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Interviewer | Hello, Constructional Dynamics Incorporated | 0:02 |
welcomes you this weekly series of commentaries | 0:05 | |
on the current economic scene. | 0:08 | |
Reporting to you will be one of the nation's | 0:10 | |
leading economists, Professor Paul Samuelson | 0:12 | |
of the Massachusetts Institute of Technology. | 0:14 | |
Doctor Samuelson, once again I'd like to welcome you | 0:18 | |
to this information service on | 0:20 | |
behalf of I.D.I and our subscribers. | 0:21 | |
We have just elected a new president, Doctor Samuelson, | 0:25 | |
and I wondered if you could perhaps project | 0:27 | |
as to what effect a new administration will have | 0:29 | |
on the economic scene. | 0:32 | |
Samuelson | Speaking on the morning | 0:34 |
after the election, of course the election outcome | 0:37 | |
must be the biggest economic news of the week. | 0:40 | |
We do not have, let's say, fair economy. | 0:44 | |
At one time it might not have mattered, | 0:47 | |
for business, for banking, | 0:50 | |
for main street, and for the farmer. | 0:52 | |
Just who happened to be our functionary in Washington. | 0:56 | |
But those days are gone and it is very important. | 1:00 | |
I'm going upon the assumption that Mister Nixon | 1:05 | |
has won an electoral majority, | 1:08 | |
that there will not be a stalemate | 1:13 | |
and that the election will not be thrown into a congress. | 1:15 | |
So, let's praise the situation in those terms. | 1:19 | |
First, I think it's very reassuring, | 1:23 | |
as far as the economy is concerned, | 1:28 | |
that Mister Wallace ran a very poor race. | 1:30 | |
Nobody knew whether the people who were gonna vote for him | 1:35 | |
were the sort of people who wouldn't tell pollsters | 1:39 | |
of their intentions. | 1:43 | |
And there was a great deal of concern abroad. | 1:45 | |
And this concern could have begun to show itself | 1:47 | |
in our commercial relationships | 1:51 | |
and in the behavior of gold markets. | 1:53 | |
That perhaps there was a know nothing strength | 1:57 | |
as represented by Mister Wallace. | 2:02 | |
And this represented a polarization of American society | 2:04 | |
with more racial unrest ahead | 2:08 | |
and more violence | 2:10 | |
and more confrontation. | 2:14 | |
That particular fear, I think, has now been put to rest. | 2:16 | |
Mister Wallace carried only the southern states | 2:21 | |
where he was expected to run strong. | 2:25 | |
He ran exceptionally weak in many of the northern states. | 2:27 | |
And that may be the biggest news in the election. | 2:33 | |
The second most important outcome of the election, | 2:37 | |
as far as the economy is concerned, is it's closeness. | 2:42 | |
This was a campaign almost without a hero. | 2:45 | |
There were many villains, almost no heroes, | 2:50 | |
but I do nominate as one possible hero, the polls. | 2:52 | |
The polls were so close at the end | 2:57 | |
that they were contradicting themselves. | 3:00 | |
And I take this to be a vindication of them | 3:03 | |
because now we know the election was that close. | 3:06 | |
It's very reassuring in terms of scientific method. | 3:10 | |
That the polls should have been so careful. | 3:14 | |
Because I've learned this in economics, | 3:18 | |
a priori ideas, and theorizing, is all very well, | 3:20 | |
but the old Chinese proverb, | 3:25 | |
One peek is worth a thousand finesses, | 3:27 | |
still holds and holds in the economic scene. | 3:30 | |
We have to get hard evidence from the facts | 3:32 | |
and we have to know how to interpret that evidence. | 3:35 | |
And the polls have given us a lead in this matter | 3:37 | |
and they have vindicated themselves. | 3:42 | |
So close as been the election that we have a congress | 3:45 | |
that has remained Democratic. | 3:49 | |
Indeed, the House has remained more solidly Democratic, | 3:51 | |
than most people had expected. | 3:56 | |
The Senate has had a few gains by the Republicans, | 3:58 | |
but it still remains solidly Democratic. | 4:04 | |
And so we face, as we have done in the past, | 4:09 | |
a divided government. | 4:13 | |
This is extremely important because it means | 4:16 | |
that the unilateral power, | 4:19 | |
that could be exercised by the new president, | 4:22 | |
is very sharply curtailed. | 4:24 | |
Later on I'm going to make a contrast | 4:29 | |
between what might be expected from the Republican | 4:30 | |
newly elected president, like President Eisenhower, | 4:35 | |
and what might be expected from a newly elected | 4:38 | |
Republican president, like Mister Nixon. | 4:42 | |
The important thing to emphasize here | 4:45 | |
is the closeness of the election. | 4:48 | |
I remember very well, as an advisor to John F. Kennedy | 4:50 | |
in 1960 and early 1961, | 4:55 | |
how important it was and what a severe limitation | 4:58 | |
it was upon his new team | 5:01 | |
that he had won only by a hair. | 5:03 | |
The election was decided in the end in California, | 5:07 | |
and Illinois, there's something familiar about that, | 5:10 | |
as we meet here today. | 5:12 | |
So, let's turn now from the election | 5:16 | |
to the state of the economy and how it's likely to develop. | 5:22 | |
Each week that has passed we've been looking for | 5:30 | |
weakness in the economy and I think it's fair to say, | 5:35 | |
up til the present moment, | 5:40 | |
the economy still looks pretty strong. | 5:42 | |
Probably still looks overly strong in the sense of | 5:44 | |
still certain amount of excess inflationary pressure. | 5:50 | |
We have had a few | 5:57 | |
bits of good news. | 6:02 | |
For example, the consumer's price index. | 6:04 | |
When last announced, showed a considerably | 6:07 | |
lower monthly increase, only 2/10 of a percent. | 6:10 | |
If I multiply that by four, | 6:15 | |
I get a 2 1/2 percent rate of increase, | 6:17 | |
but one must learn how to disregard statistics | 6:20 | |
as well as regard them. | 6:24 | |
And I think that this is a flash in the pan. | 6:25 | |
The government has alerted us to the fact that | 6:28 | |
in the months to come, we cannot expect a continuation | 6:30 | |
of so modest a rate of price inflation. | 6:35 | |
We also had, because of the election, | 6:40 | |
a leak, you might say, or at least a preview, | 6:44 | |
of what the unannounced third quarter | 6:47 | |
balance of payment figures will show.* | 6:49 | |
Arthur Okun, the outgoing chairman of the president's, | 6:53 | |
President Johnson's council select economic advisors.* | 6:57 | |
Announced perhaps, he has eye on the election itself, | 6:59 | |
in making such a cheerful announcement. | 7:02 | |
That the third quarter balance of payments | 7:05 | |
will look very good indeed. | 7:09 | |
We will have a better balance | 7:12 | |
that has been true anytime in the last three months. | 7:15 | |
Now, I think this is very interesting | 7:20 | |
because it shows that our campaign itself, | 7:23 | |
which after all was in high gear, in September, | 7:26 | |
did not alarm European investors. | 7:31 | |
And the best guess, | 7:34 | |
I would say, for the next six months at least, | 7:39 | |
is that we start out with a reservoir of good will | 7:44 | |
and lack of apprehension about American instability, | 7:49 | |
on the part of foreign investors. | 7:54 | |
Since capital movements are extremely volatile, | 7:58 | |
and since they dominate in the short run, | 8:01 | |
and sometimes in the long run, the balance of payments, | 8:03 | |
I think this is extremely important. | 8:06 | |
It's very important if you are a federal reserve watcher. | 8:08 | |
There are people who are bird watchers. | 8:13 | |
And there are people, like myself, | 8:15 | |
and I should say there are also | 8:17 | |
people who are girl watchers, | 8:19 | |
but there are people like myself, who are martin watchers. | 8:20 | |
I'm a watcher of the chairman of the Federal Reserve Board. | 8:23 | |
And whatever else will be | 8:28 | |
the influences upon him in the next few months. | 8:32 | |
It seems unlikely that there will be | 8:37 | |
an international financial crisis. | 8:39 | |
And he will not have that particular motivation | 8:42 | |
to mobilize him into very strong action | 8:45 | |
to tighten up interest rates | 8:49 | |
and to clamp down very hard upon the money supply. | 8:51 | |
As I talk here this morning, | 8:55 | |
one outcome of the election is not yet in, | 8:57 | |
but it's a very important outcome for those of us | 9:00 | |
who are interested in following the money market. | 9:03 | |
I refer to the decisions of the electrict, | 9:06 | |
with respect to authorization of municipal bonds. | 9:09 | |
There are many districts in which | 9:13 | |
a new school, a new road and other bond issues are up | 9:18 | |
for approval by the electrict. | 9:21 | |
And more than that, in California, | 9:24 | |
there is an overall referendum writer | 9:28 | |
which could severely limit the total | 9:33 | |
of the flow of municipal bonds coming out of | 9:37 | |
that state in the years immediately ahead. | 9:40 | |
Since California is a very large state | 9:44 | |
indeed, constitutes 16% of the total municipal bond market. | 9:46 | |
Because it's so rapidly growing, | 9:51 | |
and so large in its own right. | 9:53 | |
The outcome of that vote will be looked upon | 9:55 | |
with great interest by those who are trying to guess | 9:59 | |
the future move of yields in the municipal bond market. | 10:03 | |
Interviewer | Professor Samuelson, what specific | 10:11 |
economic changes could you associate with Mister Nixon? | 10:13 | |
Samuelson | This is a matter upon which | 10:17 |
one could only speculate. | 10:18 | |
But we shall be engaged in this kind of speculation | 10:20 | |
over the next few months. | 10:24 | |
Course, important questions will be, | 10:26 | |
who are his new appointments, | 10:30 | |
who will be the secretary of treasury, | 10:32 | |
that's very important. | 10:33 | |
Who will be the chairman of | 10:36 | |
his council of economic advisers. | 10:38 | |
What will be the role of specific people | 10:40 | |
who have been serving as Mister Nixon's brain trust, | 10:44 | |
in the new administration? | 10:48 | |
These appointment decisions will give us the key | 10:52 | |
to specific recommendations | 10:56 | |
that Mister Nixon may make. | 11:00 | |
I don't think that we have very much to go on. | 11:03 | |
One is learn from experience that the campaign oratory | 11:07 | |
has very little relationship, for good or ill, | 11:11 | |
with the subsequent economic performance. | 11:17 | |
But let me try to | 11:22 | |
speculate upon possible | 11:25 | |
specific things that we can associate with Mister Nixon. | 11:30 | |
I have before me, | 11:36 | |
an interview that has just appeared with a man | 11:38 | |
who played an important role in the United States Treasury | 11:43 | |
during the Eisenhower administration. | 11:48 | |
I'm referring to Harvard Business School's financial expert, | 11:49 | |
Professor Dan Throop Smith, | 11:54 | |
who this year is a visiting professor | 11:56 | |
at Stanford University's business school. | 11:58 | |
He's the author of well-known works including, | 12:01 | |
Federal Tax Reform: the Issues in a Program, | 12:05 | |
which was published in 1961. | 12:07 | |
And this particular interview, appeared in the | 12:09 | |
current November issue of Dun's review | 12:14 | |
that has just come to my desk. | 12:16 | |
I think it's interesting because Doctor Smith | 12:19 | |
had a very large role to play | 12:22 | |
in the Eisenhower administration. | 12:26 | |
And who knows, since it won't be easy for Nixon to find | 12:28 | |
a great number of experts, in my opinion, it won't be easy. | 12:33 | |
Perhaps Doctor Smith will see service again. | 12:37 | |
The first question that Doctor Smith | 12:43 | |
has commented on in an interesting way, | 12:47 | |
is the problem of capital gains. | 12:50 | |
By enlarge, | 12:52 | |
Smith is critical of | 12:55 | |
our capital gains rates, | 12:58 | |
our high capital gains rates, as he would put them. | 13:01 | |
And he's in favor of lowering them. | 13:05 | |
I think that there is a difference between the | 13:09 | |
Republican and Democratic Parties in this matter. | 13:12 | |
And within the Democratic Party, | 13:15 | |
if you take the so called more Liberal branch, | 13:17 | |
there's a very strong desire to move in on capital gains. | 13:21 | |
In fact, the biggest change in that field, | 13:27 | |
which was proposed in the early 1960's, | 13:30 | |
with which got nowhere, | 13:33 | |
even in a Democratic dominated economist, | 13:35 | |
Is to have a capital gains payable at death. | 13:38 | |
At the present time, | 13:43 | |
if I own a million shares of general motors, | 13:45 | |
which I acquired at about a dollar a share, | 13:50 | |
and if I now have something like | 13:54 | |
80 or 100 million dollars worth of wealth | 13:58 | |
tied up in that general motors, | 14:00 | |
and if my doctor says that I'm not getting any younger, | 14:02 | |
that my life expectancy is limited. | 14:08 | |
Suppose I'm 65, I'd have to be to | 14:11 | |
have had that kind of general motors experience. | 14:14 | |
I am definitely locked in on my general motors shares. | 14:18 | |
Because it's much better for me not to sell them, | 14:23 | |
take my profit, and have to pay the government | 14:26 | |
27.5% in capital gains taxes. | 14:30 | |
It's much better for me to hold them until I die, | 14:33 | |
have them be in my estate, | 14:37 | |
where they escape taxation completely. | 14:38 | |
Now, this is the biggest loop hole, | 14:41 | |
in the capital gains tax. | 14:43 | |
Needless to say, Doctor Smith would | 14:45 | |
be against plugging that loop hole. | 14:49 | |
In fact, he suggested a very interesting gimmick, | 14:51 | |
which is that we go back to a method that has been used | 14:55 | |
by other countries, in which we used at earlier times. | 14:58 | |
Right now, if you hold a stock for less than six months, | 15:01 | |
you have to pay full tax rates on it. | 15:04 | |
If it's over six months, six months and a day even, | 15:08 | |
you pay at most at half the ordinary income tax rate. | 15:11 | |
And if you're in a high income bracket, | 15:15 | |
above the low 50%, | 15:18 | |
you at most have to pay 27.5%. | 15:22 | |
Doctor Smith has suggested that | 15:26 | |
if you hold an asset for five years, | 15:29 | |
it's unfair to have to pay as | 15:31 | |
high a capital gains tax on your profit, | 15:32 | |
as if you've held it only six months and a day or a year. | 15:36 | |
And so, he proposes, and in fact, giving relief | 15:39 | |
to the tax payer on capital gains | 15:42 | |
by permitting him to pay successively lower and lower rates | 15:45 | |
the longer the holding period of the individual. | 15:49 | |
Now, what are we to think of this? | 15:52 | |
In my judgment, and I'm now looking at newspaper before me, | 15:55 | |
and scanning the composition of congress. | 15:59 | |
This is the sort of thing | 16:03 | |
which Mister Nixon could not possibly | 16:04 | |
put through the next congress. | 16:07 | |
So, we have to | 16:10 | |
very coolly measure the difference | 16:15 | |
between the philosophy of the incoming president. | 16:17 | |
What he might be tempted to want to espouse | 16:20 | |
and what an ineffective political way | 16:23 | |
he can actually get through. | 16:25 | |
I'll comment on just one more aspect of tax reform | 16:27 | |
because it's one that we're going to hear more about, | 16:30 | |
I'm sure in the next four years. | 16:33 | |
Professor Smith gives a very strong plug | 16:36 | |
to a new kind of tax. | 16:39 | |
Now I know it seems funny that Republicans | 16:41 | |
should be perpetrating one more | 16:45 | |
harsh tax upon us | 16:49 | |
that usually is regarded as the role of the Democrats. | 16:51 | |
But make no mistake about it, | 16:54 | |
Professor Smith has in mind the elevating of what he regards | 16:58 | |
as the too heavy tax burden upon the affluent. | 17:03 | |
As I looked over the votes, by enlarge, | 17:08 | |
the affluent did vote Republican. | 17:10 | |
By enlarge the less than affluent did vote Democratic. | 17:13 | |
There were some regional differences in this. | 17:17 | |
The new tax that Professor Smith has in mind | 17:20 | |
is the so called value added tax. | 17:22 | |
And his thought here, is to introduce, | 17:26 | |
even as an opening wedge, a value added tax, | 17:29 | |
and this would gradually take over some of the load | 17:32 | |
of the corporate tax. | 17:35 | |
And indeed, I suspect, that his Walter Mitty dreams | 17:36 | |
in the privacy of his own boudoir, | 17:40 | |
are that eventually the value added tax might take over | 17:42 | |
some of the load of the highly progressive, | 17:45 | |
so called the progressive graduated income tax. | 17:48 | |
What is this value added tax? | 17:51 | |
It's something which has been used | 17:53 | |
in quite a number of countries abroad. | 17:54 | |
And there is a vote for it | 17:57 | |
and that's why we shall be hearing more about it. | 17:58 | |
It's like a sales tax upon business, | 18:02 | |
but it's not a sales tax at every stage of production. | 18:05 | |
When the farmer sells his wheat to the miller, | 18:09 | |
if he pays the sales tax on that. | 18:14 | |
And if the miller sells his flour to the baker | 18:16 | |
and if he pays the sales tax on that. | 18:20 | |
And if the baker sells a loaf of bread to the consumer | 18:22 | |
and he pays the sales tax on that | 18:26 | |
you have a pyramiding of taxes. | 18:28 | |
The value added tax would get rid of | 18:30 | |
all the double and triple and quadruple counting | 18:32 | |
that's involved in this. | 18:35 | |
Because you would pay, the farmer | 18:37 | |
would pay a tax only on the wages and profit | 18:39 | |
and interest cost of his stage of production. | 18:44 | |
That's what we mean by value added. | 18:46 | |
And the miller would not pay the tax twice | 18:48 | |
that is on his value added | 18:53 | |
and also on the value added to the farmer. | 18:54 | |
Which is built into the cost of the wheat, | 18:57 | |
but only upon that of his stage. | 19:00 | |
Well, it has certain attractiveness. | 19:04 | |
I should mention, one matter | 19:09 | |
that is artificially in it's favor. | 19:11 | |
For international bargaining purposes, | 19:16 | |
in connection with tarots and quotas. | 19:19 | |
The so-called gatt agreements, | 19:21 | |
to which we subscribe, do permit you | 19:25 | |
to use as loop hole a value added taxes. | 19:28 | |
And so, if we wanted to push our exports | 19:31 | |
and hurt somewhat our imports, | 19:34 | |
then the use of value added tax | 19:39 | |
would be one way of doing so. | 19:41 | |
Interviewer | Professor Samuelson, | 19:45 |
you talk of export subsidies and import protection. | 19:46 | |
What about the free trade views of some of the people | 19:49 | |
close to president-elect Nixon are advocating? | 19:52 | |
Samuelson | Well, what about them? | 19:55 |
I suppose you have in mind my old friend, of a | 19:57 | |
more than 30 years standing, Professor Milton Friedman. | 20:02 | |
His policies are known to all of us | 20:07 | |
and is indeed an advisor of President Nixon. | 20:10 | |
However, as I look at the election returns | 20:15 | |
and as I appraise the political situation. | 20:19 | |
I feel that I have to use the principles, | 20:24 | |
not just of economics, but a political economy. | 20:26 | |
And when I apply those principles, | 20:29 | |
I don't think that even his persuasiveness | 20:32 | |
will succeed in converting the new president | 20:35 | |
into a strong exponent of free trade. | 20:39 | |
On the contrary, | 20:44 | |
I'm expecting that we will find a renewal of | 20:46 | |
protectionist sentiment. | 20:50 | |
As for example, to have quotas in the steel industry. | 20:52 | |
Now, it doesn't matter for this purpose | 20:57 | |
whether those quotas are passed by congregational law, | 20:58 | |
or whether, as is quite likely, | 21:02 | |
they'll come about through a deal | 21:05 | |
that is made with the leading Japanese steel producers. | 21:07 | |
And the leading European steel producers | 21:12 | |
to keep them from flooding our markets. | 21:15 | |
In either case, you're likely to get, | 21:19 | |
in this new administration, | 21:22 | |
with the help of quite a number of Democrats, | 21:24 | |
I should add, are a resurgence of protection. | 21:26 | |
I don't think that we're going to move | 21:36 | |
the day after the inauguration | 21:39 | |
to floating exchange rates. | 21:44 | |
We'll talk more about this | 21:46 | |
and the good deal of merit could be found in such a plan, | 21:48 | |
but I don't think it's in the works. | 21:52 | |
Well, having said this, you might well ask me | 21:54 | |
isn't there any difference | 21:58 | |
that might be made by the fact that we've gone through this | 22:01 | |
expensive and costly procedure of electing a new president. | 22:06 | |
My answer is, yes. | 22:11 | |
I think there are lots of small places | 22:12 | |
where there is a difference. | 22:15 | |
And if you add up these many small influences | 22:17 | |
and if you can you continue them over a period of time, | 22:23 | |
that's the way that massive trends are formed. | 22:25 | |
Let me give an example. | 22:29 | |
There is always strong pressure for higher minimum wages. | 22:33 | |
This pressure comes from the trade unions. | 22:40 | |
It comes from the poor themselves. | 22:44 | |
It comes from the disadvantaged groups. | 22:47 | |
The negro community, black community. | 22:50 | |
It comes from humanitarians in all walks of life. | 22:54 | |
It is a very strong and effective lobby in congress. | 23:01 | |
Now, many economists, | 23:07 | |
and here I would like to align myself with them. | 23:10 | |
Many economists have formed the view | 23:15 | |
that raising minimum wages too high and too fast | 23:18 | |
is about the cruelest thing that you could do to the poor, | 23:24 | |
who are supposed to be helped by this legislation. | 23:29 | |
If a man cannot qualify | 23:34 | |
for a dollar and forty cent job | 23:38 | |
and is thrown out of work completely. | 23:42 | |
What do you do for him | 23:44 | |
by raising the minimum to two dollars? | 23:46 | |
This lobby was something that President Kennedy had to face. | 23:50 | |
It was something that President Johnson had to face. | 23:53 | |
And within the Democratic administrations | 23:58 | |
of the recent past, | 24:00 | |
there was a division among the economists. | 24:01 | |
I think it fair to say, | 24:04 | |
that the council of economic advisors | 24:05 | |
tended to be opposed to too high minimum wage rates. | 24:07 | |
The members, the economists, and labor people | 24:12 | |
in the bureau of labors statistics | 24:15 | |
and in the labor department tended to favor it. | 24:17 | |
Here's where I think it'd have a real difference. | 24:21 | |
I think that all of Mister Nixon's advisors | 24:23 | |
will come in strongly believing | 24:26 | |
that this a bad thing and it ought to be resisted. | 24:29 | |
I suspected Mister Nixon himself will feel that way. | 24:33 | |
And since in the American political scene | 24:38 | |
it does take two to tango. | 24:40 | |
It takes the president to propose legislation | 24:42 | |
and to abstain from vetoing it and congress to initiate it. | 24:45 | |
I think that we may have a slow down in the rate | 24:50 | |
at which the minimum wage rate rises. | 24:54 | |
Still, I don't want to go on record as prophesying | 24:57 | |
that the minimum will not rise. | 25:01 | |
I think it will rise. | 25:04 | |
I think this lobby cannot be stopped, | 25:04 | |
but I think it can be moderated. | 25:07 | |
And here is one effect that I think | 25:09 | |
I can discern on the presidency. | 25:12 | |
Well, next week when the smoke has cleared | 25:17 | |
we might turn to see just what this means | 25:21 | |
for Federal Reserve Board appointments. | 25:24 | |
And what it means for the money market in general. | 25:27 | |
Interviewer | Thank you, Professor Paul Samuelson | 25:32 |
of the Massachusetts Institute of Technology. | 25:34 | |
If you have a comment or a criticism, | 25:37 | |
or a subject you would like to hear | 25:40 | |
discussed in this series, | 25:41 | |
write to Instructional Dynamics Incorporated, | 25:43 | |
166 East Superior Street, Chicago, 60611. | 25:45 |
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