Dr. Corrigan became president and chief executive officer of the Federal Reserve Bank of Minneapolis in 1980. Prior to coming to Minneapolis. He was senior vice president at the Federal Reserve Bank of New York and served as a Special Assistant to Federal Reserve board chairman Paul Volker as chairman volkers assistant. He was instrumental in the passage of the monetary Control Act of 1980 regarded as the most significant piece of banking legislation passed since the 1930s his familiarity with our economic system and particularly with the problems of Minnesota, and the region we share will be a great benefit as we continue our review of our state's economic future friends, please welcome. Dr. Gerald Carter. Thank you and good morning, as we will go along. I think you will find it in general my view in terms of economic prospects are not very different than those described by Walter and indeed are those implied by the 37 adjectives that he referred to? More fundamentally. I think you may find my perspective at least and maybe to your surprise that in very broad terms. I must say that my view of the future both its challenges and its problems are not to that fundamentally different than Walters either including one point he made earlier and that is that an unfortunate reality of the past few years or so has been that the Federal Reserve and monetary policy have unfortunately as I suggest then put in the position of having to tackle this beastly inflation problem largely, if not, exclusively on its own. And it is inevitable that when one instrument of public policy is put in that position that we do get some of the distortions and imbalances that you and I are all too familiar with. More basically, I I genuinely appreciate the opportunity to be with you today and to share with you my thoughts and the major economic trends that have and will have a particular bearing on Minnesota's economic future. That is not an easy task under the best of circumstances. But in today's world, it is even more difficult because in my judgment the degree of interdependence between the states economy the national economy and indeed the world economy around geometrically. Elements of that interdependence were always present but it seems to me that games and Technology changing patterns of resource availability and highly efficient financial markets that greatly increase that interdependence today, for example, as you know, wheat production levels in the Ukraine in the exchange value of the dollar in Tokyo the far greater implications for the Minnesota farmer an ironworker and they did a few short years ago. In that setting I think it can be said a fairly and squarely at the current economic situation within the state is nothing more than an extension and a reflection of the more generalized difficulties. We are facing around the world and around the country. The symptoms of those problems are all-too-familiar, you know them as well as I and I do not in any sense refer to things like high unemployment and deed very high unemployment the symptoms surely they are problems of the first order in their own right but in a more fundamental way, they are symptoms growing out of earlier circumstances and earlier events. And I think it's important indeed a vital part of our perspective on our current and future situation that we recognize from whence we came. The answer to that question is both simple and complex. It is complex because each of us I think can take off a long and legitimate list of facts figures and circumstances that have helped to contribute our to our current economic light. Failure is going back a decade or more for example to face up to the needs to finance the Vietnam War in a timely way opaque in the energy price of private place and supply problem of the 70s. Recurring deficits in our federal fiscal Affairs intervals of excessive money and credit growth and periodic periodic episodes of rising interest rates, sometimes associated with credit crunches in which the supply of credit at any cost was virtually unavailable for certain sectors of the economy. At least we forget most important of all in my judgment is that the decade of the 1970s witnessed a cumulative rise and the rate of inflation? That process of accelerating inflation peaked in early 1980 when the headlines of our daily newspapers told of inflation rates running an excessive 15% in an environment of heavy speculation and precious metals Fine Arts mines and other collectibles. The retrospect it is not difficult to understand why that process of Ireland inflation was associated with lower rates of savings investment lower rates of productivity growth and record high levels of interest rates. Nor with the benefit of hindsight, is it difficult to see why that process of inflation was so conducive to patterns of excessive borrowing and leveraging. Taken by themselves any of these things would have at some point produce serious problems down the road. However has with most economic phenomena these elements had an interactive an accumulative effect, which further complicated the situation and virtually assured that the corrective process would be difficult and painful. What I'm suggesting of course, is that the fundamental error of our ways that most directly accounts for the severity of our current economic problems rests with the fact that we as a nation deluded ourselves into thinking that we could somehow live with a little more inflation. That statement coming at this point in time and coming from a central Banker May to some of you strain the limits of credibility. However, I think it is important for ticul early in today's context that we not lose sight of that earlier experience and Dade. I hope and I fervently believe that we have come to the point where we fully appreciate the hard fact that accelerating inflation and sustained economic growth are fundamentally and in all terribly in conflict. The transition from that environment of rising inflation has been long difficult and painful in part because attitudes and expectations condition by 10 or more years of experience do not change quickly or easily. however The failure to have made the transition would have only meant that we would have again come eyeball to eyeball with the same hard choices a year or two or five from now the difference would be that at that later date. The choices would be harder and I can guarantee you the cost would have been higher. If that is a bit of an overview as to how we got where we are. What's an about the outlook for 1983 and Beyond. Is my judgment the outlook for a modest? I think that's one of the 37 edgic does economic recovery in 1983 is quite good. In the first instance is Professor Heller suggested that recovery should be driven largely by consumer spending and a quickened pace of housing activity. Business spending on the other hand tempered by very low rates of capacity utilization as reflected further in this morning's paper is not likely to provide much added thrust to the economy for some time to come. And they this is one of the reasons why the so-called consensus forecast for 1983 does portray a pattern of economic expansion how that is slow relative to what we have seen in the early phases of most periods of economic recovery. that notwithstanding You should also emphasize to you that I believe very firmly that we can achieve economic expansion in 1983 and a climate of further reductions in the rate of inflation and outcome that in my view is essential if we are to successfully chip away at inflation premium that is built into the current structure of interest rates. LOL, I am guardedly optimistic about the outlook for 1983 the real issue as I see it is not the prospects for economic activity over the next few quarters. The real issue is creating and maintaining the conditions and the environment which will permit and encourage sustained not inflationary economic growth over time. Now on that score to I believe there is room for optimism. Much has been accomplished in re-establishing those fundamentals, which will permit the economy to work. Well over tire inflation is down, but not out. There are tentative signs that savings habits may be moving back toward more normal levels consumer balance sheets have been greatly strengthened. The prospects for at least no near-term and sharp gains in productivity are great. And like Professor Heller, I do believe that we have developed an appropriate sensitivity to the costs associated with excessive regulation and that we seem now to have a clear view of the remaining problems that need to be dealt with if we are to bring this process. I spoke earlier of how events in the 1970s interacted accumulated to produce the subpar patterns of economic performance. We are still witnessing today. the point I am suggesting here is that we are not that far away from reversing that situation in a way that events will interact and cumulate in a positive direction of lore inflation higher savings investment and higher productivity producing in the aggregate the expanding patterns real income growth and Rising standards of living that we are all so well for millier that this economy can produce We are not yet at that point, but in my judgment, it is easily Within Reach. Let me not deceive you. However, there are uncertainties and elements of downside risk both in the short-term and the longer-term you can unlock Outlook. In the immediate setting for example consumers could retrench further as they react to high and employment recurring evidence of financial stress and still historically high levels of interest rates. similarly the financial shock here or elsewhere around the world could further undermine business confidence and consumer confidence. Well, these are other possibilities Shirley underscore the need for vigilance and flexibility the weight of evidence in my judgment solidly points in the positive direction. I outlined earlier. Longer-term it's a closer call. In that context the potential array of problems is more formidable. Will wait for example C Business and labor build on the renewed sense of discipline in the price and wage setting process that has materialized in the past year or two. Similarly will we see a pattern of worldwide economic growth that will support a much-needed resumption in more normal patterns of World Trade their by suppressing Tendencies toward protectionism and helping developing countries to finance their large if not massive debt burdens. These and other questions are important but in a way even though they are outside our direct and immediate control. Closer to home the single most troubling Cloud over the longer-term because I'm a cop look is again as Professor Heller suggested the prospect of large if not, massive structural deficits in our federal fiscal Affairs for years to come. Even assuming the very best in terms of economic performance between now and the 1980 587. We still would be looking at the prospect of budget deficits of a hundred billion dollars or more at that time. in my judgment that string of large structural deficits and the associated financing needs of the treasury constitute a major impediment to achieving that pattern of sustained and balance the economic growth to which I referred to earlier. The solution to the long-term structural deficit problem will not come easy for it will involve lower levels of government spending and or higher taxes in a context in which every line in the budget has its own powerful constituent and interest groups, but here to like Professor Heller. I am optimistic that we have both the capacity the knowledge and the will to deal with that problem in the context of a multi-year effort and that's what's needed. It's not something that we have to deal with in one shot it can and indeed should be dealt with over a. Of time. Obviously cuz I will mention in a minute the federal budget situation has important implications for the budget problems here in the state of Minnesota. And that added federal dollars simply will not be there in the context of the federal fiscal problems to assess this state or other states in meeting their own physical problems. monetary policy is Professor Heller suggest obviously has a role to play here to Fundamentally that role comes down to the Federal Reserve in my judgment persisting and it's policies of disciplined and restrain growth in money and credit. That process must go forward and we'll go forward but obviously in a context in which the FED is not alone in the process with discipline and restraint the manifestations of that process take on a slightly different form. And in that context. I too would agree that the prospects for further relief on the interest rate side might be there. But achieving lower interest rates is not a question of the Federal Reserve waving a magic wand and Dade recent events. I think of suggested that very clearly over the months going back roughly 2 Midsummer, for example, we had a string of 6 or so reductions in the Federal Reserve discount rate. and each of those occasions the reduction in the discount rate was quickly followed by further reduction in Market rates of Interest. In mid December 9th, or the I guess it was nice and a string of Interest are discount rate reductions was made moving that rate down another half point. But in that case unlike the six that had preceded it Market interest rates did not till down they went up they went up presumably because the financial markets at least we're sending some kind of a signal that maybe that price has had gone too far. Maybe we're going too fast. Maybe it raised again the Specter of more inflation further down the road. So well, I certainly hope that we can find our way free to see further reductions and interest rates. I don't think the Federal Reserve has quite the degree of an overing room that perhaps others dip. I'm looking more directly and specifically at the Minnesota economy again, I believe that the prospects for the state's economy in 1983 are distinctly better and their performance experienced in 1982. Having said that however, I too will confess that at this juncture. It seems to me unlikely that Minnesota can expect to share fully in the early stages of economic recovery primarily because it is difficult to foresee a near-term and generalize rebound a farm prices and farm income in any size. While on the subject of the state's economy. Let me digress for a moment to touch on questions that have been raised about the future of basic Industries in this country and by implication the sources of raw material supply for those basic Industries. These questions reflect among other things the well-documented and interrelated Trend toward a service-oriented economy and the intense degree of competition from a bra. Well, I am not willing to speculate that basic Industries such as autos and steel. We're necessarily regain the peace achieved in earlier years. Neither. Am I among those who believes that are basic Industries are doomed. I say that in part because our competitors are bro. Again is Professor Heller suggested are not without their own problems. And I also believe that in a climate of higher savings and capital formation in this country. The needed adjustments in those basic Industries can be forthcoming. I should add. However that in these industries even more than another's continued restraint on wages and prices must be an essential and ongoing part of the adjustment process. Obvious implication of all that I have said here is that moderate growth and economic activity will help the state's budget problems. But in the near-term that help is going to be of modest proportions indeed the overall situation as I see it points to several new realities for state governments. The first in the particularly painful reality, is it state and local governments are near the short end of the financial stick. As we wind out inflation, for example, the ever-present budgetary squeeze and state and local governments mounts on the expenditure side a high percentage of your out laser for healthcare and education and services. Generally. These are the areas in which the overall rate of inflation has proven most sticky at the same time high interest rates and high levels of unemployment balloon other expenditure categories at the same time the recession cuts into your Revenue flows. The second reality is that within those circumstances? It is my perception that the bandwidth in which you operate has been narrow. Stated differently if you sense that you have less Freedom fewer choices is my judgment that you were right. Perhaps events for reverse that situation. But even if they do it will take time in the meanwhile. It seems to me that the situation requires that the options and choices that are left to you must be exercised in the context that realistically takes into account the larger picture to which this conference is the vote. The reality of those narrow bands of course does not mean that you were impotent quite to the contrary the challenges remain and will I have no particular insights or expertise as to how best meet those challenge challenges? I would offer a few brief comments. first the state's budget must be balanced and is You full well know it must be balanced in the context in which added federal dollars will not be there in a context in which significant adjustments have already been made. No circumstances, it seems to me that the need for rigorous discipline will continue far into the future and in those circumstances. It might be well to form budget strategies with a view toward not just balancing the budget but regaining AAA Bond rating status that would provide a cushion in the budget that will also save some money on interest expenses. But more importantly it would provide both businesses and individuals with some assurances that they are not faced with the prospects of recurring an unanticipated future tax increases Secondly, I think we have to inevitably focus more aggressively on the cost-effectiveness of programs. Not simply their cost. Has a related point and if we are to have that greater success in managing our governmental Affairs, it seems to me and evitable that we must be prepared to consider the possibility of paying higher salaries to where I seen your appointed governmental officials stated more bluntly can state governments attract the best and the brightest traits that are surely needed to run complex and large institutions, but all too often the salaries paid to these individuals are at best, Provo to middle management positions in private institutions. Last and most importantly it seems to me as we consider the tough and politically charged questions of text structure and spending program allocations. It must be recognized that once perceive trade-offs between social so-called social programs and business programs are increasingly illusionary. Do not mistake. My point Shirley governments can and must provide a basic level of services. However, in the final analysis the way we tax in the way we spend time together to contribute to an environment that is conducive to economic growth and Commercial Vitality indeed only is in a setting of commercial Vitality. Can we reasonably expect to provide the income growth in the tax base that will permit us to meet those social and environmental goals. Should have always been so closely associated with the legacy of the state of Minnesota. I hope it is clear for my remarks that I see the possibility of some bright new days on the economic Horizon. I hope it is clear that I do say that we are within reach at a national level and which those conditions will come together that will permit the economy to truly work. Well again, Achieving a full measure of that Vision will not be easy. It will take wisdom leadership and continued discipline. Is a relative newcomer to the state of Minnesota. I can appreciate perhaps some ways different than you the capacity of this state and its leaders to be on The Cutting Edge of that process. Thank you.