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Henry C. Wallich
December 14, 1977

DETERMINANTS OF THE WORLD BUSINESS CYCLE
Remarks by
Henry c. Wallich
Member, Board of Governors of the Federal Reserve System
at panel meeting at Basel University
Basel, Switzerland
Monday, December 12, 1977

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.

The world economy is recovering painfully from a severe
crisis which contains both cyclical and structural elements.

Among

the more important structural factors are the rise in energy prices,
the resulting distortion of trade flows and balances of payments,
the move of LDCs into industrial exports, and, especially in the
United States, the increase in the share of women and teenagers in
the labor force, with their special susceptibility to unemployment.
At the same time the world has lost elements of stability
_ a degree that probably must be considered structural.
to

Expectations

of stability of prices and of exchange rates have been lost.

So has

the possibility of making reliable cost and return calculations.
Prices, costs are distorted and make more difficult the creation of
new jobs.

Risks have increased, business fixed investment is weak.

In some countries the distribution of income has shifted decisively
against business.




-- -"

-2Under these circumstances there is a temptation to try to
,

compensate the evident weakness of the private sector by an expansion
of the public sector.

This, however, would tend to reduce the scope

of the private sector and in that sense weaken it which in turn might
lead to further expansion of the public sector.

The way out of the

slump would be blocked through such developments.
What is needed is a more moderate policy which allows business
time for convalescence.
~an

A recession as serious as that now experienced

hardly be overcome in the course of an ordinary 2-3 year expansion.

A longer time frame is needed.

One cannot be absolutely sure that this

recovery can reach its goals within a single Ā·business cycle, although
there are no visible signals of a renewed downturn at this time.
This experience has yielded some new insights on which there
seems to be increasing agreement.

We have learned that inflation does

not aid employment but on the contrary is destructive for employment
as well as investment.

We have learned that unemployment and inflation

nrust be combatted simultaneously.

We have learned further that recovery

must proceed in moderation rather thanĀµ:-ecipitously.

We are coming to

realize increasingly that the usual methods of stimulation
have the effect that they perhaps had in the past.

no longer

If these insight$

are taken to heart, we can count with a good degree of probability
on a gradual return to a healthy world economy.