Washington Straight Talk; Brimmer

Andrew F. Bremer, member of the Federal Reserve Board. Tonight, on Washington Strait Talk, Andrew Bremmer, economist, former Assistant Secretary of Commerce in the Johnson Administration, first black member of the Board of Governors of the Federal Reserve System. Governor Bremmer answers questions from the financial editor of the Washington Post, Hobart Rowan. Governor Bremmer, the economy is going through an intense and painful inflation. The consumer inflation rate in the last quarter was about 12 percent, and the inflation wholesale commodities over six months has been something like 30 percent. Yet President Nixon in a speech to the nation about a week ago said that the worst is behind us and that the storms might be abating.

On the very next day, the Chairman of your Board, Arthur Burns in a much more pessimistic speech, said that if things continue to go the way they are, the nation might be in jeopardy, he used some very strong language. Well, who's right? Is Arthur Burns right or is the President of the United States right? Mr. Rowan, I wouldn't want to enter a debate between President of the United States and Chairman of the Federal Reserve Board. The topic, both of them, discussing is an important one, and I'd rather speak for myself on this. Well, how do you feel? Well, the same day, the Chairman of the Federal Reserve Board made a talk. I made a talk up in New Jersey, commencement address on the same subject. I believe that the rate of inflation during 1974, during the rest of this year, will receive somewhat from the 12, 10, 12 percent recorded in the first quarter. Nevertheless, I think the rate by the end of the year will still be far too high.

If it didn't, it might be in the neighborhood of 7 percent, maybe 8 percent. That's too high. So, the critical question is, what's your, the posture of the public, and I want to include the public in this, the public as well as the government be toward the prospective rate of inflation? And I say that, that, that stands ought to be one of resistance. Inflation is a serious question, we ought to resist it. Well, can the public tolerate a rate of inflation of even 7 percent, as you say, by the end of the year? Isn't that a very severe inflation in prices that all of us feel in the supermarkets and all the restores? Well, when you say, can they tolerate it, unfortunate and afraid, they will have to tolerate it. It isn't a question whether we tolerate it, but whether we set about trying to do something about it. It is not a rate we would desire, it is not one we would set out to accomplish. And of course, the public ought to be upset about that rate of inflation. And I think they will demand the public, and that includes, I'm a member of the public too. And I think that the public will demand some kind or straightforward programs deal with it.

It is one they certainly should not be willing to tolerate for a very long time. Okay, well, what's the straightforward program to deal with it? What should that program encompass beyond what we may be doing now? I would hesitate to spell out prescription for the administration, and in detail of the Congress, and in detail. Or even for the Federal Reserve, and in detail, but personally, I believe the fight against inflation must require and must get a substantial degree of fiscal restraint overall, a substantial degree of monetary restraint overall. That means keeping money tight. Oh, yes, yes. And that means high interest rates. Not necessarily tighter, but tight. By the way, you mention high interest rates, and that's one on everybody's mind. But I should remember that interest rates are high because the public is trying to demand more money and credit to buy goods and services than is consistent with the fight against inflation. In other words, interest rates are by product of the effort.

They are high. But remember, even a 11 percent short term interest rate when the rate of inflation is 10 or 12 percent is only relatively high. Well, if you pursue this kind of a course, which is roughly what the Federal Reserve Board is doing now, I would take it. Aren't you almost assuring that we get into a recession and we stimulate more unemployment than we have now? I wouldn't say there's a sure thing we get into a recession. Certainly, it means that the level of unemployment would be higher than it otherwise would be. And it means the economy would be operated at the level of output and production that is not as vigorous as it could be. But this is a question of trade-offs, a question of balancing rather than trying to pursue one objective as opposed to another without any reference at all to either the rate of inflation or to the level of unemployment. But if I understand you're correctly, Dr. Brimmer, you're willing to accept the somewhat higher rate of unemployment this year in order to make the fight against inflation, which is the number one priority in your mind.

Well, let me say accept, tolerate is a better word, recognize that it's a byproduct. Now, this doesn't mean you don't do anything about it, quite the contrary. In fact, some of us, and I personally have been among those, advocating, even directly with the question of unemployment, of rising unemployment because it will rise, the rate of rise, beyond the 5 percent, by using more federal funds to promote public employment, direct jobs and state and lower governments, a special local government. But notice what you do then is to spend more money to attack that problem directly rather than pretending that by stimulating the economy with more money and credit, without reference to the inflation sign, we simply get all benefits on the employment side. In that commencement speech that you mentioned before, I think you advocated about doubling the amount of money that would be spent on public service jobs.

And I think you said that might cut the rate of unemployment by what, two tenths of 1 percent in the first year and one tenth in the second year, is that correct? Well, yes. In other words, very little. This is very little, but remember that, well, first of all, you're absolutely right. I did do some work for that commencement address, which tested the following kind of a question. What difference would it make if we spent another billion dollars of federal money, either on the public employment program, or to provide a billion dollars of tax reduction, or a billion dollars of direct government procurement? The conclusion I reached was that the impact on employment, and that's what I really looked at, because I was concerned with the employment side initially, would have a greater impact on employment than on unemployment. But you were right. It would cut the unemployment rate modestly, but let me go on. Modestly, by how much? Or by about two tenths of 1 percent. So that would bring it down to something like five or five and a half percent still, wouldn't it?

Well, it might bring it down into neighborhood of five and a half or hold it there. Remember, we were talking about keeping the unemployment from rising too much. Let me say something here. Well, before you do a document, let me ask you this, what would it take? We used to talk about four percent unemployment as full employment in this country. What would it take to get the unemployment rate back down to four percent? Can we do it? Of course, we could do it, but then we have to ask at what cost. Remember, we always must be talking about at what cost, benefits versus cost. First, I think it would take a much more vigorous effort not only on the public employment side, but direct subsidies. And the private side to get the unemployment rate down to four percent over some reasonable period of time. And let me repeat, we are talking about the continuing effort trade-off for unemployment versus inflation over what reasonable period of time. No one insists, I hope, that the dislocations in the economy exemplified by the high rate of inflation can be corrected six months, nine months, and so on.

We must keep the time horizon in mind as well as the action. Now, I- Could you do it in a year? Well, I tried to do this in terms of the inflation rate in a year. I didn't ask what it would take to get the unemployment rate down, say, to four percent in a year. Let me say you quickly what I did. I asked a couple of staff people working me at the Federal Reserve to use our large-scale econometric model and on the computer, and I asked this question. What have we set out as a July 1, 1974, to get the inflation rate from, say, 10 percent down to four percent in 12 months? And secondly, what if we try to get it down to four percent in 18 months? The answer which came back with roughly as follows. First, with respect to the four percent price target in 12 months, it cannot be done. There is no instrument in the hands of the government powerful enough to do that without,

when I say, cannot be done. I mean, the requirements are beyond the boundaries of tolerance. So we can forget four percent on an employment for at least a year ahead? I said, remember, I'm talking about prices, not unemployment. I did work on getting the rate of inflation down, and I said, we can forget about trying to get the rate of inflation down to four percent by the middle of 1975. By the end of 1975, there is a reasonable possibility of reaching a four percent rate of inflation, but to do that would require having an unemployment rate well beyond 6 percent. And the lost output associated with that would be substantial. In other words, I'm saying that this whole process is going to take much longer. Well, in view of that, is any part of the answer to our combined problem of high inflation and high unemployment, is any part of the answer to be found in wage and price controls once again?

Well, I wouldn't want to forecast this, so let me be an historian here for a moment and say that I personally was distressed and disturbed at the abandonment of phase 2 in January 1973. I thought that program, as it was constructed, as it was operating, was serving the public. I believe that if it had been kept in place for a reasonable length of time, even by now, I would hesitate, say 18 months later, I think we, despite the jump in petroleum and food and so on, which I think we would have had to adjust for that in some way by allowing some pass through, but I think on battles of that program had been kept in place, it would have served us well. And by the end of this year and into next year, when we get back into what I believe will be the old traditional kind of cost-pushed inflation, we may very well have to give attention again to some kind of supplements.

Now, some people call them incomes policy and whatnot, but I don't think we can resolve the inflation problem facing this country by its exclusive reliance on monetary and fiscal policy. Well, aren't you really saying, Governor Brimmer, that if the course of inflation goes the way you suggest, with the pressures of the cost-pushed kind that we once experienced before putting on wage and price controls, that we may once again be in the position of having to resort to the same kind of program, not in six months maybe, but next year? Well, I wouldn't say the same kind of program. After all, we have had some passage of time. Hopefully, we have learned something. But let me repeat what I said, and I hope with some precision, that I think it would be unwise, given the prospects ahead of us out for some time to rely exclusively on monetary and fiscal policies. I think we need some supplement to those policies, and I would look toward some combination of monetary and fiscal policies and some kind of incomes policies. Let me ask you to go back to your role, really, as an historian, and ask you to what extent you think the Watergate situation and the resultant weakness in the administration has been a contributory factor to the inflation?

Well, Mr. Rowan, not only do I like to be an economic historian, but I am also a public servant, and above all in the Federal Reserve, which is independent within the government, but outside the administration. And I think it would be improper for me to comment on what is essentially a political question. Well, as you said before, you are a member of the public, too, and you're a citizen. Well, clearly, any kind of persistent source of uncertainty on the political side has some adverse effects on the economic side, and those are obvious, and everybody can see them. But I wouldn't want to get into the details of trying to fair it out and weigh these particular issues. And strictly from the point of view of the economy and not at all to bring politics into it, what would be the impact on the economy if the President were to leave office, either resignation or impeachment or any other way? No, I would prefer not to comment on that.

There would be some effect, don't you think? Or I would say that would be a major event, at all major events of that sort, would have some noticeable effects in the economy. But again, I would leave the assessment of that kind of a question to someone who is not a part of the Federal Government. Let me turn your attention to international economic affairs, because you've been one of the reserve boards experts on international monetary and economic policy, and you've spent a lot of time traveling between here in Paris, to high level economic meetings. Because of the tremendous jump in oil prices that we've had, which will result and have been resolving in huge balance of payments deficits, are you concerned by the impact that these events will have on the trade between nations and the value of their currencies? Oh, yes. In fact, I spent some time on this, and I haven't been in Paris recently, but I have been down in South America. And that's an element I would want to get in here at some point, because we tend to look at the trade and financial relations among industrial countries, these would be the oil countries.

And frankly, the biggest impact is going to be on that part of the world that is not industrialized, which does not produce oil, and which is poor. And they are the adverse effects of being quite severe. The jump in oil prices, and let me say it is a sizable jump. I think we forget how big it is three or four times that it was recent years ago. That jump, not will, but already has caused significant dislocations in the balances of payments, all countries, not just the leading one. And from the point of view of the oil exporters, they now have enormous surpluses in their balances of payments, and they funds flowing to them, opposing problems and investments, and so on. As far as the industrialized countries are concerned, it means that the real cost of production has gone up, and above all, they will have to somehow finance these deficits. They cannot be offset by a real trade.

In terms of the impact on ordinary citizens, what they spend, what they work at, and their jobs. What is the impact on the ordinary citizen of these big swings of money? The 50 or 60 billion dollars a year that the industrialized countries have to pay to the oil cartel countries? Well, first of all, it means these payments arise because individuals pay it out in the first place. They pay in higher prices, not simply for gasoline, but also for other products in which petroleum is a major input. Do you agree that's a kind of an excise tax in a way, or comparable to a tax the consumer has to pay? Well, I've been intrigued by that kind of analysis, and I think it's rather perceptive view of the process, but I don't stop there. It's a tax, but it's a tax that's been imposed unilaterally, and without the participation or representation of those who have to pay it. Moreover, it's a tax which strikes indiscriminately, independently of ability to pay.

It hits the rich American in exactly the same way it hits the poor Indian, and so on. The same way it hits the poor Uruguayan, or I should say Nigeria, but they are among the exporters now. They have a little oil. Yes, it is a tax, and about taxes, in one sense, you know, do more. They're not on a raised price, but they redistribute income, and that's what's happening here. They shift an income from the rich users and poor users to the oil exporters. Well, now what could be done about it? Let's take the case first of the rich nations, the industrialized nations who have this big, huge, new bill for oil. Should they form a cartel of their own and try to respond to the producers' cartel? No, let me say I'm personally too much committed to a multilateral trade in payments and an open world to encourage, to support, the development of cartels on either side, producers or consumers. I think that would be a very bad thing.

On the other hand, I think it is appropriate, and I support all these moves for the users to come together to discuss ways of responding to what you said yourself. A few minutes ago, was a unilateral increase in taxes by the exporters of oil. Nevertheless, I think we must work hard to facilitate expansion of trade rather than reverse. And I could go on if we had time to talk about some of those, but I know we want to get some other things. Governor Berman, we've had a rapid series of changes at the top in major government, Germany and England and France and Canada and elsewhere in the world. Do you think this rapid shift in governments has contributed to the sort of instability that leads to financial and economic jitters in the world? Is that a cause of concern to you? I don't devote as much time to the political economy of different countries as I should. In general, I would have thought it was the reverse. I would have thought that the shifts in government, to some extent, have been, let us leave aside the fact that in France, the election was posed by the death of the president.

But leave that aside, clearly in Great Britain and Canada and some of the Scandinavian countries. And Italy, there's no doubt that the dislocations and economic dislocations and the associated social problems derived from those dislocations led to the kind of elections which brought about the results you've cited. Now, having said that, and of course in Canada and UK, it's quite explicit. The election was caused because of the strike which was over inflation and economic question. Clearly, stability in government and among government would lead to persistent attention to the basic problems and new people require new learning time and so on. Well, my question was based on the notion that to some extent of course, and it's not true in all the countries, one of the reasons for the overturn of governments has been the kind of unease that people were exhibiting over such things as inflation.

And that was why I asked the question. I'm disturbed to some extent by the notion that economists, experts and so on are the only ones who can deal with question of inflation economics. After all, in democratic societies, the real test of what public policy ought to be is the voting booth. And if the public is so divided or if governments are so incapacitated that they cannot in fact formulate and implement such policies, it seems quite appropriate, not only appropriate, but I think mandatory, that they take those issues for guidance. And the only place to take those issues for guidance and parliamentary system of course is direct voting and systems such as ours isn't Congress. Where these issues must be confronted and debated, so I applaud such test.

I should ask you at this point because you mentioned economists because you're a distinguished economist yourself. In broad terms, whether or not you think economists lately have missed the vote in being able to assess and forecast the economy. Is this a time to be exceptionally critical of economists? Well, I'm going to defend economists here for this point. The answer is no, not exception to critical. First of all, I think the public ought to be critical of policy makers economists at any time because after all, we are in the position of counseling, of making judgments about appropriate policy action. But my hunch is that while we've made some errors and foreseeing the rate of inflation, for example, and the historical perspective of these matters, these errors are probably not greater than some others. But let me repeat, how could anyone have foreseeing that the oil exporters led by the Arab states would have taken the Arab-Israeli war as the occasion to cut back severely on production in thus jack up world prices of petroleum? That's a political act, and I wouldn't hold economists responsible for not foreseeing it.

Now on the other hand, the food shortage is quite a different thing. So you still have confidence in economists generally? Oh, yes, yes, yes. Let me ask you about confidence in another area. Chairman Burns and his commencement speech in Illinois said that confidence in established institutions, particularly in our government, is at a low-web. That's a direct quote. Do you agree with Chairman Burns on that? Oh, yes, at a low-web. I thought you were going to say the lowest. Well, he said low. Do you think it's the lowest? Oh, no, no, that's right. I would, as you read that, some people have interpreted that to say the lowest. No, it is that low-web. There's no doubt about that. Why is that? A combination of things. First of all, the public is frustrated over genuine problems. All the political issues you described earlier are obviously playing some part. And in conjunction, these obviously have led to disaffection and lack of confidence. Now, on the other hand, I wouldn't want to play down the resiliency of our institutions. And that's why I was prepared to object if you had said the lowest it.

I wouldn't want to go that far back into historical record. But there have been at least a dozen occasions when we have come pretty close to having a fall in a substantial fall in a way in confidence and established institutions. Some of them led to the Civil War. Dr. Brimmer, pursuing an all-out fight against inflation, which really is your prescription, a tough, austere policy, and recalling that you yourself have said that economic expansion more than legislation itself can explain much of Black's economic progress. Doesn't this policy have followed me in the Blacks more than anyone else in the economy will suffer? Oh, it's certainly not just Blacks, but anybody who is at the margin. And I recognize that. And this is why I've always tempered my calls for a staunch fiscal and monetary policy with additional measures to deal with the human side of unemployment. And I agree wholeheartedly, but notice again, we must always put the question of Blacks in the context of the economy as a whole.

And at this juncture, the overall good of the economy as a whole requires the kind of policies I've been describing, tempered by the kinds of efforts to improve unemployment compensation and public employment and welfare payments, so on. So the weak sides of the economy don't care the bird. By putting the economy as a whole first, you've sometimes incurred the iron of certain Black groups have you not as your fourth right talk about Black banks being an ornament, for example. And I believe you've also said that in other respects, you've indicated that the economy comes first in the Black part of the economy second. Well, you know, this is obviously the point of view, which anyone must take since Blacks are part of the economy, Blacks are part of the United States. Any more response if you've gotten from Black groups? Oh, a wide response, and I've been flattered by the attention and many Black groups are given to the comments and observations I've made.

But let me say that the kind of quotations you presented a moment ago, those ought to be put in a spectrum with a proper time horizon. Well, the speech I made on a really paper I gave on Black capitalism and D71969 with the American Economic Association about Black banks is not D7197, it's the same meeting. But more recently, you said you must know the difference between double entry, bookkeeping, and soul. Exactly, exactly. I was talking about those each specific one, and that's a good way to summarize it. And more and more Blacks, I'm happy to say, recognize the distinction and are not being misled by hollow arguments that the way for Blacks to get ahead is to stress soul and so on. They have to cry skills and double entry bookkeeping isn't a typical example of skills. Governor Bremmer, as you plan to leave the Fed, I believe in September to go to a new position, which we wish you well at Harvard.

I'd like to know how you feel the Federal Reserve Board of Governors ought to represent the country. It now has a division between regions and some skills and some techniques. Who should represent should there be representation of minorities and women and Blacks, for example? Oh, well, let me say, I don't look at the Fed in the category you described. First of all, I do feel you have some feeling about this, having served on the board eight years, and by the time I leave it, I feel it. The Fed ought to be there should be on the field, persons who bring some technical basis for participation. Thank you very much, Dr. Bremmer, we're out of time. From Washington, NPAC has brought you Washington Strait Talk, with Federal Reserve Board Member Andrew F. Bremmer and Hobart Rowan, financial editor of the Washington Post. Next week at Washington Strait Talk, House Majority Leader Thomas O'Neill, with NPAC correspondent Paul Duke.

This program has been made possible by a grant from the Ford Foundation. This has been a production of NPAC, a division of GWETA. Thank you.