-: Welcome once again as MIT professor
Paul Samuelson discusses the current economic scene.
This series is produced
by Instructional Dynamics Incorporated.
Professor Samuelson, as we move
into the winter heating season
when there's an increased demand
for petroleum products and natural gas,
the question has to arise once again,
where are we in terms of an energy policy?
-: Well, to discuss that issue,
let me first describe two unhedged views
on oil policy that are really
diametrically opposed to each other.
The first view, perhaps associated
with Republicans more than Democrats
and in part with the administration,
but still not completely typical of anybody
I would think, but certain economists,
would go as follows.
You begin with the axiom,
the only good price control program
is a repealed price control program.
The sooner we phase out all controls the better,
according to this view.
The same would apply actually
to President Ford's tariff on oil imports.
According to people of this way of thinking,
there is no real long run oil emergency.
Provided we let prices rise and fall
with supply and demand,
there's just nothing wrong with the US
importing half or more of its oil by the 1880s,
if that's the way the cookie of supply and demand crumbles.
Furthermore, provided we let the different kinds of energy,
natural gas, coal, oil, gasoline,
fissionable uranium, et cetera,
let them in effect be auctioned off at their market worths,
the problem will take care of itself.
Any rise in price that occurs
under this scenario is what ought to occur,
given the scarcities of the situation.
People of this persuasion, I think,
tend to go on to argue
that the temporary monopoly of OPEC,
like any temporary monopoly,
is going to disintegrate anyway.
And having free pricing of energy domestically is likely,
this school thinks,
to be the most efficient way of hastening
that day of disintegration of the OPEC oligopoly.
Well, that's
one view.
By contrast, let me try to describe
in an unhedged way, still another view.
Perhaps one associated with many
of the Democratic Congressmen.
According to this view, if you decontrol oil,
and if you try very hard in this immediate short run
to promote US independence from imports,
that that will do more of what it's already been doing.
Namely, increasing the rate of inflation
in the cost of living.
That acceleration of inflation from energy
will go farther, will be aggravated
if decontrol is allowed to take place suddenly.
And if the higher prices for fuel
will withdraw purchasing power
from our consumers and thereby slow down recovery,
first place some extra revenues may go abroad
and come back only slowly
into the purchasing power stream at home.
Secondly, some part of the domestic purchasing power will go
as rents to oil producers and oil companies,
and although they will ultimately
be recycled, there is no Say's law,
no valid Say's law according to this view,
which says that they'll be recycled at the same rate.
To put things in the language of monetary theorists,
the velocity of circulation of money is effected
by the qualitative composition of pricing
and countenancing
complete and sudden decontrol
will have a adverse effect
upon the recovery.
People of this viewpoint tend generally
to think of the recovery as in jeopardy anyway,
as not being too strong.
That will be another story to discuss,
whether our current recovery is all that fragile
and is such a tender beast that it will be killed off
by a shock of this sort.
But let me go on with this second view.
Since the wage rates tend to rise
when consumer prices rise,
you can see this, for example,
in the escalated contracts, but you also see it
in the course of collective bargaining.
There'll be a further increase
in costs and prices induced by the
decontrol of oil
resulting in an increase in energy prices.
All this will be further aggravated
by induced increases in airline costs and fares
and rises in prices of all those goods
whose production depends on energy
and which themselves are raw material cost components
for production of other goods.
Moreover, these days, this school argues,
there's not only a pass-through of higher energy costs,
but that there's also evidence of a markup,
some kind of a percentage markup,
on each such increment of costs.
So, the increase in the price of energy
cascades through the system,
not in an uncontrolled way but in an amplified way.
Moreover, just to go on with this,
if government policy on decontrol
and on insulating us from oil imports
does substantially worsen the rate of inflation,
how we will be doing in the Consumer Price Index
in the next two or three quarters
or in the overall GNP deflator,
then this school is afraid that Federal Reserve
and administration policy formulators
will feel forced into tightening the screws
of monetary and fiscal policies.
Tightening the screws on what already threatens
to be a drawn out and weak economic recovery.
So, being stampeded into the wrong activistic energy policy
will thus, according to people of this persuasion,
help to keep the unemployment rate high
in the remaining years of this decade
and will thereby put an intolerable load
on the unskilled earners and on the minority workers,
those parts of the labor force that are most subject
to unemployment, youth and so forth.
Now, I've stated two
quite opposed viewpoints.
Let me
try to
judge where there is strength
in each view and also what the effect would be
of various compromises between these different views.
Notice that neither school that I've been describing
is very gung-ho on project independence.
So, maybe I oughta complete the triangle
by putting Dr. Kissenger, Secretary of State, and
his erstwhile assistant Mr. Enders
into a third corner.
Those who think that the main problem
is to show the rest of the world
that the US can't be bullied by an oil boycott.
That we mean business
and are going to make ourselves independent
of foreign supplies of oils.
More realistically, this view would have to go
in the form that the trend of our dependence
of our increasing dependence,
which has been rather clear in the past data,
that trend must be changed by activistic action.
This third corner school, if I were
going to describe it in the same detail
that I've described the first two corners,
I would have to say, is a great believer
in organizing all of the consuming countries
into an oligopsony.
You fight oligopoly by oligopsony.
A monopoly of a few sellers
is to be checked by the countervailing power
of the monopoly of a few buyers.
And so, Dr. Kissenger is to get together
with the Japanese and the Germans and the French
and form a tight little buying cartel.
Then, in good Yankee fashion,
there's to be hard horse trading and dickering
at some international conference,
and armed with our cohesiveness,
we will then be able to hack out
and agree upon a pricing program,
which does what?
If it brings down the price that we pay for imported oil,
it doesn't play into the hands of project independence.
So, I guess the utopian version of this
would be that such limited
energy, as we continue to import,
should be imported at very low prices
compared to what OPEC,
by its unilateral monopoly, will do,
but we don't allow the sweet tooth
of the American users for energy
to be satiated by oil at cheap prices.
Well, the administration's views and programs
say as you would determine it
from monitoring the speeches of President Ford,
would be somewhere between the first corner view
that I stated and the third corner view that I stated
and I guess a number of the Democratic Congressmen
who've been resisting President Ford's suggestions
on compromise in oil would be at the second corner.
Well, what are we to think?
First, I would like to emphasize
that we must keep a sense of quantitative balance
as to how important the issues are
between these different schools.
Is it the case?
Because if it were the case
that the present system is intolerably inefficient
and the present system puts an intolerable burden
on the incentives to look for oil in North America.
Then the first view, whatever you may think
of its aesthetic and philosophical importance,
would take on a enhanced practical importance.
Well, as far as I can tell from studying
what there is that is known
about the present control system,
there is no intolerable
depressant of incentives under the present system.
If you have old oil, and if you can squeeze
an increment out of your old oil well
which puts the increment
above your quota of old oil,
then you have something which is called released oil
and you don't have to sell that released oil
at the controlled price
of five and a half dollars
a barrel for old oil.
You don't even, in effect, sell it
at the price of internationally imported oil,
let's say $11.50 or $13.50.
You in fact sell it
at something like $18
because you get a chit, an entitlement
with that released oil
and in consequence, there is a tremendous incentive
to generate, at the present time, released oil.
And if you're a believer, as most of the people
in the first philosophical camp
that I've described would be,
in the efficacy of incentives,
in getting people to do things,
then you must be a believer under the present system
in the strong substitution effects
which are in the present pricing arrangements.
Now, what's important about that
is that to the degree that this is true,
that there is even under the present system
an artificial incentive
to
generate released oil,
we cannot look for any kind of a miracle
on that happy morn
when all controls are swept away
in the fashion that Erhard,
as the
Chancellor under Occupied Germany,
disregarding the American generals instructions,
swept away all price controls and then suddenly,
as story goes, it's a little bit overdrawn,
but it's a good story.
We oughta tell it.
Suddenly goods became available on the market,
flowers flourished and so forth.
Well, I don't think you can look for that.
Now, if time permitted, I would have to give
all of the various qualifications.
For example, let's suppose you have old oil
and you've been draining off
a depletable, limited supply of your reserves
so that by no superhuman effort
can you ever get back to your quota level.
Therefore you have no chance of ever
getting into the released oil category.
Still, as a nation, if we are interested
in promoting project independence,
we would like to generate a little bit more old oil
than is now motivated by the price under control of $5.50.
Well, you would have no motivation to do that
because that's all you get on the old oil is $5.50.
So, there are places in which there is a disincentive
under the present control system.
As I've mentioned on these tapes before,
there are stories told, anecdotes,
some of them are good anecdotes,
but it's surprising to me how few they are
and how hard they are to authenticate,
that there is some hoarding of old oil going on.
Well now, to the degree that there is hoarding
of old oil going on, of course that's like
money in the bank for the future
as part of project independence.
But for somebody who's concerned
that the monopoly power right now of OPEC
as it weighs whether in the next month or so
to raise the price of oil, as OPEC says,
to compensate it for the increase
in industrial prices by 10% or by 15%,
whether it's to be $1.50 a barrel
or whether it's to be $3.50 a barrel
or whether nominally it's to be no increase at all.
There is still another possibility, by the way,
which ought to be taken very seriously.
Namely that there is in a nominal increase of 10% of $1.50
or even of $3.50,
but the discounting from list
which has been only very minor up until now, becomes major.
Well, if you wanted to reduce our demand
so as to embarrass OPEC with a lot of unsellable oil
by some of its cartel members at the pegged price,
then this hoarding of old old oil as I'll call it,
as against new old oil,
would be something which ought to be held
against the controls.
Take still another aspect of the control program.
One of the bad things about controls,
particularly if you start
controlling supply and demand prices,
and oil is not a supply and demand price
simply.
But if you start controlling the price
of lumber or the price of meat
when these are supply and demand prices
and lumber moves off to a different auction market,
the effect of a control program
is often to dry up supplies completely
in particular places.
And where I live, New England, would be a great
target for such a disappearance of supply.
However, that is not the way the present controls work.
I don't want to give the impression
that somebody in Washington cleverly contrived
all of these gimmicks and gadgets
which turn out, even though very few people
outside the industry and outside the bureaucracy
and very few in the bureaucracy understand this.
It was done the way the British Empire was formed,
in a fit of absent mindedness.
Nobody quite realized how it was working out
but it's worked out pretty well
as I want to go on to describe on the import side.
Well, on the import side,
if oil brought into the US
costs $13,
that is,
the barge captain plus the
Arabian company
collect $13.50 for oil delivered
in the Boston or New York port,
I don't think that that's what the cost is
to the oil company who brings it in
or the ultimate cost,
to the public utility in New England.
New England is at a natural disadvantage.
It should have thought twice before locating itself
in the far corner of the country.
Although, we have to remember that somebody
has to be in each corner
if the country is by nature rectangular in shape.
However, the other side of this chit
which the producer of released oil gets per barrel
and which sweetens up his return,
is the fact that there is kind of a negative chit
which reduces the price to the importers.
So, under the present system,
there is very elaborate way de facto
of taxing the oil rents
of all the things which have become more valuable
in Kansas and Oklahoma and in Texas and elsewhere.
And a very elaborate control of average cost pricing
and average profit pricing
compensated, though, by marginal effects
which are really quite tolerable.
So, the present system
is not like some price control systems.
Perhaps the German one in 1948 before the Erhard miracle
was perhaps an intolerable one,
made especially intolerable by the propensity
of the German people to obey the law.
A French system could never become as malignant
as a Scandinavian or German system
because of the rampant feeling of individualism
on the part of all the French citizenry
who prefer to go through the red light pedestrian
rather than otherwise in contrast to well-behaved Danes.
So it's a tolerable system.
The second thing is to debunk the fears
of the second school of thought
that if we instantly decontrol oil
or if we decontrol it too fast
that we go right back to the Great Depression
or right back the the recession we've been in or go
very definitely into
an anemic and abortive recovery.
Well, let's just look to see what difference it makes
and I just happen to have received in yesterday's mail,
so it's a convenient thing to refer to,
the new Wharton School
computer forecasts for the American economy
in the next two years,
from the middle of 1975 to the middle of 1977.
And one of the advantages of a structural model
like the Wharton model which brings it in contrast
with a very simplified monetarist model
or reduced form model or even a simple kind of model of the
Neo-Keynesian, Raymond Fair type,
is that you can run through different solutions
and so I'm going to first look at their control solution,
their single best guess as to what's going to happen.
That's the first thing.
Then I'm going to look through an alternative scenario
with instant oil price decontrol.
These runs were made
on September 2nd,
1975.
Since that time, of course, there have been
a little revised production index data
and I would say that the recovery
from September 2nd, that's the day after Labor Day,
until the time that I'm now speaking,
has gone a little bit better
than they could have known about in September 2nd.
Well, for one thing, the first 10 days of auto sales
have been strong and so forth and so forth.
Well, the first thing I looked at
was to see what happens to the rate of real growth
in the next four quarters,
for the middle of '75 to the middle of '76.
And the Wharton School model
is a less exuberant model than many
and it shows, under its control solution
without instant oil decontrol,
a 5 1/3% rate of growth in the current quarter,
that's the third quarter of the year,
the one that's soon coming to an end.
8% rate of growth in the fourth quarter of the year.
That's the strongest it's gonna show
for a long, long time.
Then, about 4.5%
rate of growth in the first half of '76.
The average for the year I make out to be
the average of four and a half and
six and a half,
which would be just 5.5%.
That would be a disappointing recovery
but remember that Wharton is a little bit
on the pessimistic side in comparison
with Alan Greenspan or in comparison with Arthur Burns.
I ought to mention for the record
that Congressional committees
kept badgering Dr. Arthur Burns
to give his forecast of what was going to happen
based upon his announced program of monetary growth
and finally, after many hours of badgering the poor bull,
the toreadors and picadors all poking at him,
he said, all right, you've forced it out of me,
I'm gonna give my opinion but I wanna tell you
it's only personal opinion.
It's not that of the official Open Market Committee
or the Federal Reserve or the staff.
He said, in my view, and he stated his words
very carefully, the present program of 5.5% to 7.5%
range for the aggregate monetary target
from the second quarter of '75
to the second quarter of '76
is fully compatible with an 8% real growth rate.
Now, if that means anything, and maybe it doesn't,
I read that, I wrote down in my little black book
that Arthur Burns thinks that
the real growth is gonna be fully up to
first year recovery and it's gonna be 8%.
Alan Greenspan more recently
has made an announcement for which he was
much criticized by a lot of private economists
and you can be sure the university economists
won't be very late in joining in,
saying we were gonna grow by 7%.
Well, this Wharton growth is about
six and a half, six and a third percent.
Now, let's deal with instant oil price decontrol.
So magic is the one month effect
that it reduces even the current quarter
from five and a third percent to four and a third,
by a full
percent.
Of course that's only a quarter of a percent
in the quarter because these are annual rates.
It reduces by a full percent the
booming, exuberant fourth quarter.
That goes down from 8% to 7% and reduces by a
full, well, I'd say a full percent
down to something like 3 3/4% instead of 4 1/2%.
Well, I guess that's by 3/4 of a percent.
What's gonna happen in the first half of 1976?
Well, I think that that would be regrettable
if the first year's
recovery
were not at least 7%.
That's been the target that I testified
before Congress on.
But it would be even more regrettable
if something which was going to be
about 6 1/3 or 6 1/2% were reduced almost
by a full percent to 5%.
However, what does it mean in terms
of the unemployment rate in the election quarter?
It's not as bad as you might think.
Instead of having
7.9% in the fourth quarter,
as under the control solution
without complete oil decontrol, you have 8.1.
You might say that these are within
the degree of accuracy of the numbers.
Well, that is true but I think that the spread
would be around 7.9 if this forecast is right
or around 8.1 and that is a significant difference.
I may say that these numbers
look a little bit high to me because
we're now
getting some rethinking
on how high unemployment ever reached at its peak.
We've had some revisions of the establishment data
which I disagreed with the census.
The census data of unemployment was showing rather lower
than even the Washington officials has expected
but the establishment data didn't bear that out.
But they've now revised their establishment data
and by August, the data are beginning to agree,
so that I think that unemployment
is not going to go back to 9%.
Earlier, as you know, I thought it
would go to 9 1/3% and it's about 8.4%
and I think it is on its way down very soon.
So, these numbers are high
but what I want you to learn from them
is the difference of about
two or three tenths of a percent
on the unemployment rate.
Now, for somebody who's unemployed,
this will seem very callous of me to disregard,
because this means some hundreds of thousands of people,
and I apologize for my beastliness.
But keeping this in perspective,
it is not the end of the world
if one view prevails and the other view
is correct.
I myself think that there's a powerful case
having discussed all that I've said to you
for going slow on solving our long run problem
when we're still in the acute phase of stagflation.
So, I have no trouble in finding a compromise
between the two main schools
that I have outlined for you.
I think the art of economic policy
and also the art of political economy,
of keeping our legislative system from getting polarized
is to find that compromise
and I don't think for all the noise
it's all that hard to find it.
-: If you have any comments or questions
for Professor Samuelson,
address them to Instructional Dynamics Incorporated,
450 East Ohio Street, Chicago, Illinois, 60611.