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Guest: Walter W. Heller, professor of economicsUniversity of Minnesota

Subject: "UNEMPLOYMENT, INFLATION, AND THE ECONOMY"

SOUTHERN EDUCATIONAL COMMUNICATIONS ASSOCIA TlON

The FIRING LINE television series is a production of the Southern EducationalCommunications Association, 928 Woodrow St., P.O. Box 5966, Columbia, S.C.,29250 and is transmitted through the facilities of the Public Broadcasting Service.Production of these programs is made possible through a grant from theCorporation for Public Broadcasting. FIRING LINE can be seen and heard eachweek through public television and radio stations throughout the country. Checkyour local newspapers for channel and time in your area.

\1 ( I 1'1'1 \1 \ 1\ @

FIRinG Line

HOST: WILLIAM F. BUCKLEY, JR.

Guest: Walter W. Heller, professor of economics,University of Minnesota

Subject: "UNEMPLOYMENT, INFLATION, AND THE ECONOMY"Panelists: Jeff Greenfield, writer

Alan Reynolds, Argus ResearchMike Kramer, New York Magazine

FIRING LINE is produced and directed by WARREN STEIBEL

This is a transcript of the FIRING LINE program taped inNew York City on September 9, 1975, and originally tele­cast on PBS on September 27, 1975.SOil J Hf nN f 1)11(;/\ IION/\I (;OMIVdJNIC/\ J I()NS I\SSOCJ/\ I !( 1/\

© Board of Trustees of the L land Stanford Jr. University.

© 1975 SOUTHERN EDUCATIONALCOMMUNICATIONS ASSOCIATION

MR. BUCKLEY: Professor Walter Heller has been referred to as the king of fine­tuning, a designation that instantly communicates to the world of professionaleconomists and to their great wide world of observers who, whether from thebreaches or from the thrones of political power, watch in awe, amazement, andsometimes dismay as they read the portents. Intending no disrespect, WalterWolfgang Heller was not widely known outside the economics community until hewas picked by President-elect John F. Kennedy to be chairman of the Council ofEconomic Advisers, a post he filled from 1961 to 1964. He was born in Buffalo,New York, the son of -- to quote our guest--- a know-it-all father who hadopinions, mostly learned, on every subject. He attended Oberlin College andthen the University of Wisconsin where he got his advanced degrees. He travel­ed from government to the academy over a period of years beginning with serviceas a fiscal economist to the U.S. Treasury. His specialty was public finance.He returned to the academy, having served as chairman of the department ofeconomics at the University of Minnesota and as lecturer at Harvard where hewrote a half dozen books, and spends much time now as a consultant, lecturer,tax adviser, and gadfly at large. He classifies himself as falling betweenthe extreme centralizers, like John Kenneth Galbraith, and the libertarians,like Milton Friedman.

I should like to begin by asking Mr. Heller if he could explain to usin layman's language what Professor Galbraith meant exactly when, with somecontempt a few years ago, he dismissed the middle-of-the-roaders by saying thatto fine-tune the U.S. economy is like trying to fine-tune a speech by EverettOi rksen.MR. HELLER: You're asking me to do what I'm sure, Mr. Buckley, you yourselfcan't do, and that is to explain what Ken Galbraith really meant. But essen­tially, if you want me to take that question seriously, let me just say I thinkwhat Ken Galbraith is saying is that one can't twiddle the dials of the U.S.economy and hope to fine-tune precisely what the rate of inflation is going tobe, what the rate of unemployment is going to be. And indeed that gives me anopportunity to say something, so to speak, to answer your introduction -- thekind of fine-tuners. I've never had any illusion that one could truly fine­tune the American economy. The term has been hung on me, I'll grant you, butthe idea that you could, within close limits of tolerance, program preciselythe level of unemployment, precisely the level of inflation, and so forth isreally -- We've really not had quite that much arrogance about our capacitiesas economic policy makers.MR. BUCKLEY: You've just seemed arrogant?(laughter)MR. HELLER: I've just seemed arrogant.(laughter)MR. BUCKLEY: Well, is it fair to say that at this juncture in American eco­nomic history your recommendations are to be distinguished from those of themen who surround the president primarily in the two emphases? One, do youbelieve in increasing the money supply, keeping the interest rates down andworrying less than they apparently do about reflation? Is that correct?MR. HELLER: Well, essentially yes. I feel that at the present time it'scounterproductive, it is self-defeating to follow too sharp a restrictivepolicy by the Federal Reserve, by the monetary authorities. Indeed, here isa case-- What the American economy faces now is a situation in which expan­sion is by no means synonymous with inflation. We can expand the economy ata good clip. And as a matter of fact, if we are a little bit more open-handedwith the money supply, if we are a little bit more stimulative, a little bitmore robust, a little bit more bold in fiscal policy in terms of tax cuts andtemporary expenditure increases, this will payoff in lower inflation, nothigher inflation. There're three ways in which this will fascilitate an easingof inflationary pressure. First of all, if you give the businessman strongermarkets, he can find his profits in increased sales volume instead of in boost­ing profit margins, as we see a certain tendency for some of the concentrated

© Board of Trustees of the L land Stanford Jr. University.

industries to do now. Secondly, if you squeeze more production out of existingmachinery and existing labor, existing p1a~ts, you're going to increase p~oduc­

tivity. That's going to give you some re11ef from pressure on the cost slde,give you some remission from inflationary pressure~. And t~ird, we are ~osing

in this recession about $20 billion a year of sav1ngs and 1nvestment Wh1Ch canprovide some of the increases in capacity that will help us .av?id th~ bottle­necks the next time around, the bottlenecks that caught us 1n 1nf1at1onaryshortages around the end of 1973. So that I think Washi~gto~ is very myopi~

on this. They're failing to see that the road to expans10n 1S not.necessar11ythe road to inflationary ruin; quite the contrary at the present t1me.MR. BUCKLEY: Well, what is it that distinguishes the present time from theperiod when you were chairman? Over a peri?d of four ye~rs, fr?m.1961 to 1964,you managed to get us through that period w1th a cumu1at1ve def1c1t of only$10 billion, and the Feds were pumping out money at an average rate of about3.5. Now they're pumping out money at over twice the rate that seemed tosatisfy you in those days. But we are facing an ~nf1ation that is ~arked1y

worse than anything we suffered when you were cha1rman of the Counc11. Nowwhat-- The givens in the situation are striking, right? And therefore doesn'tone look to the variables to see what might be the proximate cause of thatinflation?MR. HELLER: Well, granted. Of course, I love to talk about my half of theSixties. We had 1.2 percent inflation per year. We have more than that permonth these days. Profits doubled in the four years when I was chairman ofthe Council. And as you quite correctly point out, we had a rather moderateoverall expansionary program in the early part, but the differences are ~lso

very pronounced. What we had was, up to that date, the largest tax cut 1nhistory. We had a---MR. BUCKLEY: You didn't get that till '64.MR. HELLER: We got that in '64.MR. BUCKLEY: Yes.MR. HELLER: That's correct. We got part of it, of course, in '63 in the formof liberalized depreciation and other investment stimulants, the investmenttax cut--which was not inconsequential. It was a 10 percent tax cut for busi­ness. And that of course kept the expijnsion going and did not touch off in­flation. Inflation didn't start, really, until Lyndon Johnson failed tofinance Vietnam with tax increases.MR. BUCKLEY: Yes.MR. HELLER: What was different is that we had no oil price explosion; we hadno food price explosion; we had no devaluation; we had no sudden release fro~

economic controls; we had no worldwide commodity boom. All five of those th1ngsbelabored and beleaguered us and touched off the ferocious inflation of 1973­1974. And in that respect one could say besides good management we had goodluck.MR. BUCKLEY: Well, actually during the period that you are speaking about, thehuge increases were in taxes rather than in food and oil. Food and oil went.upbut not by comparison with, say, social security taxes or state taxes of Var10USkinds, so that--MR. HELLER: You mean in '73-'74?MR. BUCKLEY: Yes.MR. HELLER: Oh, they were dwarfed, absolutely dwarfed by the five-fold increasein the price of oil. After all, oil went up $8 a barrel. Food has gone up 40percent in the last two and a half years. Those increases have-- And overallcommodity prices in the world markets doubled in 1973. That's just part of theincreases in taxes.MR. BUCKLEY: No, I was talking about fiscal '74, which would be one ha1d in'73. I think the figures here are Social Security taxes for an average familyrose 26 percent; income taxes 21 percent; food prices 12 percent. In the pre­ceding two years, income tax rose 53 percent for a low-income family; 41 per­cent for a high-income family. The rebate offered no more than $200 of the $566

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in added taxes imposed on intermediate families or $900 on rich families, de­fined as people who get one half of what congressmen get. I make this--MR. HELLER: Well--MR. BUCKLEY: I am anxious, as I think you are, to focus on the variables.What is it that has caused these problems? To say that it's an increase in theprice of oil or even an increase in the price of fuel is, it seems to me, evenin abstract terms unsatisfactory because if you subtract, in order to pay thethe higher price for food and oil, what you would otherwise be paying for some­thing else there isn't any net inflationary propulsion, is there?MR. HELLER: Well, yes there is in this sense: Take the $30 billion of ransom,in effect, that we're paying the OPEC countries. That has this paradoxicaldual effect: It pushes up prices--the cost pushed to $30 bi11ion--and at thesame time siphons $30 billion away from consumers that they then don't have tospend on other things. Now, if your argument is implicitly that we should bereducing taxes, I couldn't agree with you more. Yes, that's precisely what weshould have done in response to the OPEC oil tax, in effect. When that pulled$30 billion out of the economy, as many of us pointed out immediately, it hadthe same effect as a $30 billion tax that wasn't put back into the economy; itwent out to the "oi1igarchs." Now, there just to finish--MR. BUCKLEY: Well, what are the "oi1igarchs" supposed to do with that?MR. HELLER: Oh, well, they--MR. BUCKLEY: Aren't they going to buy American products?MR. HELLER: Slowly. Oh, yes. Now I'd say the net drain is more like $40 bil­lion because their increase in imports--MR. BUCKLEY: Their repatriation of $10 billion.MR. HELLER: Well, what they're doing is they're increasing their improts es­pecially for arms--we're supplying the Middle East with arms right and left, asyou know--and their development programs and so forth. So their propensity toimport, to come and spend it here--MR. BUCKLEY: Increases.MR. HELLER: --is somewhat higher than people have estimated. But we're stillsuffering about a $20 billion net drain from this oil tax, and they're aboutto increase it, as you know. Now the right fiscal response to that would havebeen to address the problem that you just mentioned: namely, that the taxnoose was tightening at the same time because with the inflation our moneyincomes on which taxes are calculated were rising a lot faster than our realincomes. Real incomes were dropping. Money incomes were rising, and that fis­cal noose was just tightening all the time. So we had the fiscal noose tighten­ing; we had the OPEC oil ransom; and at the same time Arthur Burns turned aroundand tightened money. And the three just knocked us into the worst recession byfar since the Great Oepression.MR. BUCKLEY: Well, doesn't this really depend on your economic perspective?Arthur Burns, presumably, tightened the flow of money because he anticipated,if I may say so, an inflation that you did not, becuase you were telling inthe fall of 1972 that we didn't have to worry about anything more than sixpercent inflation; it was twice that.MR. HELLER: That was in the fall of '72-­MR. BUCKLEY: Yes.MR. HELLER: --and '73, I've long since confessed, we were caught with ourparameters down.MR. BUCKLEY: Yes.MR. HELLER: It was the year of infamy in inflation forecasting--let me make aclean breast of that.MR. BUCKLEY: Right.MR. HELLER: We didn't foresee the food shortage; we didn't foresee the ancho­vies disappearing from the coast of Peru; we didn't foresee the oil embargoand price increase. It's true. But those are-- We economists call thoseexogenous factors. They were external shocks; they were sui generis. AndI really have difficu1ty--now speaking of the future--seeing us face again a

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combination of circumstances that adverse on the inflation front all at once.Food, fuel, commodity price explosion, the devaluation and decontrol. As Imentioned earlier, those five things are just not on the horizon.MR. BUCKLEY: Well, let me ask you this: Assuming that the Feds were to in­crease substantially the flow of money, isn't it widely acknowledged that thereis usually about a l2-month lag--MR. HELLER: Six to twelve.MR. BUCKLEY: Six to twelve-month, yes. --between that and whatever effectit's going to have on increasing the tempo of economic life but that the lagis going to be slightly shorter than that in creating inflation and in anti­cipation of that inflation, the real cost of doing business is going to decidewhether private capital gets deployed?MR. HELLER: Well--MR. BUCKLEY: In other words, you can't synthetically hold down, can you--theEnglish have tried it and failed--the true cost of inflation by having phonyrates?MR. HELLER: Well, you know, I could grant you that and still come back to yourinitial proposition, namely, that expanding the money supply now promises ustrouble six to twelve months out. The question is: Do you get into troublewhen you have an economy that's running $200 billion below its potential? AndI'm calculating potential not at four percent unemployment but at five percentunemployment. If we were operating at five instead of nearly nine percent un­employment, the economy would be producing $200 billion more of goods and ser­vices than it is. Now let's assume that the Federal Reserve, you know, opensthe money spigot a little wider. I'm not talking about, you know, just agusher. I'm saying that instead of letting the money supply expand at five toseven and a half percent, be willing to go to eight, nine, ten percent if that'snecessary to restrain the rise in interest rates.

Take another look a year from now, and what you'll find is that unem­ployment and under-utilization of our tremendous productive potential will stillbe at levels that are below the trough of any previous postwar recession. Weare so far down in the abyss, that we can expand for a full year briskly andstill not reach the levels that were the worst levels that we've hit in anyother postwar recession. That will leave Mr. Burns and the Feds plenty of timeto close down, to gradually throttle down on the money supply before it burstsinto inflation.MR. BUCKLEY: Well, if you make these historical comparisons it becomes neces­sary, doesn't it, to note that in the first postwar depression of '57-'58 we hadvery high unemployment--7.2--MR. HELLER: Yes.MR. BUCKLEY: --but that we didn't have a high inflation? That which dis­tinguishes the phenomenon of the last couple of years has been this apparentparadox, right? High inflation and high unemployment simultaneously.MR. HELLER: Precisely. That's right.MR. BUCKLEY: Now, could it be that this high unemployment is caused by thefear of the capital market of a depreciating dollar resulting from not onlycontinued deficits but an impenitent commitment to continue deficits?MR. HELLER: I don't see it that way. You know, when an economist tries toexplain something and he finds an adequate explanation in, shall we say, tried,true, and tested phenomena, he doesn't need to look beyond that. And in thiscase the combination of tightening down on money and tightening down on fiscalpolicy with-- For the first time in a postwar period, tax liabilities went upwhen the economy was going down. And third, with the OPEC siphon that waspulling all this purchasing power out of the economy we suffered a loss in realincome. And those are fully adequate to explain the tremendous drop in theeconomy, and indeed they explain the deficit, because of course the deficit ofaround $60 billion is simply the hostage that we're giving to recession--$45billion of revenue loss and about $15 billion of unemployment payments thatwe would not have if we were at five percent unemployment. So I don't really

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feel that a major factor in this recession or in the present level of operationscan be found in this--what shall we say?--backing-off because of the Federaldeficit, for example.MR. BUCKLEY: Well, how would you explain, back when oil was available for twobucks, two successive years in which we had $23 billion of deficit in 1971-72?What variable do we find that caused that?MR. HELLER: Well, that again was a synthetic recession; synthetic not in thesense that it wasn't real but in the sense that it was touched off by a desireto curb the inflationary legacy that Lyndon Johnson had left Richard Nixon.There was a considerable inflation potential that had developed as a result ofthe underfinancing of the Vietnam war, the inflationary financing of the Vietnamwar. And this was a bipartisan policy. Johnson actually started it before heleft office. Lots of people have forgotten this, but his last budget ran asurplus. And that was partly designed to cool off the economy. Then finallythe Federal Reserve got in harness and purposely slowed down the economy. Andonce you slow it down, it's awfully hard to keep it from going on. They didn'tmean to generate a recession, but they did. And the recession generates defi­cits every time.MR. BUCKLEY: Well, that seems to be tautologous, doesn't it?MR. HELLER: Well, but it's-- No, it isn't just tautology because it does ex­plain why you get the deficit. It did follow from the attempt to cool off in­flation. There's no question about that. That is, the 1969-70 recession wasan overreaction, in a sense, to the inflation, and that in turn turned down therevenues and turned up expenditures and generated the' defi cits.MR. BUCKLEY: Well, why ought it to have been an overreaction? (laughter) Thatis to say, given what we now know about the conditions in 1969, '70, '71, whatwas .it that caused an overreaction? Was it institutional policies, monetarypollcy,.fiscal policy, or was it a certain sense of uneasiness on the part ofthe capltal market over what they saw to have been the derelictions of the John­son years and a conviction that we had to dry the whole situation up before wecould start afresh?MR. HELLER: Well, but, you know, those convictions don't work in a vacuum or insort of an abstract way. You don't have the particular manufacturer or financiersayi ng, "Now, in the i nteres ts of along-run soundness of the Ameri can economyI'm going to pull in my horns." They pulled in their horns because they saw theconsumer, under the impact of tax increases and tighter money, pulling back andthey therefore pulled back their own expansion programs and so forth. And it isvery much a-- Now, please don't misunderstand me. I don't mean to say thatconfidence doesn't have something to do with it--MR. BUCKLEY: Sure.MR. HELLER: --that they were unhappy with the rate of inflation. And I don'tmean to say that the rate of inflation doesn't have something to do with con­sumption because that undermines real purchasing power. But the reaction, Ithink, of the capital markets was fundamentally one to the shrinkage of demandin the economy.MR. BUCKLEY: And the shrinkage of demand was in reaction to--?MR. HELLER: To the purposeful damping down of the economy through tightermoney and tighter budgets in an effort to curb inflation.MR. BUCKLEY: And the correct prescription, you think, would have been whatduring these years?MR. HELLER: Well, I happened to agree with the prescription at that time. Ifelt they were doing the right thing. And I don't know that any of us who havebeen in that hot spot in Washington could have done any better. However, theyoverstay~d. They made the same mistake then as they're making now. They keptforecast~ng that the economy was going to rise briskly, and of course it fell!lat on ltS face, and as a result we gave up a lot of production and a lot ofl~vestment that we.could have enjoyed. And I think we're repeating the samemlstake. Now, agaln, I think the economy's going to be expanding at about aseven percent rate. I don't think the recovery is in jeopardy now or well into,

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oh, maybe the first or second quarter of 1976. But if we keep this same tightstance that has been evidenced so far, we really run the risk of inducing an­other recession in 1976, our bicentennial and election year, which seems unlikelythat a principle would prevail over pragmatism to that extent. But it doesseem that Mr. Ford and his cohorts are men of conservative principle and so farthey've shown no signs of giving ground on this score.MR. BUCKLEY: And on the other hand if we don't, Mr. Greenspan would say, orMr. Burns, we stand a very good chance of going back to double-digit inflation.MR. HELLER: Yes. And that's really the nub of the argument. That's where Ithink they're wrong. That's where I think and-- Well, there're really twoarguments. There's a factual argument--factual analytical. In other words,what is the connection between easing money and easing budget policy a bit andinflation? And at this stage of the game, I don't think that's our source ofinflation. I think our source has been primarily food and fuel and the relatedfactors. And then there, of course, is secondly the value question: To theextent that there is a trade-off between unemployment and inflation, you know,you might be willing to take more unemployment; I'd perhaps take a little bitmore inflation.

But there really is this basic question: How much inflation would itcost us, let's say, to reemploy two million of the effectively about nine millionunemployed today? And very careful calculations suggest it might take threequarters of one percentage point. Now, just to put it in, you know, reallystark cost-benefit terms. Suppose the American people were confronted withthe question: Would you be willing to endure over the longer run,say, fiveand three quarters percent inflation instead of five percent inflation for thenext two or three years to have two million more people employed? And then Ithink you begin to get the argument in the form that people can make a choice.MR. BUCKLEY: Well, it becomes a nice, schematic presentation and--MR. HELLER: We don't have-- Sure. We can't operate with that much precision.MR. BUCKLEY: That's right. That's right.MR. HELLER: That's right.MR. BUCKLEY: And I think probably that the response would be highly skepticalby people who, I think, with some justification will wonder how come peoplehave failed so consistently with that kind of fine-tuning. This is fine-tuning.MR. HELLER: Not really. You know, it's fine-tuning if you assume that youturn it on and then turn it off. But we're so far below par that we can turnon quite a bit of stimulus and not, you know, be in danger of having to turnit off because we're bumping up against our ceilings. Don't forget: We'reproducing $1450 billion of goods and services. We could be producing $1650billion, and that's a conservative estimate. IBM says a $225 billion gap. Butyou know my conservative proclivities, and so I'll just stick to $200 billion.But with that kind of range you have a great deal of slack to work in. And itis not irresponsible under those circumstances to say, "For goodness sake.Let's put some emphasis on reducing this tremendous amount of unemployment be­fore unemployment becomes a way of life for millions of people; before wedevelop an underc1ass. " We've backs1i d on poverty by a mi 11 i on and threequarters of our population. And I think that's a price that we're paying forvery little gain on the inflation front.MR. BUCKLEY: Well, I think if your analysis were certified there would be verylittle doubt that people would be willing to make the exchange. In effect, it'sasking everybody to contribute one third of one percent of his capital value inreturn for increasing the employment by two million. And I think that mostpeople would find that a perfectly acceptable sacrifice. But let's talk fora moment, if I may, on unemployment before we go to the panel. I was very muchstruck by a study by Mr. Feldstein---with which you are, I'm sure, famil iar-­MR. HELLER: I am.MR. BUCKLEY: --in which he said that what's happening in America is less un­employment in the sense in which we used that word in the Thirties but a refus­al by Americans to do certain kinds of work. We do know, for instance, that

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there are eight million Mexicans, most of them here illegally, while there arenine million Americans unemployed. So theoretically, if we close down theRio Grande effectively, there would be eight million more jobs. Question:Would they in fact be filled? Now, Feldstein gives us an example of a couplein Boston. He earns $6000; she earns $4500. He is laid off for a month. Asa result of having been laid off for one month he doesn't have to pay SocialSecurity taxes; he doesn't have to pay income taxes; and he gets a welfarecheck that is itself untaxable--MR. HELLER: Unemployment compensation. Yes.MR. BUCKLEY: Unemployment compensation which is itself untaxable. Now, thenet figure he shows is that there is an effective taxation on this person of89 percent. That is to say, he is only 11 percent better off by working thanfor not working, and that doesn't even bother to take into account the cost ofthe bus to work, to say nothing of 40 hours of his time. These cushions, sayshe and others that work against the incentives of employers, are inflating theunemployment figure to the point of deluding us in using it with the same kindof gravity that John Steinbeck would use it in The Grapes of ~ath.

Now, I don't know nor do I know that Feldstein has estimated by how muchthat figure of nine million would shrink in the absence of these special con­ditions, but that it would shrink very substantially, he insists, by showingus, for instance, that even as recently as two years ago 49 percent of thepeople who were unemployed weren't fired; they quit their jobs. And 65 percentof the people who were unemployed two years ago were unemployed for five weeksor less. By contrast in England, the figure was 27-"28 weeks. He then adds--To cap it off he adds, I think, a very interesting point which is that theoverwhelming majority of unemployment is among young people so that if you re­duce unemployment by 1.5 percent among people 40 years or older you reduce itby 11 percent among people who are 16 to 19 who make up 40 percent of the laborforce. He tells us in effect that the enticements to go to college work in away that is counterproductive, i.e., they force people into activity in whichthey're not at home--many people--and secondly they force them to construct afiscal portfolio based on that experience which is unrealistically related towhat the market would have them do in a fluid situation. But in effect you're-­MR. HELLER: You have raised a whole series of issues.MR. BUCKLEY: Yes. Yes.MR. HELLER: First let's take the eight million Mexicans. I don't know how toverify that figure. But if you took the eight million Mexican workers outyou'd also take eight million demanders of services and goods as well as eightmillion suppliers, so you wouldn't gain eight million jobs. That's number one.Number two: On the cases that Feldstein mentions, you know, in a country thislarge you can find 50 cases of most anything and that is a somewhat-- Let'sput it this way. I don't mean to say that that husband and wife team doesn'trepresent a slice of this population; it does. But it takes a very special caseto get anything like an 89 percent marginal rate overall. A new OECD studythat was just completed a week or so ago, a couple of weeks ago, concluded thatAmerican unemployment compensation amounts to about 50 percent of one's wage.That's the average across the board with enormous differences in the differentstates. Now, what I'm saying is that while there's no doubt that generousunemployment compensation and the savings that you make on taxes cause somelengthening of the unemployment period because, you know, you have more bar­gaining power, you have more staying power. You can look longer for a betterjob. I don't happen to find that at all reprehensible. That gets--MR. BUCKLEY: No, no. No. As a matter of fact it's paradoxical because some­times in boom situations the unemployment figure rises because people arechoosy about jobs.MR. HELLER: That's true. And that means presumably--MR. BUCKLEY: More people are quitting jobs because they want another job.MR. HELLER: And they're getting-- Sure. Now, the man that waited on me inPenney's automobile store last week: He has a major in industrial education;

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he's a licensed pilot. Needless to say, if the economy gets revved up, notonly will the unemployment numbers drop but that man will find himself eventual­ly in a better job. By the way, that's an example of the waste of human re­sources that's going on. And while Feldstein's point is correct in the sensethat there is some enlargement of unemployment total as a result of unemploy­ment compensation, Marsten of Brookings has estimated that that makes a dif­ference of maybe about 500,000 workers out of nine million. That is the cal­culated add-on to unemployment as a result of having unemployment compensation.MR. BUCKLEY: You mean, he estimates that if there were no such thing as un­employment compensation you would only reduce by 500,000--MR. HELLER: Correct.MR. BUCKLEY: --the number of people out of a job.MR. HELLER: Correct.MR. BUCKLEY: Is this a conclusion that you yourself examined or that you arejust comfortable with?MR. HELLER: No. In this case I feel comfortable with it. Yes. No,wouldn't pretend to have gone through his data and so on. But it's-­MR. BUCKLEY: Give me the one about the eight million Mexicans again.MR. HELLER: The eight million Mexicans. Well, suppose you give them back toMexico. Okay?MR. BUCKLEY: Yes.MR. HELLER: At the same time that you're taking eight million hands out ofthe United States that presumably have jobs, although I can't believe theyall have jobs--not when I look at the welfare load in New York City, for ex­ample, and the Chicanos and others who are unemployed--but--MR. BUCKLEY: Don't interrupt your demonstration with an extreme.MR. HELLER: All right. Now--MR. BUCKLEY: Let's take the assumptions.MR. HELLER: All right. All right. Take your assumptions. Now take theeight million out. You're also taking eight million consumers of goods andservices out, so that your total demand for goods and services in the UnitedStates would also drop.MR. BUCKLEY: Well, not if you employed eight million people in their stead.They would be then a fresh, new set of consumers.MR. HELLER: If you somehow or another substituted for the demand created bythose eight million people, then presumably you could go ahead and--MR. BUCKLEY: But they'd be Americans instead of Mexicans.MR. HELLER: They'd be Americans instead of Mexicans, but that would take somegovernment stimulus in order to create the demands--MR. BUCKLEY: Well, it would take machine guns on the Rio Grande. That wouldtake a hell of a lot of stimulus.MR. HELLER: Well-- (laughter) I'm glad that you--MR. BUCKLEY: But also it would minimize the deficits--right?--which is infla­tionary. I.e., by taking eight million Americans who were receiving federalwelfare checks who are now picking lemons and oranges you would not only havea fresh set of consumers, you would also minimize the drain on the state andfederal governments, wouldn't you?MR. HELLER: Well, I think those guns on the Rio Grande were about the levelat which we should discuss this. This really is highly complex, but I assureyou there's no way to solve our unemployment problem by sending those peopleback to Mexico.MR. BUCKLEY: No, no. As a matter of fact, I happen to have been rather con­sistently in favor of as much movement of labor--MR. HELLER: Oh, yes. Yes.MR. BUCKLEY: --as possible because it's the same thing with free trade really.MR. HELLER: Sure.MR. BUCKLEY: It's another form of protectionism.MR. HELLER: That's right.MR. BUCKLEY: But it is true that it is very hard in South=rn California to get

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an American to do certain kinds of work.MR. HELLER: And this was true in Florida--MR. BUCKLEY: Yes. But it wasn't true in the Thirties.MR. HELLER: --vis-a-vis the Cubans and so forth.MR. BUCKLEY: It wasn't true in the Thirties.MR. HELLER: Yes.MR. BUCKLEY: You have to get Canadians to come down and pick ~pples in Massa­chusetts because you can't find Massachusetts unemployed who w1ll do it.MR. HELLER: Today?MR. BUCKLEY: No. Yesterday.MR. HELLER: Oh.MR. BUCKLEY: I haven't checked today. (laughter) .

Mr. Jeff Greenfield is of course the author. Mr. Greenf1eld. .MR. GREENFIELD: Dr. Heller, when you were chairman of the Council of E~onom1cAdvisers it seemed to be a time that people believed in, at some level 1ngovernment, an infinitely expanding pie. Lyndon Johnson, after y?ur t~nure,

said it in just those words. President Kennedy used a term, I th1nk, therising tide lifts all the boats," which was applied both to civil rights andgeneral expansion of the economy in which one could improve the lot of allwithout facing questions of class, redistribution of income. You yourselfpresided over the tax cut which was really unaccompanied by any real tax re­form in '64.

Now it seems that the whole series of factors has changed: a decliningbirthrate for the foreseeable future; massive increase in transfer payments;massive shift to the government in-service sectors; worries about productivityin America not just through the recession, but there are much more basic ques­tions. What do we make anymore in this country? And I'm wondering, given thestructure that we've built through a kind of middle road between the market­place and what you would call some kind of socialist government, in fortyyears, when the war babies begin to reach retirement and begi~ to take onservice benefits, if we have national health care, if we cont1nue to produceless and less and expect more and more in services, then whether one fine­tunes or whatever metaphor one uses, how do we pay for it? I mean, at themost basic question, aren't the Chicago economists right when they say there'sno such thing as a free lunch? And doesn't that begin to impose some veryserious questions about the people who do work in productive areas today andin the next few decades?MR. HELLER: Yes.MR. GREENFIELD: How do we pay for what we've built?MR. BUCKLEY: I wouldn't have believed it was possible~

(laughter)MR. GREENFIELD: You haven't heard the follow-up question.MR. HELLER: The University of Chicago economists are corre~t when they s~ythere is no such thing as a free lunch. You are incorrect 1f you ~re say1ng-­and you didn't say this flatly--that the Federal Government expend1tures havebeen a rising proportion of the gross national product. They haven't. In thelast 20 years-- .MR. GREENFIELD: No. The services as opposed to goods produc1ng sectors clearlyhaven't. State and local governments have just exploded.MR. HELLER: What-- Well, yes.MR. GREENFIELD: Does it really matter whether we're-- I realize as a formerchairman of the Council it matters. But in an economic sense whether NelsonRockefeller or Gerald Ford or John Kennedy taxes my income, in terms of whereit goes and what I have to spend, it really doesn't matter that much, does it?MR. HELLER: Well--MR. BUCKLEY: Well, the public sector has risen is a safe way to put it.MR. HELLER: The public sector as a whole--MR. GREENFIELD: Right.MR. HELLER: --has risen, but the Federal sector has not.

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MR. GREENFIELD: Dkay.MR. HELLER: It's held steady in the past 20 years, about 18, 19, 20 percentof GNP. The state and local sector has risen. But don't forget that thatwas in considerable part associated not with these welfare payments. And thetransfer payments are financed out of the federal budget. That's why it'srelevant and fair to talk about the federal budget holding steady as a pro­portion of GNP, because even though the states payout the funds they come outof the federal purse. And where the big expansion has come at the state andlocal levels is the expansion of population, the suburbanization, the schools,et cetera. They're--MR. GREENFIELD: The New York City budget has exploded largely because of wel­fare and municipal servicing expenditures.MR. HELLER: I don't think you'll find that's-­MR. GREENFIELD: Well--MR. HELLER: If you look at the numbers--MR. BUCKLEY: He worked for Lindsay, I warn you.MR. GREENFIELD: We have 100,000 more civil servants in New York than we didnine years ago; and we have 100,000 fewer people. And the increase in theirbenefits and wages, I blush to say, is just a bonus.MR. HELLER: Oh, yes. Yes. Well, but why take the extreme, the Big Apple ex­ample rather than more--MR. GREENFIELD: Well, it is ten percent of-- I mean, it's--MR. HELLER: You know, when you look across the board over the country-- Wellanyway, now, what you're saying, let's get to the nub of your question. Aren'twe going to a place where in effect we go over the precipice because the totalof welfare payments, the total of the working population, the tax-eaters versusthe tax-producers, that that balance is going awry? And I don't see that that'sat all necessary. The proportion of GNP spent will probably rise. Our taxesare now 28 percent of gross national product; probably it'll go up to 35 orso. But with the growing and expanding gross national product an economicgrowth is not at an end, and with some increases in government taxes in thelong pull, we're going to be able to do this. This is not an inso1uab1eproblem. It does not mean socialization of the economy.MR. GREENFIELD: If I could just follow up one more question. It seems to methat when you mix the kind of explosion of services--Medicaid and Medicare,welfare, the number of people on public payrolls at every level of government-­with an economy which continues--here's the old me--to be so concentrated, so01igopo1istic, that when those two mix it seems to me you are headed for anexplosion. I mean, I can understand a market philosophy or a socialist philos­ophy for the future, either one of them, more coherently than I can a sensethat we're just going to muddle through out of this and continue to deflatethe value of the currency and increase the number of people on service payrollswithout at some point facing an end.MR. HELLER: Well, but what do you-- When you say "facing an end" you--MR. GREENFIELD: Well, for instance, people who spend more than 50 percent oftheir incomes on taxes without getting the benefits of other states, say, inWestern Europe where at least they get something for that, such as free medi­cal care.MR. HELLER: If you batch together all of the worst tendencies in expansion ofAmerican government, if you took, say, the pensions in New York and some ex­cesses in federal spending and so forth, I could see that. But I think you'revastly underestimating the capacity of the economy to handle these outlays.That capacity will grow and we won't be just muddling through; we'll be ableto handle it. We'll have to change, but let me go on to say--MR. GREENFIELD: You mean, there's a light at the end of the tunnel? (laughter)That's what it comes down to I think.MR. BUCKLEY: He says we're not in a tunnel.MR. GREENFIELD: Yes.MR. BUCKLEY: Yes. Mr. Alan Reynolds is with Argus Research. Mr. Reynolds.

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MR. REYNOLDS: Dr. Heller, when I'm listening to your.po~icy advice.I ~et,the

feeling of having heard it somewhere before, notably 1n 67 and aga1n 1n 71.And at that time I recall the concensus of respectable academic opinion was thatthere was no danger in pressing for massive deficits and financing them byprinting lots and lots of money because at that time they said as long as theunemployment rate is, say, three to four percent there's ample slack and wedon't have to worry about anything. Now you've changed it to five percent.That's an improvement.MR. HELLER: You will grant you're exaggerating just a bit?MR. REYNOLDS: Just a bit. (laughter) Well, there was a hedge in the argu­ment. The argument was that then if f?r some unexpected reason inflation didspeed up that's no real problem because as soon as we saw it there would beplenty of time to slam the money machine in ~ev~rse and that wou1~ ~ot causeany problems either. So in '67 and '71 we d1d 1n fact follow pO~l:les prettymuch of that sort. Principle that time did not prevail over po11t1ca1 prag­matism, and the results were quite the opposite of what had been promised tous, which we now hear is the cause of ad hoc excuses, things like that. Now,the question is: We have another empirical test coming, ~nd ~f w~ now ~ursuethat expansionary policy in the coming year, say, and th1S t1me 1nf1at10ndoes speed up in, say, '77, '78, whenever, and this time we do.have to s~am

the machinery in reverse again and do indeed face an even nast1er receSS10nthan the one we're in, would you at that point concede that your economist'stools are getting a little rusty, or would you say that the theory is stillcorrect and that the world has gone wrong?(laughter)MR. HELLER: Well, let me first say that if a student of mine, with all duerespect, had so garbled the data as you did in your question I'd flunk him tobegin with and not even answer your question because the truth of the matteris--MR. REYNOLDS: I think that would be the safest procedure.MR. HELLER: --in late '65 and early '66 we tried our level best to get LyndonJohnson to increase taxes. And that went on in '67. That tax increase thathe finally asked for was very much the kind of thing that we had 1ayed out--his advisers inside and outside the government. And then it took another yearand a half to get it out of Congress. And I've always been a critic of thepresidents for not making a two-way policy out of taxation, tax cuts. P~r~aps

you would condemn this as fine-tuning and maybe this is beyond the capac1t1esof the Congress to do. But in any event, we called for tax increases. Thenwe called, after the tightening that generated the '69-'70 recession, for theeasing of taxes. And Mr. Nixon and the Congress combined to do that in '72.But that isn't what generated that inflation. That inflation was generated bya particularly easy money policy in 1972 and then that whole series of specialfactors. Now we're seeing-- But now the real question is: Suppose we went toan easy money policy now, an easier money--I want moderate expansion; I don'twant a boom and some generosity on tax cuts and anti.cyclica1 spending. Andthen we touched off a brand new inflation and fell back into a recession. Then,yes, you'd have to give me a flunk on my Ph.D., you know, revisited exam. That'strue. I don't believe that's about to happen. There's just too much--MR. REYNOLDS: We do have an empirically testable proposition here.MR. HELLER: We do. But I don't think it's going to be tested because I don'tthink that Mr. Burns and Mr. Simon and Mr. Ford are going to follow Mr. Heller'spol icy. ...MR. REYNOLDS: Let me hit you with one more qU1ck one. I th1nk on~ of ~y maJorquarrels with you is the idea that, say, ten percent money growth 1S gOlng todrive interest rates down. I would anticipate that after a couple of monthsboth lenders and borrowers would see that money growth rate as a predictor, ifyou will, or some sort of a forecaster of inflation to come and that interestrates would then include a premium to compensate them for the shrinking dollar.By the opposite theory, we should expect to see low interest rates in Britain

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where money growth has been very fast and we should expect to see high interestrates in Switzerland where money growth has been negligible, almost not at all.In fact, the opposite is the case, and it's the case historically in the UnitedStates. What I'm saying is that to me a ten percent money growth means highinterest rates, not low interest rates. Could you answer that?MR. HELLER: What you're saying is that the psychology of the financial com­munity is such that it will translate per se a growth in the money supply intoa growth in inflation.MR. BUCKLEY: And you deny that?MR. HELLER: Well, the financial community does some funny things. And-­MR. REYNOLDS: Look at all the monitors.MR. BUCKLEY: The predictable thing?MR. HELLER: No, not very predictable, whether it's the stock market or not.There're so many other factors that would influence the financial-- For onet~ing, profits are going to explode. Profits are on the verge of an explo­Slon right now. Business is expanding and costs are going to be dropping.Business has moved up its profit margins in terms of any kind of a decent levelof o~erations..And I think that that's going to be an off-set. The pleasantread1ng on prof1ts, the pleasant reading on increases in business investmentand so forth would ~e a grea~ off-set to this fear that would be generated by,say, a ten percent 1ncrease 1n the money supply. Very good balm for the fi­nancial community.MR. BUCKLEY: Mr. Mike Kramer is with New York Magazine. Mr. Kramer.MR. KRAMER: Dr. Heller, it's good to hear that profits are going to explodepretty soon. It's also true that in New York the whole city might explodevery so?n: (laughter). And even the Ford Administration finally believes thatt~e resl11ent economy 1S somewhat limited to the extent that the Big Applew1ll have some effect on all the other little apples. If we are close to de­fault, whether it's next week or in three months when the city has to go backto the money market on its own, do you see any role now for the Federal Govern­~ent in saving the city, so to speak, and if so, you know, what would you dolf you were back being a bureaucrat there?MR. HELLER: Well, let me say two things. One, I don't think that the stateand Federal government~ c~n simply wash their hands of New York City. You know,New York has about a b1ll1on dollars of welfare costs that no other city inthe country has in comparable fashion. Maybe Denver is one exception. Second­ly, you know, the number of welfare cases that flood into New York is sort ofa natio~al problem, not a state and local problem alone. And third, the re­perCUSS10ns on the rest of the country and on the banking system-- Twenty­three.p~rcent of the asset~ of New York banks are invested in New York Citysecu~lt1es ..The repercuss10ns are such that--maybe city and state securities-­Wash1ngton slmply cannot wash its hands. I think there's been an elaborategame o~.chicken played here,.and that Washington in the last analysis would dosomethln~. ~ow, wh~t could lt do? Well, I think it would have to do it mainlyo~ a natlonW1de basls, ~radu~lly take over certain kinds of expenditures, pro­v1de more generous antlcycl1cal grants of the kind that Senator Muskie has abill for $2 billion--that ought to be $5 billion--and possibly do what FelixRohat~n.of MAC has suggest~d--give the localities the option of making theirsecur1t1es t~xa~le but havlng the federal guarantee if they became taxable.You know, th1s 1S an extremely difficult situation, but I don't think theFederal Government can just give New York City the back of its hands either interms of responsibility for the problems of New York City or in terms of therepercussions which will cost every municipality in the land high interestcosts and additional expenses if New York goes under.MR. K~AMER: Do you think the Federal Government could at this point insureor re1nsure M~C bonds and all the kind of paper that we're going to have tofloat to sur~lve, or do.you.agree with Secretary Simon that that would justmake these klnds of obl1gat1ons so attractive that it would destroy the restof the--

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MR. HELLER: You can't-- I'm sorry. You just can't have both the tax exemp­tion and the insurance. You know, you can't just have a complete bail-out.Some of the answer to the problem has to be found in New York City. I'm notsuggesting for a moment that a complete bail-out by the state and Federalgovernments is the sensible solution.MR. BUCKLEY: What's the difference between the interest rate paid by a NewYork City bond and by a Treasury bond?MR. HELLER: About three percentage points. You're paying 11 pe~cen~ in NewYork City, tax exempt, and eight percent would be the correspond1ng 1nterestrate that would be paid if it were taxable but guaranteed by the Federal Govern­ment.MR. KRAMER: Well, you're talking as if people were just gobbling them up,and they're not. We can't sell them.MR. BUCKLEY: Yes. Because over the years it's been the other way around,hasn't it?MR. HELLER: I bought one.MR. KRAMER: Well, that's good to hear.MR. BUCKLEY: You think it's a good investment.MR. HELLER: I think it's a good investment and I'll tell you why.MR. GREENFIELD: Could I sell you an Imperial Russian Railroad bond?(laughter)MR. HELLER: I'll tell you why: And that is because some of the state salestax collected in New York City is dedicated to the payment of those bonds,and quite apart, you know-- The rest of the situa Hon can fall down in rackand ruin and I believe those bonds are going to be good. But I wouldn't wantto advise anybody else. I'd rather make my own mistakes.MR. KRAMER: Can you give us a few stock tips then?(laughter)MR. BUCKLEY: Is that what you told Kennedy?MR. HELLER: That's the kind of advice I never give because I am an economicanalyst, not a psychoanalyst.(laughter)MR. BUCKLEY: Well, but you do think, or do you not, that in return for takingover this indebtedness there would have to be some political reciprocity,wouldn't there?MR. HELLER: Oh, absolutely. Are you--MR. BUCKLEY: In other words, the mismanagement could not continue indefinitely,could it?MR. HELLER: That's right. You'd in effect put them in receivership but notin the receivership associated with bankruptcy. A receivership without bank­ruptcy.MR. KRAMER: You're just trading one set of politicians for another.MR. HELLER: Well, that's your term. I think that the MAC/ state kind ofmanagement and what's been passed by the New York Legislature is a form-­MR. BUCKLEY: A contrivance.MR. HELLER: --of receivership already. And I really think that's going toexert some very tough discipline on New York. Whether it's enough is anopen question.MK. BUCKLEY: Thank you very much, Dr. Heller. Thank you, gentlemen of thepanel. Thank you all.

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© Board of Trustees of the Leland Stanford Jr. University.