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The article comments on the papers of Barry Bosworth and Robert J. Gordon about wage and price control in the U.S. I thought Bosworth's paper was excellent. I am grateful for the presentation and assembling of data that had not previously been properly correlated--for example, the reconciliation of Pay Board wage approvals with the U.S. Bureau of Labor Statistics data on union wage settlements. Undoubtedly, a significant disinflation began with the freeze. Although individual estimates of the precise impact may vary, something significant happened at that point. Nonetheless, the data lead me to conclude that the impact of both the Price Commission and the Pay Board on actual prices and wages has been surprisingly small. First, the overall price situation indicates that, with the exception of a few building materials, few prices would be raised if the controls were removed. For example, recent evidence on the term limit pricing agreements indicates that, whereas the average approved price increase was about 2 percent, only a small proportion of these increases have been put into effect. Thus, it appears that because of weak market conditions, these firms were unable to raise their prices even with Price Commission approval. The wage side is a little more difficult to evaluate. The institution of a general wage standard would be expected to narrow the distribution of wage increases by reducing the larger increases.

The article comments on studies by Robert E. Hall and Charles C. Holt that examined the effectiveness of manpower policies in improving the inflation-unemployment tradeoff in the economy in the U.S. My own position lies between these two extremes. I think that Holt and his colleagues are too optimistic, both in their assessment of the magnitude of the effect of their program in reducing unemployment and in their implication that a program of the size and kind they envision is politically feasible. I find completely unacceptable Hall's argument that, if a public employment service could succeed in doing a significantly better job than it is now doing, private placement services would have been more active since the gains accrue to the workers or the employers and therefore could be paid for. In a footnote. Hall admits that there may be some externalities involved in a public employment service. But so far as I can see, he ignores barriers to an effectively functioning labor market that a large and efficient Employment Service could hope to overcome, such as the lack of information among the unemployed and their inability or unwillingness to pay for the services of private agencies. I agree with Hall that there is little chance of eliminating the dispersion of unemployment rates among the various sectors of the national labor market. However, I think he pays too much attention to the occupational dimension, as do Holt and his colleagues. I believe other dimensions of the labor force, particularly age and sex, are more significant in this connection.

This article discusses the effect on income of Phase II of the wage-price control program of the United States. Several discussants commented on the issue of income shares under the Phase II program. R. A. Gordon, William Branson, and others noted that, with productivity growing exceptionally fast because of the rapid cyclical expansion expected in the economy, profit margins would widen so much that some cost absorption by business would still permit the profit share to expand. Arthur Okun noted that Perry's neutrality was defined as the state of income shares that would prevail in the absence of the program and that the cyclical expansion of profit margins that we are experiencing would have occurred anyhow. Gardner Ackley argued that we did not know enough about what has happened to price-cost relations in recent years to take any strong position about what income shares should be. Therefore Perry's neutrality concept should not override the need to slow inflation, and some cost absorption was appropriate as a way to help accomplish this. James Duesenberry and Michael Posner felt that the most serious practical problem was not the question of existing income shares but rather delivering on the promise to slow prices noticeably. The trade unions are reluctant to accept wage controls because they have little faith that the inflation will slow down. Differing views were expressed on the use of profit margin ceilings in Phase II. Alan Greenspan pointed out that the application of the rules on the basis of the margins of individual firms would hold down overall prices and margins more than people thought.

This section presents several comments about a paper by Edward Gramlich published in this same issue of Brookings Papers on Economic Activity, which develops systematic and comprehensive estimates of who bears the burden of an increase in national unemployment in the U.S. as of June 1974. According to the first commenter, the paper by Gramlich represents a useful attempt to study in some depth the differential effect on family income of cyclical changes in the level of unemployment. The findings are interesting and important. In general they confirm what other, less intensive, studies have led us to expect. But the cross-section data used permit detailed analysis that is not possible in more aggregative time-series studies. The author has been ingenious in developing his relationships one step at a time and in using the variables in his regression equations. The first commenter found quite useful the analysis of transfer payments in the final part of the paper. And he particularly appreciated Gramlich's careful treatment of unemployment insurance, which provides an antidote to some of the more sweeping claims regarding the disincentive effects of this form of transfer income. Meanwhile, the second commenter says that Gramlich has written a good straightforward paper.

The article comments on William Poole and Charles Lieberman's paper, Improving Monetary Control, which offers a menu of recommended changes to improve the implementation of monetary policy in the U.S. I wonder whether a domestic money concept--the official money stock less dollar balances held by foreigners or other central banks--should not receive more consideration. Domestic money--that is, money available for the purchase of goods and services in the U.S.--may be more relevant for analyzing American economic activity than the official series. One recent attempt to calculate domestic money suggests that its movements may not coincide with the official money series. Poole and Lieberman assume that lagged reserve requirements may interfere with monetary control. This is certainly a plausible hypothesis, but not self-evident, since it does depend on bank portfolio behavior. It would be desirable, therefore, to investigate its effects on monetary control. Some very preliminary studies for the Canadian money supply suggest that lagged reserve requirements do not appear to lessen monetary control. The paper utilizes supply of, and demand for, reserves as a framework to outline changes that would improve monetary control.

This article presents comments from several economists on Marina Whitman's article about the role of the U.S. dollar in the international finance. Richard N. Cooper: Marina Whitman has provided an admirable summary of the issues in monetary reform and the changing role of the dollar. My remarks are not so much comments on her paper as questions and observations prompted by reading it. The first question is, why have controls on intemational transactions increased in Europe rather than diminished with the introduction of floating exchange rates? The second question that comes to mind on reading the paper is, whyhave floating exchange rates not insulated economies from inflationary impulses from abroad as some advocates said they would? Part of the answer lies in the fact tiiat exchange rates have not floated freely. Robert Solonson: Marina Whitman has given us an interesting paper, with a wealth of useful material. But, to be frank, I mn unsure about what the real issues are in the question of leadership versus symmetry. "Leadership" implies sometbiag more than large arithmetk weight, but the paper tells litUe about the economic and political aspects of any unique role of the dollar.

This article presents the commentaries on the paper presented by William D. Nordhaus at the thirteenth conference of the Brooking Panel on Economic Activity, which discusses the measurement of corporate profits and analyzes the decline in the share of profits in national income that has occurred in the U.S. Nicholas Kaldor described the paper as impressive. Even though Kaldor had made a number of criticisms for the paper, he was still gratified that it follows some lines of thought that they have developed in Cambridge. Kaldor criticized Nordhaus for using a model of market structure in which prices are determined by some sort of full-cost pricing or markup. He believed that it is a realistic model for the price leaders in oligopolistic industries, but not for all firms. Likewise, Alan Greenspan has found conflict within the paper. The conflict is that it offers no way of testing the sensitivity of the conclusions either to the specific data that are used and the adjustments made to them or to the particular specifications of the model. On the other hand, William Brainard described the paper as extremely interesting and provocative. Nordhaus was able to discuss the conceptual issues involved in estimating profits, and attempts to correct for changes in the tax law, in financial structure, in the price level and for the difference between economic and tax-deductible depreciation.

Presents a paper on the response of wages and prices to the first two years on controls initiated by President Richard Nixon. Intent to study the changes in prices and wages behavior. Methodological preliminaries and econometric models; Alternative counterfactual simulations for 1971-73; Untangling the effects of import prices; Conclusion that the inflation of 1973 needs reconsideration; Discussion of the paper by the panel.

This section introduces the articles which appeared in the March 1972 issue of the "Brookings Papers on Economic Activity." In the first article, William Branson estimates that the 1971 currency re-alignment, when fully effective, will bolster the United States merchandise trade balance by $7 billion to $8 billion a year. The effect of the devaluation of the U.S. dollar on the trade balance depends on how much it raises the dollar prices of U.S. imports, how much it lowers the prices of U.S. exports in terms of the currencies of buyers, and how responsive both buyers and sellers are to price changes -- that is, how large their price elasticities are. As Branson views the process, exporters set the price tags on tradeable goods in terms of their own currency. The paper by F. Thomas Juster and Paul Wachtel examines the effects of inflation and of transitory changes in income on consumer saving and spending behavior, with particular reference to the inflationary experience of recent years. The authors seek to explain consumer demand in several different ways, relying on both subjective data drawn from surveys of households and objective economic variables such as income, relative prices, and the rates of unemployment and of inflation. In the third article, Arthur Okun reaffirms analytically the desirability of an activist fiscal-monetary strategy. Like other Keynesian economists, Okun believes that fiscal and monetary policy should be shifted toward stimulus or restraint in light of observed and predicted economic fluctuations.

This article presents comments from several economists on Christopher Sims' article about the statistical analysis of labor input and output in manufacturing in the U.S. Michael C. Lovell: Christopher Sims presents a fresh analysis of a much studied phenomenon: short-run increasing returns to labor, or SRIRL, which describes the tendency for fluctuations in output to be associated with less than proportionate fluctuations in labor inputs. He argues that the existing literature does not rule out the possibility that the size and duration of SRIRL that are found so regularly in the empirical work in this area are substantially biased by errors in variables. Thus his approach resembles Milton Friedman's use of the statistical errors-in-variable model in his study of the consumption function. Friedman postulated a true proportionality relationship between consumption and income and argued that the observed short-run relationship between observed consumption and income was too fiat because they contain errors of observation -- transient consumption and transient income. In the same vein, Sims argues that SRIRL may be a statistical artifact. Robert M. Solow: The most important results of this paper are summarized in Table 3. That table shows an almost proportional cumulative response of man hours of production workers to output, with the strongest response in the contemporaneous month and the full response completed within six to nine months. There is evidence for this finding in all industries reported except paper and possibly primary metals. Such results are of interest for two main reasons: they can guide the interpretation of monthly unemployment statistics and they can help in analyzing the short-term employment-output relation in macro models.

This article focuses on employment of demographic groups in the U.S. Recent increase in the national unemployment rate and forecasts of higher rates throughout 1975 have brought unemployment back into competition with inflation as the major economic problem. Since the three-and-one-half-year low set in October 1973, aggregate unemployment has increased by almost 1.9 million people, raising the overall unemployment rate to 6.5 percent in November 1974. The reported rate among teenagers has risen from the October 1973 low of 14 percent to more than 17 percent; the rate among blacks is almost 12 percent; and the rate for black teenagers is over 37 percent. Further increases in unemployment over the next year are widely forecast and there is a natural concern that the already depressed groups will be hit the hardest. In the policy debates over the appropriate fiscal and monetary restraint and on programs to assist the casualties of recession, it is important to identify the people who will be most harmed. Programs to ameliorate or offset the impacts of recession are often targeted at particular groups in the labor market. In this paper we use a job search-turnover model of the labor market to estimate the impact of a recession in 1975 on sixteen demographic groups, delineated by age, race, and sex. Through simulation, the model provides conditional forecasts of the incidence of employment losses by demographic groups. Since numbers of the groups with the highest unemployment rates -- youth, blacks, and women -- often react to a loss of job opportunities by withdrawing from the labor market, it is essential to estimate the reduced labor force participation of each group, as well as its increase in unemployment.

This section introduces the articles featured in this issue of Brookings Papers on Economic Activity.

This paper analyzes how labor market conditions determine the evolution of the wage level and hence the rate of wage inflation. The author's modeling of the wage determination process unites three characteristics of labor market and wage behavior that have been recognized individually but not previously integrated. First, in the process of shopping for jobs, workers find better opportunities when unemployment is low than when it is high; trying to do as well as possible for themselves, they are thus more likely to quit jobs and venture forth into a tighter labor market. Second, the rate of increase of wages responds to the ease or tightness of labor markets, but not because the unemployed compete for available jobs by offering to work for less. Third, past inflation casts a long shadow and plays an important role in determining current wage changes and inflation. Central to the author's model of how the wage level is determined is the concept of the scale wage. The author provides statistical estimates of the wage determination process from two separate applications of his model. He concludes that today's high rate of wage inflation is the result of a decade of continuously tight labor markets, even though the shift in the composition of the labor force has masked the tightness in recent years.

Presents a paper on the relative occupational success of blacks and whites in the United States. How blacks get less in the job market; Goal of the paper to present the results of an extensive study of data on the employment of young men; Definition of occupations and measurings of earnings within occupations; Average wages rates of black and white males; Occupational success; The model for weighing the information; Comparison of blacks and whites with equal endowments; Comparison of random groups of blacks and whites; Comparisons with actual distributions; Projections to 1973; Discussion by the panel on the findings.

This article presents commentaries on the paper presented by Stephen P. Magee at the thirteenth conference of the Brooking Panel on Economic Activity, which studies the effects of outstanding contracts on the value of U.S. imports in the months immediately following a devaluation. According to William Branson, the paper makes a major contribution in pointing out the potentially large overstatements of imports after a devaluation, reflecting both the genuine effects of currency contracts and statistical errors. However, Branson found two problems in the paper. First, it seems that the capital losses during the currency-contract period may have little, if any, relation to the subsequent adjustment process. Second, the fact that Magee focused only on the import side of U.S. trade seems to imply that the adjustment process is somehow asymmetric. On the other hand, Lawrence Krause did agree with Branson that Magee deserves the thanks for tackling some nasty problems in the trade data. Though he may be telling the nonspecialist more than he wants to know about currency contracts, Magee is presenting valuable new evidence in an unexplored area. He shows convincingly that the errors in the import data can be large enough to distort unit-value indexes and perhaps large enough to explain, in part, why some econometric models were underpredicting U.S. imports for the periods after dollar devaluation.

This article presents commentaries on the paper presented by James Pierce and Jared Enzler at the thirteenth conference of the Brooking Panel on Economic Activity, which analyzes the way external shocks may impart inflationary spurts to the economy. According to David I. Fand, the paper introduced a money demand function that is designed to pick up any increase in money demand resulting from a rise in transactions associated with the higher import prices. Since import prices have risen by as much as 10 percent in recent quarters, the demand for nominal money should have increased significantly. Fand believed that this change in money demand may be viewed either as a sort of real-balance effect or as a transaction effect. On the other hand, R. J. Gordon described the paper as very timely and important one. However, he wants to question some of their specific quantitative findings and focus on certain aspects of the model they used which he thinks could be improved. For example, the effects of a one time increase in the price level without any accommodative response from the Fed, that is, the growth of the money supply remains unchanged. The initial effect is an upsurge of both inflation and unemployment, which seems entirely reasonable. And, since this is a model with a natural unemployment rate, in the long run the economy eventually returns to the unemployment and inflation rates that would have prevailed had the initial jump in the price level not occurred.

Presents comments on an article about the relationship between interest rates and inflation. Discussion of the paper and its contents; Criticism.

Presents comments on a paper about taxation. Discussion of the paper and its contents; Criticism.

Presents comments on a paper about unemployment rates and its effect on the economy. Discussion of the paper; Criticisms.

Discusses the articles that appear in this issue of the "Brookings Papers on Economic Activity." Objectives and goals of the articles; Summaries of the articles.

The article comments on a study which suggests that endogenous policy responses do not necessarily impair the structural estimation of the working of the economy and economic policy. The paper implies that the decision period for policy is shorter than the observation period for the data. A multitude of problems arises if one really believes that the U.S. Federal Reserve or some other authority is making monthly decisions. If the proper model is a monthly one but a quarterly model is estimated, an important problem of aggregation through time arises, which should be treated explicitly. Critics of structural models argue that they are very likely to be misspecified, so that they produce the wrong coefficients and results more misleading and more troublesome than those emerging from the reduced-form approach. Solow suggested that monetary and fiscal policy makers might manage in some ways on some occasions to offset contemporaneous shifts from private demand even if they did not systematically behave according to any reaction function. Such unsystematic actions would be enough to make the policy variables correlated with the error terms in private demand equations.

This paper began with the observation that the nature of the demand for money function is likely to be of great importance for monetary policy over the next few years. Considerable uncertainty surrounds the income and interest elasticities of demand, and in a period of falling interest rates, greatly amplifies uncertainty over the appropriate rate of monetary growth. On the basis of the admittedly crude evidence reported in the paper, it would appear that both income and interest elasticities may be a little below those assumed in the simulations reported in my earlier paper. This conclusion implies that the required rates of money growth will be some-what lower than the previous analysis indicated. But the tenuous nature of this conclusion should not be forgotten. One might argue, as I would not, that data prior to 1947, or even 1950, are of questionable relevance to the current situation; but there is essential no possibility of reliably estimating the income and interest elasticities on the basis of postwar data alone. The additional year of data that will be avail-able a year from now may provide far more information than one would ordinarily expect from only one more year of data, especially if short-term interest rates remain near or below current levels and long-term rates continue to decline. In this situation, special care in updating estimates of the demand for money function would seem to be fully warranted. [ABSTRACT FROM AUTHOR]

This article analyzes the nature of unemployment that remains when labor markets are tight and the economy seems to be at full employment in the U.S. as of 1970. The body of the paper begins with a discussion of the problem of defining and measuring unemployment. Definition derives from theory. In this case the theory underlying most macroeconomic thinking about unemployment is that of Keynes. Keynes believed that a certain level of frictional unemployment was characteristic of all labor markets, but that, in addition, involuntary unemployment could arise when a condition of disequilibrium existed in labor markets, with supply exceeding demand. For the purposes of the paper, his definition can be put in the following simple way: A person is unemployed if he offers his labor at its market price but is unable to find a buyer. A conventional view among economists about the persistence of unemployment when the economy is at full employment can be put in the following way: There are many different labor markets, distinguished by geographical location and the skills and other characteristics of the participants. Workers cannot move easily from one market to another since it is expensive to move their households or to acquire a new set of skills. At any point in time, some of the markets will be in equilibrium, some will have shortages of workers and some will have excess workers and hence unemployment.

Introduces articles published in the 'Brookings Papers on Economic Activity' journal. Acceleration of inflation in 1969; Prospective price-wage performance from 1970 to 1975; Performance of home-building in 1969.

This paper analyzes the supply of U.S. domestic oil as of June 1974. The authors contend that U.S. oil production is effectively competitive; but they paint a pessimistic outlook for the expansion of U.S. production. In this paper, the authors take an almost diametrically opposite view of the current competitiveness of the domestic industry. They point to a 25 percent decline in the real price of gasoline, excluding taxes, from 1951 to 1972. What is more, during that period, real mark-ups fell sharply in refining, the very area where giant companies have the largest share of the market. They read this historical record as evidence of competitive behavior, which refutes the charge of cooperative or collusive action by the companies. They emphasize the monopoly power that the producing countries wield, but see that as existing independently of the multinational oil companies. The authors also deliver a contrasting verdict on the outlook for domestic supply. They estimate a supply function for U.S. production in the lower forty-eight by relating the demand for oil reserves to the price and user cost of oil. The authors conclude that the elimination of the special tax incentives for oil would be worthwhile since at present they impede the rational discussion of energy policy and misallocate resource.

This section presents several comments about two papers presented in this same issue of Brookings Papers on Economic Activity, which analyze the supply of U.S. domestic oil as of June 1974. Both of these papers have two parts. The first part of each deals with the competitive structure of the industry. The U.S. definition of oil reserves is essentially a very conservative one. Reserves are the oil underlying wells already drilled. This is not the precise definition; but, for all practical purposes, development has to be undertaken, and production wells have to be sunk, to prove reserves. As a consequence, Erickson is right to treat his reserves as a capital stock variable. In terms of projecting the costs of Project Independence, the first commenter is not willing to accept the Erickson approach--fitting reserve stocks against price and user costs--because it omits finding and developing costs. One other problem is the implication of Erickson's use of the prior period's reserve stock in a pooled time-series and cross-section model. Meanwhile, Davidson and his associates apply an ingenious technique which uses the rent share to estimate supply elasticity. They assume a constant-elasticity production function, in which nature is the fixed factor and all other inputs are the variable factor.

This paper develops systematic and comprehensive estimates of who bears the burden of an increase in national unemployment in the U.S. as of June 1974. Using detailed information on about 2,600 families who, during 1967-1972, participated regularly in a panel conducted by the Survey Research Center of the University of Michigan, Michigan, the paper traces the effects of an economic slump on family incomes along four routes: first, the direct impact resulting from more unemployment of the chief breadwinner of the family; second, the added burden from shorter working hours by the family head; third, the loss in earnings of secondary workers; and fourth, the cushioning of family income provided by transfer payments, such as unemployment insurance and welfare. The author's estimates do not encompass the adverse effects of a slump on the quality of jobs, nor do they assess the cushioning effect of lower income tax bills for the victims. In appraising the direct unemployment effect, the author uses his large sample to estimate the influence of various personal characteristics of the head of the family on his or her vulnerability to unemployment. The author demonstrates, a recession imposes a very regressive tax on the incomes of poor families headed by males, with an extra levy on African Americans.

This paper argues that inadequate competition in the U.S. domestic industry has been a significant factor in raising oil prices as of June 1974 and offers optimistic estimates of potential U.S. oil supplies in the decade ahead. In the first section of this paper the authors deal with two related issues: First, can market prices, even in a competitive environment, provide adequate guidelines for approaching an efficient and optimal rate of utilization of exhaustible resources? Second, in a world of conglomerate energy companies, does rationality of entrepreneurial policies imply anticompetitive and antisocial behavior that redistributes income from consumers to producers and owners of resource-bearing property? Some policy implications inevitably follow from this analysis. The second section presents the authors' estimates of the market price for crude oil required to achieve the stated goal of Project Independence: self-sufficiency by 1980. Since the first section attempts to demonstrate that for policy purposes economists who seek to determine the efficiency of any given time rate of exploitation of oil properties only waste their own resources, it follows that no one can tell whether Project Independence is on a socially optimal management path--that is, whether self-sufficiency in 1980 will maximize the sum of discounted consumer and producer surpluses.

This article presents the commentaries on the paper presented by Dale E. Hathaway at the thirteenth conference of the Brooking Panel on Economic Activity, which analyzes the explosion in food prices in the U.S. that began late in 1972, ending two decades of stability in the ratio of food to nonfood prices. Hendrik S. Houthakker basically agreed with Hathaway's paper that overcapacity in agriculture ended some years ago. While he dates the end at 1970, he would place it somewhat earlier, perhaps in 1966, when the Indian monsoon failed and U.S. agricultural exports grew temporarily. As Hathaway correctly points out, the shrinkage of inventories seems to be the major reason for the agricultural price explosion of 1972-73. In assessing the long-run outlook, he saw ample reason for concern about agriculture, even though the concern that arose in some previous episodes, like that of 1966, turned out to be unjustified. Indeed, he believed that the agricultural problem of the next decade is more serious than the energy problem. Likewise, John A. Schnitkker did agree wholeheartedly with Hathaway that the nation is in extremely precarious position with respect to agricultural commodities. He thinks that Hathaway puts too much of the blame for the current problems on the failure of economists to perceive an imminent danger to world food supplies.

Presents comments and discussion on an article by Saul Hymans on composite leading indicators. Discussion of various parts of the paper; Criticism.

Presents a paper that focuses on the Phase II and Phase III programs and the effect of wage-price increases on the economy. Need for wage-price controls to end; Failure of wage-price controls; Comparison of the different Phases employed over the years to combat recessions; Shortages in various industries as a result of wage-price controls; Speculation on how wage-prices should be controlled in the future.

Presents comments on an article on the extent to which temporary and permanent deviations of actual from potential output have offsetting, but generally measured, costs. Discussion of the paper and its highlights; Criticism; Points which deserve greater emphasis.

The article presents comments on a study on the contribution of labor turnover to unemployment, both in the aggregate and among different sectors in the labor force. The findings in the first part are interesting. On the whole they contribute to our understanding of how unemployment is generated and why its level is different for different segments of the labor force. Robert E. Hall computes the weekly probability of a person becoming unemployed, and of a person leaving unemployment. Unfortunately, the data do not permit him to distinguish unemployment arising from layoffs or quits from that arising from entering or reentering the labor force. That information is particularly important for youths and married women. In the latter part of the paper, dealing with geographical differences in unemployment and real wages, the statistical findings are presented within the framework of what is called a theory of equilibrium. This theory is static and, in effect, assumes perfect competition in product markets and local labor markets. Production of goods and services is subject to diminishing marginal productivity in the short run, while in the long run marginal and average productivity of labor may rise, but only through technical change. All employers and workers are profit maximum. Labor and capital are free to move geographically. The corollary to these assumptions is that real wages must fall as employment expands, except as the production function shifts in the long run.

This article presents comments from economists on the article by William Branson dealing with trade elasticity. Lawrence R. Klein: All economists may be divided into four groups: (1) trade elasticity optimists; (2) trade elasticity pessimists; (3) those who have no a priori opinion; and (4) those who don't care. William Branson is an optimist, and I am a pessimist. He takes his opinion on intuition, while I go strictly with the econometric evidence. He is in good company, however, joining an impressive array of students of trade theory who share his intuition and are quite willing to recommend trade policy on this basis. In addition to my concern over the lack of hard evidence on the magnitude- of trade elasticities, I question the methodology of the approach. The problems being studied cannot be answered in terms of trade relationships alone. Trade policies will have repercussions on the domestic economies of the trading nations, and these must be taken into account in a fully consistent way. Sir Alec Cairncross: I should like to comment from a British point of view on some of the issues raised by Branson's paper. Obviously, the size of elasticities is a relative matter, depending on the time period; They are smaller in the short run than in the long run. It therefore makes a big difference whether or not there is a great hurry to get the balance of payments into equilibrium. In the British case, we thought speed was at a premium; thus, we were very disappointed to see first a deterioration in 1968, and then a very slow improvement until well into 1969. Maybe, in the case of the American balance of payments, quick results may be less vital because not many good alternatives to holding dollars exist.

The article performs a statistical appraisal of the impact of the wage-price controls in the U.S. The condition of the U.S. economy improved in almost every respect after the initiation of the wage-price control program on August 15, I971. Real gross national product grew rapidly, unemployment finally began to decline, and the rate of inflation moderated. But the coincidence of timing does not necessarily mean that controls are an essential condition for prosperity, or that the August 1971 message was the key that unlocked the floodgates behind which real aggregate demand had been restrained. The determination of the four basic macroeconomic magnitudes--nominal (current dollar) income, real output, prices, and unemployment--is usefully separated into three subproblems: (1) the determination of nominal income, (2) the division of that nominal income between real output and prices, and (3) the relationship between real output and unemployment. Before the achievement of the control program can be evaluated, a criterion for its success should be established. By my standard, controls can be judged successful if the value to society of the reduction in inflation they achieve relative to that which would have occurred without them is greater than the direct and indirect costs imposed by the control program.

As the arguments favoring increased policy attention to the money stock have gained acceptance, the ability of the Federal Reserve to control the money stock has become a more prominent issue. The simple theoretical model presented earlier in this paper demonstrates that imprecise monetary control tends to aggravate the instability of both income and interest rates. In order to present a broad view of the control problem an effort has been made to analyze all of the major sources of control errors and construct as comprehensive a list of reforms as possible. While analysis has been concentrated on the technical aspects of the proposed reforms, it must be recognized that implementation of reform must await analysis of the entire range of economic effects of the reforms. Since extremely accurate control seems possible within the present institutional framework, the proposed reforms do not go outside it. For example, in designing reforms, we have ignored the fact that a system of 100 percent reserve requirements would eliminate disturbances arising from fractional reserve banking, and that freely flexible foreign exchange rates would protect the domestic money stock from foreign influences. The improvement of monetary control calls for separate reforms no one of which can, by itself, solve the control problem. And so, in the order of the discussion in the paper, here is the reform shopping list: (1) Eliminate reserve requirements against Treasury deposits in commercial banks. (2) Require all nonmember banks to adhere to the Federal Reserve reserve requirements specified for member banks. (3) If Mt is accepted without qualification as the definition of money for policy purposes, eliminate reserve requirements on time and savings deposits. (4) Abandon lagged reserve requirements in favor of contemporaneous reserve requirements. (5) Amend regulations and invest in additional data processing equipment to reduce Federal Reserve float to the greatest extent... [ABSTRACT FROM AUTHOR]

The article comments on George L. Perry's analysis of unemployment flows in the U.S. labor market. His finding that the deterioration in the unemployment rates of young workers relative to those of older workers is associated entirely with an increase in frequency rather than in duration is quite striking and is in accord with recent speculation about the importance of turn-over among young workers. Throughout the paper, Perry argues that increased turnover among young workers is not necessarily a reflection of decreased attachment to the labor force. An undercurrent of recent thinking, with which Perry is clearly not sympathetic, holds that the increased turnover of teenagers is a voluntary response to a changing economic environment. Rising family incomes and increasingly attractive opportunities outside the labor force make it less necessary and less appealing for teenagers to work steadily, according to this view. While I am no more sympathetic than Perry is to this hypothesis or to its implication that federal policy need not concern itself with the worsening position of teenagers, I am not fully convinced by the evidence he presents.

This article examines the effects of inflation and of transitory changes in income on consumer saving and spending behavior in the United States. To judge from the recent pronouncements of the forecasting fraternity, uncertainty about the behavior of consumers is at the heart of differences in view about macroeconomic policy at the present time. The inability of the economic recovery to gather sufficient force to bite into unemployment rates has been widely attributed to continued hesitancy and caution of consumers as reflected in exceptionally high ratios of personal saving to disposable income. And differences of opinion about the probable vigor or sluggishness of the recovery are due in considerable part to differences in judgments about the probable consumer response to the unfolding economic situation. One of the major sources of uncertainty about consumer reactions concerns the way that price inflation, both expected and realized, influences consumer decisions about spending or saving. This paper attempts to mine survey measures of consumer expectations, attitudes, and plans in an effort to determine their usefulness in predicting and explaining consumer behavior. We ask two questions: First, what is the role of these anticipatory variables in models designed to forecast consumer behavior? Second, what are the economic variables underlying the movement of consumer anticipation?

This article reveals the effect of the 1971 dollar devaluation on the trade balance of the United States. The year 1971 saw a major realignment of exchange rates among the world's important currencies. The basic cause of these changes was the continuing deterioration of the U.S. trade and payments position, and their proximate cause the massive speculation against the dollar throughout the year and suspension of convertibility by the United States in August. The changes in exchange rates against the dollar -- the dollar price of foreign currencies -- are expected to initiate a major swing toward surplus in the U.S. trade balance and consequently to reduce substantially the surpluses of some other countries. In the first two major sections of the paper the analytics of revaluation are discussed, flrst from the point of view of a single revaluing country, with attention to the difliculties concerning export supply elasticities and the "pass-through" issue; and then from the standpoint of multilateral trade, using a model originally developed by Paul Armington. The next three sections focus on quantitative estimates of the long-run effects of the realignment. The first reports an extension of the Armington model, under several assumptions about the relevant demand, substitution, and supply elasticities; it develops a figure of a bit less than $8 billion for the swing in the U.S. trade surplus from a 1971 base, and consistent estimates for the whole trade matrix. Next comes a brief discussion of the empirical model for U.S. bilateral trade developed by Stephen Magee, which provides estimates of the U.S. row and column of the world trade matrix.

This article analyzes developments in the 1970 balance of payments in the U.S. Lawrence Krause asked whether the trade balance was tracking its usual relationships to demand changes in the U.S. and abroad. This paper extends his question to (a) the basic balance, defined as the current account plus the net direct investment account and (b) the balance on private financial capital, that is, private capital flows other than direct investment. In 1970 the balance on merchandise trade was $2.2 billion, up from $0.6 billion in 1969. Exports rose from $36.5 billion in 1969 to $42.0 billion in 1970, an increase of $5.6 billion, or 15 percent. Adjusted for the 1969 dock strike, which shifted exports from late 1969 into early 1970, exports rose by 12 percent in 1970, compared with 13 percent in 1969. Imports rose from $35.8 billion in 1969 to $39.8 billion in 1970, an increase of $4.0 billion, or 11 percent. The usual definition of the basic balance includes, above the line, the balance on current account plus net flows of private long-term capital, both direct and portfolio investment. In the wake of the sharp decline of interest rates that began in 1970, there occurred a substantial outflow of private financial capital in 1970, which will probably continue, at a diminished rate, in 1971.

This article analyzes quantitative credit controls in the U. S. as of 1971. While public discussion of credit controls seems to have waned with the restoration of easier conditions in financial markets, an examination of their economic consequences appears worthwhile for at least three reasons. First, in the nature of things, a bout of financial stringency is certain to recur some day and the advocacy of credit controls as an anti-inflationary device is likely to recur with it. Second, credit controls as applied to banks share some features with other devices recently employed in the U.S. Third, some proponents of credit controls favor them mainly as a means of influencing the composition of aggregate demand rather than as a technique for restraining its total. The paper will consider the following kinds of credit controls: (1) quantitative limits on total bank credit, but not on the composition of bank credit, (2) quantitative limits on specific components of bank credit such as loans to business, finance companies and consumers, but not on the total and (3) quantitative limits on effective demand for credit--specifically, controls over corporate capital issues. Generally speaking, the main interest of credit controls seems to lie in their potential for altering the incidence, rather than the overall efficiency, of restrictive monetary policies.

This paper attempts to predict the response of the rate of inflation to alternative paths of economic recovery--that is, to estimate how much more rapidly prices would increase if full employment were to be attained swiftly rather than gradually. The model developed postulates that the primary force driving the rate of inflation is the determination of wages in the labor market. The dominant role this model assigns to wages in the inflation process justifies the disproportionate emphasis that it receives in the following discussion. The theory of wage determination used is similar in its general features to the approach taken by most previous econometric research. The determination of price expectations has become an increasingly popular subject for research in recent years as the accelerating pace of U.S. inflation has made the topic more relevant. The rate of inflation is increased permanently when labor market tightness increases to a new higher level. The rate of inflation at any given time also depends crucially on the expected rate of inflation inherited from the past. Factors that contribute to temporary increases in the rate of inflation are increases in social security or personal income tax rates, a sudden acceleration of the demand for commodities and a sudden deceleration of output, which causes a decline in the ratio of actual to standard productivity because of lags in hiring and firing.

The article presents the comments of several economists concerning the analysis of Arthur Okun and Nancy Teeters on the problems associated with the full employment surplus in the U.S. Warren Smith stresses that he has been skeptical about the usefulness of the full employment surplus. He states that the function of the surplus calculation is to provide a summary number that will offer a prime estimate of the impact of the budget on the economy. He claims that this concept is not applied in Okun and Teeters report. Meanwhile, R. A. Gordon denotes that he has a few difficulties and many agreements with the paper. On the part of weighting system, he agrees on the concept to adjust expenditures, transfer payments and taxes. Moreover, discussion of Okun regarding the comments is also given.

Presents a discussion of two papers that analyzed wage-price controls in relation to inflation. Criticism of the papers.