- Welcome once again as MIT Professor Paul Samuelson discusses the current economic scene. This series is produced by Instructional Dynamics Incorporated. This program was recorded August 13th. 

- This is the day after President Ford addressed the joint sessions of Congress. So of course there's only one thing to talk about today. The new president's speech was well-received. He was returning to the chambers where his career was made. I was unable to recall whether Senator Johnson as was, President Johnson, who became the successor to John F. Kennedy on the assassination date in Dallas. Whether when in his first speech to the joint sessions the reception was any less cordial. But I think it was all that you could ask for in terms of the social amenities, a subject upon which I don't consider myself to be a particular expert. The economic topics were foremost in the new president's text, but there was really very little in the way of exciting news. What did we learn? Well we learned I think what one might have expected from a man whose 25 years in Congress is an open record. A man from a middle class Grand Rapids, Michigan district. As you would guess, he had no startling new ideas on what to do about the economy. If he has any such new startling ideas, they are being kept carefully under wraps. He has taken over from the conventional wisdom. He didn't require taking over any of the, his predecessors' economic advisors in order to do this. But for the conventional wisdom, he took over the notion widely shared that the main cause of inflation is the government. In fact, he quoted what some of you probably noticed in the newspaper that over half the American population, just over half, think that you can't blame the boll weevil, and you can't blame the king's enemies. But you can blame the government for the recent inflation. And so he quoted that with approval. He shared that particular view, and he said he was going to do something about it with respect to government. Now what was it that he was gonna do? His fundamental diagnosis seemed to be that there was somehow too much government spending and that next year (speaking foreign language) we would be balancing the budget. That's the fiscal 76 budget beginning next July 1st and ending on June 30th in 1976. To show however that he is really an even-handed, middle of the road man, he said that the bill, the law on his desk which the outgoing President Nixon did not act on, did not veto, which involves spending for aid to education that he, Ford, was signing that. He was signing it with some evident reluctance. Many of the commentators afterwards said well, he talks in global terms about balancing the budget. But he in fact goes ahead and spends. I would not take quite that interpretation at this stage. It may be right, but you could say that he's giving Congress one bite. After all, he does want to enter into a good marriage with Congress. But that doesn't preclude entering into a good honeymoon. In fact a good honeymoon is often a prelude to a good marriage. And so he's going along with this spending of Congress. But he did say something which really raised the ears of Constitutional lawyers. And namely he wasn't gonna spend the money very fast. And that conjured up in the minds of some people the problem which had been thrown up by the conflict between President Nixon and Congress, in which President Nixon was taking it upon himself to impound funds. That, by the way, is not a new innovation by President Nixon. Earlier presidents have done it. But like so many things in American Constitutional law, the unwritten law is very clear. And there is no written law in many points. Well, what we'll assume is that the middle of the road man from Grand Rapids, Michigan will take a middle of the road approach to the impounding of funds. Then to show himself, and I don't really mean to be ironical, but to show himself a man of action, he said yes. He will take up Senator Mansfield's suggestion that there be a summit meeting, a meeting well aware perhaps in the highest skyscraper in Washington of the best economists in the country. But more important, the representatives of labor, agriculture and industry. I suppose he doesn't really mean to exclude transportation and commerce. And he was going to have it meet not in the distant future like six months but within six weeks time. More than that to emphasize the importance which he attached to this meeting. He, the new president, was going to take time out of his busy schedule himself to preside over this meeting. So that any pearls of wisdom thrown up by that crew would immediately be pressed into the service of the nation in the important cause of lowering the rate of inflation. I think that pretty much sums up what he said. I guess I should have mentioned that the new president emphasized the continuity of his foreign policy. And in that connection, emphasized the importance in his mind, of not cutting defense expenditure. What I presume that means is that defense expenditure is going to be cut. There is a very considerable movement in that direction. But that the new president is going to resist that. So we're gonna have a moderate cut at best in defense expenditures. What do we do with think of this? What does it augur for the economic future or for the probabilities with respect to the economic future? I guess I'd have to say that another bit of news that came up yesterday in the afternoon was the release by the agriculture department of the state of the crop and the outlook for the harvest as of August 1st. Now I'm talking in the last part of August, middle of August, and we're now talking about how the crop was up to the end of July and August 1st. And as you know, there have been some rains finally at long last to relieve the situation a little bit in Iowa, Nebraska and the prime grain territory. The August 1st numbers, which were announced, which by the way were of course very discouraging, did not take into account that slight improvement. What did they show, well, what they showed was that the corn crop was not only going to be less than the earlier more optimistic estimates. But it actually was going to be down in all likelihood in comparison with last year. The same thing was true for the soy bean crop, and I believe that wheat, much of which is already in the barn, is not going to be down in comparison to last year. This does mean, however, that around the corner in 1975, the meat, the poultry, the eggs that are made out of these grains, they are going to be scarce, and their price is gonna rise. So the agriculture department had to change its earlier more sanguine forecast in the direction of higher food prices ahead. And I guess that as a observer of the passing economic scene and as a would-be appraiser of probabilities with respect to future scenarios of this economic scene, I would have to consider the disappointing crop news as a bigger bit of information for me as an investor to digest than anything that I was able to hear in the halls of Congress last night. What about the summit conference meeting? Certainly we can all benefit from the injunction in the Book of Isaiah of the scriptures which says let us sit down and reason together. But I think we have enough knowledge on what previous such conferences and sitting downs together have produced to be a little bit skeptical that somehow the synergism of that movement is going to create new, fresh, useful ideas for handling the present inflation. Out west, when the rains don't come, and you see your crops shriveling, and the ground dry, you are desperate. You become so desperate that you will actually go through the ceremony of getting a rain expert, who will beat his drums and call down on the heavens to send down the rain. And sometimes the heavens respond to that call. You even, if there's a local Indian tribe, will use the oldest residents of that territory in this very understandable human ritual. I suppose that we're to think of this summit conference realistically as a ceremonial rain dance. It shows our good faith. It shows that we have a genuine concern about inflation. It shows that it is a number one topic in our minds and that the government is not callous to it. However, whether the heavens will send down the rains in the form of inflation abatement, or failing that will send down some good ideas to the assembled people there, I'm inclined to doubt. In fact, not knowing about the president's projected summit meeting of an economics Congress, a soviet of concerned citizens about economics. I had to write at the request of Newsweek a column on what we might expect in economics from the transition to President Ford from President Nixon. And I predicted there, I was just going by a priori reasoning and Mr. Ford's previous record. I predicted that he would be pretty much following the counsel of people like Arthur Burns. And as a matter of fact, I hit the target on the nose. I say I hit the target on the nose because there was one element in the speech which I forgot to mention. It's fairly significant that I did forget to mention it. Namely that the new president's asked Congress within the next two weeks to reactivate the cost of living council. He assured them it was not for the purpose of controlling wages and prices but for the purposes of monitoring price and wage decisions. In other words, we're going to go swimming, but we're not to go near the water. Or rather, we're not quite get in the water. Well, and this is in line, and I don't mean to cast any scorn upon the suggestion. This is in line with the suggestions that have been made by almost all economists of both political parties who are not 100 percent free market men, persons, namely that although price and wage controls are not a good thing or won't wash politically or won't be effective. That nevertheless a hands-off policy is not the optimal alternative to direct price and wage controls. And what you do need is presidential leadership. What you do need is job boning. What you do need is informed job boning. What you need is informed job boning with the sanctions of government behind it. And I ought to mention that it's action like this which is likely to cause some consternation in the hearts of those who are against price and wage controls in any form. They will begin to realize what it is that they are missing with the going out of office of President Nixon. Because this is one of the things which he did on very rare occasions. Whereas the new president on really the first occasion, there was so much economic news yesterday that I didn't have a chance to mention this third bit of news. But the new president, in the morning, as one of his first acts, did take the occasion to deplore what seemed to be a rather massive increase in prices by General Motors. I believe that averaged out to be nine and a half percent. Let's call it 10 percent. And when you realize that the average car and truck these days has to be thought of as costing in the neighborhood of $5,000, not $2,000, not $3,000, not even $4,000. That means an average increase in price of about $500. Now General Motors has by repute long been the low cost producer. And if ever there is to be moderation in administered pricing, it's always to be expected from General Motors. Chrysler is one of the more leveraged, higher cost producers and they always want General Motors to be as high as possible so that they, Chrysler, can be as high as possible. And General Motors often does not accommodate them. Well this time they are accommodating to the two and a tenth percent. But that may just indicate that for Ford and Chrysler a 10 percent, $500 per car, per truck increase may not seem adequate to compensate for the cost of their raw materials. Since I talked on these tapes last, we did get the bad news we expect to wholesale prices for July and that was a monthly increase of more than three percent. I think it worked out to 44 percent on an annual basis, which was reported to be the highest single monthly increase since 1946. In consequence, we find that many raw materials are going up. So far, oil, a very important raw material, has not joined in the latest upswing. And there had been some hope that an oversupply of oil provided by the cartel was going to make the cartels' administered, posted price structure non-operative and bring down somewhat the price of oil. But that aside, there has been a increase in the price of raw materials. Moreover, as you know, the catch up after April 30th by the industry once out of price controls, which some economists thought would be a rather short, live thing, turns out to be going full blast. And then of course finally, the cost-push inflation which had been pretty much an advance, at least submerged by other even larger factors in 1973 and back in 1972. That cost-push inflation is now very much on us and any prudent observer of the industrial collective bargaining scene must be expecting a continuation of this. Electricians have been getting and asking for large wage increases. Carpenters and the end is not yet in sight. Well, how are we to appraise the relative merits of what it is that different presidents inherited? I don't think that President Ford is one of the luckier presidents in what the state of the economy is, what he inherits. President Eisenhower in 1953 inherited the nearest thing to a full employment with stable prices economy that we've seen in, I was gonna say in the post-World War II period. But I think I could almost make it in the period since 1929. If it however paradoxically was right in the last year of the Korean War that that was the case. And of course it contrasted with what went before it, the 1950 period at the outbreak of the Korean War. President Eisenhower, when he was re-elected in 1956, really had an economy that was poised to go into recession. And when I made a little calculation on election economics or election arithmetic, I found that in some ways the toughest thing is to be re-elected, either a Republican or a Democrat. Roosevelt in 1932 was lucky because the economy was so far down that it could hardly do anything but go up. In 1936, he was poised for the 1937 recession. Well, President Kennedy was fairly lucky in this sense in that he inherited an economy which was in recession at the time of the election and prior to inauguration in January. But in a sense, he inherited at the trough of business and so conditions looked to improve. President Johnson, who was catapulted into office accidentally, tragically in 1963, inherited an economy that was nicely approaching the high employment level. Of course, in a modern mixed economy that tends to be a dangerous level. Finally President Nixon inherited an inflation in being with a fairly strong demand poll elements, which was an inflation bequeathed to him by President Johnson and President Johnson's fiscal policies, particularly President Johnson's crucial error in not increasing taxes in 1965 when he accelerated the Indochina War. Well what is it that President Ford has inherited? What has he inherited, stagflation. I think that's the toughest ailment for the medicine men to prescribe for in the modern mixed economy. The downward impetus of real growth is just behind us, and actually the economy will be doing very badly indeed if for the first four quarters of President Ford's term we do not show growth. But I think all the signs are that it will be at best anemic growth. By that I mean growth that averages for those four quarters in the neighborhood of zero to two percent, two and a half percent, definitely below the three to four percent that's needed in order to keep up with the growing labor force and with the increases in productivity. But as far as the inflation is concerned, the inflation is as bad in this third quarter right now apparently as it was at the worst of the first quarter of the year. We are in two digit inflation, low two digit inflation to be sure. But there are no great signs that the natural force of the system will act powerfully to bring low two digit inflation down to the five or six percent rate of price inflation, which just a little while ago, the majority of the economists, whether they were non-monetarists or monetarists, were thinking was in the ballpark for the turn of the year into 1975 or at least in 1975. I notice as I read the various forecasters that they've been trading down their rates of year growth and trading up their rates of inflation. Although they have not abandoned the hope that as we move into 1975, we will be in one digit inflation but alas, it would be high one digit inflation. It may seem that in my description of the non-sensational middle of the road instincts and utterances of the new president that I'm being critical. I don't intend to be an (audio muffled) here looking at a Calvin Coolidge and laughing derisively at him as (speaking in foreign language) Quite the contrary, it seems to me that this is a good time for moderation, for non-sensational ideas and procedures. This is a time to proceed very cautiously. And I think it's a time to proceed on a unifying theme. I was struck with the fact, and I'm sure that many of you have too, that we're seeing something in the way around the world of some counter-movements to fascist governments. We have seen, for example, or totalitarian governments of the left. We've seen the restoration of a measure of Constitutional democracy to Greece. You recall that one set of colonels took over, but they were replaced, not for long though, by another set of officers, generals. And this last set seems to have been so inept that they got themselves into a wrangle over oil with Turkey and then of all things, they got themselves into a real shooting situation with respect to Cyprus. This is a time when they had to realize that Turkey was a military force equal or superior to theirs. They also had to realize, or they soon learned, that the Greek civilian population is not very good cannon fodder in its present state of mind and to mobilize them and to fight an enemy. And think they'd be an efficient army is of course very dubious. The Greek pattern gives you the problem that I'm talking about. If having had a restoration of Constitutional democracy in a measure, and by the way, the generals are still there behind the scenes. You immediately have a society which becomes polarized. With let's say, I would mention their names. Let's suppose that the left won't cooperate with the right of center government now. Then what you can do is bring upon that situation in return as a fascist rule. The same problem with respect to Portugal. Portugal after many, many years finally has had a measure of freedom, a measure of freedom of the press. And a long overdue decision to let her colonies go. But if the different classes engage in the class struggle, each seeking to get a bigger share of a rather limited social pie. Then you invite the disorder, the lack of law and order, which the citizenry really want. I'm not talking about larceny, but I'm talking about the ability to go about doing the business of the gross national product and earning a rising standard of living. Then you throw all that away. But now the question I'm asking is can we have all over the world, in Canada under Trudeau, in the United States under President Ford, hopefully in Spain and Portugal and perhaps in Greece and with implications for Brazil and Chile and Peru and other countries where ordinary forms of democracy have at least temporarily been suspended. Can we begin to have some popular fronts around a middle position? Now that means give and take. It means a lot of give. It means that people on the right have to sacrifice some of their most cherished notions with respect to business freedoms, market autonomy. On the left it means that the unions, the organized groups cannot roundly disrupt the economy for the purpose of increasing their share. I must confess that I am not overly optimistic that there exists the rationality and the consensus and the cohesion in modern nations to make this pattern of democracy work. But if I could say a prayer for the world, it seems to me that my prayers would be directed towards increasing the probability of some such movements being successful. And that I think is the real importance of having President Ford in the White House. 

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