Tape 75 - Economic expansion: how fast

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

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Title:

Tape 75 - Economic expansion: how fast

Date:

circa 1970 to circa 1971

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

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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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Tape 75 - Economic expansion: how fast

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