pstau001024001.wav / Tape 24 - Response to subscribers / Duke Digital Repository

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Hello again, and welcome to this week's commentary

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on the current economic scene with Dr. Paul Samuelson,

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professor of economics at the Massachusetts

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Institute of Technology.

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This weekly series is produced and recorded

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by Instructional Dynamics Incorporated of Chicago.

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Professor Samuelson, one of our readers

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or subscribers, has sent in the following question:

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"We enjoy your economic commentaries very much,

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"and we derive much benefit from them.

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"We wonder, though, whether they would

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"not be even more valuable to your subscribers

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"if you could make them just a little more controversial.

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"What about it?"

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I now feel as if I have heard everything.

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Just imagine a jury accusing an economist

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of not being sufficiently quarrelsome.

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However, joking aside, I suppose

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it is a matter of taste and style

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as to just how much of a polemical tone

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one introduces into any current discussion.

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There are always two schools of thought

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in these matters.

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One says to debate is to disagree and to find fault.

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Another school hold to debate is to analyze.

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When I can, I try to stick with the second school,

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but being only human, I sometimes do slip in

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to the ranks of the other,

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and who is to say that one is occasionally

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not more effective by being selectively polemical?

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To be specific, let's consider current differences

1:26

in opinion that seem to divide the economics fraternity

1:29

in America at this time.

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We have a new and increasingly

1:37

important school of monetarists.

1:42

The monetarists have their fountainhead,

1:45

you might say, at the University of Chicago,

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but they have a beachhead at the Federal Reserve Bank

1:51

of St. Louis, at the University of California

1:54

at Los Angeles, at the University of Virginia,

1:58

and, indeed, in Washington itself,

2:01

there is a beachhead in the Joint Economic Committee.

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Now how have things been going as

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between the monetarist school and the more conventional

2:12

group of modern economists?

2:18

I hesitate to call the non-monetarists fiscalists,

2:20

because I don't think it's an issue

2:26

between whether fiscal policy is all-important

2:27

or whether monetary policy is all-important.

2:30

The proper issue in my viewpoint is the following:

2:33

Is money, by itself, broadly speaking enough,

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or are other elements such as the strength

2:41

of investment demand, such as the state

2:46

of the fiscal budget also important?

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Well now, not trying to be controversial,

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let me survey the difference of opinion

2:59

and how they are going.

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One of the bank economists who is very high

3:06

on the monetarist methods called me up recently,

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and he asked me, isn't it the case

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that 1968 has been a crucial test

3:16

between the two competing theories?

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And hasn't the actual failure of the economy

3:24

to slow down in the last half of 1968,

3:29

and as I think, in the first quarter of 1969,

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hasn't that been testimony that, after all,

3:39

the quantitative monetarists are correct?

3:43

Since he asked me, I told him.

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And my answer was no.

3:50

I don't think that 1968 gas been a crucial experiment.

3:52

It is true that most GNP model builders had

3:56

at mid-year predicted lower rates of growth

4:00

than had actually materialized.

4:03

I may add myself to those numbers.

4:05

I didn't have a specific complicated model,

4:08

but I did think there would be a greater slowdown

4:12

than did materialize.

4:16

But I don't think that that fact of greater strength proves

4:18

that an eclectic theory was wrong.

4:22

Let me give some reasons for that view.

4:25

First, suppose we review the year 1968

4:29

from the viewpoint of a simple-minded monetarist.

4:33

Suppose he is armed with the formula

4:37

that the St. Louis Federal Reserve Bank has developed

4:39

and which you've heard about on some of these tapes.

4:42

According to this formula, in order to predict

4:46

what is going to happen to GNP,

4:49

and to do it in the best way that is possible,

4:51

you must know the rate of growth of the money supply

4:55

for the present quarter, the last quarter,

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and for four quarters in all.

5:02

You can modify your forecast slightly

5:05

by knowing government expenditure,

5:07

but tax rate information is absolutely worthless

5:10

to you, and the formula, if you try to put tax changes

5:13

into it, spits out an answer of zero effects

5:17

from tax changes.

5:21

Now, suppose we knew this formula

5:23

at the beginning of the year.

5:26

We didn't, because it wasn't published

5:28

until November of 1967, but we can job backwards

5:29

and see how it would have done.

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And I've been helped in this audit,

5:35

this post-mortem, by a recent publication

5:38

by the Federal Reserve of St. Louis itself.

5:41

And suppose that we're trying to predict

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what would have happened in 1968 calender year.

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That means the four quarters after the last quarter

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of 1967, and suppose for the sake of the experiment

5:57

that we actually knew at the beginning of 1968

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what we could not have known, namely,

6:05

the exactly correct figures for the money supply

6:08

in each of the actual four quarters for 1969.

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And suppose then upon this basis

6:16

we had predicted where the GNP would be

6:18

at the end of 1968.

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If I said 1969 a moment ago, I meant 1968.

6:26

All of these tests are on the year

6:30

that has just passed.

6:32

As I understand it from reading the Federal Reserve,

6:36

the Federal Reserve forecast would have been in error.

6:40

It would have been too low.

6:45

Indeed, like a simple-minded fiscalist,

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a simple-minded monetarist would have been too low.

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And suppose then that the forecast

6:55

of a simple minded fiscalist had turned out to be true.

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Suppose, for example, the third quarter increase

7:03

in money GNP last September had turned

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out to be only 12 billion.

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And suppose the fourth quarter increase last December

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had turned out to be only 10 billion,

7:18

pretty much in line with what had been forecast

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by the middle of year fast GNP models.

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Then, if I understand what the Federal Reserve Bank

7:28

of St. Louis has been saying, the final answer

7:30

as then given would have been more nearly

7:34

in accordance with the predicted value

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from their formula.

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Now, if I were a polemicist I would make a lot

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of this, but I actually don't, because I don't

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think that anybody at mid year

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who was a sophisticated monetarist would have used the

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end of the year data.

7:54

And so as I fair-mindedly score what has been going on,

7:57

I think qualitatively the monetarists have prepared

8:01

their own opinion and public opinion,

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and the opinion of more eclectic economists like myself,

8:09

more for what was actually happening

8:13

by playing down the weakness in the economy.

8:16

Now, mind you, nobody had told us exactly

8:21

what the strength in the economy was due to.

8:24

It may have been due to increases

8:30

in the money supply at this date or that date,

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but as I've reported on this tape earlier,

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I assure you that playing that game,

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that kind of a numbers game in which you try fair-mindedly,

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just from the money supply, to make good forecasts

8:45

of the GNP will lose you your money at Las Vegas

8:48

and will lose you your money

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at the National Industrial Conference Board sweepstakes,

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just as easily as almost any other method.

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And I will remind listeners to this tape

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that I have collected from monetarists

9:02

the most astounding spread of actual forecasts

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for the present time and for the past time.

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So, if anyone were naive enough to think

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that a crucial experiment in a complicated field

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like economics were possible between two

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such divergent viewpoints, he would

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at the very least have to have a recorded case

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where a fair, documented account of all the forecasts made

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with one method was contrasted

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with all the forecasts made by the other method,

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and then it turned out that one of the methods agreed

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among itself and agreed with the subsequent facts,

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and the other method agreed among itself

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but disagreed with the subsequent facts.

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That I must report to you, in all seriousness,

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and not at all in a polemical vein,

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is not the case.

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The monetarist forecasts that I have

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in my files are for an 11 billion increase

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in the first quarter of this year

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from one of the best of the monetarists

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and also one of the most vocal,

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and I have from some fiscalists forecasts

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that are a low as that, but very few

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from such people, and the actual facts

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which we do not yet know, I am convinced,

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will be considerably higher than that.

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Now it is true that there are some monetarists

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who have a higher figure for the first quarter

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but now you must catch your rabbit

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before you can make the stew.

10:44

You much catch the right monetarist

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and I will say this,

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that if you can catch the right forecaster

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you don't need fiscalism, monetarism,

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or anything else.

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All you need is a man who is clairvoyant

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and he will give you the best answers.

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Now, let me, I will return

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if time permits later to the exact expectations

11:07

of a reasonable eclectic model

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and I will compare them with

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what I would think would be reasonable expecations

11:17

from a monetarist model.

11:21

But I don't think we should try to make bricks without straw

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and so I suggest that right now

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we shift gears and we begin to talk

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about the current situation.

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Let's bring some facts into the picture.

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Where do we stand a little bit

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after the middle of April?

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First, as I am talking we do not yet have

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even the first official estimates of the first quarter

11:45

of the year, so I must guess on those,

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and I will give you my best guesses.

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If I had to put down a single number,

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I suppose I would put down the number

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of a $17 billion increase in the money GNP,

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in comparison with the fourth quarter of last year.

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This is every bit as large an increase

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in the rate of growth of the money series

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as took place in the fourth quarter.

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I won't quarrel.

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Perhaps it will be a little bit less than that.

12:20

Perhaps it will be a little bit greater than that.

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A few weeks ago I would have said a little bit less

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than this figure, but that was before

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I saw the February inventory figures,

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and I then had to bank on the January inventory figures,

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which were extremely modest.

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In fact, they were almost unbelievably modest.

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As it turns out, they were unbelievable,

12:45

because now the Department of Commerce has revised

12:48

those figures upward.

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They still are modest in January,

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but February is consderably above January.

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And so it seems to me that strength in final demand,

12:59

which I mentioned in an earlier tape,

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will now be reinforced by some strength,

13:06

not outstanding strength,

13:11

but at least not weakness, in the rate

13:13

of inventory accumulation.

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And as we all know, for short run purposes,

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knowledge of what's gonna happen

13:21

in inventories can be very precious knowledge

13:22

for the short run predictor.

13:25

What about prices?

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I see no signs that the rate

13:32

of price inflation is yet abating.

13:34

We still are getting increases in copper prices,

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in metal prices, in administered prices,

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so that, although I am constantly

13:45

on these tapes speaking of a better

13:48

than 4% rate of price inflation,

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perhaps I should mend my ways

13:53

and speak more accurately of a 4.5% and a 5% rate

13:56

of price inflation.

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Now I am surprised by how short the viewpoint is

14:03

of the marketplace and the financial commentators.

14:10

It constantly amazes me,

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and I should not be amazed, because

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I've been watching them for many years,

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and I should now philosophically accept the reality,

14:19

but I am so amazed that in one two week period

14:23

everybody is talking about tight money.

14:26

Then in another two week period

14:29

they are talking about the end of tight money.

14:31

Then a few weeks go by and again

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they are talking about tight money.

14:37

The marketplace, if I may say so,

14:40

overreacts to every bit of news.

14:43

Let me illustrate.

14:47

The bond market, during the month of March,

14:50

and early in April, very first days in April,

14:54

was actually improving in terms of the price of bonds.

14:58

Interest yields were actually going down.

15:02

Why?

15:05

Well, one of the explanations given was

15:06

that the Federal Reserve is a paper tiger.

15:08

The Federal Reserve does not mean what is says.

15:12

The Federal Reserve does not mean business.

15:14

I believe it was on Thursday, April 3rd,

15:17

when the Federal Reserve showed

15:20

that it did mean business.

15:23

It raised the discount rate,

15:24

and what is perhaps more significant as a signal

15:27

to the marketplace, since after all the discount rate

15:30

was lagging behind the increase

15:33

in the prime rate and market rates generally.

15:36

What was more significant,

15:39

the Federal Reserve increased reserve requirements.

15:40

Then the market said for several days

15:43

the Federal Reserve does mean business.

15:47

We're going to have monetary restraint.

15:50

The money supply is not going to grow

15:54

as fast as it grew in 1967,

15:58

or as it grew in 1968.

16:01

The Fed does mean business.

16:03

And indeed, for a day or two, bond prices fell,

16:06

and bond yields hardened.

16:09

But then the market decided

16:13

it would work the other side of the street.

16:16

The market said, well, if the Fed means business,

16:18

and is fighting inflation, the Fed will succeed

16:21

in its fight in inflation, and if inflation is controlled,

16:23

then there's no reason for interest rates

16:29

to be so high, and consequently,

16:30

we saw for several days, again,

16:33

a weakening, a lowering of long term interest yields.

16:37

Now, what a jump, what a leap that was

16:47

from the Fed has an intention to control inflation

16:51

to the conclusion that the Fed has all

16:54

but controlled inflation and so we might as well act

16:58

as if it's controlled inflation

17:00

and begin to buy bonds and assume

17:01

that the money market is going to ease.

17:04

It reminds me of the Gilbert

17:07

and Sullivan play The Mikado.

17:10

You remember in the play, someone is to be punished,

17:13

and the executioner is told by the mikado

17:18

to punish, to behead the guilty person,

17:22

and the execution, without doing a thing,

17:26

says since the word of the mikado is law,

17:28

and he's all-powerful, then it is

17:31

as if the thing has been done.

17:32

If it is as if the thing has been done,

17:34

it has been done, and how marvelous

17:36

it was nobody had to take any actions whatsoever.

17:38

Well, the Federal Reserve is not that kind of a mikado.

17:41

It is not all-powerful.

17:44

By setting its mind to controlling inflation

17:46

it doesn't succeed instantaneously

17:49

in controlling inflation.

17:50

And so we must look for actual slowdowns

17:52

in the rate of real growth of the economy

17:56

before we can say that the Federal Reserve

17:58

is getting anywhere in its fight.

18:01

Now I believe that some of these slowdowns

18:04

are on the way.

18:06

Monetarists believe that some slowdowns are

18:08

on the way.

18:11

Eclectic economists believe the slowdowns are

18:13

on the way, but we must see signs of them,

18:16

and we must evaluate quantitatively those signs

18:21

before we write the scenario of overkill

18:25

and of recession.

18:28

So let me count straws in the wind

18:30

and go over some of the signs of what's happened

18:33

in the economy.

18:36

The unemployment rate, which had been 3.3%,

18:38

a very low rate for the United States,

18:42

for several months, three months,

18:44

or was it four months, has risen by 1/10

18:46

of 1% to 3.4%.

18:49

Big deal.

18:52

What kind of a significant sign of a slowdown is that?

18:53

I would say, objectively, that as yet

18:59

it says very little.

19:02

Moreover, if I remember the figures correctly,

19:04

the length of the working week actually increased

19:08

in the last sample.

19:12

So in the labor market itself, we have, at best,

19:13

only the beginning of a slowdown.

19:19

There is an old proverb, a journey

19:22

of a thousand miles begins with one step.

19:25

Well said, well told, but I would add

19:28

that after you have taken one step,

19:32

you have not gone a thousand miles,

19:34

you've only gone one step.

19:35

That is a prosaic fact of life.

19:37

And so, in the labor market, we do not yet have

19:40

any significant sign of easing.

19:44

And make no mistake about it,

19:48

all the indications are that the new administration,

19:50

the Nixon Administration, has no hidden weapons

19:54

by which it can go from a 4.5% rate

19:57

of price inflation to, I will not say a 1% rate,

20:01

or a 2% rate, or a 0% rate, but to a 3% rate,

20:05

just by wishing it and without creating

20:10

some significant slackness in the economy.

20:13

So I take that particular straw in the wind,

20:16

and I say we are at the beginning of the process at best.

20:20

What about housing?

20:25

We recently got some housing numbers,

20:27

and the number of housing starts,

20:29

for the month of March I guess it was, is down.

20:31

It's down to just a little bit above a million

20:35

and a half housing starts,

20:38

which is down from the previous month,

20:39

and which is down from the previous month.

20:42

So here I would say, although one cannot

20:44

from a few spring months discern

20:47

with great confidence a strong trend,

20:51

still here I would say we're beginning

20:54

to see some signs that credit policy,

20:55

that monetary restraint, is beginning

20:59

to bite a little bit, and it is showing itself

21:02

where a priori, and plausible reasoning,

21:05

and historical experience tells us

21:08

it ought to show itself in the construction area.

21:10

So I believe that we're a little bit along the way,

21:15

but again, this is still the very beginning

21:19

of the process.

21:23

I made a forecast in January

21:24

at the institutional investors conference,

21:28

that by the end of the year housing starts

21:31

would be down considerably.

21:33

It caused a great deal of consternation,

21:35

I was later told, in that audience of 2,700 people.

21:38

I suppose some of them were rushing

21:42

to their brokers to get rid of their gypsum stocks,

21:44

but it just seemed to me that

21:47

that's the old Farmer's Almanac standard

21:48

textbook explanation based upon having

21:52

to control inflation primarily

21:57

through the instrumentality

21:59

of Federal Reserve monetary policy.

22:02

Let me now turn to the budget.

22:05

We have heard recently of the provisional Nixon budget.

22:08

On the face of it, there is a cut

22:16

from the Johnson numbers.

22:18

There is a cut in the defense area

22:22

of a little bit over of a billion dollars.

22:25

And there's a cut in the welfare,

22:27

civilian non-defense area,

22:30

of a couple of billion dollars.

22:33

I don't think it's profitable for me

22:36

in a discussion like this to go

22:39

into the numbers game of just

22:43

which of the figures area likely to be phony,

22:45

and which are likely to be genuine,

22:48

which are important cuts,

22:50

and which are unimportant cuts.

22:54

I think that Mr. Nixon has given

22:57

us a signal that he takes very seriously

23:00

the inflationary problem, and his signal says

23:03

he's going to do the best he can

23:06

to control fiscal expenditures.

23:07

Mr. Nixon is not, apparently, a monetarist.

23:11

He does believe it makes a considerable difference

23:15

how the fiscal position stands,

23:19

both with respect to taxation

23:22

and with respect to expenditures.

23:23

And so, I will summarize the recent news

23:26

in this regard simply in this way,

23:29

that Mr. Nixon has promised us a slightly tighter budget

23:32

than it was thought he would be able to contrive.

23:39

Now events may falsify his estimates,

23:44

and when I say events, I mean events in Vietnam.

23:48

I mean events like the North Korean airplane incident

23:53

which has taken place recently.

23:59

Fiscal expenditures are not made in Washington.

24:03

I repeat, fiscal expenditures

24:06

of the United States are made in Moscow,

24:08

are made in Peking, are made in Hanoi,

24:11

are made in Seoul, and are made all around the globe.

24:16

So this is a factor which we all must take into account.

24:20

Mr. Nixon has restated his wish

24:27

that the surtax be extended.

24:31

And the chairman of the House Ways and Means Committee,

24:36

Wilbur Mills, whose good will is needed

24:40

for the extension of that surtax,

24:43

has said that he will put a great deal

24:45

of pressure upon the Nixon Johnson budget

24:48

to squeeze it even harder than has been squeezed

24:52

in the official presidential estimates.

24:55

And since Mr. Mills has a certain limited degree

25:00

of unilateral power, he is a strong-minded man

25:03

with a great deal of elbow force in the Congress,

25:07

I take it that there will be considerable pressure.

25:11

Now I'm not a political soothsayer,

25:16

and I cannot tell you how much of

25:19

this pressure will succeed.

25:22

I think inevitably there will be some slippage

25:25

between the numbers that Mr. Mills says

25:28

he's satisfied with and what actually happens.

25:33

But nevertheless this will not be a loose budget.

25:36

It will be on the whole a tight budget.

25:38

As a matter of fact, from the standpoint

25:40

of a humanitarian, very much interested

25:43

in the poor, and very much interested in the aged,

25:45

the Nixon budget will appear as a reactionary budget,

25:49

because Social Security wage taxes are to go up,

25:54

and Social Security benefits are to go up,

25:59

but they are not to go up as much

26:01

as had been promised by President Johnson.

26:03

And that is one of the ways that Mr. Nixon is getting

26:07

his extra surplus.

26:11

Now, in fairness I should say that,

26:13

although Mr. Nixon appears to a humanitarian

26:16

to be a reactionary, some of the most anguished voices

26:19

that one hears in the land these days

26:22

are the truly conservative Republicans

26:25

who think that Mr. Nixon has compromised on every matter,

26:28

and that he has turned out to be

26:32

a wishy-washy, Tweedledum liberal.

26:34

I think there is no help for that.

26:38

Both are saying the same thing.

26:40

Mr. Nixon, by and large, has taken the middle road.

26:42

I would like to see him move a little bit

26:46

to the left of that middle road,

26:48

but speaking for myself I'm pleased

26:50

that he isn't way off there in the right.

26:52

He's moved very slowly in all matters.

26:54

And since I come from a university campus,

26:57

it happens at the moment to be a peaceful campus,

27:01

I rather like a situation in which the people

27:04

in control move very slowly.

27:07

That's what the doctor prescribes

27:10

in these particular days.

27:12

Let me return to an analysis of the prudent man's outlook

27:18

for business conditions in the United States

27:25

for the rest of 1969.

27:27

Without doubt, a most important factor is

27:30

what is happening to the peace negotiations

27:33

in Paris and elsewhere.

27:36

Without doubt, a most important factor is

27:39

what will happen in terms of deescalation

27:43

of the war.

27:46

If we begin to bring out tens of thousands,

27:47

50,000 troops from Vietnam by the end of the year,

27:50

that will make a significant difference.

27:56

Having said that, I must say that the people

28:01

who trade stocks from day to day

28:04

in the market, have been extremely volatile

28:06

is this matter.

28:09

As with respect to the Federal Reserve,

28:11

they are plunged from gloom one day

28:15

into rosy optimism another.

28:18

Almost nothing will happen out of Paris.

28:21

Almost no announcement of any significance will be made,

28:24

but suddenly the go-go performance fund-minded people

28:27

in Wall Street will decide that we're

28:32

in a peace rally of the stock market,

28:34

and that peace is almost here.

28:38

So I must depart from my role as a reporter

28:41

and try to be an analyst and sage,

28:45

and tell you what I think is happening.

28:48

As I read between the lines,

28:51

I think we're moving very slowly

28:53

a little closer towards peace.

28:55

I think it's very slow, but the most important signal

28:58

to my mind is that it looks to me

29:03

as if the new Nixon team has got the message

29:05

that the country doesn't like the war,

29:09

and that they are prepared to make some sacrifices

29:11

of face in order to get out of the war.

29:16

And this is in the Nixon style of moving slowly,

29:20

but I think a little progress is being made,

29:23

so I wouldn't go out and buy stocks

29:25

on the basis of what's happening

29:28

or sell sell stocks when the thing moves

29:30

a little bit the other way,

29:33

but in making my forecasts of the GNP

29:35

for the last quarters of the year

29:39

and into the next year, I think

29:40

you should take into account the significant probability

29:42

that some lessening of pressure

29:46

on the balance of payments and on expenditures,

29:49

onshore and offshore, may come from these movements,

29:53

and for a analyst who keeps his eye

29:58

on the middle vision vista, I think

30:03

that is extremely important.

30:08

-

Thank you very much Professor Paul Samuelson of MIT.

30:11

Instructional Dynamics Incorporated welcomes

30:15

your questions or comments.

30:17

Write IDI, 166 East Superior Street, Chicago, 60611.

30:18

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