- Instructional Dynamics Incorporated welcomes you to another in a series of commentaries on the current economic scene for the week of January 27th. Speaking will be Dr. Paul Samuelson, Professor of Economics at the Massachusetts Institute of Technology. Professor Samuelson what's on the docket for this week? 

- I've just been reading the new Economic Report of the President, and I'd like to make some comments today about it during this last part of January. Of course this is a lame duck report of an outgoing administration. So it doesn't have the usual interest as a harbinger of policy programs yet to come. After all who remembers that last report that Dr. Saulnier willed the nation when President Kennedy's new team was taking over. Nevertheless, the present document I think does have a certain value as a valedictory, since big things did happen in the economic sphere during the Kennedy Johnson years. And it does provide a background against which to measure the problems and accomplishments of the new Nixon team. As is now standard, the report is divided into two parts. The first part is really the President's own. It may be written for him by council members, but that's true of all official documents ever since the time of Woodrow Wilson who used to peck these things off on his own typewriter. All official papers of the President are in a sense ghosted for him by his advisors and staff. Nevertheless they carry the definite imprint of his personality and represent in the last analysis his views and not that of the ghosts anymore than of the typewriter that types them. But the second part of the Annual Report, Economic Report is the professional work of the professional council. It goes without saying that this second half doesn't say anything that the President would disagree with, but I believe there is no implication that the President does agree with every last word and emphasis in that report. Now most people just read the first part improperly. But most economists hurry through that first part because what they find scientifically interesting is in the second part. Indeed so great is the interest in the council's professional report that thousands of copies are sold every year for classroom use. And it's actually become a commercial, commercially profitable enterprise to edit these volumes for commercial sale to college classroom use. And particularly in the 1960s the council reports under Hiller, and Ackley, and Okun seem to have drawn widespread approbation from inside the academic profession. Now I've just gone over my bookshelf of all the annual reports since the very beginning. But before giving you a highly subjective survey and appraisal of them, let me call attention to what is in the present one. At the beginning, and this is in the President's own report, there is an explicit prediction of what next year's GNP will be. The forecast is for next year's GNP of 921 billion that's an increase of about 60 billion or almost exactly seven percent in money terms. This forecast is almost one percent higher than the Conference Board Forecast of Paul McCracken and others that I have mentioned earlier in previous tapes. And of the typical bank forecast like that of the Harris Trust Company which I mentioned. Indeed this forecast is getting rather close to my own, I may hasten to say independently arrived at forecast which was for 924 billion. And it's a bit shy of Heller's, Walter Heller's forecast of 926 billion. The very fact that there is a forecast in the document is itself significant. Some of you will recall that Arthur F. Burns when he was Eisenhower's first Chairman of the Council of Economic Advisors, had always strongly resisted any such procedure. Believing apparently that the Dutch and Swedish patterns in which the government makes an explicit forecast and sometimes sets targets and goals was not called for by American law. I should say parenthetically that we've had a number of interesting careful audits of these forecasting forecasts by the Dutch Statistical Office and by the Swedish Government Authorities. Professor Henri Theil now of the University of Chicago and earlier from Rotterdam has gone over them with a fine toothed comb and the results of the audit seem to be that these forecasts have been amazingly good and to have been actually improving in accuracy over the years. Well it was only at the end of the Eisenhower years that such an explicit forecast was ever given. That was in the time of Dr. Saulnier, not in the time of Arthur Burns. Actually even a few years earlier there had been an implicit forecast in the official year end documents, and this for the reason that you cannot present a budget estimate for the new fiscal year without making some definite estimate of what the level of income is likely to be that forms the base for our progressive income tax. So clever analysts could deduce from the budget material what the projected GNP actually was, and this number kept coming out in congressional hearings on the budget. So now, it seems to have become practice, we'll see what the new administration does actually to give an explicit forecast. It was on the basis of this explicit forecast of a seven percent increase in money GNP that the outgoing President Johnson with something of a concurrence agreed upon in advance by the incoming President Nixon proposed that the 10 percent surcharge be retained after July 1st. Of course President Nixon keeps all his options open, and if new information suggests that that surcharge should be cut to one half and not extended or not extended at all. He isn't at all committed by anything that's happened up to this time. The official forecast does not expect inflation to come to an end. I was given recently two quotations from Arthur Burns from something that he seems to have said in Philadelphia. And one of them, and I quote and I can't vouch for the accuracy of the quotation, went something like this, "That if we don't control inflation we will have a crash." Well now I'm not sure exactly what a crash is, but we're certain to have one of those things if the second quotation of Arthur Burns is correct namely that "The only acceptable rate of price inflation is a zero rate of price inflation." Because neither the outgoing council, nor Wall Street, nor any of the business economists that I know expect that our four percent rate of inflation may taper down to a zero rate within this year. The optimists among them think that the rate of inflation may perhaps taper down to something like three percent. That's the unanimous opinion of economic experts. Well let me modify my opinion, I can't say that this opinion is completely unanimous. I do know a professor at Cornell who says he doesn't believe in Phillips Curves relating current unemployment and wage settlement increases. And who thinks that a moderate reduction in the rate of growth of the money supply will actually end the wage increases in excess of productivity fairly easily in the coming year. But I think he has rather few adherents in that particular belief. Going back now to the new Council Economic Report, I could not find an explicit quarter by quarter profile of expected gross national product increases in it. At least from my first examination. It is my inference however, that Dr. Arthur Okun probably does go along with the majority view that the first half of 1969, particularly the second quarter of it will show a definite slowing down in the growth rate relative to the growth rates that we've seen in the quarters of 1968. But this brings me to an interruption of my train of thought, my first duty I suppose is to keep listeners up to date on what seems to be happening. And I have been brooding over the fourth quarter figures. You may recall that the first estimate that the Department of Commerce has given us says that the GNP, the gross national product grew 16.8 billions in the fourth quarter of the year, this is in current money terms. Which is a slight drop, significant but not large drop from the 18.1 billion growth of the third quarter, and a somewhat larger drop from the 21.7 billion of the second quarter. However, as I read the fine print, the official release tells us that this estimate was on the basis of only the October and November inventory data. The December figures were simply unavailable. Now what about December? We know that the Christmas retail sales were disappointing, whether that was due to the flu, or to a rise in the saving rate back to the seven percent level that fitted in little more with the earlier predictions of the adherence of fiscal restraint or to whatever reason there was that disappointment in retail sales in December. This suggests to me that quite a lot of inventory may have piled up involuntarily in December. So when the Department of Commerce comes to make that second estimate of the fourth quarter figures, I wonder whether their report will not go up from a 10 billion annual rate of inventory accumulation first estimate by a couple of a billion. Now I suspect that this will make their second estimate of total GNP growth in the fourth quarter right up there with the kind of growth that was reported in the third quarter. Well who cares about ancient history? My reason for bringing this up is that some analysts expect inventories to be top heavy in the early months of this year precisely because of last year's involuntary inventory accumulation. They say that all those autos in dealer showrooms are going to be followed by a cutback in Detroit production schedules. And thus they're among those who are betting on some weakness in the first half, not a recession but some weakness. Now say to quarterly rates of growth that averaged in the first half 13 billion dollars per quarter, rather than say 18 billion dollars per quarter. You can get an argument on this matter. There are other people who say that, and some in the Detroit auto companies, that if we keep the inventories of the dealers big, top heavy if you please they'll get out like bird dogs and sale those cars and really hustle. And so the production schedules can be maintained. Well now I suppose that a good monetarist should not believe in weakness in the GNPs in the first couple of quarters of the year. Putting myself his shoes I would be tempted to look for 18, 20, or even 22 billion dollar rates of growth per quarter in the first half of the year. And indeed if the first half should fall significantly short of this, and if as I expect the Fed will be slowing down the rate of growth of the money supply between now and Father's Day. Then I guess the monetarist would have at that time to go through something of an agonizing reappraisal. Were I in his shoes then, I suppose I would have to predict that the last half of the year will also be at least as weak as is fashionably, fashionably being expected by non-monetarists that the first half will be. Well in that case I'd have to come up with an estimate, the GNP will simply not end up for the calendar year having grown the seven percent that the Council of Economic Advisors has just now predicted. But I should speak for myself, and not for Miles Standish and if the first half does turn out to be about as weak as what we've just been talking about, I shall then most likely still look for something of an upswing in the third quarter. Now it is possible that the momentum of the boom could've been broken by then, and that the adverse delayed effects of Federal Reserve restraint to which I give some weight would make for a continued stagnation. But putting all the factors together quantitatively in an eclectic fashion, it seems to me at this point, and actually I don't, I'll know more in April, but at this point it seems to me more likely that the possibility of a working off of inventory would be followed by some resumption of inventory building. When I say working off inventory, I don't mean an actual decline but a slowing down in the rate of growth of it as the economy catches up. Now the exact timing of such a ripple in inventory building is very hard to gauge. And I wouldn't be tempted to bet that a process like that could be completed so quickly as two quarters if it weren't for the fact that I'm rather expecting that the Nixon Administration will find itself willy nilly stepping up governmental expenditures by mid-year beyond the lame duck figures we have already been presented. I should say that those lame duck figures do have in them as part of legislation a very sizable increase in government payrolls in the third quarter of the year. To the tune of something like three billion dollars annual rate. Well let me return now, to a purely subjective survey of the work of past Councils of Economic Advisors. Now I want to warn you that I can't pretend to be free of prejudice in this matter. And I regard this as something like Kiplinger's Newsletter, I speak informally and not in the polished and careful terms that would be appropriate to a written article on the subject. As Dr. Samuel Johnson said in another context, one is not under oath in informal discussion of this kind and so a little candid statement of viewpoint is not inappropriate. Let me then give this highly prejudiced, informal survey of the Council of Economic Advisors. The institution was set up you'll recall by the Employment Act of 1946. Sometimes called the Full Employment Act of 1946. The exact intention of Congress in setting up that act cannot be summarized definitively because Congress does not have one mind and Robert Taft at that time had quite a different view of the matter than did the partisans of the legislation. But the first Chairman of the Council of Economic Advisors was a very distinguished elder statesman in economics, Edwin Norris, Agricultural Economist. He's Emeritus today from the Brookings Institution and he's a man of very high reputation in the economics profession. He is not at the forefront, however of research in the area. And his original view was that the council should be kind of an academic scientific body. And this did not survive the man who followed him immediately Dr. Kiserling. Dr. Kiserling is not popular with professional economists in every quarter. Sometimes it's said against him that he doesn't have a PhD in economics. Well that can't be the real reason because we know popular people without PhDs and we know people with PhDs who are utter idiots and also unpopular. But in any case, Dr. Kiserling was an activist he followed a line of his own and he did believe in getting involved in things. As I score his record, this is purely subjective, it does not go down in history as a distinguished one. He spoke a great deal in favor of private enterprise, but that was taken perhaps wrongly to be just pious talk. He spoke a great deal about controlling inflation but those people worried most about inflation were perhaps not pacified by his remarks. And according to my records he did not call the 1948 recession as early as a number of other economists had called it. There's nothing despicable about that, but he did right into 1949 when everybody could see that there was a recession still advocate the fiscal restraint which he and President Truman had thought appropriate in earlier stage. One thing he did do for the country that I think was extremely important and that is he put a great deal of pressure upon the steel industry and some other basic industries to expand capacity beyond what they wanted to do at the time and this stood us in very good stead in terms of national security during the Korean War period and later. Well in 1952 when General Eisenhower came in, one might say that in congressional quarters the Council of Economic Advisor's stock was being quoted at a very low rate and there was even a possibility that the whole operation would be phased out. At this point Arthur F. Burns was appointed Chairman, and I do think that he succeeded in restoring the stock of the Council as an institution. In fact, according to my reading of the matter he handled the recession of 1953, 54 very well. He was a strong voice crying in the Eisenhower wilderness in favor of expansionary fiscal and monetary policy as against Secretary of Treasury George Humphrey. And in these first Eisenhower years, I believe that a Burns Council generally did prevail. His finest hour in my judgment, was in predicting that 1955 would be an extremely strong year. He made a prediction beyond that of any of the expert analysts and he turned out to be right in this matter. He was followed by Dr. Saulnier and I believe that if we give credit when credit is due and if we have to give blame when blame is due, I would score the last four or five Eisenhower years very low. They were years of great stagnation, of very slow growth, of eroding profits, and of a rising trend of unemployment. And therefore, the new coming council of Heller, Tobin, and Gordon, I mentioned three names because in the Kennedy Johnson years the council has been a committee and not a one man show, was I think the best council we've ever had. No my listeners know that I have a favorable view of the present Council of Economic Advisors. Paul McCracken, and Herbet Stein, and Hendrick Houthakker. But the real vintage group, I think, was the first Kennedy council. It was followed by two very able ones I may add. I have gone over the oral history of the Kennedy economic policies in the archives of the Kennedy Library, and I've recorded my own memories. And I have just been astounded by what happened in the first 90 to 100 days within the council. Very important concepts that have now become standard of the gap of the full employment budget, of the fiscal dividend, of the, the analysis of how structural unemployment would be affected by changes in effective demand. All these things were engineered during this same very busy period. And since this is a time for valedictory, I will simply say that the 95 months of unbroken expansion which undoubtedly will go to over 100 and which is equivalent in terms of the annals of the National Bureau of Economic Research as one would measure the age of a man to a 300 year old, well I exaggerate, 225 year old man. Is the fitting tribute to the activism and expert analysis of the Councils of Economic Advisors during this particular period. I could not have predicted such good performance. I did not predict such good performance in the State of the Economy basic paper that I prepared for John F. Kennedy just as he took office. But as I went back to re-read that paper, the vision of what constituted our problem that was in that paper I think was vindicated by subsequent experience. Let us hope that with the new problems, some of them inherited from the very success of the Kennedy Johnson expansionist measures, that the new problems of the new council will be as resourcefully and as effectively, and now I speak as a professor of economics and as interestingly treated from a scientific viewpoint as these old problems. 

- You have been listening to Professor Paul Samuelson, Professor of Economics at the Massachusetts Institute of Technology. If you have comments, questions, or suggestions write Instructional Dynamics Incorporated 166 East Superior Street, Chicago 60611.