-: 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 January 31.
-: Last night, President Nixon gave his
State of the Union address to Congress.
It's natural, therefore, this morning
to try to analyze what it was that was proposed there,
but all we can go on
is this morning's selections of his program
as summarized in the public press.
It's true that The New York Times that I'm now looking at
gives a fairly complete summary,
but I do not have the text of the message at hand.
Moreover, we've all been warned on the pitfalls
of instant analysis.
But let us look at the broad picture.
There are numerous goals expressed in that message,
but President Nixon lists 10 most important ones.
You could guess what some of them would be.
One, improving the energy supply,
and I quote, while assuring reasonable prices
with the adequate environmental protections.
This, of course, is a very tall order.
Two, another giant stride to our lasting peace.
This includes a continuation and amplification of detente
and also working with the powers of the Middle East.
We're to have a check in rise in prices,
but without administering the harsh medicine of a recession.
In fact, the president said blankly, boldly,
there will not be a recession.
We have new health insurance.
We're to have more of revenue sharing.
We're to have a crucial breakthrough
in public transportation.
We're to have reforms in federal aid to education.
We're to have, I'm now at eight, an historic beginning
in legislation to protect privacy.
Nine, a new road toward welfare,
toward reform of the welfare system.
And 10, new initiatives in world trade,
with more access by Americans to markets and supplies.
There is, to be expected I suppose in any state document
and particularly at a time
when you have a president under considerable pressure,
a certain depreciation of the currency of rhetoric.
We have perhaps more than the usual dose of giant strides,
historic beginnings, new programs,
but let's try to summarize what this can mean.
I would say that to listeners interested
primarily in economics and primarily in the overall
future of the general business situation,
I took it to be an important statement by the president
that there will be no recession.
Now of course, people say King Canute said
the tides shall not come into my throne.
He did this actually, as I remember, to demonstrate to his
members of the court the limitations of government power.
President Nixon is not in a position to tell
the real world of events, the GNP inflation,
what it shall do and what it shall not do,
but I take it to mean
when he said there will be no recession,
one, that when the economic report comes out next week,
his technical advisors, Dr. Stein, Dr. Fellner,
and others are of the opinion
that the odds favor our not having
as much as two quarters' decline in real output
or certainly not three quarters' decline in real output.
But something more, I think, is being said,
namely that the president is telling the American people
that he's going to do the things that may become necessary
if they do to prevent a recession from developing.
And it's that implicit assurance of activist policy
which I think is an important signal to us.
As I recall the words of the president,
and I'm now speaking from loose memory,
he said that he would not listen to the prophets of gloom.
The prophets of gloom, by the way,
are people who are always outside
any existing administration
and who say there's going to be a recession.
Now, there are some prophets of gloom who are
people of very poor track records,
who are saying in season and out of season
there's going to be a stock market crash
and the oceans are going to warm up
and we're going to run out of
chicken feet and everything else.
They make their living at that.
There also are people in the opposition of every government
who would like to magnify and make things look worse
than they actually are and who for political reasons
exaggerate any threat to an expansion in the economy
or to high employment.
But I think most important is
that on occasion after occasion,
and I can say this in a non-partisan spirit
because the governments of both political parties
have earned this matter,
there have been well-informed people
who call the shots exactly as the best jury could call them
and who have told the American people the bad news,
the sad news that things were not going to continue to go up
and it's those prophets of gloom
who are periodically denounced by Washington
but who are worth listening to.
Now, the fact is that any informed jury
knows that 1974 is going to go down
as a year of economic travail
not only on the side of inflation
but in terms of increasing unemployment,
and you are not a discredited prophet of gloom
if you do say that.
But there was another group whom the president linked
with the prophets of gloom in the same sentence
as I recall it,
and he said he would not listen to those
who say we ought to have a slowdown,
we ought to have a recession in order to fight inflation.
Now, any intelligent person who has followed the discussion
of economic policies in the last two years
knows that it is a respectable viewpoint
that there is a natural rate of unemployment,
and at the peril of continuing and accelerating inflation
does a government contrive its fiscal and monetary policies
to push the real economy below
that natural rate of unemployment.
And therefore, people who are of this persuasion,
happens not to be my own
but it is a respectable scientific viewpoint,
people who are of this persuasion say,
and not because they are cruel people
and not because they are sadists
but say it out of conviction,
that this is the right therapy for the long run.
They say that you should engineer
deliberately a slowdown in the economy,
including perhaps a recession not a depression,
in order to check inflation.
And what it is that they are arguing
is that over the longer run,
you will average out to a higher level of human welfare,
to a lower level of unemployment,
and I think the more enthusiastic members of this camp
would say that this remark could also be made
about the unemployment and the welfare of
unprivileged minority groups in the ghetto.
Now, what I understand the president to be saying,
at least his rhetoric is saying that,
in his important State of the Union message,
is that he has rejected the counsel of such people.
Now, I don't think that a statement to this effect by itself
means anything, but I think that a lack of such a statement
or a statement to the opposite effect,
namely that I bring you blood, sweat, and tears
and this is now the year in which we ought to
take some temporary sacrifice of our prosperity,
the fact that he has made that
I think is of some significance.
Well, fourth, and here now,
we're getting into some important new initiatives,
we've known for a long time
that some form of health insurance
was in the offing because the political pressures
for it from the rank and file of both parties
make it impossible
for those within the administration who wouldn't care for
an expansion of health insurance
or who have rational apprehensions,
that given our limited supply of hospitals
and given our limited supply of medical people,
that some new money poured into the health field
is only going to bid up rents
and actually is going to reduce
the supply of effort by physicians
and is not going to improve the allocation of physicians
as between, let's say, upper Manhattan
and counties of Virginia and Wisconsin
which don't have a single physician there.
The counsel of such people inside the administration,
however, it has been regarded as having merit
on the logical situation has had to go
in terms of the realistic political pressure.
We come to five.
We're to continue, in fact, to have an intensification
of what can be called revenue sharing,
the federal government giving to the states
money for the states and localities to spend.
Nothing new there I think,
just a continuation of earlier thinking
by the administration
and by some people who aren't in the administration.
Six, we're to have a crucial
breakthrough in public transportation.
One of the things the energy crisis has done
is to make people realize how expensive in terms of smog
and in terms of oil is the internal combustion engine
of the auto.
And commuting one man to a car into town
is realized to cause traffic congestion and smog
and to use up oil resources very rapidly.
And so, the case for public transportation
has received new publicity.
And in the urban centers, the federal government is now
preparing to provide some money.
Well, there are to be reforms to federal aid to education.
We're to have an historic beginning
in legislation to protect privacy.
This presumably will have to do with the problem
which has incensed the Republican governor of Massachusetts,
namely he's unwilling to give routine computer data
to the federal computers,
which might show that a particular citizen,
for a brief time, was an outpatient in a mental hospital
and that information might be used against that person
for the purpose of credit ratings,
for the purpose of job investigations and so forth.
Well, there is plenty in the field of credit investigation
which bothers thinking people
who are concerned with privacy.
We're to have a new road toward
reform of the welfare system.
It can be as important what is not in a message
as what is in a message
because the advanced notices
given by the president's associates,
either explicitly or through leaks and through hints,
was that something was to be proposed
with respect to the negative income tax again.
And in the actual message as it was delivered,
there was a bit of an anti-climax
because there was no mention
of the negative income tax as such.
Let me see if I can find
the brief words used by the newspapers in summarizing
what it was that the president did say.
I now quote the president,
I do not intend to resubmit a new version
of the family assistance plan,
that is of the negative income tax
as proposed on a family basis earlier by President Nixon
under the stimulus of Mr. Finch and Mr. Moynahan.
I now go on quoting.
In the development of my proposal,
I will be guided by five principles.
He doesn't tell us what the proposal is,
although no doubt we will hear soon.
All Americans who are able to work
should find it more rewarding to work than to go on welfare.
That means there is to be
what is the principal feature of the negative income tax
some kind of incentive schedule
aid-rate setting
so that if you get an extra dollar of income,
you are allowed to keep some fraction of that dollar.
Two, cash assistance is what low-income people need most
from the federal government.
I take this to mean that income in kind,
such as food stamps, are, other things being equal,
to be frowned upon or healthcare at free clinics,
you're to give people cash and let them decide
whether they're to spend that money
on nutritious food for their children
or on what they think is most essential.
Three, we need to focus federal help
on those who need it most.
That, of course, would mean that some kind of a means test
would be relevant, size of family would be relevant,
degree of objective handicaps, such as being blind
and so forth would be relevant.
The new system should be as simple as possible
to administer with rules that are clear and understandable.
I think that sounds inane
but to me it points in the direction of cash,
perhaps cash administered by the IRS
on a plus and minus basis
rather than a complicated set of rules
such as a social service welfare worker would
be needed to administer.
And finally, and who'd be against this,
this new approach should not require
an increased tax burden for any of us.
Well, on that particular point,
obviously we're going to have to wait.
And then, 10, we're to have new initiatives in world trade
with more access by Americans to markets and supplies.
I think that as stated in this direction,
very few people could be against it,
but it isn't clear just exactly what that means
in terms of new initiatives.
Actually, the part of his speech
which received the most immediate attention
was his announcement that he had been assured by
his advisors who are dealing with the Near East governments,
I presume would read Dr. Henry Kissinger for that,
that there is about to be a meeting
which will end the oil boycott,
and it's quite obvious to anyone
who has seen what's been going on
in American cities this last week
that it's the gasoline shortage
which is in the minds of everybody.
It happens to be more acute on the eastern seaboard
where people are literally burning up gas,
waiting in long queues for the limited amounts of gas
which may or may not be available for limited hours
at particular service stations.
The other part of the speech of course
which received great attention came as an aftermath,
namely when the president had said
that he had been elected to do a job
and that he was not going to walk away from that
particular responsibility, which was serving notice
that he was not about to throw in the sponge
under the Watergate pressures.
Well, let me return to an analysis
of the general economic policy
as it has been indicated by this brief message.
Of course, we will get to budget messages,
we will get to the economic report of the president.
But I would have to say that what is being stressed
is the middle road.
We're not going to go all out in the way of expansion
because that would intensify inflation.
We are not, on the other hand,
going to engineer deliberately a softness
in order to have natural market forces
check the inflation and lay the base for a more stable
price later expansion.
We are not going to have outright rejection
of all presidential leadership
in the realm of incomes policy.
That is, not all price and wage controls
are to be dramatically abandoned,
but we are to have gradual decontrol on a watchdog basis.
We are not to have,
on the basis of the present energy situation,
outright rationing
but neither are we to have outright laissez-faire
increases in the price of energy
to whatever the market will bear.
Instead, the president applauds the fact
that we are moving away from the bargain prices
at which energy has been bought and squandered in the past
and he's giving his blessing to some increase in that.
But he is suggesting that he would like to use
what economists would have to call monopsony power,
he would like to get the consuming nations together,
and you know of course he's issued an invitation
for a future conference,
so that the monopoly of the Near East will be checked,
at least in part, by concerted monopsony counterpressure
by the consuming countries.
The president has stated that he has an ambitious program
for self-sufficiency, operation self-sufficiency by 1980,
but he recognizes in his message
that there will have to be a dependence on foreign oil
for some time.
There were no surprises on his budget numbers.
The expenditure budget, of course, is to go up.
We are to have a deficit,
but it's not a deficit on a full employment basis.
The amount of the increase is 29.7 billion.
It's like buying a two dollar item for $1.99,
That's 30 billion, let's call it, over the previous year.
But as the president points out,
it's not his discretion which has caused that
because about 90% of the increase
is under nondiscretionary items
which have been voted in the past by Congress.
The president would like to have Congress
somehow chain together its expenditure decisions as a whole
with the tax capacity of the tax structure
which it has voted,
but he is bothered by the fact that every time
such legislation is proposed,
there are rather embarrassing
riders and amendments put on it.
Well now let's try to
give some analytical shape to the vague outlines
of what it is that we know from the president's message.
Of course, the important thing to say first is
that a good deal of what's going to happen
between now and let's say next Labor Day
is already, to a very considerable degree, decided
because there are long lags and variable lags
in the actions of fiscal policy and of monetary policy.
Now it's very important of course
what the Federal Reserve does in the three, four, five,
six months ahead between now, say, and Labor Day.
It's very important the direction
in which the president moves his budget
and in which Congress alters what it is
that the president has proposed.
But nevertheless, the president, I think,
cannot, by anything he does,
let's say in this first half of the year,
really do very much to determine whether or not
we will have a recession.
I don't know whether we will have
a genuine recession in 1974,
but it's pretty much already decided in the data
that will be revealed to us gradually
in this current quarter and in the next quarter.
I think that if we have a bare recession,
we do have a decline for two quarters,
the president saying we will have no recession
will not be very embarrassing to him.
Of course, if we have a fairly serious recession,
something like the recession of 1954,
you can be sure that next fall,
the opposition candidates will play the TV tapes
of the president saying there will not be a recession
and will use this against him.
My own guess is that he has a pretty good chance
of winning the bet because if you're just on the ragged edge
of, let's say, having the first quarter
be a quarter of actual decline
and the second quarter being a standoff quarter,
zero growth, not plus, not minus,
or maybe announced initially as a trifling minus
but on revision being found to be a trifling plus,
then I think that you would get a lot of semantic quibble
about what constitutes a recession,
and there will be enough noise in the discussion
as against the message so that the person who said
something on either side of the proposition
will not be in serious trouble.
The significant thing in my view
in sizing up what's going to happen
is that as a result of the Watergate affair,
you do not have a president in his second term
who is in a position, if he should want to,
to take an activist economic policy,
which is different from that associated
with typical previous administrations.
In other words, the Democratic party's ideology
with respect to the general incomes policy,
with respect to the general fiscal policy,
with respect to anti-depression,
leaning against the wind policy,
with respect to what ought to happen
to Federal Reserve policy,
all of these things the president is in no position
to deviate from given his present
state of siege in political terms.
This is in contrast to where the president stood
the day after the election in November 1972
when he had 49 out of 50 states
voting for him and in that sense giving him a mandate.
He was then in a position,
if he should have wished to persevere in it,
to have had a strong anti-inflation policy.
He was then in a position, had he wished to persevere in it,
to dismantle some of the redistribution of income programs
that Congress and previous administrations
had built into the American way of life.
He is no longer in that position,
and unless things change very rapidly
between now and the November congressional elections,
it doesn't look, to the betting man,
as if he will soon be in that position.
This is all on the assumption
that he will continue in office until the end of his term.
It seems to me in here I have to depart from
economic analysis that every such appearance,
as the one the president has just made,
has to be regarded as an appearance in his favor.
The mere fact that the president shows
that he is in command of himself,
that he is not a basket, mental case,
that he is not a recluse who cannot face more than two men,
whether that be Haldeman or Ehrlichman
or General Haig and Ziegler,
that wins him bonus points in the short run.
Of course, in the longer run,
the logic of events takes over.
When the president said that he would cooperate
with the judiciary committee,
he added very carefully he would do that consistent
with protecting the office of the president.
Those who are unfavorable to the president
will interpret that, they already have interpreted that
as saying he will cooperate when he wants to cooperate,
and he will not cooperate
when he does not want to cooperate.
So although the president said
and he won applause, one year of Watergate should be enough,
it still remains to be seen
whether the particular legal procedures
and investigations which are under way
can be rapidly turned off.
It's very important
for the person interested in economic analysis to realize
that it is not a crucial factor
in what happens to the GNP
and therefore should not be a crucial factor
in our analytical probability estimations
as to what's going to happen,
whether the president of the United States is
continuing in office or is not continuing in office.
That represents a very strong statement on my part,
but it's one which I think can be justified
by a careful analysis of what it is
that makes the price level rise,
what it is that makes the GNP tick,
and we'll go into that at some future time.
-: If you have any comments or questions
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Instructional Dynamics Incorporated,
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