Tape 82 - Pessimism in 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,	0:08
	and was recorded August 9th, 1971.	0:11
-	In the last couple of weeks we seem	0:14
	to have had a barrage of bad news.	0:16
	I have noted,	0:20
	particularly in the New York financial community,	0:21
	a	0:25
	change in sentiment towards pessimism.	0:26
	This, of course, may be no more than the fact	0:31
	that the stock market has been down for several weeks.	0:35
	The Dow Jones averages, as I speak, are somewhere	0:38
	around the 850 level which is, of course,	0:43
	a great disappointment to many people.	0:47
	Also, volume has not been good on The Street	0:48
	and one does not have to be a Marxian	0:51
	to say that how one's pocketbook is behaving	0:54
	affects one's ideology very much.	0:58
	We deal here with a cause and effect situation.	1:02
	If the market has been behaving badly	1:05
	then that makes people feel pessimistic.	1:08
	But also, in the short run at least,	1:12
	if people feel pessimistic	1:14
	that does make the market perform badly.	1:16
	Let me try then to put into perspective	1:20
	just how gloomy the situation really is.	1:24
	I find myself very often, if I'm on the public stump	1:29
	answering questions from the audience,	1:34
	critical of the present administration	1:38
	in this economic policy	1:41
	and I therefore have reason to	1:44
	underline and innumerate the unsatisfactory	1:48
	aspects of the situation.	1:53
	That's well and good, provided	1:57
	I'm even handed and objective in the balance and weight	2:00
	that I give to the good factors and the bad factors.	2:05
	On the other hand, when I occasionally find myself	2:09
	in a consultants role to financial people,	2:14
	to a corporation, say,	2:18
	or to a	2:21
	bank or that sort of an organization,	2:23
	something which I do very sparingly	2:26
	and primarily for whatever	2:29
	new insights it can give me into the corporate mind	2:33
	and the financial mind,	2:36
	there's a sudden reversal of role.	2:38
	The people, particularly those	2:42
	the nearer they get to the firing line	2:44
	of actual security selection,	2:47
	actual portfolio environment,	2:50
	the more volatile, it seems to me,	2:54
	tends to be their temperaments.	2:57
	Perhaps you're attracted to that game,	3:00
	only if you have that kind of an ebullient temperament.	3:02
	But in any case, I find between visits	3:08
	that it's a succession of ups and downs.	3:11
	Well,	3:16
	recently it has certainly been a case of downs,	3:17
	and there I seem to be speaking in a different way	3:21
	than on the public stump although I'm being objective	3:24
	both times.	3:29
	But that particular audience needs to be told	3:30
	that the end of civilization as we have known it,	3:33
	is not at hand, that we are in a recovery.	3:37
	We	3:41
	are almost certainly	3:43
	that, and that despite the little differences	3:45
	that we economists have among ourselves,	3:48
	with respect to the quantitative shapes of things,	3:51
	we are in pretty much agreement.	3:54
	So, I have to ask myself,	3:57
	why is it that in the last couple of weeks	3:59
	I've been increasingly asked whether,	4:03
	maybe we've had no recovery at all?	4:06
	Maybe, if there was a recovery,	4:08
	it's a anemic and abortive one	4:10
	and that one year from now the production index	4:13
	will be 10% lower than it is today.	4:15
	I assure you that I have been asked	4:19
	that type of question by more than one person	4:22
	and if I actually were to rank	4:27
	in sophistication and intelligence,	4:29
	the interrogators who ask me questions,	4:31
	a churlish thing which I would never do,	4:34
	I might find that	4:37
	the	4:40
	pessimistic questions of this type	4:42
	are somewhat positively correlated,	4:44
	with intelligence and sophistication.	4:46
	First, let's look at the bad news.	4:52
	It seems to me that the worst news,	4:55
	and I repeat what I've said earlier,	4:57
	is	5:00
	how miserably	5:01
	we are performing on the price front,	5:03
	and the wage front.	5:06
	With respect to the wage front, it's no surprise	5:08
	if steel has had a settlement	5:11
	which involves 31%,	5:13
	30%	5:17
	wage increase	5:18
	who could be,	5:20
	over three year period,	5:21
	who could be surprised by that?	5:23
	If the	5:25
	negotiated wage contracts increasingly	5:28
	have	5:32
	unlimited escalation	5:34
	that is full protection for the workers	5:36
	against any increase in the cost of living,	5:38
	except for the inevitable time lags,	5:42
	I don't know that one should be surprised about that.	5:44
	We're not surprised,	5:49
	not because	5:51
	it fails to be an aberration and a pathology	5:53
	which makes our system harder to run,	5:57
	it is a pathology and an aberration,	6:00
	but we have become inured to it,	6:02
	we have, so-to-speak, discounted	6:05
	that bad news in advance, so we say	6:07
	"what's new, ho hum,"	6:09
	when that quantum of bad news arrives.	6:12
	However, we have been more optimistic,	6:16
	it's fair to say, on the price front.	6:19
	We have been grasping at each favorable	6:23
	straw in the wind.	6:27
	I suppose that I follow about 10	6:31
	to a dozen different price index numbers	6:33
	and if the consumers price index,	6:36
	the so-called cost of living index,	6:38
	is behaving a little better,	6:41
	growing no more than three percent,	6:42
	in some of my moods I grasp for that cheerful straw	6:44
	and I dote on it.	6:48
	I have a tendency to explain away the	6:52
	bad news, for example, if the consumers price index,	6:56
	the one I've just talked about,	6:58
	did not behave very well in a month,	7:00
	I say oh well that's just due to food.	7:01
	On the other hand, in the months	7:04
	when it does behave rather well	7:06
	I'm probably less likely to say	7:08
	oh, but that was only because of food	7:11
	or that was only because of the reduction	7:13
	in mortgage interest which, I may say,	7:16
	was a welcome thing while it was lasting	7:19
	but which no man should perhaps have extrapolated	7:23
	as continuing to last, and it has not lasted.	7:27
	If we turn then to the index numbers	7:32
	the consumers price index is no longer	7:34
	back at that three percent annual rate	7:38
	and the deterioration in its rate of increase	7:42
	has not been just due to food,	7:46
	it has been connected with interest	7:50
	and automobile transportation,	7:53
	some other disquieting	7:55
	end factors which are likely to be with us for some time.	7:58
	Wholesale prices have also been behaving badly.	8:02
	There was a period back,	8:06
	oh, at the end of last year,	8:09
	in the last quarter,	8:12
	in the autumn,	8:14
	when the wholesale price index	8:15
	seemed to be showing some abatement,	8:17
	and I suppose it's normal that there should be some lag	8:18
	between consumers' prices and wholesale prices	8:21
	so that the relief which we got in consumers' price	8:24
	beginning of this year, was a logical aftermath	8:29
	of that period of improvement in wholesale prices earlier.	8:32
	If there is some normality to that pattern,	8:37
	and one should not exaggerate these time-relationships,	8:39
	I fear that's a reason for pessimism	8:44
	because the last report of wholesale prices	8:46
	showed that in the producers' prices,	8:49
	ones which we should probably be concerned about,	8:52
	there has been a upsurge	8:57
	recently.	9:00
	I think the last month's number	9:01
	is the highest rate of increase	9:03
	that we've had in 15 years,	9:06
	but	9:08
	that is of no importance because these monthly numbers,	9:09
	when expressed as annual rates of change,	9:12
	are choppy and erratic, and they grossly exaggerate	9:16
	the relevant instability of the process.	9:19
	That is bad news, however.	9:24
	It's not only bad news for the administration	9:26
	which is under attack for not having a more	9:29
	active incomes policy, but it's bad news for all of us.	9:32
	It's not simply that with the same amount of money	9:39
	we must pay more for goods and we are thereby impoverished,	9:43
	rather,	9:47
	it's a case that the prime inhibitor	9:49
	of good policy in this country is the inflation itself.	9:53
	So long as we have this cruel trade-off	9:59
	behaving in a miserable way	10:02
	between full employment and price stability,	10:05
	between unemployment and price instability,	10:08
	every jury of economists must be stymied	10:14
	in coming into agreement about what ought to be done.	10:18
	What we shall begin to hear, very soon I predict,	10:24
	is that inflation is, after all,	10:27
	not such a great evil.	10:32
	I don't want to discourage such talk	10:34
	because the danger, perhaps, is of over-pessimism,	10:37
	of over-preoccupation with inflation.	10:42
	But I do wanna point out that such talk, as it develops,	10:47
	will be the direct response to the frustration	10:50
	of people who are unwilling to countenance	10:53
	high unemployment, 6% unemployment,	10:58
	persistence of that amount of unemployment	11:01
	for any period of time and they will say	11:03
	give us wage price controls.	11:08
	If you will not give us wage price controls	11:10
	then let us have our prosperity, our return to prosperity,	11:13
	even if that means creeping inflation,	11:18
	even if that means an intensification	11:22
	of the rate of inflation.	11:25
	It is very easy, these days, to criticize policy.	11:28
	It is very hard to come up with constructive alternatives.	11:32
	Or, rather, it is very hard to come up with constructive	11:40
	alternatives which will seem pleasing	11:44
	to men of good will.	11:47
	You must always compromise	11:50
	and, in your constructive suggestions,	11:53
	have some things which people do not like.	11:58
	If you're honest, you make that explicit,	12:02
	if you're clever, you just let it stay implicit	12:05
	saying that it's good for people to stumble	12:09
	into the right behavior.	12:11
	I don't know of anyone who is so pessimistic	12:16
	in his estimation of the American Phillips curve,	12:20
	recently,	12:25
	who came near to the pessimism	12:27
	which has been encountered in the facts themselves.	12:30
	Every extrapolation which I have seen,	12:35
	every regression equation which alleged that it was tracking	12:38
	the behavior of wages and prices in their relationship	12:44
	to unemployment	12:48
	and production has been going haywire,	12:51
	and has been going haywire in the same direction.	12:55
	I've been about as pessimistic in this matter	13:00
	as anyone that I have monitored,	13:03
	but I have not been pessimistic enough.	13:06
	Again and again you have heard me on these tapes say,	13:10
	probably, to the eye of the expert	13:14
	the peak of the inflation is behind us,	13:18
	and then I hasten to add,	13:20
	but if it could only be seen by the eye of an expert	13:22
	it can't be very great et cetera, et cetera.	13:24
	Well, I'm not sure that the major premise	13:26
	there is correct.	13:30
	History may record that we did see a little lull	13:33
	from the inflation rates which were prevailing in 1969.	13:39
	We went into a very shallow, drawn out valley,	13:43
	but that we are again	13:48
	rising	13:51
	and	13:52
	we may be back	13:54
	to the '69	13:55
	levels.	13:57
	This does make policy difficult.	13:59
	Let me give you a viewpoint, though, from which	14:02
	it doesn't make policy so difficult.	14:06
	Suppose you adopt the following hypothesis.	14:09
	The American Phillips curve is terrible.	14:14
	We must face that.	14:18
	It will take a tremendous amount of unemployment	14:21
	to dampen down inflation.	14:23
	In fact, lets take the worse situation.	14:27
	Suppose that we had a horizontal Phillips curve,	14:31
	that no amount of unemployment	14:34
	is going to have any effect upon the rate of inflation.	14:36
	If that is the case,	14:43
	then the people who have expansionist policies	14:45
	come into court with clean hands	14:48
	and they say expand, expand.	14:50
	You say yes, but if you expand, expand	14:54
	you will not cure the inflation	14:56
	and a large part of the American public	14:59
	is, much of the time, preoccupied	15:02
	with the problem of inflation,	15:03
	just as they're preoccupied with the problem	15:05
	of slow growth, of stagnant profits,	15:07
	and of unemployment and of insecurity.	15:10
	But the reply to this is	15:15
	you're hung, whether you're a sheep or a lamb.	15:18
	You might as well be a good fat sheep and be hung	15:21
	as to be a	15:25
	good fat or lean little lamb and be hung.	15:27
	And besides, they say, what's so bad about a hanging?	15:31
	Inflation isn't so bad.	15:35
	Now,	15:38
	I can't quite subscribe	15:40
	to this cheerful, un-cheerful philosophy	15:42
	because, although the Phillips curve	15:46
	has always been worse than I thought,	15:48
	I still would think that in the short run	15:49
	there is some kind of a trade-off,	15:52
	it's just that it's a disappointing trade-off.	15:54
	But let me give this viewpoint its due.	15:57
	I have taken	16:02
	many a	16:04
	model,	16:06
	let me illustrate, let's take a particular model.	16:08
	The	16:11
	I'll take two.	16:13
	Let's take the Federal Reserve Bank of St. Louis model.	16:15
	And now I'm not talking about the equations	16:18
	which it has to generate the change in GMP	16:21
	from primarily the change in lagged money supply,	16:25
	but let's look at the results of that equation	16:29
	as it feeds into the system and as it enables	16:33
	us to predict the levels of unemployment,	16:38
	and of price change.	16:41
	As I remember it, if you look at the equations	16:44
	of the Federal Reserve Bank of St. Louis	16:47
	you may have a hard time defending	16:50
	the policy recommendations of the president	16:53
	of the St. Louis Federal Reserve Bank.	16:55
	I say this because the president	17:00
	of the Federal Reserve Bank of St. Louis	17:02
	has been one of those people,	17:04
	one of those few people who consistently	17:06
	has urged	17:08
	moderation	17:10
	in aggregate spending,	17:11
	even though it means stagnation of unemployment,	17:14
	in order to break the back of the inflation.	17:17
	When I take the St. Louis equations	17:22
	and take out my pencil and my handy envelope	17:25
	I do not find that there's much cheerful hope	17:29
	offered to us for rather tremendous,	17:33
	and ferocious, and scaring amounts of unemployment	17:36
	in terms of the rate of price change.	17:39
	Now, it's true	17:43
	that if you extrapolate those equations to 1979	17:44
	and into the distant future	17:49
	you begin to get more	17:51
	of a,	17:53
	more leverage from one policy as against the other.	17:55
	You will be at a lower price level at that date,	18:00
	if you have followed	18:03
	stagnation policies between now and that date,	18:07
	but in the short run, and by the short run now I mean	18:10
	12 months, 15 months, 24 months,	18:13
	if those equations could be believed in	18:16
	there is very little that is bought	18:18
	in the way of	18:20
	inflation relief from	18:23
	countenancing more stagnation and unemployment.	18:27
	That was one model.	18:32
	The other model is the model	18:33
	which the Office of Management and Budget	18:35
	has in Doctor Schultz's office.	18:38
	The famous three equation black box model.	18:43
	In that, there is no relationship at all	18:46
	between the amount of unemployment	18:50
	and the	18:52
	moderation of prices.	18:55
	Or, rather, I should say there's no direct	18:56
	relationship because it's just possible	18:58
	that some of the unemployment variables	19:01
	might feed back into the short term interest rate	19:03
	and have an indirect effect, but the effect is	19:07
	rather tenuous at best.	19:12
	So,	19:15
	the honest person	19:19
	who looks at	19:20
	past patterns of experience	19:23
	and gives considerable weight	19:25
	to the disappointing recent pattern of experience	19:27
	must say	19:30
	it is blood, sweat and tears	19:33
	if you are to moderate this inflation.	19:35
	By means of moderation,	19:37
	you must be very moderate indeed.	19:40
	Now what that means, realistically,	19:42
	is	19:45
	you must,	19:47
	and if you get an envelope out,	19:48
	and a pencil and make the calculations,	19:50
	I don't see how you're going to get very far from this,	19:53
	you've got to be prepared to see us not back	19:56
	to, say, four-and-a-half percent,	19:59
	four-and-three-quarter percent	20:01
	unemployment rates until	20:03
	1974,	20:05
	1975,	20:06
	until the middle of President Nixon's second term	20:07
	or the middle of whoever his successor may be	20:12
	in the next term.	20:17
	Now, I have not seen	20:20
	anywhere in the American public opinion,	20:22
	anywhere in a committee of congress,	20:28
	anywhere on the floor of a congress,	20:29
	in the grass roots	20:33
	a recognition	20:35
	of this sad menu	20:38
	and a cheerful,	20:39
	or even un-cheerful acquiescence	20:41
	that, if that's the way	20:44
	the cookie crumbles, if that's what it takes	20:46
	to have moderation in prices,	20:48
	we are prepared to pay the price.	20:51
	Or, rather, we, if we have jobs, are prepared	20:53
	to have those who will be in jeopardy	20:57
	with respect to their jobs, or who don't have jobs,	21:00
	to pay the price.	21:02
	So I think we have a crisis, still,	21:04
	of consensus and of decision making ahead of us.	21:06
	Let's discuss some of the other aspects of the news.	21:11
	Interest rates continue to be high	21:16
	and, if anything, are edging upward.	21:18
	That school of thought which said	21:22
	that from flow of funds analysis	21:24
	and from other considerations,	21:27
	by the end of this year,	21:28
	interest rates were going to be well down	21:30
	from their recent levels may turn out to be right,	21:31
	but at the moment things are not looking their way	21:36
	at all.	21:41
	This has discouraged people,	21:42
	inflation watchers, generally.	21:45
	Another thing which has been discouraging,	21:50
	and I think unduly so, is the so-called	21:52
	failure of the consumer to spend.	21:55
	The savings rate, personal savings rate	21:58
	reached its highest	22:03
	level,	22:05
	eight-and-a-half percent or more,	22:07
	I don't remember the exact number,	22:08
	in the last quarter.	22:10
	This is quite contrary	22:12
	to what I was reading, before that quarter began,	22:14
	in one of the monthly bank letters	22:20
	about how the increased liquidity just had to create	22:23
	a splurge of spending and, if we measure splurge of spending	22:27
	by the relationship between consumer spending	22:31
	and consumers' income,	22:34
	the truth has been the reverse of that.	22:37
	There has also been definite deterioration	22:42
	in the consumer surveys	22:45
	of	22:48
	sentiment.	22:50
	The Office of Business Economics	22:52
	had recently published the third of these surveys	22:55
	and they showed a considerable deterioration of sentiment,	22:58
	intention to buy this durable good or that durable good.	23:02
	Previous to that, the conference board	23:06
	showed that sentiment was deteriorating	23:09
	and one survey that I saw, I think still earlier,	23:13
	I can't remember which one that was,	23:16
	whether it was Ann Arbor survey or some other survey,	23:19
	showed that the consumer at that time	23:22
	had slightly better intentions with respect to actual	23:25
	spending his money on particular things	23:27
	but he had an actual worse mental frame	23:29
	of mind in connection with his own predictions.	23:35
	I guess most retailers would settle	23:39
	for his spending propensities	23:41
	and not care so much about the background	23:42
	frame of his mind but most consumer psychologists	23:45
	might think that over a slightly longer period	23:49
	there will be some tendency for these to move together.	23:52
	This deterioration of consumer sentiment	23:56
	coincides with a general deterioration	24:01
	that's been picked up in all the polls	24:03
	of	24:05
	the American psyche.	24:07
	When Gallup or Harris or more subtle pollists,	24:09
	if there are more subtle pollists,	24:14
	asked the American people how they're feeling	24:17
	about our nation, how they're feeling about our destiny,	24:18
	how they're feeling about our present	24:21
	and how they're feeling about our future,	24:24
	you get for the first time in this historically	24:26
	optimistic nation the reply that things are blah	24:29
	and they're going to be probably, possibly worse.	24:33
	There is a real	24:37
	crisis of nerve.	24:39
	Now, what I think is very interesting	24:41
	is	24:45
	that these pollsters ask two kinds of questions.	24:46
	They ask questions about how you feel about the universe,	24:51
	and they ask questions about how're you're actually doing,	24:54
	and how do you feel about your bank book	24:58
	and your own recent progress.	25:01
	Uniformly, they've been getting a dichotomy.	25:06
	In the old days, everything was getting better and better	25:08
	for the universe and for John Doe, me,	25:11
	but today everything's getting worse for the universe,	25:15
	however, I'm okay, Jack.	25:19
	I'm doing alright.	25:22
	I suppose that	25:25
	this is a genuine	25:27
	dichotomy.	25:30
	I shall be myself less cheerful	25:32
	when the American people have to report	25:36
	that they themselves are doing very badly.	25:39
	It is true, though, and we have been warned	25:41
	in an age of affluence, when we see the drug problem	25:43
	and we see the Westchester County delinquency problem,	25:46
	the Greenwich Connecticut problem,	25:49
	the Scarsdale, the New Trier High School,	25:51
	I'm throwing stones at random,	25:54
	we do realize that what doth it avail a man	25:58
	to balance his bank account	26:00
	if he's miserably unhappy.	26:03
	I don't have time here to discuss the relationship	26:07
	between happiness and income,	26:10
	but let me simply say and I'll develop the theme later,	26:13
	show what the evidence for it is,	26:17
	that it has not been the case	26:19
	in the past that the poor	26:21
	peasant and slum dweller was the happy soul	26:24
	singing spirituals or cheerfully facing the elements	26:28
	whereas the wealthy esquire,	26:34
	the top executive,	26:36
	the bourgeois, was miserably guilt ridden and unhappy.	26:39
	Surveys show the opposite to be the case.	26:44
	That poor people are unhappy and wealthy people are happier	26:47
	and when wealthy people, I shouldn't say wealthy people,	26:52
	when middle-income people and upper-middle-income people	26:55
	are unhappy there usually are objective reasons for it,	26:59
	such as, they just have received a diagnosis of emphysema,	27:02
	or their wife has just left them,	27:06
	or they've lost their job.	27:08
	Three good reasons, I would say, for being unhappy.	27:10
	I'm just gonna close the present discussion	27:16
	by trying to introduce a sense of perspective and balance.	27:18
	The economy is not in miserable shape.	27:25
	We have some very depressing problems,	27:28
	very challenging problems,	27:31
	but it still is the best bet	27:33
	that a year from now,	27:37
	as we move toward the election period,	27:39
	although the production index will not be as high	27:41
	as I would want it to be, and although unemployment	27:43
	will be higher than I would want it to be,	27:45
	it will still be the case that the production index	27:48
	will be considerably higher, I think,	27:50
	than it is today and unemployment,	27:53
	I hope with some confidence,	27:56
	will be somewhat lower as a percentage than it is today.	27:59
-	If you have any comments or questions	28:03
	for Professor Samuelson,	28:05
	address them to Instructional Dynamics Incorporated,	28:06
	16060 Superior Street,	28:09
	Chicago, Illinois	28:11
	60611.	28:13

Item Info

Title:

Tape 82 - Pessimism in the economy

Date:

1971

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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This material is made available for research, scholarship, and private study. Copyright in this material has not been transferred to Duke University. For reuses of this material beyond those permitted by fair use or otherwise allowed under the Copyright Act, please see our page on copyright and citations: https://library.duke.edu/rubenstein/research/citations-and-permissions.

Identifier:

RL10082-CS-0082
ref2303_9zj
samuelsonpaul
duke:325105
pstau001082
ark:/87924/r4vm43d43
dd6e664c-2f02-4e54-b9f6-a1e48f8dad39

Permalink:

https://idn.duke.edu/ark:/87924/r4vm43d43

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Tape 82 - Pessimism in the economy

Transcript

Item Info

Economists' Papers Archive

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