Prices and Your Pocketbook
By David Henderson
This one shows both Friedman and George Stigler to be believers in fiscal policy to control inflation and advocates of high taxes for the war effort.
The three participants are Leo M. Cherne, executive director and editor-in-chief of the Research Institute of America, Milton Friedman of NBER and on leave in the Division of War Research at Columbia University, and George Stigler, associate professor of economics at the University of Minnesota and at the time visiting professor in the department of economics at the University of Chicago.
The show is titled “Prices and Your Pocketbook.” The date is June 27, 1943. Recall that the United States was in the midst of a relatively comprehensive regime of price controls at the time.
Some highlights follow.
Stigler introduces the show with typical Stigler humor:
America, gentlemen, really is pretty lucky. It has about one hundred million military experts and one hundred million economists. The hundred million military experts are pretty well satisfied with the conduct of the war, and, as a matter of fact, I think one could even charge that they are a little complacent about the early day of victory.
As one hundred million economists, though, they are not quite so happy. They, as consumers, claim that their prices are going up a good deal faster than their pocketbooks are growing.
Friedman makes a point about the amount of production going to the war effort: approximately half of GDP:
The point there is that only one of out of every two people who is producing goods these days is producing goods he himself can buy. The other people are producing instruments of war that they cannot purchase.
Later, Stigler and Friedman discuss briefly how rationing distorts the statistics on pricing:
Stigler: We can, therefore, say that, on the average, costs are up 25 per cent. It takes a dollar and a quarter to do what a dollar did only a couple of years ago. But that is not the whole story. You still have to be able to get the goods.
Friedman: Try to buy an automobile these days unless you happen to have a ration coupon.
Stigler on how price controls cause producers to reduce quality:
Stigler: Let us add just one item to this background material of obvious information, but, nevertheless, things we ought to keep in mind for perspective. I have in mind quality degradation–houses are not heated so well or repaired so often; clothes are not so good; meats seem to be fatter in spite of anything steers can do; and so forth.
Later, Stigler discusses how to reduce inflation:
Stigler: The general picture is pretty clear. While we were cutting down on the amount of goods or at least not increasing the amount of goods, we were giving more and more dollars to consumers. The simplest way to stop it, and the sensible, fundamental way, is to take dollars away from people by withdrawing income from individuals, so that they cannot bid up prices.
On price controls and rationing:
Friedman: That is not quite so much an attack on a symptom really. Starting by fixing prices and saying that prices shall not be higher than a certain amount, we shortly found ourselves in the difficulty that people could not buy things at those prices because just saying that prices should not go up in no way increased the supply of goods available and in no way reduced the amount of money people had available. The only answer to that, unless we were willing to go to the fundamental cause and remove the excess purchasing power, was to try to ration the goods. [Notice that he doesn’t mention another fundamental cause, at least of the shortages: the price controls.]
Stigler: I think that we can say, by and large, in the field of rationing that we have done a very mixed job. On some commodities like sugar and like coffee, I think we have done a satisfactory bit of work.
Then Friedman makes a point (pun not intended) that I first saw Joe Cobb write about in 1980: a combination of price controls and points will not necessarily put the goods where they are most valued.
Friedman: You try to set points, and those points are the same all over the country. They are complicated combination, and it is very difficult to adjust them so they will do the right job in New York and the right job in Chicago–not leaving New York with too much pork and Chicago with too much beef.
On taxing to reduce inflation, Friedman and Stigler agree.
Friedman: The basic cause [of inflation], much more important than any other cause we have mentioned, is the fact that people have a large amount of income relative to the goods and services available for them to buy. . . . Therefore, it seems to me that the basic solution–and the only solution that offers any promise of solving it and getting at the root of the trouble–is a strong fiscal policy that will be devoted to withdrawing income from the pocketbooks of the American people.
Stigler: I certainly concur in that. When we mention strong taxes, we ought to spell that out and not just leave it as a vague adjective. By that I mean specifically that, in the case of our personal income taxes, which is our big revenue source and probably the one we should continue to use primarily, we should slash our [personal] exemptions from twelve hundred dollars to eight hundred dollars for a couple. We should step up our rates, which are going to be 20 percent soon, while they ought to be at least 35 percent.
Friedman: That is tough medicine, but if we are realistic, we have to face it in those terms. There is little point in talking about a few more billions of taxes. We need tens of billions more of taxes. We need taxes as firm and as strong as those that Stigler has suggested. [Recall that U.S. GDP in 1943 was only about $200 billion.]
The photo above is the bed in Milton and Rose’s Vermont home, Capitaf. I slept there from August 7 to 11. The mess is mine.