Tape 168 - Economic outlook for 1975

Download
- Rights
- Limited Re-Use
  CC BY-NC 4.0
  More Rights Info
- Files (1)
- MP3
- Please be patient with media downloads. They are often large files.
Share

Embed Code
<iframe src='//idn.duke.edu/ark:/87924/r4t43jk08?embed=true' height='125px' width='100%' frameborder='0' marginwidth='0' marginheight='0' scrolling='no' allowfullscreen></iframe>
Permalink

https://idn.duke.edu/ark:/87924/r4t43jk08
Skip to Item Info

Loading the media player...

Files for this Item

Transcript

Transcripts may contain inaccuracies.

-	Welcome as MIT professor Paul Samuelson	0:02
	discusses the economic outlook for 1975.	0:05
	This series is produced	0:08
	by Instructional Dynamics, Incorporated.	0:10
-	This year all the forecasters are in agreement	0:14
	on the first half of 1975.	0:19
	The recession is deepening.	0:23
	The slow sales of autos cap the worsening situation.	0:28
	So that there are very few forecasters who think that	0:36
	as we move into 1975, real growth	0:41
	in the United States will not still be declining.	0:45
	I go along with that.	0:49
	I think that the epoch we are now living in	0:52
	will be called the Recession of 1974-1975	0:55
	in the history books.	1:01
	But there are some analysts who fear	1:03
	that it will be called the Recession of 1974-1976	1:06
	because they think that we have a durable	1:13
	and pervasive recession that is going to last the longest	1:18
	of any of our Post-War recessions in terms of real growth.	1:23
	Be one of the steepest in its declines.	1:29
	My own guess at this moment is,	1:34
	that the recession will hit it's trough	1:37
	about the middle of the year.	1:41
	And I see no reason to argue at this time	1:44
	that professor Paul McCracken, the advisor to President Ford	1:51
	is correct in his belief that it will be a V-shaped bottom.	1:56
	That will depend upon how intense	2:03
	the inventory decumulation becomes,	2:06
	because when a business cycle movement is dominated	2:09
	by short-term inventory movements,	2:14
	then I think you get the sharpest V-bottoms.	2:17
	The 1958 trough of the business cycle was an example.	2:22
	Professor McCracken may be correct,	2:28
	but I will go along with a more moderate view.	2:30
	Now I am speaking as if it were a sure thing	2:38
	that this is a recession,	2:40
	and that the semantic game has been decided.	2:43
	But I should call my listener's attention to the fact	2:48
	that just yesterday, just on December 1,	2:53
	there was an article by Julius Shishkin,	2:57
	the Commission of Labor Statistics,	3:00
	and a long-time collaborator of Geoffrey Moore	3:02
	of the National Bureau of Economic Research,	3:06
	on whether the business cycle is changing,	3:09
	and whether we're really on a recession.	3:14
	On November 1st, Geoffrey Moore had said,	3:19
	until the contradictions in the data run their course,	3:22
	I don't think we're able to say we're in a recession.	3:25
	And Shishkin is explaining why	3:28
	a reasonable man could still have doubts.	3:31
	I will summarize the anomalies in the data	3:34
	which could cause a Shishkin or a Moore to have doubt,	3:39
	even though most other people in the country	3:42
	no longer are in doubt, in the following way.	3:46
	First, we are definitely in stagflation.	3:49
	And if you use the decline in prices,	3:52
	which used to characterize recessions, as your touchstone,	3:57
	then of course, we're not in a recession.	4:00
	But then of course, so much the worse	4:02
	for the old fashioned definition of a recession	4:05
	if it depended upon all of the past patterns	4:08
	of behavior being realized.	4:11
	It would be something for the museums	4:13
	in this age of creeping and biased upward inflation.	4:15
	Secondly, and here we're in something more real.	4:22
	The employment levels have been expanding,	4:25
	and not contracting in a way that they contracted	4:29
	in recent recessions, and of course,	4:33
	in old fashioned pre-World War II recessions.	4:37
	But here, too, I think you must allow for the fact	4:41
	that we are in a youth boom because of the past Baby Boom.	4:45
	And so the rapid increase in the labor force	4:50
	for natural demographic reasons	4:54
	and for reason which I'll discuss in a moment,	4:56
	makes that labor force series be an expanding one.	4:58
	If we used declines in trend,	5:03
	and said if you have a decline in the employment trend	5:07
	in comparison with the long-term trend of so many percent,	5:12
	then it's possible that the present business cycle weakness	5:16
	would look more like an old fashioned,	5:21
	even post-World War II recession.	5:24
	The other demographic fact aside from our youth boom,	5:27
	is the fact that we have an expanding labor force	5:30
	because women are entering labor force	5:33
	in increasing numbers.	5:36
	This is a very real trend,	5:38
	and perhaps a correction should be made for that.	5:41
	But for the purpose of this discussion, I shall forget	5:44
	the National Bureau of Economic Research's qualms,	5:48
	and I shall assume that we are definitely	5:53
	in more than a growth, a recession.	5:57
	Real growth declining well into 1975 is my forecast.	6:02
	What about my forecast with respect	6:07
	to the rate of price inflation?	6:09
	Here, it seems to me the situation must,	6:14
	in all probability, improve.	6:21
	We, in all probability,	6:25
	will not continue to have 12 and 13% rates of inflation.	6:26
	We're already seeing in sensitive commodity prices,	6:31
	like sugar, the recent bad actor,	6:35
	that there have been several days running	6:39
	of sugar futures contracts down the limit.	6:43
	And metals, and considering the fact	6:49
	that the current American recession coincides	6:54
	with a recession all over the world,	6:58
	I think that in all likelihood	7:01
	the rate of price inflation	7:05
	should be down	7:08
	quarter by quarter	7:12
	in the year to come.	7:15
	For example, I think that	7:19
	if we're above 10%	7:24
	in the fourth quarter in the general price index deflator,	7:26
	then in the first quarter you can show a reduction,	7:32
	let's say, just to pick a number out of the hat, to 9%.	7:40
	And let's say in the second quarter of the year to 8%.	7:46
	But then as we're beginning to move towards a recovery,	7:53
	long for the lag, we can give ourselves	7:57
	even still one more percent to climb	7:59
	to 7% annual rate of price change on the deflator.	8:02
	But after that, it seems to me if the forecast is correct,	8:07
	that the trough is reached in the middle of the year,	8:13
	you will begin to get some forces making once again	8:17
	for price inflation.	8:21
	And so, on the basis of that scenario,	8:23
	I would think that the rate of price increase will	8:27
	be down to about 7% at its best in 1975.	8:30
	That's a very sensitive number to make bets about,	8:40
	so I don't have confidence that that 7% won't be 6%,	8:44
	but I'm giving you my single-best judgment	8:49
	of where I best wish	8:52
	to be indifferent about betting on either side.	8:55
	The big unknown, it seems to me,	9:03
	which must underlie every forecaster looking into 1975,	9:05
	is what will be the US government's policy?	9:11
	What will be Congress' behavior?	9:15
	What will be the Administration's behavior?	9:18
	What will be the Federal Reserve's behavior?	9:19
	Now, I'm speaking on December 2nd.	9:22
	The morning of the day when President Ford is	9:26
	to hold his first press conference in a long time.	9:30
	And at that press conference we know he is going	9:34
	to be asked questions about the economy.	9:37
	And so, I have to guess what you will know,	9:39
	when you hear my voice namely,	9:43
	to what degree the administration is abandoning	9:46
	its previous fight inflation at all costs,	9:49
	wear a win button against Demand Pull Inflation.	9:53
	And is throwing in the sponge,	9:59
	and beginning to agree that recession	10:02
	is the number one problem.	10:06
	I can't shirk my duty in giving a year-end forecast	10:09
	at this time, so I have to make my best guess	10:14
	as to what the administration will do.	10:16
	And it seems to me that the President is going	10:19
	to make some concessions in his speech tonight.	10:23
	It's not important how those concessions are worded,	10:25
	because it also seems to me that he is not going	10:28
	to say I'm forgetting inflation,	10:31
	putting it on the back burner,	10:34
	I'm gonna be soft on inflation.	10:35
	Recession is the number one problem.	10:38
	He is going to say, with greater likelihood, I believe,	10:40
	that inflation remains a problem,	10:44
	but recession is also a problem and we,	10:46
	in my Ford Administration,	10:50
	are going to be cognizant of both factors.	10:52
	I have said again and again	10:58
	that this recession was made in Washington.	11:01
	And I mean by that, that this recession is the result	11:06
	of the wish to fight inflation.	11:11
	If there had been no need to fight two-digit inflation,	11:17
	or incipient two-digit inflation,	11:21
	then Washington long since could have been	11:24
	taking actions which would have tended	11:27
	to restore the housing industry.	11:32
	And so, the question is,	11:36
	the new so-called veto-proof Democratic Congress.	11:40
	To what degree will they do what was done in 1967?	11:46
	And done in 1971?	11:51
	Namely, deliberately expand the economy	11:55
	by expansionary legislation.	11:59
	And to what degree will the independent Federal Reserve	12:03
	go along with a deliberate expansion of the money supply	12:07
	and a continued lowering of the interest rates?	12:14
	Although the Federal Reserve is independent,	12:20
	in terms of our Constitutional structure,	12:23
	I think there is this very strong cross-correlation	12:26
	between those occasions when the Federal Government,	12:29
	the Administration and the Congress shift and begin	12:32
	to lean against a different wind,	12:36
	and what the Federal Reserve does.	12:38
	I think the Federal Reserve tends to shift	12:40
	because of the same political pressures	12:42
	and psychological pressures that are bearing upon everybody.	12:45
	In my view, because the recession is hurting so much,	12:50
	and because the automobile layoffs will dramatize this,	12:55
	we shall find a definite relaxation	13:00
	of anti-inflation campaign by the Administration,	13:04
	by the effective votes of Congress,	13:09
	and also by the Federal Reserve.	13:13
	Now, of course, if Congress	13:16
	and the Administration overdo it,	13:17
	the Federal Reserve always leaning against every wind	13:19
	will begin to drag its heels.	13:24
	And I am building this forecast into my forecast.	13:27
	Otherwise, if you could really have	13:33
	a staunch Herbert Hoover-like government.	13:36
	A Montagu Norman Federal Reserve.	13:41
	Montagu Norman was the head of the Bank of England	13:44
	at the time that the Great Recession of 1929-1932	13:48
	in Britain developed.	13:53
	And if you had an electoral system like	13:56
	that which prevailed in Western Europe	14:01
	and in the United States in the early 1930's,	14:03
	I have no doubt that...	14:07
	I'm sorry.	14:12
	I withdraw the statement I have no doubt.	14:14
	I have doubt about everything,	14:15
	and the economics is not so exact a science	14:17
	that the metaphor is exact.	14:20
	But I think there would be very strong probability	14:23
	that this would indeed be the worst recession	14:26
	of the post-war period, and you could begin	14:29
	to see unemployment averaging 8% and 9% and 10%,	14:34
	which means that in states like Massachusetts,	14:45
	my state, which is third in the country	14:49
	only after Alaska and Hawaii,	14:52
	if you believe the official statistics,	14:54
	but having just been to Hawaii I have reason to believe	14:55
	that the unemployment rate in Hawaii is exaggerated	14:59
	by the official statistics so that Massachusetts	15:02
	is really second in the whole of the 50 states.	15:06
	You would see in states like that,	15:11
	11 and 12% unemployment rates.	15:13
	And of course, you would see among youth,	15:15
	unemployment rates of 20, 25, 30%,	15:17
	and black youths in slum ghetto areas,	15:21
	unemployment rates of over 40%.	15:27
	However, we deal with the subject of political economy,	15:33
	not straight economics.	15:37
	And governments have the power to change these matters,	15:39
	and I am confident	15:43
	that the political pressures will necessitate	15:44
	that the government use those powers.	15:48
	So I am betting on a expanded budget	15:51
	as the welfare needs become greater,	15:58
	due to the recession itself.	16:02
	I am betting on expanded deficit	16:05
	as the tax structure brings in less and less revenue	16:07
	even with the same rates.	16:13
	I am betting against any tax increases across the board	16:15
	of a general income tax type.	16:21
	Either on corporations at large, or on persons,	16:24
	or a general sales tax, or a general new value-added tax.	16:29
	Indeed, I would more likely bet	16:34
	that the tax rates will come down in certain areas.	16:39
	Now, I'm not speaking about loopholes	16:46
	with expected percentage depletion and so forth.	16:48
	With Congressman Mills no longer having his old-time clout,	16:51
	you may at long-last begin to see some real action,	16:57
	with respect to taxation of oil industry receipts.	17:01
	But aside from that, it seems to me	17:08
	that you're more likely to get a tax reduction	17:11
	at the middle income groups	17:17
	and lower middle income groups	17:19
	than any sort of a tax increase.	17:21
	And this, no matter what President Ford says	17:25
	in his December 2nd meeting with the press.	17:29
	The Federal Reserve, I think, will continue to expand.	17:36
	It will succeed better in expanding once we	17:43
	pass the inflection point of most rapid reduction	17:48
	in the real economy.	17:52
	I think the Federal Reserve has been aiming	17:54
	at greater increasing the money supply	17:56
	than have been achieved.	17:59
	And they just haven't quite willed the extreme action	18:01
	which would be necessary to get the money supply growing	18:05
	at four, five, six, and seven percent.	18:10
	I noticed that the Monetarist Forecasting Organization	18:14
	of Argos is betting on 7% increases in M1.	18:18
	I would think that any serious attempt	18:28
	to turn the recession around and to speed up the date	18:31
	at which the economy begins to expand,	18:37
	and increase the probability	18:41
	of that expansion's taking place prior	18:44
	to the middle of 1975, would require at least	18:49
	that much of an increase in the money supply.	18:58
	Indeed, I wouldn't expect a strong housing recovery	19:02
	even if the money supply were to increase by those numbers.	19:07
	Does this mean that the advisors to the President	19:15
	like Alan Greenspan in Washington,	19:19
	and William Fellner in Washington,	19:21
	to say nothing of Secretary of Treasury William Simon,	19:24
	or still Director of the Office of Management and Budget,	19:29
	Roy Ash have changed their minds?	19:34
	I would think that the first two	19:39
	of the professional economists whom I've named,	19:41
	have not changed our minds.	19:43
	They would like to stand up to the gale of recession.	19:46
	This is a therapeutic recession in their view.	19:52
	It's serving the useful purpose	19:56
	of doing something substantial about the inflation.	19:58
	And like the Bourbons,	20:02
	they forget nothing and they learn nothing.	20:05
	And I believe that they are standing by their guns.	20:08
	But I think that I don't have to be a Marxist	20:13
	who believes in the materialist's interpretation	20:17
	of history in order to	20:19
	lend credence to the hypothesis	20:24
	that they're just going to be pushed aside	20:26
	in the push-shove political process of Washington,	20:28
	and new advisors will be forthcoming.	20:32
	Perhaps the Trojan horse will be	20:36
	in the form of Paul McCraken	20:37
	who is a more eclectic Republican economist,	20:39
	and he at this moment is briefing the President	20:44
	on how serious the recession is.	20:49
	Since Paul McCracken comes from Ann Arbor, Michigan,	20:52
	and since the inverse square of the distance law applies	20:55
	in all communications,	21:00
	he will be very cognizant of the distress in Detroit.	21:01
	And I think we can count upon him	21:05
	to bring it to the attention of the President.	21:08
	So, mine is definitely a political forecast.	21:13
	It has to be a political forecast.	21:18
	The more expansionary the Administration is,	21:22
	the larger the deficit.	21:24
	The less expansionary I expect the Federal Reserve to be.	21:26
	Let me complete my roundup	21:33
	of my personal subjective judgements,	21:36
	and then use the rest of my time	21:41
	in seeing where my judgments stand	21:43
	with respect to other forecasters.	21:47
	The unemployment rate still 6% at the last official date.	21:54
	That's the October rate.	22:00
	Is definitely on the rise.	22:03
	And one could not be surprised to see it	22:06
	by the first part of the 1975,	22:10
	let's say by April or May or June, reaching the 7% level.	22:15
	If it does reach the 7% level before the middle of the year,	22:23
	even if the trough comes at the middle of the year,	22:28
	we know that the unemployment rate will continue somewhat	22:30
	to rise after that date.	22:34
	Now, of course, I'm assuming that any public service	22:36
	employment programs triggered off	22:41
	by more than 6% unemployment rate	22:43
	maintained for three months.	22:47
	I'm counting those people among the unemployed	22:50
	because I don't think that those	22:52
	will be good, honest jobs that give a full dollar	22:53
	for the dollar expended.	22:57
	I do not believe that we will see by the middle of the year	23:03
	unemployment rates much in excess of 7%.	23:08
	But if the economy were to deteriorate at the rapid rate	23:14
	of October and November,	23:19
	then I'm afraid my conservatism would be refuted	23:23
	by the actual data.	23:29
	So long as the economy continues to move downward	23:34
	at the rates which I've predicted,	23:39
	it seems to me that short-term rates still have a way to go.	23:42
	The City Bank for the first time, I think in 10 weeks,	23:48
	the end of last week, did not lower its prime rate.	23:56
	But the reason it didn't lower its prime rate	24:00
	was that it changed its formula	24:02
	so it wouldn't have to lower its prime rate.	24:03
	The old formula would've called for a reduction below 10%,	24:06
	I believe, of the City Bank's prime rate.	24:09
	Well just as the prime rate has dropped through 12%,	24:14
	through 11%, down now at 10%.	24:20
	It seems to me that this lagging rate will continue	24:25
	to decline and could well go down to 8%.	24:30
	But if it does go down to 8%,	24:36
	that means that commercial paper rates, and CD rates,	24:38
	and Treasury Bill rates will be down lower than that 8%.	24:42
	Particularly if my pessimism with respect	24:55
	to the rate of price inflation is wrong,	24:59
	and you begin to get a little bit better behavior	25:02
	than what I have expected,	25:06
	namely that you just get down	25:11
	to about 7% by the third quarter.	25:12
	If we got some really good news on the price front	25:17
	which is by the way,	25:20
	the single thing you should pray for hardest	25:21
	if you are rationed in the amount of praying	25:24
	that you can do,	25:27
	then I think the long-term interest rate	25:29
	could also come down 100 basis points,	25:34
	or even 150 basis points.	25:40
	But since I am pessimistic on the rate of progress	25:42
	with respect to price inflation,	25:46
	I would think that the long-term interest rate,	25:49
	the corporate bond rate,	25:54
	will come down only at most about 100 basis points.	25:58
	All bets will be off of course,	26:05
	if as we move in to the Thanksgiving season next year,	26:07
	we are still in recession so that this is to be a 1974-1976.	26:11
	In fact, there is a way of dating this	26:18
	so it might be a 1973-1976 recession.	26:20
	But given the rest of the forecast,	26:26
	I expect mortgage money, which is very hard to come by,	26:29
	to get a little bit easier to come by,	26:34
	not to go down very much in rate.	26:36
	And since the corporate and municipal calendar	26:39
	will increase tremendously each time there's	26:43
	any improvement in the bond market,	26:46
	I therefor expect that that will shade and attenuate	26:49
	the amount of the decline in the long-term interest rate.	26:56
	On the stock market, I think we have to factor	27:02
	into the equation an increasing number of corporations	27:07
	which will show a reduction of money nominal profits.	27:10
	There will be less inventory revaluation paper profitS.	27:19
	There will be less overstating of inflation profits	27:24
	because of depreciation costs	27:30
	as the price level begins to grow less rapidly.	27:32
	But this means that some of the	27:38
	four-to-one price earnings ratio stocks will go	27:40
	to five and six-to-one because the earnings have gone down.	27:47
	Unless their prices also go down.	27:52
	I think you have to factor in three terms	27:57
	in any estimate with respect to the stock market.	28:04
	I will not make an estimate with respect to stock market.	28:07
	But for your estimate,	28:09
	I think you want to allow for two cross-currents.	28:11
	One, that money profit rates will be going down,	28:14
	so earnings will be going down as reported.	28:17
	But, two, interest rates will also be going down	28:21
	so that the price earning capitalization factor	28:25
	will be going up.	28:29
	Third, the third term in your equation	28:31
	must be your view about the long run profitability	28:36
	of American corporate enterprise.	28:41
	If you think that there has been no basic erosion of	28:43
	that long run real profitability of American enterprise,	28:47
	then we have had year after year after year	28:51
	of upward increase in the cost of producing	28:55
	and buying the plant equipment and other earning assets	29:00
	of American corporate enterprise.	29:06
	And yet in the stock markets of the world,	29:07
	the price at which you can take them over	29:11
	or buy a share in them has been going down, down, down.	29:15
	And therefor this could be a period	29:20
	that economic historians will look back on	29:24
	and say was one of the greatest periods	29:26
	of under-valuation of the stock market	29:30
	of really the last decade or 15, 20 years.	29:35
	Take you back, really to the early 1950's	29:40
	for a comparable period.	29:43
	On the other hand, if a fundamental erosion	29:45
	of the earning power of American corporate enterprise	29:49
	is being undermined partly because of government,	29:52
	because of whatever reasons you wish to supply,	29:55
	then it may be that once again the stock market	29:59
	has been ahead of the game and has been telling us	30:02
	something to which we ought to have been listening.	30:03
	Now, I've given you my views.	30:11
	What are the views	30:14
	of the forecasting authorities most worth listening to?	30:15
	I would say that almost to a man,	30:20
	they are with me in thinking the first quarter	30:24
	will be a period of decline.	30:27
	To a man, they're with me in thinking there	30:30
	will be an improvement in the rate of inflation.	30:31
	About half of them think that the upturn, the trough	30:36
	will be reached more like Easter	30:42
	than like the middle of the year.	30:45
	So, I am more pessimistic than about half of them.	30:46
	On the other hand, of the other half,	30:50
	there are a number who think that the trough	30:52
	will be sometime after the middle of the year.	30:55
	And I am more optimistic	30:59
	if that's the right adjective to use than they are.	31:04
	I think I'm a little more pessimistic than the crowd	31:10
	with respect to the rate of price inflation.	31:13
	The most popular view I believe is	31:18
	that something like 6% rate of price increase	31:24
	is likely in the last half of 1975.	31:30
-	If you have any comments or questions	31:38
	for Professor Samuelson,	31:40
	address them to Instructional Dynamics, Incorporated	31:41
	450 East Ohio Street, Chicago, Illinois 60611.	31:44

Item Info

Title:

Tape 168 - Economic outlook for 1975

Date:

circa 1974

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:

Search Collection Guides

Series:

Economics Cassette Series: Paul Samuelson

Rights:

Limited Re-Use

CC BY-NC 4.0

Rights Note:

This material is made available for research, scholarship, and private study. Copyright in this material has not been transferred to Duke University. For reuses of this material beyond those permitted by fair use or otherwise allowed under the Copyright Act, please see our page on copyright and citations: https://library.duke.edu/rubenstein/research/citations-and-permissions.

Identifier:

RL10082-CS-0155
ref2449_hqx
samuelsonpaul
duke:325178
pstau001155
ark:/87924/r4t43jk08
6076ef6e-add1-4216-af4c-5a8cade797ab

Permalink:

https://idn.duke.edu/ark:/87924/r4t43jk08

Sponsor:

Sponsor this Digital Collection

Tape 168 - Economic outlook for 1975

Transcript

Item Info

Economists' Papers Archive

More Info & Options