-: Welcome, once again,
as MIT Professor, Paul Samuelson,
discusses the current economic scene.
This series is produced by
Instructional Dynamics Incorporated.
President Ford has now proposed
his State of the Union Address and his budget.
What is your evaluation on it?
-: There are no particular surprises
in any of the official State messages
which have come our way nor have there been any surprises
in the reactions to them.
So, let me concentrate on
what are the essential parts
of President Ford's proposal
and let me do this
against the background of
Ronald Reagan,
his rival for nomination
by the Republican Party,
what his particular fiscal views are.
I think the key note of the budget,
which we have received recently,
and the State of the Union message,
which came a little bit earlier,
is that President Ford is still
pressing the line
that the public sector is
too large in the U.S economy,
that the only way to get the public sector down
is to reduce simultaneously the level of public expenditure
and the
level of taxation.
Now, this reflects a value judgment
which will be congenial
to many people in the United States.
It will be particularly congenial to many people
in the United States who have, historically,
voted Republican and it will be congenial
to many Democrats who,
intermittently,
pass over and vote the Republican ticket.
By and large, if you divide the U.S. population
into two halves,
at the median income level
measured by family and individual income,
which I suppose these days
is somewhere around 13, 14,000 dollars,
the purely economic interests
of the upper half
of the income group
could be favorably served
by pushing in the direction of the President's proposal.
I say could be for reasons which I'll develop in a moment.
By and large, the long-run economic interests
of the lower half
by income of the population would,
in some degree, be hurt by the
President's proposals
and pushing in the direction of the philosophy
of the President's proposals.
I say by and large because there certainly
are some retrenchments in government expenditure
and some alterations in the way the public sector
manages its business,
which would
save taxes,
more importantly would save national resources,
and yet which would, only to a limited degree,
be harmful to anybody.
If some ...
super demon has the ability
to increase efficiency
of government operations
without affecting the scope
of those activities,
we could help everybody
by having more available
to give to the poor and having more left
by the more affluent to enjoy
as they conceive the good life.
But by and large,
there are no
proposals of administration
or of efficiency
which are important
in changing the efficiency
of the way we run
the public sector in the United States.
So, what we have here is a pretty clear-cut
value judgment choice
between a smaller public sector
with the gains that that implies
to a part of the population
and the harms
that that implies
to still another part of the population.
It's always difficult to know what the response is
to what is not
a novel proposal,
it's what the President has been pushing as a line for ...
all the time he's been in office,
but in particular for the last eight months or so.
I don't judge that the general reaction
to his proposal
has been terribly enthusiastic
nor, as far as I can now judge,
has it been terribly adverse.
It's not like
the reaction which has greeted
the Reagan proposal
to take 90 billion dollars of federal expenditure
and cut it out,
reallocate ...
by some unspecified means
the tax resources of the Federal Government
to the states and let the states pick up that fraction,
perhaps small fraction, of the 90 billion dollars,
which, in the infinite wisdom
of the grass-roots at the state and local level,
the populace decides is really
worth the sacrifice
of their private-life consumption.
That proposal of Ronald Reagan,
written, one is told, by his brain trust
and the speech writers
and, as in the
case of McGovern in the 1972 election,
perhaps not completely explained to the candidate,
has shown some signs of getting Ronald Reagan
in trouble, politically.
Of course, when you get in trouble, politically,
with a part of the population, that puts you in very solidly
with another part of the population.
And part of the appeal of Ronald Reagan,
something which I suppose is feared by
the White House confidants of President Ford,
is that there will be a resonate response
within the country to this proposal of Ronald Regan.
However, New Hampshire is not the best environment
to try out a balloon of this sort
because...
New Hampshire has the,
shall I say, distinction of being a state without
an income tax ...
well, without a full-fledged income tax,
and also without even a broad-based
sales tax.
So it looked to the
New Hampshire grass-roots people,
who are against state taxation,
that they were being the pass baby
and they had no
stomach to ...
give baby even that minimal amount of attention and care,
which even New Hampshire thinks baby will require.
I don't know that that's a particularly logical reaction
because it certainly could be the case that New Hampshire,
under a Reagan proposal would,
one way or another, gain enough
in released taxation,
that doesn't go from New Hampshire to Washington
to be able to afford this, but it would have to be done
at the grass-roots level
and through something called
New Hampshire taxation.
And the New Hampshire people are against taxation.
So, this required a great deal of explaining
by the President ...
I'm sorry, by the candidate,
Ronald Reagan, in New Hampshire.
Let me defer any discussion
of that matter
and just tick off some of the proposals made in the budget
and in the State of the Union message.
The most important proposal is the size of the budget
and the ...
plea to Congress,
the attempt to go over Congress's head
to the electorate to put pressure upon Congress
to cut down on the rate of growth of federal expenditure.
And as a bait and sweetener
for
that continence
the President is proposing, not only a continuation
of the emergency tax reductions that took place
in the recession year of 1975,
but also some decrease
for the lower- and middle-income classes
going into 1977.
The President regretfully, you'll recall,
vetoed the continuation of the recession tax reduction,
but then, just as Congress was about to go home
for the Christmas holiday, the President,
who wants a tax reduction
even without the expenditure reduction,
in order to keep up the momentum of the ...
of the recovery,
agreed for a nominal promise by Congress
that it would
think hard on the problem
of controlling the rate of growth of federal expenditures.
He designed the tax bill.
Well, I don't see any particular sign
that there's a new ball game here.
We still will have the House Ways Means Committee
having to decide what tax changes it will make
and which of the President's particular recommendations,
which I'm about to discuss, it will go for.
And you will also have the new
budgetary committees
in the Congress having to decide
what will be the total of the expenditure ...
what limits we put upon that
and what the tax resources will be for that.
I think we do have some changes in structure
in the Congress, but since I've never thought
that the basic problem in the Congress was its structure,
I would counsel that you not be too sanguine
that a change in ...
in structure can change the
actual mode of behavior of the Congress.
The Congress reacts to the electorate
in its own characteristic way.
Well, let's just go over some of the particular proposals.
There's a proposal that there'd be accelerated depreciation
for corporate construction of plants
and purchase of new equipments in areas that average
7% or higher unemployment last year.
And this is a short-run thing
that's supposed to be done in the next year.
There's something, of course, to be said for such proposals,
but if you aren't
ready to go with the plans
for capital formation in such areas already,
having one year to do it is a pretty crowded time
unless the thing were likely to be extended.
I don't know how much quantitatively one could get,
for better or worse, from such a program,
but it sounds good in a overall package.
It sounds as if, although it's something for a business,
it is really in the interests
of the unemployed.
There's not so much in this President's ...
budget and State of the Union message
for the lower income groups
and the unemployed that we can afford to disregard
any item, even rhetorical, in the proposal
that seems to work for their benefit.
Well then there's the reduction in individual
and corporate taxes.
Corporate taxation go down to 46%,
most of it at the individual, personal level,
the family level, and not at the business level.
There is a new proposal, I suppose somebody thought that up
at the last moment and put in at the last moment,
I don't know what it's gonna get anywhere,
that there be some incentive to encourage low income
and middle income wage earners to buy common stocks.
We've already had a significant increase
in the Keogh plan for the self-employed,
with respect to pensions.
The argument there is that since corporate executives
are given loopholes inconsistent with fair taxation
of every dollar of income as any other dollar of income,
then you ought to also have a loophole
for the self-employed.
And I know that for a person like myself,
this has been a significant gift.
I don't feel that I particularly need a gift of this sort,
but it has been given to me
by recent administrations and Congress.
In addition, I've had a supplementary tax shelter provided
to university professors on a very generous scale
for the last couple of calendar years,
and now we're going to get another.
It's a much greater boon to the upper income groups
than you would think at first blush,
because what's $1,500
to a high income corporate executive?
But this is the sort of thing which,
if he has any wisdom at all in the giving away
of his money and putting it in trusts,
operates unto the grandchildren,
the cousins,
and so forth, and it really amounts to
a considerable
tax subsidy.
It's another backdoor tax expenditure
at a time when we're trying to tighten up desperately
on food stamps and on school lunches
lest some lower, middle income child
get a free school lunch, which he's not entitled to
and which, perhaps, will undermine the incentive
of his father and mother to go out to work.
At that same time that we're trying to tighten that up,
we're loosening up and giving some
small little tidbits
to what you might call the middle middle income classes
and the upper middle income classes.
All you have to do is keep this stuff in common stocks
for seven years and
you're, if not home free,
you've gotten rid of a good deal of your tax liability.
There's been proposed a three-tenths of a percent increase
in both employer and employee Social Security taxes,
effective next January 1st.
Since the ...
Social Security program
has never been fully funded, it has always been obvious
that there will be increasing tax rates required,
over time,
and this recognizes
that fact.
The President, as far as I know,
has dropped his view
that Social Security payments should be
indexed only up to 5% increase in the cost of living.
That's a very strange view
at a time when
the liability of every family ...
elderly, needy family ...
was that the cost of living would rise by more than 5%,
the President wanted to take it away.
Now that, as he says in his messages,
we've made some progress on the rate of inflation,
so it's unlikely to go above 5%,
I guess the President feels there's no reason
to espouse a politically unpopular proposal.
He might as well go along with it
since he doesn't think it's gonna cost him very much.
There is talk of consolidating various
federal health programs into a block grant
to the states
and ...
what, I suppose,
captured the notice of the person
in the street more was that
even elderly people
will have to pay
up to $500 for
unusually high medical expenses.
But, since a large part of the population
would be in real distress
if they had catastrophic illnesses,
the President, in his program,
has agreed to provide insurance for
catastrophic illnesses.
Let me say that
I don't see any
reason why a liberal
should be
unduly concerned
about some payments
in the health area by
the rather
poor part of the population.
You know, in England it's been a matter
of almost ideological controversy as to whether,
for spectacles or for false teeth,
the British citizenry should be
charged any fee at all
by the British Health Service.
And the people on the left and labor party
were very much against any fee whatsoever,
even 25 cents
for a prescription.
However, this is just really part of the same philosophy
that goes into deductible insurance,
private automobile insurance ...
$100 deductible or $200 deductible.
This holds down
the unnecessitatis claims
in the automobile casualty area.
It ...
applies something against the administrative costs
and since, under an absolutely free health service,
you get a great amount of nuisance medical consultation ...
hypochondriacs who,
at the expense of
other people's access to the doctors,
utilize a lot of his time,
if you can cut that down by very small fees,
even token fees, then, in principal,
it's a good thing.
I think there always should be,
somewhere, an escape valve
so that a person who needs healthcare
and can't pony up even $200
should have some way,
in the end, of getting that healthcare.
But I must say that the uproar over this,
in many circles, is not something which
I think
should be
approved of.
Well, there's a little ...
Touch, shall I say,
a little gift again,
to the
upper middle classes,
particularly if they're farmers or small business men,
on helping them pay their estates taxes.
If a farmer ...
Let's think of a poor, Iowa farmer, if you can imagine such.
The family farm has $500,000 worth
of equipment
and buildings and land,
and in the fullness of years
the head of the family dies
and he wants to pass this farm on to his children ...
well, the government bailiff is right there at the wake
because on an estate of $500,000
you have a considerable tax obligation,
even after you allow, under the marital deduction,
120,000 to your wife and even though you've given away
over the years as those poor, ignorant, Iowa farmers
are prone these days to do,
in the form of trusts and shares in the farm ...
some part of it, you still have this obligation.
Now, if you were in distress and had to sell this farm
on very short notice for whatever it will fetch,
then you might well get less than its fair market value
in a distress sale and you'd have to pay your taxes.
And that's a bad thing, and might even have to be sold
to outsiders rather than stay in the family.
Well, under the present law,
there really is a pretty generous provision.
You can pay this over 10 years.
The interest rate used to be 9%
but it's about to be lowered to 7%.
9% sounds high, but during much of the time
that you had to pay 9% on this sort of thing,
if you went to the bank to borrow you paid 18%,
and on overnight money you could get more than 9%.
And the cost of living was rising
by more than 9%.
So we really can't think of 9% as a high punitive rate,
and certainly 7% even in this week that I'm talking,
when treasury bill yields are a good deal less than that,
is not a high rate.
But the president wants to give you
five years of postponement.
Well, five years of postponement
of a $500,000 obligation
is itself, since time is money ...
interest is always earn-able on money ...
is itself an outright gift, really,
to an income class that,
in terms of human need or equity,
as most
people define those terms,
does not have a very strong case for that.
But the President needs some sweeteners
in Iowa.
And it's possible that he gained
some political mileage in that regard.
Some of us, who aren't farmers, by the way,
are going to be beneficiaries and get a free ride
along with this, or our heirs are,
if it should come to be
passed.
Well, that's the
long and short, I guess,
of the President's proposal.
It's not a program which
shows concern to
step up
the rate of the recovery or, what I think is more important,
which involves any continuancy planning
on doing exactly that if
the recovery,
as it proceeds throughout the four quarters of this year,
turns out to be a little weaker,
or for that matter a little bit stronger,
than the consensus forecasters think.
What we have here is something which I think
probably ought to be a matter of political debate:
fundamental value judgements
on the part of the electorate,
with all sides presented forcefully
to the electorate for its mature consideration,
and for reflectioning upon
what are the essential
programs at the federal and at the local and state levels
which a majority of the electorate,
or a preponderance of majority ...
whatever you think is required for legitimacy
in collective decision making ...
What is it that the people want?
Now, I think you'll find, and past elections have shown it,
and I suspect that future campaigns
and elections will also show it,
that the public mind is divided.
On the one hand, the public is struck by
the fiscal problems of New York City.
The public thinks "there but for the grace of God go we,"
in Memphis, Nashville
and Boston ...
I don't mean to pick out any particular cities ...
The public time and again, and with increasing frequency,
has voted down bond issues
showing a certain amount of tax consciousness.
And no wonder, since for the last two or three years
the general American ...
society has not been experiencing
the trend rate of real growth of income
that has been characteristic.
On the other hand, the governmental programs
got there, generally, through a political process.
People, many at least,
are genuinely distressed
if they learn, either the easy way or the hard way,
that there are starving people in their vicinity
and the minimum
welfare programs
can be regarded
as a vast system of social mutual reinsurance,
which we've all voted upon ourselves.
And I expect therefore, that
a ...
clever interrogator
can get from the public the answer
that they want the public sector down.
All he has to do is concentrate upon the tax bill.
And he could also, at the same time,
get an inconsistent response that the public sector
is about right and ought to grow
in accordance with the growing needs
of the American people collectively considered.
-: If you have any comments or questions
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