Tape 173 - The depression of 1975, or recession?

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Speaker	Welcome once again as MIT professor	0:02
	Paul Samuelson discusses the current economic scene.	0:04
	The series is produced by	0:07
	Instructional Dynamic Incorporated.	0:09
	Professor, as we move into the third month of	0:11
	the new year, is there any reason at all for any cheer?	0:14
Paul	Frankly, if you just look at the news as it's	0:22
	coming in on the economic front,	0:26
	there is still nothing to be optimistic about.	0:29
	The economy continues to slide	0:34
	and the bottom is not yet in sight.	0:38
	Let me review the new batch of forecasts that have	0:45
	been coming and the new reports.	0:51
	First we have a semantic question to discuss.	0:57
	Are we in a recession? Yes.	1:02
	Everybody agrees to that now.	1:05
	But, does that mean that we're not in a depression?	1:09
	Nomenclator changes over time	1:17
	and originally it was customary to divide the	1:19
	business cycle up into four phases.	1:23
	There was a period of expansion,	1:27
	then there was the upper turning point,	1:29
	the end of the expansion and the beginning of decline,	1:31
	the peak and then was the period of decline	1:37
	which was called a period of recession.	1:42
	And that continued until you got to the lower turning point	1:45
	to bottom, to the trough	1:50
	and then again you were in expansion.	1:53
	So originally as Wesley Clair Mitchell,	1:59
	America's foremost student of business cycles define things,	2:03
	this is the Mitchell who was for many years	2:09
	a professor at Columbia University,	2:12
	was on of the founders of the	2:14
	National Bureau of Economic Research,	2:15
	which keeps the annals of the business cycle.	2:17
	And who was the teacher of Arthur F. Burns,	2:20
	now the Federal Reserve.	2:27
	A recession that originally was not something which	2:29
	you contrasted with a depression.	2:32
	It was a part of the business cycle,	2:34
	a period of contraction.	2:39
	By this definition, the year 1930 was a year of recession.	2:42
	It was also, as we know, a year of the Great Depression.	2:48
	A depression which, according to the calendar of the	2:53
	national bureau, it began in the middle of 1929	2:59
	and began to gather some downward steam	3:02
	after the stock market crash of October 1929.	3:05
	So much for the original meaning of recession,	3:11
	usage is what establishes the meaning of the word	3:16
	and the present day usage on the word recession is not	3:22
	for the period of decline,	3:28
	it is a euphemism for a depression.	3:30
	In other words, if the difference between a vase and a vase	3:34
	begins at $12, so that anything under $12 is a vase	3:39
	and anything above $12 is a vase.	3:42
	Then the different between a serious depression	3:45
	and a very minor depression, so minor that we needed	3:50
	a new word for it, call it a recession,	3:54
	must begin somewhere.	3:58
	And I would propose for 1975 as the sensible nomenclator	4:00
	that a depression begins with the unemployment rate	4:08
	reaches 10 percent or goes above 10 percent.	4:13
	So any recession in which the unemployment rate goes	4:17
	above 10 percent, might today legitimately be called	4:20
	not a recession but a depression.	4:25
	This must not lead to an easy confusion.	4:31
	I and other economists are being asked all the time	4:36
	these days and with increasing frequency,	4:39
	are we in for another great depression	4:42
	like that of the 1930's.	4:44
	And if we say depression,	4:46
	for the granddaddy of all depressions	4:48
	the worst depression, perhaps the capitalistic system	4:52
	has ever had in terms of it's virulence,	4:54
	in terms of it's duration,	4:57
	you'd really have to go back to	4:59
	Andrew Jackson's time and the Martin Van Buren	5:02
	to have a depression that lasted anywhere as long	5:07
	as that of the 1930's, in fact,	5:11
	if we measure depressions by whether you get back	5:15
	to within shooting distance of full employment	5:22
	however, your reasonable definition of full employment	5:25
	is frayed, then the depression that began in the middle	5:30
	of 1929 did not really end until 1940,	5:34
	when Europe was at war or even possibly 1941.	5:42
	So I guess that even beats the Martin Van Buren depression.	5:47
	Nevertheless, it is reasonable to call the period of	5:53
	the 1870's a depression and not a recession.	5:58
	It is reasonable to call the period of the 1890's	6:01
	a depression and not a recession,	6:04
	even though they didn't get to anything like	6:07
	one in four persons unemployed nor did they have an	6:10
	average unemployment of between a sixth and a fifth,	6:13
	18 percent, which was the average unemployment	6:19
	of the 1930's decade itself.	6:21
	So, when I say that we are with the probability,	6:25
	I guess of about 50/50, little bit less than 50/50,	6:32
	going to be in a depression in 1975.	6:37
	I'm simply calling attention to the fact that	6:41
	the unemployment rate with probability 40 out of 100	6:45
	is quite possibly going to go above 10 percent.	6:50
	And these are numbers worth remembering	6:58
	because already in the first month of the year, January,	7:02
	we recorded 8.2 percent unemployment.	7:08
	Which is the highest that unemployment ever got to in	7:13
	the post World War II period.	7:17
	Well, 8.2 percent is very bad but it's still growing.	7:20
	And we know from previous experience and just by reasoning	7:24
	about the increase in labor force and productivity changes	7:31
	that unemployment tends to be a lagging series	7:36
	even after we hit bottom and even if we do hit bottom	7:39
	say, about next Columbus Day or sometime between	7:42
	Labor Day and Thanksgiving the unemployment number	7:48
	is likely, on a seasonally corrected basis,	7:54
	to continue to grow for a while.	7:56
	So it was in 1961 so it has been	7:59
	after the lower turning point,	8:04
	in most of the post war and pre war	8:07
	recessions and so presumably will it be this time.	8:13
	Therefore, I think that we're going to	8:20
	have inflammatory language.	8:26
	I haven't proposed this in order to be inflammatory.	8:29
	I've proposed it in order that language have the degree	8:31
	of contrast that you need to separate	8:36
	a very mild growth recession like that of 1966, 1967.	8:39
	From a full national bureau recession but still a mild one	8:48
	like 1960, 1961 or even 1969, 1970.	8:53
	We have just been having some interesting comparisons.	9:03
	I noticed in the New York Times, just a little while ago,	9:09
	that Somuel Golden, who covers economic affairs for	9:13
	the New York Times, one of the able correspondents there,	9:17
	prepared a chart on the basis on some numbers which	9:23
	Doctor Geoffrey Moore, the National Bureau of	9:26
	Economics Research gave her.	9:28
	Geoffrey Moore was the commissioner of the Bureau of	9:32
	Labor Statistics before the present incumbent,	9:36
	Julius Shiskin, took over.	9:40
	And he's been a long time disciple of Arthur F. Burns	9:42
	at the Nation Bureau.	9:46
	He as been a pioneer in the leading indicators approach.	9:48
	You've heard me quote his various methods and thoughts	9:51
	many time on these tapes.	9:56
	And these charts, which were prepared for the New York Times	10:00
	on the basis of data supplied by Doctor Geoffrey Moore,	10:04
	compared this recession with all the	10:08
	previous post war recessions	10:11
	and with the Great Depression of the 1930's	10:15
	and as Doctor Moore, so correctly says,	10:17
	it's an extremely rash comparison	10:21
	as yet to put the present recession or depression	10:27
	in the same zoo with the Great Depression of the 1930's.	10:34
	However, if you compare this recession with the greatest	10:40
	previous recession in the post war period,	10:46
	which is the 1957, 1958, the second Eisenhower recession,	10:49
	the middle Eisenhower recession of the	10:56
	three Eisenhower recessions.	10:58
	Then, in certain respects, we are already worse than that.	11:00
	However, in certain other respects,	11:06
	we are not yet the equal of it.	11:07
	The drop in real GNP is greater than that of 1957 and 58.	11:11
	Both in amplitude and in duration.	11:20
	Particularly duration since we realized that	11:26
	we're not yet finished with the drop in real GNP by	11:28
	really any of the forecaster's calculations.	11:33
	More than 14 months of drop.	11:38
	In terms of the drop in the physical index of production	11:41
	of the Federal Reserve, for a long time this was a	11:44
	puzzling recession, very deep in terms of real GNP,	11:46
	but not very deep in terms of the drop	11:51
	in the Federal Reserve board index of physical production	11:55
	and made some observers, Dr. Moore was one of them,	11:58
	doubt that we were even in a nation bureau recession.	12:01
	But in November we got a very steep drop in production	12:04
	and December we got another very steep drop	12:08
	and now we've got the news that the drop in January was	12:11
	the steepest drop in one month of the whole post war period.	12:14
	You have to go back to 1937 to get a comfortable drop	12:19
	and no doubt the end is not yet here.	12:23
	So, I guess when the story is completed,	12:27
	Dr. Moore will find that the drop in the FRB index	12:33
	of physical production does confirm that we are	12:39
	as bad or even worse than the worst previous recession,	12:43
	that of 1957 and 58.	12:47
	In terms of drop in pricing of course,	12:50
	you wouldn't even know that this was a recession	12:52
	because we are in an age of stagflation	12:54
	and instead of having prices drop,	12:57
	all that we are even hoping for is that the rate	13:00
	of increase of prices drop from two digit increase,	13:03
	low two digit increase, to a high one digit increase.	13:08
	If we look at the level of unemployment,	13:15
	well I've already mentioned that,	13:19
	that is the highest in the post war period.	13:20
	So, we've beat the 1957, 58 record.	13:22
	If you look at the level of employment, however,	13:26
	that in duration just began the drop a few months ago	13:29
	and has been one of the puzzling features.	13:36
	My suspension is that if Dr. Moore keeps these records	13:38
	for a long time he will find that more and more labor	13:43
	is becoming and overhead factor in American enterprise	13:46
	and that as we move into, what in the old days have	13:50
	been called national bureau recession, or growth recessions,	13:55
	that people will increasingly in the large cooperations	14:00
	at least, hoard a labor so that the drop in employment	14:03
	will be slow in incoming.	14:08
	Since we've had a big upswing in female participation labor	14:11
	force, you might have thought that that would be	14:17
	counter force but it doesn't seem to have	14:19
	been an effective one.	14:22
	Still, it's very misleading to compare a completed	14:26
	57/58 recession, after all the recession ended in 58	14:31
	in a surprisingly quick time.	14:38
	I can testify from personal remembrance that	14:42
	most of the experts in Washington,	14:46
	including those in the counsel of economic advisors,	14:49
	which whom I was in very close touch at that time.	14:52
	Dr. Sonya, the successor to Arthur Burns in the second	14:57
	Eisenhower term was the chairman of the counsel of	15:02
	economic advisors and I believe with hindsight	15:05
	he's under the impression that before the April turn	15:11
	he was pretty confident it would come	15:15
	but according to my notebooks which I kept at the time	15:19
	and kept careful records of all my conversations	15:25
	of people in Washington.	15:30
	As for example, with one of the leading forecasters at the	15:32
	counsel of economic advisors, the late David Lusher,	15:37
	who was one of the best government forecasters that	15:41
	we've ever had and who served in both Republican and	15:47
	Democratic administrations.	15:49
	The turn was a V bottom,	15:51
	and it came as something of a surprise.	15:54
	Well, you mustn't compare a completed movement with a	15:57
	movement that is still incomplete.	16:01
	Indeed, if you're in the presence of ignorance	16:03
	and you walk along the road on a dark night,	16:07
	you just pick up a road and you walk along the road	16:10
	and somebody says "how long is the road?",	16:12
	the unbiased estimate is to say well it's as long again	16:14
	as what I've already traversed.	16:18
	That's a naive a bit of apriorism but	16:22
	it's the best estimate that could be made without	16:28
	biased under the circumstances and so	16:31
	if we had no other evidence but that we'd been in	16:34
	this recession depression for as long as we have,	16:37
	we'd have to make the noncommittal forecast that	16:40
	it's going to last as long again as it has already lasted.	16:46
	Now, we do have other information.	16:50
	We're not in a situation of beige imbalance ignorance.	16:52
	And so I don't think that very many of us would	16:55
	be willing to concede that we have another 14, 15	16:58
	months ahead of us of continued slide.	17:04
	Quite the contrary, as I reviewed the different	17:09
	forecasters with you, and I shall do you'll	17:12
	see that most people don't think it has that long to go.	17:15
	But, most people think it has long enough to go to	17:20
	make it change Dr. Moore's comparisons as they now stand.	17:23
	Of course he's right, not to put in future forecasts into	17:30
	a present comparisons, there will be time enough	17:35
	when the future becomes the present for Dr. Moore to	17:38
	pick up the situation as it is then.	17:42
	Well no, I was asked whether there is deterioration or	17:46
	optimism in the picture and I've had to say	17:54
	there still is deterioration.	17:58
	To illustrate quantitatively how much deterioration	18:03
	there is, let me just quote from some year end estimates	18:07
	that I rounded up for the financial times of London	18:13
	disappeared in the December 31st 1974,	18:18
	that is the new years issue of the London financial times	18:22
	as one of the many annual year end forecast	18:27
	that I have prepared for them.	18:31
	And I said that the experts had been so poor	18:35
	in 1974 that I wasn't going to single out any one of them	18:40
	and put in his forecast as I had done in earlier years	18:45
	but I was going to take montage of the different forecasters	18:51
	and I must confess that I shaded this montage	18:56
	in a pessimistic direction	19:01
	because I found that you can only win by second guessing	19:04
	the two optimistic experts.	19:09
	Until the wind blows in a different direction	19:12
	that's the line I'm going to take down in the office pools.	19:15
	However, we've only come barely two months,	19:19
	well we've come two months since I've prepared the article	19:24
	but less than two months since I've have	19:27
	a chance to change it.	19:28
	And even though I second guessed the experts	19:31
	in a pessimistic direction, I didn't do so enough.	19:33
	I just had a telephone call from Swedish publication	19:37
	and they asked me whether that forecast	19:43
	still stood and I had to tell them no.	19:46
	So let me indicate what the changes were.	19:49
	The changes were both in real GNP growth	19:53
	and also in the rate of inflation.	19:59
	Very much changes in the unemployment rate	20:04
	and some downward rate in short term interest rates	20:07
	and even a little bit in long interest rates.	20:11
	My profile for the year, when I was writing early	20:16
	in December for the year 1975 was for	20:20
	minus four percent real growth annual rate	20:23
	in the first quarter minus two percent.	20:26
	And then the turn, coming just about the middle	20:29
	of the year, you see I was a pessimist	20:32
	compared to the experts at that time.	20:35
	But not a sharp V bottom as in the Paul McCracken fashion.	20:37
	But only to a plus three percent annual rate of real growth	20:43
	in the third quarter and plus four percent annual	20:46
	rate of growth in the fourth quarter.	20:48
	However, my new numbers are	20:52
	minus nine percent in the first quarter,	20:54
	that's the current quarter we're in now.	20:57
	Minus seven percent in the second quarter,	20:59
	minus two percent in the third quarter	21:02
	so that the turn does not come until	21:04
	well really until after Columbus Day	21:10
	or just about that time.	21:13
	Minus two percent in the third quarter and	21:17
	a very week upturn in the fourth quarter, plus one percent.	21:19
	That means that the unemployment rate for the first quarter	21:23
	might well be average out for the quarter	21:28
	eight and a third percent.	21:31
	Nine percent for the second quarter.	21:34
	10 percent for the third,	21:36
	and 10 and a third percent for the fourth.	21:39
	Now if these guesses, and they're no more than that,	21:42
	turn out to be in the ballpark then by my present definition	21:47
	we shall go down in the history books	21:52
	as having a Ford depression or	21:54
	as I am discussing in a Newsweek column perhaps	21:58
	history will record this as the Arthur Burns depression.	22:06
	Short term interest rates I thought would not come down	22:12
	much because I didn't think the prices	22:15
	were going to come down a lot.	22:17
	But with this new amount of weakness in the economy,	22:18
	then naturally I've shaded downward my price numbers so that	22:21
	if prices grow eight percent in the first quarter	22:28
	by the implicit price deflator, seven percent in the	22:32
	second quarter, these are annual rates,	22:35
	six percent in the third,	22:37
	then that's about as low as I put them.	22:38
	And the fourth quarter, since we'll begin to go up,	22:42
	I put them again at six percent.	22:44
	But I must say that I may be overly pessimistic here.	22:47
	When you consider that we are really discussing a	22:52
	depression and not a recession, there's no reason why with	22:55
	a good harvest and a little luck on the oil cartel front,	22:59
	we couldn't get some improvement in the rate of inflation.	23:03
	God knows we've sacrificed enough for it.	23:08
	We've invested enough in blood and lost treasure	23:11
	that we ought to be able to get something like that.	23:15
	Well, if the economy is as week as I've now outlined it	23:20
	to be and I've by no means the most pessimistic on the block	23:25
	among the forecasters, then I think short terms interest	23:28
	rates do have a way to go.	23:32
	And commercial paper rates if they're seven percent	23:35
	in the first quarter, they'll be down to six percent	23:38
	in the second quarter and that could mean	23:41
	treasury bill rates below that and federal funds rates	23:43
	as the Federal Reserve is pushing against the strength	23:47
	as I hope they'll begin to do a little harder.	23:50
	Could be very sloppy indeed, could be five percent and	23:53
	days in which you're four percent and below.	23:57
	But since the recovery is then going to be,	24:00
	begin to be in sight,	24:04
	the short term commercial paper rate might go	24:06
	to six and a quarter percent in the third quarter	24:09
	and be on the rise to six and three quarters percent	24:11
	in the last quarter of the year.	24:14
	This is consistent I suppose just on the back of the	24:16
	envelope calculation with long term bond rates coming down,	24:20
	I thought that they might be nine point two percent	24:25
	in the first quarter, well let's say nine percent	24:28
	on corporate bonds with a calendar increasing.	24:31
	Then down in the second quarter, eight and a half percent.	24:35
	But not getting really below that very much,	24:39
	maybe at eight and three quarters percent	24:43
	in the third quarter and	24:45
	back at nine percent back in the fourth quarter	24:48
	where we were at the beginning of the year.	24:51
	Well, that shows you that the forecasts are not chiseled on	24:56
	tablets for all times.	25:04
	They're subject to a frequent change.	25:07
	If you must forecast, do forecast often	25:12
	and that is my own strategy.	25:14
	What is the policy background for all this?	25:25
	What am I presuming is gonna happen to monetary policy	25:28
	and to fiscal policy and what is not exactly the same thing	25:33
	what do I think ought to happen?	25:37
	First it should be noted that the Federal Reserve	25:40
	is not pushing hard enough on the string.	25:44
	The weakness in the business economy is proceeding	25:47
	more rapidly to undermine the demand for money	25:53
	than the increase in the supply efforts	25:57
	of the Federal Reserve to increase the supply of money.	26:01
	The result is that we still for the last numbers	26:05
	that we have for the last month and a half	26:11
	for the last three months, show very disappointing	26:14
	rates of growth to the money supply	26:20
	It's not that interest rates aren't coming down,	26:21
	they are coming down, but the Federal Reserve is	26:23
	reluctant to let the markets become sloppy with	26:28
	respect to short term funds.	26:32
	And therefore, it is constantly surprising itself	26:35
	and disappointing itself because each month	26:39
	when the open market committee meets again	26:42
	it find that it's targets for the money aggregates	26:45
	of the last were not realized.	26:49
	A couple of times in the business cycle,	26:55
	I find my self joining the monitorists.	26:57
	It's not that I suddenly see the light	27:01
	on the contrary I remain a skeptic with respect to	27:07
	those doctrines which are peculiar to the monitorists	27:12
	and most things that have happened in the	27:18
	last few years have confirmed me in my skepticism.	27:22
	The high water point in which mother nature	27:27
	seem to be going a little bit in the direction	27:31
	of the monitorists although in my reading of	27:33
	mother nature, not very far in that direction	27:36
	was reached several years ago and since then,	27:40
	the monitorist forecast and the insights	27:42
	which are peculiar to monitorism	27:47
	and which cut across and are different from	27:49
	the non monitorist have turned out, it seems to me,	27:54
	to be disappointing and misleading.	28:00
	But still, the monitorist who want to get the rate of growth	28:05
	of money supply up to their steady figure of four to	28:11
	five percent at a time where the number is minus	28:15
	10 percent per annum or only one percent over a longer	28:19
	period of time, I am rooting for the monitorist.	28:25
	I'm rooting the same direction that they are.	28:29
	I'm scolding the Federal Reserve for not pushing	28:31
	hard enough on that string, for paying too much	28:34
	attention to keeping interest rates from sliding too fast.	28:37
	All the accusations which the monitorist make of the	28:43
	manager of the open market desk, I join in those.	28:48
	Because where we'll part company is that when we get the	28:54
	rate of growth of the money supply back to four to five	28:58
	percent then I will continue and want the rate of growth	29:01
	of money supply as the economy continues to slide	29:06
	to go above four to five percent and the moniorist	29:10
	will part company with me because	29:16
	they will stand pack at that point.	29:18
	However, we have a rendezvous to meet again once the	29:21
	bottom has been reached.	29:25
	Once we are begging to gain some upward momentum.	29:28
	Once looking ahead the six months and the nine months	29:33
	one must look ahead for the lags of	29:37
	effect of current monetary policy.	29:42
	Then I will be counseling the Federal Reserve to be	29:45
	taking in slack to slow down the rate of growth	29:48
	of the money supply and indeed to	29:53
	overshoot below the four to five percent rate.	30:00
	But there'll be a moment there, a happy moment when	30:06
	both the monitorist and I shall be advocating	30:10
	a four to five percent rate of growth.	30:13
Speaker	There's a--	30:15
Paul	Let me close on a note of a partial cheer.	30:16
	First there's no evidence that we're gonna go into a	30:19
	great depression like that of the 1930's.	30:22
	And secondly, it may be that we've reached the inflection	30:24
	point that the last part of January may have been	30:27
	the period of most rapid slide.	30:30
	Now if that's comfort, I give it to you.	30:32
Speaker	If you have any comments or questions	30:37
	for Professor Samuelson, address them to Instructional	30:39
	Dynamics Incorporated, 450 East Ohio Street,	30:41
	Chicago, IL 60611.	30:45