pstau001072001.wav / Tape 72 - Reviewing 1971's first quarter: a preview / Duke Digital Repository

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Welcome once again as MIT professor Paul Samuelson

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discusses the current economic scene.

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This biweekly series is produced by Instructional Dynamics

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and was recorded March 22nd, 1971.

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We are now coming toward the end of the first quarter

0:13

but we won't know for some weeks after that

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just how the GMP increased in the first quarter.

0:20

Putting together what signs are already available,

0:25

when is it that a person can say at this stage?

0:28

You'll remember that estimates for the first quarter

0:32

of 1971 as an increase over the last quarter

0:36

of 1970 ranged anywhere

0:42

from 25 to 35 billion dollar increase

0:48

in money terms.

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That of course is a whopping increase.

0:54

But much of it, most of it, was expected

0:57

to come from the snap back of the General Motors strike

1:01

from the general auto complex related industries.

1:05

And some of it was expected

1:10

to come from the possible middle

1:11

of 1971 steel work stoppage

1:14

leading to advanced inventory hedge buying.

1:17

I was at a meeting last week in New York.

1:22

The Institutional Investors' meeting,

1:26

this is a very large annual affair.

1:28

Quite expensive.

1:31

In which various problems that interest money managers

1:32

are discussed.

1:36

I happened to be on a panel

1:37

in which the general economic outlook was discussed.

1:39

I was very lucky because my fellow panel member

1:43

was Dr. Alan Greenspan.

1:46

Who is of and perhaps it would be more accurate to say

1:50

is the Towns and Greenspan Consulting firm

1:53

and who also is an informal advisor to President Nixon.

1:58

He is an official advisor to, I believe the

2:05

Council of Economic Advisors and the US Treasury.

2:09

Just recently he's been put

2:13

on the Board of the Dreyfus Fund

2:15

and he's a relatively young, active, experienced,

2:17

articulate observer of the passing scene.

2:20

He said, and his words chilled that audience,

2:23

that the developments so far in the first quarter

2:27

are on the bleak side.

2:33

I don't recall whether he gave a number for the increment

2:36

but instead of being at the upper end of the range,

2:38

say 35 billion, a listener of Mr. Greenspan

2:43

might reasonably say that we will be

2:48

at the 27 billion increase, at the lower range.

2:51

In fact he said that if you purified the data

2:56

of any General Motors strike effects

3:02

it is even open to question whether

3:06

there is an upturn at all.

3:08

This discussion of course was in the context

3:10

of 10-66, and all that,

3:12

whether the indications

3:16

of the passing scene pointed

3:19

more or less in favor

3:24

of the rather high forecast by the government.

3:26

Or whether it pointed down

3:31

toward the more fashionable estimates.

3:36

Mr. Greenspan's testimony on this point was unequivocal.

3:39

He said that we have to do even better than we've been doing

3:43

to realize the fashionable forecast.

3:47

And he went down the line discussing retail sales,

3:50

discussing various components of the GMP.

3:54

It rather surprised me because he said automobiles aside

4:00

there didn't even seem to be any strength in retail sales.

4:03

Whereas I thought there was a little bit

4:06

of perceptible increase.

4:08

Not much, but a little bit.

4:10

I'll remind you that unemployment went down to 5.8%

4:13

in February but one has to notice

4:19

that it wasn't because employment went up.

4:24

And I mean up compared to the seasonal,

4:28

poor as all seasonal corrections are.

4:30

But rather that there was a shrinkage in the workforce.

4:33

The poor showing of employment in February

4:36

I had thought might be a reflection of great things

4:41

in the line of productivity.

4:45

But alas in lack for that hypothesis,

4:47

the Fellow Reserve Board Index of Production

4:50

actually declined in February.

4:52

I went back to look at some of the first quarter

4:55

forecasts earlier and most of them did not call

4:57

for anything like that in the February figures.

5:00

Mr. Greenspan pointed out

5:05

that all the housing starts are up.

5:06

The size of housing is down.

5:08

That is the size of the average unit.

5:12

So that the actual square feet being built

5:15

is by no means up commensurate with start numbers.

5:19

I suppose on the other side the dollar expenditures

5:26

have to be regarded as somewhat swelling

5:29

because of the steady increases still in the cost

5:32

of construction at the home building level and otherwise.

5:36

All in all it was not a speech destined

5:42

to make the group there happy.

5:46

In the mean time, not much news is coming out of Washington

5:50

which would buttress the administration's forecast.

5:54

There really has been a quiet on that particular front.

5:57

If I may presumably do so, let me tell you what I think

6:01

is the most powerful argument in favor

6:04

of the general direction

6:06

of the administration's earlier forecast.

6:08

First, let's not believe the administration budget numbers.

6:11

Let's assume that they will end up being in error

6:17

on one side.

6:20

I'm not now speaking of any conscious duplicity,

6:21

or even unconscious duplicity,

6:24

but just betting on overrides.

6:25

That makes it of course a new ballgame

6:29

and if you have, in my judgment, a large enough increase

6:30

in the full employment deficit,

6:35

which means a very large increase in the actual deficit,

6:38

much larger than the 11 and a half billion

6:40

that the president spoke of.

6:42

Then you ought properly to change your estimates

6:44

of GMP for the year.

6:48

And my opinion you should change them upward.

6:50

Secondly, no particular new numbers have been coming out

6:53

I believe on the side of giving one special new confidence

6:57

if you didn't have any beforehand,

7:02

in what I've described as the Arthur Laffer Model.

7:04

Which is a three equation system.

7:07

But whose principle equation involves an instantaneous

7:10

increase in the money GMP as a result

7:14

of an instantaneous increase in money.

7:17

Now it is true that if you look at the money numbers

7:20

in the last month or two,

7:25

the rate of growth of the money supply

7:27

which had been languishing well below what most

7:30

of us thought was the target of the open market committee.

7:34

That rate of growth has begun to increase.

7:37

Actually there's some technical reasons why the rate

7:40

of growth the money supply in the weeks ahead

7:43

might be expected to increase still further.

7:47

You will be acquainted with a lot of the difficulties

7:49

in defining the money supply.

7:52

How do you handle your dollar transactions?

7:54

Do you want a broad or a narrow definition

7:57

of the money supply?

7:59

Has Regulation Q interfered with various components

8:00

of the broad M2 definition?

8:05

Those problems are not what I have in mind,

8:07

although they are very important problems.

8:09

I have in mind the fact

8:12

that we still do not include government deposits at all

8:13

in the money supply.

8:16

I'm not prepared to argue

8:17

that if you have to have only one concept

8:19

of the money supply,

8:21

that concept should include government deposits

8:22

or should include government deposits on a par

8:25

with other kinds of deposits.

8:29

But I think it will be agreed

8:31

that it's very difficult to make seasonal corrections

8:33

in the money supply which

8:37

that part which doesn't involve government deposits.

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Since there is a going back and forth

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of billions of dollars between the money supply

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which does not include bank deposits

8:54

and the government bank deposits themselves.

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And I have the impression that this year

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the slow down, some of the slow down,

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in the seasonally corrected growth

9:06

of the money supply from October to the end of the year

9:08

and into maybe the beginning of the year

9:12

was due to the fact that there was a more than usually

9:14

seasonal acute buildup of government deposits themselves.

9:18

If that's the case, it's not at all unlikely

9:23

that there will be more than the usual seasonal spinning out

9:26

of those deposits.

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As a result you should be warned

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that the, for some periods of time,

9:35

short or longer, the money supply,

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and I now speak of the narrowly defined money supply,

9:43

may find itself growing by numbers which look well gigantic.

9:47

Not by three and 4%, which disappointed people.

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And not by the five or 6% which presumably the authorities

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are aiming for, but we might witness some 9%, 10%, 11%, 12%

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rates of growth the money supply

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at least for short periods of time.

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And if all that's afoot there is the reflux

10:10

from government balances to the rest of the community

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that should not alarm anyone unduly.

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And it shouldn't be given a very good weight.

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Presumably over a longer cycle,

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I mean from October to summer or certainly from October

10:27

to October, the ups and downs of the government bank balance

10:32

should wash out of the statistics.

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And I think the important thing for the outlook

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will be whether the October to October number

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is in the general range of 6%

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or whether it's in the general range of nine and 12%

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or whether it's in the general range of 3%.

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Those will make a very great deal of difference.

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I'm continuing though to try to find

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in the current situation

11:04

reasons to counter the slight short run pessimism

11:07

about the strength in the economy.

11:15

Which Dr. Greenspan as an honest observer

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had to report just recently have been

11:19

in the particular numbers.

11:23

Dr. Geoffrey Moore who's the Commissioner

11:25

of the Bureau of Labor Statistics

11:28

and who used to be vice president

11:31

of the National Bureau, perhaps on leave,

11:33

National Bureau of Economic Research,

11:35

he was director of research there.

11:37

He has been a long time associate

11:38

at the National Bureau of Economic Research

11:40

of Arthur Burns.

11:42

He has worked with Arthur Burns

11:44

and Julius Shiskin.

11:48

Julius Shiskin was for many years in the Census,

11:51

but now is in the Office of Management and Budget

11:53

I believe, on timing relationships in the business cycle.

11:57

Those three names that I mentioned

12:02

are the three people who carried forward

12:04

the old Warren Persons ABC Barometer program

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to its greatest degree of elaboration

12:11

in the search for leading indicators

12:19

which would help in predictions.

12:20

Well, Geoffrey Moore wrote a letter

12:24

to the New York Times, I'm sorry to say that the curator

12:25

of letters in the New York Times thought it

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of such unimportance, that he or she did not put it first

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and didn't put it in a prominent place

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on the letter page.

12:39

It just is there along with all the other mail.

12:40

But Geoffrey Moore there gives an argument

12:46

which I think you ought to take seriously

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because it's perhaps the most important reason

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for giving any credence at all to the rather optimistic

12:55

or I should say rather expansionary numbers predicted

12:59

by the government.

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What Jeffrey Moore did in effect was the following,

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he said, "Write on a ticket what happened

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in the first year of recovery after the 1948, '49

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post war recession.

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How much did real output grow?

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How much did money GMP grow?

13:20

On another ticket do the same for the period

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just following the 1953, '54 recession.

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On a third ticket do the same for the '57, '58 recession

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and do the same for the '60, '61 recession."

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I may add that some people might want him

13:37

to take account of the mini-recession of 1966, 1967.

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"Write these down."

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He actually made some more refined calculations

13:48

of previous peak to end of first year recovery

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rates of growth.

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"And put them in a hat, now draw tickets at random

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from the hat," or what's the same thing,

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draw all the tickets and average them out.

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"And when you do that," said Dr. Moore,

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"you will find that the 4.5% real output growth

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forecast by the Council of Economic Advisors

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and the President, and buttressed

14:15

by the Schultz-Laffer forecast are not at all out of line.

14:17

On the contrary, they're on the low side."

14:21

Somewhat the same story I think can be told

14:25

about the money magnitudes.

14:27

Dr. Moore has warned of course,

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that there may be certain special features

14:31

of this recession,

14:33

I would myself take that warning very seriously.

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But if you're willing to disregard any special features

14:37

of this recovery and regard it

14:41

as just a kind of random sample from that universe

14:45

then the government numbers can be justified.

14:49

I'll add that we have a good deal of information showing

14:55

that forecasters often are qualitatively correct

14:58

in the direction of their forecast.

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But they tend to be a little bit timid

15:06

about the magnitude of their forecast.

15:08

They always shade towards a conservative side

15:11

so if real output is pretty surely going

15:14

to go up instead of forecasting say five or 6%

15:18

they play safe and forecast three or 4%.

15:23

And when you study their batting averages by hindsight

15:25

you find that both on the upside and the downside

15:33

they underestimate the quantitative magnitude

15:35

of the qualitative directions which they have themselves

15:38

correctly foreseen.

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This is never more apparent

15:45

than in the first year of recovery.

15:46

So that particular argument

15:50

which I might mention has been documented

15:52

by Professor Onrei Tyle,

15:56

then in Rotterdam now at the University of Chicago,

15:59

that's also is reason for thinking

16:02

that we pessimists, we realists so called,

16:03

may have the laugh on us

16:08

and the government forecast turn out

16:10

to be completely correct.

16:12

I would think that the best argument for the government.

16:15

Do I think it a persuasive argument?

16:19

On the whole I don't.

16:23

I don't because there were some very special features

16:25

of this recession and I don't think

16:28

that these tickets in a hat represent

16:31

any sort of a random variation

16:36

around some systematically related

16:42

things which we call typical business cycles.

16:46

It seems to me that in order to have great confidence

16:52

in this particular method

16:55

you must be a subscriber

16:56

to a particular nonlinear theory of the business cycle

16:58

in which once God Almighty, or mother nature ordains

17:02

that you're in a recovery so that the National Bureau

17:06

can change the color of the stationary.

17:10

Then you are locked into a syndrome

17:12

that is pretty much automatic

17:14

and the same in its developments.

17:18

We know that in the human body

17:23

there are many such syndromes.

17:25

You touch a particular nerve in particular way

17:26

and you unleash a repeated set of operations

17:29

which can be duplicated in except

17:33

for small observational errors and minute changes,

17:35

there is great predictability.

17:40

And I'm not sure that I think the evidence is very strong

17:42

for such nonlinear theory of the business cycle.

17:47

To illustrate what I mean,

17:50

if you go back and make an actual simulation

17:53

or a thought experiment even,

17:55

as Mrs. Irma Adelman, Professor Irma Adelman

17:57

of Northwestern did some years ago

18:00

with her husband who's a professor of physics.

18:02

They used a model of the business cycle

18:05

something like Dr. Lawrence Klein's model

18:08

and they shocked it.

18:11

They put random shocks into it.

18:14

Which in their character were rather like

18:17

the theory which Professor Schumpeter

18:20

and Professor Shpetof on the continent,

18:22

Professor well, Kutveksal.

18:25

Alan Hanson had that investment opportunities,

18:28

innovations, railroad building, all such things

18:31

are like shocks operating upon a system.

18:34

When the Adelmans then simulated the course

18:37

of business behavior over a period of say a century

18:40

like the century from let us say 1860 to 1960,

18:45

they ended up with business cycles

18:51

very much like those that the National Bureau observes.

18:53

And they could find reference cycles,

18:57

they could find turning points,

18:59

they could work out the average duration

19:00

of the business cycle.

19:02

And the frequency distribution around those averages

19:04

were very much like that which the National Bureau observes.

19:07

I don't know what one can conclude from that.

19:12

I suppose one can conclude

19:13

from that the Klein-like macro models

19:16

are possible underlying mechanisms

19:19

that might be aping, or duplicating,

19:22

or illuminating the actual structure of the United States.

19:25

So I would think in a hundred years there'd

19:29

be some pretty serious structural changes

19:30

that are going on.

19:32

Well now in such a model it would not be the case

19:34

that you would get a terribly good predictions

19:39

of any one recovery from the universe of all recoveries.

19:42

There's something topologically about this process.

19:48

You don't know til after the fact

19:51

whether a particular little upbeat is a recovery

19:53

or whether it's just a false movement

19:58

in a stubborn recession.

20:02

And so the real question is

20:05

and in a way Alan Greenspan and the speech that I quoted you

20:08

throws open that question is

20:12

whether Jeffrey Moore's technique might not work out right

20:15

but work out right not for the period

20:19

of the government's forecast.

20:21

In other words not for the calendar year 1970 to '71,

20:24

which shouldn't be thought of

20:27

even as the first year recovery

20:28

but think of the,

20:30

as having hit bottom or turned up,

20:32

however you wanna call it.

20:35

And maybe you need some kind of a growth cycle terminology

20:37

to get, make this dating,

20:42

but suppose you put that date toward the end of November?

20:44

When the General Motor strike ended.

20:49

Then you won't find too many people

20:53

to doubt that 4.5% real growth is a reasonable figure

20:56

for November to the next November.

21:00

For that 12 months, but we're not talking

21:03

about the 10-65 forecast of the government.

21:06

We're talking about some hypothetical thing

21:09

which is very different from that.

21:11

Before I conclude talking about the current outlook

21:14

let me call to your attention the fact

21:20

that the First National City Bank

21:22

in one of it's recent monthly letters

21:25

has taken an optimistic view.

21:28

What the First National City Banks says in effect is this,

21:31

that consumption may be expected to save our bacon.

21:34

Or save the bacon of the Washington forecasters

21:40

because consumption will go up, will be strong.

21:43

The argument is put almost in a topological way

21:48

and as a totology is really uninteresting.

21:53

What it said as I recall, I don't pretend

21:57

that I have exactly in mind the wording.

22:03

I saw an advanced copy of it

22:06

and I didn't even have the final published version

22:08

but my recollection is it went something like this.

22:12

If you wait long enough consumption's gotta go up.

22:14

If you wait long enough consumption has to go up.

22:18

It's a completely uninteresting sentence.

22:21

Unless it's telling us something more

22:26

than what it literally says.

22:29

Because of course we know that consumption goes up

22:31

and down and we can suppose

22:33

that sometime between now and 1999,

22:36

consumption is going to go up.

22:39

A fair interpretation of what's being said there

22:42

is this, that because the money supply

22:43

has grown more rapidly in recent quarters

22:47

and because there is a lagged effect from a growth

22:51

in money supply to the growth of consumers liquidity

22:55

the First National City Bank

23:00

is betting upon a direct linkage,

23:01

a direct channel of causation from the money supply

23:05

to the consumption series.

23:08

They even, I believe, professed to see some signs

23:11

of a pick up in consumption in the early data.

23:16

Early 1971 data, that we shouldn't exaggerate this.

23:21

And as a matter of fact the Greenspan Report,

23:24

if it's reasonably on the beam

23:29

and admittedly he would be himself expect

23:31

to have more accurate numbers later.

23:36

That doesn't quickly suggest that we've come there yet.

23:38

I was hoping to find some regression equations

23:43

that I could replicate in my own computer

23:46

between of these consumption linkages.

23:49

'Cause one of the things I've been asking

23:52

of monitors and myself is let's get out in the open.

23:54

Let's find out what these linkages and channels

23:58

of monetary policy actually have been in the past

24:00

so we can make reasonable bets about the future

24:04

based upon them.

24:08

And I'm hopeful to learn something more

24:10

from a conference which the Federal Reserve Bank of Boston

24:13

is sponsoring on Nantucket Island in June, I believe,

24:16

on this general subject.

24:19

And I'm also hoping that the First National City Bank

24:21

has some pretty good regressions under its belt.

24:25

And that they'll see the light of day,

24:27

and form a memorandum or in the form of published articles

24:30

somewhere.

24:34

Now I want to comment on a letter that I received.

24:35

A growing number of corporations expecting a further squeeze

24:39

between low prices and higher labor costs

24:42

are resorting significant reductions in salaried personnel.

24:44

Is this drop in middle class income

24:47

and a fear of its extension causing a significant slow down

24:48

in the recovery?

24:51

If so, what can be done about it?

24:52

Well it's a real thing.

24:53

This recession's affecting middle class people.

24:55

I think it is making everybody apprehensive.

24:57

It may explain the high savings ratio in small degree.

25:00

And there's a great deal of sectoral distress.

25:04

But I would not say that by itself

25:06

this phenomenon is a factor of great macroeconomic

25:08

overall business cycle significance.

25:12

That's not meant as a hard-hearted statement.

25:14

It's just meant as a statement about significance

25:16

of quantitative numbers.

25:20

-

If you have any questions or comments

25:22

for Professor Samuelson,

25:23

address them to Instructional Dynamics Incorporated.

25:25

Chicago, Illinois 60611.

25:28

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