Tape 148 - Runaway inflation; gradual recovery

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-	Welcome once again as MIT professor Paul Samuelson	0:02
	discusses the current economic scene.	0:04
	This series is produced by	0:07
	Instructional Dynamics Incorporated.	0:08
	This recording was made February 26.	0:10
-	We haven't looked for a little while	0:14
	at what the different authorities think about	0:16
	the developments of the American economy.	0:18
	This is a very relevant question because there is a	0:21
	tremendous amount of inflation concern throughout the land	0:24
	and in addition, there is a tremendous amount	0:29
	of recession concern throughout the land.	0:33
	As an example, when in Grand Rapids, Michigan,	0:36
	there was a turnover in a rather safe Republican district.	0:40
	Vice President Ford's former congregational seat,	0:46
	a seat which had gone Republican in every election	0:50
	since 1910, including the 1932 debacle	0:53
	during the Great Depression, when a Democrat	0:57
	ousted the man picked by Ford to succeed him.	1:02
	The explanation which most people gave	1:06
	was that this was a mandate or a plebiscite on Watergate	1:10
	but Vice President Ford called to our attention the fact	1:15
	that there's a great deal of unemployment in that area,	1:20
	it's related to the automobile industry,	1:22
	and that that, in his opinion,	1:25
	was a swing factor in the election.	1:27
	Well, where do we stand?	1:31
	What do the different authorities think is in store for us	1:34
	throughout the rest of this year now that they've	1:39
	had a chance to take a second look at the picture?	1:42
-	Well in broad outlines as I look at	1:46
	half a dozen different forecasts,	1:48
	you still have pretty fair agreement	1:50
	that during the first part of the year,	1:54
	there will be real growth weakness in the economy.	1:58
	Negative growth in the first quarter, I think,	2:02
	in everybody's forecast.	2:04
	And that in the last quarter of the year,	2:07
	you will be on the comeback trail with positive real growth.	2:10
	There is general agreement that unemployment is gonna rise	2:16
	through most of the year, if not all of the year.	2:20
	There is general agreement that prices	2:23
	which are horrendous now, will not be as bad	2:28
	in the fourth quarter of the year	2:33
	as they are in the first quarter of the year.	2:35
	Now I know you'll say you've heard that story before	2:38
	but let's tell the story first and then	2:41
	let's analyze it to see what we think are	2:46
	the prospects for actual events working out	2:48
	in accordance with the authorities.	2:52
	What I've done is to jot down before me,	2:54
	four different forecasts.	2:58
	Thereby four different forecasters	3:02
	with pretty good track records over the years.	3:04
	These forecasters in my observation,	3:09
	have done better than any amateur's models	3:14
	and there is no exception that I can think of	3:20
	to that statement.	3:22
	They have done better than any	3:25
	automatic computer model on the average.	3:27
	Whether it be a monitores model like that of	3:31
	the Federal Reserve Bank of Saint Louis	3:35
	or whether it be a more complicated,	3:38
	if not more sophisticated model like that of	3:43
	Professor Ray Fair of Princeton University.	3:46
	So their testimony is worth paying attention to.	3:50
	What I've jotted down for these forecasters is	3:56
	where they think we're going to be in the fourth quarter	4:00
	of this year to see how much agreement there is	4:02
	and also to see whether it's a sad picture	4:06
	or whether it's a pretty picture.	4:08
	Time doesn't permit going down the whole vector of elements	4:10
	which a forecaster would want to forecast.	4:15
	Typically there are 30-40 key variables	4:17
	that you would be interested in.	4:21
	So I've just jotted down the few most important ones.	4:24
	Namely the rate of growth of real output,	4:28
	how that'll be in the fourth quarter of the year.	4:31
	The rate of growth of the general price level	4:33
	as measured by the GNP deflator which is not quite	4:36
	the same thing as the consumers price index.	4:40
	If time permits, I'll try to look into some of these	4:43
	forecasts to see what difference that would make.	4:45
	I think it's a small, significant difference	4:48
	but still a small difference.	4:52
	Then I've jotted down what the unemployment rate	4:55
	is expected to be in the fourth quarter.	4:56
	And finally for somebody who might just have interest	5:00
	in that sort of thing, what the rate of corporate profits	5:03
	after taxes will be in the fourth quarter of the year.	5:07
	Well, who is in the lineup?	5:11
	In no particular order, I've listed	5:16
	Data Resources Incorporated of my part of the world.	5:19
	The head of this is Professor Otto Eckstein	5:26
	of Harvard University.	5:28
	A distinguished student of public finance,	5:31
	a scholar, an expert in macro economics who has a PhD	5:35
	from Harvard and had undergraduate training at Princeton.	5:40
	He also has had rather extensive governmental experience	5:44
	having been on President Johnson's	5:48
	Council of Economic Advisors.	5:50
	He's the chap who, as a very young man,	5:52
	prepared the tremendous study in 1959	5:56
	for the joint economic committee.	6:00
	His credentials are in very good order	6:03
	and I would not dream of letting a quarter go by	6:07
	without trying to learn what the RI	6:10
	thinks is in the picture.	6:13
	Then we have the Wharton School model.	6:16
	I think very few words are required from me on this subject	6:18
	because I've quoted it extensively.	6:23
	The Wharton School model is of course	6:26
	not associated formally with the Wharton School as such	6:28
	but it is associated with a project there; computer project	6:32
	under the direction of Professor Lawrence Klein	6:38
	who you might say is the United State's tinbergen in being	6:43
	the dean of those who make macro economic models.	6:50
	He was a moving spirit behind the University of Michigan	6:53
	model years ago when he was at the University of Michigan	6:56
	and he's carried forward this activity.	7:01
	The third one I thought just for variety,	7:06
	I would pick a private model not for public circulation.	7:08
	This is for an investment banking firm.	7:14
	The economist who prepares the model is a friend of mine	7:18
	and he gave me this model in confidence.	7:25
	There's nothing secret about it but it's not something	7:28
	that's to be associated with his firms name.	7:30
	The reason that I think it's appropriate for me	7:33
	to bring it into the picture is that you might think	7:36
	that there are two levels of knowledge.	7:39
	There's inside knowledge and there's outside knowledge	7:42
	and there's two levels of communication.	7:45
	What people really think and what	7:48
	they think for the public record.	7:50
	I think you'll find that there is no such distinction	7:54
	were you to make a round up of internal forecasts	7:59
	and external forecasts.	8:03
	You would find that their median in the different components	8:05
	came to pretty much the same thing.	8:10
	The same distribution of fools and wise men	8:12
	and candid people and non candid people in both universe's.	8:17
	Finally, you've heard me many times	8:24
	quote from the Townsend Greenspan forecast and that	8:27
	which is the brainchild of Alan Greenspan	8:35
	has a very good track record indeed	8:40
	and I would certainly not let any quarter go by	8:44
	without finding out what the Townsend Greenspan organization	8:47
	sees ahead if that information was available to me.	8:51
	Now I could have quoted still others.	8:55
	I don't think the picture would have been	8:59
	substantially different and my leaving out any name	9:01
	represents no invidious distinction.	9:06
	It's just what I happen to have conveniently in hand	9:09
	for the preparation of this recording.	9:12
	Well now let's see what's going to happen	9:17
	to the rate of real growth in the last quarter of the year.	9:20
	Is it going to be negative?	9:26
	Not a single one of these four forecasters	9:29
	envisages a negative number.	9:32
	Indeed, two of them envisaged that we'll be above	9:34
	the normal growth rate for the American economy.	9:40
	DRI says plus 5.9% provided I have not misread	9:45
	and no I see I have not misread.	9:51
	That's a whopping six percent increase in real output	9:53
	by the last quarter of the year.	9:56
	And the Townsend Greenspan is five and a half percent	9:59
	annual rate of real growth of output.	10:03
	So if these gentlemen are right,	10:05
	the recession will be a memory at that time.	10:09
	We can go on to see what goodies they have in store for 1975	10:16
	and a data resources computer actually just keeps running on	10:21
	until the end of 1976.	10:24
	In case you wanna know, there's not going to be a recession	10:29
	between now and beyond the time	10:34
	when the U.S. celebrates it's 200th anniversary	10:37
	according to the DRI model of the very end of January,	10:42
	the very beginning of this month in which I'm recording.	10:47
	Well, what about the other two?	10:51
	The other two, the Wharton model has a two and a sixth	10:54
	percent rate of increase in the fourth quarter	10:57
	and the private unnamed forecaster has	11:00
	a plus three and a third percent.	11:04
	Both of those are a bit below the growth rate	11:06
	but they average out to more than we've seen	11:12
	for a good long time now while we've been	11:16
	in a growth recession.	11:19
	And I have no doubt that if I were to continue	11:20
	letting my eye pass down their columns to later quarters,	11:24
	that they would effectively have us out of the	11:28
	mini recession by	11:33
	early 1975	11:36
	at the latest.	11:40
	Is this good or is it bad?	11:43
	Well I think that is very encouraging for somebody	11:44
	who wants real output not to stagnate and not to decline.	11:48
	Just for comparison, let me say what the estimates are	11:55
	for real output in this current first quarter of the year.	11:59
	Data Resources thinks that we'll be at almost	12:07
	a 4% annual rate of decline, actually minus 3.9%.	12:13
	And Townsend Greenspan thinks that we'll be at	12:23
	minus 2.6% annual rate.	12:26
	On the other hand, there's nothing really to choose	12:32
	between them as far as optimism or pessimism is concerned	12:34
	because by the next quarter,	12:37
	data resources has us at 2.4% plus.	12:38
	Where as it takes a little bit longer to unwind	12:42
	in 1974 second quarter, Townsend Greenspan has flat	12:46
	so I guess if you actually averaged out those two quarters,	12:52
	you would find that they are pretty much	12:57
	in the same ball park.	13:00
	That suggests that the pollsters who are picking up the fact	13:04
	that it's inflation, which is the number one problem	13:08
	worrying the American public, may well turn out to be right	13:14
	because when we look at what's happening to prices	13:19
	in the fourth quarter of the year,	13:22
	we find that not one of our forecasters,	13:26
	however optimistic they may seem to you,	13:29
	thinks that we'll be having a dandy show on inflation.	13:32
	Let me go across the board.	13:39
	Data Resources think there'll be a six and a third percent	13:42
	increase in prices at that time.	13:45
	Wharton School thinks there'll be a seven and six percent	13:51
	annual rate of increase in general price at that time.	13:53
	Townsend Greenspan thinks that there'll be about	13:57
	five and five eighth's percent rate of growth at that time.	13:59
	5.57 percent actually.	14:06
	Our private forecaster is a bit more optimistic	14:10
	and I must say he seems optimistic to me	14:14
	because he has the rate of inflation dropping down	14:16
	to four and a half percent at that time.	14:20
	Well now to put things into perspective,	14:23
	what was the rate of inflation in the last quarter	14:27
	for which we have actual data?	14:31
	Let's look at that number.	14:36
	It was 7.9%.	14:40
	And so there isn't a one.	14:44
	Even the Wharton School who is as pessimistic as to think	14:48
	that we'll be doing as badly in the fourth quarter this year	14:51
	as we were in the fourth quarter last year.	14:53
	And this despite the fact that	14:56
	the fourth quarter of last year, the energy shortage had not	14:57
	manifested itself until the final part of the quarter.	15:01
	So what we have here is an improvement throughout the year.	15:08
	Let me give you the first quarter numbers	15:12
	for inflation of the four people	15:13
	and then I've already given you the fourth quarter.	15:16
	Data Resources think that we'll improve from 6.9%,	15:20
	first quarter 6.3%.	15:24
	Wharton will improve from seven...	15:27
	Well now we won't improve.	15:29
	We'll go from seven percent to seven and a sixth percent.	15:30
	But the private forecaster thinks we'll go from	15:32
	seven and a half percent to down to four and a half percent.	15:34
	And Townsend Greenspan thinks that this is gonna be	15:38
	a god awful quarter with nine and half percent	15:41
	price inflation's so that we'll look with relief	15:46
	upon subsiding to about five and a half percent.	15:48
	I may say that Townsend Greenspan has support from	15:53
	Albert Summers who has not prepared his fully revised	15:56
	forecast but has indicated how it'll go	16:02
	and he expects that prices in the first quarter of the year	16:06
	will be rising at almost a 10% annual rate	16:09
	and for the year as a whole, we'll be above eight percent	16:11
	which means that in the fourth quarter of the year,	16:16
	I would think that you can't be down very much below	16:19
	seven percent according to his forecast.	16:25
	For control on this though, I think I ought to see	16:29
	what a monitores forecast on prices might be	16:34
	and I'm going to take as my monitores forecaster	16:38
	the Argus Organization, which has been brave enough	16:42
	to make an estimate of worldwide inflation	16:46
	for many countries for many years to come.	16:49
	And they do this on the basis of their expectation	16:54
	of what's going to happen to the rate of growth	16:57
	of the money supply.	16:59
	Well, for the United States they have a nine percent	17:02
	inflation for the first quarter, going down to 6.9%	17:05
	by the fourth quarter and actually continuing down	17:10
	until by the middle of '75, you're down to	17:15
	not much above five and two thirds percent.	17:18
	So the monitores forecast here is	17:23
	about the same as for the others.	17:27
	Moreover, I don't think I have time to go into	17:31
	what the western Germany's price increases forecast	17:35
	for them to be or Japan's or Switzerland or Belgium	17:39
	or France or the U.K. or Italy but let me say that	17:43
	there's no place to hide because the 6.9%	17:47
	in the United States in the fourth quarter	17:50
	is going to be better, according to their estimates,	17:52
	than any other country.	17:54
	Even Switzerland is gonna have seven and a half	17:55
	and Germany's gonna have nine	17:58
	and Italy's gonna have 10.6	18:01
	and the U.K's going to have 11	18:05
	and Japan, eleven and a half	18:07
	and worst of all is going to be France for 12%.	18:09
	So there's no other currency in which	18:14
	you're going to do better or which the typical consumer	18:17
	with one unit of the currency is going to do better.	18:20
	What about unemployment?	18:25
	Do these inflation numbers imply that	18:28
	we're gonna have very tight labor markets	18:32
	and that the inflation is primarily to be expected to come	18:34
	therefore, from in the first instance a bidding up of wages?	18:38
	No, not really because as I go across the board,	18:44
	DRI expects six percent inflation by the end of the year	18:49
	and the private forecaster who was so optimistic on prices,	18:53
	he expects 6.1% by the end of the year.	18:58
	And Wharton, which is very pessimistic on profits	19:02
	as you'll see in a moment and some other things,	19:07
	is kind of optimistic on unemployment	19:10
	if you call a five and three quarters percent	19:14
	the unemployment rate for the	19:17
	last quarter of the year, optimistic.	19:19
	Townsend Greenspan is 5.9%	19:22
	and I'll remind you that these all represent	19:28
	substantial increases in the rate of unemployment	19:32
	from the last reported number which was 5.2%.	19:35
	I would suppose that the next reported number,	19:41
	which of course refers to a past period	19:44
	and which must be due pretty soon,	19:48
	that probably will be worse than 5.2%.	19:54
	So there's nothing cataclysmic	19:57
	or precipitous in these numbers, just a slow climb.	19:59
	Finally, just to bring the initial survey of the facts	20:07
	to a close, what can be expected for profits after taxes?	20:12
	Here, both counseling firms seem to be	20:20
	very close together to each other.	20:25
	Data Resource Incorporated is just a shade above	20:27
	70 billion dollars of corporate profits after taxes, 70.2,	20:32
	and Townsend Greenspan is 70.9.	20:38
	How does this compare with the last recorded numbers	20:42
	for corporate profits after taxes?	20:47
	It's almost on the nose.	20:51
	In the last quarter, '73, we have 71 billion.	20:53
	So profits after taxes, according to everybody	20:56
	go down the hill from the fourth quarter	21:00
	of last years numbers but they don't,	21:04
	according to these counseling organizations,	21:08
	go down the hill very much and they are back	21:09
	by the fourth quarter of '74 to where they were	21:14
	in the fourth quarter of '73.	21:16
	I should point out, and they would be the first	21:20
	to point out, that all of the dollar numbers are back.	21:23
	You realize that in real terms, the profits are not back	21:26
	because prices have increased during this period.	21:30
	Moreover, there is reason to think that	21:35
	if one were to calculate profits in real terms,	21:37
	carefully taking account of the replacement costs	21:41
	of the capitol used by the corporations	21:46
	who are earning profits, that in periods of rising prices,	21:49
	you overstate real earnings because the tax law	21:54
	does not permit you to recover reproduction costs.	22:00
	It only permits you to recover in depreciation allowances.	22:05
	Historic actual incurred dollar costs.	22:09
	So these profit pictures that I've been quoting	22:13
	are optimistic compared to a pessimist	22:16
	but it doesn't mean that the corporations are better off	22:21
	in the fourth quarter of this year than they were last year	22:24
	if these figures turn out to be correct.	22:30
	Let me however say that there is some difference of opinion	22:33
	because the Wharton School model	22:36
	has profits after taxes significantly less.	22:39
	I had to make a calculation from their profits before taxes	22:44
	and I won't vouch for the last digit of accuracy	22:49
	but it seems to me that by the fourth quarter,	22:54
	they think profits will be down	22:56
	to 65 billion dollars after taxes.	22:58
	Their optimistic on unemployment relatively	23:03
	and their pessimistic on profits	23:07
	and the private forecaster is in between.	23:10
	He thinks that profits will be about 67.6 billion dollars	23:14
	down somewhat but even on his forecast,	23:22
	they will be on the rise.	23:25
	Now, what are we to think about the picture?	23:28
	I think the first thing to say is that	23:33
	if these numbers are believable,	23:37
	the alarm which is beginning to go through the country,	23:41
	that we are moving into Latin American galloping inflation	23:44
	or cantering inflation.	23:51
	I've heard this from a number of public figures recently	23:54
	and many reporters have asked me is it true	23:59
	that on the basis of what Arthur Burns said	24:05
	and on the basis of what he didn't say	24:08
	but might be implied by what his words would suggest,	24:10
	that we have turned a corner and we are now	24:15
	at a point of no return and we are moving into	24:18
	a new phase of more rapid inflation.	24:21
	More rapid inflation akin to that let's say	24:26
	of Brazil over the years or Argentina over the years	24:29
	or Chile over the years or even Mexico.	24:32
	I may say I see no sign in these figures of that	24:36
	but it would be enough in terms of having concern	24:41
	whether we are moving into a new era in which we have	24:46
	rates of inflation like those of the other	24:51
	advanced countries of the world.	24:54
	The countries of western Europe and Japan	24:56
	who, these last few years, have not been enjoying	24:59
	the moderate rate of price increase at which American's	25:04
	complain their price increases are still more.	25:08
	So I have to agree that there doesn't seem to me to be	25:13
	a sea change in the numbers.	25:15
	What I think is probably true is that	25:18
	when you get prices rising as they will for some time	25:21
	this winter in two digits rate,	25:27
	say a 10% annual rate	25:32
	or 11% annual rate, and I'm thinking now of prices	25:34
	in which there's a heavy component of food,	25:37
	in which there's a heavy component of fuel	25:40
	and other energy sources, then it may be that something	25:44
	dramatic happens in the mind of the public.	25:49
	There may be a threshold effect in other words	25:52
	with respect to the drama and the trauma of inflation.	25:55
	But if we stick to the actual outlook,	26:01
	it seems to me that all these different forecasts	26:07
	have factored into them the fuel shortage.	26:11
	They have factored into them some considerable delayed	26:16
	increase in energies and I must say,	26:21
	I find these forecasts bad enough	26:25
	because it is stag inflation with a vengeance.	26:28
	But we do not see on the horizon	26:32
	an advance to a new uncontrollable rate of inflation.	26:38
	I wonder therefore, exactly what it was that	26:46
	Doctor William Fellnor, the newest member of	26:49
	the Council of Economic Advisors, had in mind	26:53
	when he talked at the conference board recently	26:57
	and said this was our last chance to control inflation	27:01
	and we had better not muff it.	27:05
	I think that that is a dramatic way simply,	27:09
	of registering his concern that we've been	27:13
	running the system with too much steam in the boiler	27:17
	and have been aiming at too low a rate of unemployment.	27:20
	Moreover, I've treated recovery as if that were	27:26
	an optimistic matter because according to these figures,	27:32
	I think the consensus will be that there was	27:36
	hardly a recession at all.	27:38
	Or if there was a recession, it was a bare recession	27:40
	which barely lasted a couple months and moreover,	27:44
	since it's explicable by means of an energy shortage,	27:47
	it's not really a macro economic recession	27:50
	that should count.	27:53
	But suppose you are one of the scholars	27:55
	and there are a few and they're respected scholars,	27:58
	who thinks that the only way to bring inflation down	28:03
	and not have it accelerate upward,	28:07
	is to have a recession of some magnitude.	28:10
	Then what I've reported on today	28:13
	is the most pessimistic thing that could be said	28:15
	because you cannot count, according to these numbers,	28:18
	upon several quarters of negative real growth.	28:23
	You cannot count on any dramatic hitting the inflation	28:29
	where it lives by means of lowering demand	28:35
	and increasing the supply.	28:40
	Well I think myself, that scholarly view	28:43
	that I've just quoted, respectable as it is,	28:48
	is by and large irrelevant.	28:52
	I don't mean the one who holds it shouldn't express it.	28:56
	He should, he should press for it.	28:58
	But if we had all this trouble in Grand Rapids, Michigan,	28:59
	in elections from say stand point of the administration,	29:05
	the incumbent administration, from an environment	29:11
	in which there's still only 5.2, 5.3, 5.4% unemployment,	29:14
	think what you're gonna have when you have an environment	29:22
	in which there is a six percent unemployment	29:26
	or neighborhood of six percent in which	29:29
	a good deal of that unemployment has begun	29:31
	to become long term unemployment.	29:34
	So there's just so much that the American political system	29:37
	can stand and therefore, I would say,	29:40
	to give you my own evaluation, that I think it's a little	29:46
	premature to have output growing as rapidly as	29:49
	the highest of the numbers I've reported on	29:53
	by the fourth quarter.	29:55
	But I think that the numbers are in the ball park.	29:56
	I think there is a little bit of optimism	29:59
	on the rate of increase in prices	30:02
	because I am concerned that the honeymoon	30:04
	with respect to wage settlements has come to an end.	30:06
	But I have no particular quarrel to make with	30:10
	the rather modest decline in corporate profits after taxes.	30:13
-	If you have any comments or questions	30:19
	for Professor Samuelson, address them to	30:21
	Instructional Dynamics Incorporated,	30:23
	166 East Superior Street, Chicago, Illinois, 60611.	30:25

Item Info

Title:

Tape 148 - Runaway inflation; gradual recovery

Date:

1974

Contributor:

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

Subject:

Format:

audiocassettes

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English

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Paul A. Samuelson papers, 1933-2010 and undated

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Paul A. Samuelson papers, 1933-2010

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Economics Cassette Series: Paul Samuelson

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Identifier:

RL10082-CS-0141
ref2421_66m
samuelsonpaul
duke:325164
pstau001141
ark:/87924/r41r6nh0t
9b1fe8a6-24db-4369-b894-b0a776a4d9f8

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Tape 148 - Runaway inflation; gradual recovery

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Economists' Papers Archive

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