Tape 135 - Recession ahead

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-	Welcome once again as MIT Professor Paul Samuelson	0:02
	discusses the current economic scene.	0:05
	This program series is produced	0:07
	by Instructional Dynamics Incorporated.	0:08
	This program was recorded August 24th.	0:11
-	I'd like today to	0:14
	discuss the probabilities with respect to a mini-recession	0:17
	or a growth recession or a genuine recession	0:23
	in the year just ahead.	0:27
	The number one question to the man on the street	0:31
	and to many people in the money market	0:35
	is the current rate of inflation.	0:37
	And I don't mean to belittle the importance of that issue.	0:41
	But what will happen to that rate of inflation	0:45
	and what can be done about it is very much conditioned	0:49
	by the answer to the question	0:53
	which I do want to discuss today,	0:54
	which is how to appraise rationally,	0:56
	on the basis of the evidence now available,	0:59
	the probabilities with respect to the US economy	1:01
	going into a mini-recession in the last part of 1973	1:06
	and continuing into 1974.	1:12
	I say this because although there are	1:18
	some micro-economic reasons why the rate	1:20
	of increase in prices should later abate,	1:24
	I have here in mind	1:28
	the	1:30
	bumper grain crops,	1:31
	which gradually turn themselves into meat,	1:35
	which with a little luck we might have,	1:38
	and which can make quite a difference	1:40
	in the world food situation	1:42
	and in the price of world staples.	1:44
	But beyond commodity inflation,	1:48
	which is admittedly something conceptually distinct	1:52
	from macroeconomic developments,	1:55
	there certainly is a component in the current inflation	1:59
	which has been caused by and is fed by	2:02
	the strength in the macroeconomy.	2:07
	And so many people, for sake of its own intrinsic interest,	2:11
	are interested in what's going to happen	2:17
	to the American economy, and I'd like to give you	2:19
	my analysis of the prospects.	2:22
	To do that, I've assembled before me	2:27
	three of the typical gross national product forecast models.	2:31
	I've selected three which are reasonably up to date,	2:40
	that have just come in in the last month,	2:46
	which take account in some measure	2:48
	of the developments in the second quarter.	2:50
	I've also selected forecasters	2:54
	who've had a pretty good track record in recent times.	2:56
	I don't think that the picture would be unaltered	3:00
	if I were to try to cram into half an hour	3:04
	all the forecast models that I've seen.	3:08
	It would be altered.	3:12
	But I think that the three forecasts	3:13
	that I'm going to discuss with you	3:16
	represent a modal view	3:18
	which is very popular among the fashionable forecasters,	3:22
	including some differences in their opinions,	3:27
	which, again, do typify the spread	3:30
	of the fashionable forecasts of any particular period.	3:35
	The most recent of these forecasts,	3:41
	one that just arrived a couple of days ago,	3:42
	is that from the University of Michigan,	3:46
	from the Ann Arbor Model.	3:49
	I received that,	3:52
	well, the run was made after the middle of August.	3:54
	I received it just a few days later.	4:00
	I suppose the Ann Arbor forecast deserves pride of place	4:02
	because in any roundup of how the forecasters	4:05
	have been doing in recent years,	4:09
	the last eight, 12 quarters,	4:12
	I think you'll find that the minimum squared error	4:15
	tends to have been enjoyed	4:19
	by the Ann Arbor Michigan forecast.	4:20
	I don't mean to attach very much importance to that fact	4:24
	because we know that a short-term track record	4:29
	is not a long-term track record,	4:33
	and it's the long-term track records	4:34
	that enable us to build up special confidence	4:36
	in a forecasting method or in a forecaster.	4:41
	The second model is that of the Wharton School,	4:45
	the Wharton Mark III Quarterly Model.	4:50
	This was done August 3rd, little bit earlier,	4:55
	but taking account of second quarter developments.	4:59
	I don't mean that the last wrinkle of revision	5:04
	in the second quarter data has necessarily been embodied	5:06
	into these Wharton School forecasts,	5:10
	but they're really quite up-to-date.	5:12
	And finally, I have before me the July 28th control forecast	5:15
	of the Data Resources Incorporated	5:22
	of Doctor Otto Ecktein of Harvard University.	5:27
	Well now, what do they show?	5:31
	If you just turn to the popular question,	5:36
	what's going to happen in 1973?	5:40
	How will the final gross national product numbers	5:46
	compare with the numbers bandied about	5:49
	by the forecasts at the beginning of the year	5:52
	in real terms, in money terms?	5:54
	And what price inflation is accompanying this?	5:56
	That's an uninteresting question.	6:03
	The interesting question is what they thinks	6:05
	going to happen in the one year ahead.	6:07
	I say it's uninteresting because so much	6:11
	of the 1973 to 1972 comparison	6:13
	is already ancient history.	6:18
	Now, nevertheless just	6:22
	for the	6:25
	sake of bringing us up-to-date with earlier thinking,	6:27
	there isn't any doubt	6:31
	that by and large the fashionable forecasters	6:33
	were in the right ballpark for the year's real growth.	6:37
	They underestimated the degree of price inflation,	6:42
	who at the beginning of this year could have forecast	6:48
	the explosion of prices	6:51
	that has taken place in the straddle border trade	6:54
	in the New York Mercantile Exchange	6:57
	and the London Copper Market.	7:00
	Anyone who could've remotely forecast that	7:03
	is now rich beyond the dreams of Everest.	7:07
	The amount of money that you could've made	7:11
	with 1000 dollars put into soybeans	7:14
	is literally a fifty fold in a price explosion	7:19
	parade of that sort and although	7:24
	many are wise after the event,	7:26
	very few were able to forecast this	7:29
	and we can't blame anyone.	7:31
	The rate of growth	7:34
	in real terms of GNP for 1973	7:38
	is going to be according to these indications.	7:42
	Certainly in the neighborhood of 6%.	7:49
	Second year in a row of 6% real growth.	7:51
	This is real growth in excess of the presumed	7:55
	4.25% which more or less represents par	7:58
	in a long-run sense for the American economy	8:03
	when we take into account the still growing	8:06
	labor force for demographic reasons	8:09
	and for cultural reasons,	8:12
	and when we take into account the normal productivity	8:15
	changes in American industry.	8:18
	However the University of Michigan,	8:23
	which last November startled so many of us	8:26
	by coming out with the no less	8:30
	than a hundred and nineteen	8:34
	billion increase for '73 of money, nominal GNP over 1972.	8:36
	Soon found that everybody else was imitating it	8:45
	and just as they began to imitate its numbers,	8:49
	Michigan raised its numbers.	8:53
	And so the typical forecast today	8:57
	is that 1973 will represent...	9:01
	Almost 12% increase in nominal GNP.	9:07
	The difference between 6% and almost 12%	9:11
	being a 5% to 6% increase,	9:17
	well a 6% increase really in the implicit	9:21
	GNP price deflator.	9:25
	Now the implicit GNP price deflator	9:27
	is a very good measure of inflation.	9:29
	It is a more conservative measure however,	9:33
	than that of wholesale prices	9:35
	or than that of the Consumers Price Index	9:36
	and I suppose it's the Consumers Price Index	9:39
	which most people follow.	9:41
	And it's much much more conservative,	9:43
	particularly in a period like this	9:45
	than an index of volatile staple prices	9:47
	of food, fiber and metals.	9:52
	Well nobody foresaw that we would be having	9:55
	those staple prices soaring at annual rates	9:58
	of 20, 30, 40, 50, 60 percent.	10:01
	Pulling up with them the GNP deflator from the...	10:05
	Levels of 4% to which we've become accustomed	10:14
	to double those rates.	10:19
	Of course the Nixon administration goal	10:21
	stated just at the beginning of this year	10:24
	of 2% to 3% price increase in that deflator	10:27
	which didn't look like a very likely winner	10:33
	as a prophecy at the beginning of the year is hopelessly	10:38
	relegated to the ash heap of history.	10:45
	We won't remotely come near,	10:49
	that's something I suppose we should remember	10:51
	as we look forward to new governmental estimates.	10:53
	We should also remember that	10:58
	these typical three forecasters that I've given you,	11:01
	good as they have been in many of these regards	11:03
	have some quite colossal forecasting errors themselves	11:08
	in respect to timing because although 6% is	11:14
	perhaps going to be approximately realized	11:18
	for real growth for the United States	11:21
	in the whole calendar year, we all know now that we	11:23
	registered more than 8.5% annual rate of real growth	11:28
	in the first quarter and less than 2.5%	11:33
	in the second quarter and I can assure you	11:36
	that before the event, nobody picked up	11:39
	that large a slow down in the second quarter.	11:43
	Just as we'd all convinced ourselves	11:49
	that we couldn't be that dumb,	11:51
	and therefore the Department of Commerce must be stupid	11:53
	and must have underestimated the rate of real growth,	11:57
	the Department of Commerce I'm sure with a lot of pressure	12:01
	implicit in the situation to raise its numbers	12:04
	came out with a revision and that revision showed	12:08
	that prices had soared even more rapidly	12:13
	in the second quarter than the Department of Commerce	12:16
	had first thought and that meant that the rate of real GNP	12:19
	was even less than the 2.4% first reported.	12:24
	Now it may be, and there are reasons to think	12:30
	that this could well happen,	12:35
	that if one applied better seasonal corrections	12:37
	that one would still insist that the second quarter	12:42
	weakness is an overstatement.	12:46
	Well with that warning that all forecasts	12:49
	have to be taken with a grain of salt,	12:52
	they're just the best that man is able to come up with,	12:54
	what do they show for a year ahead?	12:59
	Let me go down the list of the different forecasters.	13:06
	First on the rate of real growth,	13:11
	the Wharton School certainly believes	13:15
	that we are now moving into a mini-recession.	13:17
	They project for '74 over '73 only a 1.25%	13:21
	rate of real growth, well below	13:27
	the 4.33% which represents par.	13:29
	Can we get any ray of comfort from Design Research?	13:33
	Well Doctor Eckstein thinks we're only gonna have 2.5%	13:39
	rate of real growth in the year to come.	13:43
	And the University of Michigan which has earned its honors	13:47
	as the most accurate forecaster primarily	13:51
	because it has been the most expansionist in its forecasts.	13:53
	Even they have had an agonizing reappraisal.	13:58
	And they come out in real growth for '74 over '73	14:01
	to only 2.4% so they're a little bit below	14:07
	Data Resources and something above the Wharton forecast.	14:11
	If we can then accept this model	14:19
	and by the way I don't think that now	14:22
	I have anywhere in my files a forecast	14:26
	which shows for the whole of 1974	14:31
	as much as a 4.33% rate of increase in real growth.	14:36
	The exception is that Ray Fair of Princeton	14:40
	who does his own private non-judgemental forecasting	14:46
	by feeding in the data, new data to the computer	14:50
	and letting it re-estimate its coefficients	14:53
	and just spit out an answer on the basis	14:55
	of what he thinks is an intelligent and reasonable model.	14:57
	He does have a more optimistic real growth picture.	15:02
	But he only forecasts into the first half of '74.	15:08
	He shows I guess for the first half of '74	15:13
	about a 4.75% rate of real increase,	15:15
	but he gets that number by...	15:19
	A projection of the rate of price increase which	15:23
	I think would just be considered absolutely incredible	15:29
	by anybody in Washington and...	15:32
	In a New York bank or in most universities.	15:37
	Let me see as I turn these pages	15:41
	if I can find out how low his...	15:43
	Price increase is.	15:47
	Yes he's down below	15:50
	a 4% rate of price increase on the deflator from...	15:54
	The last quarter of this year,	16:01
	through the middle of '74	16:05
	so that I don't think that you can buy his	16:08
	comforts that we are not in a growth recession	16:14
	unless you're willing to also	16:16
	purchase his rather optimistic	16:20
	projections with respect to inflation.	16:25
	Now what am I saying?	16:27
	I'm saying that a man who thinks that inflation	16:28
	will only be just below 4% is an optimist.	16:31
	That shows you how much the climate of opinion	16:36
	has changed in the last year.	16:38
	Nobody, not even people in Washington	16:43
	are speaking of stable prices	16:48
	in any of the years remotely ahead.	16:52
	Nobody's speaking of reasonably stable prices.	16:56
	We don't even dream anymore of 1% to 2%	17:01
	rate of price increase.	17:07
	We debate whether the rate of price increase	17:09
	will be going into '74...	17:14
	5.92% as Wharton thinks,	17:21
	or 6.1% as the University of Michigan	17:26
	thinks is '74 over '73.	17:30
	Or 4.7% as relatively optimistic data	17:32
	Doctor Otto Eckstein thinks.	17:37
	So...	17:41
	The answer if you take people with good track records	17:44
	is measured by the criterion of a couple of quarters,	17:48
	at least, which have real growth	17:53
	of less than 4% than all the experts	17:56
	believe that we are moving into	18:04
	a growth recession or a mini-recession.	18:06
	Even the Argus Research Organization	18:09
	which has taken a realistic and fairly optimistic	18:14
	monetarist's approach to forecasting the period ahead	18:21
	and the decade which is to follow.	18:26
	Even they allow now for a temporary period	18:32
	between now and	18:38
	the latter part of 1974	18:41
	of a slow-down in the rate of real growth.	18:44
	None of the three forecasts that I've spoken about	18:52
	takes the further plunge	18:56
	of saying that we will be in a genuine,	18:58
	a genuine National Bureau of Economic Research recession.	19:03
	But as I've mentioned to you there are people,	19:09
	still a minority, who do take that viewpoint.	19:12
	Doctor Albert Summers of the Conference Board,	19:16
	I've already mentioned.	19:20
	My colleague at Newsweek, Doctor Henry Wallach of Yale	19:22
	has made some forecasts which involve a genuine recession,	19:30
	that means two quarters in 1974	19:36
	of actual negative real growth.	19:39
	I don't think we should make very much of this	19:45
	difference of opinion between a growth recession	19:47
	and a genuine recession because it's very much	19:49
	a matter of degree.	19:53
	The Wharton School we say does not call	19:56
	for a genuine National Bureau recession.	19:58
	But when you look at the quarterly pattern	20:01
	of its rate of real growth.	20:05
	It has...	20:08
	For the first three quarters of 1974	20:11
	an average of, well as I make it out,	20:17
	less than 0.5% real growth per annum.	20:21
	Now that's a very low rate,	20:27
	it's not negative but given the accuracy	20:31
	of precision of our forecast	20:36
	for as long time as a year ahead,	20:39
	I don't think that there's much difference	20:41
	between that forecast and the Summers forecast.	20:43
	The only difference is that if you begin	20:47
	more and more to believe in a genuine recession	20:49
	then there's more and more the probability	20:52
	that it has to be taken seriously,	20:55
	that it won't be just one of these	20:57
	bare National Bureau recessions but will be a	20:59
	old-fashioned kind of recession,	21:04
	more like the ones that we used to enjoy	21:07
	back in	21:10
	1948, '49,	21:11
	and...	21:13
	back before World War Two.	21:16
	Now I don't yet pick up	21:18
	anyone with a responsible track-record	21:21
	who at this point on the basis of the evidence	21:25
	which is available makes out a cogent case	21:29
	that we're going to be in a serious	21:32
	old-fashioned kind of recession.	21:35
	Now if this is what the bulk of informed opinion says,	21:41
	and by the way more casual forecasters,	21:47
	let's say somebody who relies	21:50
	heavily on judgemental models or somebody who relies	21:55
	fairly heavily on monetarist notions.	22:01
	I don't think that such people	22:04
	are inclined to disagree	22:08
	with the general qualitative nature of this forecast	22:10
	and my recollection,	22:12
	I haven't checked this because I haven't received	22:14
	a recent release from the Federal Reserve Bank of St. Louis	22:19
	but my recollection is that their model	22:22
	which in any case has been running	22:25
	with very low estimates would	22:28
	not exceed the 4% real growth estimates	22:31
	that would be needed for somebody to be able to say	22:38
	we aren't going into a growth recession.	22:41
	However that's only surmised,	22:43
	I haven't seen the most recent release and....	22:45
	You should take it with a pinch of salt.	22:51
	Now this...	22:55
	Moving into a real...	22:58
	Growth recession raises some important problems.	23:02
	If you want to understand what seems to be	23:08
	a difference of opinion among	23:11
	economists who are advising on policy,	23:15
	I think that you have to dig beneath these figures	23:19
	and have some background.	23:23
	Now, it could be that one expert thinks	23:26
	the other expert's crazy, he's just lost his marbles,	23:29
	the Federal Reserve have lost their marbles.	23:31
	We're in a period of inflation and the	23:35
	experts are not advising	23:40
	draconian fiscal tightness to	23:44
	help solve that inflation.	23:48
	And draconian behavior with respect to	23:50
	the rate of growth of the money supply.	23:55
	Or with respect to interest rates,	23:58
	or if draconian is too strong an adjective,	24:00
	strong determination by the Federal Reserve	24:04
	to keep the rate of growth of let's say	24:07
	the narrowly defined money supply	24:11
	at no more than 4% or at 4%,	24:14
	and the rate of growth of the more broadly defined	24:17
	M2 money supply at no more than 6%,	24:21
	perhaps at 6%.	24:25
	The reason why there's not an apparent consensus	24:27
	on such recommendations is of course the fact	24:33
	that people feel differently about how	24:37
	bad it would be if we do go into that growth recession.	24:42
	And how bad it would be if that growth recession is	24:46
	soon rather than later, and how bad it is	24:51
	if that growth recession	24:54
	turns itself into a genuine recession.	24:57
	Now I would say, and I say this	25:01
	based upon the evidence of having talked to people,	25:03
	that there are quite a number of people	25:09
	who not only expect that we're going	25:12
	to go into growth recession,	25:13
	but who think we ought to go into growth recession.	25:15
	They think it is both inevitable and it's desirable.	25:18
	And...	25:21
	If you understand that,	25:25
	then they have resolved a problem	25:27
	which other policy advisors are still struggling with.	25:31
	The reason why a policy advisor,	25:37
	let's say inside the Federal Reserve system	25:39
	would hesitate	25:43
	at this time when inflation is	25:45
	raging at more than a 6% annual rate	25:48
	to tell the Federal Reserve to bring	25:53
	the rate of growth of money supply to a halt.	25:56
	To make it even negative,	25:59
	or if you wanna be more moderate,	26:02
	to hold it at just below 4%.	26:04
	Is that...	26:08
	The results of this current behavior,	26:12
	most analysts believe is not registered	26:17
	in the actual GNP data	26:20
	until a considerably later period.	26:24
	Maybe 50% of the effect of what you do now	26:27
	is not realized	26:31
	until	26:32
	next Saint Valentine's Day.	26:35
	And in another three quarters,	26:39
	not until between Easter and Memorial Day.	26:41
	And the whole of its traceable effect,	26:46
	not until next Fourth of July.	26:50
	Well,	26:53
	when the	26:54
	best judgment	26:56
	based upon evidence tells us	26:59
	that the rate of real growth next Easter	27:01
	is going to be at...	27:05
	1% or 2%, if not negative, and tells us that	27:09
	unemployment will already have climbed back	27:15
	from 4.7%	27:19
	to considerably above 5%.	27:22
	That Federal Reserve advisor must ask himself	27:27
	whether he wants to counsel the Open Market Committee	27:30
	to do something which will increase	27:33
	the rate of climb of unemployment even further.	27:37
	And that's where the crunch comes with respect to policy.	27:42
	Partly it's the difference between	27:50
	the short view and the long view.	27:51
	If you take the long view	27:54
	and add the proviso that	27:56
	reasonably stable prices	28:00
	are a desideratum of the greatest urgency	28:03
	then you might well say,	28:08
	or you'd be very unpopular if you said it publicly,	28:11
	you might well say, what's so bad	28:15
	about having no growth in the American economy	28:18
	for one, two or two and a half years.	28:20
	It's true that this will put a heavy burden	28:25
	on the unskilled minorities,	28:28
	on people with the least favorable employment prospects.	28:31
	But you cannot make omelets without breaking eggshells and	28:39
	you ought to make this investment, painful as it is	28:47
	in the very short-run in the interests of the long-run.	28:50
	Now this is not really an issue	28:56
	for economic advisors to solve.	28:59
	Each particular analyst can use his own value judgements	29:03
	and proclivities in the way he pushes.	29:07
	But at a more basic level it's a problem	29:09
	for the Open Market Committee.	29:12
	It's a problem for the Congress	29:14
	and the president and the advisors to the president.	29:16
	And ultimately it's a problem for the American people.	29:20
	And I just want to conclude by saying	29:25
	that it seems to me a very curious reading	29:28
	of the history of our times	29:32
	if anyone is	29:34
	objectively very	29:37
	optimistic about the prospects	29:40
	that an electorate in a pluralistic,	29:43
	populistic democracy like our own	29:46
	is in fact going to take that long view	29:50
	which I've just described.	29:54
	So when you read about the sound and fury	29:55
	and the differences of opinion,	29:59
	don't think it's because normally sensible,	30:01
	informed economists have gone berserk,	30:05
	but rather realize that it's a reflection	30:10
	of the division which we have	30:14
	within our own breasts in our modern political economy.	30:17
-	If you have any comments or questions	30:22
	for Professor Samuelson, address them to	30:24
	Instructional Dynamics Incorporated,	30:26
	166 East Superior Street, Chicago, Illinois, 6-0-6-1-1.	30:28

Item Info

Title:

Tape 135 - Recession ahead

Date:

1973

Contributor:

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

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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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Tape 135 - Recession ahead

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