The Business of America
Dotson, Clyde L.
"The Business of America" President Ford's program to remedy unemployment and recession calls -for a tax cut of approximately $16 billion. This move is apparently based on a belief that people spend 90 percent of their...
...Morley demonstrates that the curve is only a short-run phenomenon...
...For the last twenty years the policies of the federal government have been based on the "Phillips Curve...
...First, as demonstrated by Milton Friedman in his book A Theory of the Consumption Function, the propensity of people to consume is based not on their immediate income but rather on their Permanent Income...
...Government action which causes the existing rate to go below this in the short run also causes reactions within the market which cause rates above the norm during the recovery phase of the inflationary cycle...
...If government truly wishes to reduce long-run unemployment it must investigate the inefficiencies in our current labor market structure...
...The second means of financing available is through Open Market Operations by the Federal Reserve System...
...Because of this, one of the questions concerning the tax cut is whether it is necessary...
...According to this relationship unemployment may be reduced by increasing inflation...
...Government should use its monetary and fiscal policies to aid in controlling inflation...
...The cut is intended to pull us out of a recession...
...According to this theory a temporary tax cut would not affect consumption: the additional disposable income would be saved...
...There have been several studies lately questioning this relationship...
...For a number of reasons, however, this assumption may not be true...
...Evidence provided by Leonall Anderson and Jerry Jordan in "Monetary and Fiscal Actions: A Test of Their Relative Importance in Economic Stabilization," in the Federal Reserve Bank of St...
...In this activity the Fed purchases the securities which would be sold to the public under the first procedure...
...There are two means of financing open to the Treasury...
...It is possible that our government's urge to take this action derives from a misunderstanding of the relationships in our economy...
...From December 1973 through June 1974 M-2 (the money supply defined as currency in circulation plus checking accounts and savings deposits) grew at a rate of 8.9 percent...
...This move is apparently based on a belief that people spend 90 percent of their disposable income and that there is a strong causal relationship between fiscal policy and GNP...
...Were this true a tax cut of this size should add $14.4 billion to GNP and aid greatly in solving our recession problems...
...In the area of unemployment it should investigate the above-mentioned restrictions in the labor market...
...There are only two possible results of the tax cut...
...It is thisthat causes our abnormally high unemployment today...
...Louis Review, shows that this bond sale "crowds out" an almost equal amount of private spending...
...The available evidence would seem to show that the Federal Reserve's current action in increasing the growth rate of money will accomplish this alone...
...As has been demonstrated many times, however, increased monetary growth rates cause faster growth of prices...
...This has definitely created some slack in the economy...
...Examples of these inefficiencies are current minimum wage laws, difficulties in learning about job opportunities, and organized labor's control over supply in various industries...
...Since this tax cut is being soldpartially on the basis that it can be more easily reversed than could a spending program, it would appear to be temporary...
...However, this slack should be gone soon since M-2 grew at 7.5 percent in the final quarter of 1974 and the Fed is even now pumping more money into the economy...
...Another, and more important, problem evolves from the fact that Ford's proposed budget is $36 billion in deficit even without the tax cut, and the cut raises the total deficit to $52 billion...
...There exists a normal unemployment rate which is the result of the structure of the labor market...
...Professor Friedman has shown there is a six-month lag between an increase in monetary growth and an increase in total spending...
...Since government purchases must be paid for, this deficit must be financed...
...Monetary and fiscal policies can have no lasting effects on unemployment...
...The reason for the current reduced spending is the relative reduction in monetary growth during the last half of 1974...
...On their evidence we would be returning money tothe public through the tax cut and taking it hack through "crowding out...
...The first involves selling bonds to the public...
...This is most visible in the field of employment policy...
...One of the best of these is Samuel Morley's chapter, "The Phillips Curve," in his book The Economics of Inflation...
...When the Fed purchases treasury securities it increases the monetary base which, through the multiplier, increases the supply of money...
...This means that monetary growth rates in the fourth quarter of 1974 and first quarter of 1975 are the primary causal variables of economic activity in the latter half of 1975...
...When labor discovers that its real wage is being reduced because of inflation, it requires, in order to stay even, larger and larger nominal wage increases as inflation gets worse...
...It will either "crowd out" private spending and thereby defeat its stated objectives, or,more likely, it will increase monetary growth rates and thereby inflation...
...Without reductions in government spending a tax cut at this time will either accomplish nothing or, more likely, refuel the fires of inflation...
...In the last half of 1974 it grew at 6.1 percent and only 4.8 percent in the third quarter...
Vol. 8 • April 1975 • No. 7
