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Tape 193 - State of the Union

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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
	President Ford has now proposed	0:12
	his State of the Union Address and his budget.	0:14
	What is your evaluation on it?	0:17
-	There are no particular surprises	0:23
	in any of the official State messages	0:25
	which have come our way nor have there been any surprises	0:28
	in the reactions to them.	0:33
	So, let me concentrate on	0:35
	what are the essential parts	0:40
	of President Ford's proposal	0:44
	and let me do this	0:47
	against the background of	0:49
	Ronald Reagan,	0:52
	his rival for nomination	0:53
	by the Republican Party,	0:57
	what his particular fiscal views are.	0:59
	I think the key note of the budget,	1:04
	which we have received recently,	1:07
	and the State of the Union message,	1:10
	which came a little bit earlier,	1:12
	is that President Ford is still	1:14
	pressing the line	1:18
	that the public sector is	1:20
	too large in the U.S economy,	1:24
	that the only way to get the public sector down	1:28
	is to reduce simultaneously the level of public expenditure	1:32
	and the	1:37
	level of taxation.	1:39
	Now, this reflects a value judgment	1:42
	which will be congenial	1:46
	to many people in the United States.	1:49
	It will be particularly congenial to many people	1:52
	in the United States who have, historically,	1:55
	voted Republican and it will be congenial	2:00
	to many Democrats who,	2:03
	intermittently,	2:06
	pass over and vote the Republican ticket.	2:08
	By and large, if you divide the U.S. population	2:14
	into two halves,	2:18
	at the median income level	2:21
	measured by family and individual income,	2:24
	which I suppose these days	2:28
	is somewhere around 13, 14,000 dollars,	2:30
	the purely economic interests	2:35
	of the upper half	2:39
	of the income group	2:42
	could be favorably served	2:45
	by pushing in the direction of the President's proposal.	2:48
	I say could be for reasons which I'll develop in a moment.	2:55
	By and large, the long-run economic interests	3:01
	of the lower half	3:06
	by income of the population would,	3:09
	in some degree, be hurt by the	3:13
	President's proposals	3:18
	and pushing in the direction of the philosophy	3:20
	of the President's proposals.	3:22
	I say by and large because there certainly	3:24
	are some retrenchments in government expenditure	3:27
	and some alterations in the way the public sector	3:32
	manages its business,	3:36
	which would	3:38
	save taxes,	3:41
	more importantly would save national resources,	3:44
	and yet which would, only to a limited degree,	3:49
	be harmful to anybody.	3:53
	If some ...	3:57
	super demon has the ability	4:01
	to increase efficiency	4:05
	of government operations	4:08
	without affecting the scope	4:10
	of those activities,	4:14
	we could help everybody	4:16
	by having more available	4:19
	to give to the poor and having more left	4:22
	by the more affluent to enjoy	4:26
	as they conceive the good life.	4:28
	But by and large,	4:33
	there are no	4:35
	proposals of administration	4:38
	or of efficiency	4:40
	which are important	4:43
	in changing the efficiency	4:47
	of the way we run	4:50
	the public sector in the United States.	4:51
	So, what we have here is a pretty clear-cut	4:53
	value judgment choice	4:56
	between a smaller public sector	5:00
	with the gains that that implies	5:04
	to a part of the population	5:07
	and the harms	5:10
	that that implies	5:12
	to still another part of the population.	5:14
	It's always difficult to know what the response is	5:19
	to what is not	5:24
	a novel proposal,	5:25
	it's what the President has been pushing as a line for ...	5:27
	all the time he's been in office,	5:35
	but in particular for the last eight months or so.	5:36
	I don't judge that the general reaction	5:42
	to his proposal	5:46
	has been terribly enthusiastic	5:47
	nor, as far as I can now judge,	5:49
	has it been terribly adverse.	5:53
	It's not like	5:56
	the reaction which has greeted	5:59
	the Reagan proposal	6:03
	to take 90 billion dollars of federal expenditure	6:05
	and cut it out,	6:11
	reallocate ...	6:13
	by some unspecified means	6:15
	the tax resources of the Federal Government	6:19
	to the states and let the states pick up that fraction,	6:22
	perhaps small fraction, of the 90 billion dollars,	6:27
	which, in the infinite wisdom	6:30
	of the grass-roots at the state and local level,	6:33
	the populace decides is really	6:35
	worth the sacrifice	6:39
	of their private-life consumption.	6:41
	That proposal of Ronald Reagan,	6:45
	written, one is told, by his brain trust	6:50
	and the speech writers	6:55
	and, as in the	6:57
	case of McGovern in the 1972 election,	6:59
	perhaps not completely explained to the candidate,	7:04
	has shown some signs of getting Ronald Reagan	7:09
	in trouble, politically.	7:12
	Of course, when you get in trouble, politically,	7:15
	with a part of the population, that puts you in very solidly	7:18
	with another part of the population.	7:23
	And part of the appeal of Ronald Reagan,	7:26
	something which I suppose is feared by	7:29
	the White House confidants of President Ford,	7:31
	is that there will be a resonate response	7:36
	within the country to this proposal of Ronald Regan.	7:38
	However, New Hampshire is not the best environment	7:43
	to try out a balloon of this sort	7:48
	because...	7:51
	New Hampshire has the,	7:54
	shall I say, distinction of being a state without	7:56
	an income tax ...	8:01
	well, without a full-fledged income tax,	8:03
	and also without even a broad-based	8:05
	sales tax.	8:09
	So it looked to the	8:10
	New Hampshire grass-roots people,	8:13
	who are against state taxation,	8:16
	that they were being the pass baby	8:18
	and they had no	8:22
	stomach to ...	8:25
	give baby even that minimal amount of attention and care,	8:27
	which even New Hampshire thinks baby will require.	8:33
	I don't know that that's a particularly logical reaction	8:39
	because it certainly could be the case that New Hampshire,	8:43
	under a Reagan proposal would,	8:48
	one way or another, gain enough	8:51
	in released taxation,	8:55
	that doesn't go from New Hampshire to Washington	8:58
	to be able to afford this, but it would have to be done	9:01
	at the grass-roots level	9:06
	and through something called	9:08
	New Hampshire taxation.	9:11
	And the New Hampshire people are against taxation.	9:13
	So, this required a great deal of explaining	9:19
	by the President ...	9:21
	I'm sorry, by the candidate,	9:26
	Ronald Reagan, in New Hampshire.	9:28
	Let me defer any discussion	9:32
	of that matter	9:35
	and just tick off some of the proposals made in the budget	9:37
	and in the State of the Union message.	9:42
	The most important proposal is the size of the budget	9:49
	and the ...	9:53
	plea to Congress,	9:55
	the attempt to go over Congress's head	9:57
	to the electorate to put pressure upon Congress	10:02
	to cut down on the rate of growth of federal expenditure.	10:06
	And as a bait and sweetener	10:12
	for	10:14
	that continence	10:16
	the President is proposing, not only a continuation	10:18
	of the emergency tax reductions that took place	10:22
	in the recession year of 1975,	10:26
	but also some decrease	10:31
	for the lower- and middle-income classes	10:34
	going into 1977.	10:39
	The President regretfully, you'll recall,	10:47
	vetoed the continuation of the recession tax reduction,	10:51
	but then, just as Congress was about to go home	10:56
	for the Christmas holiday, the President,	11:00
	who wants a tax reduction	11:04
	even without the expenditure reduction,	11:06
	in order to keep up the momentum of the ...	11:08
	of the recovery,	11:12
	agreed for a nominal promise by Congress	11:14
	that it would	11:17
	think hard on the problem	11:19
	of controlling the rate of growth of federal expenditures.	11:21
	He designed the tax bill.	11:24
	Well, I don't see any particular sign	11:26
	that there's a new ball game here.	11:29
	We still will have the House Ways Means Committee	11:31
	having to decide what tax changes it will make	11:33
	and which of the President's particular recommendations,	11:37
	which I'm about to discuss, it will go for.	11:41
	And you will also have the new	11:44
	budgetary committees	11:47
	in the Congress having to decide	11:50
	what will be the total of the expenditure ...	11:53
	what limits we put upon that	12:00
	and what the tax resources will be for that.	12:02
	I think we do have some changes in structure	12:06
	in the Congress, but since I've never thought	12:08
	that the basic problem in the Congress was its structure,	12:11
	I would counsel that you not be too sanguine	12:17
	that a change in ...	12:20
	in structure can change the	12:23
	actual mode of behavior of the Congress.	12:27
	The Congress reacts to the electorate	12:30
	in its own characteristic way.	12:34
	Well, let's just go over some of the particular proposals.	12:37
	There's a proposal that there'd be accelerated depreciation	12:43
	for corporate construction of plants	12:48
	and purchase of new equipments in areas that average	12:50
	7% or higher unemployment last year.	12:52
	And this is a short-run thing	12:55
	that's supposed to be done in the next year.	12:57
	There's something, of course, to be said for such proposals,	13:02
	but if you aren't	13:05
	ready to go with the plans	13:09
	for capital formation in such areas already,	13:12
	having one year to do it is a pretty crowded time	13:15
	unless the thing were likely to be extended.	13:21
	I don't know how much quantitatively one could get,	13:23
	for better or worse, from such a program,	13:26
	but it sounds good in a overall package.	13:29
	It sounds as if, although it's something for a business,	13:32
	it is really in the interests	13:34
	of the unemployed.	13:37
	There's not so much in this President's ...	13:39
	budget and State of the Union message	13:44
	for the lower income groups	13:46
	and the unemployed that we can afford to disregard	13:48
	any item, even rhetorical, in the proposal	13:52
	that seems to work for their benefit.	13:57
	Well then there's the reduction in individual	14:00
	and corporate taxes.	14:04
	Corporate taxation go down to 46%,	14:05
	most of it at the individual, personal level,	14:10
	the family level, and not at the business level.	14:12
	There is a new proposal, I suppose somebody thought that up	14:16
	at the last moment and put in at the last moment,	14:21
	I don't know what it's gonna get anywhere,	14:24
	that there be some incentive to encourage low income	14:25
	and middle income wage earners to buy common stocks.	14:30
	We've already had a significant increase	14:36
	in the Keogh plan for the self-employed,	14:38
	with respect to pensions.	14:41
	The argument there is that since corporate executives	14:43
	are given loopholes inconsistent with fair taxation	14:47
	of every dollar of income as any other dollar of income,	14:52
	then you ought to also have a loophole	14:56
	for the self-employed.	14:59
	And I know that for a person like myself,	15:02
	this has been a significant gift.	15:07
	I don't feel that I particularly need a gift of this sort,	15:10
	but it has been given to me	15:14
	by recent administrations and Congress.	15:17
	In addition, I've had a supplementary tax shelter provided	15:22
	to university professors on a very generous scale	15:28
	for the last couple of calendar years,	15:32
	and now we're going to get another.	15:36
	It's a much greater boon to the upper income groups	15:39
	than you would think at first blush,	15:44
	because what's $1,500	15:47
	to a high income corporate executive?	15:51
	But this is the sort of thing which,	15:54
	if he has any wisdom at all in the giving away	15:58
	of his money and putting it in trusts,	16:00
	operates unto the grandchildren,	16:03
	the cousins,	16:07
	and so forth, and it really amounts to	16:10
	a considerable	16:14
	tax subsidy.	16:16
	It's another backdoor tax expenditure	16:18
	at a time when we're trying to tighten up desperately	16:20
	on food stamps and on school lunches	16:25
	lest some lower, middle income child	16:29
	get a free school lunch, which he's not entitled to	16:34
	and which, perhaps, will undermine the incentive	16:37
	of his father and mother to go out to work.	16:41
	At that same time that we're trying to tighten that up,	16:44
	we're loosening up and giving some	16:49
	small little tidbits	16:53
	to what you might call the middle middle income classes	16:55
	and the upper middle income classes.	17:00
	All you have to do is keep this stuff in common stocks	17:04
	for seven years and	17:07
	you're, if not home free,	17:10
	you've gotten rid of a good deal of your tax liability.	17:12
	There's been proposed a three-tenths of a percent increase	17:18
	in both employer and employee Social Security taxes,	17:22
	effective next January 1st.	17:25
	Since the ...	17:29
	Social Security program	17:31
	has never been fully funded, it has always been obvious	17:35
	that there will be increasing tax rates required,	17:40
	over time,	17:45
	and this recognizes	17:46
	that fact.	17:49
	The President, as far as I know,	17:50
	has dropped his view	17:52
	that Social Security payments should be	17:55
	indexed only up to 5% increase in the cost of living.	17:59
	That's a very strange view	18:04
	at a time when	18:07
	the liability of every family ...	18:10
	elderly, needy family ...	18:13
	was that the cost of living would rise by more than 5%,	18:15
	the President wanted to take it away.	18:17
	Now that, as he says in his messages,	18:19
	we've made some progress on the rate of inflation,	18:23
	so it's unlikely to go above 5%,	18:25
	I guess the President feels there's no reason	18:28
	to espouse a politically unpopular proposal.	18:30
	He might as well go along with it	18:35
	since he doesn't think it's gonna cost him very much.	18:36
	There is talk of consolidating various	18:42
	federal health programs into a block grant	18:48
	to the states	18:52
	and ...	18:54
	what, I suppose,	18:57
	captured the notice of the person	18:59
	in the street more was that	19:02
	even elderly people	19:05
	will have to pay	19:07
	up to $500 for	19:10
	unusually high medical expenses.	19:14
	But, since a large part of the population	19:18
	would be in real distress	19:23
	if they had catastrophic illnesses,	19:25
	the President, in his program,	19:28
	has agreed to provide insurance for	19:31
	catastrophic illnesses.	19:36
	Let me say that	19:38
	I don't see any	19:41
	reason why a liberal	19:44
	should be	19:47
	unduly concerned	19:49
	about some payments	19:50
	in the health area by	19:54
	the rather	19:57
	poor part of the population.	20:00
	You know, in England it's been a matter	20:02
	of almost ideological controversy as to whether,	20:04
	for spectacles or for false teeth,	20:09
	the British citizenry should be	20:12
	charged any fee at all	20:16
	by the British Health Service.	20:18
	And the people on the left and labor party	20:21
	were very much against any fee whatsoever,	20:25
	even 25 cents	20:28
	for a prescription.	20:31
	However, this is just really part of the same philosophy	20:34
	that goes into deductible insurance,	20:39
	private automobile insurance ...	20:43
	$100 deductible or $200 deductible.	20:45
	This holds down	20:48
	the unnecessitatis claims	20:51
	in the automobile casualty area.	20:54
	It ...	20:58
	applies something against the administrative costs	21:00
	and since, under an absolutely free health service,	21:05
	you get a great amount of nuisance medical consultation ...	21:08
	hypochondriacs who,	21:14
	at the expense of	21:19
	other people's access to the doctors,	21:20
	utilize a lot of his time,	21:24
	if you can cut that down by very small fees,	21:26
	even token fees, then, in principal,	21:29
	it's a good thing.	21:35
	I think there always should be,	21:38
	somewhere, an escape valve	21:40
	so that a person who needs healthcare	21:42
	and can't pony up even $200	21:46
	should have some way,	21:50
	in the end, of getting that healthcare.	21:52
	But I must say that the uproar over this,	21:55
	in many circles, is not something which	22:00
	I think	22:04
	should be	22:06
	approved of.	22:08
	Well, there's a little ...	22:11
	Touch, shall I say,	22:14
	a little gift again,	22:16
	to the	22:19
	upper middle classes,	22:22
	particularly if they're farmers or small business men,	22:24
	on helping them pay their estates taxes.	22:27
	If a farmer ...	22:31
	Let's think of a poor, Iowa farmer, if you can imagine such.	22:33
	The family farm has $500,000 worth	22:38
	of equipment	22:43
	and buildings and land,	22:45
	and in the fullness of years	22:49
	the head of the family dies	22:53
	and he wants to pass this farm on to his children ...	22:56
	well, the government bailiff is right there at the wake	22:59
	because on an estate of $500,000	23:05
	you have a considerable tax obligation,	23:10
	even after you allow, under the marital deduction,	23:12
	120,000 to your wife and even though you've given away	23:17
	over the years as those poor, ignorant, Iowa farmers	23:20
	are prone these days to do,	23:24
	in the form of trusts and shares in the farm ...	23:26
	some part of it, you still have this obligation.	23:31
	Now, if you were in distress and had to sell this farm	23:33
	on very short notice for whatever it will fetch,	23:36
	then you might well get less than its fair market value	23:42
	in a distress sale and you'd have to pay your taxes.	23:46
	And that's a bad thing, and might even have to be sold	23:50
	to outsiders rather than stay in the family.	23:54
	Well, under the present law,	23:58
	there really is a pretty generous provision.	24:01
	You can pay this over 10 years.	24:04
	The interest rate used to be 9%	24:07
	but it's about to be lowered to 7%.	24:10
	9% sounds high, but during much of the time	24:14
	that you had to pay 9% on this sort of thing,	24:18
	if you went to the bank to borrow you paid 18%,	24:21
	and on overnight money you could get more than 9%.	24:25
	And the cost of living was rising	24:27
	by more than 9%.	24:29
	So we really can't think of 9% as a high punitive rate,	24:30
	and certainly 7% even in this week that I'm talking,	24:36
	when treasury bill yields are a good deal less than that,	24:42
	is not a high rate.	24:46
	But the president wants to give you	24:49
	five years of postponement.	24:52
	Well, five years of postponement	24:54
	of a $500,000 obligation	24:58
	is itself, since time is money ...	25:00
	interest is always earn-able on money ...	25:04
	is itself an outright gift, really,	25:08
	to an income class that,	25:11
	in terms of human need or equity,	25:14
	as most	25:17
	people define those terms,	25:20
	does not have a very strong case for that.	25:23
	But the President needs some sweeteners	25:25
	in Iowa.	25:29
	And it's possible that he gained	25:30
	some political mileage in that regard.	25:34
	Some of us, who aren't farmers, by the way,	25:38
	are going to be beneficiaries and get a free ride	25:40
	along with this, or our heirs are,	25:45
	if it should come to be	25:49
	passed.	25:53
	Well, that's the	25:55
	long and short, I guess,	25:59
	of the President's proposal.	26:01
	It's not a program which	26:08
	shows concern to	26:11
	step up	26:14
	the rate of the recovery or, what I think is more important,	26:16
	which involves any continuancy planning	26:20
	on doing exactly that if	26:24
	the recovery,	26:28
	as it proceeds throughout the four quarters of this year,	26:30
	turns out to be a little weaker,	26:35
	or for that matter a little bit stronger,	26:37
	than the consensus forecasters think.	26:40
	What we have here is something which I think	26:46
	probably ought to be a matter of political debate:	26:50
	fundamental value judgements	26:54
	on the part of the electorate,	26:56
	with all sides presented forcefully	26:59
	to the electorate for its mature consideration,	27:03
	and for reflectioning upon	27:09
	what are the essential	27:13
	programs at the federal and at the local and state levels	27:18
	which a majority of the electorate,	27:23
	or a preponderance of majority ...	27:27
	whatever you think is required for legitimacy	27:30
	in collective decision making ...	27:33
	What is it that the people want?	27:36
	Now, I think you'll find, and past elections have shown it,	27:39
	and I suspect that future campaigns	27:44
	and elections will also show it,	27:47
	that the public mind is divided.	27:48
	On the one hand, the public is struck by	27:51
	the fiscal problems of New York City.	27:57
	The public thinks "there but for the grace of God go we,"	28:00
	in Memphis, Nashville	28:04
	and Boston ...	28:08
	I don't mean to pick out any particular cities ...	28:09
	The public time and again, and with increasing frequency,	28:13
	has voted down bond issues	28:17
	showing a certain amount of tax consciousness.	28:20
	And no wonder, since for the last two or three years	28:24
	the general American ...	28:28
	society has not been experiencing	28:32
	the trend rate of real growth of income	28:34
	that has been characteristic.	28:38
	On the other hand, the governmental programs	28:41
	got there, generally, through a political process.	28:46
	People, many at least,	28:51
	are genuinely distressed	28:53
	if they learn, either the easy way or the hard way,	28:57
	that there are starving people in their vicinity	29:00
	and the minimum	29:05
	welfare programs	29:08
	can be regarded	29:10
	as a vast system of social mutual reinsurance,	29:11
	which we've all voted upon ourselves.	29:16
	And I expect therefore, that	29:18
	a ...	29:22
	clever interrogator	29:24
	can get from the public the answer	29:26
	that they want the public sector down.	29:28
	All he has to do is concentrate upon the tax bill.	29:31
	And he could also, at the same time,	29:33
	get an inconsistent response that the public sector	29:35
	is about right and ought to grow	29:39
	in accordance with the growing needs	29:41
	of the American people collectively considered.	29:43
-	If you have any comments or questions	29:48
	for Professor Samuelson, address them to	29:50
	Instructional Dynamics Incorporated	29:53
	450 East Ohio Street, Chicago, Illinois, 60611.	29:55

Item Info

Title:

Tape 193 - State of the Union

Date:

February 1976

Contributor:

Samuelson, Paul A. (Paul Anthony), 1915-2009

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audiocassettes

Digital Collection:

Paul A. Samuelson Economics Cassette Series

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Paul A. Samuelson papers

Series:

Economics Cassette Series: Paul Samuelson

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duke:325197
pstau001174
ark:/87924/r4707x496
0560b453-d9c5-4785-837c-4b9f2f3b08d4

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Tape 193 - State of the Union

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David M. Rubenstein Rare Book & Manuscript Library