- Welcome once again as MIT professor Paul Samuelson discusses the current economic scene. This series is produced by Instructional Dynamics Incorporated. This recording was made February 26. 

- We haven't looked for a little while at what the different authorities think about the developments of the American economy. This is a very relevant question because there is a tremendous amount of inflation concern throughout the land and in addition, there is a tremendous amount of recession concern throughout the land. As an example, when in Grand Rapids, Michigan, there was a turnover in a rather safe Republican district. Vice President Ford's former congregational seat, a seat which had gone Republican in every election since 1910, including the 1932 debacle during the Great Depression, when a Democrat ousted the man picked by Ford to succeed him. The explanation which most people gave was that this was a mandate or a plebiscite on Watergate but Vice President Ford called to our attention the fact that there's a great deal of unemployment in that area, it's related to the automobile industry, and that that, in his opinion, was a swing factor in the election. Well, where do we stand? What do the different authorities think is in store for us throughout the rest of this year now that they've had a chance to take a second look at the picture? 

- Well in broad outlines as I look at half a dozen different forecasts, you still have pretty fair agreement that during the first part of the year, there will be real growth weakness in the economy. Negative growth in the first quarter, I think, in everybody's forecast. And that in the last quarter of the year, you will be on the comeback trail with positive real growth. There is general agreement that unemployment is gonna rise through most of the year, if not all of the year. There is general agreement that prices which are horrendous now, will not be as bad in the fourth quarter of the year as they are in the first quarter of the year. Now I know you'll say you've heard that story before but let's tell the story first and then let's analyze it to see what we think are the prospects for actual events working out in accordance with the authorities. What I've done is to jot down before me, four different forecasts. Thereby four different forecasters with pretty good track records over the years. These forecasters in my observation, have done better than any amateur's models and there is no exception that I can think of to that statement. They have done better than any automatic computer model on the average. Whether it be a monitores model like that of the Federal Reserve Bank of Saint Louis or whether it be a more complicated, if not more sophisticated model like that of Professor Ray Fair of Princeton University. So their testimony is worth paying attention to. What I've jotted down for these forecasters is where they think we're going to be in the fourth quarter of this year to see how much agreement there is and also to see whether it's a sad picture or whether it's a pretty picture. Time doesn't permit going down the whole vector of elements which a forecaster would want to forecast. Typically there are 30-40 key variables that you would be interested in. So I've just jotted down the few most important ones. Namely the rate of growth of real output, how that'll be in the fourth quarter of the year. The rate of growth of the general price level as measured by the GNP deflator which is not quite the same thing as the consumers price index. If time permits, I'll try to look into some of these forecasts to see what difference that would make. I think it's a small, significant difference but still a small difference. Then I've jotted down what the unemployment rate is expected to be in the fourth quarter. And finally for somebody who might just have interest in that sort of thing, what the rate of corporate profits after taxes will be in the fourth quarter of the year. Well, who is in the lineup? In no particular order, I've listed Data Resources Incorporated of my part of the world. The head of this is Professor Otto Eckstein of Harvard University. A distinguished student of public finance, a scholar, an expert in macro economics who has a PhD from Harvard and had undergraduate training at Princeton. He also has had rather extensive governmental experience having been on President Johnson's Council of Economic Advisors. He's the chap who, as a very young man, prepared the tremendous study in 1959 for the joint economic committee. His credentials are in very good order and I would not dream of letting a quarter go by without trying to learn what the RI thinks is in the picture. Then we have the Wharton School model. I think very few words are required from me on this subject because I've quoted it extensively. The Wharton School model is of course not associated formally with the Wharton School as such but it is associated with a project there; computer project under the direction of Professor Lawrence Klein who you might say is the United State's tinbergen in being the dean of those who make macro economic models. He was a moving spirit behind the University of Michigan model years ago when he was at the University of Michigan and he's carried forward this activity. The third one I thought just for variety, I would pick a private model not for public circulation. This is for an investment banking firm. The economist who prepares the model is a friend of mine and he gave me this model in confidence. There's nothing secret about it but it's not something that's to be associated with his firms name. The reason that I think it's appropriate for me to bring it into the picture is that you might think that there are two levels of knowledge. There's inside knowledge and there's outside knowledge and there's two levels of communication. What people really think and what they think for the public record. I think you'll find that there is no such distinction were you to make a round up of internal forecasts and external forecasts. You would find that their median in the different components came to pretty much the same thing. The same distribution of fools and wise men and candid people and non candid people in both universe's. Finally, you've heard me many times quote from the Townsend Greenspan forecast and that which is the brainchild of Alan Greenspan has a very good track record indeed and I would certainly not let any quarter go by without finding out what the Townsend Greenspan organization sees ahead if that information was available to me. Now I could have quoted still others. I don't think the picture would have been substantially different and my leaving out any name represents no invidious distinction. It's just what I happen to have conveniently in hand for the preparation of this recording. Well now let's see what's going to happen to the rate of real growth in the last quarter of the year. Is it going to be negative? Not a single one of these four forecasters envisages a negative number. Indeed, two of them envisaged that we'll be above the normal growth rate for the American economy. DRI says plus 5.9% provided I have not misread and no I see I have not misread. That's a whopping six percent increase in real output by the last quarter of the year. And the Townsend Greenspan is five and a half percent annual rate of real growth of output. So if these gentlemen are right, the recession will be a memory at that time. We can go on to see what goodies they have in store for 1975 and a data resources computer actually just keeps running on until the end of 1976. In case you wanna know, there's not going to be a recession between now and beyond the time when the U.S. celebrates it's 200th anniversary according to the DRI model of the very end of January, the very beginning of this month in which I'm recording. Well, what about the other two? The other two, the Wharton model has a two and a sixth percent rate of increase in the fourth quarter and the private unnamed forecaster has a plus three and a third percent. Both of those are a bit below the growth rate but they average out to more than we've seen for a good long time now while we've been in a growth recession. And I have no doubt that if I were to continue letting my eye pass down their columns to later quarters, that they would effectively have us out of the mini recession by early 1975 at the latest. Is this good or is it bad? Well I think that is very encouraging for somebody who wants real output not to stagnate and not to decline. Just for comparison, let me say what the estimates are for real output in this current first quarter of the year. Data Resources thinks that we'll be at almost a 4% annual rate of decline, actually minus 3.9%. And Townsend Greenspan thinks that we'll be at minus 2.6% annual rate. On the other hand, there's nothing really to choose between them as far as optimism or pessimism is concerned because by the next quarter, data resources has us at 2.4% plus. Where as it takes a little bit longer to unwind in 1974 second quarter, Townsend Greenspan has flat so I guess if you actually averaged out those two quarters, you would find that they are pretty much in the same ball park. That suggests that the pollsters who are picking up the fact that it's inflation, which is the number one problem worrying the American public, may well turn out to be right because when we look at what's happening to prices in the fourth quarter of the year, we find that not one of our forecasters, however optimistic they may seem to you, thinks that we'll be having a dandy show on inflation. Let me go across the board. Data Resources think there'll be a six and a third percent increase in prices at that time. Wharton School thinks there'll be a seven and six percent annual rate of increase in general price at that time. Townsend Greenspan thinks that there'll be about five and five eighth's percent rate of growth at that time. 5.57 percent actually. Our private forecaster is a bit more optimistic and I must say he seems optimistic to me because he has the rate of inflation dropping down to four and a half percent at that time. Well now to put things into perspective, what was the rate of inflation in the last quarter for which we have actual data? Let's look at that number. It was 7.9%. And so there isn't a one. Even the Wharton School who is as pessimistic as to think that we'll be doing as badly in the fourth quarter this year as we were in the fourth quarter last year. And this despite the fact that the fourth quarter of last year, the energy shortage had not manifested itself until the final part of the quarter. So what we have here is an improvement throughout the year. Let me give you the first quarter numbers for inflation of the four people and then I've already given you the fourth quarter. Data Resources think that we'll improve from 6.9%, first quarter 6.3%. Wharton will improve from seven... Well now we won't improve. We'll go from seven percent to seven and a sixth percent. But the private forecaster thinks we'll go from seven and a half percent to down to four and a half percent. And Townsend Greenspan thinks that this is gonna be a god awful quarter with nine and half percent price inflation's so that we'll look with relief upon subsiding to about five and a half percent. I may say that Townsend Greenspan has support from Albert Summers who has not prepared his fully revised forecast but has indicated how it'll go and he expects that prices in the first quarter of the year will be rising at almost a 10% annual rate and for the year as a whole, we'll be above eight percent which means that in the fourth quarter of the year, I would think that you can't be down very much below seven percent according to his forecast. For control on this though, I think I ought to see what a monitores forecast on prices might be and I'm going to take as my monitores forecaster the Argus Organization, which has been brave enough to make an estimate of worldwide inflation for many countries for many years to come. And they do this on the basis of their expectation of what's going to happen to the rate of growth of the money supply. Well, for the United States they have a nine percent inflation for the first quarter, going down to 6.9% by the fourth quarter and actually continuing down until by the middle of '75, you're down to not much above five and two thirds percent. So the monitores forecast here is about the same as for the others. Moreover, I don't think I have time to go into what the western Germany's price increases forecast for them to be or Japan's or Switzerland or Belgium or France or the U.K. or Italy but let me say that there's no place to hide because the 6.9% in the United States in the fourth quarter is going to be better, according to their estimates, than any other country. Even Switzerland is gonna have seven and a half and Germany's gonna have nine and Italy's gonna have 10.6 and the U.K's going to have 11 and Japan, eleven and a half and worst of all is going to be France for 12%. So there's no other currency in which you're going to do better or which the typical consumer with one unit of the currency is going to do better. What about unemployment? Do these inflation numbers imply that we're gonna have very tight labor markets and that the inflation is primarily to be expected to come therefore, from in the first instance a bidding up of wages? No, not really because as I go across the board, DRI expects six percent inflation by the end of the year and the private forecaster who was so optimistic on prices, he expects 6.1% by the end of the year. And Wharton, which is very pessimistic on profits as you'll see in a moment and some other things, is kind of optimistic on unemployment if you call a five and three quarters percent the unemployment rate for the last quarter of the year, optimistic. Townsend Greenspan is 5.9% and I'll remind you that these all represent substantial increases in the rate of unemployment from the last reported number which was 5.2%. I would suppose that the next reported number, which of course refers to a past period and which must be due pretty soon, that probably will be worse than 5.2%. So there's nothing cataclysmic or precipitous in these numbers, just a slow climb. Finally, just to bring the initial survey of the facts to a close, what can be expected for profits after taxes? Here, both counseling firms seem to be very close together to each other. Data Resource Incorporated is just a shade above 70 billion dollars of corporate profits after taxes, 70.2, and Townsend Greenspan is 70.9. How does this compare with the last recorded numbers for corporate profits after taxes? It's almost on the nose. In the last quarter, '73, we have 71 billion. So profits after taxes, according to everybody go down the hill from the fourth quarter of last years numbers but they don't, according to these counseling organizations, go down the hill very much and they are back by the fourth quarter of '74 to where they were in the fourth quarter of '73. I should point out, and they would be the first to point out, that all of the dollar numbers are back. You realize that in real terms, the profits are not back because prices have increased during this period. Moreover, there is reason to think that if one were to calculate profits in real terms, carefully taking account of the replacement costs of the capitol used by the corporations who are earning profits, that in periods of rising prices, you overstate real earnings because the tax law does not permit you to recover reproduction costs. It only permits you to recover in depreciation allowances. Historic actual incurred dollar costs. So these profit pictures that I've been quoting are optimistic compared to a pessimist but it doesn't mean that the corporations are better off in the fourth quarter of this year than they were last year if these figures turn out to be correct. Let me however say that there is some difference of opinion because the Wharton School model has profits after taxes significantly less. I had to make a calculation from their profits before taxes and I won't vouch for the last digit of accuracy but it seems to me that by the fourth quarter, they think profits will be down to 65 billion dollars after taxes. Their optimistic on unemployment relatively and their pessimistic on profits and the private forecaster is in between. He thinks that profits will be about 67.6 billion dollars down somewhat but even on his forecast, they will be on the rise. Now, what are we to think about the picture? I think the first thing to say is that if these numbers are believable, the alarm which is beginning to go through the country, that we are moving into Latin American galloping inflation or cantering inflation. I've heard this from a number of public figures recently and many reporters have asked me is it true that on the basis of what Arthur Burns said and on the basis of what he didn't say but might be implied by what his words would suggest, that we have turned a corner and we are now at a point of no return and we are moving into a new phase of more rapid inflation. More rapid inflation akin to that let's say of Brazil over the years or Argentina over the years or Chile over the years or even Mexico. I may say I see no sign in these figures of that but it would be enough in terms of having concern whether we are moving into a new era in which we have rates of inflation like those of the other advanced countries of the world. The countries of western Europe and Japan who, these last few years, have not been enjoying the moderate rate of price increase at which American's complain their price increases are still more. So I have to agree that there doesn't seem to me to be a sea change in the numbers. What I think is probably true is that when you get prices rising as they will for some time this winter in two digits rate, say a 10% annual rate or 11% annual rate, and I'm thinking now of prices in which there's a heavy component of food, in which there's a heavy component of fuel and other energy sources, then it may be that something dramatic happens in the mind of the public. There may be a threshold effect in other words with respect to the drama and the trauma of inflation. But if we stick to the actual outlook, it seems to me that all these different forecasts have factored into them the fuel shortage. They have factored into them some considerable delayed increase in energies and I must say, I find these forecasts bad enough because it is stag inflation with a vengeance. But we do not see on the horizon an advance to a new uncontrollable rate of inflation. I wonder therefore, exactly what it was that Doctor William Fellnor, the newest member of the Council of Economic Advisors, had in mind when he talked at the conference board recently and said this was our last chance to control inflation and we had better not muff it. I think that that is a dramatic way simply, of registering his concern that we've been running the system with too much steam in the boiler and have been aiming at too low a rate of unemployment. Moreover, I've treated recovery as if that were an optimistic matter because according to these figures, I think the consensus will be that there was hardly a recession at all. Or if there was a recession, it was a bare recession which barely lasted a couple months and moreover, since it's explicable by means of an energy shortage, it's not really a macro economic recession that should count. But suppose you are one of the scholars and there are a few and they're respected scholars, who thinks that the only way to bring inflation down and not have it accelerate upward, is to have a recession of some magnitude. Then what I've reported on today is the most pessimistic thing that could be said because you cannot count, according to these numbers, upon several quarters of negative real growth. You cannot count on any dramatic hitting the inflation where it lives by means of lowering demand and increasing the supply. Well I think myself, that scholarly view that I've just quoted, respectable as it is, is by and large irrelevant. I don't mean the one who holds it shouldn't express it. He should, he should press for it. But if we had all this trouble in Grand Rapids, Michigan, in elections from say stand point of the administration, the incumbent administration, from an environment in which there's still only 5.2, 5.3, 5.4% unemployment, think what you're gonna have when you have an environment in which there is a six percent unemployment or neighborhood of six percent in which a good deal of that unemployment has begun to become long term unemployment. So there's just so much that the American political system can stand and therefore, I would say, to give you my own evaluation, that I think it's a little premature to have output growing as rapidly as the highest of the numbers I've reported on by the fourth quarter. But I think that the numbers are in the ball park. I think there is a little bit of optimism on the rate of increase in prices because I am concerned that the honeymoon with respect to wage settlements has come to an end. But I have no particular quarrel to make with the rather modest decline in corporate profits after taxes. 

- If you have any comments or questions for Professor Samuelson, address them to Instructional Dynamics Incorporated, 166 East Superior Street, Chicago, Illinois, 60611.