Tape 83 - Effects on president's economic policy changes

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-	Welcome once again as MIT professor Paul Samuelson	0:02
	discusses the current economic scene.	0:05
	This by-weekly series is produced by	0:07
	Instructional Dynamics Incorporated	0:09
	and was recorded August 20th 1971.	0:11
-	This has been a very busy week for an economist.	0:14
	President Nixon announced just last Sunday night	0:18
	his new economic game plan.	0:22
	In effect he threw out the window most of his old	0:25
	economic game plan and all this week	0:29
	Wall Street has been in a turmoil,	0:34
	the capitals of Europe have been in a turmoil,	0:36
	the telephone of the economist has been ringing	0:38
	repeatedly and I've been no exception in this regard.	0:42
	For me, the week began before the President's announcement.	0:46
	I didn't have the slightest leak	0:52
	that something new was to come	0:54
	but in the middle of the previous week	0:57
	when I had a Newsweek column on some general issue,	1:02
	actually it was on the blood-giving system of the	1:07
	British in comparison with that of the United States,	1:10
	I decided that I had to pull that column	1:15
	and instead I wrote a column on devaluation economics.	1:17
	It doesn't mean that I thought that by Monday	1:22
	when that column would appear that the American dollar	1:26
	would be devalued but as an economist of experience	1:29
	I just knew that something was gonna give in the next	1:33
	few weeks, either the yen was going to be appreciated	1:37
	or something would have to happen.	1:41
	That brings me to the first thing that I should say	1:44
	about the President's bold, new program.	1:46
	It was a program forced upon him	1:49
	by the international situation.	1:54
	If you talk to the man on the street	1:57
	the most important thing that's happened this last week	1:58
	is the wage price freeze but what caused	2:00
	President Nixon to go to Camp David	2:05
	to have an agonizing reappraisal all along	2:07
	was the fact that the dollar was in very deep trouble.	2:11
	So, number one, what we have had is a defacto	2:16
	devaluation of the dollar.	2:21
	The President avoided the word devaluation of the dollar.	2:23
	By indirection, he suggested	2:30
	that he was not devaluing the dollar.	2:32
	The next day, at Secretary Connally's news conference,	2:34
	he deliberately tried to use language	2:38
	to deny that the dollar was devalued.	2:44
	But, let's call a spade a spade.	2:48
	The moment that President Nixon issued orders	2:50
	to Secretary Connally not to honor our commitments	2:55
	to pay official gold to official central banks abroad	3:01
	according to the agreed upon covenants	3:06
	of the Bretton Woods International Monetary Fund agreements,	3:10
	at that moment the dollar was defacto devalued.	3:15
	It's surprising that this fact	3:22
	has not been more widely appreciated.	3:25
	There were very few surprises to me	3:32
	this last week, but there was one.	3:34
	The obtuseness of the Japanese government	3:38
	has been beyond any prediction.	3:42
	The Japanese government, in the first days of the	3:46
	present week, has frittered away two and a half billon	3:49
	dollars of their reserves in buying dollars.	3:56
	They have done this to avoid yen appreciation.	4:00
	There is no possibility that next week	4:07
	or the week after, or six months from now	4:11
	the yen can be in the same parity with respect to the dollar	4:14
	as was the case last week.	4:18
	You would have thought that the Japanese would be the	4:22
	first to understand this, but the old saying,	4:24
	whom the gods would destroy they first make mad,	4:28
	seems to apply with a vengeance to the Japanese government.	4:31
	Let me mention what is an open secret in inside circles.	4:37
	These two and a half billion dollars	4:43
	of speculators' money, which the Japanese	4:46
	have been buying up for good solid yen,	4:50
	and which will undoubtedly create a neat profit	4:53
	for those speculators.	4:58
	Who are the speculators?	5:00
	It is very difficult under the comprehensive	5:03
	exchange control of the Japanese for a	5:06
	non-Japanese speculator to take a position in the yen.	5:11
	I read in the newspaper about a smart cookie	5:16
	on the West Coast who, like me, is planning a trip	5:19
	to Japan, and who bought the Japanese travelers checks	5:24
	which he could still buy at the	5:29
	old par rate during this crisis.	5:31
	Let's suppose that he bought $2000 worth of these	5:34
	travelers checks, then as the newspaper story says,	5:36
	he does have, probably at a minimum, a 10% profit.	5:40
	Big deal, course that is, that's nothing	5:45
	and there's been almost nothing of that kind.	5:48
	What has happened is that the four or five	5:50
	large Japanese banks have been stretching their	5:53
	lines of credit with American commercial banks	5:56
	to the very limit and they are, have been buying dollars	6:00
	and turning them into their own government.	6:03
	This, the recycling, could go on indefinitely.	6:06
	If there's any justice in the world	6:10
	and if the Japanese government comes to its senses	6:12
	one would suppose that they will retroactively	6:16
	take away the profits of their own	6:19
	large commercial banks in this speculative operation	6:21
	but it's as if the Japanese cannot believe their eyes.	6:26
	I suppose if I can depart for just a moment from	6:33
	straight economics, there is increasingly a	6:37
	crisis in Japanese, American relationships.	6:41
	Our sudden change of face with respect to Mainland China,	6:46
	which caught the Japanese quite unprepared,	6:50
	has already caused a crisis of nerve in the Japanese	6:53
	and a certain amount of friction	7:00
	and friction with the American government.	7:05
	These latest moves, I'm afraid, will add to that friction.	7:08
	And yet, I believe on the economic side,	7:13
	that this was pretty much inescapable.	7:17
	Listeners to these tapes will know	7:19
	that I have not hesitated on any occasion	7:21
	to criticize President Nixon when I disagreed	7:24
	with his economic program but his decision	7:28
	forced upon him pretty much by events,	7:33
	events of the last weeks were not themselves	7:37
	commanding given another week or two	7:43
	I'm confident they would have been commanding.	7:47
	The President had no choice.	7:49
	There is a tremendous amount of protectionist sentiment	7:52
	in this country and the President could,	7:54
	at least one would understand in a person	8:01
	interested in political office,	8:03
	could be imagined to give into this.	8:04
	I think there would be a tremendous popularity	8:07
	to be received by any politician who suddenly	8:11
	becomes jingoistic and chauvinistic	8:15
	with respect to economic protection.	8:17
	To me that would be a calamity	8:21
	but as a realist I know from talking to businessmen,	8:22
	from talking to union people, from talking to	8:26
	the man in the street that the old protectionism	8:29
	which used to be so endemic in the American ideology	8:34
	and the American mind in which blissfully	8:37
	was weakened over 35 years of the Cordell Hull	8:43
	Reciprocal Trade program, the Kennedy Rounds,	8:50
	and so forth, that old virus was laying latent there	8:53
	and to tell the truth, to tell the strict economic truth,	8:58
	with the American dollar so badly overvalued	9:03
	as it has been in recent years,	9:06
	that protectionist sentiment had a strong	9:09
	rational base to it.	9:13
	In this week of exciting happenings	9:16
	I cannot review all of the abstract	9:18
	and concrete reasons for this,	9:23
	but let me just dwell for a moment on the case of Japan.	9:28
	The Japanese have been a miracle nation.	9:34
	Their gross national product in real terms	9:37
	has been growing at the rate of 10% per year	9:40
	every year, 11%, 12%, 13%, 9%.	9:45
	There's almost no precedent in the history of any nation,	9:50
	in any epoch of such continued rates of growth	9:54
	over what is now becoming a 20 year period.	9:57
	Moreover, this was not done in isolation.	10:02
	If Japan, on the basis of autarchy	10:06
	had grown faster than the rest of the world,	10:09
	then only the statistician who collects	10:11
	the annual world economic fact book	10:16
	would know that the share of Japan	10:21
	in total world GNP was increasing rapidly.	10:23
	On the contrary, this was not done on the basis of autarchy,	10:29
	this was done on the basis of a strong export program.	10:32
	Japan has increased its share of world trade gigantically.	10:37
	Now, if somebody wins in share of trade	10:43
	and that's not the way to look at the benefits of trade,	10:47
	and that's not the way to look at the welfare	10:50
	because everybody can win if we get	10:52
	a good division of labor and a fruitful interchange of goods	10:54
	but let's just look at it in terms of relative share.	10:58
	If somebody wins, somebody has to lose.	11:01
	Now, who's been losing?	11:03
	A prime loser has been the United States.	11:06
	Our share of world exports has been going down, down, down.	11:10
	More than that, the market, which has been the big market	11:16
	of expansion for the Japanese	11:20
	has been the American domestic market.	11:23
	It's true the Japanese manage to sell a little bit	11:27
	to Western Europe but it's amazing to look at the disparity	11:30
	in their penetration of the American market	11:35
	in comparison with the Western European market	11:38
	and yet the Western European nations are now	11:42
	at a very comparable level of living,	11:45
	standard of living, as the United States.	11:49
	Can it be expected that a country	11:53
	like the United States will, in the long run,	11:58
	be willing to turn over industry after industry	12:04
	to a particular invading commercial competitor?	12:07
	Yes, the answer could be, if America has certain	12:14
	new industries in which we have a comparative advantage	12:20
	then we would be turning over the old industries	12:23
	to the newcomer who has now acquired	12:25
	a comparative advantage in those industries	12:30
	and we would go on to more efficient industries.	12:32
	That is what the textbooks of economics, very properly,	12:35
	prescribe for the prosperity of a developing country.	12:40
	However, that's not been the case for the United States.	12:46
	That would be the case for the United States	12:49
	only if whether because the dollar flows relative to the end	12:51
	or the end flows relative to the dollar	12:55
	or because we have a sliding peg or some kind	12:57
	of flexibility in foreign exchange rates.	13:01
	The foreign exchange rate between the dollar	13:03
	and the end is always equilibrium.	13:05
	That has not remotely been the case of the Japanese yen	13:07
	and the American dollar these last 10 years.	13:11
	On the contrary, the American dollar	13:15
	has been increasingly over valued.	13:17
	The result has been that when the Japanese	13:19
	send textiles to the United States	13:23
	the workers who are thrown out of work	13:25
	are not shifted to more efficient industries	13:27
	they are shifted to nothing.	13:30
	Now, textiles are not the important matter,	13:33
	they're very important politically,	13:36
	but I think no rational calculation would show	13:37
	that it remains to the advantage of the United States	13:41
	to be producing the cheap textiles	13:43
	which any developing nation of the world can produce.	13:45
	But let's just go down the list.	13:49
	In the case of steel, the Japanese used to	13:51
	take more hours to produce a ton of steel	13:56
	but they were competitive because they had	13:59
	lower wage rates per hour.	14:02
	It is now probably no longer the case,	14:04
	that the Japanese take more man hours	14:07
	to produce a ton of steel.	14:10
	The Japanese have become a very expert	14:12
	at producing machinery to produce steel.	14:16
	We're moving to the time when we will be importing	14:19
	that machinery from the United States.	14:21
	The Japanese get cheap ores from Australia.	14:23
	Japan has both absolute and comparative advantage	14:27
	in steel and it's only been a voluntary quota program	14:30
	that's been keeping out these products.	14:34
	Shall I go on?	14:37
	Let's take the case of electronics.	14:39
	We boast in new England that although textiles and shoes	14:42
	are down because of competition from abroad	14:47
	and also I may add competition from the south	14:50
	that we have 128 high technology MIT type companies	14:53
	and so we've shifted, it is said, into electronics.	14:59
	That picture is very rapidly changing.	15:02
	The cassette recorder that these words	15:06
	are being recorded on is an excellent one.	15:11
	I look over and it of course says Sony,	15:15
	but it wouldn't matter if it said Panasonic.	15:18
	A nice American name if I ever heard one	15:21
	because that's simply the name	15:23
	for the American distributor of a Japanese brand.	15:25
	It would not even matter if it said	15:29
	General Electric or if it said Eastman Kodak	15:32
	because if you just took off the outer cover	15:35
	you would see that the insides	15:38
	were of Japanese construction.	15:40
	Now, I ask you or rather I ask the Japanese.	15:44
	Did they really think that they could go on indefinitely	15:49
	growing much, much faster than the rest of the world	15:54
	and much, much faster than the United States	16:00
	and maintaining the export component of their	16:02
	GNP undiminished through the process,	16:07
	taking over more and more of American markets	16:11
	at a time when the resources released from those industries,	16:14
	displaced industries, had no place to go?	16:18
	They should have been the first to realize	16:21
	that the policy of benign neglect was causing them	16:24
	to build into their export industries vested interests.	16:29
	We now realize how powerful those vested interests are.	16:33
	They're so powerful that the Japanese government itself	16:37
	is afraid of any reduction in Japanese exports.	16:40
	The Japanese export industries	16:46
	which make no mistake about it, are gonna be hit	16:48
	and are gonna be hard hit not only by	16:50
	President Nixon's 10% tax on imports	16:52
	but by the new floating level of the dollar	16:56
	vise versa the yen because the appreciation of the yen	17:01
	is inevitable, it cannot be avoided,	17:05
	this is going to hit the Japanese exports quite hard	17:08
	and it's gonna hit the rate of growth	17:12
	of Japanese exports very hard.	17:13
	It's not only gonna do that but that	17:16
	is what it ought to do, that is what its purpose is.	17:18
	And if the Japanese have not yet got that message	17:21
	then they have indeed been living in a dream world.	17:26
	The only thing which could have saved	17:33
	the dollar from defacto devaluation,	17:35
	and I'm using the wrong words because it sounds	17:38
	when I use the word saved as if devaluation of the dollar	17:40
	is a fate worse than death, which of course it is not.	17:44
	It is a movement towards equilibrium from disequilibrium.	17:48
	The only thing that could have put off	17:52
	the adjustment in that form would have been	17:54
	a dramatic announcement, long overdue, by the Japanese,	17:57
	that in some kind of an orderly way	18:02
	they were going to appreciate the yen.	18:05
	I may say that the Japanese had opportunities	18:07
	in this regard that have been denied	18:09
	to all the other surplus countries.	18:11
	When Germany contemplated appreciating the Mark	18:14
	and she did appreciate the Mark, she had to run into a	18:17
	tremendous amount of speculation because Germany	18:21
	does not have comprehensive exchange control.	18:24
	All I would have had to do would be to lift the telephone	18:27
	and I could take a position in the Mark.	18:31
	I cannot just lift my telephone	18:35
	and conveniently take a position of	18:37
	a couple hundred thousand dollars in the Japanese yen.	18:39
	The Japanese have exchange control.	18:43
	They could, in an orderly way, have appreciated the yen	18:45
	and let it float but this they steadfastly refuse to do.	18:49
	They steadfastly refuse to do this even though	18:55
	economist like myself were advising them to do it.	18:58
	Well what's that?	19:01
	Economist advice is a dime a dozen.	19:02
	The fact that the people like me have been writing	19:05
	for the Wall Street Journal in Japan so called	19:08
	that is the Neo-Keynesianismo, for years	19:11
	on the under-valuation of the yen.	19:13
	That can of course be likely shrugged off.	19:16
	More important though is that our government	19:20
	behind the scenes has been putting pressure	19:22
	on the Japanese to appreciate the yen	19:25
	and that they have shrugged off.	19:27
	Moreover, within Japan itself,	19:30
	28 of the most prominent economists banded together	19:33
	and issued a statement saying	19:37
	that the yen should be appreciated.	19:39
	I repeat, whom the gods would destroy	19:43
	they first make mad and in the mundane	19:45
	and prosaic field of currency exchange disequilibrium	19:49
	we've had a new lesson for that.	19:54
	Let me turn back to the Nixon program.	19:57
	The big news with the man in the street	19:59
	who always, properly, naturally says,	20:02
	what's in it for me?	20:05
	What's gonna effect me?	20:06
	Is the wage price freeze.	20:08
	I think that the wage price freeze	20:11
	was a bold, calculated risk.	20:12
	Anything short of a comprehensive freeze	20:16
	could not possibly have worked.	20:21
	If you were going to have anything like this at all	20:23
	I think you had to go all the way for at least this period.	20:26
	There is ample precedent abroad	20:30
	that short-term freezes, at least during that short time,	20:32
	do work and they do work very effectively.	20:36
	It will tell us something about the solidarity	20:40
	of the American people or the lack of cohesion	20:44
	and solidarity of the American people	20:47
	after these sad years of the Vietnam War conflict,	20:49
	after these years of civil right disturbances,	20:53
	after the years racial inequity,	20:57
	after the law and order controversies within our country.	21:00
	It will tell us much about the present state of our cohesion	21:05
	if unlike any other mixed economy in the world	21:10
	we cannot even make a wage price freeze last for one week.	21:14
	If you were to tune in on the television airwaves	21:19
	of just last night and sample the statements by	21:23
	George Meany titular head of the AFL-CIO,	21:29
	the statements by Ralph Nader,	21:33
	the statements by Leonard Woodcock, the successor to	21:35
	Walter Reuther at the United Autoworkers Union,	21:39
	you would have reason to wonder whether in the face	21:44
	of what the Gallup poll has confirmed	21:49
	and what I was sure one could confidently predict	21:51
	would be an initial great upsurge of popularity	21:55
	of the President for his bold new program.	21:59
	Well if in the face of that kind of temporary consensus	22:01
	you had as much wheedling away at the program	22:06
	it might, I think, tell you something disquieting	22:10
	about the state, not of the American economy, but the state	22:13
	of the American psyche and the American society.	22:19
	I find it ironical that Woodcock of UAW	22:24
	was one of the most vociferous in asserting that if after	22:29
	the 90 days the autoworkers don't get theirs as given	22:33
	to them by contract that they will regard themselves	22:37
	as having no contract with the implicit threat	22:39
	that we will have a new wave of strikes, slowdowns,	22:43
	sit-downs, non-cooperation because, one of the most notable	22:47
	things about President Nixon's program,	22:52
	I suppose it shows there is no gratitude,	22:55
	anything we get we attribute to ourselves	22:57
	and anything we lose we attribute to the President,	23:00
	is the tremendous give-aways to the automobile industry.	23:04
	The one item of his tax reduction program	23:09
	which could remotely be thought to filter down	23:14
	to the middle income recipient would be	23:17
	the remission of the excise tax on autos.	23:22
	That will not help the person with under $6000 a year.	23:25
	He doesn't buy a new Galaxys or for that matter	23:29
	new Pintos or Vegas he got to take the hand-me-down	23:33
	used cars and make the old car a go.	23:36
	But the middle classes do buy cars.	23:39
	This is a boom almost without precedent	23:41
	in fact it's almost indefensible to the automobile industry,	23:45
	and the first union spokesman to speak out	23:49
	against the President's program,	23:53
	against that part of the package,	23:55
	which he didn't like, was the head of the UAW.	23:57
	Well there's a good deal of irony in the prosaic	24:04
	passing scene of economics.	24:08
	The President, I think, made an error in economics	24:13
	in the qualitative shaping of his domestic programs	24:19
	that went along with the revaluation of the dollar	24:24
	and with the wage price freeze.	24:28
	He put himself into the position	24:32
	of seeming to have a lopsided pro-business program.	24:34
	Let me enumerate, although he hoped corporations	24:40
	would not raise their dividends, he did not	24:45
	forbid them to raise their dividends.	24:50
	Perhaps he didn't have executive powers for this	24:52
	but since he's going to Congress	24:55
	and must go to Congress for so many powers	24:56
	in connection with this new program	24:59
	he could have asked for that power.	25:00
	Mind you, I don't think there'll be very many corporations	25:03
	who will be so crass and stupid	25:06
	as in this 90 day period to raise their dividends.	25:10
	But you must appear to be doing even-handed justice	25:13
	as well as defacto, learning in a history book years later,	25:18
	that some injustice was avoided	25:22
	and this was a tactical error.	25:25
	In this country there's great populist desire	25:29
	for low interest rates, an excessive one,	25:32
	I may say, speaking as an economist.	25:35
	The President hoped that interest rates would not be raised	25:37
	but he did not do anything in the way of coercion.	25:41
	At a time when he's coercing school teacher	25:44
	and union labors who have already be conceded,	25:46
	wage increases coercing them from getting their increases,	25:51
	he is putting no coercion upon the banks	25:56
	and finance companies, mortgage lenders and so forth.	26:01
	There are powers that the federal reserve does have	26:06
	in which the President could have asked the federal reserve	26:09
	to invoke but he did not do that	26:11
	and so he is very vulnerable.	26:13
	I know why he didn't, he didn't want funds to dry up	26:16
	in a crisis because of fixed rates.	26:18
	There was no great prospect that that would happen	26:23
	but if it had happened the federal reserve	26:27
	and the various housing agencies, I'm sure,	26:30
	could have done a great deal to off-set that.	26:33
	Well, the job development tax credit	26:36
	which is a nice euphemism for investment tax credit	26:40
	which is a payment to business	26:43
	and will appear to be a payment to business	26:46
	is the most important revenue aspect	26:49
	of his particular program.	26:51
	I'm not gonna go into the merits and demerits of that	26:54
	at this time 'cause my time is running out	26:56
	but let me say that with investment boom just behind us	26:58
	and with a great deal of excess capacity all around	27:03
	it is a dubious prediction that	27:06
	even a 10% investment tax credit	27:11
	and even one which is known to be temporary	27:13
	which puts a great stimulus, if there is any stimulus	27:15
	in that weapon, it is dubious that this will ignite	27:17
	a real plathe-equipment, a boom,	27:21
	and in terms of any sort of long-run, orderly priorities	27:24
	and also a long-run maintainability	27:29
	it's of some doubt that we should engineer,	27:32
	at this point, a deepening of capital.	27:35
	My time is running out, let me conclude with the single most	27:38
	unfortunate part of the President's domestic program.	27:45
	At the same time that he was reducing taxes	27:48
	in order to make jobs, as he put it, he promised	27:51
	that he would be reducing expenditures, if I understood	27:55
	his arithmetic correctly, more or less pari passu.	27:58
	Now, attrition of federal workers	28:01
	like attrition from the Army which the President improperly	28:05
	gave as his alibi for the increases in unemployment	28:09
	improper not because we haven't let people out of the Army	28:12
	but because in a growing, healthy economy	28:15
	you absorb labor resources like that.	28:17
	If with the President's left hand	28:22
	he has expenditure austerity that matches tax laxity	28:25
	then according to almost every theory of	28:30
	modern fiscal policy this will not be job-creating net.	28:35
	In fact by many theories it would hurt jobs.	28:39
	So, I'm hoping that the President did this just	28:43
	in order to seem orthodox and respectable in a time	28:47
	of national crisis when the dollar was being devalued	28:49
	and I'm hoping that he had his fingers crossed	28:52
	but more than that I expect Congress to take over	28:55
	and introduce a little fiscal sanity	28:59
	into this part of the recovery budget.	29:01
	Well, there's a lot more to talk about	29:07
	but we'll do that in the weeks ahead.	29:10
-	If you have any comments or questions for	29:12
	Professor Samuelson address them to	29:14
	Instructional Dynamics Incorporated	29:16
	166 East Superior Street	29:18
	Chicago, Illinois 60611	29:20

Item Info

Title:

Tape 83 - Effects on president's economic policy changes

Date:

circa 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

Rights Note:

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-0083
ref2305_yn0
samuelsonpaul
duke:325106
pstau001083
ark:/87924/r4qz23026
c3dc4093-5805-4441-9787-8c6ef55d778a

Permalink:

https://idn.duke.edu/ark:/87924/r4qz23026

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Tape 83 - Effects on president's economic policy changes

Transcript

Item Info

Economists' Papers Archive

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