pstau001155001.wav / Tape 168 - Economic outlook for 1975 / Duke Digital Repository

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Welcome as MIT professor Paul Samuelson

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discusses the economic outlook for 1975.

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This series is produced

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by Instructional Dynamics, Incorporated.

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This year all the forecasters are in agreement

0:14

on the first half of 1975.

0:19

The recession is deepening.

0:23

The slow sales of autos cap the worsening situation.

0:28

So that there are very few forecasters who think that

0:36

as we move into 1975, real growth

0:41

in the United States will not still be declining.

0:45

I go along with that.

0:49

I think that the epoch we are now living in

0:52

will be called the Recession of 1974-1975

0:55

in the history books.

1:01

But there are some analysts who fear

1:03

that it will be called the Recession of 1974-1976

1:06

because they think that we have a durable

1:13

and pervasive recession that is going to last the longest

1:18

of any of our Post-War recessions in terms of real growth.

1:23

Be one of the steepest in its declines.

1:29

My own guess at this moment is,

1:34

that the recession will hit it's trough

1:37

about the middle of the year.

1:41

And I see no reason to argue at this time

1:44

that professor Paul McCracken, the advisor to President Ford

1:51

is correct in his belief that it will be a V-shaped bottom.

1:56

That will depend upon how intense

2:03

the inventory decumulation becomes,

2:06

because when a business cycle movement is dominated

2:09

by short-term inventory movements,

2:14

then I think you get the sharpest V-bottoms.

2:17

The 1958 trough of the business cycle was an example.

2:22

Professor McCracken may be correct,

2:28

but I will go along with a more moderate view.

2:30

Now I am speaking as if it were a sure thing

2:38

that this is a recession,

2:40

and that the semantic game has been decided.

2:43

But I should call my listener's attention to the fact

2:48

that just yesterday, just on December 1,

2:53

there was an article by Julius Shishkin,

2:57

the Commission of Labor Statistics,

3:00

and a long-time collaborator of Geoffrey Moore

3:02

of the National Bureau of Economic Research,

3:06

on whether the business cycle is changing,

3:09

and whether we're really on a recession.

3:14

On November 1st, Geoffrey Moore had said,

3:19

until the contradictions in the data run their course,

3:22

I don't think we're able to say we're in a recession.

3:25

And Shishkin is explaining why

3:28

a reasonable man could still have doubts.

3:31

I will summarize the anomalies in the data

3:34

which could cause a Shishkin or a Moore to have doubt,

3:39

even though most other people in the country

3:42

no longer are in doubt, in the following way.

3:46

First, we are definitely in stagflation.

3:49

And if you use the decline in prices,

3:52

which used to characterize recessions, as your touchstone,

3:57

then of course, we're not in a recession.

4:00

But then of course, so much the worse

4:02

for the old fashioned definition of a recession

4:05

if it depended upon all of the past patterns

4:08

of behavior being realized.

4:11

It would be something for the museums

4:13

in this age of creeping and biased upward inflation.

4:15

Secondly, and here we're in something more real.

4:22

The employment levels have been expanding,

4:25

and not contracting in a way that they contracted

4:29

in recent recessions, and of course,

4:33

in old fashioned pre-World War II recessions.

4:37

But here, too, I think you must allow for the fact

4:41

that we are in a youth boom because of the past Baby Boom.

4:45

And so the rapid increase in the labor force

4:50

for natural demographic reasons

4:54

and for reason which I'll discuss in a moment,

4:56

makes that labor force series be an expanding one.

4:58

If we used declines in trend,

5:03

and said if you have a decline in the employment trend

5:07

in comparison with the long-term trend of so many percent,

5:12

then it's possible that the present business cycle weakness

5:16

would look more like an old fashioned,

5:21

even post-World War II recession.

5:24

The other demographic fact aside from our youth boom,

5:27

is the fact that we have an expanding labor force

5:30

because women are entering labor force

5:33

in increasing numbers.

5:36

This is a very real trend,

5:38

and perhaps a correction should be made for that.

5:41

But for the purpose of this discussion, I shall forget

5:44

the National Bureau of Economic Research's qualms,

5:48

and I shall assume that we are definitely

5:53

in more than a growth, a recession.

5:57

Real growth declining well into 1975 is my forecast.

6:02

What about my forecast with respect

6:07

to the rate of price inflation?

6:09

Here, it seems to me the situation must,

6:14

in all probability, improve.

6:21

We, in all probability,

6:25

will not continue to have 12 and 13% rates of inflation.

6:26

We're already seeing in sensitive commodity prices,

6:31

like sugar, the recent bad actor,

6:35

that there have been several days running

6:39

of sugar futures contracts down the limit.

6:43

And metals, and considering the fact

6:49

that the current American recession coincides

6:54

with a recession all over the world,

6:58

I think that in all likelihood

7:01

the rate of price inflation

7:05

should be down

7:08

quarter by quarter

7:12

in the year to come.

7:15

For example, I think that

7:19

if we're above 10%

7:24

in the fourth quarter in the general price index deflator,

7:26

then in the first quarter you can show a reduction,

7:32

let's say, just to pick a number out of the hat, to 9%.

7:40

And let's say in the second quarter of the year to 8%.

7:46

But then as we're beginning to move towards a recovery,

7:53

long for the lag, we can give ourselves

7:57

even still one more percent to climb

7:59

to 7% annual rate of price change on the deflator.

8:02

But after that, it seems to me if the forecast is correct,

8:07

that the trough is reached in the middle of the year,

8:13

you will begin to get some forces making once again

8:17

for price inflation.

8:21

And so, on the basis of that scenario,

8:23

I would think that the rate of price increase will

8:27

be down to about 7% at its best in 1975.

8:30

That's a very sensitive number to make bets about,

8:40

so I don't have confidence that that 7% won't be 6%,

8:44

but I'm giving you my single-best judgment

8:49

of where I best wish

8:52

to be indifferent about betting on either side.

8:55

The big unknown, it seems to me,

9:03

which must underlie every forecaster looking into 1975,

9:05

is what will be the US government's policy?

9:11

What will be Congress' behavior?

9:15

What will be the Administration's behavior?

9:18

What will be the Federal Reserve's behavior?

9:19

Now, I'm speaking on December 2nd.

9:22

The morning of the day when President Ford is

9:26

to hold his first press conference in a long time.

9:30

And at that press conference we know he is going

9:34

to be asked questions about the economy.

9:37

And so, I have to guess what you will know,

9:39

when you hear my voice namely,

9:43

to what degree the administration is abandoning

9:46

its previous fight inflation at all costs,

9:49

wear a win button against Demand Pull Inflation.

9:53

And is throwing in the sponge,

9:59

and beginning to agree that recession

10:02

is the number one problem.

10:06

I can't shirk my duty in giving a year-end forecast

10:09

at this time, so I have to make my best guess

10:14

as to what the administration will do.

10:16

And it seems to me that the President is going

10:19

to make some concessions in his speech tonight.

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It's not important how those concessions are worded,

10:25

because it also seems to me that he is not going

10:28

to say I'm forgetting inflation,

10:31

putting it on the back burner,

10:34

I'm gonna be soft on inflation.

10:35

Recession is the number one problem.

10:38

He is going to say, with greater likelihood, I believe,

10:40

that inflation remains a problem,

10:44

but recession is also a problem and we,

10:46

in my Ford Administration,

10:50

are going to be cognizant of both factors.

10:52

I have said again and again

10:58

that this recession was made in Washington.

11:01

And I mean by that, that this recession is the result

11:06

of the wish to fight inflation.

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If there had been no need to fight two-digit inflation,

11:17

or incipient two-digit inflation,

11:21

then Washington long since could have been

11:24

taking actions which would have tended

11:27

to restore the housing industry.

11:32

And so, the question is,

11:36

the new so-called veto-proof Democratic Congress.

11:40

To what degree will they do what was done in 1967?

11:46

And done in 1971?

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Namely, deliberately expand the economy

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by expansionary legislation.

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And to what degree will the independent Federal Reserve

12:03

go along with a deliberate expansion of the money supply

12:07

and a continued lowering of the interest rates?

12:14

Although the Federal Reserve is independent,

12:20

in terms of our Constitutional structure,

12:23

I think there is this very strong cross-correlation

12:26

between those occasions when the Federal Government,

12:29

the Administration and the Congress shift and begin

12:32

to lean against a different wind,

12:36

and what the Federal Reserve does.

12:38

I think the Federal Reserve tends to shift

12:40

because of the same political pressures

12:42

and psychological pressures that are bearing upon everybody.

12:45

In my view, because the recession is hurting so much,

12:50

and because the automobile layoffs will dramatize this,

12:55

we shall find a definite relaxation

13:00

of anti-inflation campaign by the Administration,

13:04

by the effective votes of Congress,

13:09

and also by the Federal Reserve.

13:13

Now, of course, if Congress

13:16

and the Administration overdo it,

13:17

the Federal Reserve always leaning against every wind

13:19

will begin to drag its heels.

13:24

And I am building this forecast into my forecast.

13:27

Otherwise, if you could really have

13:33

a staunch Herbert Hoover-like government.

13:36

A Montagu Norman Federal Reserve.

13:41

Montagu Norman was the head of the Bank of England

13:44

at the time that the Great Recession of 1929-1932

13:48

in Britain developed.

13:53

And if you had an electoral system like

13:56

that which prevailed in Western Europe

14:01

and in the United States in the early 1930's,

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I have no doubt that...

14:07

I'm sorry.

14:12

I withdraw the statement I have no doubt.

14:14

I have doubt about everything,

14:15

and the economics is not so exact a science

14:17

that the metaphor is exact.

14:20

But I think there would be very strong probability

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that this would indeed be the worst recession

14:26

of the post-war period, and you could begin

14:29

to see unemployment averaging 8% and 9% and 10%,

14:34

which means that in states like Massachusetts,

14:45

my state, which is third in the country

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only after Alaska and Hawaii,

14:52

if you believe the official statistics,

14:54

but having just been to Hawaii I have reason to believe

14:55

that the unemployment rate in Hawaii is exaggerated

14:59

by the official statistics so that Massachusetts

15:02

is really second in the whole of the 50 states.

15:06

You would see in states like that,

15:11

11 and 12% unemployment rates.

15:13

And of course, you would see among youth,

15:15

unemployment rates of 20, 25, 30%,

15:17

and black youths in slum ghetto areas,

15:21

unemployment rates of over 40%.

15:27

However, we deal with the subject of political economy,

15:33

not straight economics.

15:37

And governments have the power to change these matters,

15:39

and I am confident

15:43

that the political pressures will necessitate

15:44

that the government use those powers.

15:48

So I am betting on a expanded budget

15:51

as the welfare needs become greater,

15:58

due to the recession itself.

16:02

I am betting on expanded deficit

16:05

as the tax structure brings in less and less revenue

16:07

even with the same rates.

16:13

I am betting against any tax increases across the board

16:15

of a general income tax type.

16:21

Either on corporations at large, or on persons,

16:24

or a general sales tax, or a general new value-added tax.

16:29

Indeed, I would more likely bet

16:34

that the tax rates will come down in certain areas.

16:39

Now, I'm not speaking about loopholes

16:46

with expected percentage depletion and so forth.

16:48

With Congressman Mills no longer having his old-time clout,

16:51

you may at long-last begin to see some real action,

16:57

with respect to taxation of oil industry receipts.

17:01

But aside from that, it seems to me

17:08

that you're more likely to get a tax reduction

17:11

at the middle income groups

17:17

and lower middle income groups

17:19

than any sort of a tax increase.

17:21

And this, no matter what President Ford says

17:25

in his December 2nd meeting with the press.

17:29

The Federal Reserve, I think, will continue to expand.

17:36

It will succeed better in expanding once we

17:43

pass the inflection point of most rapid reduction

17:48

in the real economy.

17:52

I think the Federal Reserve has been aiming

17:54

at greater increasing the money supply

17:56

than have been achieved.

17:59

And they just haven't quite willed the extreme action

18:01

which would be necessary to get the money supply growing

18:05

at four, five, six, and seven percent.

18:10

I noticed that the Monetarist Forecasting Organization

18:14

of Argos is betting on 7% increases in M1.

18:18

I would think that any serious attempt

18:28

to turn the recession around and to speed up the date

18:31

at which the economy begins to expand,

18:37

and increase the probability

18:41

of that expansion's taking place prior

18:44

to the middle of 1975, would require at least

18:49

that much of an increase in the money supply.

18:58

Indeed, I wouldn't expect a strong housing recovery

19:02

even if the money supply were to increase by those numbers.

19:07

Does this mean that the advisors to the President

19:15

like Alan Greenspan in Washington,

19:19

and William Fellner in Washington,

19:21

to say nothing of Secretary of Treasury William Simon,

19:24

or still Director of the Office of Management and Budget,

19:29

Roy Ash have changed their minds?

19:34

I would think that the first two

19:39

of the professional economists whom I've named,

19:41

have not changed our minds.

19:43

They would like to stand up to the gale of recession.

19:46

This is a therapeutic recession in their view.

19:52

It's serving the useful purpose

19:56

of doing something substantial about the inflation.

19:58

And like the Bourbons,

20:02

they forget nothing and they learn nothing.

20:05

And I believe that they are standing by their guns.

20:08

But I think that I don't have to be a Marxist

20:13

who believes in the materialist's interpretation

20:17

of history in order to

20:19

lend credence to the hypothesis

20:24

that they're just going to be pushed aside

20:26

in the push-shove political process of Washington,

20:28

and new advisors will be forthcoming.

20:32

Perhaps the Trojan horse will be

20:36

in the form of Paul McCraken

20:37

who is a more eclectic Republican economist,

20:39

and he at this moment is briefing the President

20:44

on how serious the recession is.

20:49

Since Paul McCracken comes from Ann Arbor, Michigan,

20:52

and since the inverse square of the distance law applies

20:55

in all communications,

21:00

he will be very cognizant of the distress in Detroit.

21:01

And I think we can count upon him

21:05

to bring it to the attention of the President.

21:08

So, mine is definitely a political forecast.

21:13

It has to be a political forecast.

21:18

The more expansionary the Administration is,

21:22

the larger the deficit.

21:24

The less expansionary I expect the Federal Reserve to be.

21:26

Let me complete my roundup

21:33

of my personal subjective judgements,

21:36

and then use the rest of my time

21:41

in seeing where my judgments stand

21:43

with respect to other forecasters.

21:47

The unemployment rate still 6% at the last official date.

21:54

That's the October rate.

22:00

Is definitely on the rise.

22:03

And one could not be surprised to see it

22:06

by the first part of the 1975,

22:10

let's say by April or May or June, reaching the 7% level.

22:15

If it does reach the 7% level before the middle of the year,

22:23

even if the trough comes at the middle of the year,

22:28

we know that the unemployment rate will continue somewhat

22:30

to rise after that date.

22:34

Now, of course, I'm assuming that any public service

22:36

employment programs triggered off

22:41

by more than 6% unemployment rate

22:43

maintained for three months.

22:47

I'm counting those people among the unemployed

22:50

because I don't think that those

22:52

will be good, honest jobs that give a full dollar

22:53

for the dollar expended.

22:57

I do not believe that we will see by the middle of the year

23:03

unemployment rates much in excess of 7%.

23:08

But if the economy were to deteriorate at the rapid rate

23:14

of October and November,

23:19

then I'm afraid my conservatism would be refuted

23:23

by the actual data.

23:29

So long as the economy continues to move downward

23:34

at the rates which I've predicted,

23:39

it seems to me that short-term rates still have a way to go.

23:42

The City Bank for the first time, I think in 10 weeks,

23:48

the end of last week, did not lower its prime rate.

23:56

But the reason it didn't lower its prime rate

24:00

was that it changed its formula

24:02

so it wouldn't have to lower its prime rate.

24:03

The old formula would've called for a reduction below 10%,

24:06

I believe, of the City Bank's prime rate.

24:09

Well just as the prime rate has dropped through 12%,

24:14

through 11%, down now at 10%.

24:20

It seems to me that this lagging rate will continue

24:25

to decline and could well go down to 8%.

24:30

But if it does go down to 8%,

24:36

that means that commercial paper rates, and CD rates,

24:38

and Treasury Bill rates will be down lower than that 8%.

24:42

Particularly if my pessimism with respect

24:55

to the rate of price inflation is wrong,

24:59

and you begin to get a little bit better behavior

25:02

than what I have expected,

25:06

namely that you just get down

25:11

to about 7% by the third quarter.

25:12

If we got some really good news on the price front

25:17

which is by the way,

25:20

the single thing you should pray for hardest

25:21

if you are rationed in the amount of praying

25:24

that you can do,

25:27

then I think the long-term interest rate

25:29

could also come down 100 basis points,

25:34

or even 150 basis points.

25:40

But since I am pessimistic on the rate of progress

25:42

with respect to price inflation,

25:46

I would think that the long-term interest rate,

25:49

the corporate bond rate,

25:54

will come down only at most about 100 basis points.

25:58

All bets will be off of course,

26:05

if as we move in to the Thanksgiving season next year,

26:07

we are still in recession so that this is to be a 1974-1976.

26:11

In fact, there is a way of dating this

26:18

so it might be a 1973-1976 recession.

26:20

But given the rest of the forecast,

26:26

I expect mortgage money, which is very hard to come by,

26:29

to get a little bit easier to come by,

26:34

not to go down very much in rate.

26:36

And since the corporate and municipal calendar

26:39

will increase tremendously each time there's

26:43

any improvement in the bond market,

26:46

I therefor expect that that will shade and attenuate

26:49

the amount of the decline in the long-term interest rate.

26:56

On the stock market, I think we have to factor

27:02

into the equation an increasing number of corporations

27:07

which will show a reduction of money nominal profits.

27:10

There will be less inventory revaluation paper profitS.

27:19

There will be less overstating of inflation profits

27:24

because of depreciation costs

27:30

as the price level begins to grow less rapidly.

27:32

But this means that some of the

27:38

four-to-one price earnings ratio stocks will go

27:40

to five and six-to-one because the earnings have gone down.

27:47

Unless their prices also go down.

27:52

I think you have to factor in three terms

27:57

in any estimate with respect to the stock market.

28:04

I will not make an estimate with respect to stock market.

28:07

But for your estimate,

28:09

I think you want to allow for two cross-currents.

28:11

One, that money profit rates will be going down,

28:14

so earnings will be going down as reported.

28:17

But, two, interest rates will also be going down

28:21

so that the price earning capitalization factor

28:25

will be going up.

28:29

Third, the third term in your equation

28:31

must be your view about the long run profitability

28:36

of American corporate enterprise.

28:41

If you think that there has been no basic erosion of

28:43

that long run real profitability of American enterprise,

28:47

then we have had year after year after year

28:51

of upward increase in the cost of producing

28:55

and buying the plant equipment and other earning assets

29:00

of American corporate enterprise.

29:06

And yet in the stock markets of the world,

29:07

the price at which you can take them over

29:11

or buy a share in them has been going down, down, down.

29:15

And therefor this could be a period

29:20

that economic historians will look back on

29:24

and say was one of the greatest periods

29:26

of under-valuation of the stock market

29:30

of really the last decade or 15, 20 years.

29:35

Take you back, really to the early 1950's

29:40

for a comparable period.

29:43

On the other hand, if a fundamental erosion

29:45

of the earning power of American corporate enterprise

29:49

is being undermined partly because of government,

29:52

because of whatever reasons you wish to supply,

29:55

then it may be that once again the stock market

29:59

has been ahead of the game and has been telling us

30:02

something to which we ought to have been listening.

30:03

Now, I've given you my views.

30:11

What are the views

30:14

of the forecasting authorities most worth listening to?

30:15

I would say that almost to a man,

30:20

they are with me in thinking the first quarter

30:24

will be a period of decline.

30:27

To a man, they're with me in thinking there

30:30

will be an improvement in the rate of inflation.

30:31

About half of them think that the upturn, the trough

30:36

will be reached more like Easter

30:42

than like the middle of the year.

30:45

So, I am more pessimistic than about half of them.

30:46

On the other hand, of the other half,

30:50

there are a number who think that the trough

30:52

will be sometime after the middle of the year.

30:55

And I am more optimistic

30:59

if that's the right adjective to use than they are.

31:04

I think I'm a little more pessimistic than the crowd

31:10

with respect to the rate of price inflation.

31:13

The most popular view I believe is

31:18

that something like 6% rate of price increase

31:24

is likely in the last half of 1975.

31:30

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If you have any comments or questions

31:38

for Professor Samuelson,

31:40

address them to Instructional Dynamics, Incorporated

31:41

450 East Ohio Street, Chicago, Illinois 60611.

31:44

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