Full text of Statements and Speeches of Andrew F. Brimmer : Inflation and Economic Welfare in the United States: Implications for Monetary Policy : Remarks before The City Club, Cleveland, Ohio

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F r i d a y , November 9 , 1973
12:30 p . m . , EST

INFLATION AND ECONOMIC WELFARE IN THE UNITED STATES
Implications for Monetary Policy

Remarks By

Andrew F . Brimmer
Member
Board of Governors of the
Federal Reserve System

Before

The City Club
Cleveland, Ohio

November 9 , 1973

- 2 -

of monetary policy or of money market and credit developments.

We also

refrain from detailed forecasting of the general economic outlook.
Prudence would suggest the wisdom of this position at any time, but it
is especially necessary to be cautious in the present environment 0
Conflicting signals are being given off by the economic indicators —
which is normally the case in the advanced stages of economic expansion Q
The situation is further clouded by the uncertainties stemming from the
Middle East military s i t u a t i o n — a s well as by the continuing uncertainties
on the domestic political front«

Moreover, any assessment of the economic

outlook and the prospects for inflation must be conditioned on the future
of the Administration's wage and price controls p r o g r a m — a future which
is by no means clear at this time c

Despite these uncertainties, however,

I believe that those of us who share responsibility for the conduct of
economic stabilization policies have an obligation to explain to the public
the reasons underlying our actions 0
In my personal view, the basic objective of national economic
policy should continue to be the moderation of inflationary pressures.
I am not unmindful that evidence is accumulating which suggests that the
pace of economic activity is already moderating.

I am also aware of the

emerging concern on the part of some observers about the likelihood of a
rise in unemployment during the coming year.

O n the other hand, I am

highly conscious of the persistence of strong inflationary pressures which
seem likely to be with us for quite some time.

S o , as I weigh the need

to combat inflation and the need to be sensitive to the danger of precipi-

INFLATION AND ECONOMIC WELFARE IN THE UNITED STATES
Implications for Monetary Policy
By
Andrew F. Brimmer*
A few weeks ago, I was asked by an interviewer on a television
program:

"When will the Federal Reserve reduce interest rates so people

can buy houses?

After explaining that the Federal Reserve did not

control such rates, I went on to explain as well as I could the connection
between the persistence of inflation and high interest rates in the
United States,

I also emphasized the continuing need for national policies —

and the need for public support of such p o l i c i e s — t o end the inflation
that has plagued this country for almost a decade.
It is to this same topic that I wish to return today.

In so

doing, I want to look beyond the short-run question of whether interest
rates are likely to be higher or lower tomorrow, next w e e k , or next month.
I can appreciate the genuine interest that so many people have in such
questions.

However, I am unable to provide any guidance as to the likely

prospects.

By long-standing tradition (one which I share), Members of

the Federal Reserve Board do not attempt to forecast the future course
* Member, Board of Governors of the Federal Reserve System.
I am grateful to several members of the Board's staff for assistance
in the preparation of these remarks. M r s . Susan Burch undertook the
principal responsibility for the analysis of price developments and the
assessment of inflationary expectations,, M r s . Mary Smelker also provided
some assistance in the examination of price changes. M r . John Austin and
M r s . Ruth Robinson helped with the analysis of income changes and the
differential impact of inflation.
However, while I am grateful for the staff's support, the views
expressed here are my own and should not be attributed to the Board's
staff. Nor should they be attributed to my colleagues on the Board.

- 3 tating a downturn in the economy, I come out at the present time on the
side of continuing the fight against inflation,,
As we all know, prices this year have risen at extraordinary
r a t e s — t h u s further intensifying inflationary expectations.

This year's

inflation, in turn, will add more fuel to the wage-price spiral which got
underway in the late 1960's and which was not eradicated during the 196970 recession.

There was an excessively rapid expansion of activity earlier

this year, and an increasing number of sectors have come to operate at or
close to capacity.

Under these circumstances, it was imperative that the

Federal Reserve moderate the expansion of money and credit.

Monetary

p o l i c y — w h i c h had already been in a tightening p h a s e — m o v e d further in
the direction of restraint in late 1972, and this became increasingly more
vigorous as 1973 progressed.

Specific efforts have also been made to

increase the cost and reduce the attractiveness of bank lending to businesses,
financed through the acquisition of money market funds.

And the instruments

of monetary policy have been supplemented recently with a less expansionary
fiscal policy and a renewed effort at direct controls over the rise in
wages and prices.
While I would prefer to be hopeful, I see little cause for optimism
with respect to the near-term price outlook.

The Federal Reserve System

in its official statements has stressed the continuing need to check inflation,
and the System has also stated that it is committed to continuing its efforts
to help bring inflation under control.

Unfortunately, success in this effort

will take some time.

And as past experience has suggested, the burdens

will probably weigh disproportionately on housing, smaller businesses,
and the younger or less-advantaged workers 0

Consequently, positive steps

need to be taken at the national level to spread the sacrifices«

In the

meantime, inflation has had a noticeably uneven effect on different income
groups in the economy 0

A g a i n — a s one might expect on the basis of experience-

inflation seems to have favored profit recipients and wage earners in strong
bargaining p o s i t i o n s — w h i l e those dependent on fixed incomes and public
assistance appear to have carried much of the burden caused by the sharp
rise in the general price level.
In the rest of these remarks, I will present my assessment of
recent price developments and the impact of inflation on major types of
income recipients.

I will then explain why I believe monetary policy c a n —

and s h o u l d — m a k e a significant contribution to the restoration of price
stability in the United States.
The Record of Inflation
The origins of the current inflation have been explained many
times, but it may be helpful to refresh our memories:

its roots are to

be found in the excess demands arising from a business investment boom
and the marked step-up in the Vietnam War effort in mid-1965.

At that time,

the economy was close to full employment, and the rapid rise in demand
for goods and services for military purposes (unmatched by higher taxes to
pay for the war) made the Federal Government a principal source of inflation.
Countervailing monetary policy actions were taken fairly promptly, but

- 5 fiscal policy did not provide much assistance until the passage of the
10 per cent income tax surcharge in mid-1968.

The better meshing of

fiscal and monetary policies reduced the pressures on aggregate demand.
However, these stabilization measures were less effective in controlling
wages and prices, which by then were responding strongly to inflationary
expectations.
As the cumulative impact of these restrictive policies was
registered, the annual rate of growth in real — ^ gross national product
(GNP) declined from 3 0 3 in the first quarter of 1969 to a minus 2.5 per
cent in the latter part of that year and into early 1970.

The rate of

unemployment rose during this period and continued upward during the
subsequent sluggish r e c o v e r y — f r o m 3.4 per cent to about 6 per cent of
the labor force.

Yet the pace of inflation did not slacken significantly

until the middle of 1971.

The intractability of the inflation is clearly

seen in the behavior of the GNP implicit deflator, the most broadly based
of the various price indexes.

During the period of substantial price

stability between 1961 and 1965, the GNP deflator rose at an average annual
rate of 1.5 per cent.

But beginning the next year, the advance quickened:

during 1966 and 1967, 3.5 per cent; 1968, 4.1 per cent; 1969 and 1970, 5.3
per cent.

Finally, in 1971 as a w h o l e , the rate slowed to 3.6 per cent, and

in the third quarter of that year (when Phase I of the direct wage-price
control program took effect) it dropped to 2.8 per cent.
I n 1972, it seemed that inflationary pressures were being
dampened a p p r e c i a b l y — d e s p i t e the recovery of the economy which was then
1/

Real GNP is defined as GNP in current dollars corrected for inflation.

- 6 in its second year D

The GNP implicit price deflator rose a more moderate

3.3 per cent during the year, and consumer prices climbed 3.4 per cent for
the second consecutive y e a r .

Average hourly earnings increased 6.2 per cent--

the smallest percentage rise since 1967.
Part of the improvement in price performance probably stemmed
from the delayed impact of the 1969-70 economic slowdown.

However, the

wage-price restraints introduced as a part of the economic stabilization
program also contributed to the better performance.

During this period, the

size of price and wage increases undoubtedly was lower than would otherwise
have occurred.

The requirement for pre-notification of wage and price

increases by large unions and business corporations was clearly an important
element in the success of controls.

But it should also be recalled that the

initial public reaction to the program was highly favorable, and inflationary
fears at that time were somewhat allayed«,
Rekindling of Inflation
At the same time, however, developments during 1972 worked against
price stability and helped to rekindle inflationary expectations.
prices behaved far less well than did retail prices.

Wholesale

In fact, the rise of

6.5 per cent in wholesale prices was the fastest since 1950.

Of major

importance was a developing world scarcity of grains and oilseeds.

Except

in the United States, harvests were poor in most of the world last year-inducing a sizable increase in U.S. exports of wheat, corn, and soybeans.
Prices of w h e a t , feed grains, and oilseeds began rising in the second half
of 1972, and they reached record levels about a year later.

Although corn

and soybean prices have since dropped, prices are still far above those of
a year a g o .

- 7 Deficient domestic supplies of food commodities contributed to
the extremely sharp wholesale price increases.

A major problem was the

failure of the number of meat animals available for slaughter to keep
pace with the rising demand for meat.

In contrast to other recent years,

the per capita supply of red meat declined last year.

Unfortunately,

supplies of other foods (such as eggs, broilers, and most fresh and
processed fruits and vegetables) were also less than normal.

As a result,

food prices rose 19 per cent between September, 1972, and the same period
this year--with meat increasing 37 per cent.
Pressures on farm and food prices (which rose by almost 24 per
per cent between January and October of this year) were augmented by an
acceleration in industrial price increases which accompanied an expansion
of economic activity on a world-wide basis.

The degree of sychronization

in cyclical expansions in the industrial nations that we have witnessed
over the last year or two is most unusual.

Worldwide materials shortages

of unprecedented severity (except for wartime) developed during 1972--with
the prices of hides, steel scrap, textiles, ana lumber rising sharply.
In 1973, the rise accelerated noticeably, and nonferrous metals, natural
rubber, and basic chemicals were added to the list of commodities in
short supply.
The devaluation of the dollar in relation to many foreign currencies
aggravated

our price situation by making it more expensive for Americans to

buy materials produced abroad and less costly for foreigners to buy our
already scarce corn, wheat, and soybeans as well as industrial materials

- 8 and products.

It is impossible to estimate with any precision how much

the currency realignment — a m o u n t i n g to a 20 per cent decline in the value
of the dollar against other currencies since August, 1971--have added to
inflation in the United States, but it has clearly been a factor.
In short, by early 1973, scarce supplies of foodstuffs and
animal feeds, rising world demand, domestic prosperity, and the reduced
value of the dollar in international trade all converged to produce sharply
heightened inflationary pressures.

Hence, when Phase II was replaced by

the more relaxed controls of Phase III in January of this year, producers
found it relatively easy to translate increases in costs into higher prices
as well as to widen profit margins.

Consumer prices increased 7.5 per cent,

in the 12 months ending in September, and wholesale prices (including farm
products) rose 17 per cent.

Between January and June of this year, wholesale

industrial prices rose at a 12 per cent annual rate.

This resurgence of

inflation prompted the Administration to impose a second temporary price
freeze in mid-June while a more comprehensive control program was being
worked out.
The freeze was followed in mid-August by Phase IV--a controls
program stiffer in many respects than that of Phase II.

When Phase II was

imposed, profits and profit margins were abnormally low--due mainly to
almost 3 years of sluggish economic activity.

Because of this, and in

order to support economic expansion, businesses were allowed not only to
raise prices to reflect increases in materials and labor costs--but also
to add the usual mark-up, generally expressed as a percentage of costs.

- 9 Profit margins and total profits rose sharply last year and have improved
further in 1973.

The regulations for Phase IV generally permit a dollar-

for-dollar passthrough
increase on volume.

of higher direct costs, so that profits can only

Consequently, the Phase IV rules could limit the rise

in profits more severely than those of Phase II.

A 30-day rule requiring

pre-notification of price increases by the larger corporations was also
imposed in Phase IV, during which the authorities can challenge the cost
basis of the proposed increase.

This requirement is having the effect of

postponing price increases for automobiles, metals, and other important
commodities.

Farm and food prices were left uncontrolled at the farm level,

but the controls for processors and distributors permit only a dollar-fordollar passthrough of costs.
Relative prices had moved badly out of balance earlier this year,
so that the more rigorous controls program is bringing increasingly serious
distortions in markets.

In some industries, price increases in domestic

markets are being suppressed, and producers reportedly are diverting to
exports materials which are also under strong demand pressures in this
country 0

Indeed, this problem has already led to the total decontrol of

prices in the fertilizer industry,,

Complaints are also heard that below-

market prices for some products (such as steel and paper) are serving to
retard capital outlays to expand capacity in such critical basic materials
industries.

- 10 Strengthening of Inflationary Anticipations
As 1973 progressed, a significant proportion of the public came
to expect continued substantial i n f l a t i o n — n o t only for the next few months
but extending for some time into the future.

These changing attitudes

can be traced to the legacy of the wage-price spiral and the inbalances
f

between wages and prices caused by 1973 s inflationary outcome 0

Measures

of inflationary anticipations are somewhat elusive, but there are clear
indications of a worsening in the attitudes of trade unions, consumers,
and businessmen.
The changing attitude of trade unions obviously reflect the recent
deterioration in the real earnings position of wage recipients 0

Adjusted

for the increase in consumer prices, average weekly earnings have actually
declined thus far this y e a r .

Wage rate increases in recent months have

been accelerating in response to this situation..

For example, in the March-

October period, seasonally-adjusted average hourly earnings rose 7 C 5 per
cent at an annual rale, compared to an increase of 6 C 6 per cent in the
previous nine months 0

The pressure for higher wages is likely to be even

greater next year as more workers make an effort to regain or improve on
the purchasing power that their wages had obtained in 1972 0
Trade unions are also seeking better cost-of-living escalators
which were a permanent feature of the recent automobile contract.

Other

unions can be expected to press strongly for the inclusion or continuation
of such clauses in new contracts.

There also is some interest in eliminating

entirely the limits on these provisions.

Following a period of extensive use

in t h e late 1 9 5 0 s , escalator provisions became less prevalent in the early
f

1 9 6 0 s — w h e n they were discontinued in the steel, aluminum, can, and railroad
industries.

By 1966, about 2 million workers were covered by contracts

containing escalator c l a u s e s — o n l y half the number reported for 1958.

Since

then, however, the number of workers affected by escalator clauses has more
than doubled.

In 1973, over 4 million workers — the same number as in 1 9 5 8 —

were covered.

Much of the increase occurred when the provisions were

reestablished in steel, aluminum, and cans, and introduced in communications
during 1971.
Earlier this year, consumer demand was much stronger than
many observers had expected.

This strength has been attributed at least

in part to consumer hoarding or "buying in advance of price increases."
For instance, the Michigan Survey Research Center reports that inflationary
anticipations by consumers are now more intense than at any other time in
the almost 25 years of the surveys.

Over 20 per cent of the households

surveyed in August and September thought that prices during the next 12
months would increase 10 per cent or more.

Given their decidedly pessimistic

evaluations of their own financial situations and of the outlook for business
conditions, a surprisingly large number of consumers also responded that
it was a good time to buy household durables because of the likelihood
of future price increases.

By the third quarter of this year, pessimists

considerably outnumbered optimists in the population, and 44 per cent of
all families thought that the Federal Government was doing a poor job in
handling the crucial economic issues of inflat ion and unemployment.

the time of the freeze in August, 1971, about 24 per cent of the respondents
gave the Government low m a r k s .

12 -

The price expectations of households find a counterpart in the
anticipations of businessmen.

For example, Dun and Bradstreet reports

that in July more than 80 per cent of manufacturers foresaw the price
of their products rising through the fourth quarter of 1973.

This is in

sharp contrast to the situation at a similar stage of the previous
business cycle when only 50 per cent of manufacturers were expecting
continued inflation.

Moreover, the most recent Livingston survey (reporting

interviews as of last June) indicates that average weekly wages in manufacturing
are expected to increase at an annual rate of 7 per cent through the period
ending June, 1974;

respondents to this survey also expect the consumer

price index to rise 5.2 per cent in the same period.

Finally, the recent

consensus forecast of the National Association of Business Economists
anticipated that the GNP deflator would grow at an increasing rate through
1974, averaging 5 per cent for the year as a whole.
One must assume that businessmen's investment decisions
are generally affected by such price expectations.

T h u s , the

projections by the major private surveys of a significant increase
in plant and equipment spending in 1974 (in the range of 12 to 15
per cent) may reflect an attempt by firms to compensate for
continued inflation.

Of course, capacity constraints are of paramount

importance in certain industries, and these problems have also become
increasingly severe during the current year.

For example, the percentage

of productive capacity utilized for basic materials production

(including

- 13 steel, woodpulp, paperboard, and manmade fibers) rose to 9 6 0 3 in the third
quarter compared to 91.0 a year earlier 0
utilization was the highest on record 0

The third quarter rate of capacity
During the previous periods of

strong expansion, the utilization rate stopped short of the present level.
In the first quarter of 1951--the peak of activity during the Korean W a r —
the rate reached 9 3 c 3 per cent, and the same percentage was recorded in the
first quarter of 1956.

In the second and third quarters of 1966, the utili-

zation rate was 92.0 per cent, and it was at 91.6 per cent in the last
quarter of 1969.
Long-Run Impact of Inflation on Income Distribution
In the meantime, the inflation that has plagued the United States
since the mid-1960's has had widely differing effects on particular groups
in the economy.

This is by no means surprising.

As is generally known,

inflation (especially when it is unforeseen) tends to redistribute income
away from creditors and fixed-income receivers to debtors and profit
receivers.

In periods of deflation, the situation is reversed.
Of course, it is very difficult to measure the specific effects

of inflation on particular segments of the population since individual
situations vary so widely from the average experience.

If inflation is

generated primarily by the expansion of demand for output in the face of
limited resources (as is frequently the case), it may be accompanied by an
increase in jobs for persons who were previously unemployed.

So workers

as a group may very well experience both an absolute and relative rise in
their money income.

The latter may even climb faster than the general

- 14 level of prices.

But for those who already had jobs, compensation may not

rise as fast as prices, so their relative position may deteriorate.

balance, however, inflation is likely to have its most noticeably adverse
effects on those groups that are out of the labor m a r k e t — o r that occupy
marginal positions on its fringes.
A general idea of the way in which particular groups in the
population have fared in the inflationary environment of the last decade
can be traced in broad outline in Table 1 (attached).

This table shows

annual average rates of change in prices and national income in selected
sub-periods between 1960 and 1972.
level are shown:

Three measures of the general price

the GNP implicit deflator;

(WPI), and the consumer price index (CPI).
the same story.

the wholesale price index
All of them tell essentially

National income is total earnings of labor and property

generated in the current production of goods and services in the economy
as a whole.

It is composed of compensation of employees, proprietors

rental income, corporate profits and net interest.

income,

The behavior of the

various price indexes and the different types of income is examined for
four time periods:

1960-65;

1965-70;

1970-72, and 1960-72.

effect of inflation is also shown, being indicated roughly by

The differential
the difference

between the percentage change in a particular type of income and the
percentage change in the CPI.
Several conclusions are suggested by these data.

During the period

of relative price stability between 1960 and 1965 (when the rise in the CPI
averaged 1.3 per cent per year), all principal types of income rose faster
than the general price level.

The largest relative gain was recorded by

- 15 net interest.
after taxes.
profits.

A sizable .gain was also registered by corporate profits
This was reflected in both dividends and undistributed

Employees as a group kept well ahead of inflation, but the

variation among them was considerable.

Both fringe benefits and total

wages and salaries rose rapidly, averaging 8.5 per cent and 5.8 per cent,
respectively.

Among types of employees, government civilian workers (with

an average annual increase of 8.0 per cent) did appreciably better than
workers in the private sector (whose income rose at an annual average
rate of 5.4 per cent).

The least relative gain in income was experienced

by owners of real estate (3.7 per cent annual average rate of increase),
and the income of proprietors rose only slightly more rapidly (4.4 per
cent).

The latter rate of increase was recorded for farmers as well as for

proprietors in nonfarm fields of activity.
The years 1965-70 witnessed a considerable expansion of military
activity in Vietnam as well as a strong rise in economic activity in the
United States.

Toward the end of the period, military outlays began to

grow more slowly, and the pace of domestic expansion eased appreciably during
the 1969-70 recession.

Nevertheless, as indicated above, inflationary

pressures did not moderate very much until 1971.
The impact of this inflation on different income groups can also
be seen in Table 1.

Wholesale prices (which had remained essentially stable

between 1960 and 1965) rose at an annual average rate of 2.7 per cent in
the 1965-70 period.

The GNP deflator and the CPI rose at an average rate

- 16 of 4.1 per cent and 4.3 per cent, respectively.

Reflecting the strong

upsurge of economic activity, national income climbed a t an annual average
rate of 7.2 per cent.

However, after adjusting for the rate of inflation,

real income expanded by an average rate of only 3 per cent.

Among

principal income components, net interest recorded the largest relative
gains.

This was traceable to higher interest rates as well as to

greatly expanded volume of borrowing by both the Federal Government and
the private sector.
8.9 per cent.

Compensation of employees rose at an average rate of

Again, payroll supplements increased more rapidly (12.0 per

cent) than wages and salaries themselves, but the latter also registered
a sizable advance (at an

average rate of 8.6 per cent).

During this

period, earnings of civilian government workers as well as military pay rose
significantly faster than earnings in the private s e c t o r — i . e . , 10.8 per cent
for civilian government workers and 10.1 per cent for military personnel v s .
8.0 per cent for employees on private payrolls.

All of these rates of increase

were well above the advance in the general price level.
However, the story for owners of property and the owners of
unincorporated enterprises was quite different.

In the case of property

owners, rental income barely kept pace with the rate of inflation--rising
at an annual average rate of only 4.7 per cent while the advance in the CPI
averaged 4.3 per cent.

Among unincorporated enterprises, the income of

the farm sector rose at an average rate of 2.7 per cent--considerably below
the rate of inflation.

The lag in prices of farm commodities was mainly

responsible for this outcome.

In the nonfarm sector of unincorporated

enterprises, the largest proportion of income originates in services, with

- 17 retail trade a distant second.

In both areas, many proprietors pay

themselves salaries or establish fees for services which rise roughly in
line with the general price level.

Reflecting this general tendency, the

increase in business and professional income fell only slightly short of
the average rise in the CPI.
Book profits of corporations declined on average by 1.0 per cent
between 1965 and 1970.

This was partly attributable to the impact of the

recession at the end of the period, but the sizable rise in capital
consumption allowances during those years also exerted an influence on
corporate profits.

Corporate profits tax liability rose at an average

rate of 2.1 per cent, so after-tax profits recorded an average decrease
of 3.3 per cent over the 1965-70 years.

Corporate dividends rose about

in line with prices, and undistributed profits recorded a sizable decrease 0
During the 1970-72 period, a quite dramatic change occurred in
the relative position of different income recipients.

The rate of inflation

(as measured by the CPI) was somewhat less than that registered in the
preceding period, easing off to an average annual rate of 3.8 per cent
from a rate of 4.3 per cent.

Total national income rose at an accelerated

rate (averaging 8.5 per cent vs. 7.2 per cent in the previous period), and
the rate' of increase in real income climbed to over 4-1/2 per cent.

The

rise in the compensation of employees (at an average rate of 8.2 per cent)
expanded somewhat more slowly than in the earlier period (when the rate
was 8.9 per cent).

Fringe benefits continued to increase faster than

wages and salaries•

The pay of government civilian workers again rose

somewhat more rapidly than the pay of employees on private payrolls
(9.2 per cent v s . 7.5 per cent).

However, both of these rates of

increase were below those recorded in the 1965-70 period (when the
gains were 10.8 per cent and 8.0 per cent, respectively).

In both

cases, the moderation in the uptrend of compensation was undoubtedly
influenced by the mandatory restraints on wages.

Nevertheless, the

rise in compensation was well ahead of the advance in the general price
level.
In the case of unincorporated enterprises, the farm sector
experienced a sizable increase in income during the 1970-72 p e r i o d —
averaging 8.8 per cent per year.

This was principally a reflection

of the strong increase in demand for agricultural products which began
in those y e a r s .

Rental income of persons (which had risen roughly in

line with prices) experienced virtually no increase during the most
recent period.

The explanation of this behavior is rather complicated,

but basically it appears that rents have been much more sticky than
market prices of owner-occupied h o u s e s — w h i c h have risen sharply in
2/
recent y e a r s .

Moreover, in the national income accounts, a considerable proportion
of the amounts reported as rental income is imputed rent assigned
to home-owners. Increased interest charged on the growing amount
of equity accumulated in owner-occupied houses and higher capital
consumption allowances have largely contributed to the slow rate
of growth of rental income.

- 19 A sharp turn around
in the 1970-72 period.

occurred in the case of corporate profits

Book profits (which had declined slightly in

the earlier years) expanded at an annual average rate of 15.1 per cent over
the 1970-72 years.

Although corporate profit tax liability also rose sharply,

after-tax profits increased at a rate averaging nearly 19 per cent.

All

of these rates of growth were substantially greater than the increase
in the general price level.

On the other hand, corporate dividends

during this period rose at an annual rate of only 2-1/2 per cent, and
undistributed profits expanded at an annual rate of 42 per cent.

This

sharp divergence between the growth of after-tax profits and dividends
paid out was clearly a result of the restraints imposed on dividends by
the Administration's Committee on Interest and Dividends.

Net interest

increased at an average rate of 11.3 per cent between 1970-72.

So, on

balance, it appears that in the most recent period one result of inflation
has been a significant shift in the distribution of national income more
in favor of profit recipients relative to those whose income is derived
from wages and salaries.
Inflation and Fixed Income
Even sharper insights into the impact of inflation on income
distribution is provided by an analysis of the experience of those groups
in the economy who rely primarily on fixed incomes. Changes in three of
these types of income (Social Security, private pensions, and public
assistance payments) are shown in Table 2, along with total personal income
and the three principal price indexes.
Table 1 are reproduced here.

The same time periods set out in

- 20 These data cast in bold relief the impact of inflation on fixedincome g r o u p s — e s p e c i a l l y during the last few years.

For example, in

1960-65, total personal income rose at an annual average rate of 6 per
cent.

Personal tax and non-tax payment rose somewhat more slowly and

disposable personal income advanced at an annual rate of 6.2 per cent.
Since the average increase in the CPI was 1.3 per cent, real disposable income
expanded by roughly 5 per cent.

In contrast, incomes in the form of

transfer payments lagged considerably behind.

Social Security payments

advanced at roughly 3 per cent in that period, but the rise in prices
shaved the increase to less than 2 per cent.

Private pension fund payments

rose at an annual rate of somewhat over 5 per cent, but after allowance
for the price change the advance was just over 4 per cent.

The experience

of various groups of public assistance recipients varied widely.

However,

these types of transfers generally kept ahead of the rate of inflation.
During the 1965-70 period, personal income rose at an annual
average rate of 8.4 per cent, but personal taxes rose even more rapidly
(at an average rate of 12.2 per cent).

Consequently, disposable income

advanced on the average by about 8 per cent.

Since the CPI increased

at an average annual rate of 4.3 per cent,the real purchasing power of
disposable income advanced at an annual rate of about 3-1/2 per cent.

Social

Security benefits increased at roughly a 7 per cent annual r a t e — o n l y

slightly

less than the rise recorded by total personal i n c o m e — s o that the purchasing
power of this type of income rose at an annual rate of about 3 per cent.

- 21 In contrast, private pension funds transfers recorded an average annual
gain of less than 4 per cent in the 1965-70 period, and this resulted
in a modest decline in the relative income position of this group of
retirees after taking account of the price increase.
public assistance recipients was again varied.

The experience of

Those receiving old age

assistance just about broke even after allowing for inflation.

Payments

to recipients of aid to families with dependent children increased at
an annual average rate of about
2 per cent by inflation.

7 per c e n t — w h i c h was shaved to just over

Other forms of transfer payments also showed

a net increase after allowing for the advance in the general price level.
During the 1970-72 period, a markedly different pattern of income
changes was etched by inflation.

Again, however, partly responding to

controls on wages, total personal income expanded at an annual average
rate of about 8 per cent.

Since prices increased by almost 4 per cent

real personal income also rose at a rate of about 4 per cent.

While

personal tax and non-tax payments rose somewhat more slowly than in the
previous period, the average increase was still 10-1/2 per cent.

So disposable

personal income increased at an annual average rate of 7.3 per cent during
the 1970-72 years.

After allowing for inflation, the average gain was 3-1/2

per cent.
The income experience of some of the fixed income groups was
substantially better than that recorded for personal income as a w h o l e while for others the experience was considerably worse.

For example, Social

Security payments rose at an average rate of over 17 per cent during the
1970-72 period;

and even after adjusting for the increase in prices, the

- 22

gain was about 13-1/2 per cent.

Payments to recipients of private

pensions also rose by an average rate of about 6 per cent and by
3/
roughly 2 per cent after eliminating the impact of higher prices.— In
sharp contrast, income of recipients of public assistance either just
broke even or fell behind the advance in prices.

This was especially

true of those receiving old age assistance and aid to families with
dependent children.

In weighing the significance of the latter relative

changes in income, it should be

noted

that the figures refer to cash

receipts, and they do not include the value of food stamps and other noncash benefits.

Nevertheless, these data demonstrate again the extent

to which inflation in the last few years has lead to a significant
redistribution of income in the United States.
Inflation and Short-Run Changes in Income Distribution
Some of the longer-run changes in income distribution resulting
in part from inflationary pressures have become even more pronounced in
the last year.

Some appreciation of the effect of these changes can be

gotten from Table 3, which shows changes in consumer prices and personal
income from the third quarter of 1972 to the third quarter of this year.
Over that 12 month period, the CPI rose by about 8 per cent.

Total personal

income expanded by 11 per cent and real income by just over 3 per cent.
The increase of total wage and salary disbursement was approximately of the
same magnitude.

Within this category, however, the relative experience

of employees in different industries varied appreciably.

For example,

wages and salaries in the manufacturing sector rose by 12-1/2 per cent;
those in services by 11 per cent, and earnings in the distributive
industries by 9-1/2 per cent. Government payrolls rose by 8.2 per cent.
3/
As indicated in Table 2, the growth rates for private pensions are
for 1970-71.

- 23 In general, the income of workers on private payrolls increased by
slightly more than 3 per cent after allowing for inflation.

In contrast,

workers in public services experienced virtually no net gain as virtually
all of their pay increase was eroded by inflation.
In the case of unincorporated enterprises, the income of farmers
took an extraordinary jump during the 12 months ending last S e p t e m b e r rising by 37 per cent.

Even allowing for the effects of inflation,

farm income still advanced by nearly 30 per cent.

On the other h a n d ,

the increase in business and professional income fell slightly short
of the rise in prices.

Rental income of persons rose by about 1-1/2 per

c e n t — a rate of increase substantially below the advance in the general
price level.

Dividend income rose by just over 7 per cent, but this too

was slightly less than the rate of inflation.

On the other h a n d , personal

interest income (reflecting the substantial increase in interest rates and
the sizable expansion in credit demands) rose about 13 per c e n t — a g a i n
substantially more than the increase in the general price level.
The se

data on transfer

payments are much less complete than

the statistics summarized in Table 2.

However, total transfer payments

increased by 17-1/2 per c e n t — a n d by 10 per cent after allowing for the
climb in prices.
Security benefits.

A substantial part of this gain reflected higher Social
For example, old a g e , disability, health and survivors

insurance payments (which include
28-1/2 per cent.

Social Security benefits) rose by

Although the advance in prices cut the purchasing power

of these payments, the real gain was still over 20 per cent.

Figures

- 24 on private pensions and public assistance payments are not available
on a quarterly basis; however, they are included in the "other" transfer
payments classification.

This category of payments rose by 11 per

cent in the 12 months ending last September and by slightly more than
3 per cent after allowing for the general

ri6e in prices.

The foregoing review of the income statistics points to
a clear conclusion:

the persistent inflation in the United States during

the last decade has produced a significant redistribution of income in
favor of recipients of profits although well-situated workers have
also shared in the relative gains.

In contrast, while recipients of

Social Security benefits have kept well ahead of the advance in prices,
other groups dependent on fixed incomes (particularly public assistance
payments) have fallen substantially behind, especially in the last few years.
Economic Policies to Restore Price Stability
Returning to the present and looking ahead, I see continued
inflation reinforced by deeply rooted inflationary expectations.

Thus,

I am personally convinced that it will take a considerable time to bring
about an orderly moderation in price performance, so that inflation is
reduced to an acceptabledly low level.

This means that we must be

prepared to accept the use of our resources at less than full capacity.
The Federal Government's budget must not be overly expansive.
policy must continue to pursue a responsible role.

Monetary

Both fiscal and monetary

policy must continue to be supported by some type of discipline in the
wage and price area.

And above all, we as a nation must be prepared to

live through the time required for a winddown of the current inflation.

- 25 Despite the unexpected decline in the unemployment rate from
4.8 per cent in September to 4.5 per cent in October, the accumulating
evidence suggests that the growth of the economy is already slowing in
response to a less expansionary Federal budget and the restrictive
monetary policy measures put into place over the last year or so.

For

example, during the last two quarters, real GNP rose at an annual rate
of only 3 per cent, compared with a gain averaging about 8 per cent
in the two preceding quarters.

In current dollars, GNP rose at an

annual rate of 14.4 per cent in the first quarter; 9.5 per cent in the
second quarter, and

10.1

per cent in the third quarter.

of inflation was also rapid.

But the pace

The GNP deflator climbed at an annual rate

of 5.9 per cent during the first quarter; 7.1 per cent in the April-June
period, and 6-1/2 per cent in the third quarter.

For 1973 as a w h o l e ,

current dollar GNP may advance by 11-1/2 per cent; the general price
level may rise by over 5 per cent, and real output may expand by more
than 6 per cent.
Still other indications of moderating economic activity can be
observed.

For instance, Federal purchases of goods and services in the

third quarter were actually 9 per cent lower in real terms than at the
beginning of last year, and the budget on a national income accounts (NIA)
basis moved into surplus for the first time since 1969.

Growth of

industrial production slowed in the last two quarters, increasing at an
annual rate of just under 6 per cent--or slightly over half the rate in

- 26

the previous six months 0

(Part, but not all, of this slower growth reflected

capacity limitations and materials shortages.)

Expenditures for personal

consumption in real terms, which grew at an annual rate of more than 8
per cent from October, 1972, to M a r c h , 1973, rose less than 1.5 per cent
further in the last six months.

Housing starts have declined from a

peak annual rate of 2.4 million units in the fourth quarter of last year
and the first quarter of this year to an average of 2.0 million units in
the third quarter.

In September, housing starts were at a 1.8 million

unit annual rate.
In talking about the prospects for slower growth, I want to
make it clear that I do not foresee a full-scale
not of the magnitude of 1969-70.

recession—certainly

Moreover, assuming that appropriately

restrictive monetary and fiscal policies are kept in place--reinforced
by the continuation of some form of meaningful restraints on prices and
w a g e s — a better price picture could emerge for 1975.

Favorable factors

which at that time should work against inflationary pressures and which
should dampen inflationary anticipations include the following:

— T h e beef cycle will be in the stage which produces an
enlarged volume of meat. World supplies of food and
feed grains, given normal growing conditions, are likely
to come into better balance.
--The effects of the dollar devaluation on domestic prices
should be largely behind u s .
--Some expansion in capacity should be in place in those
industries for which devaluation and other factors have
increased demand the m o s t .
— E c o n o m i c activity abroad, which seems likely to climb
further in 1974, may be leveling off.
— F i n a l l y , with the passage of time, domestic price and
wage relationships will probably come into better and
more sustainable balance.

Unfortunately, however, fiscal and monetary policies which
impose the degree of restraint on the rate of economic expansion needed
to help check inflation, are likely to have uneven distributional
effects on particular groups in the economy.

The impact is most pronounced

in curtailing additional employment opportunities for disadvantaged groups
in our populatiori--for older workers, new entrants into the labor force,
blacks, poorly skilled persons, and those living in economically depressed
areaso

As a nation, we have a special responsibility to assist these groups

when we adopt measures to combat inflation--but which also dampen economic
progress.
Summary and Conclusions
In summary, as I scan the horizon of the American economy,
several elements stand out:

--Growth in economic activity appears to be slowing toward
a more sustainable pace. Real output increased at an
annual rate of about 3-1/2 per cent in the third quarter,
and the increase in the closing months of this year seem
likely to be in the same order of magnitude. In the year
ahead, the rate of expansion may continue somewhat below
the long-run trend, but I personally would not expect an
actual decline in real G N P .
--Unfortunately, inflationary pressures have not yet
responded to the moderating trend of real economic
activity. A number of industries are operating at or
close to capacity, and this exerts substantial upward
pressure on the general price level c Moreover, inflationary
expectations appear to have strengthened in recent m o n t h s .
The deterioration in attitudes seems widespread--affecting
businessmen, investors, trade unions, unorganized w o r k e r s ,
and consumers. The strong expansion of spending on plant
and equipment apparently was stimulated by anticipated
demand growth and profits, although inflation has also
1
played a role. The erosion of purchasing power of workers
earnings has also induced numerous trade unions to stepup their demands for wage increases, and the trend may
accelerate during the coming year.

28 -

--The persistent inflation in the United States during the
last decade has produced a significant redistribution of
income in favor of recipients of profits although wellsituated workers have also shared in the relative gains.
In contrast, while recipients of Social Security benefits
have kept well ahead of the advance in prices, other
groups dependent on fixed incomes (particularly public
assistance payments) have fallen substantially behind.
--The rate of inflation in the United States during the
current year may exceed 5 per cent (measured by the GNP
implicit deflator). During 1974, unfortunately, the overall
rate of inflation may continue in roughly the same
magnitude.
--Given these prospects, the need to maintain firm
stabilization policies seems clear. I am not unmindful
of the emerging concern on the part of some observers about
the possibility of some increase in unemployment next
year. On the other h a n d , I am also highly conscious of the
likely persistence of strong inflationary pressures. So
as I weigh the need to combat inflation and the need to be
sensitive to the danger of an economic downturn, I come out
at this time on the side of continuing the fight against
inflation.
— A t the same time, I know that policies to moderate economic
growth have a disproportionately adverse impact on some
sectors, in depressed areas, and on younger or disadvantaged
workers. To cushion these adverse effects, the appropriate
policy is one aimed at lessening the structural defects-rather than one which relies primarily on the provision
of excessive stimulus to the economy via easy money or
large deficits in the Federal budget.
--In the meantime, however, the restoration of price stability
requires the maintenance of appropriate restraint in monetary
and fiscal policies. Moreover, these need to be supported
by the continuation of some form of direct Government
influence on the setting of wages and prices in the private
sector.

S o , returning to the question to me which I reported at the outset,
the answer appears fairly clear:

high interest rates in the United States

today reflect the persistence of severe inflation.

W h e n genuine progress

is made toward checking the excessive rise in the general price level,
interest rates will be lower, and the nation can afford to press harder
on the task of improving the real economic welfare of its citizens.
Monetary policy can make a meaningful contribution in pursuit of this goal.

- 0 -

Table 1.

Annual Average Rates of Change in Prices and National Income, Selected Periods, 1960-72
(Percentages)

Full text of Statements and Speeches of Andrew F. Brimmer : Inflation and Economic Welfare in the United States: Implications for Monetary Policy : Remarks before The City Club, Cleveland, Ohio

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