- Welcome once again as MIT professor Paul Samuelson discusses the current economic scene. This bi-weekly series is produced by Instructional Dynamics Incorporated and was recorded May 19th, 1972. 

- I do a great deal of traveling and some public lecturing, and it's always a matter of surprise to me, also gratification, the variety of the people who listen to these tapes, whether it's somebody from the planning commission in Puerto Rico or some high official in the Italian Central Bank, or I suppose one should feel flattered that the Allende government is interested in my views on the passing economic scene. This enables me to envisage an audience and the topics which different people will be interested in. So today, I'd like to discuss a variety of current topics. I am interrupting the long term outlook for international trade of a rich country like the United States. In my last tape, I reviewed the optimistic view of conventional economics, that if the price is right, there will essentially be no hitches and no problems in connection with moving to a free trade situation, keeping to a free trade in a world of dynamic productivity change. Because so much news is popping right now, I think I had best interrupt the continuity of that discussion, I will summarize when I come back to it in the next tape or the one after that, and make some comments on the current news. First, at the personal level, there was the very surprising, sudden resignation of Secretary of the Treasury Connally. This was announced to a world which had not anticipated the event, and in the place of Secretary Connally, Dr. George Schultz was shifted from heading the Office of Management and Budget to being the new Secretary of Treasury. Now, how do we appraise the regime of Secretary Connally? Why was the shift made? What does it foretell for the future? Finally, what sort of a man is George Schultz and what can we expect to come from this change at the top of the Treasury? I'm an economist. I'm not a political scientist. I am not a Washington insider, privy to gossip, so I have no sensational revelations to make as to why Secretary Connally resigned at this time. One presumes that he signed up for a limited tour of duty. One presumes that that limited tour of duty ended some time ago, and that Secretary Connally, at his volition, left this position. I see no reason to go against the widely held view that Secretary Connally would like to be President of the United States someday. Whether on the right of the Democratic party, or whether in the Republican party is perhaps not so important to him as that he achieve that particular goal. Since he has finished, in a sense, an important task at the Treasury, it's not unnatural that he should want to step out. And so I think I will take at face value the rather fulsome praise which President Nixon gave to Connally in announcing this sudden resignation and the return praise, which Secretary Connally gave to the president. I don't think we've heard the end of him. If you want interesting hypotheses, the most interesting hypothesis that I picked up in a recent travel trip to Pittsburgh was that President Nixon does not intend to run again and that Secretary Connally is his choice to run, and that Secretary Connally will have an important function in ending the Vietnam War and negotiating a peace in Paris, and that the great success of George Wallace at the polls, both as indicated prior to the shooting of George Wallace, but also as indicated by the preponderance of his victory in Michigan and the size of his plurality in Maryland, despite the fact that he was lying in a hospital bed with the serious possibility of being paralyzed from the waist down. A southerner there would therefore have certain merits. Probably some of you have seen the New York Times analysis of who has been voting for Wallace, and their hypothesis based upon an analysis of these voting patterns that Wallace on a third party is a greater threat to the Republicans, to President Nixon, in taking away votes which he would otherwise get, than he is a threat to the Democratic candidate. But remember, since we have never, in Congress, gone about the business of setting up some kind of sensible reform of the electoral college, a successful third party run by George Wallace in a number of states, even though he were to draw even handedly from both parties, and even if he were still to remain in the strong minority, would still make it quite possible that no candidate would have a majority, and we would again in American history have certain crises based upon having, in this case, not even an unambiguous outcome, throwing the election into the House of Representatives or into some other state. Well, as an economist, I will appraise how Secretary Connally did in the job. First, Secretary Connally was a man, is a man of tremendous public face. He is really the only member of the president's team who has been able to cut any ice with Congress. He's able to look the hostile congressman in the eye and look them down, as you might say, in Texas parlance. So, he has served the president very well. You will remember almost a year ago, early last summer, when there was an agonizing reappraisal at Camp David as to whether the old game plan was to be junked or not, and after a weekend of meetings, an announcement was made that Secretary Connally would be the economic spokesman for the president. And Secretary Connally announced what Newsweek called the four point no action program. As we said at that time, the voice was that of Secretary Connally, but the policies were essentially those of George Schultz and of the original Nixon economic team. The old game plan was reaffirmed on that occasion. Still, it's interesting that Secretary Connally was used as the thrust to speak to the Congress, to speak to the people, and he certainly was effective in that role. But he had a much greater importance, and I think this will go down in the detailed annals of the economic history of our country. I believe that the decision announced at that time was against the advice proffered by Secretary Connally. I think that Secretary Connally said you should throw away the old game plan, you should modify it very substantially, but at that time, he was overruled. When the August 15th crisis arrived on the international scene, and when the president was forced to suspend gold convertibility, this was not an active choice by any administration, Republican or otherwise. It was forced upon us, I believe, because of the chronic overvaluation of the dollar, which had persisted from the late 1950s, exacerbated, finally, by a rash of speculation against the mark in the spring of 1971, just over a year ago, which was successful speculation against the mark and caused it to be appreciated, and similar speculation, where possible under exchange controls, against the yen. Since the president had to act internationally, he took this occasion to succumb, I believe, to the advice of Secretary Connally. Now Secretary Connally is not an economist. He is a lawyer, but he is a political figure, and I think that he kept saying to the president, in season and out of season; you are going to be murdered at the polls if there is as much unemployment in the industrial states of California, New York, Illinois, Michigan, Ohio in November 1972 as there was in November 1970, then you will be in real trouble and your party will be in real trouble. He probably reminded the president that the president's own advisors in the spring of 1970 had not predicted for the president that he would be going into the November 1970 election with the lack of abatement of inflation, which in fact prevailed up to that time, and with the intensifying of the unemployment. Quite the contrary, some fairly authoritative information from Washington would have suggested that there was greater optimism about how the old game plan was actually going to work, and anyone who has ever advised the prince or presidents will know that the Chief of State has a long memory, and he remembers if he has been led down the garden path by over optimistic advice on previous occasions. And with a forceful man like Secretary Connally speaking to the president, I believe no further explanation is needed as to why, on August 15th, in that chat to the nation, the president threw away the old game plan, threw it away more decisively than he had been urged to do by the Democratic opposition, and introduced the phase one complete price wage freeze and prepared the way for the phase two limited price wage control epoch in which we now live. As a third part of that announcement, there was the expansion of the federal net deficit and the stimulation from the federal budget to the economy. This took the form of restoration of the investment tax credit of accelerated appreciation slightly before mid-August 1971 and the repeal of the automobile excise tax and some very nominal reductions in personal income tax rates. That, you may remember, was the period in which the president said just off camera, I am occasion now, between the election of November 1970, and the election of November 1972. President Nixon was moved from his original vision of how he could best, in our pluralistic democracy, conduct fiscal and monetary policy to a more expansionary policy. Well, I give Secretary Connally credit for that. If you think that the August 15th announcement, except for it's suspension convertibility, was a disaster, you must give him blame for that decision, but since I think we needed more expansion in terms of the social priorities that I hold dear and since I thought benign neglect in the area of incomes policy was an extremist position. I give him credit. Now, I don't say that in the belief, either on August 16th, or at the turn of the year, or now, that I have ever had confidence that limited price waste controls could be made to solve the dilemma of America's fiscal problem. We have a very important short-run and long-run trade-off problem between the tightness of our labor markets and the degree of our wage and price inflation. For a short period of time, direct wage price controls can improve that trade-off, but I think they've become increasingly inefficient, increasingly inequitable, increasingly ineffective, and in a heterogeneous country like ours I don't think the American electorate has the stomach to continue them so that although Paul McCracken, when he left the government at the end of last year, said in his final words that direct wage price controls would be with us for a long time and although any exponent of them like John Kenneth Galbraith if he is candid, and Dr Galbraith is candid, believes that they should be permanent because the problem will simply reoccur after you've got rid of them if you do maintain high employment. Despite all that I have never, as a political predictor, thought that they would be permanent. I thought that the chances are, and I still think that, that about next April when the powers expire they will either officially become a dead letter or they will nominally become less and less effective and more and more of a placebo. Nonetheless as I read the price index numbers, as I go below the price index numbers to try to interpret whether the controls are distorting the message which they bring and as I try to reckon how much trouble we're storing up for ourselves in the way of post control bulges I am of the opinion that something has been accomplished in terms of breaking the momentum of the creeping inflation and speeding up the rate at which the inflation is abating. That rate of abatement, by the way, has been extremely disappointing and I do not believe economists who after the fact tell me that the rate of inflation abatement is about what one should have expected, about what they themselves expected under the circumstances that actually happened because I have gone through every regression equation on this subject that I could find and looked at its before the fact predictions and then I've looked at what actually happened and I've done the same thing, tried to do it fairly, to calibrate people who in a literary way are speaking prose and also speaking in kind of metric equations to see what they seem to be saying before the fact and then I compared what happened after the fact with what they said and I think that I have learned something and I pity other economists if they have also not learned something, namely that the wage price creeping inflation problem has been surprisingly more virulent than one had a right to expect on the basis of past patterns of experience by which I mean pre-1968 patterns of experience. Well, Secretary Connally is gone, let's now turn to Secretary Schutz, the king is dead, long live the king, that is always the rule for succession, that's true also at the bureaucratic level. George Schultz is a Princeton graduate, a Marine, fighting Marine in the war, PhD in Labor Economics from MIT. He was on the MIT staff, very much liked, very much respected. He received a call that he could not refuse from the University of Chicago business school, Graduate School of Business. He went there, he lived up, I think, to all of their rosy expectations, so much so that he became the dean of that school and under his deanship I believe that school made remarkable progress both in accomplishments and in reputation. He was called down by the president at the beginning of the term and he really did not know the president intimately. He was called in to be Secretary of Labor. He accepted, he was so outstanding as the Secretary of Labor that he became the number two confidant of the president, it is said, Henry Kissinger, the number one confidant on international affairs and on domestic affairs. George Schultz, he was moved to head the new office of management and budget, continued in this position. Very important on the team, perhaps almost overshadowing the council of economic advisors under the more dissident Paul McCracken and he has remained the tireless, loyal advisor to the president. If the president had very short notice to take account of Secretary Connally's decision it would be the most natural thing in the world for him to have taken, to have shifted, a stalwart right on the scene, and I believe that's the main reason why he must have shifted George Schultz to the Secretary of Treasury. Certainly that is the most prestigious cabinet post. I would have said the Secretary of State is the most prestigious cabinet post but in the last 12 years, this is not just under Mr. Nixon's administration but goes right back to the Kennedy administration, the White House has superseded the state department and it's been rather an ignominious role that the Secretary of State has had to play, whether it was Dean Rusk with McGeorge Bundy double guessing him or whether it was Rogers, the very good personal friend of the president. Nonetheless, when you move out of the White House you will have somewhat less influence. Now my time is going so let me try to say what difference will this make in politics. I think that the man on the scene has a tremendous importance which no outside advisor can ever have and so, although Connally still will be giving advice to the president no doubt, still will be a trouble shooter, perhaps will help to settle the peace in Paris, he will not be in there day in, day out pushing his viewpoint to the president. I don't know what Dr. Schultz's day to day changes are but I think he's a person of great integrity and I think that he thinks a problem through and when he has done that he tends to stick to that unless he has convincing evidence to the contrary so I would suspect that he still believes that there is an awful lot of merit in the old game plan and that the price control, price wage control program is a good deal placebo, where it is not placebo, it is actually toxic and harmful and is exaggerated and so I would expect him to bring, to the administration, the general Chicago view of economics in a very forceful way. On the international side, Secretary Connally was sometimes a bit abrasive with our allies and there is probably a sigh of relief in certain problem market quarters that a reasonable man like George Schultz has now been put in there or even a new man, a man with a clean slate. George Schultz has not been an expert in macroeconomics, he has not been an expert in international economics but any good, intelligent economist can brush up on this and I would expect Dr. Schultz to be in favor of some further agreement on exchange rate flexibility which I regard as one of the most important areas of the international settlements still to come. I would expect him still to attach great importance to federal reserve policy with respect to the rate of growth of the money supply as against fiscal policy but I do not see any discontinuity in policy, certainly not until we have come to the elections. Let me hurry on now to comment on the new revised numbers which we have for the first quarter of the GNP. They have been revised essentially upward. Some of us suspected that that might well be the case, if there was a change it would be upward. The rate of growth of real output, which was first reported as 5.3%, is now reported at 5.6%, that is to the good, it's not gigantic but it is in the right direction. The rate of increase of prices as measured by the implicit deflator, which was at first reported at the very disappointing 6.2% is now at 6%. Very little improvement over the first number but some improvement. I won't comment on the reasons why the 6% is excessive in terms of making your longer run prediction because there are some very special factors in it and I have mentioned those before. I think what is very encouraging to business is that profits had increased. I had suspected this, I mentioned it in an earlier tape that as an institutional investor I suddenly changed my numbers in the upward direction and it turned out to be the high man, particularly with respect to profits when I said that they might well be 20 to 25% after tax is higher in 1972 than 1971. Well, after tax profits, we're growing from the fourth quarter to the first quarter according to my calculations, seasonally corrected at 21%. The before tax number was even higher, more like 27%. So we are in a substantial recovery, generally people are advising their numbers forecast upward, upward near to that of the Council of Economic Advisors and I go along with that change. Next time I hope that we can return to the longer run international trade problems. 

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