by the micro-policy considerations. There is no mystery about how
to manage an economy in terms of increasing aggregate economic
activity. That is a cinch! The fact is, Keynes said something quite
profound and quite simple when he said that spending creates in-
come. It is as simple as that! Spending is what creates income, and
an absence of spending will deteriorate income. If we want to hypo
an economy up, all we have to do is pump something into it and get
people to spend. On the monetary policy side, it means making
money and credit more readily available. On the fiscal side, it
means either cutting taxes or increasing expenditures. Anything to
increase aggregate demand will ultimately increase income.
On the other hand, we have learned a lesson, which I hope will
cause economists to have a greater degree of humility, and that is,
it is not so easy to turn an economy off when it gets to going at an
excessive pace. That is the lesson that should have been learned,
but was not learned. And it is in that regard that the constraints
upon the ability of monetary and fiscal policy to do their job hinge
so much on micro-policy considerations. If, in fact, we can in-
crease aggregate demand to increase real output, we can, theoreti-
cally, induce more slack in the labor and product markets to get
price and wage pressures down. That is assuming that all inflation
is a demand phenomenon and is caused by excess demand.
If that were the case, we would have no problems. The fact is
we are learning that inflation is not wholly a demand induced
phenomenon. There are supply constraints independent of demand
factors, and this complicates our search for stability.
Public policy, whether it is fiscal or monetary policy, when
construed for stabilization purposes, implicitly assumes that those
policy initiatives and actions are going to work their way through
the marketplace to product markets and to labor markets, to re-
move excess price or cost pressures. If the key component, a
well-operating competitive product and labor market, is absent,
then it does not matter how hard we push on those policies. All we
are going to get is more unemployment and more slack and only
modest improvement in prices and cost.
That is what prompted President Nixon in 1971 to undertake an
incomes policy. The reason was that the economy just was not
responding to normal policy. Then as soon as the incomes policy
was undertaken, fiscal and monetary actions which excessively
stimulated the economy undercut the prospects for relief from the
incomes policy.
Whatever the structural problems are in the economy, mone-