ec tu re


share drops during recessions and pauses; it rises sharply
in recoveries. Thus, we must question whether the re­
marks quoted from Solow fully succeed in banishing
concern that guidepost formulas tend to resist natural
economic forces by trying to freeze relative factor
shares. This is one way of looking at the problem which
vexed President Johnson’s advisers. To give, at the end
of a cycle, wage increases equal to average productivity
growth over the cycle, is to produce inflation at the end
of the cycle. On the other hand, to hold down wage in­
creases at the end of the cycle to the low productivity
advances of that period is to fly in the face of tight labor
markets and invite noncompliance with the guideposts.
Let me turn from the arithmetic of the problem to
what it is that wage-price guideposts are an attempt
to do.

I cannot stress too strongly that wage-price guideposts
are not substitutes for proper macroeconomic fiscal and
monetary policies. Economists have always known that
excessively easy monetary policy and/or enlarged ex­
penditures coupled with small tax receipts can produce
demand-pull inflation. The only cure for that situation is
tighter money and/or more restrictive fiscal policy.
If prices and wages were perfectly flexible, like those
in ideal auction markets, there would be no need for
guideposts. The authorities would engineer fiscal and


F u ll Em plo ym en t

monetary expansion just up to the point of full employ­
ment. Prior to that point, the general price level would
not rise and average wages would grow automatically
with productivity. Relative prices and wages would have
to show fluctuations in order to clear particular markets.
In this ideal world, which differs dramatically from
every mixed economy that now exists, the problem
would be merely one of macroeconomic dosage, and
there would be no dilemmas of policy.
Our mixed economy— like that of Germany, Japan,
England, France, Sweden, and Belgium— reveals a tend­
ency for prices to creep upward even when there is sub­
stantial unemployment. To keep wholesale prices stable
and the implicit-GNP-deflator index growing at a mod­
erate 1.5 percent might well require that U. S. unem­
ployment be, in the short run, 5 percent or more.
Experience suggests that in the short run there is a
trade-off between the intensity of unemployment of
men and capital and the intensity of price increase. This
can be plotted as a statistical scatter diagram and graphed
in the form of what is called a Phillips curve— named
after Professor A. W . Phillips of the London School of
Economics, who measured this relationship for the
United Kingdom over the past century. One must not
exaggerate the exactitude of the Phillips curve but never­
theless it is one of the most important concepts of our
times. Any criticism of the guideposts which does not
explicitly take into account the Phillips curve concept

Second L ec tu re


I have to treat as having missed the fundamental point
of all economic policy discussions.
Let me illustrate with a case in point. I have quoted
Friedman’s view that the quantity theory of money is
all-important in explaining fluctuations of aggregate
spending. Suppose we grant a premise that I regard as
untenable, namely that the velocity of circulation of
money can be treated as a constant. Then the GNP can be
rewritten as MV and by hypothesis it will move in strict
proportion to the supply of M. One can still imagine two
mixed economies that would differ drastically in their
behavior with respect to creeping inflation. To put the
matter succinctly, Economy A might have a very bad
Phillips curve and Economy B might have a very good
one. In Economy B the monopoly power of price-administrating corporations and of union bargainers is hardly
to be observed at all. Employment can be very full indeed
before the price level creeps. The problem of macroeco­
nomic policy is the transparent one of dosage.
But how can we make mixed Economy A like that
of B?
Now, maybe guideposts won’t do it, which is a ques­
tion that has to be examined on its merits. But don’t
make the mistake of thinking that macroeconomic policy
can do it.
Macroeconomic policy can determine where you are
on the Phillips curve. But if you have a bad short- or
long-run curve, macroeconomic policy cannot give you a
good Phillips curve.


F u ll E m plo ym en t

Figure 1. On the left is shown a typical Phillips curve for a mixed
economy like that of the United States. By contrast, on the right
is shown Economy B with a more ideal Phillips curve. The problem
posed for guidelines and for "income policies” generally is not
where one should be on the Phillips curve; that is the problem of
proper macroeconomic fiscal and monetary policy. Rather the guideposts attempt to achieve a better Phillips curve— to shift the curve
leftward so that it will be more like that of Economy B. This is
also the problem for antitrust enforcement, for labor legislation,
for avoidance of too-high minimum wage laws, for manpower
retraining, and mobility programs.

Now, how can you get a good Phillips curve? And by
a good Phillips curve I mean how can you get an economy
which takes every expansion of purchasing power short
of full employment and converts it into real, physical
product of things that people want, an economy which
lowers structural unemployment before prices creep.
That’s the problem for guideposts.
And that is why I think it is of the utmost super­
ficiality for some people to say guideposts worked well

Second L ec tu re


from 1962 to 1964 but that they worked very badly in
1965, 1966, and 1967.
For prices to behave well in 1962-64 is a very easy
victory, and it is not a victory that necessarily belongs to
guideposts. And for guideposts to be judged to work
badly in 1965 and 1966, you can’t ask whether prices
crept upward. You have to ask how prices and wages
would have behaved in the absence of incomes policy or
One may fairly ask what it is that critics of guideposts
themselves advocate to meet this genuine problem of
cost inflation.
We can all agree that the government should be care­
ful in the way it spends its money so as not to drive up
prices. And, of course, it would be nice to have better
antitrust laws. I think we’re all in favor of that. And if
you know some way of making union behavior more like
that of Economy B, then that will be very welcome. But
the proposals that have been put forth, in terms of their
actual feasibility, have not yet amounted to much.
The guideposts and related "incomes policies” are at­
tempts all over the world to give us the same degree of
fullness of employment with less price creep than would
otherwise have been the case.

Now, how would you judge whether guideposts have
been influential? If this were a physical science, you
might hope to make a controlled experiment, run the

F u ll E m plo ym en t


thing twice, with guideposts and without guideposts, and
then see what the difference is. Of course, we can’t do
One attempt by statistical multiple correlation, much
quoted, was done on the subject at the Massachusetts
Institute of Technology by George Perry of the Univer­
sity of Minnesota.
Perry first did what many people have done, such as
Phillips in England. He tried to find a formula to estimate
wage increases in the United States statistically. Then he
related wage increases statistically to the degree of un­
employment and to the amount of profits— because if
the profits are very high, then concessions are given to
wages— and to rates of change of these variables. This is a
very familiar exercise.
I can’t remember the exact date of his investigation,
but I think he first used data that went up to about
1962 or 1963.
Then, on the basis of these previously established pat­
terns, he tackled the post-1962 period in which the
guideposts were operating. A number of other people
have done the same thing and with much the same results.
All of these studies show that prices and wages did
not rise as much in 1964, 1965, and 1966 as had been
predicted for them on the basis of previous experience.
For the same levels of unemployment, profitability, rates
of change, and so forth, in post-19 62 we did seem to
have a better Phillips curve.

Second L ec tu re


What was different? Well, some people say what was
different were the Kennedy-Johnson guideposts. Now,
that is not a conclusive argument. We can certainly
think of some other things that were different. One is
that in the late 1950s we ran a very sluggish economy.
This has been called an investment in sadism by the old
William McChesney Martin— not the new William McChesney Martin.
Although I call it an investment in sadism, it wasn’t
done just for kicks, and it may have had a return. Some
can argue that one of its returns was the fact that we had
a better Phillips curve in the 1960s under Kennedy and
Johnson because of the unemployment that was tolerated
in the 1950s by Eisenhower, i.e., differences in past his­
tory, which are not in Perry’s regressions, might possibly
explain it.
I think if that were the case, I would expect as the
passage of time goes on that this would be a fading type
of effect; and it isn’t clear to me that with the passage
of time this has been the case.
I don’t know how you feel about the present mid-19 67
wage settlements and how they are going; but 12 months
ago, if you had described today’s tight labor market to
me and asked me to predict how the wage settlements
would be going, I would have thought, frankly, they
would be higher than they have been.
I do want to mention one other factor, though, which
is also different and which doesn’t show in Perry’s re­
gression. That is the balance-of-payments constraint and


F u ll E m plo ym en t

the possible constraint on our prices and wages that come
from the import picture.
As an example, I don’t believe that the difference in
behavior of the steel industry in the 1960s and the 1950s
can be understood without reference to the import pic­
ture. I think socially the steel industry has been behaving
immeasurably better in the 1960s than in the 1950s. And
for the purpose of this argument I am not saying that
this is because of a confrontation between President Ken­
nedy and Roger Blough. Moreover Fm talking about
better performance on the part of the union and the in­
dustry generally. I suspect that part of the reason is that
the workers are beginning to realize that when they raise
money wages and when that increases steel prices, they
lose volume of business and employment.
And so a better Phillips curve in the 1960s— if indeed
we have it— may be due to the openness of the economy
and to the international competition.
Yet when all is said and done, I think that there is
some influence discernible from the guidepost philosophy.
Last year at a Chamber of Commerce debate, I described
the guideposts as really an attempt to affect the philos­
ophy of men in the marketplace.
Now, if you think that the marketplace is subject only
to Walrasian equations of perfect competition, then the
will of men, except as it affects our tastes between cheese
and apples and clothing, will cancel out of everything
and nobody’s influence can make a difference. Then there
is certainly no room for the guideposts.

Second L ec tu re


By contrast, I think that there are many sectors in our
modern mixed economy where the short-run behavior of
people can be substantially affected through moral
suasion and public attitudes.
But, if it were just that, these effects would probably
be very short run. Remember, in these industrial sectors,
as elsewhere, the whole is the sum of its parts. And if in
the short run all of the oligopolies can be persuaded to
take things easy on the upside with respect to price, that
makes it much easier for every one of them to go along
with this philosophy.
Sometimes what I am talking about is called the
apologetics of the modern corporation. An old friend of
mine from Japan once told me in the postwar period that
if Japanese capitalism were like the new American
capitalism, then he would not be a Socialist. He said "You
are a rich country, which can afford a more gentle kind
of capitalism.”
The hard-boiled believers in markets say that this is
rot, capitalism is just as bad as it ever was— by which
they mean just as good as it ever was; they say, "The
worst thing in the world would be for capitalists to stop
acting like capitalists, to stop maximizing profits and
start doing what it isn’t their business to do. Don’t believe
them when they say they are doing it: in the first place
they are lying; in the second place, they don’t know
what they are saying; and in the third place, if they really
act that way, they won’t be here tomorrow, because
competition will take care of them.”


F u l l E m p lo y m e n t

Again by contrast, I think that there is a lot of cushion
in the 500 largest corporations, which permits them to
follow independent policy that takes some account of
the public welfare.
I don’t think you can expect the president of Ameri­
can Tobacco to get religion on lung cancer. I think that
if he gets a violent view about cigarettes and lung cancer,
he must go; he cannot stay as president of American
Tobacco. He can’t take the company with him, he has
to go. But I don’t think that is the situation in which the
typical large corporation is. Here I am not talking about
a single corporation trying to buck the system, because
if one corporation behaved this way and no other cor­
poration did, I agree that ruthless competition might
soon eliminate it. But if all the 500 corporations in some
degree have a social philosophy and purpose, I think that
they enable each one to perform in this way.
One of my former students who works for one of the
largest corporations in the world tried to get his board
of directors there to admit that they maximize their
profits. He said, "Profits aren’t a dirty word. All I want
you to do is admit that you maximize your long-run
profits. And that it’s good public relations in the long
run to maximize your profits.” Yet, he tells me, he can­
not get them to admit that, adding, "And why not?
These people have been in this large corporation all their
executive lives; they have a lot of headaches, but by no
means is their biggest headache the annual meeting. And
when they say that they regard themselves as pluralistic

Second L e c tu r e


cally responding to government, to their consumers, to
their workers, and to their stockholders, after years of
trying to get them to say the opposite I felt forced to
believe them.”
Now, the background of my argument that guideposts have some effect is that all the large corporations
together and the labor unions do have some discretionary
power in marking up their prices. While their sectors
could charge what the market will bear, every time the
demand seems to be inelastic, raising the prices, I don’t
recognize that as realistic for the large-corporation sec­
tor. I think you can get a price spiral in which all the
large corporations simultaneously goad each other into
raising prices. I extend this same argument, by the way,
to the wage part of the picture.
Now, mind you, guideposts have been shown not to be
a substitute for macroeconomic policy. You cannot print
trillions of marks or dollars per day and think that public
spirit is going to hold prices stable. But what you can do
is have a system which at 5 percent unemployment gen­
erates creeping inflation of 3 percent per year, or one
which at 5 percent unemployment generates a lower rate
of price increase, being able to go to 4 percent of unem­
ployment and still generate reasonable stability in the
price index.
I regard the Galbraith quotation as absurd— that dur­
ing the big war we held prices down and it worked well;
that during the Korean War we held prices down and it
worked well; that there is no real difference between war


F u ll E m plo ym en t

and peace, so let’s just hold prices and wages down. The
more you are trying to push the Phillips curve down,
while also operating in the inflationary part of it, the less
the situation can be maintained, particularly in the longer
run. But within limits I think that the experience of the
1960s suggests to us that there has been an important
role to be played by these informal controls.

Now, the time for my formal discussion is almost up,
but I do raise a more complicated problem: How does
the Phillips curve change over time?
I mentioned the hypothesis that unemployment in the
late 1950s has made possible the good price behavior of
the early 1960s. This can be expressed in different ways,
and has been expressed in different ways. Professor
Friedman in the cited volume expresses the matter this
way: There is no tradeoff between unemployment and
the rate of change of prices. (By that he means there
is no such tradeoff, except in the short run.) Instead, he
says, there is a tradeoff between today’s unemployment
and tomorrow’s unemployment. And if you generate
some unemployment today, you may be able to reduce
unemployment tomorrow with the same price stability.
Now, I think that’s true in part. I think that this effect
is plausible from economic reasoning. I think there is
some experience in the statistics which suggests that this
is in fact the case.
But I do not think the sharper form of the doctrine is

Second L ec tu re


true, namely that there is a one-to-one tradeoff between
today’s and tomorrow’s unemployment. This would sug­
gest enunciation of a new doctrine. We have the law of
conservation of energy; we have the law of conservation
of matter. We are now to have a new law of conservation,
the alleged law of conservation of unemployment, which
says: Any mixed economy has the same amount of un­
employment to be enjoyed— if that is the right verb—
over the long run regardless of price behavior, that it is
the same whether in the long run you are averaging a
3 percent increase in the price level or stability in the
price level, or a decrease in the price level.
If this notion of a vertical long-run Phillips curve
were true, and if we like price stability and can afford
the long-run view, then I suppose we might as well have
stable prices and get this fundamental amount of un­
employment at a stable price level.
You see what all this implies in terms of a Phillips
curve diagram on this blackboard. We now have a ver­
tical line at the structural amount of unemployment
which is characteristic of the mixed economy in question.
And independently of the price level you are always
going to return to that same vertical line which repre­
sents the same fundamental amount of unemployment.
Of course, that line could conceivably be shifted. For
example, trustbusting, getting rid of a minimum wage,
promoting flexibility, making various structural changes,
and educating the labor force might move the line to the
left, but it is a vertical line regardless of price behavior.


F u l l E m p lo y m e n t

I have been studying the time series trying to piece to­
gether from cases of experiences of different countries
what I can. I also have been thinking of what is plausible.
In the end I can’t really see that it is plausible that un­
employment should be a fundamental long-run constant,
that there should be a one-to-one tradeoff.
I think it is true that you may gain in high employ­
ment in one short period and have to pay in some amount
for it later. But I don’t think that you need always pay
an equal amount, and that the Phillips curve will re­
constitute itself always at a perverse level, and at the
same perverse level.
I hope that we’ll get more scientific studies trying to
elucidate this. The trouble is, of course, that experience is
very slow to come by when we are trying to measure
long-run relationships of this sort. And we rather hope
that economies won’t go through the fluctuations which
will give us the experience that will add to our scien­
tific knowledge, because the guinea pigs that the experi­
ments will involve would be ourselves and our neighbors.



The main point of Professor Samuelson’s paper, as I read
it, is that our government’s wage and price guidelines—
I prefer this term to guideposts— tend to restrain wage
and price increases. Take two similar economies, Econ­
omy A which pursues a guidelines policy and Economy B
which does not. At any given level of unemployment,
wages and prices will tend to rise less in A than in B; so
that A has more elbowroom for expansionist monetary
and fiscal policies than B. It follows, therefore, that A
will find it easier than B to approximate the twin ob­
jective of full employment and stability of the price
level. This is the heart of Professor Samuelson’s argu­
ment, and I believe he has made as good a case along
these lines as can be made.
He has left me in doubt, however, on some essential
points. I am not sure whether his cautious appraisal ap­
plies principally to the guidelines proclaimed by the
Council of Economic Advisers in January, 1962, or to
the rather different guidelines of January, 1964, or to
the still different guidelines of January, 1967, or to all
these versions. Nor can I tell whether his qualified ap­
proval of the guidelines applies to the enforcement


F u ll E m plo y m e n t

procedures used by the government as well as to the
principle or principles of the guidelines. Nor can I tell
whether he recognizes that, granting their promise, the
guidelines may also have perverse side effects— for ex­
ample, by inducing some weak trade unions to hold out
for higher wages than they otherwise would, or by
inducing some business firms not to lower prices today
because of fear of criticism or reprisal if they restore
prices tomorrow, or by inducing this or that government
to pursue expansionist policies beyond what he calls the
''proper” point.
In view of these doubts, I will not dwell on the details
of Professor Samuelson’s admirable paper. Nor do I in­
tend to dwell on my own position with regard to the
guidelines. My paper in the Harvard Business Review,
from which Professor Samuelson quoted, was devoted to
the guidelines policy set forth in 1964. That policy
called, in effect, for setting wages and prices by mathe­
matical formula. That policy implied, or at least I so in­
terpreted it, either the sort of capricious enforcement
that we have had or more comprehensive procedures that
could permanently damage the efficiency of our econ­
omy. That policy also carried the danger, which I felt it
was important to emphasize, that expansionist measures
would be pushed in practice well beyond the proper
point. Neither the course of recent history nor Professor
Samuelson’s defense has led me to change those views. On
the other hand, I have no quarrel with the sort of guide­
lines that were set forth in 1962, if they would only stay

R ebuttals f


that way and if we also were realistic enough not to ex­
pect very much from them. Thus, if Professor Samuelson
stopped being the devil’s advocate, he and I might not be
very far apart.
In any event, if our own nation’s or foreign experi­
ence is any guide, this or that set of guidelines is at best
likely to make merely an occasional or marginal con­
tribution to the problem of enabling our economy to
realize over any considerable period both full employ­
ment and a stable price level. This problem has baffled
economists and government officials for many years both
in our country and elsewhere. The chances are that we
will continue to struggle with it, and that we will have to
try out many ideas, both new and old. Toward the end of
the paper I presented here two weeks ago, I referred
tersely to some of the things that we may need to do
or consider, and I want to take advantage of the time at
my disposal to elaborate a little on some of those
One major need, as I see it, is to strengthen the forces
and institutions of our society that favor high employ­
ment and reasonable price stability. Governmental fuss­
ing with minor changes in the performance of the
economy may easily be ill-timed, prove ineffective or
perverse, and therefore ultimately weaken the effective­
ness of governmental policy in handling major problems.
We have become too preoccupied with short-run varia­
tions of macroeconomic policy, and we do not give
enough thought to creating and maintaining an environ-


F u ll E m plo ym en t

ment that will lessen the burden of discretionary policy­
To begin with, the public interest would be well served
if the government dismantled some of the impediments
to competition which it has itself erected or fostered;
that is, if it proceeded to reduce tariffs, eliminate import
quotas, reduce farm price supports, discourage restrictive
work practices, reform the minimum wage, and enforce
the antitrust laws more strictly. Forthright and cou­
rageous attention to these matters would in my judgment
do more to curb advances in the wage and price level
than the guidelines on which we have recently been re­
lying. Last year, for example, the government kept
lecturing labor leaders on the importance of restraining
wage increases, and yet it proceeded to raise the mini­
mum wage and to bring many additional workers under
this legal umbrella. Such a policy is not only inconsistent
with the professed objective of price stability; it is blind
or cynical as well. To be sure, a higher and more inclusive
minimum wage will benefit those who keep or get jobs.
But it will also exert upward pressure on the price level
and it will restrict the employment opportunities of in­
experienced and unskilled workers— who, I need hardly
say, suffer most from unemployment. Indeed, our prac­
tical choice may soon be between higher unemployment
of unskilled workers and a price level that is sufficiently
high to validate in the marketplace the newly prescribed
worth of marginal workers.
Besides attending better than we have to the need for

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open and competitive markets, I believe that it would be
desirable to strengthen the unemployment insurance
system— which over the years has fully proved its useful­
ness as an automatic stabilizer. In 1958 and again in 1961,
the Congress tardily enacted a temporary extension of
unemployment insurance benefits. When the next re­
cession strikes, as in time it probably will, our country
should be equipped with an unemployment insurance
system that at last covers practically all wage earners,
that automatically provides for extended benefits during
periods of abnormally large unemployment, and that
guards against present abuses. It may also be helpful to
devise some new automatic stabilizers. One possibility
that deserves consideration is a stabilization fund to
which individual workers would be required to con­
tribute, and on which they could draw— to the extent
that their personal accumulation plus earned interest
permits— in the event of unemployment, retirement, or
perhaps serious illness as well. Under such a scheme of
compulsory saving, the credit balance of a worker would
pass to his estate or to a designated beneficiary upon
But whether or not we proceed to strengthen the auto­
matic stabilizers, we may well need some protection
against their limitations. The stabilizers tend to cushion
an economic decline automatically, and this is a good
thing; but they also tend to check economic expansion
automatically— and this is often undesirable. The latter
tendency can be especially serious on account of our


F u ll E m plo ym en t

income tax, which is so highly productive of govern­
mental revenue when the private economy is expanding
that it may choke off the process of expansion pre­
maturely. Fortunately, the latter tendency can be offset
by a systematic policy of tax reduction. Once the war in
Vietnam is over, reductions of income taxes will prob­
ably be needed, and it is not too early to consider what
to do. I can think of no policy that is more likely to
foster a steady advance of prosperity than the one spelled
out in the preamble of the Revenue A ct of 1964. In
order to assure that such a policy will this time endure,
legislative plans should provide for modest yearly tax
reductions over a five- or ten-year period. The legislation
should permit, however, some flexibility, and one way of
achieving it would be to stipulate that the reduction
specified for a given fiscal year will not go into effect if
the President finds it undesirable and the Congress ratifies
his decision.
I have commented thus far on a few of the ways in
which the government can create conditions that will
favor high employment and general price stability. There
are other desirable changes, particularly in the financial
area, such as the early reduction or removal of the gold
cover against Federal Reserve notes; but time is in­
sufficient to discuss them. Let me turn, therefore, to a
second major problem area— namely, the need to im­
prove the machinery and tools of economic policy­
In my lecture I noted how faulty statistics on prices

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and the gross national product complicated the task of
policymakers in 1965. Many other branches of our sta­
tistical system need improvement; and it may be espe­
cially pertinent, in view of the importance that the
guidelines have assumed in the present discussion, to say
a few words about wage statistics. The wage data that
are followed most intensively by economists are the
monthly figures on hourly earnings in manufacturing.
These figures gave an accurate picture of wage levels
and trends a generation ago, but they no longer do so.
In the first place, they represent hours paid for rather
than hours worked, and hence do not allow for the in­
creasing number of hours that are paid for but not
worked. Second, they exclude the cost of fringe bene­
fits— a factor of large and increasing importance to
employers and employees alike. Third, they exclude the
sizable and increasing fraction of employees who are
classified by official statisticians as "nonproduction5
workers. It is also worth noting that employees in the
goods-producing industries are now outnumbered by
those in the service industries, and that the statistical
coverage of wage rates and earnings in the service in­
dustries is meager. I do not think that our present wage
statistics are capable of carrying the burden that the
guidelines have imposed on them.
A still more serious deficiency of our economic in­
telligence system is the virtual lack of data on job vacan­
cies. The Employment A ct declares that the federal
government has the responsibility of promoting "condi­


F u l l E m p lo y m e n t

tions under which there will be afforded useful employ­
ment opportunities . . . for those able, willing, and
seeking to work.” To discharge this responsibility, sta­
tistics are needed to determine to what degree, if any,
the aggregate demand for labor falls short of the number
of "those able, willing, and seeking to work.” Clearly,
the aggregate demand for labor includes the unfilled jobs
as well as those that are being manned, just as the ag­
gregate supply of labor includes the unemployed workers
as well as those who have jobs. Hence, to determine the
relation between aggregate demand and supply, data on
job vacancies are every bit as essential as data on un­
employment. If, at any particular time, unemployment
exceeds job vacancies at prevailing wages, then the de­
mand for labor is obviously insufficient to provide a job
for everyone who is "able, willing, and seeking to work.”
At such a time, an expansionist economic policy is suited
to the nation’s domestic needs. On the other hand, when
the number of vacant jobs is equal to or larger than the
number of unemployed, there is no deficiency of aggre­
gate monetary demand. A government that is seriously
concerned about inflation will not seek to expand demand
at such a time. Hence, if we equip ourselves in the future
with the information needed to ascertain the true state
of demand, and if we also devote far more effort than we
have to securing better matching of the men and women
who seek work with the jobs that need to be filled, we
should be able to pursue the objective of full employment
with less danger of causing serious inflation.

R ebuttals


Once existing statistical information is improved and
the more obvious needs— such as systematic data on job
vacancies and short-run projections of the federal budget
— are provided for, it should be possible to improve the*
economic forecasts on which discretionary policymaking
is so heavily based. Much research on forecasting tech­
niques is going forward, but much more is needed. Fore­
casters have not yet learned how to take account of the
changing state of confidence, either in their equations
or in their practical judgments. Nor do they as yet know
enough about the timing or the magnitude of the re­
sponse of the economic system to shifts in monetary or
fiscal policy. Nor do they know enough to allow for
the momentum of economic forces in the private econ­
omy when they forecast the nation’s output. Nor do
they always allow, as they might, for the cyclical be­
havior of productivity when they forecast such a subtle
magnitude as potential output. According to a study
by the National Bureau of Economic Research, profes­
sional forecasters erred, on the average, by $10 billion in
estimating the year-to-year change in the gross na­
tional product between 1952 and 1963. In view of this
finding, and I might note that the record of the best—
or luckiest— forecasters was not dramatically better, it
is highly important to keep in mind the present limita­
tions of the art of economic forecasting, even as we try
to improve it.
I was surprised to learn this January that our govern­
mental authorities believed that, while the economy


F u ll E m plo ym en t

would remain sluggish in the first half of the year, so
rapid a recovery was likely in the second half that a tax
increase would be needed as of July 1, in order to restrain
the expansion. Although intuitive forecasts sometimes
turn out to be right, it is dangerous to base tax policy on
such a contingency. It is possible, of course, that the
forecast of our policymakers and their tax proposal were
influenced by the prospect of a huge budgetary deficit.
If so, I must confess to a momentary nostalgia for the
"good old days5 when a tax proposal of the sort made in
January would have been defended in a straightforward
manner on budgetary grounds.
Clearly, there is much work ahead for economists in
improving the tools on which governmental policy­
makers rely in their efforts to promote prosperity with­
out inflation. There is also work ahead for political scien­
tists. In a far-flung government of divided powers, such
as ours, it is not easy to achieve effective coordination of
economic policies. Yet, it should be possible to do better
than we did in 1956 or again in 1966, when failures of
coordination became especially glaring. I have long felt
that an Economic Cabinet could become a useful instru­
ment of coordination, but I am by no means sure that
this alone would prove a significant reform. On the other
hand, I have grave doubts about the desirability of adding
to the economic powers of the executive. Centralization
of economic authority in the office of the President has
its intellectual appeal, but let us not overlook the pro­
tection against the risk of concentrated error that the

R ebuttals


economy now derives from the dispersal of power in
our governmental scheme.
In addition to dealing with the problem of coordina­
tion, political scientists might be helpful in devising
better ways of mobilizing the forces of economic under­
standing and of bringing them to bear on policymaking.
The reports of the Council of Economic Advisers have
contributed very materially to this purpose, and so too
have the hearings and scholarly studies of the Joint Eco­
nomic Committee. These instrumentalities, however,
have their limitations. No matter how excellent this or
that report by the Council may be, it is by its very
nature a political document and it may therefore be
taken too seriously by some and not seriously enough by
others. The hearings and studies by the Joint Economic
Committee have the singular advantage of drawing on a
wide range of economic thinking, but they are not read
as widely or as closely as the reports of the Council. Many
citizens, both within and outside the government, have
therefore come to feel the need for guidance in economic
matters that is more objective than the Council’s reports
and less diffused than the Committee’s reports. One way
of meeting this need would be to establish on a bi­
partisan basis a commission of economic experts whose
major function would be to review, in the spirit of
science, the economic reports of the President and the
Council. Such a commission might be recreated each
year on an ad hoc basis, or it might be given continuity.
In either case, it would have to be independent of both


F u ll Em plo ym en t

the executive and the Congress. I need hardly add that
there may be other and more effective ways of mobilizing
knowledge in the interest of informed discussion of the
true state and prospects of the nation’s economy.
In summary, I see a need for creating conditions that
will of themselves tend to favor high employment and
reasonable price stability, so that the burden of dis­
cretionary policy may become lighter. A t the same
time, I fully recognize that whatever automatic or
semi-automatic devices are eventually developed, the
area for discretionary actions will remain large. That is
why my lecture was devoted to monetary and fiscal
policy and that is why I have commented so extensively
today on the need for better tools of policymaking.
Some of the devices that I have considered should serve
to improve the Phillips curve, as Professor Samuelson
likes to put it, directly. Others— among which a proper
monetary and fiscal policy is basic— will tend to do so
indirectly by serving to stretch out a relatively high
degree of prosperity.
In discussing tools and institutions, I have said very
little about the policymakers themselves or how their
role might be improved. Surely, the best of tools will not
of themselves assure good monetary and fiscal policies
any more than crude tools will necessarily lead to poor
policies. I wish I had a formula for arriving at wise
discretionary policies, for I could then unveil it on this
occasion. I know of no such formula or rule or set of
rules. All that I can do is to submit a half-dozen prac­

R ebuttals


tical observations for your judgment. First, frequent re­
visions of basic tax policies can be needlessly disturbing
to private decision makers and they should be avoided
as far as possible. Indeed, if it ever becomes govern­
mental policy to move income tax rates up and down
at very brief intervals, this rule of behavior will become
a normal part of expectations and the effectiveness of
fiscal policy will be drastically reduced. Second, abrupt
shifts of monetary policy can easily cause economic im­
balances, and they too should be avoided as far as possible.
Third, since reductions of governmental expenditure are
extremely difficult to achieve in practice, the most careful
thought should be given to any proposed enlargements
of expenditure. Fourth, ''fine tuning” of economic policy
is a hazardous art in the present state of economic knowl­
edge. Fifth, unless signs of inflation are recognized and
respected at an early stage by the makers of monetary
and fiscal policy, troublesome economic imbalances are
soon likely to pile up. Finally, free markets are our na­
tion’s most valuable economic asset and we should there­
fore be wary of governmental edicts, perhaps all the more
so when they come in the coquettishly modern dress of
voluntary guidelines.


Last Tuesday when I spoke here I characterized myself
as a middle-of-the-road man and I characterized Arthur
Burns as a middle-of-the-road man, and I said that some­
times we are so much alike that I am not sure that I
don’t cross over to the other side of him.
At that time, I had not read his paper. I didn’t have
the privilege of hearing it the previous week. One of
the more fortunate members of this audience said to me,
"You may be both in the middle of the road but you
have been talking about entirely different subjects; there
is very little resemblance between the topics that you
have chosen to deal with and those that Arthur Burns
dealt with last week.5
So I had the task of saying to myself, sort of a Walter
Mitty task, "If I were Arthur Burns, what would I say
on the subject that I didn’t talk about?” And I turned
out to be a pretty good prophet, as judged by my reading
of his speech.
I felt a little bit like the old farmer who came to town
and heard Aristotle speak. When he was asked what he
thought about Aristotle, he said, "I thought he was


F u l l E m plo y m e n t

pretty good and, as a matter of fact, I thought he was
expounding some of my best ideas.”

There is very much for me to agree with in Burns’
speech of two weeks ago, which text I have now read,
and with what he said here today.
For example, I listened to his Five-Point Program for
improving, if you want to put it this way, the Phillips
curve. Reducing tariffs and quotas, I am for that. For
lowering farm price supports. Like 95 percent of the
economists polled by the Chase Manhattan Bank, it turns
out that we all are for that. A girl in Wisconsin once
wrote to me and said, "Sir, what is it you have against
the Merchant Marine? Your animus shows.”
Just recently a University of Maryland student wrote
to me and said, "Your ill-disguised contempt for the
farmer comes through in everything that you write.”
Well, I don’t think that I’m against the kind of farm
price support program that we have had just because I
don’t like farmers. There is no difference between us on
that point.
If somebody has a good method for improving work
practices in American industry, I would like to hear
about it and I would like to endorse it.
I know that just introducing into a major collective
bargaining dispute a requirement that there be better
work practices in some years is about the best way de­
vised to get a bad Phillips curve in that year. It can

R ebuttals


take a union rank and file who isn’t very militant on
money-wage increases and turn it into a lynching mob,
as in the case of the 1959 steel strike when "work rules”
became an issue.
I am also in favor of more successful enforcement of
the antitrust acts and, in particular, the antitrust acts
that increase competition and not those which reduce
When it comes to the minimum wage, I always wel­
come that as a rare opportunity to appear as a reactionary
in any discussion. I fear the consequences of too high a
minimum wage. We had a candidate for governor in
Massachusetts who outdid almost anyone because he
came out for a $2 minimum wage and, when he was
told that that was a lot to ask for Massachusetts, he said,
I’m for a $2 minimum wage for the workers all over
the world.
I wrote to him— he happened to be a learned pro­
fessor— and said, "There isn’t anything that the devil
could devise that would do more harm to this globe
than to enforce a $2 minimum wage all around the
world, although that indeed would be to the benefit of
Massachusetts, if it were done.”
I am for strengthening the unemployment insurance
system and a number of other matters of that sort.
I don’t think, excellent as those ideas are, that all of
them will be implemented and I do not believe that by
themselves they will solve the dilemma in a mixed econ­


F u ll E m p l o y m e n t

omy of an incomes policy. Moreover, to take just the
first of these, the reductions of tariffs and quotas, that,
of course, is a once-and-for-all thing. If we, in fact,
could quench the fires of one budding inflation by reduc­
ing tariffs and quotas down to zero, we would have shot
our bolt. It is not something that you can do again and
again. However, for the long pull of getting tariffs and
quotas down, I can’t imagine a better way of doing it
than on the occasions when we have over-full employ­
ment and an overly tight labor market. That is the time
to make some progress in this matter.
Still, what is one of the most important reasons why
we want to keep creeping inflation from taking place at
all, or from creeping as fast as it creeps in years like
1965? I think that virtue is worth pursuing for its own
sake. But, in addition, it is the balance of payments
that makes us desire that our creeping inflation and our
increase in wage costs not go in excess of those of other
countries. And, since I have a suspicion that the dollar
may be in some degree overvalued— as could be tested
in the abstract by a floating exchange rate to see whether
it would move up or whether it would move down— I
am not sure that at this stage of history we really can
afford a sizable reduction in tariffs and quotas.
And my own fear is that, as time develops, we will
get a renascence of protectionist sentiment. We see it
in the textile industry and we see it in the steel industry.
Nevertheless, I am in favor of gradual reduction in
barriers to trade.

R ebuttals



Let me move on, because this is to be a debate, even
though a rational debate, and I shouldn’t make it a love
fest. I ought to try to find some difference of opinion
in the excellent review of the 1950s and the 1960s that
Arthur Burns put before you a couple of weeks ago.
I would like to start out and say that I agree that the
late 1950s was a period of a rather sluggish American
economy; and that one of the reasons for this was indeed
the fear of the authorities over the creeping inflation
which was then in evidence. Particularly, the 1957-58
experience was disquieting. At a time when labor mar­
kets weren’t tight, you still had prices and wages creep­
So I can understand that the Federal Reserve and the
executive branch were tempted to move in the direction
of austerity even though, as I would put it, they were
led to cross the line into being overly sadistic.
Second, I also want to agree that the Kennedy-Johnson
America of the 1960s did derive considerable benefit
from this investment in sadism by the second Eisenhower
Administration. I don’t mean merely to joke, but Presi­
dent Kennedy’s predecessor made him look good. I think
that this was true because of Eisenhower’s inactivism
and errors of omission. But also he created conditions
which were helpful to the long expansion which we have
had in the 1960s and which perhaps we still are having.
Now let me comment on the change in thinking which
Arthur Burns, I think correctly, discerns in the new


F u l l E m plo y m e n t

economists. There was a distinct move to change the
emphasis away from business-cycle thinking towards
long-term-trend and growth thinking. This can be illus­
trated by the task force which I headed for President­
elect Kennedy at the turn of the year between 1960 and
1961. It’s not a secret, at least it’s not a secret any more,
that the majority of this task force was in favor of a
tax cut at that time.
This was a notion which was shocking to the men
around President Kennedy and it was shocking to Presi­
dent Kennedy himself. There was one perfectly good
psychological reason for this shock.
John F. Kennedy had asked the country for sacrifices
in his speech in Detroit on Labor Day and, for the first
time, his campaign seemed to get off the ground. You
should have seen the President-elect’s face when told that
the first sacrifice he should ask of the American people
was to accept a tax-cut handout. It took a great deal of,
shall I say education and rational debate to change that
viewpoint. The confrontation with the leaders of the
steel industry in the first part of 1962 may have also
contributed to President Kennedy’s conversion to the
course of a massive tax cut. Perhaps that steel incident—
none of us can be sure— had something to do with the
intensification of the stock market decline in April and
May of 1962.
I am not clairvoyant, but I think that suddenly the
President realized that, if we went into a recession, he
was the one who w a s ^ o ^ ^
be blamed, rightly or

R e b u tt a ls


wrongly, for this; so, despite some of his reservations
with respect to budget deficits and orthodox budget
constraints— for which, at the end, Arthur Burns ex­
pressed some nostalgia, and for which I express no
nostalgia— this 1962 incident may have pushed him over
the line politically into deciding for a tax reduction. I
think intellectually he had been converted earlier than
To go back to that task force, we were in no doubt
that the recession of 1960-61 would come to an end
within 1961. The consensus, and it was a strong con­
sensus, was that this would probably take place by the
middle of the year. But little did we realize how power­
ful was our new peerless leader, that he could take office
on January 27th and by February 15th turn the whole
business cycle situation around so that Geoffrey Moore
would mark a National Bureau turning point so soon.
But, nevertheless, our predictions were in that ball­
park and still we were in favor of a tax cut. We were
in favor of expansionist programs even though the reces­
sion were to be over. Contrast our view with the advo­
cacy, which some wise men made in 1957-58, of a tax
The notion then was that we were in a recession in
1957-58 and that there should be a tax reduction. You
will recall that the Congress went home at Easter time.
It turned out the country was not hurting and not de­
manding a tax increase, and that tax increase never did
come about prior to the April upturn.


F u ll E m plo ym en t

Many people who had advocated a tax cut said it
should have been done earlier but now it’s too late; and
they were right, if they meant by that, too late in terms
of a National Bureau recovery. At least by hindsight,
they were right. I emphasize "by hindsight” because
many people now claim they knew that Geoffrey Moore
was going to declare an upturn and a revival around
April of 1958. However, an acquaintance of mine who
was speculating heavily in the government bond market
and who told me he had two years’ income hanging on
the results was canvassing all of his friends in Washington
in high and low places, as late as May and June, 1958,
and he says, "Don’t believe them when they tell you
that they were sure that the turn had come.”
Nevertheless, it was in the air that something like
bottom had been reached and so, if you had been in favor
of a tax reduction only for cyclical purposes, the time
was past for that. But from this longer-run viewpoint
of growth, of reducing— if I may use the new-economics
jargon— the "gap,” then it was not too late in April of
1958 for a tax cut and it was not too late for one in 1961.
If I could remake history, having the wisdom of hind­
sight, I think we should have had massive tax reductions
after the Korean War, not small ones. We might then
have had an entirely different kind of 1950s, including
leaving the legacy to the 1960s of the high employment
environment with which we are now grappling tonight.
We would earlier have confronted the problem of how
you can have over a considerable period of time in a

R e b u tt a ls


mixed economy like ours both low levels of unemploy­
ment and reasonable price stability.

Now, as I read the chronicle of the 1960s as described
by Dr. Burns, I think that on most of the facts and
most of the interpretations I would be in very close
agreement with him.
There are some differences in our policy prescriptions.
I’d say that I have been more of a "high-pressure” man
than Dr. Burns. I would be very surprised if we would
ever both be at a meeting of the Federal Reserve and I
would say they should be cutting down and Arthur
Burns would be saying they should be pouring it on.
That’s not usually the configuration that takes place in
such meetings.
This involves value judgments. It involves value judg­
ments as to the importance, in the short run, of marginalworker, youth, and Negro unemployment. It also in­
volves practical questions that none of us are able to
answer and which I only scratched the surface of last
week, the long-term Phillips curve— what the relation­
ship is between unemployment today and unemployment
tomorrow, and whether you in the longer run minimize
the level of unemployment by tolerating a little more
unemployment in the present.
Now, there are differences of opinion and emphasis
between me and Dr. Burns. It would be idle for me to
say that in the present state of economic knowledge I


F u l l E m p lo y m e n t

have confidence that he is wrong and I am right; but I
think we should record and note these particular differ­

Within the framework of analysis there is a more
minor point that I would like to comment on. Arthur
Burns just happened to mention it very briefly today.
That is the problem of confidence. What is the role of
business confidence for the analyst, quite aside from ap­
proving or disapproving, but just in understanding the
course of events?
Sometimes I am reminded a bit of the question that
Napoleon put to Laplace, after Laplace had finished his
great treatise on celestial mechanics. Napoleon said to
Laplace, "W hat is the role of God in your system?” And
the Marquis de Laplace said, "God? I have no use for that
hypothesis, sire.” Lagrange was heard to whisper under
his breath, "Ah, but what a beautiful hypothesis.”
I sometimes think about the role that the confidence
factor plays in my regressions. I am not now referring
to the regressions of the computer but I am speaking
now of the regressions of the mind, the intuitive fore­
casting which I do. The other day a colleague of mine,
Ed Kuh, said to me, "Paul, how long do you think it will
take before a computer will replace you?” This is because
I had just shown him some marvelous printouts that we
get now from certain government agencies, which give
you the GNP for the next four quarters as an IBM print­

R ebuttals


out. "How long will it take before a computer will re­
place me?” I thought for a moment, and as the question
seemed to be asked in a mean way, I replied, "N ot in a
million years.”
I could be off by a factor of ten— but I still stick to
the intuitive regression equations of my mind and ask
myself quite seriously: "W hat is the role of confidence
in them?”
I am reminded again of a very brilliant mathematician
who was a Junior Fellow at Harvard at the same time
that I was, Stanislaw Ulam, one of the developers of the
hydrogen bomb and one of the world’s greatest mathe­
maticians, then in the full flower of his mathematical
youth and vigor. Ulam told me that he had worked out
a formula for success in life, and that there were many
factors in the formula. Relevant factors included how
hard you worked, how good looking you were, who your
father-in-law was, what your natural ability was, and
so forth. He said though, that with respect to the factor
of natural ability, he had manipulated the formula and
manipulated it until finally he found that natural ability
entered in both the numerator and denominator so that
he could cancel it right out of the equation.
I jest with a purpose. I am not convinced that con­
fidence merits much of an independent role for the
For one thing there is a problem of defining confi­
dence. At the most trivial level it is how businessmen feel
in after-business hours about the President. That index


F u ll E m plo y m e n t

of confidence goes up and down. I have friends in the
financial community who have kept book, looseleaf note­
books, on the 72 unfriendly acts of President Kennedy
between inauguration day and the steel confrontation.
At one period you have a honeymoon period and the
businessmen are friendly toward the President. You
have an alleged consensus. And then that goes away.
Now, I think this sort of radioactive background count
of presidential popularity is one of the less important
meanings of the word "confidence.”
On the other hand, if you mean by confidence whether
businessmen think there will be profitability of a dollar
investment, then, that kind of confidence, I don’t think
is made by sweet talk and speeches, nor do I think it is
easily unmade by even gross acts of indiscretion by the
Chief Executive.
My old teacher and professor, Schumpeter, used to
comment, on the whole in an admiring way, about the
business annals. He would quote how the death of Queen
Victoria’s consort was explained by Bagehot as the cause
of some crisis in Lombard Street, and he would laugh at
I think that confidence in the sense of profitability
almost follows its own laws without respect to what goes
on in Washington. I don’t mean that you can’t kill con­
fidence by punitive tax laws or, if TVA builds a genera­
tor in your county, that this is going to leave the marginal
efficiency of capital of private public utilities in that
county undisturbed.

R e b u tt a ls


But I recall having pointed out to me the annual re­
ports of Monsanto Chemical, a young and growing com­
pany in the 1930s, headed at that time by a very young,
vigorous, strongly opinionated businessman, Mr. Queeny.
Mr. Queeny was in favor of Franklin Roosevelt at the
time of the 1932 election. We have forgotten what those
times were like. There were a number of businessmen
who turned New Dealers in a very radical way.
He said, in his annual report just before the inaugura­
tion, "Things are terrible, the country is in awful shape
but there is hope on the horizon. We have a young,
vigorous President, determined to do the right thing and
we look forward to a new year with confidence.”
Then, at the end of the next year, his annual report
said: "Profits are in the black; they are immeasurably
better than last year. However, we see on the horizon
certain ominous signs of the octopus of Washington.”
So these quotations went. Each year Monsanto Chemical
expanded tremendously, its share price went up in the
stock market; it did the business of the GNP in a mag­
nificent way. And yet the dyspepsia with the Washing­
ton administration grew as the private profits grew.
Now, I rather prefer to believe, and this is on the basis
of plausible reasoning and experience, that there will be
found a small role for confidence. After all your views
with respect to profitability can be affected by political
events. But, when I look at the residuals that I have to
explain after I have used the plausible variables of eco­
nomic analysis, I am not sure that I find residuals there


F u l l E m p lo y m e n t

which need to be correlated with the factor of confi­
dence. Just to make this a debate, let me say that I am
not sure that the delay in the revival of fixed plant and
equipment expenditure in early 1961-62 is not ade­
quately explained when you put in the variables of
profitability, taking into account the overhang of capac­
ity from the previous investment boom. I question
whether the R2 which you get without the factor of
confidence— the coefficient of determination or fraction
of explained variance— would be sizably in need of im­
provement and capable of improvement by the factor
of confidence. Still, that’s a small matter.

I want to go back to what I think divides us new econ­
omists from— I can’t really think of everyone else as
old economists— from other economists. It is our activist
attempts to stretch out the prosperity periods by explicit
Since everybody talks about "me and Kennedy,” let
me relate that one of the things that astonished me most
in 1961 was how the lawyers in the Kennedy Administra­
tion really believed their own rhetoric— that the country
was going to get moving by speaking about getting it
moving; and it was a great surprise and required some
education for them to realize that you had really to do
things to achieve vigorous growth and prosperity.
Actually, many things were done from the very begin­
ning in 1961. Expenditures were deliberately expanded.

R e b u tt a ls


There was a great deal of— I hesitate to call it hypocrisy
— but of semantic double talk because there was a great
deal of need for the country to adjust itself to rational
fiscal thinking. Thus the desire for the investment tax
credit by the Kennedy Administration was a genuine
desire to stimulate investment by giving away revenue,
even though, for window dressing purposes, it was some­
times thought necessary to couple it with revenue-raising
verbiage. Eventually too we had the accelerated depre­
ciation guidelines of mid-1963.
Every time the economy showed signs of flagging,
other programs were introduced. It seems to me the
dynamics of the private economy are not much different
from what they were 20, 30, or 40 years ago. I think the
businessmen were not dumb then. I think that they are
smarter now and they do have better control over in­
ventories; but this could give us, in some models, sharper
and quicker inventory cycles than before.
The big change is this, and it could have been made in
the last half of the 1950s, had there been a will to do so.
Now almost in a hypochondriacal way, the minute the
economy begins to flag the least little bit, the stops are
pulled out in favor of expansion. This is true in the
Federal Reserve as well as in the executive branch.
Here is a trivial example. In some years life insurance
policies of veterans are paid out on their birthdays. That
gives you a random distribution through the year. In
other years, you will note that they are paid out early
in the year. These are not accidents. I hesitate to call this


F u l l E m p lo y m e n t

sort of thing fine tuning. I sometimes think that Walter
Heller is too gifted in the use of words and the creation
of expressions. I mean too gifted for the good cause. But
this is not fine tuning; it’s merely an example of the
new activism.

Now, let’s take this particular year itself. I want to
address our attention to it because I want to examine
how dependent we are upon accurate forecasting.
I heard it said the other day at a private meeting within
the government that the government forecast had been
essentially right this last year. I found that an interesting
and surprising statement — surprising because I think
that the 1967 January figure given by the government
was too optimistic. I even think that some of the analysts
in the government at that moment, if asked qua scientist
and having to bet their family fortune on it, would also
have thought that it was a little bit too optimistic at the
time. But, of course, it is not their private scientific fore­
cast. It is part of a total picture and there is often a
difference of opinion among the experts.
A very high official in the government, who is not an
economist, told me that he felt in his bones that plant
equipment expansion was going to increase by 11 per­
cent. All of the surveys showed something very different.
I told him he had better go see his orthopedist— if that
was the case, the man was in trouble, in my judgment.
But, in any case, I think the government people were

R e b u tt a ls


high in terms of what happened. Yet they are now doing
the new things which will help their wrong forecast from
ending up too far wrong. Although I may turn out to
be wrong, it does look to me now in April as if we are
going to get through this year probably without having
the National Bureau pull out the change in stationery
for a recession. I don’t say this on the basis of the foolish
notion that the inventory adjustment is behind us. I
don’t see how there could yet have been enough time
for any sizable adjustment to be behind us.
The release of highway funds I think is indicative of
the government activistic policies that will lessen the
chance of a recession. This has been done three times
now. We mustn’t overemphasize the announcement
effects and the size of this sort of thing, but the increase
in Vietnam spending that is on the way does bulk large.
Note too the really surprising rate of expansion by the
Federal Reserve of the money supply. I think all this is
very likely to turn this thing around. It may, indeed,
take us from the frying pan into the fire, and we may be
soon worrying about the other problem of inflation as a
result of this trigger-happy activism that I have been
speaking about with such admiration.
Notice that it doesn’t take such terribly accurate fore­
casting, if these are your weapons and this is your philos­
ophy. In a sense the forecasts fulfill themselves because,
one way or another, you are going to get by activism a
better than 3-to-4 percent increase in money GNP.
I still do fault the January forecaster because I don’t


F u l l E m plo y m e n t

think he forecast that he would be now doing these
things in order to get his target. But if you judge him
by the sum of the squared deviations from what he said
would happen and what actually happens, after he has
had another whack at the control mechanisms that are
involved, I think his forecasting record will look better
than it otherwise would be. God knows it’s bad enough
as it is. But my point is that with this kind of behavior
you don’t have to have all that accurate forecasting.
The difficulty is, and this is the weakness in my argumen^many things do operate with a lag. If what our
right hand does today had its effect upon the economy
tomorrow, we would have limited need of accurate
forecasting. If what our right hand does today has ac­
tions nine months from today and nothing along the way
can change that action, then it’s quite obvious that we
must have some notion of what things are going to be
like nine months from now.

Now, to go back to the cyclical versus
It was that kind of notion which I believe was in the
minds of the people on my task force, of the Council of
Economic Advisers, and of the new economists generally.
Professor Burns coined the expression, for the new
economists in April of 1961, the gay^tagnationists- Once
my textbook, by the way, said "rentier” rhymes with
"gay,” in Time fashion. A businessman who took a dim
view of my economics orthodoxy said, "That’s quite un­

R ebuttals


fair.” I said, "W hat’s the matter with it? I didn’t think
it was very funny but what’s unfair about it?” He said,
"You know what I mean.” I said, "No, I don’t know
what you mean.” He said, "Well, ask a psychologist
friend of yours what gay means.” Well, I asked him and
I learned something. Now, when Professor Burns spoke
of the gay stagnationists, I doubt that there was any
innuendo intended in his remarks. But it did remind
me a little bit of the thinnest fat man in the world,
these stagnationists who are exuberant and enthusiastic.
Still, he had his difference of opinion in 1961. I know
that he disagreed on technical grounds withjthejgap con­
operational measurement and the confidence
with which you could hold a view with respect to the
gap’s size at that time. Nevertheless, the Council of
Economic Advisers in those days, Heller, Tobin, and
Gordon— it’s like the Notre Dame football teams of
earlier years to mention the names of such giants— had
the notion that the gap was here, that it was large, and
that it was going to be there for some time and so the
expansionary things that they did at that time and that
needed to be done would not have to be quickly reversed.
One couldn’t be cocksure of this, and there were argu­
able differences of opinion.
If I may go back to those times, there were people
from early in 1961 who were worried about the pace of
the advance and who counseled moderation of that pace.
This was before the Berlin Wall incident. This was before
quite a number of the tax changes that were subsequently


F u ll E m plo y m e n t

made. The Council was not of this cautious frame of
mind. Even I thought they were overly optimistic. I
expected Phillips curve problems by 1963. I am very
happy for all of us that I was wrong and that we had
from 1958 to 1964 stability in the wholesale price index
and what today passes for moderation in the GNP de­
flator index and in the consumers5 price index.
Yet I always felt that those who urged moderation
were going to come into their time and that there would
arrive a time when expansion would be overdone and
when we ought to do something about it. I believed that
the end of 1965 was that time.
Now, I know there are people who say that it was
merely a question of the Federal Reserve going crazy in
1965 and of M increasing too fast. My interpretation is
that it is all much more complicated; e.g., the Vietnam
increase from the middle of 1965 and for the next three
quarters was a colossal amount by any account. So you
can have a GNP model to explain the exuberance of that
period or you can have an M model: each will come to
the same conclusion.
I thought that we were lucky in 1965-66 that that
inflation looked to be of the demand-pull type, for demand-pull inflation requires macroeconomic therapy
that is a matter of dosage. We should have had more
macroeconomic fiscal restraints in early 1966. I don’t
know whether it can be judged by history that reliance
on the wage-price guideposts was a factor in putting off
reliance upon macroeconomic policy. I am inclined to

R ebuttals


doubt it; but, if it was a factor, then it is something
which you must debit against the wage-price guideposts
because, in my view, we did have too little restrictive
fiscal policy. Thus I quite disagree, and have done so in
rather bad-tempered terms, with Secretary Fowler’s dis­
cussion on the Monday morning quarterbacks, which
alleged that the government did exactly the right thing
last year with respect to overall fiscal policy.
I am not sure but that by the last quarter of this year
you will not want to have some contractionary dosage
with respect to macroeconomic policy, which means
something like the 6 percent surcharge. I counseled
against it last New Year. I now [April, 1967] counsel
against it for July 1st. But I cannot in conscience, on the
basis of the evidence and the probabilities, say "Put it
away for another 12 months; it won’t be in season.”




JO H N PIERSON, United Press International: Pro­
fessor Burns, do you think that we are in a recession now
or on the brink of one?
PROFESSOR BURNS: I see little basis for saying that
we are now in a recession. That is the only answer I can
give, if you mean by a recession what we at the National
Bureau of Economic Research have over the years meant
by a recession. We think of a recession as being a sustained
decline in aggregate economic activity lasting at least six
months. The economy has turned sluggish in recent
months, but one cannot properly claim that a sustained
decline has begun. Hence, it would be entirely pre­
mature to speak of our being in a recession.
It has been clear to me since last summer that we
would be heading into a period of considerable sluggish­
ness. But my powers of prediction have not been ade­
quate to the task of judging whether the economy in
1967 would rise a little, move horizontally, or decline a
little. That is a subtle distinction and I cannot do any
better today.
I might note that there is more than one concept of a


F u ll E m plo ym en t

recession. Thus the Japanese, and also somfe Europeans,
consider any sharp retardation of growth as a recession.
In terms of that concept of recession, the answer to your
question is clearly that we are in one and have been for
some time.
But, to return to the American concept, I am not
ready to say that there has yet been an appreciable decline
in aggregate economic activity, and I am certainly not
prepared to say that we are likely to experience a sus­
tained decline. After all, while there are many forces of
weakness in the economy at present, you must not over­
look the fact that government expenditures, at all levels,
are rising very rapidly. Under such conditions, a signifi­
cant decline in economic activity seems quite unlikely to
me. On the other hand, it is plain that the boom in busi­
ness capital investment has temporarily come to an end,
and that a very sizable inventory adjustment must still
take place. Such a correction takes time. While the op­
timists who believe that the inventory adjustment can be
completed by mid-year may turn out to be right, his­
torical experience is against them. Inventory adjustments
of the magnitude that now face us have not been com­
pleted in the past in so short an interval.
Maryland: Professor Burns, I understood you to say that
it is impossible to tell, at the present time, just how low a
level of unemployment we can hope to reach through
stimulating aggregate demand. I gather from you that
we need more data in order to determine this. I wonder

D iscussion


if you could tell us, since this is a very important ques­
tion, just what data you think we could acquire that
would let us know what is a legitimate goal in this.
PROFESSOR BURNS: As you phrase the question, I
would have to say that unemployment could surely be
brought down below 4 percent, that it could come down
to 3 percent, or even to 2 percent, by a sufficiently rapid
expansion of aggregate monetary demand. I don’t think
there can be any serious doubt about this. We proved it
during World War I, we proved it again during World
War II and during the Korean War, and other nations
have proved it time and again during the postwar period.
The critical question, however, is this: how far is it
safe to keep expanding aggregate demand when you have
some concern not only for the unemployment that exists
today, but also for the integrity of the nation’s money
and for the unemployment that may be here tomorrow?
Statesmen must concern themselves with the welfare of
the entire population and they must have some concern
for the future as well as for today.
In handling this difficult problem, the most important
body of statistics that we need, but do not yet have, is
statistics on job vacancies. At present, we have data on
the supply side of the labor market, but we lack data on
the demand side. If we had comprehensive data on job
vacancies and proceeded to match them with data on
unemployment, we could tell at once whether aggregate
demand is or is not sufficient— in principle— to make it
possible for everyone who wanted to work to have a job.


F u ll E m plo y m e n t

For example, if job vacancies just equaled the number
of unemployed, you would not have a deficiency in
aggregate demand. You might still have a lot of unem­
ployment, but then the problem would be to bring to­
gether somehow those who were unemployed with those
who were seeking workers. This would require labor
market techniques and policies, rather than an aggres­
sively expansionist monetary and fiscal policy.
In view of what is now possible through the computer
and telecommunication, we ought to have a system such
that a workingman could walk into any employment
office and within a matter of minutes find out about all
the jobs suited to his requirements that are available
within a radius of 25 miles, a radius of 50 miles, etc.
Likewise, any employer ought to be able to locate quite
promptly suitable employees within this or that geo­
graphic radius. We can’t do that today, although it is
technically a very easy problem. Hence there is a need
to change institutions and habits of thought. The U.S.
Employment Service used to be one of the stodgiest of
the bureaucratic outfits in this wonderful city. Whether
it still is or not, I do not know. But I have yet to see it
develop the initiative and dynamism that are needed.
Moreover, while we are doing far more with training
programs than we did only a few years ago, I don’t think
we are doing enough and I don’t think we are doing it
well enough. The vocational education program in this
country is obsolete and needs to be overhauled to suit the
nation’s business and technological requirements.

D iscussion


To return to your question, I think we have a critical
need of data on job vacancies to tell us whether and to
what degree a deficiency of aggregate demand exists.
With such data at hand, we would in practice find our­
selves putting more emphasis on labor market policies
than we have been doing; in other words, we would seek
full employment through policies that would give us a
little more protection against inflation.
There are many other statistical needs. Our wage staj^jics and our price indexes are not nearly precise enough
to suit the needs of a full employment policy that is sen­
sitive to the danger of inflation. Inventory statistics are
neither prompt enough nor precise enough. And our
estimates of the gross national product involve too much
H ARVEY SEGAL, Washington Post: Professor
Burns, what would you do to reduce the destabilizing
role of monetary policy? How, after your very lucid
account tonight, would you improve it in the future?
PROFESSOR BURNS: Well, I think that it would
be desirable for the Federal Reserve Board to keep the
rate of change in bank credit more nearly stable than it
has been accustomed to doing. The shifts are frequently
more abrupt than they need to be.
Circumstances may, of course, arise when abrupt shifts
in policy will be needed. Think of what the Labor gov­
ernment in England has done recently. That government
was elected on the promise that it would put an end to
the stop-and-go policy, but it had the bad luck of in­


F u ll E m plo ym en t

heriting a serious balance-of-payments problem. At first,
it hesitated to take bold steps to restrict the expansion
of domestic demand which was the heart of the difficulty.
Later, as the position of the pound continued to deterio­
rate, the Labor government shifted abruptly to orthodox
policies— indeed, to far more orthodox financial policies
than any Conservative had dared to suggest or perhaps
even to dream of.
Circumstances like that can arise in any nation’s life.
However, they can often be avoided by responding more
promptly to economic problems, instead of waiting for
the crisis stage. I think that abrupt shifts by the Federal
Reserve Board have been too frequent in our nation’s
history. Our monetary authorities, along with the rest of
us, need to learn how to forecast better. In the absence of
marked improvement in this respect, they need to recog­
nize that oscillations of monetary policy may easily prove
HERBERT STEIN, Committee for Economic Devel­
opment: My question is somewhat related to the previous
one. At the end of your talk, you seemed quite optimistic
about our learning from experience and complimentary
about what had been learned in the last five or six years.
But as I look over the body of the talk, I am not sure that
this learning process has been a secular trend rather than
a cyclical process. The Eisenhower Administration seems
to have learned after 1958 that inflation was the great
danger, that unemployment was transitory, and that
what we needed was even bigger surpluses than had been

D iscussion


achieved in 1956 and 1957. So they pursued that policy.
They pursued it to extremes, stopped the inflation, left
their successors with a huge full-employment surplus to
work with. Then the successors learned that lesson. They
learned that the large full-employment surplus was a
drag on the economy, that the great danger was stagna­
tion and that inflation was stopped. They pursued a
policy to correct that. They ran that into the ground by
1965. That is what the learning consisted of— to ex­
change mistakes with their predecessors. So I am wonder­
ing just what your general reaction is to our secular
learning processes as distinct from—
PROFESSOR BURNS: I agree with much of your
comment. In fact, I tried to convey in my paper that
what we learn from experience, we remember for a time
and then, not infrequently, we forget again and repeat
the old mistake. Economic policies themselves have a way
of moving in cycles. For a time they are in tune with
underlying conditions, but then a good policy is pushed
beyond need or reason. This has been true too often, as
you suggest.
And yet I see, or think I see, a gradual secular improve­
ment in policymaking. To begin with, while mistakes in
economic forecasting have certainly been made in recent
years, no recent mistake in forecasting, or in policy based
on forecasting, can compare with the blunder of January,
,1949, when— with the nation already in a recession—
President Truman came forward with a massive anti­
inflation program. Forecasting is still a very imperfect


F ull E m plo ym en t

art, but that kind of mistake has not been made recently
and I think it unlikely that it will be made in the calcula­
ble future. Our factual information has been improving
and we have become more skillful in using the informa­
tion at our disposal.
We have also made advances in thinking about fiscal
policy. Even the conservatives among us are less fearful
of budgetary deficits than we were before. We recognize
that a budgetary deficit for a year or two, or possibly a
little longer, need not mean that inflation will result.
This improved understanding of the role of govern­
mental finances in our economy helped policymakers not
only in the Kennedy-Johnson years, but also during some
of the Eisenhower years. I think that this is a significant
Not less important, the constructive role of business­
men and the influence of profits on the rate of innova­
tion and investment are understood better today than
they were in the 1930s or 1940s. Governmental policy­
makers have therefore become more mindful of the
need to maintain a healthy state of business and investor
I think also that we have a better understanding today
than we did 10 or 15 years ago of the large role that
changes in the supply of money and credit have in our
kind of economy.
So, while we keep taking some steps forward and some
steps backward, we are making progress on balance. Our
record is not nearly good enough, but if it is taken in the

D iscussion


large and looked at fairly, it is an impressive record all
the same. I expect that we will continue to make gradual
improvements in our overall economic policymaking,
although I sometimes wonder whether our policymakers
are not overreaching their strength.
PROFESSOR H EN R Y BRIEFS, Georgetown Univer­
sity: Professor Burns, you covered the area very carefully
and it is very difficult to find anything that you have not
covered. There is only one point that I would like to ask
you about and it is this. I think that one of the factors
in the difficulties that we faced in 1966, looking back to
1965, was not only an underestimate of defense spending
connected with Vietnam but, of equal importance, the
impact of the defense spending on the economy. We get
our figures from the national income budget when
delivery is made which means at a time when inventories
are being turned over and cash is being turned over the
other way. So that we tend to neglect the lag of the
impact in government spending on the demand for re­
sources. It seems to me that this is one of the factors that
was quite important in the misjudgment of the amount
of inflation impact that the Vietnam War had on the
economy. I would suggest that, in terms of policy, one
would have to look at the second half of 1965 or, let’s
say, the fourth quarter, rather than early 1966 in order
really to look at the inflation in its incipiency.
PROFESSOR BURNS: I certainly agree with your
technical point that it is far more important to pay
attention to defense orders and defense contracts, and


F u ll E m plo ym en t

their timing, than to defense expenditures as reported in
the national income accounts. Those are interesting
magnitudes, but as you point out, they have a tendency
to lag.
Now, turning to the issues of policy, the proper time
for governmental restraint was in 1965— in the late
summer of 1965. After that, it was already late. Much of
the criticism that has been leveled at the administration
for not acting on taxes early in 1966 has missed this vital
basic mistake was made in 1965, not in 1966.
And yet, as I tried to bring out in my paper, it was
difficult in 1965, given the economic and political en­
vironment, to bring about the necessary measure of re­
straint. Therefore, those of us who have our feet on the
ground cannot look forward to a world that will soon be
free of instability or that will be recession-proof. Some
kinds of mistakes are difficult to avoid.
versity: I was interested, Dr. Burns, in your comment
that, in effect, the government was asking the business
firms and the labor unions to play a role that might be
argued was really a governmental role. I could raise a
whole series of questions, but I would like to ask one.
What impact on this whole picture is coming from the
increasing employment of economists by private business
firms and, presumably, the increasing influence that the
business economist is having on management decisions in
business firms?
PROFESSOR BURNS: I think that the influence of

D iscussion


economists on the world of business is increasing tre­
mendously. I think also that their influence, by and large,
has been salutary.
PROFESSOR BAILY: Does it tend to make the busi­
ness firm pursue its own economic interests regardless of
Washington, as you imply, or does it make the business
firm more effectively an agent of government?
PROFESSOR BURNS: With or without the aid of
economists, businessmen generally pursue the interests
of their stockholders, and that necessarily means that
they also pursue the interests of their workers and their
communities. Yet, much of what we hear from govern­
ment people, and sometimes from businessmen, about the
public responsibilities of business is just rhetoric. Who is
an authority on the public interest? What do business­
men know about the public interest? How can they best
act in the public interest? Government officials like to
think that they are the authorities, but that is a little
presumptuous on their part.
Businessmen are qualified by training and aptitude to
manage resources— to expand markets, to lower costs, to
seek out or create new opportunities for putting re­
sources to more effective uses. When a businessman de­
velops a new and superior product or brings down the
cost of a shirt by a nickel or a cent, he is making a con­
tribution to the public interest and one that we must
never underestimate. That is the major function of busi­
nessmen in our society and we should not expect more
of them than they are capable of doing. I sometimes


F u l l E m pl o y m e n t

wonder, as I listen to some of my business friends,
whether they think they are running little Health, Edu­
cation, and Welfare shops. The sums which they so
generously contribute to colleges and so on are not their
distinctive contribution. The government can do that
too. Their real contribution is to put resources to in­
creasingly effective uses, and this is something that the
government is not especially good at. Of course, I like
to see businessmen be good citizens. They should be. We
need good corporate citizens just as we need good per­
sonal citizens. But the vital function of a businessman js
to make a profit in the marketplace. In an economy char­
acterized by keen competition, and ours is certainly that,
profits are the critical test of how well a business serves
the public.
To expect businessmen to act counter to their own
interests is to expect them to give up the constructive
role which they play in our society and to assume a role
which they are not really capable of performing. It by
no means follows, when a businessman does what some
government official thinks is right in the sphere of prices,
that he is really serving the public interest. Higher prices
may be inconvenient to government officials, but they
commonly serve the function of stimulating larger pro­
duction of what the public demands. Moreover, it is
naive to expect businessmen or trade union leaders to
overlook their own interests and to do what this or that
official happens to consider the public interest. That is a
highway to illusions. What happens when government

D iscussion


officials develop faith in the wage and price guidelines?
Well, the government can then pursue an expansionist
policy and trust that the trade union leaders and business
executives will somehow see to it that inflation does not
occur. This kind of illusion delays recognition of the
need for corrective policies, and it postpones the taking
of corrective policies.
MR. PIERSON: You said the Federal Reserve Board
should avoid abrupt shifts in monetary policy. Do you
think that the current shift toward easier money has
been too abrupt?
PROFESSOR BURNS: Yes, I think that, as of today,
the Federal Reserve Board is overdoing things. Looking
at the record of February and March, it seems to me that
the Federal Reserve Board is permitting bank credit to
rise much too rapidly once again. However, this is a
tentative judgment. When the figures for April are out,
the record may look better. In any event, I fail to see the
advantage of the recent sudden, sharp movements of
bank credit. An abnormally high rate of increase is just
that; it cannot be maintained, and this may bring trouble


LOUIS DOMBROWSKI, Chicago Tribune: Dr. Samuelson, what in your opinion is the future of the guideposts as to the economy, say next year or ten years from
DR. SAMUELSON: I think that the single number,
like 3.2 percent which had a certain understandability
because it was a single number, is dead.
It was not replaced by a new single number this year,
and I think perhaps advisedly. I would hesitate to know
what number to replace it by.
But I think the problem of incomes policy remains
and something like guideposts philosophy and oratory
plus the influence of government is going to be here if
we meet ten years from now.
Take something like moral suasion of the Federal Re­
serve. I have been in economics now for about 30 years
and I have heard that moral suasion is dead, and that it
never was alive. But still you just can’t seem to kill it off.
In Canada and Great Britain where you have a few large
banks, moral suasion is very, very important.
I think that it has considerable, if marginal, impor­


F u ll E m plo ym en t

tance now in the U.S.A. and I think it is going to be
more important in the mixed economy of the future than
it is today. This means that the Federal Reserve is going
to be less automatic and mechanical and standoffish and
more directly communicative with the actors.
In that same sense, I think the wage-price guideposts
are here to stay.
But the strong effect that the President can get when
he loses his temper with the head of some large company,
who is not at his public relations best in the incident,
does dissipate itself. You can’t keep repeating the rope
trick by losing your temper and having confrontations
on each new thing.
That part of it, I think, inevitably declines in impor­
MR. DOMBROWSKI: But do you think that they
will essentially establish a new single number at some
later date? Or from year to year?
DR. SAMUELSON: I doubt that a new number can
be found which will be of lasting significance, namely
good for a three or four-year period.
That raises the question whether we will have some
kind of an ever-moving guidepost figure like the parity
figure in agriculture.
Technically, the way the Council explained how it got
its first figure— and it may later have regretted that it
ever gave the explanation— was by taking a five-period
moving average.
They didn’t want the productivity of any one year.

D iscussion


They wanted something representative, so they took a
five-period moving average.
Well, in the course of a five-period moving average, a
year passes, you add a figure and you drop a figure. But
sometimes you don’t like the productivity of the year
that you are adding, and sometimes you are losing a figure
that you wanted very much, such as an early recovery
Still, if there are going to be numbers, I think it will
probably have to go toward a moving set of numbers.
I am not so sanguine of the political sex appeal of it
when there will be a numbers game as against qualitative
Of course, guideposts also can be periodic phenomena.
We have right now in the United Kingdom a definite
kind of a freeze. Since I have rejected the Galbraith argu­
ment that in times of peace these things work well on a
permanent basis, you know that I don’t think that the
U.K. could live with that. But that it can gain some time
to help bring its balance of payments into some sort of
temporary equilibrium, I don’t doubt.
My general view about selective controls— installment
controls and such— is that they are very powerful. But
they don’t last, and therefore you want to keep them in
reserve for those emergency periods rather than use
them up.
It’s like some new antibiotic, to which the germs will
gradually develop resistance. You want to save it for an
emergency and not use it on a common cold.


F u ll E m plo y m e n t

DONALD WEBSTER, Joint Economic Committee:
You spoke of the possibilities of improving the Phillips
curve. You said that during the 1960s the balance-ofpayments problem and perhaps the unemployment of the
Eisenhower years h^d this effect. How would you evalu­
ate our training and retraining programs, the new pro­
grams, in contributing to this? That’s the first part.
And the second part: Do you think that training pro­
grams, retraining programs, perhaps considerably ex­
panded, could enable us to improve the Phillips curve
sufficiently so that we could have an acceptable level of
unemployment, perhaps 3.5 percent, and a reasonably
stable price level? And without the guidelines, or guideposts?
DR. SAMUELSON: I think that training and man­
power programs can help the Phillips curve, particularly
with respect to the unemployment rates of young people.
I should also have mentioned that one of the things that
improves the Phillips curve is a long, steady expansion.
I think that if you have been experiencing unemploy­
ment in a mixed economy of 8 to 10 percent for a decade
or half a decade, it is quixotic to think that in any short
period of time you can get unemployment down to 4
But a lot of the hard core of unemployment does melt,
and I think that success in job expansion breeds success
and gives you a better Phillips curve in some degree.
I don’t want to rehash the debate on structural un­
employment, but by and large we know that the re­

D iscussion


gional problem— the so-called West Virginia story—
has been getting better all the time. I don’t mean that
West Virginia has been getting better, although I gather
it has been getting a little bit better too. But what I mean
is that West Virginia is the exception. CED, in a study
of the two censuses, 1950 and 1960, found that on a
state basis, on a regional basis, and on a metropolitandistrict basis, we are getting an evening up of the amount
of unemployment around the country and not a worsen­
ing of pockets of unemployment.
In summary, it seems to me plausible that the re­
training side of the picture would help the Phillips curve.
I haven’t myself had the opportunity to review our re­
cent experience with this, but I would think that this
is a place where you can spend quite a lot of social re­
sources with advantage.
I would welcome, though, learning what the actual
experience has been. We do an awful lot of things so­
cially, but don’t scientifically follow through and see
how it worked out. I remember when Bill Batt ran the
Regional Development Program in the early Kennedy
days. He didn’t know at all how the certificates of
necessity given in the Korean period for plants in dis­
tressed areas had worked out. Consider a plant that got
a certificate of necessity with rapid amortization. Did
that plant survive or did it only live as long as it had
the subsidy?
Now, there should have been some way of keeping
track of that. After all, Kennedy came in just seven


F u ll E m p l o y m e n t

years later, and if we spent all of that money on doing
things, we ought to try to learn something from the
HERBERT STEIN, Committee for Economic De­
velopment: I wish you would say a little more about
your view of the Phillips curve in the long run. As I
understand [University of Chicago Professor Milton]
Friedman’s argument, he essentially says that unemploy­
ment is a real phenomenon and it depends upon real
characteristics of the economy, and the general change
of the price level is not a real phenomenon and shouldn’t
be expected to affect unemployment aside from its tran­
sitional or unexpected changes. Now, what’s wrong with
DR. SAMUELSON: I don’t think unemployment is
simply a real phenomenon. At least I don’t think much
follows from saying it is.
I particularly balked at the wording. I don’t mean to
be unkind, and am trying to be constructively critical.
Let’s take, for example— I don’t know whether this is
a realistic model, but it’s not a wild model— a case where
the Phillips curve is pretty good or pretty bad, but is
definitely permanent and actually doesn’t shift through
Now, in such a model changes in mere purchasing
power, where you are on the Phillips curve, do change
permanently the amount of unemployment.
We could argue in terms of plausible causal sequences
and empirical behavior whether this particular model is

D iscussion


relevant or whether it is worse than some particular
inter-temporal model. But I cannot accept that any­
thing necessarily follows from the fact that unemploy­
ment is a real thing and the price level is a money thing,
that unemployment must therefore be unaffected by
the degree of purchasing power.
I don’t know whether I have been constructive. You
have to be the judge of that.
Maryland: I believe you said that we might expect that
the guidelines would gradually improve our Phillips
curve as it induced business firms and labor unions to
take a more moderate attitude towards price and wage
I wonder whether, using the laboratory of the world
and looking at Western Europe, you find any evidence
of that in those countries, particularly since most of
them have used the counterpart of guidelines for 10 or
20 years.
DR. SAMUELSON: The European experience is a
very mixed one. I have here a study made for the Cana­
dian Council that brings up to date and reviews incomes
policy in different countries. The different European
countries differ considerably in how bad their Phillips
curves are. For a long time I envied Germany its Phillips
curve, and I think I still do a little bit. Right now there
is some unemployment in Germany developing for the
first time. There is some slack in the economy and some


F u ll E m plo y m e n t

I was just speaking to Professor Krelle from Bonn Uni­
versity, and was told that the labor unions there like to
be respectable and fear that the man in the street is
rather critical right now of wage demands.
The problem is that the union movement also feels
that over a long period of time it can and should affect
the relative distribution of income. As economic an­
alysts we feel that it can do this only within narrow
limits and over very long periods of time. What we
don’t want is for the struggle over the division of the pie
to result in a paper increase in prices.
I don’t know whether I’m being optimistic, but it
seems to me that the union movement— and I speak of
the rank and file as well as the leadership— is less inter­
ested now than in the 1950s in money increases that will
be self-defeating because they can be expected to be
followed by general price increases. This may be because
unions are on the run. It may be because the kind of
occupations which you can unionize are blue collar and
northern and are in relative decline.
I have heard it said, but I do not have any experience,
that in the Common Market there are not international
unions across all six countries; the unions in each coun­
try, as the economies become more open, are quite con­
scious that they will lose employment of their people to
the rest of the Common Market; and this therefore leads
them to have more moderation in their wage increases.
To respond directly to your question, there have been
some disappointments in the European experience. We

D iscussion


used to point to the Netherlands. Here was a country
where they really did things right. Jan Tinbergen on
one famous occasion told the unions, "The nation can’t
afford a wage increase. Don’t ask for a wage increase
now. But I’ll be watching, and when I think the country
can afford one, I’ll give you one.” And, according to the
tale, that’s exactly the way it worked out: the unions
held back; then after a while Tinbergen looked around
and said, "Now you can have one,” and everything
worked very well.
Well, in the last three years, four years, wages have
risen 37 percent in the Netherlands. A few years ago,
although the governmental machinery had decided on
a 6 percent wage increase, it turned out to be 12. Later
they decided on a 9, and it turned out to be 17.
Fortunately they have such productivity miracles
that when this happens to them, it doesn’t ever seem to
give us a balance-of-payments surplus. I say fortunately
for them, and unfortunately for us.
This recent experience goes back to the fact that
guidelines are not a substitute for macroeconomic policy.
They were running the system so tight that the thing
broke of its own accord, because when they succeeded
in holding wages down in the Netherlands, Dutch work­
ers began to go to Germany. And what is the point of
getting Spaniards and Greeks and Moroccans into the
Netherlands, as they were doing, only to be losing your
own workers? When labor markets get very tight, the
interest of the employer coincides with that of the


F u ll E m plo ym en t

worker and the union; firms want wages raised in the
attempt to attract workers from elsewhere. Europe has
had a problem which we haven’t had in any degree yet,
the problem of so-called "wage drift.” In the United
States, by and large, except for piece rates, the negoti­
ated minimum wage rate is also the maximum wage.
But that isn’t true in the over-full-employment coun­
Without incomes policy, maybe it would have been
a lot worse there than that. I’m not sure.
NORMAN TU RE, National Bureau of Economic
Research: Paul, may I put an illustration to you? Let’s
take two economies, A and B, that are identical in every
respect except with respect to the use of wage-price
guideposts. One does use the guideposts in order to main­
tain full employment and avoid the price creep. The
other doesn’t. It eschews the use of them and allows the
price creep to go on. Isn’t it likely that after a number
of years the distribution of resources and distribution
of income will differ between the two countries? And if
that is likely, what is the a priori basis for the assessment
that one is better off than the other?
DR. SAMUELSON: Well, let me answer the second
part of the question first. I would say that if you had a
closed economy with no international trade relationships,
the mild creeping inflation of the sort that you posit,
which isn’t so certain that everybody can count on it
every year but still averages out on the up side, is a
possible way of life.

D iscussion


In an open system, it seems to me that you cannot
have, with fixed exchange rates, one economy having a
stronger price creep over a long period of time than the
other. Being something of a pessimist in this regard, I
long thought that our problem is not to have stable
prices but to have prices and wages and productivity
such that our increase is not greater than that abroad.
In fact, because, in my opinion the dollar was a little bit
overvalued earlier, costs here had to rise a little bit less
over the decade than costs abroad.
So my answer to you would be that, except for the
differences that I’ll discuss in answer to your first ques­
tion, I don’t see why you couldn’t go on except for the
balance-of-payments problem. I think it’s rather lucky
that we are all mixed economies together. We can’t all
run deficits because we each act like a mixed economy.
All we have to do is act about as mixed up as other
economies, and we probably won’t have to worry about
the balance of payments.
Now, on the guideposts, what is the difference between
an economy with guideposts working and one with open
inflation? I am not thinking of a successful guideposts
policy as one which really has a large measure of sup­
pressed inflation. If you have an economy in which the
prices are held down, then prices aren’t operative, you
can’t buy anything at those prices. That’s the classical
case of suppressed inflation. Under it you will get certain
redistribution effects. But you will also get a lot of dead­
weight effects. So I would expect that the country with


F u l l E m plo y m e n t

a mild amount of open inflation is better off than one
with suppressed inflation of that sort.
The guidepost philosophy, where it applies— that is, in
the realm of the 500 largest corporations and in the
collective bargaining sphere, and in the general attitude
of employers and workers in the nonunionized sector—
if it works, it seems to me, does work with prices still
clearing markets.
PROFESSOR T U R E: That wasn’t the point I was
DR. SAMUELSON: So I don’t see that there would
be any great distributional differences.
PROFESSOR T U R E: I was not talking about the sup­
pressed inflation case at all. I was simply assuming that,
by virtue of the fact that the allocative mechanism has
got to be a little bit different where an effective guideposts policy is operating than in one which would allow
prices to move and in general to creep upward. After
some period of time the composition of activity in that
economy, the first economy, is likely to differ from that
of the second. The question that I raise with you is: Why,
on a priori grounds, should one assume that that shift
in resource utilization and the consequent shift in the
allocations of incomes is preferable on any welfare basis
than that creep in inflation?
DR. SAMUELSON: Yes. And I have been trying
to respond to you. I don’t respond with confidence but
this is my hypothesis: where the guideposts are working,
the allocative mechanism is not very different, except

D iscussion


in one respect; namely, that we don’t have the instability
of the general price level.
In other words, I think that relative prices would be
very much the same. An economist who studied the role
of supply and demand schedules industry by industry
would find them to be allocating resources in about the
same way. It is the basis of the quantity theory of money
and of much in macroeconomics that has never been se­
riously disputed that the absolute price level makes no
great difference in the long run.
It doesn’t help you much just to be changing your
general price tags all the time. Hopefully a successful
incomes policy will keep the price level from soaring
PROFESSOR TU R E: No, the case is not of soaring
price levels but of creeping price levels.
DR. SAMUELSON: That’s right. I think that con­
siderable argument can be found that when you have a
creeping price level that is foreseen, the distorting effects
or the changing effects of allocation are not so great. For
example, the interest rate gets built into it, some allow­
ance for the rate of price change too. It is not true, for
example, that only the holders of common stock are
protected. Over time, bonds are renegotiated and other
people also get protected. The substantive difference that
remains is that the average real cash balance wouldn’t be
quite the same, as has been commented on by writers on
monetary theory, but it seems to me this is a secondary


F u l l E m plo y m e n t

ROBERT WILLIAMS, Forbes Magazine: Dr. Samuel­
son, I understand that the guideposts may have over­
looked the process by which we can have a rise in the
total labor cost nationally without individual rises in
wage rates in certain industries through the migration
factor, as workers move from lower paying industries or
jobs into higher paying jobs, which has happened in the
last year or so. My question is this: First, did the guideposts overlook this migration factor? And, secondly, can
they, in the future, be modified so that they would in­
clude this?
DR. SAMUELSON: You are speaking now of the
problem of upgrading, that every job could keep the
same wage but, as you shifted the mix towards the higher
paid jobs, you would get a change in average wages paid.
MR. WILLIAMS: Yes. Walter Heller mentioned in
his letter this was a surprising thing, he thought, to
many people this year. Even without higher settlements
there would still be a higher cost.
DR. SAMUELSON: I think what we need to try to
distinguish in our own minds is to decide whether this
is a spurious effect or a real effect. If the same man doing
the same work is reclassified as a higher paid worker then
that’s a hidden wage increase. But if, in fact, a man is
moving from a low productivity function to a high pro­
ductivity function, that is a true productivity im­
MR. WILLIAMS: Let’s say the worker is just moving

D iscussion


from the rural area to the urban area to take a higher
paying job.
DR. SAMUELSON: Yes, but if he is actually pro­
ducing a higher real output, that would show in the
calculation. You have to decide which of these effects
you think it is.
Now, I think, as you get into fiats which actually hold
wages down by law, you will encounter a spurious get­
ting around the law by reclassification. The prime rate in
banks, for example, can stay very sticky. If you don’t
qualify any more for the prime rate when money gets
tight, that’s a spurious difference.
I can’t answer whether the original productivity fig­
ures of the Council sufficiently allowed for the fact that
you spoke of. I think that their figures would have
picked up the normal upgrading that goes on through
time in their base period and that’s all.
I didn’t mention one of the things that would interest
labor most about this year. Labor can feel that last year
it got cheated because of the guideposts philosophy. Let’s
assume that labor got a wage increase not too much
more than 3.2 percent.
That goal was premised upon reasonable stability of
the consumer price index, defined either as a zero in­
crease in the price index or the one-and-a-quarter percent
increase in the consumer price index which would be
typical of the earlier part of the 1960s. In fact, in 1966
we had a three-and-a-half percent increase in consumer
prices— at least 2 percent more than that. So some could


F u ll E m plo y m e n t

argue that they should have had, just for equity, since
the guideposts didn’t work, 5.7 percent wage increases!
I think there is some sympathy with that view in
government: namely, that 1967 could, in equity, be a
year of catching up; and for this year alone labor could
get more than the productivity guideposts in order to
make up for last year. What they didn’t want to do was
to give their blessing to escalation because they were
afraid they’d get this catching up plus escalation in
three-year contracts.
I think that if you have one year catching up and
price-level escalation but no excessive improvement
term in each year of three-year contracts, a good deal
could be said in equity for that. It won’t lead perhaps to
stable prices but maybe we’ve given up on that because,
in my opinion, we didn’t have last year the proper
macroeconomic dosage policy. I think last year we
should have had early in the year a tighter fiscal policy,
and shared restraints on the part of both monetary and
fiscal policies.
ton University Law School: You seem to attach con­
siderable significance to the possibility of effectively
using moral suasion on the directors of the 500 largest
corporations. Yet that seems to raise a number of difficult
You offered us some evidence of what directors say
they do about prices and yet, when the pressure is really
on, this theory suggests that all of these individuals must

D iscussion


trust each other, that none will break it, that the usual
experience with cartels wouldn’t be repeated here, that
they won’t lower quality as a way of raising prices. Even
assuming that the whole system could be made to work,
don’t you still just wind up with a shift of resources to
smaller companies not included in the 500 who in turn
will, I presume, raise their prices?
DR. SAMUELSON: Well, now, I don’t recognize
that it takes the collusion of a tight cartel. All, it seems
to me, it takes is a way of life that’s shared, a shared
consensus of our values. We are all members of society.
We behave in certain ways, including such things as re­
porting truthfully to stockholders. If you have any ex­
perience with some other countries, you know how sur­
prising it is that stockholders are told the truth about
their company. I think that’s all that is required.
Now, the question is whether the 500 largest corpora­
tions are constitutional monarchs who will be displaced
the minute they begin to show some social consciousness.
I go back now. This is related to the question from
Norman Ture. It seems to me that, if the guideposts had
the successful purpose of giving us a better Phillips curve
so that we live with three-and-a-half percent unemploy­
ment as being consistent with reasonable overall price
stability instead of 4 percent, it is not clear to me that
the 500 largest corporations are doing something un­
economical, giving away something and, therefore, that
somebody outside of the system can take a whack at


F u ll E m plo y m e n t

It merely seems to me that we are then just not all
raising the balloon together in a self-defeating way.
PROFESSOR M ANNE: Then you have made it in
their self-interest to act in this way and no moral suasion
is necessary.
DR. SAMUELSON: It is in their self-interest in this
sense. Suppose you had Kant’s categorical imperative and
they were asked as a collective group: under this com­
mon rule are you all better off than under a different
common rule? I think the answer is yes. But if you asked
if 499 out of the 500 were behaving in this way it would
be to the interest of the 500th to do so, then because they
are in quasi-competitive relationships to each other and
because their competitive relationship to each other is
much greater than to the rest of small industry, I think
it might still be in their interest.
PROFESSOR M ANNE: Even that assumes that over
a period of time there won’t be a shift of resources to
smaller businesses.
DR. SAMUELSON: I do think that the larger the
business the more honest it is. It is not always true that
honesty is the most profitable policy. So adherence to
law and order, including the new kind of law and order
of the mixed economy, is like a hidden tax on the largest
Now, to this degree, we do move things out of large
business. But when I look at that result and stand off at
a distance, there is just enough of old Judge Brandeis
in me to think that this is not the worst situation in the

D iscussion


world. Besides, it couldn’t happen to a nicer bunch of
PROFESSOR M ANNE: But that’s something you
know as a judge and not as an economist.
DR. SAMUELSON: Certainly. What I was saying
has something to do with my social welfare function
and isn’t technical economics.
But industrial statesmanship is one of the prices that
could be paid. I also believe that to achieve the economies
which exist in the large corporations, their size is a help.
You can’t get perfect substitutes for them elsewhere. If
you could, I doubt that there would be any problem.
If you had laissez faire reproducing atomistic compe­
tition, you probably wouldn’t have a bad Phillips curve
problem to begin with.
RICHARD LURITO, Georgetown University: Pro­
fessor Samuelson, would you comment on the following
possible argument: Because we have not walked along
the ceiling for any great length of time, the trade-off be­
tween unemployment and price rise and sustained full
employment may not be as bad as statistical estimates
have suggested.
DR. SAMUELSON: I thought I did comment on
that in connection with the question that I was asked
about manpower; namely, that successful maintenance
of a long expansion itself gives you a better Phillips
curve. I don’t know of any mixed economy that can go
from a very high level of unemployment in a short
period of time to a lower level.


F u ll E m plo ym en t

Our memories are very short, but I can remember
fortune magazine in the immediate postwar period say­
ing that we would need 7 million unemployed in the
American system, just for normal lubrication of the
joints. Now, I don’t think that they were necessarily
wrong when they wrote that. They were thinking of
how much the unemployment had been in the 1930s
and didn’t know what the postwar was going to be like
or that we would be able to work our way to lower levels.
I have always hoped that, after the proximate goal of
4 percent unemployment was reached, and I don’t mean
has been collided with, that you could push down below
it— both by manpower and other policies but also just
from people moving around, as they will under the pull
of opportunity. So I hope I have commented on thaf
quotation. Who was the quotation from, by the way?
MR. LURITO : I just made it up.
DR. SAMUELSON: Oh. That’s like the fact that
for many years the most colorful gown in the Harvard
Processional was old Professor Albert Bushnell H art’s.
Somebody once asked him, "Professor Hart, which Chi­
nese university did you get that degree from?” He re­
plied, "Oh, that’s not from a Chinese university; it’s
just a mandarin kimono I saw once and liked.”

H ARVEY SEGAL, Washington Post: I would like
to address my question to Professor Samuelson. I was a
little disturbed by the point that he made about it not
being terribly necessary to forecast accurately. I won­
dered if he would care to comment about what I con­
sider to be the tense period of uncertainty between, let’s
say, April and September, 1966, when it seems to me,
although I can’t prove it, that many of the administra­
tion economists missed a turning point, at least in the
rate of GNP growth.
Certainly one’s forecast determined one’s position on
whether or not to ask for a tax increase and it certainly
must have had something to do with the unfortunate
suspension of the investment tax credit in October.
DR. SAMUELSON: I would like to ask for clarifica­
tion. Is it your implication that the economy from April
to September of last year grew faster than had been
MR. SEGAL: No, I think that the rate was slowing
down but I’m not sure that the forecasters or at least
many of them were correct.


F u l l E m plo y m e n t

DR. SAMUELSON: Now, if I understood Secretary
Fowler correctly, he took some credit to himself for
having, in the face of experts outside of the government,
noted the lessening of need for a tax increase after April
and he would consider this an advantage on his side. I
must confess that the first quarter of the year was
stronger than I had expected. And I did expect a further
continuation of that, not myself foreseeing the full
slowing down that happened.
If you ask why, in the face of some slowing down,
there was the suspension of the investment tax credit,
there are a couple of factors to explain this:
One very important one was the desire to change the
mix. The tight money was hurting very much. ExPresidents of the United States don’t count for very
much in American history, but sometimes when they
speak and there is a resonant environment they are lis­
tened to. When Truman spoke from Independence,
Missouri, and said, "Look, you’re killing the country
with tight money,” I think that this was the last straw.
Behind the scenes, of course, when the Mellon Bank
unloaded its municipals for whatever they would bring,
there was what was called a near-crisis in the money
market. I think that too gave rise to the determination
to suspend the investment tax credit.
I don’t suppose we have to blame, if that is what the
economic historians of the future will do, Secretary
Fowler or Assistant Secretary Surrey for the suspension
because, to me, they gave all the signs of men who didn’t

D iscussion


want to suspend it. They had argued forcibly before
Congress just before the event that it couldn’t be done
and gave all the reasons that it couldn’t be done; so I
didn’t envy them the task of explaining how they were
going to do what couldn’t be done. I think it was a deci­
sion reached elsewhere.
Now, I am not persuaded that the suspension was a
mistake. I admit that, if I had come out a month later
with a recommendation that it be restored I could hardly
have considered myself covered with glory for having
urged its suspension.
You may ask: What’s the difference between four
months and one month? Well, it’s not enough to be
comfortable but I do think that the investment tax
credit had for its purpose the lessening of the queues
which were taking place in the machinery industries.
We know from the Rinfret Survey which was taken at
the same time, and which anticipated rather accurately
the results of later official surveys, that there already was
some decrease in the rate of increase of the plant and
equipment spending.
So I think the change in mix was the motivation. It
wasn’t the government’s being misled in thinking that
in September the rate of growth of the GNP was fully
as intense as it had been in the first quarter. For one
thing, automobiles are always a bellweather, being prob­
ably given more importance than their actual quantita­
tive importance in the GNP. And autos had definitely
signaled a lessening of inflationary expansion and pres­


F u ll E m plo y m e n t

sure after the first quarter, as I remember their sales.
Maryland: For Professor Burns: Professor Samuelson
has defended the guideposts essentially in terms that it
makes for a better Phillips curve, that is, that we can
push unemployment down further with the same price
rise. Do you agree or do you basically disagree with this
PROFESSOR BURNS: Let me try to answer your
question briefly.
I believe that the effect of the guideposts is likely to
be quite small as a rule in our kind of economy, and I
believe that it has in fact been quite small during the
period since 1962. Possibly, the effect was for a while in
Professor Samuelson’s direction, but that is uncertain. In
any event, and to repeat, the net effect of our price and
wage guidelines appears to have been slight.
The second point that I would make is that the Phillips curve, as customarily used, merely records short-run
responses and this can be quite misleading. I have no
doubt at all that, even when unemployment is already
moderately low, an aggressively expansionist policy can
reduce the level of unemployment in the short run still
further. What troubles me is that in the process of doing
that you are likely to stir up inflationary pressures and
create other imbalances in the economy. Therefore,' in
the course of reducing unemployment aggressively
today, you may release forces that will enlarge unem­
ployment tomorrow.

D iscussion


I think Professor Samuelson would grant this point,
though he would perhaps argue that there is still a net
gain. Whether that is so or not, I don’t think that either
he or I could answer categorically in the present state of
University: Professor Samuelson, I did not have the
privilege of hearing you last week. In regard to the
guideposts, as I understood Professor Tobin at the 20th
anniversary meeting last year, he said that one purpose
the guideposts were to serve when they were formulated
in January, 1962, was to guide government procure­
ment, try to set standards for federal agencies in nego­
tiating with defense, space, and other contractors.
Federal spending has been rising at a very rapid rate.
In terms of 1966 dollars, the per capita federal expendi­
ture next year will be about $200 per capita higher than
it was ten years ago.
Now, do you have any impression whether the admin­
istration tried seriously to use the guideposts in their
own contract negotiations?
DR. SAMUELSON: I don’t have any knowledge on
that subject. I would point out one related point but
working in the deflationary direction. Because the gov­
ernment is a very important buyer, it has what Profes­
sor Galbraith might call countervailing power; it has
sometimes used that power or the threat of that power
to put some punch behind its exhortation.
For example, it is believed by business that, if you get


F u ll E m plo ym en t

into a fracas with the government— let’s say you are
the oligopolist in the millinium industry who breaks the
line and raises prices— that the word may go out to all
of the Quartermasters, "When in doubt, when there is
a tie, don’t give the order to this fellow, give it to the
other fellow.”
It is not so important that it be true as that it be
believed. I have heard some testimony of businessmen
that they not only feel crucified before the bar of public
opinion when dressed down by the President, but also
that their own employees get penalized at a future date.
Hence, they are a little more agreeable in playing ball.
We have seen government restraining pressure on
prices with respect to stockpile behavior. Sometimes, if
you have a stockpile, it’s a good thing to get rid of it on
a rising market; but sometimes when things are really
scarce, that’s when you really need the stockpile and you
can’t afford to use it to put out inflationary fires.
versity: The discussion about the guideposts seem to me
to have two Achilles’ heels that are not properly taken
into account in this discussion. One is institutional and
one is statistical.
Let me start with the statistical. As far as I know,
the only really solid evidence of a statistical nature that
argues for the general effectiveness of the wage guidepost is the George Perry study of wage determination.
The difficulty with his econometric wage function is
that once you get beyond the late 1950s that relation­

D iscussion


ship breaks down progressively. As you add years and
extend the experience, the coefficients become unstable;
you get negative signs where there should be positive
signs. Perry’s relationship just doesn’t seem to hold
In other words, we don’t at this stage have a viable
statistical test of the effectiveness of the wage guidepost, even in the manufacturing sector.
We have been doing a considerable amount of research
on econometric wage functions at Georgetown Univer­
sity and we have developed some alternative models.
The results seem to be that there is no general evidence
for the effectiveness of the wage guidepost.
My second problem is that the guideposts, institu­
tionally, are aimed at manufacturing and construction.
A good deal of the long-term pressure on prices, how­
ever, comes from the service sector. If you get produc­
tivity gains of 1.5 percent over the long haul, according
to Victor Fuchs, or maybe a little more in the recent
period, you are going to get some inflationary pressure
unless it is fully offset in manufacturing.
So the guidepost approach really requires that manu­
facturing prices must decline continuously and substan­
tially over time in order to offset the increases in service
prices. Given the wage determination process in manu­
facturing under existing institutions, is it reasonable to
expect the requisite moderation in the rate of wage
advance? Furthermore, how are you going to get after
the fellows in the service and other sectors who may


F u ll E m plo y m e n t

also be causing a good deal of long-term pressure on
prices? The guideposts theory is that there are identi­
fiable conglomerates of power in manufacturing and
construction and you can bring pressure to bear on
them. But, if that is only one source of the inflation,
the guideposts are not an effective instrument to deal
with the problem. It seems to me that, referring to the
guideposts and then arguing, as Professor Samuelson has
done, that we are now in a position to pursue a more
expansionist monetary and fiscal policy rests on rather
shaky ground.
DR. SAMUELSON: First, with respect to the George
Perry analysis, I will remind you what that seems to
show. His is a typical statistical study trying to predict
wage changes from variables such as the existing amount
of unemployment, the existing amount of profits in in­
dustry, the past amount of unemployment, the rates of
change in those variables, and so forth.
It is my understanding that the Perry equations were
based on pre-1963 data. When applied to post-1962
data, the equations predict higher wage increases than
actually took place in the guidepost period.
What George Perry’s equation shows quite a number
of other similar studies have also shown. The usual argu­
ment goes, "Yes, the previous relationship does go hay­
wire and it develops a residual; it is precisely the pres­
ence of the guideposts that is inferred by this residual.
Guideposts explain the wage moderation.”
If I understand you, you are saying something more

D iscussion


than that, that after you put in the guideposts as an
explanatory dummy variable in the multiple regression,
you then get in your internal estimation of the coeffi­
cients all kinds of haywire behavior.
Is that right?
PROFESSOR BRIEFS: It’s that plus the fact that it
ceases to overestimate the wage change.
DR. SAMUELSON: Yes, but that’s the point of the
demonstration, that Perry’s equation without the guideposts doesn’t estimate the wage increase and that, ergo,
it’s the presence of the guideposts that explains the
Now, if there is that other factor of signs of coef­
ficients going haywire, then I have learned something
here tonight.
On the question of service price increase, I don’t
think that there is anything spurious or illegitimate
about increase in the price of services, provided that in
the service area supply and demand is being cleared and
there is no cost-push problem— as e.g., that it is actually
the increase in demand for medical services that is bid­
ding up the price of doctors in terms of supply. It cer­
tainly is true that, if services represent an industry with
low productivity (as we measure it) and are an increas­
ingly large part of the total picture, then the average
productivity, which determines the average wage that
we all can get, grows that much slower.
Does this mean that in your opinion the 3.2 percent


F u l l E m plo y m e n t

figure was not properly estimated, taking account of
the service sector of the economy? Alvin Hansen before
the Joint Economic Committee made an opposite point.
He said that taking the government’s own figure, and
considering there has always been a 1 percent increase
in consumers’ prices, then, in fact, a 4 percent figure
is more justifiable for the allowable wage increase; if
labor had gotten only the 3.2 percent, it would have
continued to be cheated because of the 1 percent up­
ward drift in the consumers’ price index. I thought he
must be wrong and that he hadn’t really looked care­
fully at the figures, that these smart fellows in Washing­
ton would have a ready answer. But when I tried it out
on a couple of them, they said, "Well, the kid’s got a
point there.”
If his point is right about 4 percent, then the point
about less than 3.2 percent can’t at the same time be
right. I think that there is room for more expository re­
search in this particular area, particularly if you are
going to play the numbers game and attach a great deal
of importance to any particular number.
Can the economy as a whole justify a 4 percent in­
crease, or, as your remarks seem to suggest, taking
account of services, less than 3.2 percent over some
extended period of time?
PROFESSOR BURNS: Let me say a word or two
about Professor Perry’s analysis, as I understand it. The
book itself deals with data which stop, I think, in 1963.
Therefore, Perry’s analysis as such hardly tells you very
much about the effectiveness of the guidelines. As you

D iscussion


may recall, the guidelines were first proclaimed in Janu­
ary, 1962.
Furthermore, as I understand Professor Perry’s analy­
sis, he seeks to show what the rate of increase in wages
would be, given the rate of unemployment, given the
level of profits, etc. Now, there is another factor that
I have always felt is of very considerable importance
in wage determination, and that is how long a given
level of unemployment has existed. I don’t think this
factor of duration is taken account of in Professor
Perry’s equations.
My recollection of Perry’s analysis may be wrong and,
if so, I would like to be corrected.
DR. SAMUELSON: May I say that I did comment
on that last time and suggested that the only thing— the
thing which is different in the post-1963 experience
can’t be said to be just the presence of the guideposts.
There is, for example, the increased international trade
pressure, which is not in his equations, and there is a
possible factor along the lines of what Arthur Burns
mentioned, which I mentioned earlier; namely, the
legacy of the Eisenhower years of a sluggish economy
with high unemployment whose effects might be ex­
pected to be felt for some period thereafter. Also, econo­
mists such as Simler and Telia can explain the Perry
post-1962 residual by hypothesizing a hidden amount of
unemployment because of the failure of marginal work­
ers to enter the labor force when job opportunities were
weak in the 1959-64 period.


F u ll E m p l o y m e n t

Perry has a more recent different bit of evidence that
guideposts may have been influential. He got experts
to divide industries into the category of those in the
public eye and those not. Then he looked to see whether
wage increases had actually been more modest than
might have been expected in those industries in the
public eye and subject to guidepost influence. He did
find unusually modest wage increases there.
ington University: I would like first to make one com­
ment, and then a question for Professor Samuelson.
My first comment is to take issue with Professor
Hansen’s comment, because I don’t think the upward
drift in the consumer price index is something inde­
pendent of the change in wage rates which was going on.
I think it is agreed that the 3 percent or so increase
in average wage rates is inflationary. In other words, a
3.2 percent guidepost I believe overstates the average
increase you could get in wage rates in particular oc­
cupational groups consistent with a stable price level.
The reason is that 3.2 is the average annual increase in
real private product per man-hour, actually due to
shifts of man-hours from lower paying to higher paying
occupations generally. Part of this 3.2 was captured
through these shifts, upwards of 1 percent.
A true non-inflationary wage increase is closer to,
say, 2.5 percent, than to 3.2. This is a minor matter. I
think we would all be delighted if wage rate increases
were held to 3.2 and we would take the 1 percent infla­

D iscussion


tion if we could be assured of so moderate a result.
The question I would like to address to Professor
Samuelson is: Assuming that the guideposts have to be
promulgated again more forcefully in the coming year,
assuming success of expansionist policies that are being
inaugurated at the present time, what modifications
would he suggest in the guidepost formulation, particu­
larly to meet the objections of so many people, as re­
flected in the Chicago conference of last year, the objec­
tions with respect to equity of the guideposts? The
people who are the business managers who have social
conscience and try to conform are penalized relative to
those who don’t, which also leads to some distortion in
allocation of resources, as Milton Friedman points out.
I am just wondering what modifications might be made,
particularly to hit this problem of equity.
DR. SAMUELSON: I set up the hypothesis tenta­
tively that the guideposts’ only efficacy would be in the
realm of the 500 largest corporations, and that by and
large these compete with each other. Admittedly, over
a period of time there could be some attrition in their
position, if they take a socially conscious view— and I
argued that they do have some leeway under our present
degree of competition to take such a social view.
I argued that, in a sense, this is a tax on them. It
means that a certain advantage spills over to small busi­
ness which doesn’t take that view; in a certain sense, it
is a tax on the efficiency of the system, because these
big fellows are probably efficient people.


F u ll E m plo ym en t

But, I said then, that there was enough of old Justice
Brandeis in me to think that it couldn’t happen to a
nicer bunch of fellows; that there was something to be
said for keeping the system open; and that they can af­
ford a little more weight in the horse race of life.
However, you could get to the point where, like all
things, you are putting too heavy a handicap on the
jockey who is riding this particular horse. A t that point
I would begin to ease up.
It is not all that clear that the guideposts are so suc­
cessful that large corporations are carrying this tre­
mendously heavy weight. I say this more in sorrow
than in anger.
DANIEL EDWARDS, Joint Economic Committee:
A question for both Burns and Samuelson. The Joint
Economic Committee this week is holding hearings on
post-Vietnam planning. The administration has ad­
mitted that, if Vietnam hostilities ceased tonight, the
administration does not have contingency plans to put
into effect tomorrow morning. I am wondering about
the massive tax cut you recommended for after Korea.
In December, 1961, [Federal Reserve Board] Chair­
man Martin came up on the Hill and stated that the
tax decrease that the administration was discussing
would have to be financed out of real savings. The Fed­
eral Reserve Board shifted into a policy of rather sig­
nificant restraint in the beginning of 1962. Some econo­
mists at the Board suggested that this restraint would

D iscussion


lead to the largest stock market break since 1929 and it
would lead to very poor performance in GNP.
Mr. [James] Tobin, in the Annual Report of the
Council of Economic Advisers, indicated that there
would be certain target values for money and liquid
assets which would have to be provided in order to fi­
nance the target GNP for 1962. These values were not
achieved. The administration did not follow the same
policy with the Federal Reserve Board at that time that
it did with the steel industry; it did not say anything
publicly about monetary policy. Mr. Martin was much
more aggressive in the 1950s in killing the dragon of
I am wondering if we had gotten a tax decrease, a
massive one after Korea, if Mr. Martin would have
emasculated this cut completely? Or, what are you as­
suming about the mix of fiscal-monetary policy?
DR. SAMUELSON: I thought it was idiocy, when
we were proposing a massive tax decrease, for Mr.
Martin to succeed in doing what he occasionally said he
would and which was being urged upon us by many
bankers, namely, to have it all come out of saving, or
whatever the expression was. It was explained at that
time this was necessary to appease the foreign bankers,
the Gnomes of Zurich, who were concerned about our
balance of payments, and who apparently didn’t want
us really to get any benefit from the tax cut.
To run a massive deficit, only to have it offset by a
tight monetary policy, would have been bad for growth


F u ll E m plo ym en t

and nonexpansionary on total aggregates, if really con­
templated. But I always felt at the time that Mr. Martin
didn’t understand what he was talking about, and that
kept me from being very scared that it would come to
MR. EDWARDS: Just look at what the Federal Re­
serve Board did in 1962 and, if you want, just look at
the record of growth in this decade. The growth records
for 1962 and 1966 are quite comparable. These are the
two years that you get a departure in economic growth
and reductions in the reserves available for private de­
mand deposits on a quarterly basis.
DR. SAMUELSON: I don’t think that, as grown
men, we ought to spend our time relating the rate of
change of money and of national income for past pe­
riods. Professor James Tobin has taken a new fresh look
at all of the data and it is all practically pure noise.
The notion that anybody has demonstrated that you
take the current rate of change of the money supply and
the current rate of change of GNP and get a good pre­
diction is ridiculous. You get a terrible scatter.
Even if you take past rates of change of the money
supply and current changes of GNP, only by selective
talk about incidents do you get a good fit. You do not
get a good overall fit, as measured by correlation coef­
ficients of say -[-.8.
If you take the models that were proposed by the pro­
ponents of this sort of simple money model, let’s say in

D iscussion


1962, and apply them to subsequent times, they turn
out just terrible in their predictions.
Or consider the rate of change of the money supply
as a National Bureau leading indicator. The recent study
of Geoffrey Moore and Julius Shiskin has rated each of
the indicators in terms of their consistency and so forth.
Shiskin told me just last week that the rate of change of
the money supply was a pretty good indicator, not the
best, but a pretty good one. However, he said, in the
postwar period it has deteriorated considerably.
So it is ironical that precisely in the postwar period
we hear about the crimes of the Federal Reserve of omis­
sion and commission. To me that’s rhetoric. It has not
yet been backed up by solid scientific research, and I
have no reason to think that it can be. In fact, here is
a view that reminds me of generals who win every battle
but never have any territory solidly behind them.
NORMAN TU RE, National Bureau of Economic
Research: Paul, may I answer that objection just for a
PROFESSOR TU R E: It was, was it not, what the
Federal Reserve Board did beginning last spring and
leading up to the end of last summer that made it neces­
sary for the administration to propose and to ram
through the suspension of the investment credit and ac­
celerated depression, which made it necessary for them
to use a highly selective and very particularistic kind


F u ll E m plo ym en t

of tax device to correct deficiencies that were develop­
ing in the money market?
DR. SAMUELSON: I suggested something like that
earlier this evening.
PROFESSOR T U R E: I don’t know why it’s incon­
sequential then— to back Dan up— on the basis of the
kind of observation you made a moment ago to write
off what the Federal Reserve Board does.
DR. SAMUELSON: I don’t. Money is one of the
variables in my system, but to show that money matters
is not to show that money alone matters, and that’s what
the modern debate unfortunately has degenerated into.
It just turns out that when you examine the variables
that you can’t vindicate that monistic-money position,
at least you can’t in most counties in the country.
PROFESSOR BURNS: If I may, I would like to
make an historical point.
Professor Samuelson suggested that we should have
had a massive tax cut after the Korean War. Let me
recall a few facts. First, in January, 1954, the excess
profits tax went off. Second, the individual income tax
was lowered, on the average, by 10 percent at the same
time. Third, some excises were reduced in the spring
of 1954. Fourth, the Revenue Act of 1954 provided for
faster depreciation and futher lowered taxes.
Thus, in all, we had rather substantial tax reductions
after the Korean War. My recollection is that the net
tax reduction, after allowing for the increase in social
security contributions, came to something more than $6

D iscussion


billion. Whether that is massive or not is a matter of
opinion. It is worth noting, however, that the tax reduc­
tion of 1954 was not very different from the tax reduc­
tion of 1964 once account is taken of the size of the
economy in these two years.
Now, going beyond the facts, I want to express a
judgment. If we had had a larger tax reduction in 1954
than we did have, I am afraid that we would have had
a still larger degree of inflation in the troublesome years
1956 and 1957.
DR. SAMUELSON: I think that I really ought to
agree in part with that. I am now recalling the timing:
The sluggishness that one was concerned about, I think,
was in the last part of the 1950s. We should have been
prepared, as Japan and some other countries have done,
to have a succession of tax reductions.
It wasn’t necessary to guess the long-term tax-cut
dosage in 1953 when the hostilities ceased. Still I would
have liked to have had the 1954 recession a bit lighter
than it was. I don’t think it was necessary for therapeu­
tic purposes to have had all that we had then. But I do
recall that 1955 and 1956 were years of upswing in the
price level, partly of the demand-pull character; and I
have to recall that 1957-58 showed disquieting cost-push
behavior. With a more massive 1953 tax cut, we would
have then been in the dilemma we are discussing tonight
in a very marked way.
We are luckier in this decade. Aside from patting
ourselves on the back as being smarter, of which there


F u l l E m plo y m e n t

has been plenty of evidence, we actually are luckier:
Productivity has done a lot better, and it couldn’t have
been counted upon to have done so; contrariwise pro­
ductivity was just unfortunately bad in the 1957 period.
We never saw the harvest of the 1955-57 equipment
boom. We seemed to fritter away in white collar work­
ers all that we saved in blue collar workers.
So I accept that amendment.
PROFESSOR BURNS: Since Paul and I agree on so
much, let me add a further word of agreement. I defi­
nitely think we should have had a tax reduction early
in 1958. I thought so then, in fact I felt strongly about
it, and I still think so. I also think that we should have
had a tax reduction in 1960.
I felt unhappy that we didn’t get these tax changes.
Without crying about what happened or didn’t happen,
let me merely say that I believe that both economic and
political history would have been different if those tax
reductions had been made when the economy so badly
needed them.
PROFESSOR TU R E: It seems to me that Professor
Samuelson is saying there are two main lines of develop­
ment in public economic policy currently: One is the
long term, the secular focus of policy, and he says this
is a distinguishing concern of "new economics.” Let’s
not debate that point. The second thing that he did was
to defend activism in public policy with respect to
short-term development.
Let me point out, as a further application of Professor

D iscussion


Burns5 historical correction, that the excess profits tax
was scheduled to expire on June 30, 1953, and legis­
lation was introduced in the House Ways and Means
Committee to accompany that expiration with an ac­
celeration by six months of the automatic reduction in
individual income tax rates.
The administration opposed this saying it was exces­
sively expansionary at that point in time. Of course, if
we are going to date the onset of the downturn, that's
when it occurred. What we ought to conclude from this
is that people who were looking at things at the time
and offering policy judgments to guide an active fiscal
and monetary policy for short-term purposes misread
the signs then.
I think from that point on the record is unmistakably
clear. They misread it all the time. They did it quite
recently. I51 call to your attention that there were some
hearings in the late spring of 1957 on the economic and
budgetary outlook and the fiscal-policy implications
thereof. A large array of very impressive economists and
public finance specialists testified to the same thing, be­
fore the Joint Economic Committee, that any kind of
expansionary public policy at that point would be
highly irresponsible and, as I read the National Bureau's
record, the recession was then underway.
DR. SAMUELSON: Norman is too kind. He didn't
name names. I testified in June of 1957 before the Joint
Economic Committee. Irwin Friend was on the panel
at the time. I was told later, this was years later, that I


F u ll E m plo ym en t

had been the most pessimistic of those testifying but far
from pessimistic enough. Irwin Friend told me that he
did a postmortem on where he went wrong. It was a
May-July turning point, as I remember, so we were just
at the peak; Friend said that he reproached himself for
not having seen it; so he looked to see where he went
wrong. He said he went wrong in estimating govern­
ment expenditures. He said, "I should have listened to
George Humphrey. I just didn’t believe what he said
was going to happen could possibly happen. I went
wrong by billions of dollars on what one might call the
multiplicand at that time.”
PROFESSOR T U R E: But Paul, in all fairness, I don’t
think Irwin should chastise himself so, because that re­
duction in federal expenditures that resulted from the
Secretary of the Treasury stirring up the hornet’s nest
did not occur until after the recession was well under
way. Congress slashed appropriations in the course of
the year 1957.
DR. SAMUELSON: No, what Irwin was saying was
that he took the subsequent period for which he had
forecast and he went through all of the components of
his forecasts to see where he had been wrong in that
period. It was very heavily in his estimates of the govern­
ment expenditures.
PROFESSOR BURNS: Since we are doing some
chastising, let me just put into the record one historical
fact; namely, that in August, 1957, one month after the
recession had started according to the National Bureau’s

D iscussion


chronology, the Federal Reserve Board raised the dis­
count rate.
DR. SAMUELSON: It is worse that that— Mr. Mar­
tin made a speech in October speaking about the need
to control inflation and when I expressed some surprise
to a member of the Federal Reserve System, it was ex­
plained to me that Martin had been on a vacation.
Perhaps he hadn’t been properly briefed. It’s on such
matters that history rests.
HERBERT STEIN, Committee for Economic De­
velopment: I understood Professor Samuelson to have
given a somewhat qualified good mark to the restrictive
policy of the late 1950s and early 1960s, as having in some
way prepared the groundwork for a period of expansion
without very much inflation. I wonder whether he fore­
sees the possible necessity of going through such a thing
again, if we again revive experience and expectations.
DR. SAMUELSON: I think it would be more ac­
curate to say that I take certain cold comfort from the
fact that, even though at the time I didn’t espouse it, I
must not blind myself to the good that the late 1950s
slowdown may have done to our Phillips curve.
I’m not the one to make the recommendation, but I
think it might be argued that the optimal policy in a
mixed economy like ours might be intermittent periods
of letting a certain amount of slack develop, then get­
ting the benefit of this slack in breaking inflationary
expectations, and then going on strong.
It was thought that Mr. Lloyd’s policy of a pause in


F u l l E m plo y m e n t

England was stupidity when the Labor government
went in. Stop-and-go driving was considered to be the
most wasteful kind of driving by analogy with gasoline
advertisements. But now Harold Wilson finds himself
putting in a price-wage freeze and a pause much greater
than the Conservative government had ever toyed
I am afraid there may be a time when, in a mixed
economy, you need a dose of Paishism, after Frank
Paish, who advocates slack in season and out of season.
We have plenty of Paishes in this country, so I think I’ll
let them speak for themselves. There is a limit, after all,
for a chap to be the devil’s advocate.
PROFESSOR KENDRICKS: Paul, now there is no
difference between you and Arthur, if you say that oc­
casional slowdowns are good. I thought you said the
difference between the two economists was in the degree
of expansionism.
DR. SAMUELSON: No, no, what I’m saying is that
I think there is possible merit in that case. But that’s
not where I would draw the balance in summing up.
I want to try activism until it is demonstrated that
activism is wrong, but I hope the statute of limitations
will keep us from discussing the balance-of-payments
aspect of that.
PROFESSOR BRIEFS: The one point that I think
failed to be developed is your caveat that in being an
activist one has to be concerned about the lags that

D iscussion


attend policy measures. It seems to me the essence of
your position. I am a little unhappy with the lack of
development of this caveat. I wonder if you would ex­
DR. SAMUELSON: There is a problem here. I don’t
want to gloss over it and that’s why I am not prepared
to say that there is no need for forecasting. However, I
think that in the 1960s by taking the longer cyclical
view you could operate on the assumption that the actual
swings in the economy were themselves going to be slow
and long and, therefore, it wasn’t likely that you were
going to have to reverse yourself very fast. Hence you
didn’t have to worry too much about the lags.
I don’t want to end on a note of disagreement but I
really don’t think that the reversals of monetary policy
are quite the bad thing that the incautious listener to
Professor Burns’ first remarks might think. I believe that
monetary policy should zigzag. It is the stability of the
trend, and leaning against the short-term wind that you
want. I think that if we operated a model of the Ameri­
can economy as a Monte Carlo simulation experiment
and if you were in fact not to have swings in monetary
policy, then you would find that everything else in the
economy would get destabilized in some very bad ways.
I say this because I don’t believe in strict constancy with
respect to velocity and other matters, but that’s a very
long story.
PROFESSOR BURNS: The last thing that I want is
to have the last word. But I do want to express apprecia­


F u l l E m p lo y m e n t

tion to Professor Samuelson for referring to the incau­
tious listener.
of Virginia, Coordinator of the Rational Debate: I
wonder if in concluding whether you might have any
last word you would like to give. Arthur, would you like
to say anything?
PROFESSOR BURNS: I am getting the last word
after all and I will try to be brief. Professor Samuelson
has indicated that he is more of an expansionist than I
am and I would agree. I think he is. He has also indi­
cated that a difference in our value judgments may be
responsible for this difference. And once again, I want
to say that he is probably right.
I would add, however, that I think I am just as much
concerned about the unemployed, about the Negroes,
and about the teenagers as is anyone, including Professor
Samuelson. But I do not think they are the only ones in
the society to consider. There are other people as well
whose interest must be taken into account. We must
try to concern ourselves with the welfare of the popula­
tion as a whole.
Secondly, I do not believe that by pushing very hard
with an aggressive monetary and fiscal policy, at a time
when there are already signs of strain on the nation's
resources, one can do more than give momentary help to
the unemployed. We have got to think of tomorrow as
well as of today.
I have been reading recently Walter Heller’s book,

D iscussion


as many of you doubtless have. Walter Heller takes
President Eisenhower to task for his concern about our
grandchildren. It is perfectly true that in referring to
budgetary deficits and the dangers of inflation, President
Eisenhower has put a certain emphasis on the morality
of shifting burdens to our grandchildren. But all that
he ever meant was that what we do today has conse­
quences not only today, but also tomorrow.
Now, one reason why I have been so much concerned
about aggressively expansionist policies, not only in re­
cent years but also at other times, is that I have pro­
ceeded from a certain judgment, based partly on history
and partly on recent trends in economic thinking—
namely, that the more militant expansionists will simply
not know when to stop. I have thought so over the
years and that is why I have deemed it important to
issue warnings from time to time. And I have yet to be
shown that in this practical judgment I have been en­
tirely wrong.


1 Research assistance of Felicity

Skidmore is gratefully




deliberately preserved the informal oral flavor of the exposition.
2 J. P. Schultz and R . 2 . Aliber (eds.), G uidelines, In fo rm a l C ontrols and the
M arket Place (Chicago: University of Chicago Press, 1 9 6 6 ), pp. 18 and 19.

3 P. A. Samuelson, J. R. Coleman, and F. Skidmore (eds), Readings in Econom ics
(New Y ork: M cGraw -Hill, 1 9 6 7 ), pp. 376-77, taken from A. F. Burns, "Wages
and Prices by Formula?” H a rv ard Business R eview , M arch-April, 1965, p. 59.
4 Shultz and Aliber, op. cit., pp. 48-49.
a Actually, there is a pitfall here, since the residual must also include taxes; and
when we consider more realistic cases, where the prices of raw materials and
imports may fluctuate, the non-wage residual is more complicated than would be
a mere profit figure.

1 Both Professor Burns and Professor Samuelson have reviewed their remarks
throughout the Discussion section. Original transcripts are available at the offices
of the American Enterprise Institute.