Tape 188 - Assessing the recovery

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-	Welcome once again as MIT Professor Paul Samuelson	0:03
	discusses the current economic scene.	0:05
	This series is produced	0:07
	by Instructional Dynamics Incorporated.	0:08
-	The third quarter has ended, and we don't yet know	0:17
	what the real growth of GNP was in the third quarter.	0:22
	But the estimates have been coming in,	0:28
	and I think it's fair to say	0:31
	that with each passing month of the third quarter,	0:33
	they have not been going lower.	0:37
	If anything, the consensus forecasters	0:40
	have been tending to raise their estimates.	0:43
	Just to give you one straw in the wind,	0:46
	a straw that is not in the middle of the range	0:51
	of the consensus forecasters, it's a little bit extreme,	0:54
	but it's an interesting straw.	0:57
	Let me comment on the report on the recovery	1:00
	that was issued by the new Congressional Budget Office.	1:05
	The Congressional Budget Office is an innovation	1:10
	in our system of government.	1:14
	The Federal Reserve has long had a career staff	1:17
	at the call of the Federal Reserve Board,	1:25
	and at each Open Market Committee	1:30
	of the Federal Reserve Board,	1:33
	prepared to lay out for the Open Market Committee	1:35
	what have been current trends,	1:39
	and what are the likelihoods with respect to future trends?	1:42
	Every important agency in the Executive	1:48
	also has a macroeconomic monitoring research staff.	1:52
	Of course, the Council of Economic Advisors.	2:00
	the Treasury, the Bureau of The Budget,	2:03
	Office of Budget and Management.	2:07
	These constitute the so-called troika who meet	2:11
	and determine, for the President,	2:15
	what his policy options are.	2:19
	Congress has been at something of a disadvantage	2:26
	in this adversary procedure.	2:29
	It could sit and have hearings,	2:31
	and an occasional congressional committee,	2:36
	like the Joint Economic Committee,	2:39
	might have an in-staff set of macroeconomists	2:40
	who occasionally did forecasts.	2:48
	But the Congress at large	2:51
	has not had access to expert opinion.	2:54
	And so the Congressional Budget Office was set up	2:58
	with Alice Rivlin, Dr. Alice Rivlin,	3:06
	a distinguished economist who's served a tour of duty.	3:11
	I think it was in HEW.	3:15
	I believe it was during the Nixon term.	3:18
	She was previously just most recently at Brookings.	3:21
	She's a very respected figure,	3:26
	not only gave a great deal of joy to those	3:28
	who've been concerned that career women	3:33
	in the professions get a fair shake	3:37
	when Alice Rivlin was appointed,	3:39
	but on her own merits there was a great deal	3:41
	of approval for this.	3:45
	And she has assembled, in remarkably fast time,	3:46
	an excellent staff.	3:52
	As somebody has said she landed running,	3:53
	and they put out a report in June,	3:59
	and they put out another report in September.	4:02
	And periodically, they will outline for the Congress,	4:05
	what the various policy options are.	4:09
	Their inflexible rule is not themselves	4:13
	to make any policy recommendations.	4:16
	And I hope they stick to that rule,	4:19
	because the more liberal half of Congress,	4:22
	I think welcomes the Congressional Budget Office,	4:29
	and the more conservative half of Congress	4:33
	is a little bit doubtful.	4:37
	Dubious as to whether this is or isn't a good thing.	4:43
	The last thing in the world	4:47
	that the conservative half of Congress wants	4:49
	is a Brookings Institution inside of Congress.	4:53
	They don't want a bunch of technocrats,	4:56
	members of the Galbraithian Technostructure,	4:59
	who tell them what to think and what to do,	5:02
	and push them around.	5:05
	Now, I take it that whatever one's persuasion	5:07
	as a legislator,	5:12
	having information available on what's happening,	5:15
	and having analysis of what experts	5:18
	across a broad spectrum think,	5:23
	are the likelihoods that will happen from different policies	5:25
	is going to help one rather than hurt one.	5:31
	Unless you have a very weak case,	5:34
	so that ostrich-like, you wanna keep your head in the sand	5:37
	and not know the arguments against your case.	5:41
	I will hope that ultimately,	5:45
	the Congressional Budget Office	5:47
	will turn out to be the good right hand	5:48
	as well as the good left hand of Congress.	5:51
	That's by way of preamble.	5:57
	Now, what did they put out in their report	5:58
	early in September?	6:03
	They said that the economy in the last half of 1975	6:06
	looks to be very strong indeed.	6:11
	In fact, their point estimate number under present policies	6:13
	is 8% real growth in the third quarter, just behind us,	6:19
	and 8% growth, annual rates, of course,	6:23
	seasonally corrected, once again in the fourth quarter	6:27
	averaging 8% for the last half of the year.	6:30
	When the report came out early in September,	6:33
	this was considered to be rather an oddball viewpoint	6:37
	because they were one or two percentage points	6:40
	above the consensus forecasters.	6:47
	However, it now looks as if they've got a fair chance	6:51
	of being right in the third quarter.	6:57
	For one thing, the second quarter data	6:59
	had been revised upward,	7:01
	so we start out from a springboard	7:03
	not of a small minus rate of growth in the second quarter,	7:05
	but about a 1.9, call it 2%, annual rate of growth	7:09
	in the second quarter.	7:13
	And to add 6% on top of that in one quarter	7:15
	isn't quite the stretch as to add something	7:19
	more than 8% would be.	7:23
	Furthermore, there is reason to think	7:26
	that autos have been strong in the middle of September.	7:29
	Middle 10 days, first 10 days of September.	7:34
	And auto sales, of course, are a very important tail	7:37
	that helps to wag the dog.	7:42
	And, as a matter of fact, the tail in this case	7:44
	constitutes part of the poundage and structure	7:47
	of the animal.	7:51
	We have to be careful.	7:53
	This year, General Motors is permitting its automobiles	7:56
	to be sold before their official introduction date.	8:01
	That was not true last year.	8:04
	Last year, there was a bulge in August.	8:06
	And in September.	8:08
	It was a bulge in sales of domestic old model year cars	8:10
	as people rushed to jump the gun	8:16
	to buy at the lower prices of the old model year.	8:21
	But also, even-steven at the same price, they didn't care	8:26
	for the new model year cars last year.	8:30
	The new model year cars, they thought,	8:34
	like the new model years for so many years now	8:36
	in this pollution-conscious age,	8:40
	would have more and more gadgets and guck on them,	8:43
	which would improve the atmosphere.	8:46
	There's some evidence that the pollution controls	8:49
	have worked reasonably well, in fact surprisingly well,	8:52
	in helping with respect	8:57
	to most components of atmospheric pollution.	9:00
	But they have done this somewhat at the expense	9:03
	of gasoline mileage and efficiency of operation.	9:07
	However, the new American cars show now	9:11
	a great improvement in gasoline mileage,	9:17
	and the stories, I won't say the fictions,	9:19
	that can be told about them are also very pleasant to hear.	9:23
	The General Motors has introduced a very small Chevrolet,	9:29
	the Chevette I think it is,	9:34
	which is comparable in its claims	9:36
	with the claims of the small foreign cars.	9:40
	If you take a Japanese Honda	9:43
	as the ideal small, light car	9:45
	that produces almost 40 miles per gallon	9:48
	on certain test dynamometer conditions	9:52
	that simulate what happens in the open highway,	9:57
	well, the Chevette does 40 miles per hour.	10:01
	And that means that under conditions	10:04
	that simulate city driving, it will do very well indeed.	10:08
	Even if any one of us wants	10:14
	to shade the numbers from the tests.	10:17
	What we know is the tests at this value	10:22
	that if one car in city driving is supposed	10:25
	to get 24 miles per gallon	10:29
	and another car's supposed to get 20 miles per gallon,	10:30
	whether you believe in the 24 or the 20,	10:33
	I think you have good reason to believe	10:35
	that you will get better gasoline efficiency mileage	10:38
	in the 24 than in the 20 car.	10:43
	So we have had a strong automobile sales.	10:48
	Most important, I think though,	10:55
	is the fact that the inventory decumulation has tapered off.	10:57
	In fact, it may have tapered off a bit ominously	11:04
	because the preferred scenario would be	11:08
	to get rid of the excess inventories	11:12
	even if you don't get rid of them at the same rapid rate	11:15
	that manufacturing industry was getting rid of them	11:19
	in the second quarter.	11:23
	It now appears as if quite a number of people	11:24
	have started to accumulate inventory.	11:28
	Let's take retailing as an example.	11:29
	Last autumn, the American economy collapsed	11:33
	at really almost an unprecedented rate.	11:38
	There is no method of forecasting that I know of	11:41
	which correctly picked up the strength of the decline.	11:47
	Let me just review that fact.	11:55
	You will remember,	11:57
	from things that've been said on these tapes,	11:58
	that at the summit meeting, the bulk of the economists,	12:01
	23 out of 28 by actual head count,	12:04
	were pessimistic about the outlook	12:08
	and thought that President Ford had	12:10
	a problem of recession to worry about,	12:12
	which was becoming as important,	12:15
	or they said more important,	12:18
	than the problem of inflation.	12:21
	As I recall, there was some difference of opinion on that.	12:25
	Dr. Beryl Sprinkel, for example,	12:29
	who is a respected monetarist	12:32
	from the Harris Trust Bank in Chicago,	12:34
	was, according to my notes on the meeting,	12:38
	the most optimistic.	12:41
	He thought that the economy was in quite good shape.	12:42
	And I think I've mentioned to you	12:45
	that the Federal Reserve Bank of St. Louis	12:47
	thought that the economy was in pretty good shape.	12:52
	And it seems to me that according to their theories,	12:54
	they had reason to be optimistic.	12:59
	I have before me a plot,	13:03
	which I have been keeping track of over the months	13:06
	and over the quarters and years,	13:12
	of what's happening to the trend of the money supply.	13:15
	Perhaps some of my listeners will be surprised	13:21
	'cause they don't think of me as a monetarist.	13:24
	I will take help from any quarter.	13:27
	I'll take help from angels.	13:31
	I'll take from help from the devil	13:34
	if it'll help me in my forecasting.	13:36
	And my position has been,	13:39
	ever since some distant date in 1938 or '39,	13:44
	that not only does money matter,	13:51
	but money matters quite a lot.	13:54
	So I like to watch what's happening with the money supply.	13:57
	If I plot the supply of money,	14:02
	let's say M1,	14:08
	from the fourth quarter of 1969	14:10
	until the second quarter of 1974,	14:13
	and people at the summit wouldn't	14:18
	have had much more than that,	14:20
	they would've had some readings into the third quarter	14:22
	because the summit in September, September 5th,	14:26
	was still well in the third quarter.	14:29
	If I plot the supply of money,	14:32
	not its rate of change,	14:35
	but the supply of money,	14:36
	then I find that the Federal Reserve	14:38
	seems to have done a remarkable job.	14:41
	I can put a black thread through that time series	14:43
	and fit it remarkably well.	14:47
	The trend rate of growth is at 6.58%.	14:52
	This connects the actual values	14:59
	at the beginning of the period	15:01
	and the end of the period.	15:02
	Now, the fit is not perfect.	15:04
	The money stock runs ahead of this trend occasionally,	15:08
	but it isn't very long	15:12
	before the Federal Reserve corrects that.	15:13
	And then it typically overshoots	15:18
	on the other side a little bit.	15:21
	I don't think that most monetarists	15:23
	who are not perfectionists	15:26
	would have anything to complain about	15:30
	if, instead of looking at the rate of growth	15:32
	of the money supply,	15:35
	and looking at the unrevised figures as they come in,	15:36
	that is a method calculated to make	15:39
	the adrenaline of any observer run at the time.	15:41
	If they look at this smoothed behavior	15:44
	and see really how smooth it is,	15:49
	then it does appear that the Fed	15:51
	must be either paying a lot of attention	15:53
	to the money aggregates in their own right,	15:57
	or they are conditioned to fear	15:59
	the stinging criticism of the monetarists	16:04
	and they therefore pay attention	16:06
	to the rate of growth of the aggregates.	16:09
	And so if I cover up the page of what happened	16:13
	after, say, August 1974,	16:19
	there is nothing in the money supply data	16:26
	which would warn me of anything ominous about to happen.	16:30
	Let's make that a little more specific.	16:38
	Let's plug into the Federal Reserve Bank	16:40
	of St. Louis's regression model, the numbers.	16:46
	And you don't get anything very ominous.	16:50
	And since there's a distributed lag,	16:55
	even if we think that that lag	16:58
	is a little bit shorter than it used to be,	17:00
	but of course the evidence	17:04
	for its being a lot shorter wasn't as strong in 1974	17:05
	on September 1, on Labor Day, say,	17:12
	as perhaps somebody who's flexibly ready	17:15
	to modify his hypotheses	17:19
	on the basis of little sample of recent data	17:20
	would be inclined to do,	17:23
	you would get a quite cheerful outlook.	17:25
	And yet, we know that what ensued	17:30
	was the fastest decline	17:35
	and the longest-lasting decline	17:38
	in the whole post-war period.	17:42
	It shows that even those who make claims	17:44
	that having a steady rate of growth of money supply	17:51
	will reduce some of the variability	17:54
	would be ill-advised to put in their prospectus	17:57
	that it would wipe out all of the variability,	18:02
	or most of the variability.	18:06
	It would wipe out, it would be fair to say,	18:08
	a substantial amount.	18:10
	Well, the subsequent result was a debacle.	18:11
	I think it had a lot to do with what was happening	18:18
	to the automobile industry,	18:21
	and some other industry showings.	18:22
	There is a role in economic history for history	18:24
	as against for regular and repeated patterns.	18:28
	Indeed, the regressions of monetarism	18:33
	tended before this period,	18:38
	several years before this period,	18:42
	to have R-squares of about .5, .6,	18:44
	which means that the unexplained variance was about 40%.	18:50
	What we've had in recent years,	18:53
	and this goes back to before 1974,	18:55
	according to quite a number of the different	18:58
	variants of monetarism,	19:01
	which I've been monitoring,	19:02
	we've had more than the usual amount	19:06
	of unexplained variants.	19:08
	Well, you'd have done better if you had used	19:13
	a certain eclectic GNP model,	19:17
	in which money also matters.	19:22
	You'd have done better if you'd used the MIT pin,	19:24
	Social Science Research Council model	19:28
	of Professor Modigliani.	19:30
	You'd have done better if you used the Wharton model,	19:32
	the University of Michigan model,	19:34
	or if you had used the Otto Eckstein data resources.	19:36
	But you would still not have realized	19:41
	the virulence of the decline,	19:44
	and that's, I think, because the virulence	19:47
	was due to business cycle factors	19:52
	not of the repetitive and predictable sort.	19:58
	Now, just to be sure that one is not misunderstood,	20:03
	in the subsequent period after the third quarter	20:07
	and during the third quarter,	20:15
	the rate of growth of money supply did fall off.	20:17
	If you look at the actual targets of the Federal Reserve,	20:23
	which we now have,	20:27
	and I commend to you a recent discussion	20:28
	in the Morgan Guaranty monthly letter,	20:32
	it seems to me an excellent discussion,	20:34
	also an excellent discussion	20:37
	of the business outlook at this time,	20:39
	you'll see that the Fed thought of itself as loosening.	20:43
	But the demand for money	20:47
	as a result of the weakness in the economy	20:49
	was outrunning the Fed's willingness	20:51
	to lower its interest rate targets.	20:56
	The money supply did fall off.	20:59
	Now, if you believe that money acts simultaneously,	21:01
	something that we've been taught	21:05
	by bitter experience not to believe,	21:07
	but you may remember there was a Laffer Ranson model	21:10
	that was used by George Shultz	21:15
	when he was the coordinator	21:17
	of the domestic economic scene of the Nixon Administration,	21:21
	and they said that the money supply	21:24
	in the contemporaneous quarter	21:27
	determines what happens to the flow of money GNP.	21:29
	Unless you believe that,	21:34
	you would not be able to explain the weakness	21:36
	that set in the economy in September, October, November,	21:39
	by the weakness of the money supply	21:44
	in September, October, and November.	21:45
	Only the weakness of this last spring	21:48
	could so be explained,	21:51
	but, of course, by the same token,	21:53
	what happened was that the recovery	21:57
	we now think came from April.	21:59
	Or very early in May.	22:03
	And again, you have to much shorten your lags.	22:04
	Now, you can track history	22:10
	and put in dummy variables	22:12
	of shortening and lengthening.	22:13
	Whatever is needed ex post	22:15
	in order to wipe out your residual error	22:18
	that you made ex ante	22:21
	by using past patterns of experience.	22:23
	But everybody knows,	22:25
	who has done a lot of work over a period of time	22:27
	in economic time series,	22:30
	that that way lies disaster	22:31
	to follow the data so flexibly	22:34
	is to use up all your degrees of freedom	22:37
	and to be saying nothing.	22:40
	To be saying nothing more than, for example,	22:41
	if I have seven points and seven constants	22:45
	in a six degree polynomial,	22:50
	I can make my sample points be fitted exactly	22:53
	by the fitted polynomial.	22:56
	But the cost of that, the price of that,	22:59
	is that you predict very badly	23:02
	once you get some new observations.	23:04
	Well, to return to the present situation,	23:08
	I've told you what	23:14
	the Congressional Budget Office report said,	23:14
	and its most interesting finding, to me.	23:18
	But the headlines found	23:22
	as the most interesting finding not simply that,	23:24
	that the economy couldn't be strong	23:27
	in the last half of 1975,	23:28
	but that the present policy mix	23:31
	unless Congress were, for example,	23:37
	to extend the tax cuts,	23:39
	would be likely in the year '76	23:44
	under the announced Federal Reserve program	23:47
	to result in a tapering off	23:51
	of the strength of the recovery.	23:56
	That would mean we had a very short recovery	23:58
	from a very long decline.	24:01
	And by post war standards, a fairly deep decline.	24:04
	Now, the Congressional Budget Office	24:09
	did not say that the recovery would be too weak.	24:11
	They simply showed what the effects would be	24:14
	of different fiscal stimuluses,	24:17
	of different monetary stimuluses,	24:20
	they, of course, gave less emphasis to that	24:24
	not because they thought that the money factor	24:26
	was less important than the fiscal factor,	24:29
	but because it's not the direct mandate of Congress	24:32
	to set a monetary targets.	24:35
	A proposition which, by the way,	24:38
	I think that the Congressional Budget Office should rethink	24:39
	because the Federal Reserve is now	24:42
	more and more responsive to Congress.	24:44
	And they did another thing,	24:48
	which I think is extremely interesting,	24:49
	namely, they showed what the differential rate of inflation	24:51
	would be from the different policies of stimulus	24:54
	and of restraint.	24:59
	They did something very useful, in my judgment.	25:04
	They didn't address themselves	25:07
	to what the effect would be on inflation	25:10
	just in this next year or the year after,	25:12
	they also addressed themselves	25:14
	into what would be the effect upon the price level	25:16
	and the rate of inflation in 1980.	25:19
	Because you always can buy a little expansion	25:23
	in the very short run with very little cost	25:26
	in terms of the price level.	25:29
	However, it does catch up with you.	25:31
	And the Congressional Budget Office, in my opinion,	25:33
	can only benefit from leaning over backwards	25:37
	in being non-liberal, non-conservative,	25:40
	non-radical, non-reactionary.	25:45
	They should take into account, eclectically,	25:48
	any reasoned view of how fiscal stimulus, for example,	25:51
	will add to the rate of price inflation.	25:58
	And they should give more weight, really, I think,	26:01
	this is just my own tactical opinion,	26:06
	to the non-liberal side of the matter.	26:08
	Because I regard them as on trial	26:10
	with respect to at least half of the Congress.	26:13
	And I think that the more objective they are,	26:16
	the greater will be their long-run credibility.	26:19
	And I say this, as you know,	26:23
	with some interest in the liberal side.	26:25
	Now, there's one thing which they did not mention.	26:29
	And it's so important that I hope on a later tape	26:33
	to devote most of my time to discuss it.	26:38
	Namely, the fact that this will be an election year.	26:41
	1976 will be an election year,	26:46
	and I say quite seriously and soberly	26:50
	that I think that any ex ante forecaster	26:55
	should build into his conditional probabilities	26:58
	that essential fact.	27:02
	What happens in the election year, economically,	27:08
	is thought to be very important as a determinant	27:12
	of how an incumbent fares	27:16
	and how rivals to the incumbent will fare at the polls.	27:19
	And I would like to review with you	27:23
	some of the evidence on that matter	27:26
	at greater length.	27:29
	Now, this does not mean that if the economy	27:32
	is allowed to weaken into the summer of 1976	27:36
	and into the early fall,	27:40
	that you can then turn on the tap again	27:43
	unless you believe in extremely short lags	27:47
	between policy stimulus and effect.	27:54
	And I don't think that the totality of the evidence	27:57
	will support the weight of such a hypothesis.	28:01
	Then, what is to be done must be done	28:06
	not long after the turn of the year at the latest.	28:10
	In other words, we're talking about	28:14
	the budget period itself.	28:16
	And I believe that if there are signs	28:18
	that the economy is beginning to weaken,	28:21
	and particularly if the weakening in the real economy	28:25
	should be accompanied by some tapering off	28:29
	in the rate of inflation,	28:33
	and anyone who believes in supply and demand	28:35
	would, I think, want to concede	28:40
	that there was some such effect,	28:44
	well particularly under those circumstances,	28:46
	it seems to me that all that the Executive has to do	28:48
	is to change the stiffness of his vetoing	28:51
	of congressional expansion.	28:58
	As I'll develop the notion,	29:01
	we may once again have the case	29:03
	where a democratic majority in congress	29:05
	by its expansionism	29:08
	helps to re-elect a republican presidential candidate.	29:11
-	If you have any comments or questions	29:20
	for Professor Samuelson, address them to	29:22
	Instructional Dynamics Incorporated,	29:24
	450 East Ohio Street, Chicago, Illinois, 60611.	29:26

Item Info

Title:

Tape 188 - Assessing the recovery

Date:

October 1975

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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ref2479_25d
samuelsonpaul
duke:325193
pstau001170
ark:/87924/r40g3hf1j
5739b0e5-3861-4fe8-a80e-82501965ccaf

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Tape 188 - Assessing the recovery

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Economists' Papers Archive

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