When confronted with an incipient recession or continued
economic slack and rising unemployment, the response in times
past has been quite clear. Fiscal policy has moved toward
stimulus, and monetary policy has moved toward easing. That is
the kind of policy prescription that would be called for if the only
consideration were the economic outlook I have described.
But, as you know, these are not normal times. With prospects
for the economy as grim as I have described, we have to superim-
pose on this the equally grim prospects for price inflation. We may
still be seeing rates of inflation as measured by the GNP deflator of
at least 8 to 9 percent by year end. Price inflation in the second
quarter of this year, at an annual rate, was 9.6 percent, down from
a little more than 12 percent in the first quarter. 1 will take issue at
this point with the expectation that we can bring inflation to its
knees by July 4, 1976. The best 1 can hope for is that the process of
returning this economy to some modicum of stable prices might be
under way by year end and that it will continue through 1975 into
1976. 1 have no expectations whatsoever that we will see an
inflation-free economy by July 4, 1976, unless we are willing to pay
a much higher price in terms of recession and slack than any of us
is prepared to pay.
We are faced with a dilemma. The economic situation clearly
calls for one set of policy prescriptions, while the price situation
clearly calls for something else. It is in this regard that I think the
micro-economic or micro-policy considerations are most impor-
tant.
It is disturbing to me that in any analysis of today’s inflation
combined with today’s recession, we find almost a total exclusion
of considerations of economic structure in the United States. We
find instead allusions to crop shortages, fertilizer shortages, energy
crises, and the like. The incredibly strong worldwide demand last
year contributed to inflation, by kicking up the prices of raw mate-
rials. The energy crisis, which resulted in tripling and quadrupling
of the price of crude oil, has accelerated inflation. These other
considerations such as crop shortages have contributed to infla-
tion. But in 1969 and 1970 we experienced a recession with
accelerated inflation, and in 1974 we are again experiencing a re-
cession with accelerated inflation, which is being aggravated but
not wholly caused, by those factors which I have mentioned.
There is something about the American economy that does not
seem to work like it used to.
First, however, I want to talk about the macro-policy consider-
ations. These are important. But, in a sense, they are constrained