Tape 79 - Previews of 4th quarter effects of possible steel strike
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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 | 0:07 | |
| and was recorded June 27th, 1971. | 0:10 | |
| - | Today is a good day to discuss | 0:14 |
| the short-run business situation, | 0:16 | |
| where do we stand, where do we seem to be going? | 0:19 | |
| The month of May brought some new information. | 0:22 | |
| Some of it was on the upside; | 0:24 | |
| some was on the downside. | 0:26 | |
| The Production Board Index of the Federal Reserve | 0:28 | |
| finally showed an upward blip | 0:31 | |
| that's welcome and long delayed news. | 0:34 | |
| I think this is independently of any revision | 0:37 | |
| of the Production Index theories, | 0:40 | |
| which I understand is in the works. | 0:42 | |
| Personal income was also up in May | 0:45 | |
| and housing starts were up. | 0:48 | |
| The increase in personal income of course | 0:51 | |
| is related to the increase in production itself. | 0:54 | |
| On the other hand, one I say had to note | 0:58 | |
| that the prices also have been up. | 1:01 | |
| The consumer's price index, which had been looking | 1:05 | |
| rather more cheerful, less inflationary | 1:11 | |
| for the first four months of the year, | 1:14 | |
| in May, increased at sixth tenths of one percent, | 1:18 | |
| which means that about a seven percent rate, | 1:24 | |
| little bit more than seven percent annual rate. | 1:28 | |
| That's the seasonally corrected figure. | 1:31 | |
| The unseasonally corrected figure | 1:32 | |
| was at a six percent annual rate. | 1:34 | |
| The former figure is presumably the better one | 1:37 | |
| for us to make judgments about. | 1:41 | |
| However, this is only one month's number, | 1:43 | |
| and we shouldn't let it by itself | 1:46 | |
| cause us to despair about inflation. | 1:49 | |
| I think though that there are some things to worry about. | 1:51 | |
| For one thing, the increase in prices | 1:54 | |
| in consumer price index in May was not due to food. | 1:57 | |
| If it were a question just of food, | 2:01 | |
| economists know that food is a very volatile item. | 2:04 | |
| Sometimes it goes up; sometimes it goes down. | 2:07 | |
| Definitely just be part of the ball game. | 2:10 | |
| But this time it was not food. | 2:12 | |
| It was elements which are gonna be, I'm afraid, | 2:14 | |
| a bit more persistent. | 2:18 | |
| And important cause of the increase | 2:20 | |
| was the fact that the cost of housing services, | 2:23 | |
| which includes the long term mortgage rate of interest | 2:27 | |
| that people actually have to pay, | 2:31 | |
| that stopped working in favor of slowing down the inflation. | 2:34 | |
| And, as one looks at the interest rate picture, | 2:39 | |
| one's afraid that that good news is a thing of the past. | 2:42 | |
| I may say that the consumer's price index's growing | 2:47 | |
| at only three percent as it did | 2:51 | |
| in the first months of the year | 2:53 | |
| had an element of probable illusion in it. | 2:54 | |
| It was precisely because of the reduction in mortgage rate | 2:58 | |
| that much of that was due to, | 3:02 | |
| if I remember the figures correctly, | 3:03 | |
| if you include the reduction in mortgage rates, | 3:05 | |
| the consumer price index increases | 3:09 | |
| at about three plus percent per year. | 3:11 | |
| But if you don't put in that favorable factor, | 3:14 | |
| and there are main reasons why | 3:17 | |
| some people think you shouldn't, | 3:19 | |
| as for example that the most of my listeners | 3:20 | |
| have not been in the market for a new mortgage, | 3:22 | |
| this is an imputed item. | 3:25 | |
| If you don't include that, | 3:27 | |
| the consumer's price index would've been | 3:28 | |
| four and a half percent. | 3:30 | |
| In fact, it would have agreed with the | 3:31 | |
| consumption price index in the general | 3:33 | |
| Gross National Product deflator, | 3:38 | |
| which has not been showing favorable numbers | 3:40 | |
| like three percent annual rates | 3:42 | |
| but has been right up there | 3:45 | |
| at four and a half percent annual rates. | 3:47 | |
| I've said before in these tapes | 3:50 | |
| that there's a little bit of bad news | 3:51 | |
| probably ahead of us in food prices. | 3:54 | |
| Last year's corn blight which has nothing to do | 3:56 | |
| with this year's corn blight, | 3:58 | |
| it may well be that this year's corn blight | 3:59 | |
| has been exaggerated. | 4:01 | |
| But last year's corn blight has | 4:04 | |
| sent up the price of grain and that has not yet | 4:06 | |
| been transmitted to us in the form of meat scarcity | 4:10 | |
| and increase in the price of meat. | 4:14 | |
| But almost certainly, | 4:15 | |
| that scarcity of meat is on the way | 4:18 | |
| and meat prices, high as they are, | 4:20 | |
| look to go higher. | 4:23 | |
| You can already see this in the future's markets. | 4:25 | |
| Pork bellies, live beef prices | 4:28 | |
| in the Chicago organized exchanges | 4:32 | |
| and I think that one has to believe | 4:35 | |
| the indications that are there. | 4:39 | |
| All in all, there is no escaping the conclusion | 4:44 | |
| that the rate of progress on the inflation front | 4:46 | |
| has been extremely discouraging. | 4:51 | |
| I can't think of worse news. | 4:54 | |
| Sometimes, businessmen ask me | 4:57 | |
| what should we pray for? | 4:59 | |
| What would be good news to watch out for? | 5:01 | |
| And I don't say to them, | 5:04 | |
| well, great news would be that the employment index | 5:07 | |
| is up a little or that the budget behaves this way or that. | 5:10 | |
| What I say to them is, | 5:14 | |
| pray for good luck on the inflation front | 5:17 | |
| because if prices are behaving better on inflation front, | 5:20 | |
| there will be absolutely no problem for the government | 5:25 | |
| and for the Federal Reserve to gauge the amount | 5:28 | |
| of purchasing power, dollar spending correctly. | 5:32 | |
| What is inhibiting Dr. Burns from providing exactly | 5:36 | |
| the needed amount of money to finance | 5:41 | |
| an early full employment recovery | 5:44 | |
| is his sensible concern | 5:46 | |
| that if the inflation is still raging, | 5:49 | |
| if the inflationary tendency is both in the wage market | 5:54 | |
| and the price market are still very strong, | 5:56 | |
| then he has to go very easy | 5:59 | |
| in creating abstract purchasing power | 6:02 | |
| because a lot of that new abstract purchasing power | 6:05 | |
| will show itself not in an increase in output | 6:07 | |
| but rather in an increase in prices. | 6:10 | |
| Well, that's what would be good news, | 6:14 | |
| but the actual fact is the news has not been very good. | 6:15 | |
| Further, of course we have seen | 6:21 | |
| an increase in interest rates. | 6:23 | |
| This has been fairly broad across short term interest rates | 6:25 | |
| and also showing itself | 6:30 | |
| in the long term corporate bond market. | 6:32 | |
| You can get two arguments today | 6:35 | |
| in the money market about the future of interest rates. | 6:40 | |
| Of course, at any day of the week, | 6:44 | |
| you can get two or 20 arguments. | 6:45 | |
| But what I'm trying to say is | 6:47 | |
| that there are two well-thought out positions | 6:49 | |
| about the future of interest rates. | 6:52 | |
| They are diametrically opposed. | 6:56 | |
| On the one hand, there is the view | 6:58 | |
| which is that interest rates have seen it. | 7:01 | |
| The reductions are a thing of the past, | 7:05 | |
| and interest rates are going to work their way up | 7:07 | |
| or at best be stable | 7:10 | |
| as this recovery period advances. | 7:13 | |
| Opposed to this is the rather more optimistic view | 7:17 | |
| that interest rates by the end of this year | 7:21 | |
| are gonna be lower than they are now | 7:23 | |
| and if any of you who have to do financing | 7:25 | |
| should hold off, some of the people who hold this view | 7:26 | |
| have themselves actually been holding off on financing. | 7:30 | |
| They're putting their money where their mouth is. | 7:32 | |
| They really believe this. | 7:34 | |
| And this viewpoint has been buttress | 7:35 | |
| by a considerable flow of funds analysis. | 7:40 | |
| I think it'll be more useful | 7:44 | |
| before I give my opinion as between these two | 7:46 | |
| competing views to dwell longer | 7:50 | |
| on where we are and where we're going | 7:53 | |
| in terms of general business activity. | 7:56 | |
| 'Cause I think that the most important determinant | 7:57 | |
| of what's going to happen to interest rates, | 8:02 | |
| let's say, in the last quarter of this year | 8:04 | |
| is what's happening to general business | 8:06 | |
| between now and then and what are the legitimate | 8:09 | |
| reasonable expectations at that time | 8:12 | |
| and what's happening to the rate of inflation | 8:15 | |
| between now and then. | 8:18 | |
| Let's begin them with the solid data just behind us. | 8:21 | |
| The final product of the GNP grew by | 8:26 | |
| the rather considerable $33 billion | 8:29 | |
| between the fourth quarter of the strike period | 8:33 | |
| and the first quarter of the recovery | 8:36 | |
| from the General Motor strike period. | 8:38 | |
| The GNP, not in final terms but in actual money, | 8:41 | |
| or nominal terms, grew by more than $30 billion. | 8:46 | |
| The rate of real increase was | 8:52 | |
| rather large, although part of that $30 billion increase | 8:57 | |
| was of course due to disappointment | 9:02 | |
| on the price front, the deflator behave worse | 9:05 | |
| than we had expected. | 9:07 | |
| Now, the big question there we're asking is, | 9:09 | |
| how much of that is going to continue? | 9:12 | |
| How much of that is just the rebound | 9:15 | |
| from the auto strike? | 9:18 | |
| And let's then look at the second quarter. | 9:22 | |
| The second quarter as I speak is almost over. | 9:27 | |
| The official first estimates won't come out for a while, | 9:31 | |
| but we can begin to make a guess. | 9:35 | |
| I would guess for the second quarter | 9:39 | |
| a increase of, let's say $22 billion. | 9:42 | |
| That's not 30, but remember, | 9:48 | |
| there's no strike rebound to help us. | 9:53 | |
| That's a fairly considerable increase. | 9:57 | |
| There is some help in those numbers | 10:01 | |
| from the possible steel strike | 10:03 | |
| that is looking us in the face | 10:06 | |
| as we move closer towards the third quarter. | 10:08 | |
| So rapid has been the delivery of steel. | 10:12 | |
| So great have been the orders | 10:15 | |
| from the steel users to protect themselves | 10:20 | |
| against the possible work stoppage | 10:22 | |
| that even before we get to the collective bargaining period, | 10:24 | |
| even before we get up to the deadline of the strike, | 10:27 | |
| a lot of steel users are finding | 10:30 | |
| that they've got all the protection they need, | 10:32 | |
| and you probably noted, certain stock market has noted, | 10:34 | |
| that a number of the steel companies | 10:38 | |
| are already cutting back on their rate of operations | 10:39 | |
| because they surprise themselves | 10:42 | |
| by the rapidity with which the hedge steel buying | 10:44 | |
| became associated. | 10:49 | |
| I don't think there's any mystery | 10:51 | |
| as I mentioned in earlier tape | 10:52 | |
| with a production up both abroad and here. | 10:54 | |
| It has been the supplier who's been determining | 10:58 | |
| the rate of steel deliveries and not the demander. | 11:00 | |
| The demander has had a more than sufficient demand. | 11:03 | |
| And with supply behaving better | 11:07 | |
| than many people who aren't real close | 11:10 | |
| to the situation had realized, | 11:12 | |
| it meant that the protection was achieved in earlier days. | 11:14 | |
| Well of course we're gonna pay for that sprint in the future | 11:19 | |
| with a slow down, with a walk. | 11:24 | |
| I perhaps ought to speculate as to whether there's gonna be | 11:29 | |
| a steel strike or not. | 11:33 | |
| I'm not an expert in this area. | 11:35 | |
| There aren't very many experts | 11:37 | |
| worth listening to in this area. | 11:39 | |
| My own guess would be that at a 50-50 bet, | 11:41 | |
| there is gonna be a steel strike | 11:46 | |
| and it's gonna be a short one. | 11:48 | |
| There is no need for a steel strike in the following since | 11:50 | |
| the aluminum settlement was a very high one. | 11:54 | |
| The can settlement was a very high one. | 11:57 | |
| Practically everybody I talk to | 12:00 | |
| has become reconciled to the notion | 12:02 | |
| that the steel workers cannot get less | 12:05 | |
| than these very high settlements. | 12:08 | |
| Therefore, why go through the charade | 12:10 | |
| of a strike when the ball game is lost anyway | 12:12 | |
| as far as a non-inflationary settlement is concerned? | 12:16 | |
| Taking this in its face value | 12:21 | |
| and many people in the industry do, | 12:22 | |
| they say there's no need for a strike | 12:24 | |
| and there won't be one. | 12:26 | |
| But one or two of the large steel companies, | 12:27 | |
| I want to identify them by name | 12:30 | |
| but people in the trade know which ones I mean, | 12:32 | |
| have the view that the industry can just not afford | 12:37 | |
| to be a doormat. | 12:40 | |
| And that they've got to stand up and show some resistance, | 12:42 | |
| even if in the end, there is a high settlement. | 12:44 | |
| And it's that kind of talking and thinking | 12:47 | |
| which will make a strike more likely. | 12:51 | |
| If there is strike, it will show itself of course | 12:54 | |
| in a complete or almost complete slowdown | 12:57 | |
| in the steel industry | 13:00 | |
| and you'll see that in the production index. | 13:01 | |
| But so many people have steel | 13:04 | |
| and there is so much steel around | 13:07 | |
| that it won't have secondary effects upon the economy. | 13:08 | |
| It will show itself in a little extra | 13:12 | |
| inventory accumulation in the second quarter | 13:16 | |
| and the 22 billion figure that I mentioned a moment ago. | 13:17 | |
| And a little decumulation of steel inventory | 13:22 | |
| in the third quarter. | 13:26 | |
| So it won't be like a strike of Longshoremen | 13:28 | |
| or a strike of the railroad which has almost instantaneous | 13:34 | |
| repercussions on all industries in the land. | 13:37 | |
| Only if we had a long strike would you begin | 13:40 | |
| to run in to those effects. | 13:42 | |
| I would say actually, | 13:46 | |
| well, let me make the case against a strike. | 13:47 | |
| Why not have the strike? | 13:50 | |
| You might say the industry has lot of inventory. | 13:52 | |
| It may be a good excuse for the companies | 13:55 | |
| to lay off some costly labor | 13:56 | |
| and to shut down and the labor | 13:59 | |
| which had been working overtime in many cases, | 14:01 | |
| could get a nice rest. | 14:03 | |
| There is that no matter how short the strike is, | 14:05 | |
| you're going to get some people | 14:08 | |
| who don't have exactly the kind of steel they want | 14:10 | |
| and you're gonna give the imports | 14:13 | |
| coming in from abroad an extra chance. | 14:15 | |
| And once those imports from abroad, so to speak, | 14:17 | |
| get their foot in the door, | 14:20 | |
| they never take it out again. | 14:21 | |
| And so the long run interest of the industry | 14:22 | |
| probably say if you give the steel executives | 14:26 | |
| themselves a choice, they will prefer not to have a strike. | 14:29 | |
| However, let me return to my main point. | 14:33 | |
| That if we're talking about a strike of four weeks | 14:36 | |
| or no strike, then as far as the macro-economic | 14:38 | |
| situation is concerned, as far as | 14:42 | |
| the third quarter increase is concerned, | 14:44 | |
| as far as the annual figures are concerned, | 14:46 | |
| as far as the profile going into 1972 is concerned, | 14:50 | |
| I don't think it makes very much of a difference. | 14:53 | |
| Well, if the second quarter is going to grow | 14:56 | |
| by 22 billion, | 15:01 | |
| what about the third quarter? | 15:04 | |
| This has to be speculated, | 15:06 | |
| but most people are looking for a little bit of relaxation | 15:08 | |
| for the reasons that I have stated. | 15:11 | |
| And so I guess I would say a reasonable number | 15:12 | |
| maybe even a reasonably optimistic number | 15:17 | |
| or a reasonably number on the high side | 15:19 | |
| is for $18 billion. | 15:24 | |
| I suggest therefore that you think of the middle | 15:26 | |
| two quarters a year as representing a $40 billion | 15:29 | |
| increase in GNP and you can divide it up as you like | 15:32 | |
| between those quarters depending upon whether you think | 15:34 | |
| my estimate is little excessive of 22 billion | 15:37 | |
| in the second quarter and only 18 in the third quarter. | 15:40 | |
| Perhaps you'd like to make it 21 and 19 | 15:44 | |
| or even 20 and 20. | 15:47 | |
| Then, the fourth quarter, well, | 15:52 | |
| of course I've collected dozens of estimates, | 15:54 | |
| but I wanna discuss just in terms of profiles. | 16:00 | |
| Let's try to put things on the optimistic side | 16:03 | |
| and make that a $25 billion increase. | 16:05 | |
| That shows for the year a profile of 30 billion, | 16:11 | |
| 22 billion, 18 billion, and 25 billion. | 16:15 | |
| What does it add up to? | 16:20 | |
| Well of course it does not add up to 1065. | 16:21 | |
| It doesn't come anywhere near to 1065. | 16:24 | |
| I haven't done arithmetic but anyone of my listeners | 16:28 | |
| can quickly do it. | 16:31 | |
| I guess if I will show something a little under 1055. | 16:33 | |
| Now, you may say that's not so bad | 16:38 | |
| because that's on the high side | 16:40 | |
| of the fashionable forecast | 16:43 | |
| but remember that the fashionable forecast | 16:45 | |
| assumed better inflation control | 16:48 | |
| than we have witnessed in the first half of this year | 16:52 | |
| or we seem likely to witness in the second half. | 16:58 | |
| Certainly, all the experts whom I talked to | 17:01 | |
| about the second half have not been able to assure me | 17:03 | |
| that we're on course | 17:07 | |
| with respect to the fashionable forecast. | 17:09 | |
| I guess it's appropriate for me to remind you | 17:13 | |
| that at the end of last year, | 17:15 | |
| I was skeptical about the official forecast | 17:18 | |
| but also skeptical even about the fashionable forecast | 17:24 | |
| when it came to the rate of price increase. | 17:27 | |
| So if we turn to real increase, | 17:32 | |
| let's look at the real number that corresponds | 17:37 | |
| to the official government forecast of 1065. | 17:39 | |
| And let's look at what's implied | 17:42 | |
| by the profile I've just stated to you. | 17:44 | |
| And of course you have here a much greater | 17:46 | |
| shortfall in percentage terms | 17:49 | |
| than it's indicated by the nominal GNP. | 17:51 | |
| There's no mystery on how that's coming about. | 17:56 | |
| According to the official forecast, | 17:59 | |
| the 1065 scenario, unemployment should be | 18:01 | |
| way below as it is now. | 18:05 | |
| It should be on its way to four and a half percent | 18:06 | |
| unemployment rate in '72, middle of 1972, | 18:08 | |
| second quarter of 1972. | 18:13 | |
| Well of course unemployment is not behaving that way at all. | 18:16 | |
| At the last count, it was 6.2 percent. | 18:20 | |
| And under the what I call fairly optimistic scenario | 18:24 | |
| that I've just given to you, | 18:29 | |
| the unemployment isn't gonna be a very much less | 18:31 | |
| than six percent by the end of the year. | 18:35 | |
| Unemployment is very slow to decline | 18:39 | |
| if these particular numbers are realized. | 18:42 | |
| Now, the particular numbers that I've given you | 18:46 | |
| I think are in line with the fashionable forecast | 18:50 | |
| although they're a little higher | 18:56 | |
| than the fashionable forecast. | 18:57 | |
| But I have confidence in the people | 18:59 | |
| who are a la mode. | 19:01 | |
| They will raise their numbers | 19:02 | |
| and bring them up to my numbers | 19:04 | |
| as they see the implications of the price behavior. | 19:06 | |
| So it's where the fashionable forecast is going to be. | 19:11 | |
| I dare to think | 19:14 | |
| if the fashionable forecast | 19:16 | |
| has not already reached that number. | 19:18 | |
| It's always good to look at every opinion. | 19:21 | |
| I am an eclectic. | 19:25 | |
| So I never fail to look at | 19:28 | |
| the forecast of people who use methods | 19:33 | |
| different from my own. | 19:35 | |
| I have commented in earlier tape | 19:38 | |
| on the methodology which says | 19:41 | |
| let's regard this as a first year of recovery | 19:44 | |
| typical of previous first year recoveries, | 19:47 | |
| this would be the old National Bureau Technique. | 19:50 | |
| I say old National Bureau Technique | 19:53 | |
| because there seems to have been something of a change | 19:55 | |
| in the composition of the National Bureau in recent years. | 19:57 | |
| But if Dr. Geoffrey Moore, | 20:01 | |
| the commissioner of the Bureau of Labor Statistics | 20:04 | |
| were still at the National Bureau | 20:07 | |
| instead of being on Washington, | 20:09 | |
| this is the kind of technique which he would use well. | 20:10 | |
| We don't seem to be on that particular target, | 20:14 | |
| that particular analog. | 20:16 | |
| Forecasting the model has not so far | 20:18 | |
| been a very helpful one. | 20:22 | |
| However, the story is not yet told. | 20:24 | |
| Let's turn to the models of monetarism. | 20:27 | |
| This is a bit complicated because | 20:32 | |
| the monetarists have quite a spread | 20:36 | |
| in their particular estimates. | 20:38 | |
| And you have to specify | 20:41 | |
| which monetarist it is that you mean. | 20:43 | |
| There is the Laffer model. | 20:48 | |
| Let's just begin with that | 20:50 | |
| since I've commented in several earlier tapes on it. | 20:51 | |
| I remind you that that's the one | 20:54 | |
| developed inside the Office of Management and Budgets | 20:56 | |
| by Arthur Laffer. | 21:01 | |
| It's a three equation model | 21:03 | |
| and it puts great score by the contemporaneous change | 21:08 | |
| in the money supply as its moving variable. | 21:12 | |
| The only new news I have in the Laffer model is that | 21:17 | |
| some simulations have now been made | 21:19 | |
| taking its coefficients up to say 1960 | 21:23 | |
| and then simulating since 1960. | 21:26 | |
| And since it's the first difference model, | 21:29 | |
| a very important question to ask of it | 21:31 | |
| is does it drift off? | 21:33 | |
| And the answer is, I understand from those | 21:35 | |
| who have made these simulations is, | 21:38 | |
| yes, it drifts off quite badly. | 21:39 | |
| Much worse, for example, than the St. Louis, | 21:43 | |
| Federal Reserve Bank of St. Louis monetarist model | 21:48 | |
| which also drift but doesn't drift to the same degree. | 21:51 | |
| In all fairness, it ought to be said | 21:55 | |
| that it would be a miracle model | 21:57 | |
| based upon first differences which showed no drift. | 21:59 | |
| And so you have to decide what is an interesting | 22:02 | |
| lack of drift and what is a really significant bias | 22:05 | |
| as revealed by a drift. | 22:12 | |
| One technical comment on the St. Louis model, | 22:15 | |
| because there are some new findings on it, | 22:20 | |
| I mentioned in an earlier tape | 22:23 | |
| some very crude simulations which I myself made. | 22:25 | |
| I took a model in which money | 22:30 | |
| is not the sole thing which matters. | 22:34 | |
| In which money is only one of quite a number of things | 22:36 | |
| that matters. | 22:40 | |
| For example, physical policy mattered in the model | 22:42 | |
| which I set up. | 22:45 | |
| Spontaneous increase in business expectations | 22:49 | |
| about the marginal efficiency return on investment mattered. | 22:52 | |
| A spontaneous change in the Pennsy consumer schedule | 22:55 | |
| in my model mattered. | 22:58 | |
| And I ran off a simulator run in history. | 23:01 | |
| After I'd done that, I tried fitting | 23:08 | |
| a regression, reduced form regression | 23:11 | |
| of the St. Louis type to my data | 23:13 | |
| and I reported to you that I got results | 23:17 | |
| not unlike that of St. Louis which | 23:20 | |
| if you took them literally as representing | 23:23 | |
| a popularly identified causal model, | 23:26 | |
| I would've told you that it was only money | 23:28 | |
| that mattered in a systematic way | 23:32 | |
| that the other variables that I've mentioned | 23:35 | |
| washed out in the longer run | 23:37 | |
| or even never washed in in the shortest run. | 23:39 | |
| Well, that was crude because it was really | 23:43 | |
| a back of the envelope kind of simulation. | 23:45 | |
| But I understand for my colleague, | 23:48 | |
| Professor Franco Modi-gliani that now, | 23:50 | |
| a very elaborate test has been made | 23:53 | |
| of what I understand to be | 23:55 | |
| essentially the same type. | 23:58 | |
| The FRB-MIT-PENN model. | 24:01 | |
| That's the Federal Reserve Board | 24:03 | |
| measuring technology, University of Pennsylvania model | 24:05 | |
| with which Professor Modi-gliani | 24:10 | |
| is one of the moving spirits | 24:12 | |
| took a similar one in which they know exactly | 24:14 | |
| what the eclectic effects are | 24:18 | |
| of a physical policy, of monetary policy, | 24:20 | |
| of pens we consume and so forth. | 24:23 | |
| And they applied the St. Louis reduced form | 24:24 | |
| estimation procedure to it | 24:30 | |
| and they found that if they are badly identified | 24:31 | |
| the true relationship, it did not | 24:35 | |
| give them back the structures they'd put in. | 24:38 | |
| But instead, it gave them a false structure | 24:40 | |
| namely the structure which the St. Louis model | 24:43 | |
| is interpreted to alleged to hold | 24:48 | |
| for the American economy itself. | 24:50 | |
| Now, let's take a more qualitative monetarist viewpoint. | 24:54 | |
| I don't not think | 25:02 | |
| I have reviewed the last half dozen years in detail, | 25:03 | |
| and I do not think that the monetarist forecast | 25:08 | |
| had been very good in this period. | 25:12 | |
| I don't think they've been as good | 25:14 | |
| as eclectic forecasts. | 25:15 | |
| I know that there are monetarists | 25:19 | |
| who think otherwise. | 25:22 | |
| I don't have the time here to discuss | 25:24 | |
| the evidence for and against the proposition | 25:27 | |
| which I have just stated. | 25:30 | |
| But the view which I think you should take seriously | 25:31 | |
| is this. | 25:36 | |
| We've had an explosion of money. | 25:36 | |
| If in the future, the increases in, say, M2, | 25:39 | |
| that's the money supply including time deposits, | 25:45 | |
| have the same pattern, the same systematic influences | 25:47 | |
| they've had in the past, | 25:52 | |
| then even the second and third quarter of this year | 25:54 | |
| could well show increases in money GNP | 25:58 | |
| of not the 40 billion that I've been talking about | 26:02 | |
| but much near to 60 billion. | 26:05 | |
| And I suppose that if that comes to pass, | 26:09 | |
| we will all raise our estimates | 26:12 | |
| about the subsequent periods. | 26:15 | |
| I don't think I have not been able to find | 26:18 | |
| from the models of monetarists, | 26:22 | |
| a qualitative monetarists | 26:26 | |
| exactly how this is to be divided among real output | 26:27 | |
| and prices. | 26:31 | |
| In the St. Louis model, I know exactly how it's divided, | 26:34 | |
| but in the general monetarist model, | 26:37 | |
| I have been monitoring expressions and I cannot find. | 26:39 | |
| But I cannot find a definite theory | 26:43 | |
| so I don't know how to score them | 26:45 | |
| to be right or to be wrong. | 26:47 | |
| I should have thought that the most reasonable thing | 26:50 | |
| to expect would be that any increases in money GNP beyond | 26:52 | |
| what seemed to be indicated. | 26:58 | |
| Because let's say of some long variable legs | 27:01 | |
| of past increase in the money supply, | 27:03 | |
| which now monetarists have been neglecting, | 27:06 | |
| that that ought to be divided between | 27:08 | |
| price level changes and real output changes. | 27:10 | |
| And therefore, the numbers which I've been giving you | 27:13 | |
| about the real GNP, which are so disappointing | 27:17 | |
| about unemployment which are so disappointing | 27:22 | |
| in terms of official government policy | 27:24 | |
| should turn out to be overly pessimistic. | 27:27 | |
| And if this is so, and if we find ourselves | 27:31 | |
| as we move into 1972, | 27:34 | |
| really on the track of a substantial reduction | 27:37 | |
| in the rate of unemployment | 27:43 | |
| and then I think that we'll have, as eclectic people, | 27:45 | |
| to build into our forecast a greater potency | 27:52 | |
| for the recent increases in the money supply. | 27:58 | |
| Well, the future will tell us. | 28:01 | |
| - | Your questions and comments to Professor Samuelson | 28:03 |
| are welcome. | 28:06 | |
| Address him to Instructional Dynamics Incorporated, | 28:07 | |
| 166 East Superior Street, Chicago Illinois 60611. | 28:10 |
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