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Address by Dr. Mark Willes, President, Federal Reserve Bank
of Minneapolis, at the October 25, 1977 Annual Meeting of
the Minnesota State Council on Economic Education.

Like many of you, I have been involved in economic education
my whole life, and one thing I learned was that you are always
supposed to preassess your class before you start to teach
so you know where you stand before you teach.
do that is usually by asking questions.

The way you

I have one simple

question I'd like to ask before I start, and that is, how many
of you have ever heard me speak before?

I stand here tonight in place of Bruce MacLaury, who was my
predecessor and has gone on to Washington.

Since you haven't

heard me speak, I will tell one story that is I ’m afraid all
too painfully appropriate to my being here tonight.

This is

a story about the Quaker meeting in Pennsylvania, which is
where we spent the last ten years of our lives, and the man
who was supposed to sing got sick.

They asked someone else

to take his place just the way I am taking Bruce's place tonight.
He was a little reluctant to do it, but he finally said he

He did just an awful job.

sang off key.
about it.

He forgot the words and

It was just terrible, and he felt very badly

One member of the congregation,

in an effort to

cheer him up, came up to him and said, "Thee should not feel
bad, thee did thy very best.
be shot!"

Tis he- that asked thee should

I'm going to talk about economic education.

It's something

in which I have invested a large part of my life and it's something
which I have some very strong feelings about.

That is particu­

larly true since I am now on the other side of that and am
subject to the statements, criticisms, etc., which take place
when we have inadequate,

ineffective economic education.


I have learned a couple of things since I've been involved
in the venture.

First, I've learned that I, and perhaps you,

too, have to be just a little bit more humble about what we

When I started teaching at Columbia University and

the Wharton School at the University of Pennsylvania,

I was

convinced on the basis of my training in economics that basically
the Keynesian view of the world was right.


all of my students that that's how the world worked.

I told
If they

could understand that, they could analyze most problems.


then moved to be Director of Economic Research at the Federal
Reserve Bank in Philadelphia.

As I watched the economy perform

and as I watched our attempts to influence the economy, I decided
that the Keynesian system just wasn't adequate to explain the
problems that we faced.

I became convinced that what we now

call monetarism was the best approximation to our understanding
as to what the policy could do and how it would impact on our

That was fine until I came here to Minneapolis.

I now have

a staff who says that both of my former views are wrong.
is really the rational expectations view of the world that


describes how things work, and they almost have roe convinced
of that.

It may be that I've been a little bit more wishy-

washy than most/ but I think that the kind of intellectual
evolution that I've gone through, to a rather remarkable degree,
approximates the kind of evolution that is taking place in
economic professions.

If we have finally reached, as my staff keeps telling me we
have, the rational expectations view of the world we now really
understand how things work, and that's the end of the line,
then we can all stand up and say, "Now students, here's how
things work,” and we can count on it.

I suspect that since

we all have a few more years to live somebody is going to come
along and say that's a silly way to look at the world.
another way that displays it better.


Five years from now we

will be using that method to explain to students how the economy

I gained from that a rather large d ose’of humility

in terms of what I tried to inflict on others as I explain
my views as to how the economy works.

I nevertheless feel

quite free to inflict my views until someone changes my mind.

The second thing I've learned about economic education is v?hat
a big job there is to do.

I can't help but think of a story

about Winston Churchill, who was quite fond of his nightcap.
One day in his reclining years as he was having a nightcap
at 2 in the afternoon at a good friend's house:
looked around the very large room and said,

his friend

"If you took all

of the whiskey that you consumed and put it into this room,

it would come all the way up to the first pane in the windows.”
Winston Churchill examined the distance between the first pane
and the ceiling and said, "Oh, so much left to do and so little
time to do it."

That's how I feel about economic education

when we see the general level of economic understanding that
we have and the serious problems that we confront.

There is

so much to do and so little time to do it.


I'd like to take a couple of minutes to cite what

to me are two rather compelling examples of what I mean and
why I think the job that you're engaged in is so significant.
Some of the things I say may offend some of you, and X apologize
for that in advance.

Let me also say that that's an inherent

part of the education process.

I once had an outstanding professor.

As we were sitting around getting ready to write our dissertations,
one of my friends said, "How do you write an unbiased book?"
He very appropriately answered,
unbiased book.

"There is no way to write an

No matter how hard you try, your own biases

are going to come through what you write or what you teach.
The important thing is to make sure that you have access to
an unbiased library."


I'm going to present a biased book.

I am sure that

you will want to follow-up with someone else from another part
of the library who can explain the alternative point of view.

Let me first discuss the minimum wage.

Congress recently passed

legislation that will result in the minimum wage going up by
over 45% in the next four years.

The economics profession

agrees on the following set of facts relating to those kinds
of inreases in the minimum wage:


There is almost a unanimous concensus in the pro­
fession that increases of that kind will exert
significant upward pressure on prices.
for that is very simple.

The reason

If you move the minimum,

the base part of the wage structure, everyone knows
that when labor and management sit down together
one of the key things that has to be done is to maintain
the differential between where my job previously
was and where my job now is.

So when you move the

minimum, almost automatically you end up moving the
entire wage structure.
by over 10% a year

If the minimum wage has moved

(average over the next four years)

then it's not too far fetched to suppose that the
whole wage structure is going to move by a corresponding

T h a t ’s not exactly true, but for the sake

of discussion, let's assume that it is.

That would

mean, other things being equal, wages are going to
go up by 10%.

If productivity goes up by 2%, that

means human labor costs will increase by 8%.
they increase 8% per year,


then it's virtually impossible

to think of an inflation of less than 6%, which is

what we now have.

In fact,

it seems more likely

to think of inflation as closer to 7 - 8%.

By that

kind of change in the minimum wage law, almost as
if nothing else took place, you would expect to
see significant upward pressure on prices.

T h a t ’s

a fact that really has a remarkable concensus within
the economic profession today.


In the process of increasing that base rate, the
required wage, thousands of people will no longer .
have an opportunity to work in the private sector.
Jobs will just not be made available to them.


the Secretary of Labor suggested that the increase
that will take place in January 1978 will cost about
90,000 jobs.

Our estimate is closer to 200,000 jobs.

Those are primarily the jobs for the young and the
unskilled and minority groups.

The very people that

we need the most to get into the labor force to gain
experience and skills to be a viable part of the
economic system.

Again, there’s very little difference

of opinion within the profession that that will take

Why then, with those two facts essentially agreed on by the
economic profession, did the legislation pass?

It may be that

we just have very greedy, barbaric labor leaders who, recognizing
these facts, still wanted to go out for the benefit of their

members and see the legislation pass.
the case.

I don't think that's

It may be that it was just some greedy politicians

were trying to buy votes at the expense of the public, but
I don't think that's the case either.

That doesn't correspond

with my views of the politicians that I know.

I think, unfor­

tunately, it's just a very clear example of a lack of under­
standing on the part of most of the public as to those facts
the economic profession just takes for granted.
an example:

Let me cite

A good friend of mine, who happens to be black

and lives in an eastern city, received a phone call before
the legislation started going through the congressional mill.
I said, "Do you realize what's about to happen to your people?"
He said, "No, tell me."
I sent to him.

So I explained these basic facts that

My friend said, "Good grief!

We can't have

Unfortunately, my efforts and his were too little and

too late to make a change in the outcome.
to me of what takes place repeatedly.

That seems typical

Many people don't really

understand the basic economic fact that you and I just take
for granted.

It seems to me that's a fundamentally important

responsibility of economic education to make sure that those
facts receive broad public understanding.

This issue is going

to come up again four years from now when the current legis­
lation is complete.

Hopefully by then you and I will have

sufficient success to secure a better outcome than the one
we have received this time.

I would like to talk about the problem of inflation.

I'd like

to say that there is a professional consensus on this as well,

but unfortunately many of my good friends have not yet seen
the light.

It's a very serious problem and it has to have

a significant increase in public understanding if we're to
have the kinds of public policies that would be necessary to
deal with the public.

We in the Federal Reserve find that

skateboarding is the only thing that is universally plotted.
When we talk about monetary policy, we tend to lose half our
friends depending on what we say.

We have recently had our

hands slapped by the White House.

They issued a statement

saying that we just better not try to bring down the rate of
growth, or have interest rates go up any higher because we're
going to choke o f f the recovery and cause umemployment.


the same time, we're getting a very strongly worded letter
from an outfit called the shadow open-market committee, money
is growing much too fast, and we've got to bring the rate of
growth of money down significantly or there will be too much
inflation, causing unemployment.

They can't both be right.

I'll tell you who is right, then you can tell me who is right.
My view is that we now know enough about the economic system
to recognize that there really is no trade-off between inflation
and unemployment.

We can't buy as we used to think we could

a little less unemployment if we're willing to have a little
more inflation.

It just doesn't seem to work that way.


fact, what we find is that the more inflation we have the more
unemployment we have.

That's not very surprising because in­

flation does essentially three things:

it creates uncertainty,

it creates misallocation of resources, and it creates distortions
in the way the economic systems works.

As a result, rather

than buying a reduction in unemployment with inflation, we
aggravate the very thing we're trying to solve.

That's why

most of us in the Federal Reserve System think that in spite
of what the White House would like to have us do, we think
it's fundamentally important for us to stand against inflation.
In order to do that, we're going to have to bring down the
rate of increase of money.

Yes, in the current environment

that's going to cause interest rates to go up.

But my view

is if we don't do it now, we're going to get more inflation
and higher interst rates and higher unemployment in the future.

A primary responsibility of economic education is to make sure
that we understand at least what the alternatives are —


if we can't agree.

Let me conclude with the following observation.

We have been

referred to as being a part of the dismal science.

Many of

us try very hard to overcome that image by making economics
interesting, clear and happy.

That's the only way we can com­

municate and have others willing to listen.

I hope that we

will not forget that fundamentally in the real world we are
dealing with hard choices.

There is no free lunch.

are competing demands for scarce resources.


There is no easy

way to solve any economic problem without somebody or something
having to pay the cost of that solution.

We can't let anyone

have the impression that there is an easy solution to any of
the problems we face.

Instead, we have to help them see clearly

the alternatives so that together we can make the trade-offs
that seem to make the most sense.

I would hope that through

your efforts and mine we can accomplish two things:

l)we could

lower expectations as to what can be done, and 2}we would sub­
stantially increase our performance in terms of what we actually

If we can do those two things, through economic education

and understanding, I think we will have contributed more than
our share to the public welfare.


Walter Heller...

Walter Heller and I have a number of differences of views.
We are currently running a federal deficit for next year
about $60 billion.

In my judgment that's far too high

to begin with, I wouldn't want to add any more to that.

I don't think the economy needs it.

The economy is very

strong, and we will expect to see real economic growth
next year to be much stronger than most people expect.
If for no other reason, we have put an awful lot of money
into the system and it's going to take time to run short.
The only thing in my judgment that's going to make the
economy really turn down is if we have inflation starting
to run away from us.

That's going to make people nervous

and we will have a serious problem.

What's going on in the stock market?

My grandfather was a druggist in Utah.

The way they used

to sell stocks is that a man would come around with a
bunch in his portfolio and sell them.

One day one stock

salesman came into my grandfather's drug store and said
I have two very good stocks that I'd like to suggest you

One is for a new firm called Coca Cola and the other

is for a new firm called Wino.
a lot of Wino stock.

My grandfather bought

My view of the stock market is very simple.


have finally learned that inflation is very bad for business.
They have a much more critical view of the prospects of
inflation than most other people do.
my judgment,

You will not, in

see the stock market turn around and convince

the people that we have inflation under control.

What's going to happen to Arthur Burns?

I don't know, and I don't think Carter knows at this point.
It will depend an awful lot on what the economy looks
like in January.

His probability of being reappointed

has gone from about 75% down to below 50%.

Many people asssume that inflation at 5 or 6 percent is
imbedded and there is nothing we can do about it.

I think if we give into that idea, we'll have 8%, and if
we give into 8%, w e ’ll have 10%.

There is no single example

in this country or any other country where we have been
able to permanently stabilize the rate of inflation at
any of those numbers.

It is precisely that kind of thinking

that puts in the kind of activities that results in accelera­
ting inflation.

If I assume w e ’re going to have at least

6% inflation, how am I going to price my products?
have to start with a minimum of 6% to get more.

W e ’ll

If I

assume that I'm going to have 6% inflation, how do I price
my labor?

I've got to start with a minimum of 6% and

get whatever amount I can.

In the process of getting

that little bit more in each piece along the chain, we
move from 6-7.

We just start the process all over again.

X would hope that if nothing else, one of the things we
can rule out is that kind of psychology that says we're
going to have to live at 6% becausejunfortunately^I don't
think we can.