Tape 102 - Change in the treasury department

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-	Welcome once again as MIT professor Paul Samuelson	0:02
	discusses the current economic scene.	0:04
	This bi-weekly series is produced	0:07
	by Instructional Dynamics Incorporated	0:09
	and was recorded May 19th, 1972.	0:11
-	I do a great deal of traveling and some public lecturing,	0:15
	and it's always a matter of surprise to me,	0:20
	also gratification, the variety of the people	0:23
	who listen to these tapes, whether it's somebody	0:28
	from the planning commission in Puerto Rico	0:31
	or some high official in the Italian Central Bank,	0:33
	or I suppose one should feel flattered	0:37
	that the Allende government is interested in my views	0:40
	on the passing economic scene.	0:44
	This enables me to envisage an audience	0:50
	and the topics which different people will be interested in.	0:54
	So today, I'd like to discuss a variety of current topics.	1:00
	I am interrupting the long term outlook	1:05
	for international trade of a rich country	1:10
	like the United States.	1:13
	In my last tape, I reviewed the optimistic view	1:15
	of conventional economics, that if the price is right,	1:21
	there will essentially be no hitches and no problems	1:25
	in connection with moving to a free trade situation,	1:29
	keeping to a free trade in a world	1:35
	of dynamic productivity change.	1:38
	Because so much news is popping right now,	1:43
	I think I had best interrupt the continuity	1:46
	of that discussion, I will summarize when I come back to it	1:50
	in the next tape or the one after that,	1:55
	and make some comments on the current news.	1:58
	First, at the personal level,	2:03
	there was the very surprising, sudden resignation	2:07
	of Secretary of the Treasury Connally.	2:11
	This was announced to a world	2:15
	which had not anticipated the event,	2:16
	and in the place of Secretary Connally,	2:20
	Dr. George Schultz was shifted	2:25
	from heading the Office of Management and Budget	2:28
	to being the new Secretary of Treasury.	2:31
	Now, how do we appraise the regime of Secretary Connally?	2:34
	Why was the shift made?	2:40
	What does it foretell for the future?	2:44
	Finally, what sort of a man is George Schultz	2:48
	and what can we expect to come from this change	2:53
	at the top of the Treasury?	2:59
	I'm an economist. I'm not a political scientist.	3:03
	I am not a Washington insider, privy to gossip,	3:08
	so I have no sensational revelations to make	3:15
	as to why Secretary Connally resigned at this time.	3:18
	One presumes that he signed up for a limited tour of duty.	3:25
	One presumes that that limited tour of duty	3:29
	ended some time ago, and that Secretary Connally,	3:31
	at his volition, left this position.	3:36
	I see no reason to go against the widely held view	3:40
	that Secretary Connally would like	3:44
	to be President of the United States someday.	3:48
	Whether on the right of the Democratic party,	3:51
	or whether in the Republican party	3:55
	is perhaps not so important to him	3:57
	as that he achieve that particular goal.	3:59
	Since he has finished, in a sense, an important task	4:03
	at the Treasury, it's not unnatural	4:09
	that he should want to step out.	4:11
	And so I think I will take at face value	4:13
	the rather fulsome praise	4:16
	which President Nixon gave to Connally	4:18
	in announcing this sudden resignation	4:22
	and the return praise, which Secretary Connally	4:24
	gave to the president.	4:29
	I don't think we've heard the end of him.	4:31
	If you want interesting hypotheses,	4:33
	the most interesting hypothesis	4:35
	that I picked up in a recent travel trip to Pittsburgh	4:37
	was that President Nixon does not intend to run again	4:42
	and that Secretary Connally is his choice to run,	4:48
	and that Secretary Connally will have an important function	4:53
	in ending the Vietnam War and negotiating a peace in Paris,	4:56
	and that the great success of George Wallace at the polls,	5:03
	both as indicated prior to the shooting of George Wallace,	5:09
	but also as indicated by the preponderance	5:16
	of his victory in Michigan	5:20
	and the size of his plurality in Maryland,	5:23
	despite the fact that he was lying in a hospital bed	5:27
	with the serious possibility of being paralyzed	5:31
	from the waist down.	5:35
	A southerner there would therefore have certain merits.	5:37
	Probably some of you have seen the New York Times analysis	5:42
	of who has been voting for Wallace,	5:46
	and their hypothesis based upon an analysis	5:50
	of these voting patterns that Wallace on a third party	5:54
	is a greater threat to the Republicans, to President Nixon,	6:00
	in taking away votes which he would otherwise get,	6:05
	than he is a threat to the Democratic candidate.	6:08
	But remember, since we have never, in Congress,	6:13
	gone about the business of setting up some kind	6:17
	of sensible reform of the electoral college,	6:20
	a successful third party run	6:24
	by George Wallace in a number of states,	6:26
	even though he were to draw even handedly from both parties,	6:28
	and even if he were still to remain in the strong minority,	6:32
	would still make it quite possible	6:36
	that no candidate would have a majority,	6:37
	and we would again in American history	6:40
	have certain crises based upon having, in this case,	6:42
	not even an unambiguous outcome,	6:46
	throwing the election into the House of Representatives	6:49
	or into some other state.	6:52
	Well, as an economist, I will appraise	6:57
	how Secretary Connally did in the job.	7:01
	First, Secretary Connally was a man, is a man	7:04
	of tremendous public face.	7:08
	He is really the only member of the president's team	7:13
	who has been able to cut any ice with Congress.	7:17
	He's able to look the hostile congressman in the eye	7:21
	and look them down, as you might say, in Texas parlance.	7:25
	So, he has served the president very well.	7:30
	You will remember almost a year ago, early last summer,	7:34
	when there was an agonizing reappraisal at Camp David	7:39
	as to whether the old game plan was to be junked or not,	7:44
	and after a weekend of meetings,	7:49
	an announcement was made that Secretary Connally	7:51
	would be the economic spokesman for the president.	7:54
	And Secretary Connally announced	8:00
	what Newsweek called the four point no action program.	8:01
	As we said at that time, the voice	8:07
	was that of Secretary Connally,	8:10
	but the policies were essentially those of George Schultz	8:12
	and of the original Nixon economic team.	8:16
	The old game plan was reaffirmed on that occasion.	8:22
	Still, it's interesting that Secretary Connally	8:27
	was used as the thrust to speak to the Congress,	8:29
	to speak to the people, and he certainly was effective	8:33
	in that role.	8:37
	But he had a much greater importance,	8:38
	and I think this will go down in the detailed annals	8:41
	of the economic history of our country.	8:45
	I believe that the decision announced at that time	8:47
	was against the advice proffered by Secretary Connally.	8:51
	I think that Secretary Connally	8:58
	said you should throw away the old game plan,	9:00
	you should modify it very substantially,	9:03
	but at that time, he was overruled.	9:06
	When the August 15th crisis arrived	9:09
	on the international scene,	9:14
	and when the president was forced	9:16
	to suspend gold convertibility,	9:18
	this was not an active choice	9:22
	by any administration, Republican or otherwise.	9:24
	It was forced upon us, I believe,	9:27
	because of the chronic overvaluation of the dollar,	9:30
	which had persisted from the late 1950s,	9:33
	exacerbated, finally, by a rash of speculation	9:37
	against the mark in the spring of 1971,	9:41
	just over a year ago, which was successful speculation	9:45
	against the mark and caused it to be appreciated,	9:48
	and similar speculation, where possible	9:51
	under exchange controls, against the yen.	9:55
	Since the president had to act internationally,	9:59
	he took this occasion to succumb, I believe,	10:02
	to the advice of Secretary Connally.	10:05
	Now Secretary Connally is not an economist.	10:07
	He is a lawyer, but he is a political figure,	10:11
	and I think that he kept saying to the president,	10:15
	in season and out of season;	10:18
	you are going to be murdered at the polls	10:20
	if there is as much unemployment in the industrial states	10:23
	of California, New York, Illinois, Michigan, Ohio	10:27
	in November 1972 as there was in November 1970,	10:34
	then you will be in real trouble	10:40
	and your party will be in real trouble.	10:41
	He probably reminded the president	10:45
	that the president's own advisors in the spring of 1970	10:46
	had not predicted for the president	10:51
	that he would be going into the November 1970 election	10:55
	with the lack of abatement of inflation,	10:59
	which in fact prevailed up to that time,	11:03
	and with the intensifying of the unemployment.	11:06
	Quite the contrary, some fairly authoritative information	11:11
	from Washington would have suggested	11:15
	that there was greater optimism	11:18
	about how the old game plan was actually going to work,	11:20
	and anyone who has ever advised the prince or presidents	11:23
	will know that the Chief of State has a long memory,	11:28
	and he remembers if he has been led down the garden path	11:32
	by over optimistic advice on previous occasions.	11:35
	And with a forceful man like Secretary Connally	11:38
	speaking to the president, I believe no further explanation	11:41
	is needed as to why, on August 15th,	11:46
	in that chat to the nation, the president	11:49
	threw away the old game plan,	11:52
	threw it away more decisively than he had been urged to do	11:54
	by the Democratic opposition,	11:58
	and introduced the phase one complete price wage freeze	12:00
	and prepared the way for the phase two	12:04
	limited price wage control epoch in which we now live.	12:07
	As a third part of that announcement,	12:14
	there was the expansion of the federal net deficit	12:16
	and the stimulation from the federal budget to the economy.	12:24
	This took the form of restoration	12:29
	of the investment tax credit of accelerated appreciation	12:32
	slightly before mid-August 1971	12:36
	and the repeal of the automobile excise tax	12:40
	and some very nominal reductions	12:44
	in personal income tax rates.	12:50
	That, you may remember, was the period	12:58
	in which the president said just off camera,	12:59
	I am occasion now, between the election of November 1970,	13:01
	and the election of November 1972.	13:06
	President Nixon was moved from his original vision	13:11
	of how he could best, in our pluralistic democracy,	13:17
	conduct fiscal and monetary policy	13:22
	to a more expansionary policy.	13:25
	Well, I give Secretary Connally credit for that.	13:29
	If you think that the August 15th announcement,	13:34
	except for it's suspension convertibility, was a disaster,	13:37
	you must give him blame for that decision,	13:40
	but since I think we needed more expansion	13:44
	in terms of the social priorities that I hold dear	13:48
	and since I thought benign neglect in the area	13:52
	of incomes policy was an extremist position.	13:56
	I give him credit.	14:00
	Now, I don't say that in the belief,	14:01
	either on August 16th, or at the turn of the year,	14:06
	or now, that I have ever had confidence	14:11
	that limited price waste controls	14:14
	could be made to solve the dilemma	14:17
	of America's fiscal problem.	14:23
	We have a very important short-run and long-run	14:26
	trade-off problem between the tightness of our labor markets	14:30
	and the degree of our wage and price inflation.	14:35
	For a short period of time, direct wage price controls	14:42
	can improve that trade-off, but I think they've become	14:45
	increasingly inefficient, increasingly inequitable,	14:49
	increasingly ineffective, and in a heterogeneous country	14:53
	like ours I don't think the American electorate has	14:57
	the stomach to continue them so that although	14:59
	Paul McCracken, when he left the government at	15:04
	the end of last year, said in his final words that	15:07
	direct wage price controls would be with us for a long time	15:11
	and although any exponent of them like	15:14
	John Kenneth Galbraith if he is candid,	15:18
	and Dr Galbraith is candid, believes that they should	15:21
	be permanent because the problem will simply reoccur	15:25
	after you've got rid of them if you do	15:28
	maintain high employment.	15:30
	Despite all that I have never, as a political predictor,	15:33
	thought that they would be permanent.	15:37
	I thought that the chances are, and I still think that,	15:39
	that about next April when the powers expire they will	15:42
	either officially become a dead letter or they will	15:46
	nominally become less and less effective and	15:51
	more and more of a placebo.	15:54
	Nonetheless as I read the price index numbers,	15:58
	as I go below the price index numbers to try to	16:02
	interpret whether the controls are distorting the	16:06
	message which they bring and as I try to reckon how	16:11
	much trouble we're storing up for ourselves in the way	16:16
	of post control bulges I am of the opinion that something	16:19
	has been accomplished in terms of breaking the momentum	16:25
	of the creeping inflation and speeding up the rate	16:29
	at which the inflation is abating.	16:35
	That rate of abatement, by the way, has been extremely	16:40
	disappointing and I do not believe economists who	16:43
	after the fact tell me that the rate of inflation abatement	16:48
	is about what one should have expected,	16:53
	about what they themselves expected under the circumstances	16:56
	that actually happened because I have gone through	17:00
	every regression equation on this subject that I could find	17:06
	and looked at its before the fact predictions and then	17:12
	I've looked at what actually happened and I've done	17:16
	the same thing, tried to do it fairly, to calibrate	17:19
	people who in a literary way are speaking prose and	17:23
	also speaking in kind of metric equations to see what	17:26
	they seem to be saying before the fact and then I	17:31
	compared what happened after the fact with what they said	17:35
	and I think that I have learned something and I pity	17:40
	other economists if they have also not learned something,	17:43
	namely that the wage price creeping inflation problem	17:46
	has been surprisingly more virulent than one had a right	17:50
	to expect on the basis of past patterns of experience	17:55
	by which I mean pre-1968 patterns of experience.	17:59
	Well, Secretary Connally is gone, let's now turn to	18:05
	Secretary Schutz, the king is dead, long live the king,	18:11
	that is always the rule for succession,	18:14
	that's true also at the bureaucratic level.	18:17
	George Schultz is a Princeton graduate, a Marine,	18:23
	fighting Marine in the war, PhD in Labor Economics from MIT.	18:29
	He was on the MIT staff, very much liked,	18:37
	very much respected.	18:41
	He received a call that he could	18:43
	not refuse from the University of Chicago business school,	18:44
	Graduate School of Business.	18:48
	He went there,	18:49
	he lived up, I think, to all of their rosy expectations,	18:50
	so much so that he became the dean of that school	18:54
	and under his deanship I believe that school made	19:00
	remarkable progress both in accomplishments	19:04
	and in reputation.	19:08
	He was called down by the president at the beginning	19:11
	of the term and he really did not know	19:13
	the president intimately.	19:15
	He was called in to be Secretary of Labor.	19:17
	He accepted, he was so outstanding as the Secretary of Labor	19:20
	that he became the number two confidant of the president,	19:26
	it is said, Henry Kissinger, the number one confidant on	19:31
	international affairs and on domestic affairs.	19:35
	George Schultz, he was moved to head the new office	19:40
	of management and budget, continued in this position.	19:45
	Very important on the team, perhaps almost overshadowing	19:50
	the council of economic advisors under the more	19:55
	dissident Paul McCracken and he has remained the tireless,	19:59
	loyal advisor to the president.	20:06
	If the president had very short notice to take account	20:12
	of Secretary Connally's decision it would be the most	20:16
	natural thing in the world for him to have taken,	20:18
	to have shifted, a stalwart right on the scene,	20:21
	and I believe that's the main reason why he must have	20:26
	shifted George Schultz to the Secretary of Treasury.	20:29
	Certainly that is the most prestigious cabinet post.	20:32
	I would have said the Secretary of State is the most	20:38
	prestigious cabinet post but in the last 12 years,	20:40
	this is not just under Mr. Nixon's administration	20:45
	but goes right back to the Kennedy administration,	20:49
	the White House has superseded the state department	20:51
	and it's been rather an ignominious role that the	20:55
	Secretary of State has had to play, whether it was	20:59
	Dean Rusk with McGeorge Bundy double guessing him	21:02
	or whether it was Rogers, the very good personal friend	21:07
	of the president.	21:12
	Nonetheless, when you move out of the White House	21:15
	you will have somewhat less influence.	21:19
	Now my time is going so let me try to say what	21:21
	difference will this make in politics.	21:24
	I think that the man on the scene has a tremendous	21:26
	importance which no outside advisor can ever have	21:29
	and so, although Connally still will be giving advice	21:33
	to the president no doubt, still will be a trouble shooter,	21:37
	perhaps will help to settle the peace in Paris,	21:39
	he will not be in there day in, day out pushing his	21:45
	viewpoint to the president.	21:49
	I don't know what Dr. Schultz's day to day changes are	21:51
	but I think he's a person of great integrity and I think	21:57
	that he thinks a problem through and when he has done that	22:01
	he tends to stick to that unless he has convincing	22:06
	evidence to the contrary so I would suspect that	22:08
	he still believes that there is an awful lot of merit	22:11
	in the old game plan and that the price control,	22:14
	price wage control program is a good deal placebo,	22:19
	where it is not placebo, it is actually toxic and harmful	22:26
	and is exaggerated and so I would expect him to bring,	22:31
	to the administration, the general Chicago view of economics	22:36
	in a very forceful way.	22:41
	On the international side, Secretary Connally was	22:45
	sometimes a bit abrasive with our allies and there is	22:49
	probably a sigh of relief in certain problem market quarters	22:53
	that a reasonable man like George Schultz has now	22:57
	been put in there or even a new man,	23:00
	a man with a clean slate.	23:04
	George Schultz has not been an expert in macroeconomics,	23:07
	he has not been an expert in international economics	23:10
	but any good, intelligent economist can brush up on this	23:12
	and I would expect Dr. Schultz to be in favor of some	23:18
	further agreement on exchange rate flexibility which	23:23
	I regard as one of the most important areas of the	23:27
	international settlements still to come.	23:31
	I would expect him still to attach great importance to	23:34
	federal reserve policy with respect to the rate of growth	23:37
	of the money supply as against fiscal policy but I do not	23:40
	see any discontinuity in policy, certainly not until	23:45
	we have come to the elections.	23:49
	Let me hurry on now to comment on the new revised numbers	23:50
	which we have for the first quarter of the GNP.	23:53
	They have been revised essentially upward.	23:56
	Some of us suspected that that might well be the case,	24:00
	if there was a change it would be upward.	24:03
	The rate of growth of real output, which was first	24:06
	reported as 5.3%, is now reported at 5.6%,	24:09
	that is to the good, it's not gigantic but it is	24:13
	in the right direction.	24:15
	The rate of increase of prices as measured by	24:17
	the implicit deflator, which was at first reported at the	24:20
	very disappointing 6.2% is now at 6%.	24:24
	Very little improvement over the first number	24:28
	but some improvement.	24:31
	I won't comment on the reasons why the 6% is excessive	24:33
	in terms of making your longer run prediction	24:38
	because there are some very special factors in it	24:42
	and I have mentioned those before.	24:44
	I think what is very encouraging to business is that	24:47
	profits had increased.	24:52
	I had suspected this, I mentioned it in an earlier tape	24:55
	that as an institutional investor I suddenly changed	24:58
	my numbers in the upward direction and it turned out	25:02
	to be the high man, particularly with respect to profits	25:06
	when I said that they might well be 20 to 25% after	25:08
	tax is higher in 1972 than 1971.	25:12
	Well, after tax profits, we're growing from the fourth	25:15
	quarter to the first quarter according to my calculations,	25:19
	seasonally corrected at 21%.	25:22
	The before tax number was even higher, more like 27%.	25:25
	So we are in a substantial recovery,	25:30
	generally people are advising their numbers forecast upward,	25:36
	upward near to that of the Council of Economic Advisors	25:42
	and I go along with that change.	25:47
	Next time I hope that we can return to the longer run	25:56
	international trade problems.	26:01
-	If you have any comments or questions for	26:04
	Professor Samuelson, address them to	26:06
	Instructional Dynamics Incorporated,	26:08
	166 East Superior Street, Chicago, Illinois, 6-0-6-1-1.	26:10

Item Info

Title:

Tape 102 - Change in the treasury department

Date:

1972

Contributor:

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

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audiocassettes

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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 102 - Change in the treasury department

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