76-06-A3
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Unemployment and Inflation III
TranscriptMost people relate inflation to higher prices, and rightly so. Inflation occurs when there is an increase in the money supply without a commensurate increase in goods and services on which to spend the money. But people spend it anyway, bidding up the prices on existing goods and services. The greater the money surplus, the greater the inflation and the higher the prices. Many economists believe that there is also a direct correlation between inflation and the number of available jobs. The more inflation, the more jobs; a reduction in inflation causes a reduction in the number of jobs and therefore, higher unemployment, or so the thinking goes. And, as far as it goes, it's probably correct. But it doesn't go far enough. Higher unemployment can be the product, not only of fewer jobs, but of more people wanting to work, and that is at the heart of our current unemployment problem. The size of the labor force is growing faster then the size of the labor age population as more and more wives and children try to become second and third workers in their families just to make ends meet. Inflation itself has become a cause of unemployment, and the probability is that the unemployment rate will continue to rise no matter what happens to inflation. Now the evidence is mounting that inflation is about to take off on another double-digit ride. In September and October wholesale prices rose at an annual rate of 9%. Industrial prices in October rose at a 12% annual clip. Wholesale food prices were slightly lower, but, due to prolonged draught conditions in many of our farming areas, large increases in food prices seem likely to occur in the next six to nine months. Perhaps the most disturbing news is that prices of crude materials, those used in the earliest stages of manufacture, rose in October at the fantastic annual rate of 48%. These double-digit wholesale price increases foreshadow, by a few months, double-digit retail price increases , and that means the return of double-digit inflation. If you remember the inflation of 1974, followed by the recession of 1975, you'll have some idea of what could be in store for us the next two years. Only this time, it will be worse, because rising inflation won't lower, even temporarily, the unemployment rate. More and more families, squeezed by inflation will seek second and third jobs, and the unemployment rate will go up right along with the inflation rate. And the recession which will surely follow, with its layoffs and plummeting sales, could be twice as bad as the last one. How will the government try to stem the inflation it has created? Next time I'll talk about that. This is Ronald Reagan. Thanks for Listening. |
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