Friedman warns on inflation

There was a cartoon the other day showing Jimmy Carter about to enter the door of the White House. Balanced uneasily above the lintel was a barrel of oil and standing inside the room, crouched against the wall, was a gleeful Arab. There's nothing very original or ingenious about this simple drawing but then there's nothing necessarily original or ingenious about most nightmares and you may be sure that if Mr Carter has one recurring nightmare, or daymare, this is it.

One of the American sights that amazes foreigners these days is the return of the giant American automobile. Nobody, so far, has thought to restore those swooping tail fins of the 1940s and Fifties which made American cars look like some sort of mechanical whale and gave such mischievous delight to Italian peasants watching these amphibious monsters try to negotiate the back alleys of Naples, Florence, say. 

We used to say, only two years ago, that the ill wind that blew out of the oil-producing countries and their cruel price increase was the decision it forced on the automobile manufacturers to return to small cars, what became known as 'compacts'. I hired a car a couple of weeks ago and the girl asked me what I preferred and I said, 'A compact'. But I seem to be already out of touch with the elasticity of the American language so that when I arrived at the car hire agency I was shocked when I was shown to a gleaming pantechnicon. 'This,' I said, with a sarcastic inflexion, 'is a compact?' 'This', said the man, 'is a compact.' 

A year or more ago, I noted with relief, looking over the figures of car manufactures coming out of Detroit, that the bulk of the cars being put out were compacts. That's the trouble with reading the newspapers. Statistics don't prepare you for what happens to the language in life. What we now call a compact is what we used to call a monster. In other words, the big American car is back and when I took this up with a man from Detroit, he told me it was none of the manufacturers' doing. It took less than a year after the Arabs upped the price of oil for Americans to accept as a fact of life that petrol is 65 cents a gallon instead of 37 cents. And once they came to accept it, in the wake, naturally, of wage increases in the basic industries, then it was the customer, not the manufacturer, who began to clamour for a return to normality. 

And yet, every responsible economist in sight and lots of anxious politicians are worried sick that when the Arab oil-producing nations meet this month they will seem to be ready with another thunderbolt. Eighteen months ago, Americans went around boasting that they'd got a car which did 30 miles to the gallon. A month ago, I was picked up at an airport by a large, sleek, black limousine. I had this long, silent giant meet me because I was arriving at the airport with an invalid. I asked the driver how many miles he got to the gallon. 'Eleven,' he said, casually, 'maybe twelve.' The air-conditioning, you know, doesn't help and most American cars now have air-conditioning. 

Well, this fool's paradise, I'm reliably told, could come crashing around our fuel tanks any day. And if it does, Mr Carter's going to have to forget a score of high-minded promises he's made and when he's asked again, in what ways the American people are going to have to tighten their belts, he'll have a far more brutal answer than the one he gave in, I think it was the last of the campaign debates with Mr Ford. 

From all I hear, there is nothing that an American government can do, whether it's run by Ford or Carter, to prevent the Arabs doing what they want to do whenever they feel like it. This week, however, American industrialists did something that could actually encourage, certainly justify, the Arabs to drop the other shoe, or thunderbolt. The steel and aluminium makers, no doubt taking advantage of the fact that the Ford administration is a lame duck and the Carter administration is not yet born, announced stiff increases in the price of their products – and this happened a day or two before the government published its official economic indicators for October. The result was an immediate plunge of stocks on Wall Street. 

The two most plausible reasons given were that the higher cost of steel and aluminium automatically depressed manufacturers and there was a natural pause on the part of investors until they saw which way the economy is going. Well, the official report was bad. The usual complexities of what we lump under the name of the national economy had been fed into the computers and come up with a prediction that few people had expected, which is that there is going to be a new wave of inflation. 

Now we assumed, I assume, that Mr Carter's roster of advisers assume that inflation is, more or less, under control in spite of the campaign rhetoric. And the recipe Mr Carter was preferring, to give a jolt to the sluggish economy, was – wouldn't you know it? – a tax cut. He'd never promised this in the high-flown days of the presidential campaign but, like every other president of the past 12 years, when the economy starts to doze, the automatic prescription for waking it up is cut taxes. Then there'll be more money in people's pockets and they'll go out and spend it, right? 

Right. So then there aren't enough goods for all the people who want to buy them. So then the price goes up, which leads the customer to scream that his pay packet isn't enough to buy the things he wants. So then we have some strikes. They're still called by that humble name in the United States, which is an odd thing since Americans love polysyllables and it's they who should have invented the phrase 'industrial action'. Then there's general inconvenience for a while till the strikers win. They get more money and can afford the fewer goods until, for one reason or another, the price of the goods goes up again. 

Well, this is such a tedious roundabout that most of you must be bored stiff being reminded of it. But we're all on it, Americans as well as Britons, and the simplicity of it, the maddening simplicity of it, drives ordinary people to drink – if they can afford drink – and drives intellectuals into orgies of scorn, for, to an intellectual, there is no such thing as a simple explanation of anything. Simple explanations are called 'simplistic' and are, therefore, contemptible. 

But from no quarter, expert or lay, have we had any effective solution. It was, therefore, fascinating to hear this week from an expert economist with a terribly simple solution. Dr Milton Friedman was, I don't know if you can say 'is', President Ford's chief economic adviser, which would instantly rule him out among Democrats and Socialists as simply a stand pat Republican economist with a prejudice against public works and deficit financing, which means spending money that you haven't got. 

But Dr Friedman is something more considerable than that. He's regarded around the world as the classic exponent of what you might call 'the new economics', the modern rebuttal to John Maynard Keynes and, a few weeks ago, Dr Friedman received the Nobel Prize for Economics. He's not a man to be sniffed at, even by non-economists who think him simplistic. 

As a fact, Dr Friedman achieved something in the two years of the Ford administration which President Ford, strangely, never boasted about in his debates with Mr Carter. He mentioned it in a tentative, almost apologetic fashion, which is that, in those two years, inflation in America was cut exactly in half, went down from 12 per cent a year to six per cent, making it the lowest rate of the Western countries outside Germany. Yet, in the debates, Mr Carter was so much more effective as a Jeremiah and kept lamenting, without contradiction, that inflation was ruining the country. 

Well, now Dr Friedman has been to England and he takes an alarmingly dim view of the economic future of Britain. Not because he's an Anglophobe. On the contrary, he's a great admirer of Britain and her resources, especially of her resources of intelligence and moderation. But this week he issued a warning to both of us, the same warning because he sees us all on the same treadmill or roundabout and he thinks that Britain will be the first to get dizzy and collapse. 

In the current issue of Newsweek magazine, he wrote a piece called, 'From Jimmy to James' – the Jimmy being Mr Carter and the James being Mr Callaghan – and he laid it promptly on the line. The advice Mr Carter is getting from his new economic advisers is 'cut taxes, increase government spending, get the Federal Reserve Board to boost the rate of monetary growth and the economy will take the big leap forward.' 

Dr Friedman thinks it's bad advice. It's precisely the prescription which Mr Callaghan rejected at the Labour Party conference in September and Dr Friedman, admiringly quoted Mr Callaghan's key sentences, which were: 'We used to think that you could just spend your way out of a recession and increase employment by cutting taxes and boosting government spending but, in so far as this option ever existed, it only worked by injecting bigger doses of inflation into the economy followed by higher unemployment as the next step. That is the history of the past 20 years.' Unquote. 

Dr Friedman says 'Amen' and he calls it one of the most courageous statements ever made by a leader of a democratic government. He says it's been the policy of every British government, Labour or Tory, since the war, and of almost every Western government and that it leads to bankruptcy. And Dr Friedman now sees the United States going the same way. Indeed, he says she has been going the same way, more slowly, and was arrested for the eight years of the Eisenhower regime – and this is odd – because we had a non-political president. 

If Mr Carter listens to his advisers, Dr Friedman sees in 1980 drastic unemployment and drastic inflation.

Well, the cure seems to be to persuade governments to stop printing money and maybe to get the people to elect a non-political president or prime minister or whatever, which is, certainly, a novel prescription. 

I don't second Dr Friedman, necessarily, but he has certainly appeared to describe the disease. He's a world famous diagnostician. I'm simply reporting what the man said.

This transcript was typed from a recording of the original BBC broadcast (© BBC) and not copied from an original script. Because of the risk of mishearing, the BBC cannot vouch for its complete accuracy.

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