Washington Straight Talk; #2; Rowen/Greenspan

Alan Greenspan, longtime Wall Street business consultant, advised you to form a president Nixon. Now Chairman of President Ford's Council of Economic Advisers. Tonight, on Washington Strait Talk, economist Alan Greenspan is interviewed by the financial editor of the Washington Post, Hobart Rowan. Alan, just before the summit conference has started, you said it would take from 18 months to three years to bring inflation under control. Now that President Ford's economic program is out, we know what it is. Can you say that the time will be shortened in that effort to control inflation? No, but I wish it were, but I think that the forces that are in place at this stage

are such that I know of no program that can appreciably alter that sort of timetable. I do think it's more likely to be in the shorter end rather than longer, and in fact many of the policies which are now being put in place and hopefully will continue to do so in this new program, will assist in pushing it closer to the 18 months than the longer period. I wish I knew a set of programs which could make it six months or eight months or at less than that, but I don't know of anyone who does. Well, that's a still for the moment that the major recommendations that he proposed are accepted. When will we get below that double digit, that 10 percent level of inflation? Well, I think we will get below it sometime early next year, perhaps by the spring, but I don't want to indicate in a sense that this is largely the effect of the program itself.

I think that what we're looking at now in the current level of double digit inflation is a number of what I would call transitory components to the price level. There's no question, for example, that there are a number of elements in this low double digit inflation rate that we have at the moment, which are just one shot and presumably by their very nature being one shot will phase out. Certainly, the oil price run up as severe as it's been still working its way through the general price level. When you say that if inflation does drop below the double digit level by sometime next spring, it may not be due to the program itself. Are you saying in a way that if prices come down, it will be due to the recession that's developing in the economy? No, actually, it's largely the result that while inflation is very severe at the moment, its basic underlying thrust is somewhat

under the double digit inflation rate. What I'm essentially saying is that part of what we're looking at now in the price level and incidentally will, for the next several months, is not something which one could normally project much beyond, say, January, February, next year. Let me come back to the President's program itself, as you know, it's been widely criticized as a weak program. Some have suggested that it doesn't tackle either recession or inflation vigorously enough. Are there any standby plans that the President has to come back, perhaps after the election, with stronger recommendations that this program does do the job? Well, Bart, I think that when you look at a program such as this, in the context of the type of problems we have, it's really quite easy to say that what is presently in place and what has been recommended by the President

will not basically do terribly much. Now, I will grant you that there are numbers of areas of discussion in the economic policy group that have gone on and will continue to go on. Well, areas of economic discussion on policy, remember that economic policy does not stop at the point the President annunciates a new program. First of all, I think you have to distinguish between types of changes in programs. One is, unfortunately, the type of thing which we've seen much too often, reversals of programs after you put something in place, then you go literally contrary to it. There are a number of other types of things which I think we'll see as the months and quarters go on, additions and revisions and alterations in the existing program, meaning not that they're contradictory to, but

amendments to alterations of, in the normal evolution of programs, as you see their consequences and the response, I think that's essentially the way policy is and should be made. You mean President Ford has something basic in place now, he may add to it later? Well, he may and I emphasize the word may. It's not that he's dissatisfied with the current program on the contrary. Considering all the various options, this is the basic program which he feels, confronts the problems as he sees it. It's quite likely that it may turn out that this may work out exactly the way everyone hopes and no alterations whatsoever will be required. Now you say he's basically satisfied. How do you respond? How do you think he would respond to a criticism such as Otto Eckstein's who says that the tax surcharge to take one element of it worsens the chance of creating this severe recession?

Well, first of all, I think one must look at the total economic outlook as a total, you know, is not in terms of simple tax here increase there. Remember that the purpose of the surcharge was essentially not to suppress demand per se, but largely to balance the other elements of the program which will increase federal expenditures. One of the things that everyone I think within this administration and many on the outside are aware of is that if we attempt to expand a, to put in place a program which augments fiscal stimulus in any excessive way, I think what we're essentially doing is setting the seeds for a far higher and worsening state of inflation one year and two years out.

Well, I understand that, but I don't think that was his criticism of it. Well, let me take it from another angle. What rationale can you offer for putting an additional tax on the middle income groups who are already paying their fair share of taxes when there are so many loopholes through which other people don't pay their fair share of taxes? Well, the point at issue is that what constitutes so-called fair share is obviously a subjective judgment in many respects. And I think that what the president was attempting to do was in embracing much of what is in the Ways Committee bill to attempt to alter the tax structure in ways which he felt most comfortable with. Now, to say in effect that this is a tax on middle income brackets I think is numerically incorrect because if you actually take the average tax rates that are implied as a percent of income, I think what you'll find is that

they're really exceptionally small and really don't begin to bite and never really bite the numbers not really that large until you get well up into the $25,000, $30,000, $50,000 area. So, I mean, that was basically the president's view on raising sufficient revenue. Of course, in embracing the Ways and Means Committee tax bill, he's also embraced the many proposals that a lot of critics think open up further loopholes for the privileged taxpayer. Do you agree with that or not? Well, the question is that, as you know, what is a loophole to one person is an equity or incentive to another. And we've been down this road back and forth for many years. And the judgment says to what is equitable, what's a loophole, what's right and what is wrong. I think, unfortunately, is too often discussed at the pretty superficial levels. And I never can quite follow what the conversations are most of the times myself.

As I understand your basic approach to present day problems are the biggest problem we have is excessive government spending. That in turn forces the government to borrow lots of money and that creates a competition in the capital markets and that drives interest rates up. Is that the basic approach you take? Well, part way, Bart, I think that it's that I would continue from the higher interest rate than what tends to occur when those interest rates begin to rise is that the Federal Reserve has historically attempted to counter the rise of interest rates by supplying credit, bank credit, to the private sector, which is in a sense been elbowed out of the capital markets by government borrowing or government guarantees. And the attempt to accommodate this increased credit demand has, as a consequence, created an increase in the money supply which has run foreign excess of our capacity to produce in physical volume terms.

But the thrust of your point is that inflation really starts here in Washington with the government with excess spending. Yes, most certainly. Right. Now, how do you answer those like Art Oaken and Walter Heller of other economists, all of whom I know you have great deal of respect for, who say it doesn't start that way, or this one is different, that this inflation is due to cost push pressures, high oil prices, high food prices, even the devaluation of the dollar. And therefore, the old way of tackling inflation that we've been taught about, cut demand, cut the credit supplies so that you deal with excessive demand, too much money chasing too few goods, isn't today's problem. How do you respond to that? Well, I hear what they're saying, and I don't quite understand it. Let me explain to you why. First of all, it's unquestionably true that part of the rise in the general price level are these dramatic increases in the oil price and agricultural price. In fact,

this is essentially what I was referring to earlier about the transitory elements in the price structure. Now, to be sure, the possibilities do exist of wages beginning to accelerate severely as a consequence of this type of price thing. In fact, as I think Walter Heller says, it's not a wage price, but price wage. Now, that may well turn out to be the case at the moment it hasn't. The basic underlying look at any particular inflation pattern, I think of necessity, has to be looked at in a longer term context. But wouldn't it make sense to come to grips since you bring up the wage price thing? Wouldn't it have made sense for the President to have incorporated in his program something stronger on the wage price side to interrupt the threat of a wage price spiral? I know. So, the even Marine Whitman, who is a Republican and a former member of President Nixon's economic council, says that the main economic problem of 1975 is likely to be a wage price, price

wage spiral. Why didn't the President do something more positive in his program on wages and prices? Well, basically because, as he said in his program, he thinks that that's essentially counterproductive, that is, it's not a question. And you agree with that? Oh, I certainly do. In fact, I don't want to, it was having really gotten back to the previous question, which I haven't fully answered. I would like to, but let me answer this one first, then go back to the previous one. Certainly, if one could find a way of just artificially or temporarily adjusting the price and wage level, if the system came to, you know, stuck in that sense, yeah, sure, you'd solve the problem. But what all of our experience indicates is every time you attempt to suppress the general price level as we did, from 1971 through 1974, what you do is you bottle up the supply side, cause very severe restrictions and expansion of capacity and supply. And I think end up where we did in the spring of 1974, whereas when we released all of these

rigid controls, what we found was that we had so inhibited supply at that time, that in order for a supply-demand balance to be reestablished, we got these very sharp price increases. But would you say that the possibility of a wage price viral as suggested by both Marine equipment and art open and all these other people is so remote that there would be no possibility of this administration doing something stronger on the wage price side directly in 1975? Well, first of all, let's, there are two questions there. When you're asking me for a forecast, and the second you're asking me for a policy action, I would say at this particular point, there is a possibility of an acceleration in wages. However, I think it's important also to realize that approximately 75% of the existing workforce is non-union, and that much of what has been quoted as these big increases are largely these first year

so-called front-loaded union contracts. Now, I don't want to get into the arithmetic of the type of analysis one has to get to in forecasting wages. But we are in a position where if you look at the pattern of the so-called deferred increases and the cost of living increases, and these fairly high first year contracts. So long as we continue to get as we have, so these big front-loaded contracts with the first year cost is high, and the second and third year costs sort of trail off, there is no automatic, certainly no automatic acceleration of wages. Nonetheless, I think that at least in the way I would forecast, I would certainly expect some. However, that does not lead us to the point where we're saying, therefore, one must clamp on some form of restraining wage and price controls on the presumption that that helps the situation. Well, don't go that far, how about wage-priced guideposts? Well, the president said he is against him,

and the reason he is against him is that they are, in a sense, sort of simulated types of wage and price controls. I think a number of labor leaders have quite correctly pointed out that guidelines are not terribly distinct from mandatory wage controls, and I would agree with them. Alan, let me turn your attention to monetary policy. I know that asking a member of the White House staff about monetary policy is a sensitive question. Indeed. Particularly when the Federal Reserve Board is run by Arthur Burns, but I'm emboldened to ask you because the president himself dealt with the subject in his speech, and he said that he had been personally assured by Burns that the supply of money and credit will expand sufficiently to meet the needs of our economy, and that no event will accredit crunch occur. What does that mean to you? It means to me that the credit system, which is still at the moment, even with the recent easing we've seen, under severe strain, will not be allowed to break up for lack of credit availability. Does it mean that interest

rates are going to be lower? Will people find it easier to get a mortgage? No, I wouldn't say the particular statement, which the president quoted Chairman Burns on, says anything with respect to interest rates from here, and I think for very good reason it would be inappropriate for that sort of remark to be made, but it does state that the anything which would resemble very severe constrained pressures, I think, is not to be expected, and I think certainly a breakdown in the system has ruled out. To what extent was the president's program in any way predicated on the expectation that interest rates would, at worst, stay where they are and possibly come down a bit? There was a good deal of talk as you recall during the summit sessions, and it was fairly widespread among business groups and labor and everybody for the need of a lower interest rate pattern.

Not necessarily a great departure, but some ease. Well, it's very difficult to say what parts the program implicitly or otherwise would imply that. I will say that that was not an element of discussion during the formulation of particular policies, but clearly everyone who was conceiving of what types of packages to put together had at least in his own mind some basic views of what interest rates would do and the like, because clearly one cannot formulate a policy without at least some view of what that is. Now, I think it would be inappropriate for me to discuss, at least my view, because I don't think that's particularly correcting to do. We mentioned recession just in passing before, and I want to come back to it just quickly. The president said we're not in a recession. Arthur Burns on the Hill the other day said we are in a recession. I recall that back in September of 73 before you came to the

government, you was a very good forecast to predict that there would be a recession in 1974 hitting bottom in 1975. Now, just a simple question, are we or are we not in a recession? Well, let me go back and say that the type of forecasts I was making, say in the summer, which before I came on board here, was something which I don't think I described as a recession but what I did describe is a very dull, possibly marginally negative type of weakness in the economy throughout this year into the spring of next. In fact, that's still my forecast. The point at issue is, is that properly describable as a recession? And I would say I don't know. Certainly at the moment to say where we are now, I think is incorrect. I would not call or in right now a recession. I don't know how you can say something is in a economy

is in a recession, any meaningful term, when the level of total employment is at an all-time record high. In other words, I think just as a minimum. Well, so is the population in an all-time high? Oh, sure. But the concept of recession in any meaningful term is got to mean receipt. Well, hasn't the economy receded since the first quarter when it dropped seven percent in real terms, it dropped again in the second period? Sure. And then indications that it's dropping again in the second period? Yeah, and the question then gets down to Bart, how much do you need for recession? In other words, first of all, part of the decline in our GNP figures is, I think, statistical. I think that I'd be more inclined to look at the physical production indexes which have been a little bit shabby, you know, very slight changes. So far, at this point, the reason I say I don't know the answer to your question is, what one can certainly say unequivocally is that the weakness we have had and the weakness which I think will continue to have is of

such a minimal type, assuming my assumptions are correct, that it's not clearly the one thing or the other. Let me ask you a little bit about yourself and your job at the Council of Economic Advisors. You've said very often that you want to depoliticize, take the CEA out of politics, I guess that means, or I should ask you, what does that mean to you? Well, what it means to me is that gradually to pull back into a position where, essentially, most of what the Council of Economic Advisors is doing is essentially analytical work for purposes of evaluating programs, doing forecasting and the like. Now, obviously, there is no way to fully pull the Council of Economic Advisors out of politics, largely because there are certain requirements to appear before congressional

committees and inevitably, people are going to be asking me and the other members of the Council, political questions which we have to be responsive to. So it's a matter of degree. Well, do you anticipate then that under your direction the CEA, the Council, will have a less public role? That's what I'm endeavoring to do. Unfortunately, that's not the way it's happened because I myself fell in right into the summit and that was not something which was exactly in line with a somewhat lower profile that I had intended to initiate. You don't regard that as a downgrading of the role of the Council on political affairs. No, I don't. I don't mean political, I'm it again. No, I don't. I think that the influence of the Council rests largely on its technical capabilities, the type of analytical work that it does. It's a valuation of what various policy positions will have on the economy. It's, I think, very important to try to anticipate

the types of problems which will emerge six months, nine months, 12 months out. There is, as you know, just too much short range, crisis fighting that goes on in the government. And I think this element of sort of immediate crisis response, crisis response is clearly the type of thing which has got us into much of the types of problems which we're in. Let me ask you to look beyond our own borders. There's been a lot of talk about the threat of a worldwide depression largely based on the gloom and doom that surrounds the oil problem. What's your view on that? Well, I must say I am quite concerned about this. If you take an evaluation of what's happening, it's fairly obvious that at these oil prices that what we're getting are huge, flows of funds from the oil importing countries to the oil exporting countries. This is something which can go on for a while, but people are

looking too much at the flows as distinct from the so-called balance sheets. That is the accumulated debt which can be sort of accommodated in the short run. After a while, generates some very substantial interest payments. And I think is getting a number of major Western countries in difficulty. Can a difficulty lead to a depression? Well, I certainly would say that if you did not get any alteration of the type of outlook which we have now, there is some adjustment whether depression here is the correct word. I don't know. I would doubt it, but certainly some lowering in the rate of economic activity because they can't finance the oil imports. It's something which we must be most concerned about. If you go along with Arthur Burns' idea, and other people have had a too, that we, the Consuming Nations ought to form some kind of a counter cartel. Well, I would certainly go along with the view that at this particular point, some lowering

of the oil price is, some worldwide, is important. I agree with Arthur Burns that the recycling question is not something which is essentially focusing on the problem that we have. Now we have already seen, as you know, some marked reduction in world oil consumption as a result of the price increase to date. Are we in this country and people in other Western countries faced with an actual loss of a reduction in the standard of living because we have to transfer real resources to the Arab and other cartel countries? Well, I would distinguish between a reduction in real wealth or standard of living and the effect on the rate of change. The answer, of course, is yes. As I vaguely recall that the number that had been bandied about at the time of the price increase was a 1% shift

in real wealth from the oil importing countries to the oil exporting countries. Now obviously that is a reduction but looked in the context of two or three years, all it turns out to be is a reduction in the growth of standards of living rather than an absolute reduction. But there is, as people say, the definite real wealth transfer and there's no question that it has an effect. Let me ask you a direct maybe a personal question about yourself. As a final question, you've been called a super-capitalist and a super-conservative. Are you one or the other and what does it mean? Well, I'm neither in that in one sense. Super-capitalist presupposes a general who would drama terribly clear on. I wouldn't call myself a conservative in the conventional sense of a term. That means that one conserves what exists irrespective of whether it's right

or wrong. I'm more inclined towards a 19th century liberal view as distinct from conservative and I put very great store in political freedom and this is in a sense why many of my ideas tend to focus on concern about infringement of rights either economic or political. Thank you very much, Dr. Greenspan. Washington Strait Talk. From Washington, N-PAC has brought you Alan Greenspan, Chairman of the Council of Economic Advisers, with Hobart Rowan, Financial Editor of the Washington Post. Next week on Washington Strait Talk, the Republican Governor of California, Ronald Reagan, is interviewed by N-PAC correspondent Paul Duke. Production funding provided by Public Television Stations, the Ford Foundation and the Corporation

for Public Broadcasting. This has been a production of N-PAC, a division of GWETA.