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- | Welcome once again as MIT professor Paul Samuelson | 0:02 |
discusses the current economic scene. | 0:04 | |
This bi-weekly series is produced by Instructional Dynamics | 0:06 | |
and was recorded May 3rd, 1971. | 0:09 | |
- | As we move into the late spring the general picture | 0:13 |
in the economy has clarified itself | 0:19 | |
as far as the question is concerned | 0:22 | |
whether we're over the recession, | 0:24 | |
whether we are in recovery, | 0:25 | |
but it really hasn't seemed to clarify itself, | 0:28 | |
particularly, on the more interesting question | 0:30 | |
as to whether we are moving into a period | 0:34 | |
of strong economic expansion, | 0:37 | |
like that path which the official forecast said | 0:40 | |
would bring us to 4.5% unemployment | 0:44 | |
by the middle of 1972, or whether, rather, | 0:47 | |
we are moving at the more modest pace | 0:52 | |
of the fashionable forecast among business economists | 0:56 | |
and university economists, which says | 1:01 | |
that unemployment will decline only very stubbornly, | 1:04 | |
and that real growth, although it will definitely | 1:09 | |
be positive, will not be, in the immediate quarters ahead, | 1:12 | |
sufficiently in excess of the 4.25% rate | 1:19 | |
which we need just to keep the percentage rate | 1:24 | |
of unemployment about constant. | 1:27 | |
It will be above that rate but not sufficiently above | 1:30 | |
to realize the official forecast. | 1:32 | |
The 64 dollar question for economists is | 1:38 | |
what light can you throw upon that crucial issue? | 1:42 | |
So let me comment upon any new information | 1:46 | |
which has been forthcoming that bears upon this. | 1:50 | |
First we have had a month of good housing starts, | 1:55 | |
some rebound in housing starts, | 1:59 | |
so that the picture there is generally a good one. | 2:01 | |
It's in line with the good picture | 2:05 | |
that has been expected by the fashionable forecast. | 2:06 | |
It is not so over-exuberant, or so exuberant, | 2:12 | |
I should say, yet as by itself to be a factor | 2:16 | |
which will make the official view | 2:21 | |
of the world be more likely to become true. | 2:24 | |
With respect to plant and equipment expenditures, | 2:29 | |
there is no new information known | 2:32 | |
to me at this time. | 2:34 | |
We have had orders for durable goods | 2:35 | |
which have been a little bit on the down side. | 2:38 | |
I don't know how much the auto strike influences | 2:42 | |
this particular series. | 2:47 | |
I don't think it's significant that some numbers | 2:49 | |
which have increased rather substantially | 2:53 | |
in the last four, five, six months should go down | 2:54 | |
for a month, but I do think it would be important | 2:57 | |
to know whether, say, orders for trucks, | 3:01 | |
which are up as a rebound from the car strike, | 3:05 | |
have been inflating those numbers | 3:08 | |
in the previous three, four, five months. | 3:11 | |
In any case, the official survey which found | 3:14 | |
that businessmen intended to increase | 3:19 | |
their plant and equipment expenditures | 3:21 | |
in 1971 by about 4%, is more encouraging | 3:24 | |
than the end of last year survey, | 3:29 | |
which showed them barely increasing | 3:31 | |
their expenditures at all in money terms. | 3:33 | |
But it sill is consistent with a steady | 3:36 | |
or even a decline in the real expenditures | 3:40 | |
for plant and equipment. | 3:43 | |
As yet there is no new extra strength there. | 3:45 | |
In a moment I will depart from the hard empirical data | 3:50 | |
and go in to the problem of what analysis | 3:54 | |
would condition one to expect | 3:57 | |
in the realm of plant and equipment. | 3:59 | |
Two facts deserve comment. | 4:05 | |
First, we are indeed having a more expansionary | 4:08 | |
fiscal policy than was called for | 4:11 | |
in the president's budget. | 4:12 | |
For example, we have had an increase in Social Security | 4:14 | |
benefits legislated by Congress | 4:19 | |
which is to be retroactive to the beginning of the year, | 4:22 | |
but no increase in the taxing to pay | 4:24 | |
for those benefits to take effect | 4:28 | |
until next year. | 4:30 | |
This is definitely expansionary | 4:32 | |
to the tune of a few billions of dollars. | 4:34 | |
On the assumption, which I must regard as possibly doubtful, | 4:38 | |
that Dr. George Shultz of the Nixon team really wants | 4:44 | |
the official forecast to be realized, | 4:48 | |
I find it somewhat comical that he was able | 4:50 | |
to go to Chicago and speak before the economics club, | 4:54 | |
I believe it was there, and with a straight face deplore | 4:57 | |
Congress's defying the president's budget recommendations | 5:01 | |
and overriding them in connection | 5:06 | |
with this Social Security increase. | 5:08 | |
Because on the supposition that he really does | 5:11 | |
want the official forecast to realized, | 5:13 | |
in my judgment, this is precisely the kind | 5:16 | |
of action which is likely to save the bacon | 5:19 | |
of the official forecasters. | 5:21 | |
And I exaggerate only a little, | 5:25 | |
he should privately be very thankful | 5:27 | |
to Congress for performing this particular act. | 5:31 | |
Now why do I say on the supposition | 5:37 | |
that Dr. Shultz would really like the official forecast | 5:40 | |
to be realized? | 5:44 | |
I say that because there are many economists sympathetic | 5:46 | |
to the Nixon administration, sympathetic | 5:51 | |
to its general goals, whose last wish is | 5:55 | |
that actions be taken by the Federal Reserve, | 5:59 | |
by Dr. Arthur Burns and his associates | 6:02 | |
on the board, and by his associates | 6:05 | |
on the Open Market Committee, | 6:07 | |
or that actions be taken by Congress | 6:08 | |
which will be sufficient to give | 6:12 | |
us the nominal GNP numbers for 1971 | 6:14 | |
which were called for in the official forecast. | 6:20 | |
They definitely want a shortfall from those numbers, | 6:23 | |
and although I have no pipelines | 6:27 | |
into the present administration, | 6:33 | |
you have only, as I have done, | 6:35 | |
visit Washington, talk to journalists, | 6:37 | |
talk to people outside of the government | 6:40 | |
who are in Washington and who know the people | 6:43 | |
in the government very well, to realize | 6:45 | |
that there is a very strong opinion inside the Nixon team | 6:48 | |
itself that the official forecast would be a mistake | 6:52 | |
to even try to realize. | 6:57 | |
I can make a prediction with much greater confidence | 7:00 | |
that it will come true about some of the words | 7:03 | |
that are gonna be uttered in Washington | 7:07 | |
than I can make a prediction about what's gonna happen | 7:08 | |
for the economy itself. | 7:11 | |
More and more you will hear official spokesmen | 7:13 | |
of the government say, "Forget the 1065 number. | 7:18 | |
"It is not important." | 7:23 | |
Secretary Connolly has already made noises | 7:26 | |
to that effect. | 7:30 | |
At least some of the passages in speeches | 7:32 | |
by Dr. Stein suggest to me that he would just | 7:38 | |
as soon these days have us all thinking | 7:44 | |
about 1055 as about 1065. | 7:47 | |
Dr. Shultz himself has put some considerable emphasis | 7:52 | |
upon turning our gaze away from the official numbers | 7:55 | |
toward the desirable policy as the administration sees it. | 8:00 | |
Now, I may be wrong in this, because it may be | 8:05 | |
that 1065 materializes, in which case, | 8:09 | |
all of these particular movements will go in reverse. | 8:12 | |
We will be reminded that when there were doubters | 8:16 | |
throughout the land, the government was steadfast | 8:19 | |
with its 1065 number. | 8:21 | |
But since the basic evidence does not | 8:24 | |
at this time suggest that however the strong | 8:27 | |
you may think the economy is going to be in 1972 | 8:30 | |
that there will be as much strength in 1971 | 8:33 | |
as will be needed to save the accuracy of that statistic. | 8:36 | |
The present moment is a time for retreat | 8:41 | |
from that particular statistic. | 8:45 | |
Walter Hiller gave a speech recently, | 8:48 | |
which I read, in which he emphasizes | 8:51 | |
that the government number is over high, | 8:55 | |
and asserts his confidence that that is the case. | 8:58 | |
I saw a speech given at the University of Chicago, | 9:01 | |
at a meeting of business economists, | 9:04 | |
by Dr. Arthur Oaken, and he says | 9:05 | |
that he feels even more secure in his number | 9:08 | |
which is near the fashionable forecast, | 9:12 | |
now that several months of the year have gone by, | 9:14 | |
than he did at the beginning of the year. | 9:16 | |
One interesting sentence appeared | 9:19 | |
in the Hiller speech, which I ought | 9:21 | |
to call your attention to. | 9:23 | |
I do this because I agree that it isn't the 1065 number | 9:25 | |
which we should concentrate on, | 9:29 | |
but the general philosophy, the Weltanschauung | 9:31 | |
that was implied by that number. | 9:35 | |
Hiller has increased his forecast for the year. | 9:38 | |
I can't remember. | 9:41 | |
I don't have the speech in front of me, | 9:43 | |
but my impression is that he and Dr. Perry | 9:44 | |
of Brookings, who issue the so-called Perry-Hiller | 9:48 | |
numerical forecast, had been predicting 1047. | 9:53 | |
They now have increased their numerical prediction | 9:58 | |
to say 1050. | 10:01 | |
This may be a case of the government turning out | 10:04 | |
to be right, and everybody now beginning to trim | 10:06 | |
and beginning to edge upward, | 10:09 | |
and move toward the government. | 10:10 | |
But that's not the explanation which Dr. Hiller gave | 10:12 | |
in expressing this modest change. | 10:15 | |
He said, "It's precisely because price behavior is worse | 10:17 | |
"than I thought that I'm writing up my nominal | 10:21 | |
"or money GNP numbers a little bit, | 10:25 | |
"but I'm solid as a rock still in my expected real GNP, | 10:28 | |
"and so I wish there was some number which | 10:34 | |
"we could all keep in mind to laugh about, | 10:37 | |
"to argue about, to defend, to attack, | 10:40 | |
"which was in real terms like that 1065 number, | 10:43 | |
"but which is not the 1065 number, | 10:48 | |
"which is in money terms, but is the real output increase. | 10:51 | |
"And then we could ask whether, as the year develops, | 10:55 | |
"we are on target or not on target | 11:00 | |
"with respect to that real path." | 11:04 | |
Now in a moment I'm going to talk | 11:07 | |
about what's been happening to the rate | 11:09 | |
of growth of the money supply by various definitions, | 11:12 | |
and I think that that ought to change somewhat | 11:15 | |
our view as to what the nominal GNP magnitudes | 11:17 | |
are likely to be. | 11:21 | |
But before doing that, | 11:23 | |
and doing that in a serious way, | 11:25 | |
let me make reference to the latest word | 11:31 | |
that is going the rounds with respect | 11:37 | |
to the Laffer model. | 11:39 | |
You will remember that one of the reasons | 11:43 | |
that some of the people inside the administration were | 11:46 | |
in favor of the high forecast was the fact | 11:49 | |
that Arthur Laffer, in the Office of Management and Budget, | 11:53 | |
had a particular three-equation model of the economy | 11:58 | |
which suggested that the GNP would be that high | 12:03 | |
in money terms. | 12:07 | |
As a matter of fact, if you go back | 12:09 | |
to that original model as it would have appeared, | 12:10 | |
let's say in December or January, | 12:14 | |
when decisions were being made inside the government, | 12:16 | |
it was not at all difficult to squeeze | 12:19 | |
out of that model a reasonable estimate | 12:23 | |
of 1070 and 1075, and it could even be | 12:25 | |
that there was some sort of | 12:30 | |
an adversary procedure compromise | 12:31 | |
in which, on the grounds of realism, | 12:34 | |
on the grounds of credibility, | 12:37 | |
on the grounds of feasibility, | 12:38 | |
and also on the grounds of target, | 12:40 | |
that these even higher numbers were shaded down. | 12:42 | |
Well two bits of information that have developed | 12:46 | |
with respect to the Laffer Model. | 12:50 | |
First comes from Professor David Fand | 12:54 | |
of the Wayne State University in Detroit, Michigan. | 12:57 | |
Professor Fand would characterize himself, | 13:01 | |
I believe, as a monetarist, therefore | 13:03 | |
he has a genuine interest and is ready | 13:07 | |
to be sympathetic towards a monetarist model | 13:10 | |
like the Laffer model. | 13:13 | |
But he must have been worried | 13:16 | |
by its insistence upon using seasonally uncorrected data | 13:18 | |
and then introducing seasonal factors | 13:23 | |
in the so-called variable dummy form | 13:25 | |
to explain the seasonal variation. | 13:29 | |
So Dr. Fand had the very bright idea | 13:33 | |
of just seeing how much of the high correlation, | 13:34 | |
multiple correlation of Laffer was due | 13:40 | |
to the purely seasonal effect. | 13:43 | |
You will recall that the Laffer model explains | 13:46 | |
about almost 96% of the total variation | 13:48 | |
of the GNP movements in the recent decades. | 13:53 | |
Fand introduced into a multiple regression | 13:59 | |
only the seasonal dummy variables, | 14:02 | |
no money supply, no stock market prices, | 14:04 | |
no strike variables. | 14:06 | |
And lo and behold, he got a multiple correlation of 91%, | 14:08 | |
0.91, in other words, 91/96ths of his explanation was | 14:12 | |
concerned with what might be called the garbage | 14:19 | |
in the data, the garbage in which we have no interest, | 14:22 | |
because it really is almost of no interest whatsoever | 14:25 | |
to learn that spring comes each year after winter, | 14:30 | |
and summer comes after spring. | 14:34 | |
By itself, though, this leaves us with the fact | 14:37 | |
that, of the nine to 10% of the variation | 14:41 | |
which is not garbage, about 60% of that is explained | 14:44 | |
by the Laffer variables. | 14:50 | |
The corrected R-square, then, of what we're interested in, | 14:52 | |
call it a partial R-square if you like, | 14:55 | |
is of the order of magnitude of 0.60. | 14:58 | |
Now, that's not to be sneezed at, | 15:01 | |
but that's just in the order of magnitude | 15:03 | |
of an awful lot of competing analysis, | 15:06 | |
in particular, as I look at if from | 15:09 | |
this very crude arithmetic viewpoint, | 15:11 | |
I don't see that the Federal Reserve Bank | 15:14 | |
of St. Louis model, which tends to have R-squares, | 15:16 | |
both the garbage having been removed from the data, | 15:21 | |
of 0.5 and 0.6, that it has anything particularly | 15:23 | |
to apologize about in comparison with the Laffer model. | 15:27 | |
This is much more important to monetarists | 15:32 | |
than it is to me, because what it means | 15:35 | |
to a monetarist, I suppose in part is, | 15:39 | |
that using long and variable lags, | 15:41 | |
which might be called the St. Louis philosophy, | 15:45 | |
lags of four quarters, does not penalize | 15:49 | |
your good performance in retroactive prediction. | 15:53 | |
And so the Laffer model has not really brought forth | 15:56 | |
any powerful evidence on the point | 15:59 | |
which will interest monetarists tremendously, | 16:01 | |
of whether the lags are short as Laffer claims, | 16:04 | |
or as Laffer's equations claim, | 16:08 | |
or whether they are long. | 16:09 | |
That's the first point about the Laffer model. | 16:12 | |
The second point, which one can pick up | 16:16 | |
on any visit to Washington: | 16:18 | |
When Dr. Shultz testified | 16:21 | |
before the Joint Economic Committee | 16:23 | |
that the official forecasts of the government were | 16:25 | |
essentially correct because, among other things, | 16:29 | |
the Laffer model corroborated them, | 16:31 | |
Senator Proxmire of the Joint Economic Committee | 16:33 | |
was impressed enough to ask the Federal Reserve | 16:36 | |
when it testified. | 16:39 | |
I believe it was of Arthur Burns | 16:41 | |
that he made his interrogation, | 16:42 | |
what does the Federal Reserve think | 16:45 | |
about the monetarist model of Mr. Laffer? | 16:46 | |
And apparently he instructed the Federal Reserve | 16:50 | |
to go home and do its homework, | 16:54 | |
and come back back with an analytical comment | 16:56 | |
upon the Laffer model. | 16:58 | |
This I understand the Federal Reserve has now done, | 17:01 | |
and it has submitted to Congress, | 17:03 | |
to the Joint Economic Committee a brief | 17:05 | |
or a report in which it goes into the merits | 17:08 | |
of the Laffer model. | 17:11 | |
I have not seen that report. | 17:13 | |
It will be a matter of public record. | 17:15 | |
It'll appear in the official publications | 17:16 | |
of the Joint Economic Committee, I'm sure. | 17:19 | |
But I understand it has the following | 17:22 | |
rather remarkable finding. | 17:24 | |
Laffer uses the period from 1948 | 17:27 | |
to 1968, 1969, for his estimation. | 17:30 | |
This includes some pretty abnormal periods. | 17:36 | |
One of those abnormal periods is the Korean War. | 17:40 | |
And the Federal Reserve, in trying | 17:44 | |
to see whether anything of the abnormality, | 17:47 | |
I can't call it garbage, in the data is responsible | 17:51 | |
for the high Laffer result, | 17:54 | |
apparently tried an alternative in which certain | 17:57 | |
of the quarters in the distorted Korean War period | 18:01 | |
were removed from the sample. | 18:07 | |
And then they recomputed the coefficients | 18:11 | |
of the Laffer model, and then they recomputed | 18:14 | |
the forecast for 1971. | 18:18 | |
Now, what do you think it showed? | 18:21 | |
It showed, and this has caused some considerable amusement | 18:24 | |
around Washington, that the most reasonable estimate | 18:26 | |
for the GNP for the year 1971 is 1048, | 18:29 | |
not 1065, and right plunk in the middle | 18:37 | |
of the fashionable forecast zone of 1045 to 1050. | 18:40 | |
I don't know which is better, | 18:46 | |
or whether a sample in which the abnormal Korean War years | 18:48 | |
is left in or one in which those particular periods | 18:51 | |
are left out. | 18:55 | |
But how much confidence can we have in a model | 18:58 | |
where a slight adjustment of that order | 19:01 | |
of magnitude of just a few quarters | 19:05 | |
out of, I suppose, 80 quarters of observations going back | 19:08 | |
to 1948, maybe more than 80 quarters, 90 odd quarters, | 19:14 | |
that the results are so very sensitive | 19:19 | |
to that specification. | 19:23 | |
It would look as if this is a model | 19:25 | |
which has what econometricians call multi-colinearity, | 19:26 | |
and that it's extremely sensitive | 19:31 | |
even to small changes in the data. | 19:33 | |
And God knows the data are quite inaccurate, | 19:36 | |
so that they're all subject to perturbation errors | 19:39 | |
of considerable magnitude. | 19:43 | |
I would say that these two last bits | 19:47 | |
of information go a little distance | 19:50 | |
towards discounting the Laffer model. | 19:53 | |
There's that third bit of information | 20:00 | |
which I believe I commented on | 20:01 | |
in my last tape that although | 20:03 | |
I haven't the computer programmed facility | 20:07 | |
to make the correct calculation, | 20:10 | |
my impression is that the Laffer model gave | 20:13 | |
for the first quarter an increase not | 20:17 | |
of the $28.5 billion such as was witnessed, | 20:20 | |
but a very much higher increase than that. | 20:23 | |
And now this can only be conjecture, | 20:28 | |
and I again say I hope that one of my listeners is | 20:30 | |
in a position to correct me and to write in | 20:32 | |
and tell me what the number is, | 20:35 | |
but it would seem that with the Laffer independent variables | 20:37 | |
you probably would have estimated an increase | 20:42 | |
in the first quarter GNP of above 35 billion, | 20:45 | |
maybe 40, maybe even 45, and I'm not sure | 20:50 | |
that it couldn't go up above that level | 20:54 | |
with all of the variables conspiring | 20:56 | |
to push things in the same direction. | 20:57 | |
Now, let me turn more seriously | 21:02 | |
to monetary developments. | 21:05 | |
We've had a very rapid increase in the money supply | 21:10 | |
in the first quarter. | 21:13 | |
That suggests to me that, two things, | 21:15 | |
one that the Federal Reserve is trying | 21:17 | |
to help the administration reach, | 21:19 | |
if not its own targets, reach defensible targets. | 21:21 | |
But second it suggests to me | 21:27 | |
that the Federal Reserve is up | 21:29 | |
to its old habits, I will not say old tricks, | 21:30 | |
of having some passive component in the money supply. | 21:34 | |
This is what monetarists have criticized | 21:38 | |
in the Federal Reserve in the past, | 21:42 | |
that at a time when the General Motors strike | 21:43 | |
depresses the economy, the Federal Reserve | 21:48 | |
so conducts its open market operations | 21:52 | |
as to have the money supply grow very slowly. | 21:54 | |
And when there's a rebound from the auto strike | 21:56 | |
and a great deal of steel inventory accumulation | 22:00 | |
against the future strike, | 22:04 | |
that the Federal Reserve acts in such a way | 22:06 | |
that in the end the money supply grows very rapidly. | 22:09 | |
I do not consider this as a grave crime | 22:13 | |
on the part of the Federal Reserve, | 22:16 | |
but it looks as if that behavior pattern is | 22:18 | |
still being persisted in by the Federal Reserve. | 22:21 | |
The monetarists, it's a free country, | 22:25 | |
have a right to criticize that. | 22:27 | |
On the other hand, if they criticize that, | 22:29 | |
they should realize that by the same token | 22:31 | |
they are saying that the reduced form estimates | 22:33 | |
of the potency of monetary policy, | 22:39 | |
which they themselves profess to calculate, | 22:40 | |
have a discernible bias in them in the direction | 22:44 | |
of over-exaggerating the potency of changes | 22:47 | |
in the money supply as such. | 22:49 | |
Now, my position is eclectic. | 22:53 | |
My position is somewhere in between. | 22:54 | |
My position is that there are components | 22:57 | |
of the money supply which can be regarded | 22:59 | |
as autonomous and which have an expansionary effect | 23:01 | |
upon the GNP, and there are components | 23:04 | |
of the money supply which are passive, | 23:06 | |
and our reactions, actually one would presume | 23:09 | |
that Laffer has picked up a lot of those | 23:12 | |
in his contemporaneous one quarter formulation. | 23:14 | |
Let me turn then to the autonomous part. | 23:20 | |
Whatever the reason, we've had a substantial increase | 23:24 | |
in the money supply in the first quarter of the year. | 23:27 | |
I don't expect money to continue to grow at this rate. | 23:30 | |
If it does continue to grow at this rate, | 23:34 | |
I agree with those monetarists who say | 23:36 | |
that this suggests that we ought to write up | 23:38 | |
our end of the year rates and our 1972 rates. | 23:41 | |
My time is just about up. | 23:46 | |
I had hoped to talk about the plight of the dollar | 23:47 | |
at greater length. | 23:51 | |
I obviously am not going to have time to do so, | 23:52 | |
but let me, in closing, say that all | 23:55 | |
of the signs are beginning to point towards 1972 | 23:59 | |
as being a rather stronger year than 1971. | 24:04 | |
So it could be that those who are so expansionary minded | 24:10 | |
in their forecasts, are simply wrong | 24:16 | |
in the problem of timing, that somebody | 24:19 | |
who says there'll be a lot of plant and equipment investment | 24:22 | |
for 1971 is wrong, but he will turn | 24:24 | |
out to be right in 1972. | 24:26 | |
Those who say that the economy will begin | 24:29 | |
to pick up some steam in 1971, real steam, | 24:30 | |
are wrong, it'll be 1972. | 24:35 | |
And I will close with a final quote | 24:36 | |
from Walter Hiller. | 24:40 | |
The Perry Hiller forecast has made a first pass at 1972, | 24:43 | |
and although they have the fashionably modest increment | 24:48 | |
of money GNP for 1971, they have 100 billion increase | 24:53 | |
in money GNP for 1972 over 1971, | 24:58 | |
and that's a pretty good clip by anybody's calculation. | 25:03 | |
So, if you're playing this guessing game | 25:07 | |
of now to the election, unless the Nixon administration | 25:09 | |
has worse luck than I think we have a right | 25:13 | |
to expect it to have, you ought | 25:15 | |
to expect the economic pace to be warming up | 25:17 | |
as we move towards the campaign period, | 25:23 | |
even if we are not at best bet then at full employment | 25:26 | |
or even very near to it. | 25:34 | |
- | If you have any comments or questions | 25:36 |
for Professor Samuelson, address them | 25:38 | |
to Instructional Dynamics, Incorporated, | 25:40 | |
166 East Superior Street, Chicago, Illinois, 60611. | 25:42 |
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