Tape 102 - Change in the treasury department
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Transcripts may contain inaccuracies.
- | 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 |
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