Tape 140 - Third period GNP; soft landing?

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-	Welcome once again,	0:02
	as MIT professor Paul Samuelson	0:03
	discusses the current economic scene.	0:05
	This series is produced by	0:07
	Instructional Dynamics Incorporated.	0:08
	This program was recorded November 1st.	0:10
-	The first thing that we should talk about today	0:13
	are the new third quarter preliminary statistics	0:17
	which have come in.	0:20
	The rate of growth of the economy	0:24
	measured in real terms by the real GNP	0:27
	did pick up a little bit from the second quarter,	0:31
	more or less as expected.	0:33
	However, it didn't pick up as much	0:36
	as some people had thought it would.	0:39
	So I think the fairest thing to say	0:43
	is that for the last two quarters,	0:46
	the real GNP of the American economy	0:48
	has been growing at about a 3% annual rate.	0:51
	Whereas in the previous two quarters to that,	0:57
	the annual rate of real growth was a whopping 8%.	1:01
	By and large, what's happened is confirmatory then	1:07
	of the hypothesis, which is very widely held,	1:11
	that the US economy has already moved	1:15
	into a growth recession.	1:19
	A growth recession being defined as a recession	1:22
	in which the rate of growth is still positive,	1:25
	not like a genuine full-fledged recession,	1:30
	but is significantly less for two or three quarters at least	1:34
	than the four plus percent which represents par	1:39
	for American growth rates taking into account	1:44
	demographic increase and taking into account	1:47
	productivity changes.	1:50
	The facts, as they've developed, are compatible	1:53
	with a continuation of this growth recession	1:58
	for at least another two or three or four quarters.	2:01
	And I would have to say that	2:07
	even before these numbers came in	2:09
	there was a noticeable tendency for the fashionable forecast	2:12
	to gain in confidence and a	2:18
	tendency for those who are more pessimistic	2:24
	than the fashionable forecast,	2:27
	and who believe in a genuine recession	2:29
	to lose adherence or,	2:34
	to put it more conservatively,	2:38
	not to gain the adherence which they ought	2:40
	to be picking up now if there causes in the end to prevail.	2:43
	A moral for even those who still believe	2:50
	that the most likely outcome is a genuine recession	2:54
	have slowly begun to modify their predictions	2:59
	and they're pushing that recession	3:04
	into later quarters of 1974.	3:06
	And at least in the latest one,	3:12
	which I've been looked at here,	3:15
	I'll avoid names for this purpose	3:17
	'cause I don't mean to criticize,	3:21
	but the late October forecast	3:24
	instead of the last half of 1974	3:27
	having a 3% annual decline in real growth,	3:31
	rather it now looks for about 2.5% rate of decline.	3:36
	Now I don't think that we should spend our time	3:44
	in pouring over the fine detail of the outcome	3:48
	in order to try to form a judgment	3:52
	about just how strong or weak the economy is gonna be	3:55
	four or five quarters from now.	3:58
	The tools of economic analysis are not	4:01
	fine enough given the grossness of the statistical data	4:07
	to make such considerations worthwhile.	4:12
	But I think it's very important for us	4:16
	to stand away from the third quarter numbers	4:18
	and to try to see what	4:22
	the general forces are that have been operating	4:26
	and what are the things that we ought to be	4:28
	watching in order to be able to shade	4:30
	our opinion about the future.	4:34
	Well, the first thing that has to be said,	4:37
	in fact, it has to repeated, is this.	4:38
	The general economy is doing better	4:42
	than American society at large.	4:44
	I've had to call attention here again and again	4:48
	to the fact that all the	4:52
	indicators of consumer sentiment have a tendency	4:57
	to deteriorate and deteriorate very badly.	5:01
	And if you had a crude confidence theory	5:04
	of the business cycle so that department store sales	5:08
	and durable consumers good sales could be	5:12
	accurately predicted from the degree of optimism	5:17
	or pessimism that the American public typically feels	5:21
	about itself and about its society,	5:26
	then I think you would have to expect there to be	5:29
	a rather serious recession.	5:32
	However, the past behavior of consumer spending,	5:36
	in relationship to past surveys of consumer sentiment,	5:39
	do not suggest that consumer sentiment is a factor	5:43
	that you should give all that much weight.	5:47
	And although right at the moment	5:51
	we still are in the constitutional crisis,	5:54
	occasioned by the resignation of Elliot Richardson	5:57
	and his assistant and the firing of Archibald Cox,	6:01
	the political	6:09
	seismographs are very volatile,	6:14
	and given little time that may cease to be	6:17
	quite so important in the future.	6:21
	Nevertheless, as I read the case of those	6:26
	who believe in a full-fledged recession,	6:31
	they are increasingly beginning to base their case	6:34
	on a possible shortfall in consumer spending in the future.	6:40
	They are forced to do this by the fact	6:47
	that the other strong reason for expecting	6:51
	a full-fledged recession, the behavior of inventories	6:56
	does not seem to be developing in accordance	7:01
	with what would be needed in order to have	7:05
	a convincing case for a recession.	7:08
	I'm referring to the fact that unless inventories	7:12
	become high, unless they go through	7:17
	a few quarters of excessive rate of increase,	7:20
	you're unlikely to find later in '74	7:25
	a considerable decumulation of inventories.	7:30
	From this view point, we should scrutinize very carefully	7:37
	what happened in the third quarter.	7:39
	Well, in the third quarter, the inventory	7:41
	rate of accumulation annual rate,	7:46
	as measured by the Department of Commerce,	7:47
	and this involves a lot of corrections	7:50
	for a mere price change, did go up.	7:52
	It went up from a $4.5 billion rate of accumulation	7:56
	in the second quarter and indeed in the first quarter	8:01
	about that same level up to 8.7 billion.	8:04
	And that is an increase,	8:11
	but we still have a long way to go	8:15
	before we get to the 17 and $20 billion increases	8:17
	which are needed if the slingshot is to be cocked	8:22
	very far back into a swing snapback	8:26
	and give us the inventory recession	8:31
	which will make a growth recession	8:34
	become a full-fledged recession.	8:36
	I guess we have to reserve judgment on this matter.	8:40
	As one of the adherence of the view	8:46
	that were in for genuine recession	8:49
	has put the data for the third quarter	8:52
	are compatible with either scenario.	8:58
	They don't actually lend comfort	9:01
	to the full-fledged recession hypothesis,	9:04
	but they don't deny it either.	9:08
	I should also mention another factor which,	9:11
	I guess, I think is very important.	9:13
	For this purpose, I might quote the view	9:16
	of Dr. Michael Evans, who appeared on the same panel	9:19
	with me before the Joint Economic Committee	9:23
	testifying on the outlook.	9:28
	I've quoted the Chase Econometrics models before,	9:31
	but I wanna call your attention to two respects	9:36
	in which his view is perhaps a little bit different	9:40
	from the consensus view.	9:44
	First, he is not so optimistic	9:48
	about what's going to happen to our	9:52
	net exports of goods and services.	9:54
	The net exports in goods and services in the third quarter	9:57
	were very gratifying.	10:02
	They were $4 billion, a surplus of our exports over imports	10:05
	'cause these are goods and services,	10:10
	this is not just merchandise.	10:12
	But my recollection is at the very last month's	10:13
	merchandise numbers that came in	10:16
	were also quite gratifying.	10:18
	They were something like $800 million surplus for the month.	10:20
	I don't know what seasonal correction is required,	10:24
	but that's an eight or $9-billion surplus	10:28
	on a 12-month basis.	10:32
	But Dr. Evans thinks that a good deal	10:35
	of our improvement in exports is in the agriculture domain.	10:39
	And since he believes that in 1974	10:44
	food prices and fiber prices are gonna come down,	10:47
	then he thinks we're gonna lose some of that	10:51
	buoyancy in our exports.	10:54
	And he doesn't yet see the strong upswing	10:56
	in the competitiveness of our manufacturing imports/exports.	11:00
	So that this is a minus factor	11:05
	in his particular reading of the future	11:10
	if we're not gonna even be able to hold	11:14
	the degree of improvement which we had.	11:16
	This is very relevant for any of you who wanna make bets	11:17
	on whether the dollar is undervalued	11:21
	and whether there could be any kind of reoccurrence	11:23
	of trouble for the dollar in the clean floating	11:28
	or dirty floating markets of the world.	11:33
	The other point that Dr. Evans made,	11:37
	and I think it's a interesting point to keep in mind,	11:39
	it's constant with my own thinking, and that's this.	11:42
	Dr. Evans thinks that that drop in food prices,	11:47
	which will be the reflection of supply and demand	11:50
	just as the big upswing in food prices	11:53
	was a reflection of supply and demand,	11:55
	he thinks that's a very favorable factor.	11:59
	It means that the consumer price index,	12:01
	to which wages are tied, will not,	12:05
	in the first half of 1974,	12:07
	be increasing by as much as 2.5%.	12:12
	It also means, and this is probably much more important,	12:20
	that the Federal Reserve, as we	12:23
	move definitely into the eye of the,	12:28
	wind of the growth recession,	12:33
	will be much more favorably disposed	12:36
	towards countering that recession	12:38
	if it doesn't have terrible apprehensions	12:41
	about price inflation and about the kind of price inflation	12:44
	which the man in the street is most sensitive to,	12:49
	namely, food prices.	12:53
	So I think that if Dr. Evans expected	12:55
	that for some reason food prices	13:01
	were gonna be disappointing,	13:06
	let's just say some horrible crop situation this autumn,	13:07
	yet to come, that this would cause him	13:11
	to move his forecast of no recession,	13:15
	no genuine recession, only growth recession,	13:21
	to a yes, in that case there will be a genuine recession.	13:24
	Now I don't know whether I have the courage	13:30
	to put this amount of weight	13:32
	on that food price behavior.	13:36
	I put a great deal of weight on it,	13:39
	but whether I would actually change	13:40
	from a no recession to a definite recession,	13:42
	I'm inclined to doubt.	13:48
	Let me call your attention that Henry Kaufman,	13:52
	a partner of Salomon Brothers,	13:58
	and who, earlier this year, was one of those	14:01
	who believed that we were going to have a real money crunch	14:03
	and that that was going to precipitate a real recession,	14:09
	and we thought that that was a good thing,	14:16
	now, apparently, is a little disappointed	14:19
	by the course of actual events.	14:22
	And in a talk which he gave in Phoenix, Arizona	14:25
	on October 23rd, he warned that	14:30
	we don't seem to be having that desirable recession.	14:35
	And if, in fact, we do things too soon	14:40
	to avoid that desirable recession,	14:45
	that the results of that will be very serious	14:48
	for the long range inflation outlook.	14:53
	Indeed, I, myself, take the	14:59
	possibility of a genuine recession seriously,	15:05
	although I regard it only as	15:07
	a high odds bet.	15:11
	If I had to bet on a genuine recession,	15:15
	(mumbles) very favorable odds.	15:18
	But I would take that case a little more seriously	15:21
	from the analysts who espouse it.	15:23
	If it weren't the fact that, as I tally up	15:26
	the opinions of different people,	15:32
	I'm not sure that I have in my files a single person	15:34
	who expects there to be a recession, a genuine recession,	15:37
	and who doesn't want there to be.	15:41
	So in my own thinking, I always try to separate out	15:43
	what I want and what I think will happen.	15:46
	Because I find that unless I do that,	15:48
	there's a tendency, a very human and natural tendency,	15:52
	for me to try to forecast things that I want to have happen,	15:56
	that my heart wants to have happen	16:01
	even though my brain perhaps is telling me	16:03
	that they're not too likely to happen.	16:07
	So I guess you have to take a little bit off the credibility	16:09
	of the forecast.	16:15
	It's when you learn that they being human beings	16:17
	and they being in favor of recessions,	16:21
	they may be telling you a little bit more	16:27
	about their favored policy recommendations	16:28
	and their valued judgments and their therapy ideas	16:32
	than about the differences in the way	16:35
	that they read the actual record.	16:37
	I get a lot of feedback from listeners	16:42
	and I would be very happy to learn from any listeners	16:44
	of exceptions to what I now stated.	16:49
	Now there's still another view about	16:55
	the possibility of a recession	17:00
	which comes from some of the monetarist camps.	17:03
	I have to say, some of the monetarist camps,	17:07
	because the monetarist forecast that I have seen	17:09
	now spread all over the map and they are at least	17:15
	as disbursed as the non-monetarist forecast,	17:20
	so we're certainly not gonna get any kind	17:24
	of a controlled experiment this year.	17:26
	Whatever happens, you're gonna be able to quote	17:29
	a monetarist, who expect it to happen,	17:31
	and you also, I'm saying the same thing,	17:35
	are gonna be able to find other monetarist,	17:39
	who hadn't expected that to happen.	17:41
	Now some monetarist group like the Argus organization,	17:44
	James Meigs and William Wolman and other economists there,	17:51
	I have listed among the optimists.	17:57
	They do expect there to be a slight decline	18:00
	in the rate of growth of the GNP in comparison with par,	18:04
	but it's rather slight indeed.	18:09
	On the other hand, there are other monetarists	18:12
	who expect that we are going to be in a recession.	18:16
	Now let me quote	18:19
	the line of argument which I understand	18:24
	to underlie this.	18:28
	These monetarists who expect	18:33
	there to be a genuine recession,	18:34
	in fact have money GNP forecasts	18:37
	much like the fashionable forecast.	18:41
	But they have price	18:44
	inflation forecasts which are higher	18:48
	than the fashionable forecast.	18:53
	And if we subtract off a higher estimate for price inflation	18:55
	from the same estimate of money increase,	18:59
	we get a lower estimate of real increase.	19:02
	And so I have to ask myself	19:07
	whether there is something in monetarism	19:09
	which should make me respect	19:12
	their price increase.	19:17
	Now I put the question that way because I, myself	19:19
	have certain amount of pessimism	19:22
	about the behavior of prices.	19:25
	But I wanna see whether there's any reinforcement	19:27
	for that pessimism from the standpoint of monetarism.	19:31
	And I have to confess to some puzzlement	19:35
	as to why the past patterns of experience	19:38
	which had been analyzed by monetarists	19:43
	should have any power to give us resolutions	19:46
	with respect to price behavior peculiarly.	19:52
	In other words, why shouldn't one	19:57
	rely in one's price estimates upon	20:02
	the best information one can get for 1974	20:06
	about what will be happening to the degree	20:09
	of excess capacity in the economy	20:12
	to the behavior of order backlogs	20:17
	whether as those who expect there to be a recession	20:21
	think there will be inventory coming out of our ears	20:24
	and plenty of delivery of stuff which people don't want.	20:28
	Why, under those circumstances,	20:33
	should we still expect a price increase?	20:35
	And as I review the record,	20:40
	I cannot find where that special relevance	20:45
	of monetarism should be.	20:50
	Now let me illustrate.	20:54
	The Federal Reserve Bank of St. Louis, for a long time,	20:57
	aside from its estimates of what's gonna happen	21:03
	in the money GNP, made a breakdown of that	21:05
	between prices and real output.	21:10
	And they weren't particularly successful	21:14
	in their breakdown.	21:20
	Now it can be argued, I think, that there was nothing	21:24
	in the monetarist philosophy which would	21:28
	sanction those particular breakdowns	21:31
	which they had, and I would agree.	21:34
	But that's precisely the point that I'm making.	21:37
	If you study the history of the quantity theory of money	21:40
	and the views of the leading exponents	21:44
	of the quantity theory of money,	21:48
	I'm thinking of Alfred Marshall and Irving Fisher	21:50
	going back a long way, and then in later days	21:54
	people like Warburton and, in our own time,	21:59
	Professor Milton Friedman, I recall the wisdom	22:04
	stated at a conference by Jacob Viner,	22:11
	who knows that literature very well,	22:14
	and there he went on record saying	22:16
	that the quantity theorists of the past,	22:20
	and by the way he considered himself	22:22
	a member of that group,	22:24
	had never had any special way	22:26
	of analyzing the effects of money	22:32
	in the MV equal PQ monetary equation	22:36
	as between the P and Q	22:39
	and there was actually a libel on them	22:41
	to claim that, as some of the critics	22:43
	of monetarism had done, that the monetarist think	22:48
	that M controls prices and the fiscalists think	22:52
	that the canes in fiscal policy determines quantity	22:56
	which leaves the one with kind of a schizoid theory.	23:00
	He said, there was no warrant for that.	23:04
	So until one learns what the causal connections are,	23:07
	I guess, I don't find much extra strength	23:13
	on the side of a genuine recession	23:16
	from the monetarist line of reasoning.	23:20
	Well, now I always try to think	23:26
	of where trouble could come from	23:28
	and not to satisfy oneself	23:31
	with the fashionable forecast.	23:36
	So let me just try to tick off some of the areas	23:38
	where it seems to me we ought to be on alert	23:40
	if our concern is whether there will be	23:43
	a genuine recession.	23:47
	I don't think we can dismiss the state of public opinion.	23:51
	There is a definite possibility that	23:56
	we are not yet out of any constitutional crisis.	24:01
	And this could be a definite wet cloth	24:04
	on the animal spirits of the American consumer	24:09
	and of the American investor.	24:14
	In my opinion, it's most likely that	24:18
	the money GNP is like ol' man river,	24:21
	it just goes rolling along independently	24:24
	of Kiplinger's newsletter out of Washington	24:27
	and independently of the Gallup poll.	24:30
	But one would be very rash to say that that's true	24:34
	at 100% level of confidence.	24:38
	And so it's definitely possible	24:40
	that there could be some crises	24:43
	which would begin to cut into business generally.	24:48
	Second, there's a lot of discussion about	24:52
	whether we have a energy crisis or not.	24:55
	And that becomes a semantic question	24:59
	as to whether the word crisis is a desert.	25:03
	We certainly have a short-run problem of shortage	25:09
	under the way we've been controlling prices	25:14
	and allocating supplies.	25:16
	And that short-run problem is not gonna go away.	25:19
	And I should emphasize, it would take another tape	25:22
	to discuss the details of this,	25:25
	that that particular short-run problem	25:27
	was also here before there was any	25:31
	outbreak of war in the Mideast.	25:35
	We have to add, though, there has been	25:38
	an outbreak of war in the Mideast,	25:40
	we now have a ceasefire, but there has been	25:41
	a de facto, a decrease of 10 and 20%	25:45
	of the oil outflow from the Persian Gulf.	25:49
	Now since the United States is associated	25:55
	in the minds of some of the Mideast countries,	25:57
	peculiarly with the support of Israel,	26:01
	we're not the only country.	26:06
	I noticed that the Dutch are being discriminated against	26:07
	in oil shipments because they were not	26:10
	sufficiently pro Arab during the fighting stage.	26:14
	But since we're in that camp, then there may be	26:19
	a greater cut down on the supplies which we depend on	26:23
	from the Mideast than the cut down for other countries.	26:27
	And I have to word that very carefully,	26:32
	because it's understood that we depend	26:34
	much less in the Mideast.	26:36
	So that's a favorable factor that makes us less vulnerable.	26:38
	And Japan, about whom perhaps the Arabian countries	26:43
	have good feelings now, because Japan did not	26:48
	rally to the side of Israel.	26:51
	Japan may be more vulnerable, nevertheless,	26:53
	because she depends for 90% of her oil there.	26:55
	But we still have to allow for the possibility	26:59
	that energy will begin to run short	27:04
	and we have to allow for the possibility	27:07
	that the constitutional crisis	27:09
	and the general inefficiency of the administration	27:11
	will not lead to a smooth allocation of resources.	27:15
	And so you could begin to get some shut downs	27:21
	around the country which are occasioned by	27:23
	shortages of fuel.	27:28
	Now I don't wanna argue with anyone	27:30
	who wants to use elementary text book economics	27:31
	that if you just auctioned off the scarce supplies,	27:34
	you'd always have a buyer for a seller.	27:37
	I just wanna point out that there could be	27:39
	some trouble from misdirection.	27:42
	And if you look at past history, there has been many a time	27:43
	when a flagging boom has been turned into a recession	27:47
	by exogenous factors such as a very long rail strike	27:51
	or a very long steel strike.	27:56
	The most recent notable event of that sort,	27:57
	as I remember it, was the very long 1959 steel strike.	28:01
	When it first starts, it's just kind of a holiday	28:07
	for everybody, the workers get a vacation,	28:10
	but after a while the inventories begin to run thin	28:13
	and begins to really dig in deep	28:15
	and that does affect the macroeconomic figures.	28:19
	In fact, the 1969, 1970 recession	28:23
	will go down in the annals in a very silly way	28:30
	that doesn't truly reflect the macroeconomics that went on,	28:33
	because we will show that recession lasting	28:37
	until the General Motors strike was settled	28:41
	in November of 1970, when in point of fact	28:44
	there's much analytical reason to expect	28:49
	that if that strike had been avoided,	28:53
	the National Bureau, if it was permitted to	28:56
	have a genuine recession in its records,	28:59
	would still have changed the timing of the outcome	29:02
	from that recession by at least a quarter	29:05
	and it could've been changed by as much as by five months.	29:09
	Well, let me summarize	29:15
	by giving you my view.	29:18
	The continued third quarter slowdown	29:21
	it seems to me is a good thing.	29:24
	It seems to me it doesn't matter whether that slowdown	29:26
	was brought about primarily by demand factors	29:29
	or supply factors from the standpoint	29:32
	of some of the good which it will do	29:36
	in helping us to make a soft landing	29:38
	or at least not to bump too hard	29:42
	into the full employment, full capacity ceiling.	29:45
	I think we're going to have a mixed situation	29:51
	in which you're gonna have lots of basic industries	29:53
	that are going to continue to run flat out	29:56
	for quite a while.	29:58
	Textiles, papers, paper chemicals, et cetera.	29:59
	Those provide materials for lots of other	30:04
	not so basic industries.	30:06
	And so what the doctor would've ordered, I think,	30:08
	would be a plateau of let down.	30:13
	And I don't know that I believe we can keep	30:18
	a 3% rate of real growth.	30:23
	What I've said into the Joint Economic Committee,	30:24
	for example, in policy, was that as things begin	30:27
	to persist below 2%, then policy should be directed	30:31
	to doing something about it.	30:35
	But so far the development seems to me	30:37
	to be much better than it looked when,	30:41
	you will recall on these tapes,	30:45
	I came back from Australia in April, in May,	30:46
	and listened to all that talk about inevitable money crunch,	30:50
	more serious than any of the recent money crunches,	30:55
	we look to be making a much softer landing.	30:59
	But nature's options are still open.	31:03
	She still could give us a real recession.	31:06
	And I should say that the policy options are also still open	31:10
	and that'll bear discussing at another time.	31:14
-	If you have any comments or questions	31:18
	for Professor Samuelson, address them to	31:20
	Instructional Dynamics Incorporated.	31:21
	166 East Superior Street, Chicago, Illinois 60611.	31:24