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

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

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-0173
ref2487_ap7
samuelsonpaul
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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Economists' Papers Archive

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