Tape 14 - New economics conference board forecast

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-	Welcome to another in a series of commentaries	0:02
	on the current economic scene.	0:04
	Our guest again this week, for the week	0:06
	of February 10th is Professor Paul Samuelson	0:08
	of the Department of Economics	0:11
	at the Massachusetts Institute of Technology.	0:13
	Professor Samuelson, what has become	0:16
	of the new economics, is it now old hat?	0:18
-	I don't think that the the new economics is obsolete.	0:21
	It's interesting to read in the newspaper various eulogies	0:27
	and epitaphs for the late departed, the new economics.	0:33
	I think what is clear, unmistakably,	0:38
	is that the people have spoken at the polls	0:42
	and we have a new set of economists	0:44
	in the new administration.	0:47
	But if I honestly ask myself what the difference is	0:49
	between the new economists and the new administration	0:52
	and the old economists and the old administration,	0:57
	I don't come up with the same answers	1:01
	that I read in the popular press.	1:05
	Let me try to enlarge upon this subject.	1:08
	First, there is, of course, something of a difference	1:14
	in general philosophy of the republican party	1:19
	and the democratic party.	1:23
	This shows itself in something of a difference	1:25
	in philosophy of the new republican president	1:28
	and the recent democratic presidents.	1:31
	I don't want to expand upon that theme,	1:36
	it actually is quite complicated	1:39
	to delineate what those differences are,	1:41
	but it's not necessary for my present purpose to do so.	1:45
	A new man in office, of course, picks his own people	1:49
	and he picks his people from those	1:54
	who are eligible to be picked, generally, by him.	1:57
	I don't say that a republican president	2:02
	doesn't occasionally pick a democrat	2:05
	so that his administration can tap all the talent	2:09
	that's available and so that it can seem	2:14
	to be somewhat bipartisan, but by and large,	2:16
	there is a panel of economists who are known	2:21
	not to be democrats and it's from this panel	2:25
	that the new administration tends to pick.	2:28
	Now, in order to belong to that panel,	2:33
	you must, over the recent years, have behaved	2:37
	in a certain way and have had certain attitudes,	2:42
	so it's fair to say that most of the economists	2:45
	on any typical panelist of republican economists	2:50
	are, philosophy somewhat different	2:57
	from those of the old establishment,	3:02
	a la Kennedy and Johnson.	3:08
	The words right and left almost came to my tongue.	3:12
	I will use them as shorthand but with the understanding	3:15
	that right and left have not quite the same meaning	3:20
	that they have had in the history books	3:24
	and that they have in some continental countries.	3:26
	By and large, the people who believe	3:29
	in more limited government, in less government intervention,	3:32
	in a smaller role of the public sector in comparison	3:36
	with the private sector have historically belonged	3:40
	to the republican party and they still do	3:43
	and so you have that particular difference.	3:46
	Now, such a difference is a difference in degree,	3:48
	if you like, you can make into a difference in kind	3:51
	but I don't think that that difference	3:55
	constitutes the difference between new economics	3:59
	and old economics.	4:01
	I won't purport right here to try to formulate a definition	4:03
	of exactly what constitutes the new economics	4:10
	but a minimal definition would include	4:13
	a considerable emphasis upon the modern theories	4:17
	of income determination which give fiscal policy	4:22
	an important role in the estimation	4:26
	and control of total aggregate demand.	4:31
	This is a movement which began in the early 1930s,	4:35
	already 35 years ago, its greatest impetus	4:42
	was in the 1936 general theory of John Maynard Keynes	4:48
	and it has gone through a certain amount of evolution	4:54
	and development so I will simply call it	4:57
	the post-Keynesian orthodoxy.	5:02
	It's, by all head count, the predominant orthodoxy	5:05
	in the academic textbooks	5:12
	and in the academic community generally.	5:16
	Your humble servant, now speaking, I suppose,	5:19
	is a pillar of that particular establishment	5:22
	and if you were to look at the most recent edition	5:26
	of my elementary textbook, Economics,	5:30
	which is in its 7th edition, you would find embalmed	5:35
	many of the analytical notions and preconceptions	5:39
	of the new economics.	5:43
	Now, the new economics is an evolving thing.	5:46
	There are many differences between the first edition	5:50
	of my Economics textbook of 1948, a little	5:54
	over 20 years ago many differences from the 7th edition	5:59
	and I'm now busily engaged in preparing the 8th edition	6:08
	which will, most assuredly, be different.	6:12
	But nevertheless, a man has only one life	6:15
	to live and my readers would be greatly surprised if,	6:18
	in the 8th edition, I sloughed off all my previous skins	6:23
	and turned out to be a pre-Keynesian economist	6:27
	or an anti-Keynesian economist	6:31
	and I can give advance notice or warning	6:34
	or prediction that, in fact, in the next,	6:39
	newest edition of my book, the brand of FAB,	6:45
	which is better than the old FAB, even,	6:50
	there will be a heavy emphasis upon public expenditure	6:54
	as a predictable determinant	7:01
	of aggregate total money demand.	7:04
	In that book, the prospects	7:09
	for over-inflationary exuberance	7:11
	will be much affected by a too-high level	7:16
	of public expenditure.	7:21
	That exuberance will be controllable and limitable	7:23
	by, other things equal, a reduction in public expenditure.	7:26
	In the new edition of the book and in the tenets	7:33
	of the new economics, an increase in tax rates will be	7:36
	postulated to have a definite and predictable effect	7:43
	upon aggregate demand.	7:49
	In that new edition of the book, there will be chapters,	7:52
	many of them, dealing with monetary policy.	7:57
	And changes in the stock of money will,	8:02
	other things equal, have a predictable effect	8:06
	upon the state of aggregate demand.	8:09
	If you look at the first edition of my book	8:13
	and look for the role of money	8:17
	and if you compare it with the 7th	8:19
	and with the new 8th edition, you will find	8:21
	that the important of money has been vastly increased.	8:23
	This is not necessarily a post-Keynesian change	8:29
	or an anti-Keynesian change because,	8:37
	as students of the subject know very well,	8:40
	John Maynard Keynes himself never gave up the notion	8:44
	that if you could bring longterm interest rates down	8:50
	by aggressive monetary policy,	8:56
	you would have substantial effects	8:59
	upon the level of total spending,	9:01
	upon inflation, upon the level of unemployment.	9:05
	So Keynes himself was, in part,	9:08
	what is today called a post-Keynesian.	9:11
	Now that doesn't mean that all of the Keynesians	9:14
	of his time held that view.	9:16
	There was a narrower, deep Depression version	9:19
	of the Keynesian system which pooh-poohed the role of money.	9:22
	That has not been true, that was not true, by the way,	9:26
	in the form that I've described it,	9:32
	of my first 1948 edition, it has not been true	9:33
	of any edition but the role of money has steadily increased.	9:37
	Well now if we use this analytical definition	9:42
	of what constitutes the new economics,	9:44
	and I may say that this particular version	9:47
	of the new economics could not be found	9:50
	in the textbooks and in the writings	9:54
	of economists, prior to 1930.	9:58
	I don't say you won't find a foreshadowing of it,	10:01
	here or there, but every historian of science knows	10:04
	that a brief glimmer of, say, a Newtonian truth,	10:07
	is not to be regarded as a genuine precursor	10:13
	of that particular message.	10:21
	Now, that generally constitutes the new economics.	10:23
	Now what was so very new in the 1960s was that,	10:27
	for the first time, the official apparatus of government,	10:30
	the prince, if you will, became converted	10:35
	to these particular ideas and these particular ideas	10:39
	were put into effective practice.	10:43
	This had been done in other countries	10:47
	and I may say with very great success,	10:48
	in my judgment, earlier but had been done	10:50
	only piecemeal and grudgingly	10:54
	in our own country, prior to 1961.	10:56
	So on the whole, if I were to give a non-technical	11:00
	definition of the new economics,	11:09
	I would couch it not in terms of innovations	11:11
	of economic analysis and theory	11:15
	but of a change in the effective know-how	11:18
	of government in our mixed economy democracy.	11:22
	The people insist upon a very high level of employment.	11:28
	They are more callous with respect	11:33
	to the risks of inflation than used to be the case	11:37
	in the 19th century and they are determined	11:40
	to have government use these new tools.	11:44
	Now, if that is my definition of the new economics,	11:51
	it's not the only possible definition,	11:54
	I would say that there has	11:56
	not been a great seat-change in Washington.	12:00
	I do not believe that Paul McCracken	12:04
	or Herbert Stein or Hendrick Houthakker,	12:07
	the three members of the Council of Economic Advisers,	12:12
	will go from the new economics back to the old economics.	12:16
	I do not believe that Arthur F. Burns	12:21
	will go back to the old economics.	12:24
	I believe that Arthur F. Burns,	12:28
	in 1953 to 1955 was, in a less activist way,	12:31
	using the new economics, both with respect	12:41
	to fiscal policy and with respect	12:45
	to his urgings on monetary policy.	12:47
	Now, I'll comment upon some differences	12:52
	in methodology in a moment but,	12:56
	to a first approximation, I think	12:59
	that there is where the truth lies.	13:01
	Now how do I reconcile this with the fact	13:04
	that one, there does exist a challenging ideology,	13:08
	if you like, within the field of analytical economics,	13:15
	namely that of the Chicago school	13:19
	or, if that is too broad a description,	13:22
	let me be more specific and identify this	13:31
	with the view of my colleague in this series	13:35
	and my old friend of more than 30 years standing,	13:39
	Professor Milton Friedman.	13:43
	Professor Milton Friedman is not a post-Keynesian	13:45
	in the sense that I have described.	13:53
	I think that he would argue that his position,	13:55
	his present position, has been very little affected	14:01
	by the Keynesian developments	14:04
	and that he would be where he is now	14:07
	if Keynes had never lived, if Keynes had never written.	14:10
	I'm not an expert on this particular topic	14:18
	and so there's no need for me to go into it.	14:22
	Now there are certain elements though,	14:25
	in the analysis, which Professor Friedman has arrived at	14:27
	independently of the post-Keynesians,	14:30
	which coincides with the views of the post-Keynesians	14:34
	and I think for this purpose, I had better	14:37
	be specific and mention two particular people	14:39
	because they are prolific writers,	14:44
	very well-known to economists, although perhaps	14:46
	not so well-known to many of my listeners,	14:49
	if you are bankers and investment people,	14:52
	students, although the teachers among my listeners	14:58
	will know the names very well.	15:03
	I refer to Professor James Tobin who was a sterling	15:04
	professor of economics at Yale University	15:07
	and to my own very distinguished colleague	15:10
	at MIT, Professor Franco Modigliani.	15:13
	If I write down the things that Professor Friedman believes	15:18
	about the demand for money and if I write down the things	15:22
	that Professor Tobin, Professor Modigliani believe	15:24
	about the demand for money, there is a very great overlap.	15:28
	An example would be Professor Friedman's statement	15:33
	of his views in the new International Encyclopedia	15:37
	of the Social Sciences.	15:40
	Except for a final paragraph or two,	15:42
	which in my judgment do not necessarily follow logically	15:45
	from anything that was said earlier,	15:52
	or from the general drift of what was said earlier,	15:55
	there is little in Professor Friedman's statement	15:59
	of the demand for money, the factors upon which it depends	16:03
	and which he enumerates in that article,	16:08
	which include, by the way, the rate of interest	16:12
	that Professors Modigliani and Professor Tobin	16:17
	would not agree with.	16:21
	Now mind you, I presume that when Professor Friedman	16:22
	wrote this article for the International Encyclopedia	16:27
	of the Social Sciences, it was not his purpose	16:29
	to give a statement of his views	16:33
	emphasizing their differences with those	16:37
	of economists generally.	16:40
	On the contrary, perhaps he properly felt it his duty	16:43
	to give a balanced survey of the field	16:47
	and, in a sense, such a survey tends	16:52
	to play down the differences in opinion.	16:55
	Well, there is this very large overlap.	16:59
	Now I expressed my own views very candidly.	17:02
	Where Professor Friedman overlaps	17:07
	with Professors Tobin and Professor Modigliani,	17:11
	I agree with him.	17:16
	My view is very similar.	17:18
	Where he differs, and I think these differences	17:21
	become very important for policy,	17:26
	I don't agree with them, Professor Modigliani	17:31
	doesn't agree with them, Professor Tobin	17:34
	doesn't agree with them.	17:35
	Now, the question that I would like	17:37
	to ask is where we find this difference.	17:38
	Does Paul McCracken agree with him?	17:44
	Does Herbert Stein, does Arthur Burns?	17:48
	I think in these matters you must judge people	17:52
	by what they say and you must also judge people	17:56
	by what they advocate and Paul McCracken has,	17:59
	many times in recent years, gone on record	18:06
	and said that he has become more Friedman-esque	18:10
	and to me, that is perfectly compatible	18:14
	with his now being convinced of the truth	18:22
	of those ideas which Professor Friedman has in common	18:28
	with the post-Keynesians.	18:31
	I doubt very much, I'm not privy	18:34
	to the private councils of new administration	18:36
	but I doubt very much, when Mr. Nixon held a meeting	18:38
	with his new economists, that is,	18:45
	his new new economists on what his attitude should be	18:48
	towards perpetuation of the surtax,	18:52
	I will bet a penny that if I could have been a fly	18:56
	on the wall, that there would not have been,	19:03
	forcefully represented at that meeting,	19:07
	by McCracken and Burns, the view	19:10
	that the surcharge maintenance does not matter,	19:15
	as far as the control of inflation	19:24
	in the middle of this year is concerned.	19:28
	Now let me make very clear the ground rules	19:30
	of this discussion.	19:32
	I am concerned that extraneous matters	19:35
	not complicate the differences in viewpoint.	19:42
	So I wish to specify that the view	19:47
	of McCracken, I've studied very carefully all	19:52
	of his writings, seems to me not to be compatible	19:54
	with the following, if you hold the rate of growth	19:59
	of the money supply constant	20:02
	and if you are concerned with the total	20:05
	of the aggregate demand, I do not believe	20:09
	that Paul McCracken is of the opinion	20:12
	that lowering taxes, in that situation,	20:15
	would not be inflationary or inflationary	20:20
	in comparison with what would have happened.	20:24
	Now I won't cite chapter and verse	20:27
	of just which writings of McCracken in the recent past	20:33
	would have to be referred to in this regard	20:37
	but I'm giving you my measured opinion in this matter.	20:40
	And let's make no mistake about it,	20:46
	because you've heard this on your tapes	20:48
	and if you read the last edition of Newsweek,	20:51
	that Professor Friedman, as a result of his studies,	20:58
	is very definitely convinced	21:02
	that a change in the tax rates,	21:05
	as he said in a very recent tape,	21:09
	if you control the money supply constant	21:11
	and if you make the separate allowance	21:14
	for the change in our potential GNP	21:15
	that comes from the change in mix	21:20
	of the public and private sector	21:24
	and capital formation versus consumption,	21:26
	it has no other effects upon the state	21:31
	of aggregate demand, that is, no other predictable effects.	21:35
	In other words, Paul McCracken, in all	21:41
	of his writings and views and Arthur Burns	21:44
	does not act as if he believes	21:46
	in the finding of the November Federal Reserve Bank article,	21:49
	which econometrically determined the tax rates	21:55
	have no independent influence upon the state	21:58
	of aggregate demand.	22:02
	I could go on with respect to public expenditure,	22:04
	but it's only necessary for the present purpose	22:06
	of defining whether we really have a substantial group	22:08
	in government who have turned their backs	22:13
	upon the new economics to stick	22:15
	with the more clear-cut case of tax rate changes.	22:18
	Suppose I am right in this view	22:30
	that, essentially, the same analytical apparatus	22:34
	of the new economics is the model	22:38
	which guides the thinking of the Nixon advisers,	22:43
	how are we to account for the fact	22:50
	that we read, in the press, that the new economics is dead.	22:52
	I account for that sociologically.	23:00
	I think there is an absolute need	23:03
	for a differentiation of product.	23:06
	I may say that I'm perfectly prepared	23:08
	to go along with the gag and to encourage	23:11
	this talk because what I want is rational economic policy.	23:15
	And if rational economic policy,	23:21
	let's say in the field of agriculture,	23:23
	gets contaminated with the name of somebody called Brannon,	23:25
	so that to call a thing the Brannon plan is	23:29
	to kill it politically, then I would hope very much	23:32
	to have it called the Ezra Benson plan	23:37
	and brought back into existence.	23:41
	Or to be called the Clifford Harding plan	23:44
	or to be called the Richard Nixon plan	23:46
	or whatever good name of the moment is needed	23:49
	in order to make this excellent plan viable	23:56
	in the political environment.	24:00
	Could you imagine Paul McCracken taking office	24:02
	and saying, I take office with the full cognizance	24:07
	that the people whom I follow were exactly right	24:12
	in their general model of thinking.	24:16
	To me, that would be absurd.	24:21
	It would be absurd changing roles for a new Kennedy,	24:22
	let's say Edward Kennedy people in 1972	24:28
	to come into office and say, gee,	24:33
	that Herbert Stein really had things exactly right	24:36
	and we intend to do more of these very good things	24:39
	in our administration except we'll do them even better.	24:43
	It's politically necessary to differentiate your product,	24:46
	adjust as it's necessary for Marlboro cool cigarettes	24:49
	to be differentiated from Winston's hot cigarettes.	24:57
	So I think that there's a certain amount	25:02
	of unconscious, non-Machiavellian window dressing	25:05
	of this particular kind that goes on	25:11
	and I say more power to it.	25:16
	I may say, I'll comment in later tapes,	25:23
	about just how the new team seems to be doing,	25:27
	once specific economic action becomes more discernible.	25:32
	But as an observer, I've become convinced	25:38
	that sometimes change is a good thing.	25:44
	I mean now, from the standpoint of a person	25:47
	who believes in a very active role for government,	25:51
	I'll put that cap on my head for the present discussion,	25:54
	I think that many things that will involve	25:58
	an expanding scope and role of government	26:02
	in directions that are needed can only take place	26:05
	when one party goes out and another party comes in.	26:10
	That's the way I think the evolution of the system proceeds.	26:16
-	Professor Samuelson, you promised to comment	26:24
	on the methodology of the Conference Board Forecast.	26:26
	Would you do that now?	26:30
-	I will very briefly, in signing off.	26:32
	I appeared on a program in New York, a week or so ago,	26:37
	before 2,700 investment analysts,	26:42
	representing $200 billion worth of assets	26:45
	and on the platform with me was Pierre Rinfret,	26:48
	who has been one of Nixon's advisers	26:52
	and he had a little bit of a field day	26:55
	in which he recapitulated the forecasts	26:57
	of panels of economists like those	27:00
	of the National Industrial Conference Board	27:02
	and he showed that they were always too bearish	27:04
	in their forecasts, that they averaged 10, 15 billion	27:09
	too low in their forecasts.	27:15
	Now, they were just on the nose in 1967	27:17
	but he said that is just because the economy	27:20
	happened to be weak in that year,	27:22
	and so you have, among economists, excessive bearishness.	27:25
	Now this is true in my judgment	27:28
	of the last Conference Board Forecast, too,	27:31
	and I puzzled about the matter and studied it	27:34
	and I'd like to report to you on it.	27:37
	The Wharton School has a econometric model	27:40
	under Lawrence Klein and it predicted,	27:43
	for the fourth quarter of last year,	27:48
	an $11 billion increase.	27:51
	This prediction was made in the middle	27:53
	of the quarter, in November and as you know,	27:55
	the increase was 17 or $18 billion.	27:58
	I thought only a machine could make a forecast	28:03
	as bad as that within one quarter, but I was wrong.	28:06
	When I looked at the Conference Board Forecast	28:11
	for the coming year, which is for a $915 billion GNP	28:13
	and which is a, more than 1% below my own forecast,	28:20
	I discovered that the fourth quarter numbers,	28:27
	on which the panel was operating, were by and large,	28:30
	already several billion dollars too low	28:34
	and actually, if I increase the yearly forecast,	28:37
	that's one way of making the correction,	28:40
	it's not the only way, to get them right	28:42
	in the fourth quarter, they are much more nearly	28:45
	on the beam, in my judgment, than appears	28:48
	from their very raw figures.	28:54
	Now there's a lesson in this.	28:57
	You should be as up-to-date as you can possibly be	29:00
	in making a longer run forecast,	29:04
	because that's the springboard for your forecast.	29:06
	Moreover, the committee member, Gainsbruch,	29:10
	who put together a summary of their forecasts,	29:17
	instead of just taking a mean of them,	29:21
	took all the reasonable things that he found out	29:23
	about them and he borrowed them	29:26
	from the forecast, just like taking a Model T part here	29:29
	and Chrysler part there and when we put 'em together,	29:33
	lo and behold, he had a wonderful sports car.	29:36
	He had a forecast which, if I correct	29:39
	for a proper fourth quarter figure,	29:42
	is very nearly on the beam with my own,	29:45
	well, that doesn't make it a wonderful forecast	29:50
	but it makes it more nearly on the beam	29:52
	with what we've been getting in recent times.	29:54
	So I conclude from this that you must be very careful	29:59
	in the way you score and use forecasts.	30:05
	Correct them so they are up-to-date	30:10
	and then you'll be surprised how much better	30:13
	the final figures will be.	30:18
	One last remark before I sign off,	30:23
	I think there's a reason why so many	30:26
	of these economists had numbers	30:29
	that were in the right direction,	30:32
	but were short of the full magnitude.	30:33
	It serves their purpose perfectly well	30:35
	to be qualitatively right, why stick your neck out	30:37
	and go all the way, even if your mean figure was higher	30:41
	and Professor Theil, whose name I mentioned earlier,	30:46
	has found this a very common aberration	30:49
	among forecasters and fortunately,	30:52
	it happens to be one we can correct for,	30:55
	rather mechanically, thank you.	30:57
-	You have been listening to Dr. Paul Samuelson,	30:59
	professor of economics at MIT.	31:02
	If you have suggestions, questions, or comments,	31:05
	write Instructional Dynamics Incorporated,	31:08
	166 East Superior Street, Chicago, 60611.	31:10

Item Info

Title:

Tape 14 - New economics conference board forecast

Date:

1969

Contributor:

Samuelson, Paul A. (Paul Anthony), 1915-2009

Subject:

Format:

audiocassettes

Language:

English

Digital Collection:

Paul A. Samuelson papers, 1933-2010 and undated

Source Collection:

Paul A. Samuelson papers, 1933-2010

Series:

Economics Cassette Series: Paul Samuelson

Rights:

Limited Re-Use

CC BY-NC 4.0

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samuelsonpaul
duke:325037
pstau001014
ark:/87924/r41z4288t
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Tape 14 - New economics conference board forecast

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Economists' Papers Archive

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