Tape 67 - The president and the economy

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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	0:07
	by Instructional Dynamics Incorporated	0:09
	and was recorded January 11, 1971.	0:11
-	The first week of the new year brought one bit	0:15
	of bad news, namely the announcement that unemployment	0:18
	in December reached the high level of 6%.	0:21
	This did come as a bit of a surprise.	0:25
	You will recall that in November unemployment was at 5.8%.	0:28
	You may also recall that some administration spokesmen	0:33
	had said that the 5.8% was swelled	0:37
	by the General Motors strike, that perhaps only 5.3%	0:41
	unemployment was a more legitimate figure,	0:47
	purified of the strike.	0:49
	I may say that that downward adjustment	0:52
	did seem to be excessive because remember	0:55
	an automobile worker who is himself out on strike	0:59
	is not counted in among the unemployed.	1:03
	So, the only swollen elements	1:05
	in the November unemployment figures would have to be	1:08
	workers in the glass industry and the rubber tire industry,	1:10
	in subsidiary industries, who were thrown out of work	1:16
	even though they themselves were not on strike.	1:20
	If that 5.3% had been anywhere near the mark,	1:24
	one would have expected the December number when announced	1:28
	to have shown a drop from 5.8% toward 5 1/2%.	1:34
	I'm a bit puzzled, therefore, to learn	1:40
	that even though the General Motors strike was settled	1:43
	three weeks before the census date,	1:47
	the registered unemployment in December	1:49
	did shoot up to the 6% level.	1:53
	When I look at the detailed figures of the release	1:58
	it appears that the increase in unemployment was	2:02
	pretty much across the board, it was of course	2:05
	very heavily among professional people.	2:09
	Professional unemployment has gone up by 50%,	2:12
	which is a very, very high level, but previously	2:16
	professional unemployment had tended to be very low.	2:20
	I presume that a good deal of this	2:24
	must consist of engineers and physicists, technicians,	2:26
	who have been thrown out of work	2:32
	because of the wind down of the space program	2:35
	and of the defense program.	2:38
	If unemployment in December was 6%	2:45
	and not as many thought 5 1/2%	2:49
	that will be a political factor of some importance,	2:54
	I presume, for the coming year.	2:57
	Since most estimators had expected unemployment	3:02
	in the first half of 1971 to inch upward	3:07
	the inching upward may take place from 6%.	3:12
	So, I guess I wouldn't like to bet my last cookie	3:16
	that unemployment won't reach 6 1/2%.	3:21
	Earlier, I considered it very doubtful	3:26
	that unemployment would get so high, but I	3:29
	would've bet against unemployment in December as being 6%.	3:32
	It may be that we're learning	3:37
	about little more weakness in the system	3:41
	than earlier was realized.	3:43
	I believe it was since my last tape that the President has	3:47
	had his conversations with four reporters	3:51
	before the national television network audiences,	3:56
	and I ought to comment on that.	4:01
	Before I do so, let's take notice of the fact	4:04
	that the interest rates	4:08
	have continued to weaken a little bit.	4:11
	We've had still another cut in the prime rate.	4:14
	We've had a cut in the discount rate.	4:16
	The slight firming of long-term corporate bond yields,	4:22
	which	4:28
	went on in the last part of December,	4:30
	after the rather dramatic	4:33
	drop in those yields in November	4:37
	and the first part of December.	4:41
	That interruption seems about over.	4:43
	One supposes that the higher the unemployment	4:49
	reported numbers, the more likely it is	4:52
	that the demand for money is weak,	4:57
	and the more likely it is	4:59
	that the Federal Reserve Open Market Committee will be	5:01
	expansionary in its month-to-month and day-to-day policies.	5:05
	It may well be that we still have some way to go	5:13
	with respect to further drops in interest rates,	5:17
	particularly in long-term interest rates,	5:21
	some further narrowing of the differential	5:23
	between long-term interest rates	5:26
	and short-term interest rates.	5:28
	On the President's report to the nation,	5:31
	it seemed to me that that a very good format	5:34
	from his viewpoint.	5:37
	He's very much in control of the situation,	5:39
	unlike even an ordinary press conference,	5:43
	where the President always has great advantage	5:47
	in talking to reporters, but even more so here.	5:50
	He can say answers fully, the things	5:56
	he wants to answer as he likes,	5:59
	and he can virtually give no comment to	6:00
	other questions if he so chooses.	6:06
	It didn't look as if the network people	6:09
	were very happy in there, in their role.	6:12
	Perhaps, it's the kind of duty	6:15
	which they can't refuse to do.	6:18
	It does add to a person's reputation to be involved,	6:20
	but it's the kind of duty where you can't really add	6:24
	to your reputation as a news gatherer.	6:28
	The main problems covered in the	6:33
	conversation, I suppose, would have to be regarded	6:40
	as the outlook with respect to the Vietnam War	6:43
	and also the outlook with respect to the economy.	6:46
	Our business here on this tape is primarily	6:51
	with the economy, but the Vietnam War does have some	6:53
	repercussions and implications.	6:57
	So let me just comment on one question	7:00
	which the President was asked	7:02
	and to which we did not hear an answer.	7:04
	He was asked, "What are you going to do	7:08
	"if your Vietnamization Policy fails?"	7:11
	That, I think, is what is worrying Doves the most.	7:17
	Well and good, many of them would say	7:20
	if the President can get out of Vietnam on his own terms,	7:23
	more or less with a limited victory	7:27
	with the South Vietnamese taking over successfully	7:30
	and maintaining the status quo of the split nation.	7:34
	But, what if the South Vietnamese aren't up to that?	7:39
	The President really refused to contemplate,	7:45
	at least he refused to contemplate over the airwaves	7:49
	in the presence of everybody, that contingency.	7:52
	In the end, he said that he was confident	7:57
	that that wouldn't happen.	8:00
	If it should happen,	8:03
	and I must say it would be rash	8:07
	to think there isn't at least a 1/3 probability	8:12
	of exactly that happening.	8:17
	The whole questions raised whether	8:22
	we're back once again in the war.	8:24
	Will we economically support a air war,	8:32
	in which the South Vietnamese take the major brunt	8:39
	of the land battles, but in which we do	8:44
	supporting, tactical and strategical bombing.	8:48
	I would say from the standpoint of the GNP of the country,	8:53
	it seems to me that such a situation	8:56
	could be maintained indefinitely.	8:58
	On the other hand, there would undoubtedly be	9:01
	a transfer of losses of American lives	9:05
	from American infantry lives lost,	9:08
	which American mothers and public opinion do not like,	9:11
	to an increasing number of air pilots'	9:15
	lives lost, which I presume would also not be liked.	9:19
	Furthermore, there would be an increase	9:25
	in the rate at which prisoner's of war,	9:27
	which is a very sensitive issue, are accumulating.	9:29
	The upshot is that I'm not able in my own mind	9:34
	to rest easy with the assumption that Vietnam	9:39
	military expenditure is definitely on the wane,	9:47
	and that every economic forecast can be built	9:51
	around that solid fact.	9:54
	The other question which the President was asked	9:59
	and to which he did not give an affirmative answer	10:01
	was this, "Can you bring the economy back to full employment	10:06
	"by the November 1972 elections?"	10:10
	The President didn't say he could.	10:14
	He didn't, by the way, say he couldn't,	10:16
	but it seems to me that he can't.	10:19
	It seems to me that the remarks he did make are compatible	10:23
	with the position of mine that it cannot be done.	10:27
	That is, it cannot be done within the framework	10:33
	of limitations which are imposed upon the President	10:36
	and which he will, I am confident, impose upon himself.	10:39
	What he did say was that 1971 will be a good year,	10:45
	and 1972 will be a very good year.	10:50
	Now,	10:55
	I think that it's possible	10:57
	that both of those statements are correct.	11:01
	If by a good year,	11:05
	you mean year in which unemployment has stopped growing,	11:07
	in which real output has resumed growing,	11:11
	in which there is some slight improvement in profits,	11:17
	and in which there is no further deterioration	11:25
	of the rate of inflation but rather	11:30
	a very modest improvement in the rate of inflation,	11:34
	if all of those components go into your definition	11:38
	of a good year, then it seems to me	11:42
	that 1971 might very well on that definition be a good year.	11:44
	Furthermore,	11:50
	by 1972 I would hope and I would also expect	11:53
	that we would be doing an even better job	11:58
	with respect to reducing unemployment and reducing the gap	12:01
	because it seems to me that	12:07
	as	12:10
	the budget one year from now begins	12:12
	to be prepared for the following calender year,	12:15
	the year of the election itself, there will be very strong	12:19
	pressures from within the administration	12:22
	to try to make the economy look good	12:24
	just prior to the election.	12:28
	I've said earlier on these tapes that I don't think	12:30
	that such efforts	12:32
	will	12:36
	be forthcoming sufficient to bring us back	12:40
	to anything like full employment,	12:42
	to anything like 4%, 4.2%, 3.8% unemployment	12:45
	by the months after the middle of 1972.	12:50
	But I've also said that	12:55
	it may be that the President, in order to have good	13:00
	economic image for politics,	13:04
	may find that it's enough to help him get reelected	13:09
	to be able to say that he's bringing unemployment	13:14
	down from 5 1/2%, 5 1/4%,	13:17
	down in the course of 1972	13:23
	to 4 1/4% or 4 1/2%	13:26
	by the end of 1972.	13:32
	There was one interesting remark quoted	13:34
	in the press about that conversation.	13:38
	Apparently, after the President went off the air,	13:42
	he said, and I suppose he said this on the record,	13:45
	I think it was it John Chancellor,	13:49
	in any case he got quoted as if it were on the record	13:50
	in the newspaper, he said, "I am a Keynesian now."	13:53
	It's interesting if the President was not a Keynesian	14:02
	last year that he has had in his own mind	14:06
	a change of mind.	14:11
	Speaking as an old Keynesian myself,	14:16
	I would say that the labels aren't very much important.	14:20
	It doesn't matter much whether you subscribe to the notion	14:27
	that the budget doesn't have to be balanced in every year.	14:32
	Because under modern Realpolitik,	14:35
	the budget can't be balanced in every year.	14:38
	For it to be meaningful that the President is now	14:42
	a Keynesian and this is to mean something new,	14:45
	it should mean that in terms of quantitative dosage	14:49
	of expansionary fiscal policy of deficits	14:54
	that the President has a new determination to	14:59
	contrive deliberately a larger deficits.	15:04
	This will be a very interesting change of attitude	15:10
	if it does turn out to materialize.	15:14
	I should comment on one technical point that was raised	15:19
	explicitly by the President in that conversation.	15:23
	It's a point which I've seen kicked about a good deal	15:28
	in the public discussions.	15:34
	The President said, "I am having a deliberate,	15:37
	"actual deficit in order to fight unemployment."	15:42
	That deficit, we don't know what will come out with,	15:47
	but it might well be for the next fiscal year	15:51
	something like $15 billions,	15:56
	$17 billion to even $20 billion.	15:59
	This is	16:04
	supposedly the new Keynesian talking.	16:06
	"But," he said, "That will not be an inflationary deficit	16:11
	"because the full-employment budget will be balanced."	16:15
	This is not a new element for President Nixon to say	16:20
	that he believes in balancing the full employment.	16:24
	He has said that before.	16:27
	It's a welcome admission for him to make	16:30
	because it's very important to get into the public record	16:34
	the view that neither political party	16:38
	insists as a matter of principle upon a balanced budget.	16:43
	But the technical point that I want to talk about	16:48
	is to say that there's nothing in the old economics	16:50
	and there is nothing in the new economics	16:55
	which agrees that	16:57
	a budget balanced at full employment is noninflationary.	17:02
	A budget balanced at full employment	17:08
	might be an indication that a government	17:13
	is pursuing policies which will not result	17:16
	in accumulative, one-way increase in the public debt.	17:20
	The reason for that is that supposedly	17:26
	we're at full employment half the time	17:28
	or half the time we're below full employment,	17:30
	half the time we're above full employment,	17:32
	so half the time we are having the budget in surplus,	17:34
	and half the time we're having the budget in deficit.	17:40
	This example of half the time	17:46
	must be taken with a grain of salt,	17:49
	since the President himself said, he said it defensively,	17:51
	but let's take it at face value,	17:54
	that actually our present levels of unemployment	17:56
	are quite respectable levels of unemployment for peacetime.	18:00
	I think he said that on only two or three years of peace	18:05
	did we have unemployment as low as this.	18:10
	If that's a meaningful statement,	18:13
	it must have the meaning that	18:15
	par is not 4% unemployment,	18:19
	the level at which the full-employment budget	18:23
	is to balanced, but par what we realistically	18:26
	have to settle for in the present mixed economy	18:29
	is something which is above that.	18:33
	If we have to settle for more unemployment	18:36
	than the full employment amount	18:38
	in typical peacetime years, it means that	18:40
	although the full-employment budget is balanced	18:44
	we're going to have accumulative, steady,	18:46
	increase decade by decade in the level of the public debt	18:49
	because you're going to average out actual deficits	18:53
	even though the full-employment budget	18:59
	is throughout the period balanced.	19:01
	Let me say, speaking for myself, that	19:06
	I do not deplore that steady cumulative increase	19:10
	in the public debt	19:13
	because	19:16
	over the decades as our GNP grows	19:19
	from $1 trillion per year to a trillion and 1/4	19:22
	billion per year to a trillion and 1/2 billion per year	19:27
	and I would suppose that by the end of the decade,	19:30
	it's going to be	19:34
	very easily in the $2 trillion neighborhood.	19:38
	I would not think it at all	19:43
	bad public policy to aim for a public debt	19:46
	which if it is at the present time	19:51
	in the neighborhood of say $300 billion	19:54
	to have one in the neighborhood of six or $700 billion.	19:58
	That would give you a very considerable	20:04
	amount of deficit in every year of the 10 years.	20:09
	By the way, we're never gonna make	20:13
	on the basis of the kinds of deficits	20:16
	which we're now envisioning.	20:19
	Say $20 billion, 25$ billion, $15 billion,	20:22
	we're never make by the end of the decade	20:25
	public debts of the level that I've just now described.	20:27
	But we could reach such levels	20:32
	without exhausting debt capacity	20:35
	is the point that I'm now trying to make.	20:39
	The	20:45
	inflation which we are now worrying about	20:49
	is very importantly connected	20:54
	with non-demand considerations.	20:57
	If one had gone by demand considerations alone,	21:00
	we should not have had the stubbornness	21:04
	of last year's inflation.	21:07
	Therefore, the President could run huge surplus	21:11
	in the full-employment budget.	21:15
	Much more conservative finance	21:21
	than he now says he's gonna do and you still could have	21:23
	a very serious inflation problem to worry about.	21:27
	My first technical point is that	21:31
	when you're dealing with cost-push inflation problems,	21:33
	when you're dealing with Phillips curve	21:36
	cruel trade off problems between full employment	21:38
	and price stability, then there is no guarantee	21:42
	that any particular moderation of level of	21:46
	aggregate demand will by itself	21:49
	be	21:53
	an insurance of non-inflationary conditions.	21:55
	Now I go to my second technical point, and that is	22:02
	even if we were primarily concerned	22:05
	with demand-pull inflation, it is not the case	22:07
	that the rate of price increase is directly proportional	22:12
	to the budgetary deficit of the full-employment budget.	22:17
	The full-employment budget could be	22:23
	fully balanced, consistent	22:28
	with a demand-pull inflationary gap	22:30
	or depending upon the strength of private investment demand,	22:33
	depending upon concomitant monetary policy that's going on,	22:38
	it could be compatible with a very considerable amount	22:43
	of deflationary gap from the standpoint	22:48
	of demand-pull aggregate demand.	22:51
	There is nothing in other words sacred	22:55
	about the point of balance of the full-employment budget.	22:58
	The only good thing to be said	23:03
	about the full-employment budget	23:04
	is that it's more permissive toward your having a rational,	23:07
	anti-cyclical budgetary policy,	23:13
	a rational,	23:17
	effective demand policy than the old-fashioned shibboleth	23:20
	of balancing the budget in every year.	23:25
	But it's just a weaker shibboleth	23:28
	than the old-fashioned shibboleth.	23:31
	It is not itself a precept of rational behavior.	23:34
	In the few minutes that remain of today's tape,	23:39
	let me comment upon some other	23:42
	important economic news that's been taking place.	23:45
	We've just had today as I speak the report	23:48
	that the President is going to come in	23:53
	with a recommendation for faster depreciation.	23:55
	No doubt the purpose of this is one,	23:59
	to add a little bit to expansionary pressure.	24:03
	Two, since the outlook for	24:06
	business plant and equipment fixed investment	24:10
	is not very strong in real terms, it's to	24:13
	add something to a sector which is now	24:16
	more or less in doldrums.	24:20
	Three, since the President is making lots of noises	24:24
	in a liberal direction towards his welfare plan	24:28
	and so forth, perhaps this is part of a balance package	24:32
	to help the business community,	24:36
	the more affluent part of the community.	24:39
	The exact provisions are for faster depreciation,	24:45
	even in the present allowed fast depreciation,	24:50
	and if you buy a bit of equipment	24:56
	on the last day of the year and use it even for one day,	25:00
	you're allowed six months depreciation.	25:03
	If you buy a piece of equipment,	25:06
	according to the new proposed legislation,	25:08
	one day before the middle of the year and have therefore	25:11
	used it in the first half of the year for even a day,	25:16
	then you'd get as I understand a full depreciation.	25:20
	What are the effects likely to be of this?	25:24
	Well, first, I can't say that I'm against this.	25:27
	I was one of those who thought	25:31
	that the investment tax credit	25:34
	should be suspended, not repealed.	25:36
	It should've been suspended, in my judgment,	25:39
	when there was too much investment spending.	25:41
	But the potency of that act	25:46
	to reduce the surplus of investment spending	25:50
	would've been very much greater	25:54
	if it had been the, if the legislation had been in the form	25:56
	of suspension with the promise of its being restored later.	25:59
	In that case, you would have got	26:05
	what economists call substitution through time.	26:06
	I would've found that it would save me money	26:09
	to stop investing when we had too much investment,	26:13
	and to start investing when we had too little.	26:16
	Instead, for reasons which I have never	26:20
	been able to understand, the administration took the view	26:22
	that you should get rid of the	26:26
	investment tax credit completely.	26:27
	Since I wouldn't mind putting the investment tax credit	26:31
	back on, I think that, and it more or less equivalent thing,	26:33
	it's not exactly the same,	26:38
	but it works in the same direction,	26:39
	faster depreciation is a similar step	26:41
	and I would not deplore it.	26:45
	On the other hand, I've been talking	26:51
	to some experts on investment, and they tell me	26:52
	that there isn't much stimulus in it.	26:55
	On the contrary, in a way	26:58
	the President is maximizing his own problems	27:00
	with respect to budget balancing.	27:02
	He's losing a maximum of revenue in the first year or two	27:04
	with a minimum of presumed return	27:09
	in the way of budgetary stimulus.	27:12
	This is going to cost, according to the experts,	27:14
	about 700 million in the first year and it's gonna build up	27:16
	to about $2 1/2 billion in the steady state.	27:20
	And you're not gonna get very much for that	27:24
	because lives are already very, very, short.	27:27
	So this particular move I don't think would be enough.	27:31
	If I wanted a quick shot in the arm for the economy,	27:35
	I think at this time I could not imagine a better proposal	27:37
	than to get about our job	27:41
	of increasing Social Security benefits.	27:43
	That is overdue.	27:45
	And make it retroactive to the beginning of this year,	27:48
	but go a little more slowly in putting in the new	27:50
	tax step-up for Social Security.	27:55
	The whole history of Social Security	27:58
	has been a history of each new program	27:59
	tending to be deflationary in the first years	28:02
	of its being introduced because we're always so anxious	28:06
	to put in the revenue measures	28:08
	in early, I suppose, to prove our soundness in this	28:13
	allegedly unsound operation of Social Security.	28:18
	Although that I think will get you more stimulus	28:21
	for business in the coming year.	28:25
-	If you have any questions or comments	28:28
	for Professor Samuelson, address them	28:29
	to Instructional Dynamics Incorporated,	28:31
	166 East Superior Street, Chicago, IL 60611	28:33

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Title:

Tape 67 - The president and the economy

Date:

circa 1970 to circa 1971

Contributor:

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

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audiocassettes

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English

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Paul A. Samuelson papers, 1933-2010 and undated

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Paul A. Samuelson papers, 1933-2010

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Economics Cassette Series: Paul Samuelson

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ref2273_pko
samuelsonpaul
duke:325090
pstau001067
ark:/87924/r43b5wq8c
396d6cc7-601d-48fa-a48f-d458c613252c

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Tape 67 - The president and the economy

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