WEBVTT

1
00:00:02.480 --> 00:00:05.100
<v ->Welcome once again as MIT professor Paul Samuelson</v>

2
00:00:05.100 --> 00:00:07.280
discusses the current economic scene.

3
00:00:07.280 --> 00:00:08.430
This series is produced

4
00:00:08.430 --> 00:00:11.240
by Instructional Dynamics Incorporated.

5
00:00:11.240 --> 00:00:14.380
Professor Samuelson, near the midpoint of the third quarter,

6
00:00:14.380 --> 00:00:15.743
how does the recovery look?

7
00:00:19.300 --> 00:00:22.123
<v ->This is a good time to take stock.</v>

8
00:00:23.110 --> 00:00:28.110
I have before me a series of the newest forecasts for the

9
00:00:29.080 --> 00:00:34.080
next year and beyond by the usual consensus forecasters.

10
00:00:34.140 --> 00:00:38.517
I have the brand new Wharton School forecast,

11
00:00:38.517 --> 00:00:43.517
the Albert Summers private forecast from the conference

12
00:00:46.860 --> 00:00:51.860
board, the new Chase Econometrics forecast,

13
00:00:52.210 --> 00:00:57.140
the new DRI forecast, and they all tell pretty much

14
00:00:57.140 --> 00:01:02.140
the same story, they all are fairly in agreement that

15
00:01:04.018 --> 00:01:07.880
we reach bottom some time around May,

16
00:01:07.880 --> 00:01:12.390
that we are now in the first year of a recovery.

17
00:01:12.390 --> 00:01:17.390
And I would have to say that by and large, the new batch

18
00:01:18.760 --> 00:01:23.220
of forecasts are a little bit more optimistic,

19
00:01:23.220 --> 00:01:28.220
a little bit more expansionary in terms of real growth,

20
00:01:28.430 --> 00:01:33.150
a little bit more sanguine with respect to the developments

21
00:01:33.150 --> 00:01:37.940
of the unemployment rate than the last ones.

22
00:01:37.940 --> 00:01:41.830
These consensus forecasters move, but they move like a

23
00:01:41.830 --> 00:01:46.830
glacier pursuing a reality as it develops.

24
00:01:47.810 --> 00:01:52.810
Now, you may ask are they, other than reacting to the

25
00:01:53.780 --> 00:01:58.130
fact that their hopes that we would have a turn seem

26
00:01:58.130 --> 00:01:59.663
now to have been confirmed?

27
00:02:00.560 --> 00:02:04.560
And I guess I would reply to that leading question,

28
00:02:04.560 --> 00:02:09.210
yes, they've taken courage, bottle courage you might say,

29
00:02:09.210 --> 00:02:12.640
from the fact that what they thought was going to happen

30
00:02:12.640 --> 00:02:13.563
has happened.

31
00:02:14.770 --> 00:02:19.730
But I would hasten to point out that that is necessarily

32
00:02:19.730 --> 00:02:24.730
irrational, that there is a great deal of momentum in any

33
00:02:26.380 --> 00:02:30.970
business cycle situation, and if you do finally get

34
00:02:30.970 --> 00:02:35.970
a peak at a turn in process, that should probably,

35
00:02:36.680 --> 00:02:41.403
rationally, lift your conditional probabilities.

36
00:02:43.480 --> 00:02:47.100
I used to say, you've heard me say it, that in the first

37
00:02:47.100 --> 00:02:51.870
year of a recovery, the consensus forecasters are sort

38
00:02:51.870 --> 00:02:56.490
of looking to six to seven percent real growth in the first

39
00:02:56.490 --> 00:03:01.490
12 months after the middle of 1975, and for some policy

40
00:03:07.500 --> 00:03:11.200
makers, this ought to be a little bit on the low side.

41
00:03:11.200 --> 00:03:15.100
Of course, it's reassuring as against those who fear the

42
00:03:15.100 --> 00:03:20.100
continuation of the slide, and it's also reassuring as

43
00:03:20.340 --> 00:03:24.460
against those who thought that we were in for a very anemic

44
00:03:24.460 --> 00:03:25.293
recovery.

45
00:03:26.630 --> 00:03:30.700
I think if I were to take an average of all the different

46
00:03:30.700 --> 00:03:35.700
variants of the forecasters who's names I've mentioned,

47
00:03:35.740 --> 00:03:38.210
that the mean number now would

48
00:03:38.210 --> 00:03:41.893
come to at least seven percent.

49
00:03:42.980 --> 00:03:46.160
I testified before the joint economic committee not very

50
00:03:46.160 --> 00:03:51.160
long ago, and I was asked what a good target would be,

51
00:03:51.810 --> 00:03:56.810
and I this time chose the avenue of the moderation,

52
00:03:58.600 --> 00:04:03.600
and said that the seven percent real growth was a suitable

53
00:04:04.911 --> 00:04:07.793
target at this time.

54
00:04:09.120 --> 00:04:13.640
You may say is seven percent really a moderate figure?

55
00:04:13.640 --> 00:04:18.640
Well, let me simply reply that in the

56
00:04:24.150 --> 00:04:28.600
locker rooms that I frequent, it's considered a fairly

57
00:04:28.600 --> 00:04:32.291
modest thing and I've been berated if not reproached

58
00:04:32.291 --> 00:04:37.291
by some of my peers and colleagues that I didn't

59
00:04:37.770 --> 00:04:42.243
come out for eight percent and even nine percent.

60
00:04:43.470 --> 00:04:48.070
Well, a number of the forecasters have quarters,

61
00:04:48.070 --> 00:04:53.070
single quarters in the next four quarters, which

62
00:04:53.200 --> 00:04:57.820
in real terms are in the ballpark figure of two digits.

63
00:04:57.820 --> 00:04:59.074
Ten percent.

64
00:04:59.074 --> 00:05:04.074
The Ray Fair Model, which is a non-judgmental model,

65
00:05:05.830 --> 00:05:09.740
which compared to most of the names that I've mentioned,

66
00:05:09.740 --> 00:05:14.740
is a model of a few variables, it has a 12% rate of real

67
00:05:17.070 --> 00:05:20.980
growth in one of these last two quarters of the year,

68
00:05:20.980 --> 00:05:25.980
mostly due to the inventory turn around, kind of a slingshot

69
00:05:26.140 --> 00:05:29.670
effect, from the inventory deacumulation.

70
00:05:29.670 --> 00:05:32.545
We ought to take off our hat to that model,

71
00:05:32.545 --> 00:05:36.540
or we ought to take off our hat, because the model

72
00:05:36.540 --> 00:05:41.387
is now dying, this was its last forecast, professor

73
00:05:42.410 --> 00:05:46.660
Fair has I think been doing this more or less on his own,

74
00:05:46.660 --> 00:05:51.660
and it isn't so much that he's gotten tired of doing it on

75
00:05:52.740 --> 00:05:57.740
his own as that he is now working on a new model which he

76
00:05:57.940 --> 00:06:00.500
thinks is a better model.

77
00:06:00.500 --> 00:06:05.500
In his post-mortem, in his requiem eulogy of the Fair model,

78
00:06:08.120 --> 00:06:13.120
He said that in terms of its X-post forecasting record,

79
00:06:15.600 --> 00:06:19.930
that is if you put into the model, the correct exogenous

80
00:06:19.930 --> 00:06:22.450
factors after you know what they're going to be,

81
00:06:22.450 --> 00:06:25.086
and don't have to rely as he did on

82
00:06:25.086 --> 00:06:29.870
forecasting the exogenous factors from the unknowable,

83
00:06:29.870 --> 00:06:31.363
that it did pretty well.

84
00:06:33.220 --> 00:06:38.220
That it does as well as the X-post non-judgmental use

85
00:06:40.350 --> 00:06:42.930
of the more elaborate models.

86
00:06:42.930 --> 00:06:47.250
Hope that's not true, because it seems to me, and I

87
00:06:47.250 --> 00:06:52.250
say this in no spirit of criticism, that the Fair Model

88
00:06:54.700 --> 00:06:57.610
has been an extremely interesting experiment,

89
00:06:57.610 --> 00:07:00.410
but that it's been a disappointing experiment.

90
00:07:00.410 --> 00:07:04.730
It has shown us that without judgment, you do very badly

91
00:07:04.730 --> 00:07:06.550
in forecasting.

92
00:07:06.550 --> 00:07:09.850
I don't know how good the formal models are of the consensus

93
00:07:09.850 --> 00:07:14.450
forecasters, the Wharton model, the Chase model, the DRI

94
00:07:14.450 --> 00:07:18.550
model, but I do know that the people who massage those

95
00:07:18.550 --> 00:07:23.550
models, who adjust their constants, are quite well informed

96
00:07:25.990 --> 00:07:27.350
on what is happening.

97
00:07:27.350 --> 00:07:30.700
And there is serial, positive serial correlation and

98
00:07:30.700 --> 00:07:33.810
momentum and drift, so that you can extrapolate from what's

99
00:07:33.810 --> 00:07:38.120
happening, and so they do very much better.

100
00:07:38.120 --> 00:07:42.500
I would, for example, be inclined not on this occasion,

101
00:07:42.500 --> 00:07:45.200
but just in season and out of season to bet against

102
00:07:45.200 --> 00:07:47.030
that 12% number.

103
00:07:47.030 --> 00:07:50.704
It's just too big a shift in a short period of time.

104
00:07:50.704 --> 00:07:55.539
I think the Fair Model tells us something, a little,

105
00:07:55.539 --> 00:07:59.339
about the merits of big models versus small models.

106
00:07:59.339 --> 00:08:02.270
You know, you can have a model which is so big it just

107
00:08:02.270 --> 00:08:04.060
falls of its own weight.

108
00:08:04.060 --> 00:08:06.540
There was the famous social science research council

109
00:08:06.540 --> 00:08:08.100
Brookings model.

110
00:08:08.100 --> 00:08:13.100
It had some of the best Lieutenant Colonels, Majors,

111
00:08:13.330 --> 00:08:17.893
Generals, that we have in the econometrics army,

112
00:08:19.130 --> 00:08:24.130
but it was so big you could hardly test for its own

113
00:08:24.860 --> 00:08:29.500
consistency except for a run through the model.

114
00:08:29.500 --> 00:08:32.150
It was not good for short run forecasting and it was not

115
00:08:32.150 --> 00:08:34.300
good for long run forecasting.

116
00:08:34.300 --> 00:08:37.330
So some people said, what you really need is a two or

117
00:08:37.330 --> 00:08:39.160
three equation model.

118
00:08:39.160 --> 00:08:44.160
The Fair model is in that direction, and it has not,

119
00:08:45.290 --> 00:08:49.970
I think, done very well, certainly in X-anti forecasting.

120
00:08:49.970 --> 00:08:53.563
Which is what its main use has been.

121
00:08:54.820 --> 00:08:56.320
It's been discontinued.

122
00:08:56.320 --> 00:08:58.510
It's the same thing that's happened to the St. Louis

123
00:08:58.510 --> 00:09:01.610
Reduced Form Monatrist model.

124
00:09:01.610 --> 00:09:05.140
It certainly is simple in terms of number of equations,

125
00:09:05.140 --> 00:09:10.140
and it has done very poorly, even more poorly than the

126
00:09:11.819 --> 00:09:16.819
Fair model, and it too I think is now discontinued as

127
00:09:18.380 --> 00:09:22.280
far as published forecast.

128
00:09:22.280 --> 00:09:24.912
There is a new version of the equations which has been

129
00:09:24.912 --> 00:09:29.912
published by Dr. Lino Anderson, but I no longer get

130
00:09:33.157 --> 00:09:37.020
forecasts that tell me from quarter to quarter what's gonna

131
00:09:37.020 --> 00:09:40.320
happen to money GMP, what's gonna happen to real GMP,

132
00:09:40.320 --> 00:09:44.520
what's going to happen to the rate of increase in

133
00:09:44.520 --> 00:09:47.330
prices, and that's of course, what we would hope from

134
00:09:47.330 --> 00:09:49.083
a monatrist model.

135
00:09:50.890 --> 00:09:54.810
In the black book in which I keep all the forecasts that

136
00:09:54.810 --> 00:09:58.810
I learn anything about, I think actually the federal reserve

137
00:09:58.810 --> 00:10:03.810
bank of St. Louis has the largest squared error for the

138
00:10:04.390 --> 00:10:08.260
last half of 75, 74.

139
00:10:08.260 --> 00:10:12.877
The last half of 74 surprised everybody in its virulence.

140
00:10:12.877 --> 00:10:15.890
I think there's no exception to that statement.

141
00:10:15.890 --> 00:10:20.530
Nobody, even some of us who were on the pessimistic side

142
00:10:20.530 --> 00:10:25.530
say at the summit in September of 1975, none of us could

143
00:10:26.410 --> 00:10:30.345
foresee just how rapidly the economy would slide.

144
00:10:30.345 --> 00:10:34.600
But some of us had bigger squared errors than others,

145
00:10:34.600 --> 00:10:39.600
and it was from the federal reserve bank of St. Louis

146
00:10:41.207 --> 00:10:46.207
that of all the forecasts in my collection, both was

147
00:10:46.220 --> 00:10:50.380
respected a qualitative tone of the situation, and for

148
00:10:50.380 --> 00:10:55.380
the quantitative detail that was the largest in error.

149
00:10:55.604 --> 00:10:59.110
You can't prove anything by these simple little experiments,

150
00:10:59.110 --> 00:11:03.240
maybe if you continue them over many lifetimes, there will

151
00:11:03.240 --> 00:11:08.240
be, for the joy of judgment and eclectic discernment, a

152
00:11:09.020 --> 00:11:13.030
moral that will gradually emerge, but for whatever it's

153
00:11:13.030 --> 00:11:17.450
been worth, the experiment with the small models seems

154
00:11:17.450 --> 00:11:22.450
to have suggested that in this season, I mean now, the last

155
00:11:25.746 --> 00:11:30.746
three, four, five years, times when we certainly have been

156
00:11:32.160 --> 00:11:35.150
very desirous of getting good forecasts,

157
00:11:35.150 --> 00:11:40.057
they have done statistically, significantly worse than

158
00:11:41.110 --> 00:11:43.610
the other models.

159
00:11:43.610 --> 00:11:47.810
Well, we'll make of that what we can.

160
00:11:47.810 --> 00:11:52.810
The fact that the consensus forecasters have got their

161
00:11:55.730 --> 00:11:59.989
courage back and are looking for a fairly vigorous

162
00:11:59.989 --> 00:12:04.989
recovery, that same news, and that same feeling has spread

163
00:12:06.130 --> 00:12:07.730
through the country.

164
00:12:07.730 --> 00:12:12.730
The various indicators of consumer sentiment have shown a

165
00:12:13.620 --> 00:12:18.480
rapid rebound in consumers sentiment.

166
00:12:18.480 --> 00:12:22.810
The concern which was very widespread at the turn of the

167
00:12:22.810 --> 00:12:25.610
year, that the government wouldn't do anything about the

168
00:12:26.490 --> 00:12:31.110
deepening depression, not just recession, and that we

169
00:12:31.110 --> 00:12:35.330
would have a domino effect, slide into something like the

170
00:12:35.330 --> 00:12:40.330
1930s maybe with some real epidemics of bankruptcy and

171
00:12:41.430 --> 00:12:46.430
even of bank failures, that concern has been soft-peddled.

172
00:12:47.683 --> 00:12:52.683
The pragmatic effect of all this of course, has been one of

173
00:12:53.837 --> 00:12:58.837
the most rapid percentage rises in the United States stock

174
00:12:58.980 --> 00:13:03.980
market that you can find in the history books, from the lows

175
00:13:04.020 --> 00:13:09.020
of last December until recent times, and the stock market

176
00:13:10.830 --> 00:13:15.830
seems almost like Moses, you remember that he could lead

177
00:13:17.160 --> 00:13:21.203
god's chosen people for 40 years through the wastelands,

178
00:13:21.203 --> 00:13:26.203
but when the promised land was in sight, it was not given

179
00:13:26.210 --> 00:13:30.030
to Moses to lead his people in, and he had to turn that

180
00:13:30.030 --> 00:13:34.070
job over to Joshua or Aaron or somebody or other.

181
00:13:34.070 --> 00:13:39.070
Well the stock market seems to be able to sniff at

182
00:13:39.710 --> 00:13:44.710
any impending recovery, and to make very substantial

183
00:13:46.080 --> 00:13:47.270
progress.

184
00:13:47.270 --> 00:13:52.000
But just as the fact of the recovery was confirming itself

185
00:13:52.000 --> 00:13:57.000
to the rational eye, the market began to move sidewards,

186
00:13:57.080 --> 00:14:00.350
and even to lose ground.

187
00:14:00.350 --> 00:14:05.020
It is a possible explanation, it's so simple that I hesitate

188
00:14:05.020 --> 00:14:09.303
to give it, but I think I can overcome my hesitation and

189
00:14:09.303 --> 00:14:10.243
give it.

190
00:14:11.940 --> 00:14:16.940
There is a view, a moralistic view, that in order to know

191
00:14:18.080 --> 00:14:21.810
whether stocks will go up or down, all you have to do

192
00:14:21.810 --> 00:14:25.580
is to know what's happening to interest rates.

193
00:14:25.580 --> 00:14:28.320
Particularly volatile, short-term interest rates.

194
00:14:28.320 --> 00:14:30.902
When interest rates go down, stocks will go up,

195
00:14:30.902 --> 00:14:35.902
when interest rates go up, stocks will go down.

196
00:14:36.740 --> 00:14:41.740
It's surprising how far in the last decade, that simplest

197
00:14:43.336 --> 00:14:47.210
view would carry you.

198
00:14:47.210 --> 00:14:52.210
You've heard me mention that I know some people in New

199
00:14:53.320 --> 00:14:58.320
York who ask my advice at intervals, and they operate almost

200
00:15:00.750 --> 00:15:05.370
exclusively in terms of this simple relationship.

201
00:15:05.370 --> 00:15:09.640
And I keep telling them, it's too simple, there are more

202
00:15:09.640 --> 00:15:14.640
factors involved than this one factor, and yet they so

203
00:15:16.620 --> 00:15:20.616
to speak laugh all the way to and from the bank, because it

204
00:15:20.616 --> 00:15:25.190
has done very well for them, and done very well for them

205
00:15:25.190 --> 00:15:29.633
at a time when very few people are doing at all well.

206
00:15:33.470 --> 00:15:35.520
Why did interest rates go down last fall?

207
00:15:37.150 --> 00:15:40.630
They went down because the economy was going to hell

208
00:15:40.630 --> 00:15:45.630
in a basket, at an unprecedented and unpredicted rate.

209
00:15:49.670 --> 00:15:54.233
Strange for the stock market to go down, to go up,

210
00:15:55.770 --> 00:15:58.423
when the economy is going down.

211
00:15:59.800 --> 00:16:04.800
Nigh impossible to provide an explanation, but at first

212
00:16:05.440 --> 00:16:10.433
blush, it would seem a little bit pickwickian or ironical.

213
00:16:11.930 --> 00:16:16.870
Similarly, why are interest rates now going up?

214
00:16:16.870 --> 00:16:20.600
That's a subject which I want to discuss in some detail.

215
00:16:20.600 --> 00:16:25.600
But certainly an important aspect of the picture is the fact

216
00:16:26.730 --> 00:16:30.610
that everybody now believes that the economy has made its

217
00:16:30.610 --> 00:16:33.160
recovery, that the slide is over.

218
00:16:33.160 --> 00:16:35.910
We're no longer sliding downward.

219
00:16:35.910 --> 00:16:40.910
And therefore, given the way the federal reserve maintains

220
00:16:42.740 --> 00:16:46.110
its posture with respect to the money market,

221
00:16:46.110 --> 00:16:50.320
this tends to create conditions which I'll describe in a

222
00:16:50.320 --> 00:16:55.303
second, which tend to tighten interest rates.

223
00:16:56.739 --> 00:17:00.560
Never the less, do you want to be smart?

224
00:17:00.560 --> 00:17:03.100
Do you want to be deep?

225
00:17:03.100 --> 00:17:06.750
Do you want to be understanding and perceptive?

226
00:17:06.750 --> 00:17:08.593
Or do you want to be rich?

227
00:17:10.370 --> 00:17:15.370
I'm of course, suggesting, because I really don't

228
00:17:15.540 --> 00:17:19.720
believe that the new formula, the new philosopher's stone

229
00:17:19.720 --> 00:17:24.720
has been found, that you can just blindly watch to see

230
00:17:25.040 --> 00:17:28.880
what interest rates do and then do the opposite with respect

231
00:17:28.880 --> 00:17:30.500
to stocks.

232
00:17:30.500 --> 00:17:32.990
But it is interesting that the stock market has not been

233
00:17:32.990 --> 00:17:37.310
able to make headway since the Dow Jones' peaked out

234
00:17:37.310 --> 00:17:42.310
at about 880, just at a time when the money market has

235
00:17:43.790 --> 00:17:48.100
convinced itself that the federal reserve is tightening up.

236
00:17:48.100 --> 00:17:53.100
The money market does believe this, and let me just read

237
00:17:53.990 --> 00:17:58.990
from the Salomon brothers weekly comments on credit.

238
00:18:03.210 --> 00:18:07.973
This one is written by Henry Kaufman, a name respected

239
00:18:08.840 --> 00:18:12.883
and revered in the money market.

240
00:18:13.750 --> 00:18:18.750
It comes at the end of July, and it's therefore not out

241
00:18:21.140 --> 00:18:22.583
of season yet.

242
00:18:24.110 --> 00:18:27.697
Comments on credit, Vigorous Monatrism is the title.

243
00:18:27.697 --> 00:18:31.440
"Through a dramatic series of actions, and the congressional

244
00:18:31.440 --> 00:18:34.920
testimony of its chairman this week," that's Burns, "the

245
00:18:34.920 --> 00:18:37.360
federal reserve gave notice to the market that it intends

246
00:18:37.360 --> 00:18:40.670
to pursue a much stricter monatrist policy than in the

247
00:18:40.670 --> 00:18:42.020
past."

248
00:18:42.020 --> 00:18:45.233
I think that adjective, monatrist is regrettable,

249
00:18:48.740 --> 00:18:51.340
because its a stricter policy with respect to the interest

250
00:18:51.340 --> 00:18:56.340
rates as well as with respect to just the money aggregates.

251
00:18:57.187 --> 00:18:59.830
"This means their attempt to hold relatively short-term

252
00:18:59.830 --> 00:19:02.900
trends in the monetary aggregates within moderate bounds,

253
00:19:02.900 --> 00:19:05.880
even if that means typing money market conditions in the

254
00:19:05.880 --> 00:19:09.370
earliest stages of economic recovery.

255
00:19:09.370 --> 00:19:12.900
Successive fed open market interventions this week confirm

256
00:19:12.900 --> 00:19:15.810
resoundingly that the authorities were raising their

257
00:19:15.810 --> 00:19:18.780
target for the fed fund's rate, which for some time had

258
00:19:18.780 --> 00:19:20.093
centered around 6%.

259
00:19:21.080 --> 00:19:25.660
On Monday," this is the last week in July, "the fed sold

260
00:19:25.660 --> 00:19:28.390
a substantial volume of treasury bills for cash, when

261
00:19:28.390 --> 00:19:33.390
fed funds were quoted 16% on Tuesday, they consummated

262
00:19:33.632 --> 00:19:38.632
reverse repos with funds at six-and-a-sixth percent.

263
00:19:39.310 --> 00:19:41.370
On Wednesday, authorities entered the market to provide

264
00:19:41.370 --> 00:19:44.717
reserves only after the funds hit six-and-a-half percent."

265
00:19:45.830 --> 00:19:50.803
Well, why is the fed moving its interest rate target upward?

266
00:19:51.690 --> 00:19:56.690
Undoubtedly, it's doing so because it has been somewhat

267
00:19:57.140 --> 00:20:02.140
frightened by what maintaining its previous lower targets

268
00:20:04.430 --> 00:20:08.083
seemed to be doing to the rate of growth of money supply.

269
00:20:08.990 --> 00:20:12.740
We had a rates of growth of money supply in short periods

270
00:20:12.740 --> 00:20:16.510
of time, which were 14%, in shorter periods of time which

271
00:20:16.510 --> 00:20:21.510
were 20% annual rate, and since the fed has given as its

272
00:20:24.290 --> 00:20:28.830
goal, under pressure of congress, congressional committees

273
00:20:28.830 --> 00:20:33.830
to get a goal that the money supply, M1 say, is to grow

274
00:20:34.180 --> 00:20:38.639
from five to seven-and-a-half percent in the period,

275
00:20:38.639 --> 00:20:43.610
or first they said for March to March, but now from the

276
00:20:43.610 --> 00:20:48.610
second quarter of 1975 to the second quarter of 1976,

277
00:20:50.200 --> 00:20:55.093
and since they were, as the economy was making its turn,

278
00:20:55.093 --> 00:21:00.093
and as the federal government was pumping money into the

279
00:21:00.370 --> 00:21:04.760
economy, at its peak rate, in the second quarter of the

280
00:21:04.760 --> 00:21:09.760
year, the annual rate of the fiscal deficit, if you use

281
00:21:11.220 --> 00:21:15.870
that as a rough measure of fiscal stimulus, fiscal

282
00:21:15.870 --> 00:21:19.638
deficit on the national income account, it peaked out

283
00:21:19.638 --> 00:21:24.638
at the second quarter at 100 billion dollars.

284
00:21:25.870 --> 00:21:29.950
It will be, would be a lesson then on a year's basis,

285
00:21:29.950 --> 00:21:34.950
and it's no coincidence that the turn of the economy was

286
00:21:35.730 --> 00:21:39.820
confirmed, the fiscal stimulus had something to do with

287
00:21:39.820 --> 00:21:44.820
confirming that in the face of an unprecedentedly large

288
00:21:44.920 --> 00:21:47.233
inventory deaccumulation.

289
00:21:48.330 --> 00:21:52.840
Well, the fed had realized that this would be a situation

290
00:21:52.840 --> 00:21:56.680
which would probably, unless interest rates were allowed

291
00:21:56.680 --> 00:22:01.380
or forced sky-high, cause a monatrist to have his

292
00:22:01.380 --> 00:22:06.380
hair curl, that it would be a very rapid short-term

293
00:22:07.770 --> 00:22:11.670
rates of growth in M1, and so they were prepared, as

294
00:22:11.670 --> 00:22:15.340
I remember it, for a number above their target of seven-

295
00:22:15.340 --> 00:22:18.320
and-a-half percent, the upper interval.

296
00:22:18.320 --> 00:22:22.610
But they weren't prepared for twice that amount,

297
00:22:22.610 --> 00:22:26.220
or even more, and so it kinda scared them, particularly

298
00:22:26.220 --> 00:22:29.663
since they know the monatrists are gonna be on their tail

299
00:22:29.663 --> 00:22:34.663
very soon, once those numbers get out, and nothing is new,

300
00:22:37.470 --> 00:22:41.960
everybody is on the federal reserve's tail, the economists

301
00:22:41.960 --> 00:22:46.490
who want a vigorous expansion complain when the

302
00:22:46.490 --> 00:22:49.620
federal reserve lets interest rates, short-term interest

303
00:22:49.620 --> 00:22:54.560
rates go up, the monatrists complain when they don't let

304
00:22:54.560 --> 00:22:58.750
them go up if the price of not letting them go up is to have

305
00:22:58.750 --> 00:23:03.750
increase in the money supply, and congress, now, is looking

306
00:23:03.970 --> 00:23:07.310
over if not the day-to-day activities of the federal

307
00:23:07.310 --> 00:23:11.050
reserve, certainly the month-to-month activities.

308
00:23:11.050 --> 00:23:13.250
I wouldn't say by the way, that congress are doing it in

309
00:23:13.250 --> 00:23:18.250
a particularly informed way, but we have only one democracy

310
00:23:19.580 --> 00:23:22.853
and we have to work with the democracy that we do have.

311
00:23:26.010 --> 00:23:31.010
Well, it'll be interesting to see how the recovery actually

312
00:23:32.640 --> 00:23:37.330
does develop in comparison with the average of all post-war

313
00:23:37.330 --> 00:23:42.330
recoveries and with the special features looked forward

314
00:23:42.610 --> 00:23:47.160
to by the forecasters with the best betting average.

315
00:23:47.160 --> 00:23:50.920
Let me just turn from the future, to mention something

316
00:23:50.920 --> 00:23:55.920
extremely interesting, the unemployment numbers as reported

317
00:23:56.953 --> 00:24:01.953
for July came in with a pleasant surprise.

318
00:24:03.890 --> 00:24:08.800
Let me just review, in May, the unemployment rate leaped

319
00:24:09.700 --> 00:24:14.700
up to 9.1%, and it was thought that that number had a bad

320
00:24:15.310 --> 00:24:17.520
seasonal correction in it, and was a little higher than

321
00:24:17.520 --> 00:24:22.520
it ought to be, so the punitive, genuine rate, if you had

322
00:24:23.750 --> 00:24:28.390
a good seasonal correction, was expected by experts

323
00:24:28.390 --> 00:24:32.473
to be in the ballpark of 8.9%.

324
00:24:34.060 --> 00:24:37.270
Mr. Julius Shiskin, the commissioner of labor statistics,

325
00:24:37.270 --> 00:24:42.270
who I must say has been conducting himself well among other

326
00:24:42.620 --> 00:24:45.540
things, very cautiously, at this stage of the game,

327
00:24:45.540 --> 00:24:50.003
he hasn't even to admit that there has been an upturn.

328
00:24:51.570 --> 00:24:56.570
Well, Mr. Shiskin warned us to expect that the June number

329
00:25:02.330 --> 00:25:07.270
would fall, and that wouldn't represent all that much of

330
00:25:07.270 --> 00:25:10.100
an improvement, it would just represent a correction of a

331
00:25:10.100 --> 00:25:12.920
correction, of something that needed to be corrected.

332
00:25:12.920 --> 00:25:15.620
While the June number did fall, and it fell perhaps a little

333
00:25:15.620 --> 00:25:20.620
bit more than he had warned us of, it fell from 9.1%

334
00:25:20.637 --> 00:25:25.080
as I remember, to 8.6%, but we could all say to ourself,

335
00:25:25.080 --> 00:25:30.080
aha, it's still consistent with 8.8, 8.9%, and people like

336
00:25:31.010 --> 00:25:33.780
me as when I testified before congress, said the

337
00:25:33.780 --> 00:25:36.300
unemployment has probably been lagging, so it's going

338
00:25:36.300 --> 00:25:39.093
to peak out a little bit above nine percent.

339
00:25:40.840 --> 00:25:45.060
But then, just a week or so ago, we got the July number,

340
00:25:45.060 --> 00:25:49.360
and the July number showed a further drop, not a rise,

341
00:25:49.360 --> 00:25:54.360
a further drop from 8.6% to I guess it was 8.4% in the

342
00:25:54.390 --> 00:25:59.390
rate of unemployment, and it was also a drop that in part

343
00:26:00.510 --> 00:26:04.990
was due to an increase in employment, not just an increment

344
00:26:04.990 --> 00:26:07.460
of discouraged workers, et cetera, et cetera.

345
00:26:07.460 --> 00:26:11.450
Now, the evidence is by no means all conclusive,

346
00:26:11.450 --> 00:26:16.450
because we have two ways of estimating employment from the

347
00:26:16.870 --> 00:26:21.520
sample of asking people and also from establishment data,

348
00:26:21.520 --> 00:26:23.840
and they show some disagreement.

349
00:26:23.840 --> 00:26:28.840
Nevertheless, it looks, now, as if it's a plausible

350
00:26:30.590 --> 00:26:35.590
hypothesis that the 9.1% number in May was the aberration,

351
00:26:37.220 --> 00:26:42.220
and maybe that'll be the peak of unemployment, and maybe

352
00:26:42.740 --> 00:26:47.740
unemployment is almost already on its way down.

353
00:26:47.810 --> 00:26:52.732
And of course, I think that's very good news, because

354
00:26:52.732 --> 00:26:57.510
one of the worst aspects of all the forecasts including the

355
00:26:57.510 --> 00:27:02.510
optimistic ones, has been that only very slowly do we bring

356
00:27:03.470 --> 00:27:08.470
the rate of unemployment down to eight percent, say some

357
00:27:08.780 --> 00:27:13.510
time next spring, and very slowly down to seven-and-a-half

358
00:27:13.510 --> 00:27:18.510
percent, say about the time of the election, November, 1976,

359
00:27:21.190 --> 00:27:26.190
and it'll be a long, long day on that scenario, until we

360
00:27:27.500 --> 00:27:30.925
get the unemployment rate even down six percent.

361
00:27:30.925 --> 00:27:35.925
But, you see now, it looks as if we have gained maybe

362
00:27:36.470 --> 00:27:41.470
as much as a half a percent in comparison with what were

363
00:27:43.420 --> 00:27:46.980
reasonably dire forecasts before, and I have to regard

364
00:27:46.980 --> 00:27:50.951
that as good news, after all, it is the unemployment

365
00:27:50.951 --> 00:27:55.951
which is the greatest human cost of the way we've chosen

366
00:27:58.205 --> 00:28:00.513
to fight inflation.

367
00:28:01.550 --> 00:28:06.550
I mustn't conclude without using the last minute to discuss

368
00:28:06.970 --> 00:28:08.493
inflation.

369
00:28:09.730 --> 00:28:13.980
Here, the consensus forecasters are really, fairly far

370
00:28:13.980 --> 00:28:15.050
apart.

371
00:28:15.050 --> 00:28:17.530
The hardest thing in the world for economists to forecast

372
00:28:17.530 --> 00:28:18.556
is prices.

373
00:28:18.556 --> 00:28:19.623
It's ironical.

374
00:28:21.150 --> 00:28:23.070
Chase is very pessimistic.

375
00:28:23.070 --> 00:28:26.680
Chase thinks that the rate of increase in prices will

376
00:28:26.680 --> 00:28:31.590
be eight percent, even nine percent, that this will

377
00:28:31.590 --> 00:28:33.730
feed into short-term interest rates and even into

378
00:28:33.730 --> 00:28:37.063
long-term interest rates, and is doing so already.

379
00:28:38.264 --> 00:28:40.510
On the other hand, there are students of the labor

380
00:28:40.510 --> 00:28:44.130
market, like Robert Gordon in Northwestern University,

381
00:28:44.130 --> 00:28:47.660
and Robert Hall, my own colleague here at MIT, who think

382
00:28:47.660 --> 00:28:51.610
with all this slack, that it is bringing down the rate

383
00:28:51.610 --> 00:28:54.750
of increase in wages and in prices, and I have heard

384
00:28:54.750 --> 00:28:56.690
from such people, I don't recall either of those

385
00:28:56.690 --> 00:29:00.610
two gentlemen, 'cause I haven't checked with them recently,

386
00:29:00.610 --> 00:29:05.090
that by the last quarter of the year, we might well see

387
00:29:05.090 --> 00:29:09.130
a three-and-a-half percent, four percent rate of price

388
00:29:09.130 --> 00:29:10.023
inflation.

389
00:29:11.910 --> 00:29:14.020
Along comes the drought in the middle west,

390
00:29:14.020 --> 00:29:19.020
along comes the bad crop prospects in Russia, and

391
00:29:19.724 --> 00:29:23.067
we're again, off to the races with respect to

392
00:29:23.067 --> 00:29:27.600
grain prices and with respect to food prices generally.

393
00:29:27.600 --> 00:29:32.443
So I think I will maintain my agnosticism that the

394
00:29:34.360 --> 00:29:39.360
rate of inflation will continuously abate, and that

395
00:29:39.810 --> 00:29:42.720
the recession has all been for good purpose and

396
00:29:42.720 --> 00:29:45.130
is achieving that good purpose.

397
00:29:45.130 --> 00:29:49.620
I think that we will do well over the next year,

398
00:29:49.620 --> 00:29:52.330
if we're able to keep the rate of price inflation,

399
00:29:52.330 --> 00:29:55.825
as measured by the GMP deflator or the consumer price

400
00:29:55.825 --> 00:30:00.825
index, in the ballpark range of five or six percent, not

401
00:30:01.299 --> 00:30:05.021
three, four percent, and I think there's a chance that

402
00:30:05.021 --> 00:30:08.970
it might well be that seven or eight percent, particularly

403
00:30:08.970 --> 00:30:10.443
if oil is decontrolled.

404
00:30:12.270 --> 00:30:14.530
<v ->If you have any comments or questions for Professor</v>

405
00:30:14.530 --> 00:30:17.210
Samuelson, address them to Instructional Dynamics

406
00:30:17.210 --> 00:30:21.250
Incorporated, 450 East Ohio St. Chicago, Illinois,

407
00:30:21.250 --> 00:30:22.773
60611.