From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm. “An Appraisal of America’s Economic Prospects: Newsweek's Economic Columnists Survey the Past Year and Predict What Lies Ahead” by Milton Friedman, Paul A. Samuelson, and Henry Wallich Newsweek, 12 January 1970, pp. 52-53 ©The Newsweek/Daily Beast Company LLC Newsweek’s Economic Columnists Survey the Past Year and Predict What Lies Ahead What’s in store for the economy in 1970? Faced with the cloudiest crystal ball in years, NEWSWEEK put a list of questions to its three economic columnists: Milton Friedman, economics professor at the University of Chicago and leader of the increasingly influential monetarist school; Paul A. Samuelson of Massachusetts Institute of Technology, one of the foremost exponents of the Keynesian “new economics,” and Henry Wallich of Yale, a former member of the President’s Council of Economic Advisers who is now a consultant to the Treasury Department. The questions, and the varying answers: 1. What went wrong in 1969? FRIEDMAN: Nothing went wrong, except that people expected too much too soon. True, prices are still rising, but they are rising less rapidly than a few months ago. The rate of rise will continue to decline. Inflation has started tapering off. The delay between monetary tightening and slower price increases is about par for the course. WALLICH: I would say not much went wrong, and on the whole we are not far behind schedule. Recession was avoided, and things are slowing down in the order you might expect: first output, then employment, and prices last. One problem that made inflation worse was the tendency of business to believe that because the Administration was trying to avoid recession, its anti-inflation efforts would not succeed. I still think it was right to tell people honestly what was being attempted, rather than try to scare them with the prospect of recession. SAMUELSON: Every year is known for one big error. History will judge that 1969’s biggest blooper was the “gradualism” of the early Nixon team. They misgauged the strength of inflationary expectations; and because of their obsession against fine-tuning, they did too little at the beginning. In consequence, they may wind up doing too much in the end. 2. As you see it, what is the biggest question mark for 1970? SAMUELSON: I think it is: “Will 1970 be a year of actual recession–sustained decline in real national product?” And I would guess that the answer is “No.” Some slowdown, yes; but my betting chips go against the extremists who envisage a 1958-type recession, with 6 and 7 per cent unemployment. FRIEDMAN: The real question will be the monetary policies followed by the Federal Reserve Board. In the past, the Fed has tended to go from one extreme to the other–from a policy that is too contractionary, as it is right now, to a policy that is too expansionary. My guess (and hope) is that this will not happen again; that under the new leadership of Arthur Burns, the Fed will move now to a moderate and steady expansion of the nation’s money supply. From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm. WALLICH: There are many questions. There is the role of the government itself—not just because of the undetermined cost of the war and defense spending, but also because Congress doesn’t get around to voting the full budget until the fiscal year is half over, and even then it pays little attention to its own spending ceiling. The consumer is another gamble; right now he is acting scared. Business plant and equipment spending is crucial—if it folds, we have had it. But the biggest uncertainty is not whether we have a recession, but what kind of slowdown it is—whether the year follows the pattern of the monetarists (a certain recession, and perhaps a deep one), or the pattern of the standard forecast (a short stagnation, followed by a quick recovery). 3. In the end, are a recession and high unemployment really necessary to slow down inflation? FRIEDMAN: There’s no way to slow inflation that doesn’t involve some economic slowdown and some rise in unemployment. That is the price we must pay for the inflationary policies that were followed from 1965 to 1968. The only way to avoid a slowdown in 1970 would be to speed up inflation still further—and that would only postpone the slowdown, and probably make it more severe when it finally comes. However, this doesn’t mean that we need a severe recession to bring inflation under control at this point. A mild slowdown would still be enough. SAMUELSON: Since President Nixon has renounced guidepost leadership, he has no other way to moderate inflation than to contrive a slowdown. But if unemployment went higher than 5 per cent, the nation would consider it politically intolerable; and that obviously means that there is still considerable inflation ahead. If unemployment is not allowed to rise above 5 per cent, we can expect price inflation merely to moderate—to drop from an annual rate of about 5.5 per cent to not much below 4 per cent. WALLICH: It would be wrong to say that a recession is “necessary,” but there is always a risk that it might happen. And some increase in unemployment is probably unavoidable. However, over the year as a whole, I would not expect the unemployment rate to average much above 4 per cent. The effectiveness of a recession in halting inflation can be overplayed in this day and age. Since everybody is looking at “the other side of the valley,” a short recession wouldn’t change expectations much. 4. The Administration’s forecast now is that there will be a mild slowdown, with equally mild impact on the inflation rate, followed by renewed growth. What do you think? WALLICH: I agree. Inflation won’t be reduced very much—not much below 4 per cent on the cost-of-living index—but the drop will demonstrate that inflation can be halted. Once that is driven home, progress should be easier. SAMUELSON: Even Barnum couldn’t expect many to swallow that. If I couldn’t believe Arthur Burns last winter when he promised that inflation would be down to 3 per cent by this Christmas, how can I believe the Council of Economic Advisers when it forecasts that business can look beyond the valley to full-employment growth with only a nominal increase in price levels? Can Paul McCracken believe his own numbers? From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm. FRIEDMAN: The most likely pattern for the year is a mild recession, such as that which occurred in 1960-61. But a more severe recession, such as occurred in 1957-58, is not at all unlikely, and will become very nearly a sure thing if the Federal Reserve Board continues its present policies much longer. On the other hand, if the Fed overreacts, we shall be off to the inflationary races again. If the board shifts to a moderate but steady expansion of the money supply, the recession will end two or three quarters later and we can start on a path of non-inflationary growth. 5. Professor Samuelson, the Friedmanites seem to be dominating economic dialogue these days. Is Keynes dead? SAMUELSON: Yes. So are Newton and Einstein. 6. But are the post-Keynesian economists swinging to the monetarist camp? SAMUELSON: Not in my county. Keynes didn’t ignore monetary policy; he was eclectic—and the eclectic approach decisively outperformed strict monetarism in 1969. I’ve just compared my own forecast of a year ago with the forecasts of several leading monetarist economists. Modesty forbids me to say more. 7. Dr. Friedman, some economists who agree with your general monetary theory now believe that money isn’t really as tight as it seems. In effect, these economists argue that people are finding ways to move money faster and stretch it farther than in the past. What do you think? FRIEDMAN: The velocity of money always tends to rise for a time after a reduction in monetary growth; then it turns around and starts to decline. So far, there is nothing unusual about the present episode. I think the usual pattern will continue to unfold, and thus a recession in 1970 is highly likely. 8. There are other economists this year who doubt that there will be any slowdown at all. This school argues that all the real forces point to expansion—and that if the Fed doesn’t provide more money to meet the resultant demand, the economy is headed for bankruptcies and money panic. SAMUELSON: When the 1968 surcharge didn’t end the inflation, and then the 1969 tight Fed policy didn’t end the inflation, a lot of Wall Street people turned nihilistic on economics. That’s their privilege: if youth under 25 can be nihilistic, why deprive the over-50 of their civil rights? But why buy an argument from people who say in one breath that economic policy is impotent to curb inflation, and in the next breath say it will plunge you into depression if you persist in it? FRIEDMAN: Their outcome is one chance in a thousand. Their analysis goes wrong mostly because of its lack of perspective, and its failure to allow for the time lapse between action and reaction. WALLICH: There’s no precedent suggesting that inflation cannot be stopped.