- 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. 

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