Tape 121 - Presidents messages; unemployment; phase III

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Instructor	Welcome once again as MIT professor,	0:02
	Paul Samuelson discusses the current economic scene.	0:04
	This biweekly series is produced by	0:07
	Instructional Dynamics Incorporated.	0:09
	This program was reported February 8th.	0:11
	Professor Samuelson.	0:13
Paul Samuelson	Now we have the budget message.	0:16
	We have the state of the union message.	0:18
	We have the economic report of the president.	0:19
	As I predicted in my last tape,	0:24
	one could pretty much know in advance	0:26
	exactly what would be in these documents	0:29
	and there were no surprises.	0:33
	The president having determined to give up phase two	0:35
	to move directly into phase three.	0:41
	To rely on voluntary price end wage controls	0:46
	except in the limited areas of building	0:51
	food processing health care	0:55
	had no choice in my opinion,	0:58
	but to come in with a very contractionary	1:00
	set of recommendations.	1:06
	These he has made, they have I think somewhat the supplies.	1:09
	The Congress, they certainly have irritated the Congressmen.	1:14
	But let's first before trying	1:19
	to make guesses about the politics of the situation	1:22
	look into what seems to be needed	1:27
	by the economics of the situation.	1:29
	We must begin with the observation	1:33
	that the economy is still overstrung.	1:36
	The fashionable forecasts which we discussed a month ago	1:40
	were higher than the fashionable forecasts	1:45
	that we discussed a couple of months ago	1:47
	and the present forecasts are higher still.	1:50
	I would guess that the majority	1:57
	of the forecasting fraternity now	1:59
	look for at least a 10 percent increase in money GNP.	2:03
	That's something like 115 billion increase in money GNP	2:10
	uncorrected for a price change.	2:15
	As against what they were expecting a month or two ago	2:17
	which was 105 billion.	2:22
	Even Ray (inaudible) of Princeton,	2:24
	who I told you does not ever get influenced	2:29
	by the current enthusiasms	2:35
	because has a completely mechanical	2:38
	computer method of forecasting.	2:41
	I looked at his most recent forecast	2:44
	and that seems to be up by, unless I've made a mistake,	2:47
	something like at least 10 billion dollars.	2:51
	So we have been growing at a rate of 8 percent in mil terms.	2:56
	Now it's possible to do that for a quarter or so.	3:02
	It's possible to do it for two or three quarters.	3:07
	But it's not healthy a healthy thing.	3:09
	Most economists would gladly trade	3:13
	to have lots of six percent quarters	3:16
	as against just a few eight percent quarters.	3:20
	So the time was ripe,	3:24
	if not overripe for moderation in terms of macroeconomics.	3:26
	Otherwise we will run too quickly	3:34
	into old fashioned demand-pull inflation.	3:37
	And remember, we're not yet out of the woods	3:40
	from the last cost-push inflation	3:43
	induced by the post Vietnam demand-pull inflation.	3:45
	I suppose from this point of view	3:52
	we should be thankful that the Federal Reserve	3:54
	was over-contractionary from the view of monetarists	3:56
	back from the middle of the year until November	4:01
	because with long and variable lags	4:04
	there should now be an element working	4:07
	for moderation in the picture.	4:08
	However, most people are apprehensive	4:12
	with respect to monetary analysis.	4:16
	Probably unduly so.	4:19
	At years end the money supply continued to grow.	4:23
	My information is that in January,	4:26
	the money supply did not grow at the rapid rates	4:30
	of the last part of November and December.	4:35
	It had slowed down	4:38
	to something like a four percent rate of growth.	4:39
	Nevertheless, I would suppose,	4:43
	that in the first half of this year,	4:46
	we will find reason to complain	4:49
	that the Federal Reserve is not being tight enough.	4:55
	Then in the last half of the year,	5:00
	and no doubt there will be reason to complain	5:02
	that the Federal reserve is being too tight.	5:06
	This is inevitable if the Federal Reserve	5:09
	applies a policy of gradualism.	5:12
	If the Federal Reserve has some concern	5:15
	for what's happening in the interest rate markets	5:19
	of the country and if the Federal Reserve,	5:23
	therefore permits interest rates too rise,	5:28
	but will not tolerate interest rates leaping upward	5:30
	then nobody is going to be satisfied	5:37
	with the behavior of the Federal reserve.	5:40
	On the other hand,	5:44
	the major topic of the day is a fiscal policy.	5:44
	The president,	5:51
	if he wanted to have contractionary fiscal policy	5:53
	might have introduced recommendations for tax increases.	5:57
	He made promises during the campaign period,	6:01
	that he would not, in 1973 ask for a tax increase.	6:05
	I don't know whether he will someday regret that promise.	6:13
	But there's certainly no sign that he	6:17
	or his team at this moment	6:19
	have any intention on going back on that promise.	6:21
	That leaves them only with the policy on cutting down hard	6:28
	on government expenditures.	6:33
	This (inaudible).	6:37
	For philosophical reasons,	6:39
	the Nixon Republic and administration,	6:40
	particularly in it's second term,	6:44
	well it needn't be directed concerned with re-election	6:45
	has a predilection on philosophical grounds	6:51
	for limited role for government	6:54
	and a limited role for government at the center.	6:58
	So that what spending they will be forced to do	7:00
	in the field of welfare.	7:07
	They will prefer to do out of a revenue sharing basis.	7:08
	We've had the comical spectacle	7:13
	of the mayors of this country lobbying,	7:14
	pressuring the federal government.	7:17
	Pressuring the president into a program of revenue sharing.	7:20
	Apparently the mayors in this country	7:25
	believe in Santa Claus.	7:28
	They thought that they would	7:29
	get something extra for nothing,	7:29
	but of course they've discovered	7:33
	to their concern that the revenue sharing	7:34
	which they got was not always adequate.	7:37
	But in any case there was a hook, there was a catch.	7:40
	The programs that are directly involved problems	7:44
	in the urban environment have been cut back	7:50
	by the president and now he tells the mayors	7:53
	if you have an asset out of the money	7:56
	that I've given you and let's make no mistake about it,	7:58
	these programs are now hurting.	8:03
	Of course you could have had	8:06
	a massive rethinking of social priorities,	8:08
	we could have cut down	8:11
	on the farm legislative subsidies	8:13
	which no economists approve of actually	8:16
	for gratuitous reasons connected	8:22
	with the Russian crop failure and with the food shortage,	8:23
	the farm programs at long last	8:28
	look to be on the way to be liquidated.	8:31
	But to go on we could have had a massive rethinking	8:34
	of military security expenditures.	8:40
	And there might have been a determination	8:44
	to purchase what some people would regard	8:46
	as the same security at a much lower cost.	8:50
	I'm thinking of phasing out plans for land bombers.	8:53
	I'm thinking of more concentration	8:59
	on submarine deterrent missiles, things like that.	9:02
	And have a really thorough going shakedown	9:07
	in the military establishment.	9:11
	That could include, by the way,	9:15
	now that we've gone on to a voluntary army basis,	9:17
	voluntary arms services basis,	9:21
	that could include a much smaller amount	9:23
	of better trained in the arm services of the United States.	9:26
	So to put pressure on the developing overheating	9:32
	of the american economy,	9:39
	we could have maintained those social welfare programs	9:41
	which are most desperately needed.	9:46
	Those which the proof of experience have shown	9:51
	to be the most adequate.	9:55
	Of course it's too much to ask for optimality	9:57
	its unlikely that, you know,	10:00
	our political process very often discover	10:02
	the very best program that the man	10:06
	or commissions might devise.	10:10
	But we still could have maintained these programs	10:13
	of humanitarian import	10:18
	and which also contribute towards a rectifying	10:21
	of the excessive amount of inequality	10:26
	which men of goodwill are deploying in the American economy.	10:32
	But of course you know that that would not have been likely	10:37
	and of course that didn't come to pass.	10:41
	I said that we've had the comical spectacle of mayors	10:48
	where we've had the comical spectacle of congress.	10:51
	And if a country gets what it deserves	10:56
	and if we deserve the present congress	10:59
	then we should perhaps feel less unhappy	11:02
	about our present plight.	11:07
	Many of my listeners will have seen on the TV news shows	11:11
	the testimony of the president's economic team.	11:19
	George Shultz, the domestic economic (inaudible)	11:24
	so to speak, secretary of the treasury.	11:28
	But more than that some of them call him the super	11:30
	(inaudible) in Washington, was on hand.	11:32
	Herbert Stein, the chairman	11:36
	of the Council of Economic Advisers	11:39
	man who presumably used to be the number one economist	11:41
	in the government and now number two,	11:45
	if not three or four was on hand	11:48
	the designated new head of the	11:54
	Office of Management and Budget.	11:58
	(indistinct) Industries was on hand	12:00
	and it's quite obvious that the team had briefed itself	12:04
	for a rough going over from congress	12:09
	and they were prepared as best they could	12:12
	to defend the budgetary cuts	12:15
	which the president was urging upon congress	12:18
	and the refusal to spend which the president	12:22
	unilaterally by his own executive self orders	12:25
	was imposing on that spending the money	12:29
	which congress had already voted for many programs	12:32
	due to the heart of the Congressmen.	12:36
	But if that's what they expected	12:39
	in the hands of the committee,	12:40
	they were disappointed,	12:42
	but of course pleasantly disappointed.	12:44
	Because Senator Man, a democrat, went into a tiraid	12:46
	about the huge size of the president's deficit.	12:51
	George Sultz was so taken aback	12:57
	that he took this to be an indication of a desire	12:59
	in the party congress to have a tax increase.	13:03
	And he said that into the television cameras	13:06
	directed towards the Senator,	13:10
	but obviously directed towards the American people.	13:12
	I don't understand why the congress is so bent upon	13:15
	forcing upon the American people a tax increase	13:20
	when in administration,	13:22
	president Nixon are not at all in favor of that.	13:24
	Well the last thing in the world Senator Man,	13:27
	with his upside down fiscal finance in this occasion	13:30
	willing to settle with	13:33
	was that he was in favor of a tax increase.	13:34
	And so he said,	13:37
	but you're coming in with a larger budget than last time.	13:39
	Now that employment is down to a five percent	13:42
	and we should take note of the fact	13:46
	that it is down to five percent.	13:48
	How can you justify running this huge deficit?	13:50
	Well in the first place, the stronger the economy is,	13:56
	the less will be the deficit	14:01
	and the more contractionary tax policy	14:03
	or contractionary fiscal policy	14:07
	and contractionary monetary policy eluded.	14:09
	Congressman thinks that when a lot of revenues come in,	14:12
	you don't need taxes.	14:14
	Economists know the opposite is the case.	14:16
	The only point in increasing taxes in a situation like this,	14:19
	is for the purpose of cutting down on spending.	14:24
	In other words it must be a tax that hurts,	14:29
	it can't be a tax which isn't felt.	14:31
	So, we haven't had on the part of the opposition in Congress	14:35
	as yet any regrouping,	14:41
	any very intelligent action to react to the president.	14:44
	In the meantime, there's some very important programs	14:50
	which are languishing.	14:55
	You can go down the list of those who are in universities	14:56
	at institutions like MIT.	15:01
	I know that pure science,	15:05
	for some time has been out of favor	15:07
	and that there has been a move towards the applied science.	15:09
	The scientific advisor,	15:13
	the president never got to see the president.	15:15
	The president finally formalized that arrangement	15:17
	by having the new scientific advisor not even report to him,	15:20
	but report only through George Shultz.	15:26
	So it goes, there's a lot of money.	15:32
	Too much money I'm told for jazzy subjects like cancer.	15:35
	But there's not money for fundamental research	15:40
	which nobody can predict in detail	15:46
	will give rise to higher productivity	15:51
	in the future to a better environment,	15:53
	to less pollution to more copious	15:57
	and safer energy sources and so forth.	16:02
	Well I don't see anything that can stop this	16:07
	in the two years before the election.	16:12
	No doubt congress will be accumulating grievances	16:15
	and irritations and in some future date,	16:20
	somebody may pay for these humiliations	16:24
	and their insults.	16:30
	But until the next elections,	16:32
	we're pretty much on the same course	16:35
	that you find in parliamentary systems of administerial	16:36
	responsibility to a majority party in parliament.	16:41
	Keith or Palmer in Sweden,	16:45
	Keith in UK maybe unpopular with the electorate now.	16:49
	But until the next election they can put through	16:53
	their parliaments any legislation	16:56
	that they set their minds to	16:59
	because of members of their own party	17:02
	would have to jeopardize their own jobs	17:04
	by joining in a vote of no confidence.	17:07
	Let's turn to the general business situation.	17:13
	Is this (indistinct) budget,	17:18
	is there such a decline in spending	17:21
	that the over exuberance in the economy	17:23
	which I've just spoken of will be eliminated	17:26
	and indeed is there a danger that it will be followed	17:31
	by a period of too little	17:35
	purchasing power steam in the economy.	17:37
	I don't think so.	17:40
	In the first place, the budget spending will go up	17:42
	by something like seven percent in real terms.	17:48
	That is a reduction because,	17:52
	no that's not a reduction in real terms.	17:57
	In the sense that the prices haven't risen by seven percent.	18:01
	But most of that,	18:05
	much of that is an increase in transfer expenditures	18:07
	by the expanded social security program.	18:10
	And so if you subtract that out	18:14
	and look at the resulting increase	18:17
	or change in the money value of goods	18:21
	and services purchased by the government.	18:26
	And then if you deflate that by the increase in prices	18:29
	of those goods and services bought by the government.	18:34
	You will then end up with an estimate of the real	18:37
	GNP goods and services purchased by the government.	18:42
	And that I think would prove to be a negative number,	18:48
	but it would not be a huge gaping hole	18:54
	in the circular flow of purchasing power.	18:57
	And I see no reason to believe that	19:01
	the first quarter of this year will not be a very strong one	19:04
	and the second quarter also.	19:08
	This leaves us with the question of whether by the third	19:11
	or fourth quarter the rate of increase in real GNP	19:16
	will be down to the normal level,	19:22
	the trend level for the American economy	19:27
	which is perhaps four and a quarter percent	19:29
	or as a few people think, but still only a few,	19:32
	down to below that so that the unemployment situation	19:36
	which has been generally improving will go into reverse.	19:40
	That could happen but I think on the basis	19:45
	of the current leads and lags	19:48
	and the inertia in the system	19:52
	and the best estimates that I've been able to see	19:54
	of what's going to happen to inventory spending	19:57
	in the next four or five quarters to housing	20:00
	to plant the equipment expenditures.	20:03
	I think it's premature to blow the whistle	20:07
	and say that the period of expansion is over	20:10
	and now we're entering into the period of stagnation	20:13
	or of stagflation.	20:17
	A word or two on the unemployment situation.	20:21
	I believe that the administration has won its bet	20:25
	that by the end of the year the unemployment	20:29
	of the United States will be in the neighborhood	20:31
	of five percent.	20:34
	You know that on the evidence available	20:35
	in the beginning of the year	20:37
	I didn't think that the best scientific judgment	20:38
	would be that that would be a correct statement.	20:42
	I said that something like five or quarter percent,	20:44
	but it was explained nicely to me by one of the members of	20:46
	the Nixon Council of Economic Advisors	20:50
	that by the end of the year	20:53
	they didn't mean the first quarter,	20:54
	they meant literally New Years midnight	20:56
	which means halfway between the fourth quarter	20:58
	and the first quarter	21:01
	and that alone would almost make their debt worthwhile.	21:02
	But many a case,	21:08
	the drop in November to 5.2 percent from 5.5 percent,	21:09
	which being a full three tenths of a percent	21:14
	looked suspicious.	21:17
	And now that they've revised the data it seems it stands up.	21:18
	And the continuance in December	21:23
	of another 5.2 percent month,	21:24
	now that they've revised the data,	21:26
	it turns out to be an overstatement of unemployment.	21:28
	It was now with new seasonal corrections, 5.1 percent.	21:31
	And then in January,	21:36
	which I guess we can say is around the end of the year,	21:37
	we had 5.0 percent.	21:41
	So there isn't any reason at this time,	21:45
	not to think that in the months ahead,	21:53
	the number may well work it's way below a five percent,	21:58
	more or less steadily.	22:03
	The major doubt in this regard, I think,	22:05
	would be the fact that the improvement	22:09
	in the unemployment numbers.	22:12
	Which could come about either	22:17
	because the job situation was exceptionally strong	22:18
	or because the labor force growth was weaker than expected.	22:22
	Either of those two could have been possibilities	22:33
	was turned out in the last few months	22:34
	that it's been weakness in the labor force.	22:37
	Seems to me that that's fair enough.	22:39
	After all, there was excessive strength in the labor force	22:42
	for month after month after month back early in 1972	22:46
	and indeed in 1971 and so the rosy expectations	22:50
	of the administration were rewarded for that reason.	22:55
	Well you can't get it coming and going	22:59
	and since they got it earlier,	23:01
	we got to let them get some relief	23:05
	from a relaxation in the labor force.	23:07
	A relaxation, by the way although it wasn't predicted.	23:10
	The magnitude is not at all out of the ball park	23:14
	for what seems reasonable	23:18
	at this stage of the business cycle.	23:20
	I don't know that the productivity	23:23
	has been doing anything noteworthy.	23:25
	As you know, early in the business cycle expansion,	23:29
	productivity does very well	23:34
	and that has turned out to be true.	23:35
	In this expansion,	23:37
	once we got into a period of real expansion,	23:39
	got behind the 1971 very weak endemic expansion,	23:43
	productivity did improve	23:48
	and although we can't expect to maintain that pace	23:50
	there is no reason to think that it will go away,	23:54
	the productivity and pace will go away overnight.	23:57
	I return to what must be the key question	24:04
	and preoccupation for anyone who wants to understand	24:07
	the developing business cycle situation in the Unites States	24:11
	in 1973 and in 1974.	24:17
	The key must be found in the behavior	24:21
	of prices and of wages.	24:23
	If phase three works,	24:26
	if the moderating of inflation which had been going	24:30
	on before phase one	24:36
	and which when I'm very strongly in phase one	24:39
	and continue but with less strength	24:42
	(that is the degree of moderation in phase two).	24:46
	If that continues nicely	24:50
	and if the administration wins its bets	24:52
	that by the end of the year prices will be growing	24:55
	at less than three percent	24:59
	and that's the beginning of 1973.	25:01
	And then I think we can look to a strong 1974.	25:03
	I think its fruitless to try to look beyond then.	25:13
	But remember this,	25:16
	almost none of the experts,	25:19
	those who are for administration	25:23
	or those who are against administration	25:24
	are really that optimistic.	25:26
	Almost all the forecasts before phase two was abandoned,	25:28
	looked for prices to be increasing in 1973 itself.	25:33
	Somewhere around the three and a half percent rate.	25:38
	Less than three and a half if you compare '72 with '73.	25:44
	But three and a half in '73 itself.	25:48
	After phase two was removed,	25:52
	I think representative of what we've seen happening	25:54
	for example in fuel and oil in the number of other lines	25:57
	that relevant price increases	26:02
	frowned on by the administration,	26:03
	but they have yet pulled a big stick out of the closet.	26:05
	They've I guess pulled it out of the closet	26:09
	and now put it on the table,	26:11
	but they have yet beat anybody with it.	26:12
	After phase three was introduced,	26:15
	most of these estimates went up to three and a quarter	26:19
	through three quarters, four percent.	26:22
	Since I though the estimates previously	26:27
	were a little bit on the overly optimistic side	26:29
	and I'm not alone in thinking this.	26:33
	Many monetarists have also thought this	26:34
	and then I had to take their new numbers	26:37
	and still add something on.	26:42
	And so although I have to reserve judgment	26:43
	until we see how the wage settlements break.	26:49
	How the Arabic Workers' Affair	26:54
	or whether the team stirs later in the spring.	26:57
	(indistinct) with the general guidelines.	27:03
	I think there is reason,	27:06
	as a betting man to have some apprehension on this score.	27:09
	The result is that there will be increasing anxiety	27:12
	in the country about inflation.	27:16
	There will be increasing apprehension	27:18
	and anxiety in Washington.	27:21
	And the forces that urge upon the Federal Reserve	27:23
	sharply contractionary policy will grow in strength.	27:31
	The forces that urge upon the budget	27:36
	sharply contractionary policy will grow in strength.	27:40
	And it's out of the working's out,	27:45
	I think of such forces that the next period of stagnation,	27:48
	the next period of recession will be bred.	27:54
	This process can be helped of course	27:58
	by the natural forces of over exuberance in the system.	28:01
	If inventory accumulation moves up to	28:03
	a 12 billion annual rate in some quarters	28:06
	then onto 15 then onto 18.	28:11
	You have very many of those and you will naturally	28:13
	get an overstocking in the economy	28:15
	and there will be natural forces working for stagnation	28:18
	and recession reinforcing	28:22
	the contractionary forces of rushing.	28:24
	Now all of this is not inevitable.	28:28
	There is something that can be done about it.	28:31
	It seems to me that the proper policy	28:34
	is not at all times study as you go.	28:38
	Just agree upon what kind of a budget you want	28:40
	on the social philosophical grounds agreed upon	28:44
	what rate of growth of money supply you want.	28:47
	That's not the council which I would urge.	28:50
	It seems to me that the best council	28:53
	is lean against the wind that your best judgment tells you	28:56
	is gonna prevail in the next six months.	29:00
	Unless that wind is blowing in exactly the right direction	29:03
	for a healthy American economy.	29:06
	And that's why I have been supporting the movement	29:08
	for moderation on the credit front	29:14
	for five or six months now.	29:17
	Including the period when the Federal Reserve	29:20
	had a slow growth in the money supply.	29:23
	And that is why on budgetary grounds	29:26
	I think that the case is strong for restraint.	29:30
Instructor	If you have any comments or questions	29:35
	for Professor Samuelson, address them to	29:39
	Instructional Dynamics Incorporated	29:41
	166 East Superior Street,	29:43
	Chicago, Illinois 60611.	29:45

Item Info

Title:

Tape 121 - Presidents messages; unemployment; phase III

Date:

1973

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

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RL10082-CS-0119
ref2377_wcx
samuelsonpaul
duke:325142
pstau001119
ark:/87924/r4x63bn47
88720560-406d-4568-8554-cc95c8d6b7bf

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Tape 121 - Presidents messages; unemployment; phase III

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Economists' Papers Archive

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