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- | Welcome once again as MIT Professor Paul Samuelson | 0:02 |
discusses the current economic scene. | 0:05 | |
This series is produced | 0:07 | |
by Instructional Dynamics Incorporated. | 0:08 | |
This program was recorded December 20th. | 0:10 | |
- | This is the occasion for my annual outlook tape | 0:14 |
on what's going to happen to the American economy in 1974. | 0:20 | |
A year ago, I had the same task | 0:30 | |
to try to peer into the future | 0:34 | |
and decide how the odds looked | 0:37 | |
with respect to the American economy in 1973. | 0:39 | |
It's worth a word or two at the beginning | 0:45 | |
to go back to that time to see how things developed in 1973 | 0:47 | |
and compare that with how they looked to be a year ago. | 0:51 | |
At the turn of the year from 1972 to 1973, | 1:00 | |
there was the usual fashionable forecast | 1:04 | |
that the fashionable forecast | 1:08 | |
was on the whole an optimistic one. | 1:10 | |
It predicted a strong increase in money GNP. | 1:15 | |
It looked forward to a continuation | 1:21 | |
of substantial real growth | 1:26 | |
not as rapidly as in 1972 itself, | 1:30 | |
but more rapidly than is required just to keep up | 1:35 | |
with the long term trend of the American economy. | 1:41 | |
And that fashionable forecast was reasonably optimistic | 1:43 | |
with respect to some abatement | 1:48 | |
of the rate of price inflation. | 1:51 | |
Indeed, it was in the backwash | 1:55 | |
of that rather optimistic fashionable forecast | 1:58 | |
that the Nixon economic team | 2:03 | |
made the fateful decision on January 11th 1973 | 2:06 | |
to suspend the phase two price controls. | 2:11 | |
How did things shape up? | 2:17 | |
In the event, we now know that the money GNP | 2:20 | |
did increase strongly in 1973. | 2:27 | |
The experts were right in that respect | 2:31 | |
but they were not right for precisely the correct reasons | 2:34 | |
because the experts all underestimated | 2:40 | |
the degree of price inflation. | 2:45 | |
They underestimated the degree of food price inflation | 2:47 | |
in the first part of the year. | 2:50 | |
These are supply and demand prices. | 2:51 | |
They underestimated the amount of increase | 2:54 | |
in industrial prices under the decontrol program | 2:57 | |
as the phase two was gutted on January 11th. | 3:04 | |
And the experts overestimated the rate of real GNP growth. | 3:11 | |
This is very striking because within a couple of months, | 3:19 | |
two to three months after the turn of the year, | 3:25 | |
the more canny of the experts were changing their tune. | 3:28 | |
And you could see the new fashionable forecast forming. | 3:32 | |
And actually if we turn to the shading | 3:37 | |
which had taken place by March | 3:42 | |
from the January unmitigated optimism, | 3:44 | |
it had moved in the following way. | 3:51 | |
Namely, there was then by March | 3:55 | |
came to be universal agreement | 3:58 | |
among the fashionable forecasters, the experts, | 4:00 | |
that there would be a growth rate slow down in real terms | 4:03 | |
in the last half of the year. | 4:08 | |
And as a matter of fact, | 4:10 | |
they shifted their position just in time | 4:12 | |
because just as they were shifting their position | 4:15 | |
in the second quarter itself, | 4:17 | |
the so-called growth recession already began to set in. | 4:19 | |
So I would say that this has been a pretty good year | 4:24 | |
for the experts. | 4:30 | |
I was at a meeting just recently | 4:31 | |
and they were all congratulating themselves | 4:33 | |
on how closely they had hit the year. | 4:36 | |
I was not quite as congratulatory to them | 4:39 | |
as they were to themselves because there was after all | 4:42 | |
that period from January to March | 4:46 | |
before they really got the word of what was going to happen. | 4:48 | |
Namely, that we would be moving | 4:55 | |
into the growth recession sooner than before. | 4:59 | |
Actually, there's a panel of 60 economists | 5:04 | |
followed by the American Statistical Association | 5:08 | |
and their median forecast has done pretty well | 5:11 | |
over the years. | 5:15 | |
It does as well as the random experts | 5:17 | |
in the fashionable forecast. | 5:20 | |
It does better than pure monetarism | 5:22 | |
and it does better than non-judgmental computer forecasts, | 5:26 | |
but perhaps not quite as well | 5:33 | |
as the very best of the eclectic | 5:36 | |
computer judgmental forecasters. | 5:39 | |
Well, more interesting perhaps | 5:44 | |
than the median figure given by the experts | 5:47 | |
was a number which they collect | 5:50 | |
which is the probability of a downturn | 5:52 | |
two months ahead, four months ahead, and so forth. | 5:55 | |
And already by the end of 1972, | 5:59 | |
the probability of a downturn ahead | 6:05 | |
was going up on the part of these experts. | 6:07 | |
One of the reasons that the experts are complacent | 6:12 | |
is that they give themselves the alibi | 6:15 | |
that they couldn't have foreseen the increase | 6:17 | |
in food prices and other prices. | 6:19 | |
Well, if in the year | 6:23 | |
when your price forecast turns out right, you take credit, | 6:25 | |
then I would say those who take credit for the sun | 6:28 | |
must be prepared to be blamed for the rain in some part. | 6:32 | |
And so that is a defect of the forecasting art | 6:36 | |
if price increases happen because of exogenous factors, | 6:41 | |
harvests, and so forth, | 6:46 | |
and if you aren't able to predict those, | 6:47 | |
then you must admit that that is part | 6:49 | |
of the imprecision of your forecasting ability. | 6:51 | |
Let's turn from the past to what the outlook is ahead. | 6:56 | |
And here, I think we should do it in two steps. | 7:04 | |
We should begin with what the outlook was | 7:07 | |
prior to the October war in the Mid East | 7:11 | |
because once again there was forming a consensus, | 7:15 | |
a clustering of the fashionable forecasters | 7:20 | |
around a particular scenario. | 7:24 | |
That scenario, you know very well. | 7:26 | |
It was that 1974 was to be a year of growth recession. | 7:29 | |
That the real output in 1974 was to grow positively. | 7:34 | |
It was not to be a national bureau year | 7:43 | |
of genuine recession, | 7:45 | |
not even of the mini-recession type. | 7:47 | |
But that positive rate of growth of real output | 7:50 | |
in the four quarters of 1974 | 7:54 | |
was to average out perhaps at 2% per year annual rate, | 7:58 | |
3% per year annual rate. | 8:03 | |
Some of the fashionable forecasters might have said 1%. | 8:06 | |
But within that range, | 8:11 | |
you would capture most of their forecasts. | 8:12 | |
They also forecast there would be | 8:16 | |
some degree of inflation abatement | 8:18 | |
so that instead of enjoying or suffering | 8:21 | |
a 7% rate of increase in price inflation | 8:26 | |
of the overall price index that's used as the GNP deflator | 8:31 | |
which is what we did experience in '73. | 8:36 | |
In '74, the optimists thought | 8:39 | |
that we might go down to 5%, five and a half percent. | 8:43 | |
There were a few optimists who even went down below that | 8:48 | |
and a few optimists, | 8:51 | |
and now I mean a few optimists | 8:53 | |
with a good forecasting record, | 8:55 | |
who thought that as far | 8:57 | |
as the cost of living index is concerned, | 8:58 | |
the improvement in the rate of inflation | 9:00 | |
might be even more than that. | 9:03 | |
You could begin to talk in some of the quarters in 1974 | 9:04 | |
of 3% rate of increase in prices and not more than that. | 9:08 | |
This growth recession did mean | 9:17 | |
some lessening of the steam in the economic boiler. | 9:21 | |
It would imply some upward climb | 9:24 | |
in the rate of unemployment. | 9:28 | |
But the unemployment rate which had gone down | 9:31 | |
in the fall of this year | 9:34 | |
just before the Mid East war to four and a half percent | 9:37 | |
could stand a bit of climb | 9:43 | |
in the view of lots of economists, | 9:46 | |
particularly non-university business economists. | 9:49 | |
They were concerned whether the natural rate of unemployment | 9:52 | |
at which inflation would begin to accelerate | 9:56 | |
was as low as four and a half percent. | 9:58 | |
So they thought of us as being in an overheated economy, | 10:00 | |
the result in part of stimulating the economy | 10:04 | |
for an election year. | 10:08 | |
And so they were prepared to suffer. | 10:11 | |
Of course, they wouldn't be out of jobs, | 10:15 | |
but they were prepared to suffer fairly cheerfully | 10:17 | |
an increase in the unemployment rate | 10:21 | |
from four and a half percent | 10:22 | |
to four and three quarter percent, | 10:23 | |
to 5%, to five and a quarter percent, | 10:25 | |
five and a third percent. | 10:28 | |
And they were only going to begin to worry | 10:29 | |
about that unemployment rate | 10:31 | |
if it seemed to threaten to go to five and a half percent | 10:33 | |
and above five and a half percent. | 10:38 | |
With respect to profits, | 10:41 | |
there was some spread of opinion among the forecasters, | 10:44 | |
but on the assumption that the decontrol program | 10:48 | |
would be favored by the administration | 10:53 | |
and politically, it would be acceptable. | 10:55 | |
They had some optimism that profits would not fall off | 11:00 | |
in this growth recession in any degree. | 11:06 | |
Some of them had a very slight drop in profits. | 11:10 | |
Some had profits level throughout the growth recession | 11:13 | |
to be followed by a climb later. | 11:17 | |
And some even had an increase in profits. | 11:19 | |
I'm of course speaking of money profits. | 11:23 | |
Those are the kind that the accountants let you report. | 11:26 | |
As an afterthought, many analysts pointed out | 11:30 | |
that those profits were swollen | 11:34 | |
by inventory valuation upward adjustments | 11:36 | |
due to the inflation itself. | 11:39 | |
And so if you put everything on a reproduction cost basis | 11:41 | |
including the cost of reproducing the machinery | 11:44 | |
that was being depreciated during the year | 11:47 | |
in order to produce the output on which you made a profit, | 11:49 | |
then you would find that your real profits | 11:53 | |
corrected for price inflation | 11:56 | |
were by no means as rosy as the reported money profits. | 11:58 | |
The dollar looked as if it was going to improve. | 12:07 | |
The medicine of exchange rate devaluation (mumbling) | 12:10 | |
that took place in February. | 12:16 | |
The even stronger medicine more often applied | 12:18 | |
of depreciation of the dollar | 12:22 | |
relative to some key currencies | 12:24 | |
which took place in February | 12:26 | |
and in March on an official basis | 12:29 | |
and which continued on a floating basis | 12:31 | |
of pretty much of a clean float basis up until June | 12:34 | |
meant that the dollar | 12:40 | |
was becoming more comparative all the time. | 12:42 | |
And although we were troubled by our rate of inflation | 12:45 | |
here in this country in 1973 and in 1972, | 12:48 | |
when we looked abroad, | 12:52 | |
we realized that the rate of inflation abroad | 12:53 | |
was even greater than here. | 12:55 | |
And so more and more of our export industries | 12:57 | |
felt that they were becoming competitive. | 13:00 | |
A very good example, of course, a dramatic example | 13:04 | |
is that of the compact car and the mini car in Detroit, | 13:07 | |
the American Motors Company cars, | 13:11 | |
the Ford Maverick, the Javelin, the Vega, the Pinto. | 13:14 | |
These were holding fairly constant with respect to price | 13:21 | |
at a time when Volkswagens were going up in price | 13:25 | |
in part because of the depreciation of the dollar | 13:30 | |
which meant the appreciation of the mark. | 13:34 | |
The Toyota, the Datsun, the Mazda, the Honda, | 13:36 | |
they too were going up in price. | 13:41 | |
More than that, with food scarce all around the world | 13:44 | |
with the United States having in Iowa | 13:48 | |
on our commercial farms | 13:50 | |
great comparative advantage in foodstuffs, | 13:52 | |
we were finding ourselves with very ready markets | 13:55 | |
and at high prices. | 13:58 | |
You might say that what the Arabian countries | 14:00 | |
are experiencing this year | 14:04 | |
which is a very high price for their exports, | 14:05 | |
we were experiencing early in the year for our foodstuffs. | 14:08 | |
And therefore, there was a very nice comeback | 14:16 | |
in our merchandise balance of payments, | 14:20 | |
a comeback in our current balance of payments | 14:24 | |
on current accounts including invisibles, | 14:28 | |
net export surplus rising nicely. | 14:31 | |
And the basic deficit which takes into account | 14:34 | |
the fact that the United States became a pretty good place | 14:38 | |
to buy into, to invest in, to buy land if you were Japanese, | 14:41 | |
to buy stocks if you were from Western Europe. | 14:47 | |
The basic deficit was also improving. | 14:50 | |
And so one had reason to look forward | 14:54 | |
to a continuation of this trend. | 14:57 | |
All in all, since following periods | 15:00 | |
of overly strong expansion, | 15:04 | |
there tends to be some need for periods of relaxation | 15:07 | |
the way we have to run our mixed economy these days. | 15:12 | |
That was a fairly cheerful picture | 15:18 | |
and although it didn't seem so cheerful to many of us | 15:21 | |
who were making that forecast at the time, | 15:24 | |
in retrospect, we look back with nostalgia upon it. | 15:26 | |
Then came the Mid East War. | 15:31 | |
The impact of the belligerency itself on the economics | 15:34 | |
is not particularly notable. | 15:40 | |
Obviously, that was a very intensely fought war. | 15:43 | |
It meant that inventories of tanks | 15:47 | |
and munitions were depleted on both sides | 15:49 | |
so it meant some nice reorders for the Russians | 15:52 | |
on the part of the oil liquid Arabians, | 15:55 | |
those countries which had oil giving Egypt and Syria | 16:02 | |
which didn't have oil the revenues | 16:06 | |
to support them in that rearming. | 16:09 | |
It meant to some degree for the U.S. repurchases | 16:11 | |
either by the Israelis who were paying for it themselves | 16:16 | |
out of their own resources | 16:21 | |
or to the degree that we were making loans, | 16:23 | |
or putting it in the cuff, | 16:27 | |
or making gifts as the so-called aid program, | 16:28 | |
it meant some increase for the defense business, | 16:32 | |
but this is negligible. | 16:35 | |
If you reckon the total of this | 16:36 | |
in comparison with what is needed | 16:39 | |
to change the business situation for 1974, | 16:43 | |
the Mid East War as a war | 16:48 | |
has no important macroeconomic repercussions | 16:50 | |
on Western Europe, on Russia, or on the United States. | 16:53 | |
But in the aftermath of the war, | 16:58 | |
we did have developing the oil boycott. | 17:00 | |
The OPEC Monopoly of 1216 leading oil producers | 17:04 | |
primarily in the Persian Gulf but not all of them Arabian | 17:11 | |
was already flexing its muscles | 17:16 | |
and increasing prices all the time. | 17:19 | |
There was squeeze play on. | 17:21 | |
Typical monopoly operation. | 17:23 | |
And isolating each of the big consuming countries, | 17:25 | |
some of which were very dependent upon Mid East oil. | 17:29 | |
I'm thinking of Western Europe and Japan in particular. | 17:33 | |
The monopolist was able to strike some very sharp bargains. | 17:36 | |
From the standpoint of the monopolist | 17:42 | |
and from the standpoint of the non-Arabian countries, | 17:44 | |
the war was a godsend | 17:47 | |
because it enabled a vast increase in the price of oil. | 17:50 | |
And so the whole outlook has changed. | 17:55 | |
If we are to have for as long as say half a year of 1974 | 17:58 | |
a shortfall in oil from the Mid East | 18:05 | |
which by the President's reckoning | 18:08 | |
will be in the order of magnitude of 17% of our oil needs. | 18:11 | |
Let's say three million barrels per day | 18:17 | |
out of an 18 million barrels per day needed. | 18:20 | |
Then all of the fashionable forecasters | 18:25 | |
began to go back to their computers, | 18:28 | |
began to recompute the picture | 18:29 | |
and they were able to find | 18:31 | |
that we went from a likely growth recession | 18:34 | |
with minority odds for a genuine recession | 18:37 | |
in which you had | 18:41 | |
at least two quarters of drop in real output | 18:42 | |
to the odds favoring that real recession. | 18:45 | |
And so I have to say | 18:51 | |
that premised upon that prudent man's view | 18:53 | |
with respect to energy | 18:57 | |
that 1974 is going to be a year of genuine recession. | 18:59 | |
The first half of the year is going to be weak. | 19:05 | |
That output is going to decline | 19:08 | |
for the first half of the year. | 19:09 | |
The unemployement, if it was previously going to grow | 19:11 | |
to five and a third percent, | 19:14 | |
perhaps five and a half percent, | 19:15 | |
then I have to go along with the fashionable forecasters | 19:17 | |
who think that by the end of 1974, | 19:20 | |
we'll be talking about 6% unemployment. | 19:23 | |
In the case of some forecasters, even more. | 19:28 | |
Now, I'm going to qualify this if proposition | 19:31 | |
about energy in a moment, | 19:36 | |
but let's stick with it | 19:38 | |
because I think a prudent man must do so | 19:39 | |
in the absence of knowledge to the contrary. | 19:43 | |
This means for the year 1974, stagflation with a vengeance | 19:46 | |
because instead of there being an abatement | 19:51 | |
of the rate of price inflation, | 19:54 | |
whatever abatement there may tend to be | 19:56 | |
with respect to foodstuffs, | 19:59 | |
whatever abatement there would tend to be | 20:02 | |
with respect to international metals | 20:05 | |
because Europe is going to be in a growth recession | 20:07 | |
or now with an energy cut off to her too | 20:12 | |
and I'll include Japan in this. | 20:16 | |
She's going to move into a more genuine recessions. | 20:18 | |
Whatever abatement you could have expected | 20:23 | |
on the rate of inflation from those factors | 20:25 | |
is going to be much more than outweighed | 20:27 | |
by the increase in the cost of energy itself | 20:29 | |
which is dramatic. | 20:33 | |
Many of my listeners will have known that just a week ago, | 20:35 | |
86 million barrels of oil were sold at auction by Iran | 20:40 | |
not at the one dollar and two dollar price per barrel | 20:46 | |
which was typical of just a couple of years ago, | 20:51 | |
not at the three and four dollar per barrel | 20:53 | |
which are typical of what's going on now, | 20:56 | |
but at the 16 dollars a barrel | 21:00 | |
and for low sulfur oil, | 21:03 | |
for as much as 17 dollars and 40 cents a barrel. | 21:05 | |
The part of the country where I am, | 21:09 | |
we're beginning now to get the fuel bills | 21:11 | |
which have gone up from 20 cents to 40 cents a unit. | 21:14 | |
And the end is not yet. | 21:21 | |
So when you take into account the energy induced shortages. | 21:25 | |
I just saw a large tire company. | 21:30 | |
I saw a letter to their suppliers | 21:31 | |
speaking of a 26% increase | 21:33 | |
in the price of tires by the spring. | 21:35 | |
I make that out to be an annual rate of 100%. | 21:38 | |
There is no way of reckoning all these matters | 21:42 | |
without having for the first half of the year | 21:46 | |
a horrendous increase in the annual rate | 21:50 | |
of the cost of living index. | 21:55 | |
In fact, everybody should begin to talk | 21:58 | |
about the GNP deflator | 21:59 | |
because that won't show quite such horrendous figures. | 22:01 | |
And so we're now talking about stagflation. | 22:06 | |
On this basis, a drop in profits is implied year over year. | 22:10 | |
A drop in profits is implied | 22:15 | |
from the fourth quarter of this year where we are now | 22:19 | |
to the fourth quarter of next year | 22:23 | |
even though that may be followed, | 22:25 | |
according to the most fashionable forecast, | 22:27 | |
by an increase in profits | 22:30 | |
from say the fourth quarter of a year from now | 22:32 | |
to the middle of 1975. | 22:35 | |
I've looked at a round up of the conventional wisdom | 22:40 | |
and it's amazing how a monetarist economist | 22:46 | |
who does detailed forecasting has a figure | 22:52 | |
which is just like that of a Keynesian economist. | 22:56 | |
The different consulting firms, | 23:02 | |
the Wharton School model, | 23:05 | |
they all show pretty much a similar picture. | 23:07 | |
And therefore, in summary, | 23:14 | |
that is the single most likely picture. | 23:19 | |
However, more valuable than having a particular number | 23:23 | |
is to have a probability spread. | 23:29 | |
And so I must call your attention | 23:33 | |
to something very important. | 23:35 | |
If you've read the London Economist | 23:38 | |
this last week as I'm speaking, | 23:40 | |
you will have been alerted to the fact | 23:42 | |
that there may be an element of charade going on | 23:44 | |
in the oil boycott. | 23:47 | |
If you calculate how many tankers | 23:49 | |
have been loaded in the last weeks of the boycott | 23:52 | |
from the Persian Gulf on their way to Western Europe, | 23:57 | |
to Japan, to the United States, | 24:01 | |
then you would expect a tremendous shortfall | 24:03 | |
from an earlier period | 24:06 | |
or from what could have been expected from this period. | 24:07 | |
And yet when the alert journalist of the London Economist | 24:09 | |
did their numerical exercise, | 24:14 | |
they found that not to be the case. | 24:17 | |
I heard from a well-placed journalist | 24:21 | |
with respect to Japan that he couldn't understand | 24:24 | |
how the flow of oil was still continuing there | 24:26 | |
in view of the tough talk of the Arabian nations | 24:29 | |
and in view of the cries of pain | 24:32 | |
by the Japanese government and the Japanese public. | 24:35 | |
He still couldn't see it in the actual tangible statistics. | 24:39 | |
Even Holland which is being made the special victim | 24:44 | |
of a power play of diplomacy | 24:48 | |
seems to have in Rotterdam pretty good inventories. | 24:50 | |
A bank economist in the Midwest took a poll | 24:57 | |
of the customers of his bank | 25:01 | |
and not one of them had yet suffered | 25:03 | |
from any energy shortage. | 25:05 | |
And only one out of a fairly considerable number | 25:07 | |
had legitimate grounds, | 25:12 | |
tangible grounds for concern for the months ahead. | 25:15 | |
So the conventional wisdom is beginning to think | 25:20 | |
the three million barrels per day | 25:24 | |
is not the correct number, the 17% number. | 25:26 | |
The oil foundation research unit | 25:33 | |
put the number down from three and a half million per day | 25:35 | |
to two and a half million per day. | 25:40 | |
And so we're getting a revisionist viewpoint. | 25:41 | |
Moreover, the whole point of this | 25:45 | |
is for the purpose of resting concessions from Israel. | 25:47 | |
The only way to get those concessions from Israel | 25:52 | |
is to put pressure on the United States | 25:56 | |
to put pressure on Israel | 25:58 | |
because Israel needs the munitions to maintain her security. | 26:00 | |
And so if there seems to be some semblance | 26:08 | |
of successful pressure on the United States | 26:13 | |
and for this purpose, you know, | 26:18 | |
the threat of an oil boycott, | 26:20 | |
a Potemkin oil boycott, an unreal one | 26:22 | |
may be as effective in terms of public relations | 26:25 | |
as a real one. | 26:27 | |
If there's effective pressure on Europe and Japan | 26:28 | |
to put effective pressure on the United States | 26:31 | |
to put effective pressure on Israel to make concessions. | 26:35 | |
And if the Russians are able | 26:41 | |
to put some kind of effective pressure on the Arabians | 26:44 | |
to seem to be going along with the concessions, | 26:48 | |
and we don't know what the Russian interest is | 26:52 | |
whether their interest is in making trouble here. | 26:54 | |
The fact that we have detente going | 26:58 | |
doesn't mean a thing | 27:00 | |
in terms of you're being able to predict | 27:01 | |
what's going to happen. | 27:02 | |
I may also say nobody has the slightest reason to know | 27:04 | |
whether some concessions made by Israel | 27:08 | |
will in fact in any degree satiate | 27:12 | |
the desires of the Arabian countries. | 27:15 | |
Henry Kissinger doesn't know that. | 27:19 | |
He cannot know that. | 27:21 | |
And I'm not sure the powers that be | 27:23 | |
in the principle Arab countries | 27:25 | |
are in a position to know that. | 27:28 | |
Nevertheless, it's possible | 27:31 | |
that having flexed the muscles of the monopoly | 27:32 | |
that there will be a letting up of the embargo | 27:35 | |
and then the stage is set actually | 27:39 | |
for a rather unagonizing reappraisal of optimism, | 27:42 | |
and you could have a lot of tinder around | 27:46 | |
for an overheating of the economy, | 27:50 | |
and an expansion, and for further price rise, | 27:53 | |
and I may also say for stock market boom. | 27:57 | |
But now, since my time is short, | 28:00 | |
let me say that given the oil embargo picture, | 28:02 | |
you must expect that long term interest rates | 28:07 | |
will not come down very much. | 28:12 | |
Housing starts being hard hit by the energy shortage | 28:14 | |
for reasons I needn't detail in this annual survey | 28:17 | |
will mean that mortgage rates will go down some | 28:21 | |
as a result of determined federal reserve | 28:25 | |
and housing agency actions. | 28:28 | |
Corporate bond rates will not go down as much | 28:31 | |
and so if you talk about 50 basis points | 28:35 | |
on the long term rate | 28:39 | |
between now and say the average of next year, | 28:41 | |
you may be talking about | 28:45 | |
all that you can get in the long term sector. | 28:46 | |
In the short term sector | 28:50 | |
in the face of this stagflation, | 28:52 | |
the flation part, I don't see how you can get | 28:54 | |
more than 100, 150 basis points reduction. | 28:57 | |
You certainly are not going to get down to 4% | 29:03 | |
and to 5% in my judgment. | 29:06 | |
With respect to housing, the permits picture looks bad. | 29:11 | |
There's a backup of units to be sold. | 29:19 | |
People don't know where they've got the heating connection | 29:25 | |
if they start to build a house. | 29:27 | |
And so I think we have to be prepared | 29:29 | |
that housing will fall off | 29:31 | |
unless it is given special support. | 29:33 | |
Given the energy shortage, I see no alternative | 29:36 | |
but for the government to be accommodating. | 29:40 | |
The Federal Reserve, I think, | 29:45 | |
will have a countercyclical increase in the supply of money | 29:47 | |
given that assumption. | 29:52 | |
And this, they will be uncomfortable about | 29:55 | |
because it will be in the face | 29:58 | |
of rather horrendous price news. | 30:00 | |
However, six months ahead | 30:05 | |
if we're now talking about the middle of the year, | 30:09 | |
unless you think of the embargo as permanent | 30:12 | |
and I've seen no responsible persons | 30:14 | |
who have been making policy on that basis | 30:16 | |
and I reproached ourselves for that lack. | 30:18 | |
The general picture | 30:22 | |
should begin ahead to look more cheerful. | 30:23 | |
The unemployment rate will be worse | 30:27 | |
but the last half of '74 looks to be better | 30:30 | |
and the conventional wisdom for whatever it is worth | 30:33 | |
looking a year and a half ahead | 30:37 | |
would think that we will be on the upswing again | 30:39 | |
from the middle of next year to the middle of 1975. | 30:43 | |
And this means that the stock market | 30:50 | |
which always tries to discount ahead. | 30:53 | |
Some people say it over discounts matters ahead | 30:57 | |
will before that event actually comes into immediate view | 30:59 | |
will already begin to act upon it. | 31:07 | |
Now, I guess I should tell you if I'm going to be wrong | 31:11 | |
in this general round up of forecasts | 31:18 | |
in which direction I think I'm most likely to be wrong in. | 31:21 | |
I think that we may all be too pessimistic | 31:26 | |
rather than not pessimistic enough. | 31:30 | |
It's part of the elevating of our consciousness | 31:34 | |
with respect to the energy shortage. | 31:36 | |
Even with the boycott being genuine, | 31:39 | |
if the problem is handled at all well in Washington, | 31:41 | |
there are lots of improvisations which can be made | 31:46 | |
and there's a lot of good will on the part of the public | 31:49 | |
which have nothing to do with price | 31:52 | |
which will ration things out. | 31:53 | |
Actually, we've already begun to see | 31:57 | |
in the statistics of energy use | 32:00 | |
some tremendously encouraging amounts of economizing. | 32:02 | |
The trouble is it's like reducing. | 32:08 | |
It's very easy for anybody to reduce for a short time | 32:11 | |
but without the price incentive, | 32:13 | |
it will be very hard to keep patriotism | 32:15 | |
and social solidarity working. | 32:17 | |
In short, the mixed economy is still in a healthy state. | 32:21 | |
We can look forward over the '70s | 32:26 | |
to a satisfactory rate of growth. | 32:29 | |
Undoubtedly, we live in an age of creeping inflation | 32:35 | |
and there is no solution in sight | 32:39 | |
to the unemployment inflation trade off problem. | 32:42 | |
Undoubtedly, we're moving into an epoch | 32:47 | |
where energy is going to be dear. | 32:50 | |
One prediction I can make with great confidence. | 32:54 | |
There will be shortage of economic problems | 32:57 | |
in the year ahead. | 32:59 | |
- | If you have any comments | 33:01 |
or questions for Professor Samuelson, | 33:03 | |
address them to Instructional Dynamics Incorporated, | 33:05 | |
166 East Superior Street, Chicago, Illinois, 60611. | 33:07 |
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