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SIMON SCHOOL DEAN: THREATS OF DEFLATION AND GLOBAL OVERPRODUCTION ARE NONSENSE
Rochester, N.Y.--December 11, 1997--Charles I. Plosser, dean and John M. Olin Distinguished Professor of Economics and Public Policy at the William E. Simon Graduate School of Business Administration, presented his outlook for the 1998 U.S. economy on Tuesday, December 4, 1997, at the 19th annual Economic Outlook in Rochester, N.Y. He took issue with what he called the "new gloom-and-doom mantra"--a worldwide glut in industrial capacity creating the risk of a devastating deflation.
Plosser's talk was entitled "Global Glut, Deflation and Other Nonsense." Co-presenter Roger E. Shields, managing director--Head of the Country Risk Management Group, Chase Manhattan Bank, spoke on "Southeast Asia: Is the Miracle Over?." The Economic Outlook was sponsored jointly by the Simon School, the Greater Rochester Metro Chamber of Commerce and Chase Manhattan Bank.
The Global Glut Theory "The global glut theory is gibberish," Plosser stated unequivocally. "Its flawed logic does not stand up to even the simplest economic scrutiny." The "global glutters," according to Plosser, seem to base their main thesis on three propositions: (1) in many industries, existing companies are capable of producing far more than the world's consumers can buy, (2) technological and productivity enhancements will exacerbate this excess supply of goods, and (3) developing countries are net suppliers of goods, and do not contribute adequately to the demand side.
Although Plosser agreed that there may be excess worldwide capacity in certain industries, leading to a decline in market prices relative to prices of other goods and services, he said that it does not follow that there is excess capacity in all industries. "Global glutters," he said, "have taken a few specific anecdotal observations and grossly over-generalized."
Technological progress in manufacturing, Plosser said, has been making it possible to produce a greater abundance of goods with fewer workers for almost 200 years, since the beginning of the Industrial Revolution. It has not led to gross excess supplies of manufactured goods or a general deficiency of demand, he pointed out. "The global glutters," said Plosser, "offer no explanation as to why such basic economic forces won't continue to operate."
Deflation Plosser also discussed a second group of deflationists, who focus less on the global glut and more on the prospect that the U.S. will "import" deflation from developing countries. They argue that as their economies approach collapse, these countries will cut prices dramatically, resulting in falling import prices in the U.S. Competition will then cause declines in domestic prices and the U.S. will suffer deflation.
The major missing element in both deflation scenarios, said Plosser, is that no mention is made of monetary policy. "We all know by now," he explained, "that sustained inflation is always a monetary phenomenon. You simply cannot have significant inflation without rapid expansion of the monetary supply. By like token, any significant or sustained deflation would have to be driven by dramatic reductions in the growth of money. And unless the Federal Reserve becomes substantially more stingy with the growth in money than it has been, deflation is not in the cards."
The Forecast for 1998 Calling 1997 a "remarkably good year so far" and stating that consumer confidence and spending remain strong "despite the turmoil in the Far East," Plosser predicted a moderate growth in GDP of 2.7 percent for 1998. He said that the unemployment rate is at its lowest since 1973 and is "not likely" to change very much in 1998, remaining between 4.5 and 5 percent. "Today, it is not jobs that are scarce, but qualified workers," Plosser stated.
Acknowledging the determination of the Federal Reserve and its "increasingly credible commitment to low inflation," he forecasted that in 1998 the inflation rate will remain in the 2.0-percent range. Plosser issued a warning, however: "Inflation can and surely will return if the Fed is pressured into using monetary policy to improve real economic growth or to fight nonexistent deflation." What the U.S. economy needs to sustain a higher growth rate is improved long-term productivity growth--something that is, according to Plosser, "beyond the scope of the Fed and monetary policy."
Plosser also expects that short- and long-term interest rates will not change much "on average" in 1998. He emphasized the "on average," stating that there is "reason to believe that uncertainty and thus volatility is likely to remain high in the near future, especially in financial markets."
Southeast Asia: Is the Miracle Over? According to Chase Manhattan's Roger E. Shields, the miracle is not over in Southeast Asia--but rather, "on hiatus." Calling the economic growth of Southeast Asian countries a "spectacular achievement," Shields asserted that their performance was "as advertised."
"However, every economy needs to make adjustments during periods of growth," Shields stated. "The Southeast Asian economies failed to address some structural issues, and will now have to do so." It will be a painful process, he predicted, more so for some countries, like Thailand, than for others, like the Philippines. "Some countries may experience a very bad year--like Mexico did," Shields said, "but we can expect everything to work out in the end."
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EDITOR NOTE: Copies of Charles I. Plosser's talk, "Global Glut, Deflation and Other Nonsense," which includes his Economic Forecast for 1998, are available upon request. Please call the Simon School's Office of Public Affairs at (716) 275-3736; or fax: (716) 275-9331; e-mail: [email protected].
Information about the Simon School is also available on the World Wide Web at http://www.ssb.rochester.edu.
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