Tape 153 - Re-analysis of first quarter figures

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-	Welcome once again as MIT Professor Paul Samuelson	0:03
	discusses the current economic scene.	0:06
	This series is produced by	0:08
	Instructional Dynamics Incorporated.	0:09
	This program was recorded May 7th.	0:12
-	This is a very exciting time to be following	0:14
	the course of the American economy.	0:18
	We've had the first quarter numbers,	0:21
	I commented very briefly on them	0:24
	last time.	0:27
	Shortly after the new numbers come out,	0:29
	the way vultures go to carrion,	0:33
	the computer experts begin to grind out	0:37
	the new forecasts based upon	0:41
	the new benchmarks of the new numbers.	0:44
	And so today I can begin to tell you	0:46
	what wasn't available to me at the last recording,	0:49
	how the various forecasters have reacted	0:53
	to the rather surprising new first quarter numbers.	0:56
	All of this reminds us of the wisdom involved	1:02
	in that folk saying,	1:06
	if you must forecast, forecast frequently.	1:08
	I just learned from an article in one of the newspapers	1:12
	that that particular aphorism	1:17
	is attributed to Marcus Nadler.	1:19
	Well, more power to him.	1:21
	I'd rather be	1:25
	changing my mind and not stay wrong,	1:28
	in that sense be right,	1:32
	than to stick with a earlier wrong number.	1:33
	By and large I have to say that	1:39
	the forecasters have not lost their nerve	1:42
	as a result of the	1:46
	surprising and disappointing first quarter numbers.	1:49
	You might have thought that with	1:53
	5.8% rate of decline in the first quarter	1:57
	and with a worse rate of inflation,	2:00
	that those people who were inclined	2:02
	rather towards believing in a recession,	2:04
	who ordinarily position in that regard	2:08
	without taking into account any oil-break cuts	2:12
	that they would be now	2:16
	feeling more certain about their recession estimate.	2:19
	But if I look at the actual forecast,	2:22
	the new forecast of Albert Summers of the Conference Board.	2:25
	It doesn't appear to me that	2:28
	he is essentially more pessimistic than he was	2:30
	before he knew the first quarter numbers.	2:33
	On the contrary, he's more like the rest of the crowd now	2:35
	than he was previously.	2:40
	I noticed that Chase Econometrics which for once	2:44
	Wasn't on the nose, well nobody was on the nose	2:49
	in the first quarter forecast but	2:53
	it was a bit farther this time from the preliminary	2:55
	commerce estimates than the people I suppose	3:00
	that Chase Econometrics typically watches	3:05
	people like Otto Eckstein	3:09
	and DRI	3:11
	and Alan Greenspan.	3:13
	Well they were just a bit closer this time	3:16
	than Chase Econometrics was.	3:19
	Now that doesn't mean anything of course	3:21
	because it's your batting average over a long time	3:23
	that counts and also,	3:25
	all three that I've just mentioned	3:27
	are very much in the ballpark	3:29
	and particularly in the ballpark	3:32
	in comparison with the general run of forecasters.	3:34
	But it's interesting that	3:38
	Michael Evans in his discussions of the first quarter	3:41
	and what it means for forecasts to come	3:45
	has expressed the opinion that this time	3:48
	the original estimate of the commerce department	3:52
	may simply be wrong.	3:56
	Now it's a mug's game of course,	3:58
	every time your forecast isn't realized for you to say	4:02
	well I'm right and the figures are wrong, dammit.	4:06
	But that is not what I understand to be said here.	4:09
	There's a reasoned argument as to why	4:14
	the figures may be several billion dollars too low.	4:17
	And before we...	4:22
	Disregard that as sort of sour grapes,	4:27
	I want to call your attention	4:31
	to a very interesting phenomenon that's been noticed	4:33
	by people who follow the techniques of forecasting.	4:35
	Very often I'm told this	4:40
	by my colleague Franco Modigliani who	4:42
	is the...	4:46
	First among equals in the,	4:48
	what used to be called the FRB-MIT PENN Model	4:51
	and now is the called I believe the	4:54
	MIT-PENN Social Science Research Council Model.	4:57
	I'm told by him that very often their model	5:02
	isn't exactly right when the first estimates come out.	5:06
	But it's surprising how the first estimates,	5:11
	when they come to be revised,	5:13
	and they almost always are revised,	5:15
	tend usually, not always, to be revised	5:17
	in the direction of what the model said.	5:20
	So it may be that	5:24
	when all this is economic history and when we look back	5:28
	that the third shall be first,	5:32
	and that the first quarter which was surprisingly weak	5:35
	wasn't quite as weak as	5:42
	the preliminary estimates seem to suggest.	5:44
	I wanna report though that if I look at the different	5:49
	models they still...	5:54
	By and large all unchanged, they still by and large	5:58
	cluster around almost no change in the second quarter.	6:02
	On the one hand somebody like Doctor Eckstein	6:07
	of Data Resources Incorporated looks for	6:10
	positive numbers of some significance	6:13
	in the second quarter, the current quarter.	6:16
	And Chase looks for still a very small negative,	6:22
	but you can find the mob pretty much clustered	6:25
	within that same interval.	6:29
	And that's not much different from before.	6:32
	Now what's more important and what I'd like to	6:35
	talk about today because it's what	6:37
	is in the minds of everybody.	6:39
	The experts have not significantly been changing	6:42
	their estimates of inflation	6:48
	in the fourth quarter of the year.	6:51
	Now that's deceptive because there is a slight tendency	6:55
	for them to be edging up as you get nearer and nearer	6:59
	to that date and as you have been	7:01
	disappointed in	7:04
	your price forecast	7:06
	you begin to adjust your next forecast in the direction	7:08
	of the reality you've just experienced.	7:12
	But by and large you will find more people	7:15
	who think that the price inflation will be around	7:19
	6.5% to 7% in the fourth quarter of the year	7:23
	than you will find who think that price inflation	7:27
	will be double-digit numbers like 10% or 11%,	7:31
	like that which was experienced in the first quarter.	7:36
	Or even than	7:39
	8% or 9%.	7:42
	So we still have the split between	7:45
	the great...	7:48
	Lay public, the man in the street,	7:51
	the man in Main Street, the man in Wall Street,	7:55
	and the man on Capitol Hill,	7:58
	and on Pennsylvania Avenue.	8:02
	Split between all of them and the experts	8:04
	because there's still prevail throughout the land,	8:07
	an abiding concern about double-digit inflation.	8:11
	And so we have to ask ourselves	8:17
	could it be that this time	8:20
	the heart has reasons that reason doesn't know	8:24
	and that the instinct of	8:27
	the non-economist is more nearly correct.	8:30
	It's that problem that I wanna address myself.	8:35
	Related to it is the question	8:39
	of what we ought to be doing about the situation.	8:41
	And of course the number one question,	8:45
	well there two questions really,	8:47
	and these are both matters of hot debate.	8:49
	First, how much should the rate of growth	8:52
	of the money supply be	8:55
	contrived, engineered or permitted by the Federal Reserve	8:58
	in view of what we can expect ahead?	9:03
	And secondly, what should the budgetary posture be?	9:07
	And in particular, in this last fiscal policy connection,	9:11
	ought there to be some kind of a tax cut?	9:15
	A tax cut in part at least perhaps	9:20
	to counter	9:23
	the weakness that is in the economy.	9:25
	These are all related matters.	9:30
	Before I discuss the policy	9:33
	issue and try to weigh for you the pros and cons	9:36
	and discuss the probabilities	9:40
	and where the bulk of those probabilities lie.	9:42
	I ought to mention that we've had	9:45
	some more numbers	9:48
	since the first quarter numbers came in.	9:51
	In particular we have had the good news	9:54
	that unemployment dropped for the second time in a row.	9:59
	You'll recall it had been	10:03
	four and six tenths percent, that's low for this	10:06
	last business cycle expansion	10:11
	and it had been climbing	10:13
	and it actually took a jump to 5.2% earlier in the year but	10:15
	it came down to 5.1% and now is down to 5.0%.	10:22
	I think there's no doubt that this goin' take	10:28
	a good deal of esteem out of the movement for a tax cut.	10:30
	And so	10:36
	those members of the administration who	10:38
	oppose a tax cut,	10:43
	I'm thinking of people like	10:46
	outgoing Treasury Secretary Shultz	10:48
	will find that the new unemployment numbers	10:51
	provide them with defensive ammunition for their position.	10:56
	The same thing I think will be true of those who are	11:02
	urging upon the Federal Reserve a tight...	11:07
	Money policy.	11:11
	I have in mind here people like the so-called	11:14
	Shadow Open Market Committee which meets at intervals.	11:18
	I don't think they can afford to meet	11:22
	at three-week intervals like the genuine	11:24
	Open Market Committee but since they generally	11:27
	after meeting and consulting all the omens and...	11:30
	Symptoms, come out with the same recommendation, 5.5%,	11:37
	it doesn't really hurt us that we get those recommendations	11:42
	maybe only three months rather than every three weeks.	11:45
	Particularly since the Federal Reserve doesn't particularly	11:50
	seem to follow their recommended policies.	11:53
	While those who think that the money supply	11:59
	must be allowed to grow at 9% or more...	12:03
	Because...	12:09
	The rate of price increase is something	12:11
	which you must ride along with.	12:15
	They will find their argument weakened	12:18
	by the lower unemployment numbers.	12:21
	I know that if you pore over that unemployed...	12:25
	Unemployment number, you can...	12:29
	Argue in different directions, for example	12:33
	part of the drop in the unemployment percentage rate	12:35
	may have been to due to a...	12:39
	Reduction in the labor force,	12:44
	the numbers seeking work, and maybe that reduction	12:47
	in the labor force, those seeking work,	12:50
	has been a little bit	12:52
	more than one would've predicted	12:54
	on the basis of past experience	12:57
	for a period in the business cycle	12:59
	just like the present one.	13:02
	However from the standpoint of pressure on Congress,	13:06
	these niceties don't, I think matter.	13:13
	You have had...	13:16
	Senator Kennedy recommend a tax cut.	13:18
	You've had Senator Mondale of Minnesota	13:21
	recommend a tax cut, now there's not much	13:24
	news in that, these are two liberal senators	13:27
	if they're not both gonna run for the presidency,	13:32
	certainly it must be said that both of them	13:35
	have the presidency in the back of their minds.	13:38
	But more significantly,	13:43
	you've had some noises by speaker Albert,	13:45
	not a flaming liberal,	13:48
	not a left-wing Democrat,	13:53
	speaking in favor of a tax cut.	13:57
	And you've had some similar...	14:01
	Remarks by Senator Mansfield,	14:04
	the majority leader in the Senate in the same direction.	14:08
	Mansfield again is a middle of the road person.	14:12
	And there's even been talk although I will only believe it	14:15
	when I hear it with my own ears	14:18
	that chairman of the House Ways Means Committee,	14:21
	Wilbur Mills was beginning to look with slightly more favor	14:25
	on some kind of tax reduction.	14:30
	Well again, it's one thing if the unemployment numbers	14:34
	had been marching up 5.2%, 5.3%,	14:38
	5.5%, 5.7% by let's say the middle of the summer.	14:43
	And	14:50
	one could...	14:51
	Expect that	14:53
	by election time,	14:54
	November 1974, they might well be at the dangerous,	14:57
	politically dangerous 6% level.	15:03
	Well that may still happen,	15:06
	but it hasn't yet materialized.	15:09
	Well so, you must factor into the political equation	15:12
	and I may say into the policy, economic equation	15:16
	what's been happening to the unemployment rate.	15:21
	That's point number one.	15:26
	Point number two, we've had new information	15:28
	on businessmans intentions to invest in plant and equipment.	15:33
	I'm referring now to the latest McGrath Hill private survey.	15:38
	This is a very respected survey, very much watched	15:43
	and it interpolates between the official	15:46
	Office of Business Economics SCC	15:49
	governmental survey of businessmans intentions.	15:52
	And this is certainly on the expansionary side.	15:55
	The number now is something like 19%	15:59
	increase in plant and equipment expenditure for the year	16:04
	over the previous year.	16:07
	I seem to recall that the last government figure,	16:10
	which perhaps was only modestly below	16:12
	the previous McGrath Hill figure	16:15
	was more in the range of about 13%.	16:17
	Of course these are money numbers and when you deflate them	16:20
	by the increase in cost of construction,	16:24
	you don't get real increases of this magnitude.	16:26
	But if you were to have businessmen	16:29
	trying to get 19% increase	16:32
	and if they succeeded in getting let's say only 14%,	16:35
	but the shortfall was due to supply reasons	16:41
	then I doubt that the deflator would be so high	16:44
	that you could conclude that there'd been no real increase.	16:46
	Those who are apprehensive about a serious recession	16:53
	and about a dangerous problem of unemployment	16:59
	will not find the new plant and equipment investment figures	17:02
	particularly buttressing their case.	17:07
	Now let me...	17:12
	Go then into the	17:16
	policy debate.	17:18
	First, most people and I mean now	17:24
	most economists are very diverse methodology,	17:28
	a very diverse philosophical and political opinions.	17:32
	I'm not of the two-digit price inflation school.	17:37
	They don't deny that in case of	17:44
	a crop failure,	17:48
	a serious crop failure that we could be	17:50
	off to the races again with respect to food.	17:52
	And they don't deny that labor is restive.	17:55
	So that collective bargaining agreements	17:59
	could begin to escalate in their escalated demands.	18:02
	But when they put all these elements together,	18:08
	they feel that this present time	18:12
	is the spring of our discontent	18:14
	and that if we can just hang on	18:17
	things are gonna get a bit better.	18:18
	For example,	18:21
	a monetarist who believes that the long-run trend of prices	18:23
	is determined primarily by the long-run trend	18:29
	of the money supply...	18:32
	Will find	18:35
	that	18:37
	a 9% trend in the money supply...	18:38
	Which is what we've been having since early 1971 despite	18:44
	what Federal Reserve spokesmen seem to say about their goal.	18:48
	That increase in the money supply would correspond	18:54
	to about a 6% increase in the price level,	18:58
	not the current 11% increase which we've been observing.	19:05
	And so by...	19:10
	Monetarist lines of reasoning	19:12
	when we get over the bulge	19:15
	that results from the cessation of price controls,	19:20
	it's a 6% level to which we'll return.	19:25
	Now of course a monetarist looking at	19:27
	the way the world's been going politically in the last	19:31
	two decades might well be of the opinion	19:36
	that we're losing our Puritan ethic more and more	19:40
	and if 6% price increase is what's indicated	19:44
	by recent behavior since '71,	19:49
	with our increasingly loose moral fiber	19:52
	with respect to the money supply	19:56
	then there may well be an acceleration	19:59
	for the next few years in the rate of growth of money supply	20:03
	and therefore an acceleration of prices	20:06
	beyond 6% but that's in the womb of the future	20:10
	and isn't indicated for the next year or two.	20:13
	Let me, I mentioned to you a very interesting	20:19
	memorandum, actually a speech that was given by	20:24
	Professor Robert J. Gordon of Northwestern University.	20:27
	I think was a speech given before a business group.	20:31
	Well it was a Conference Board group in Chicago.	20:33
	Professor Gordon is one of the ablest young	20:37
	general business cycle economists.	20:43
	He's in his 30s and any of you who have been reading	20:47
	Brookings Papers will see at very frequent	20:52
	periodic intervals discussions by him	20:55
	of how to account for what's been happening to wages	20:58
	and what's been happening to prices.	21:01
	He has recently taken a good hard look	21:03
	at the policy problem.	21:07
	I believe he started out with the view that...	21:10
	There was something to be said for	21:17
	not accommodating...	21:20
	The economy in its expansion in the last half of the year.	21:23
	By a concomitant increase in the money supply	21:29
	at a rate higher than the long-run level.	21:33
	But much to his own surprise,	21:37
	when he came to analyze the consequences of that position,	21:40
	he found himself converted to the opposite viewpoint.	21:44
	Here's how his argument goes:	21:49
	First, he says he cannot find...	21:51
	That the control programs had any particular	21:56
	downward effects upon wages.	21:59
	This is a bit surprising 'cause most of us	22:03
	have thought that the control program	22:05
	if anything had effects upon wages	22:07
	and didn't have effects on prices.	22:09
	But his finding	22:11
	is interesting because it's the opposite of that.	22:13
	It is that prices are 2% or 3% lower today	22:16
	than they would've been without the control program	22:21
	but wages seemed to be about the same given everything else.	22:23
	The result is he feels	22:26
	that prices now that we have gotten rid of the controls	22:29
	are gonna want to get back that 3%.	22:32
	And so for the rest of 1974 and for part of 1975,	22:36
	he has built into his price equation some catch up.	22:42
	This is bad news in a way because it means	22:46
	that the 5% or 6% which is the base-load	22:51
	rate of price increase	22:54
	is going to be delayed because of the catch up period.	22:57
	This is aside from...	23:01
	A bad harvest.	23:05
	He...	23:07
	Does not take that into account in this particular exercise.	23:09
	And so he says now, suppose that the Federal Reserve	23:14
	does what people have been urging upon it.	23:17
	Suppose that out of its concern for double-digit inflation	23:20
	or for that matter, out of a more rational concern perhaps	23:24
	for 7% or 8% or 9% price inflation,	23:29
	it maintains a rather stiff posture with respect	23:32
	to the money supply.	23:37
	What will consequence be?	23:40
	As he works out and here I think I wouldn't myself	23:42
	put the greatest weight as he works out	23:47
	the velocity multipliers that	23:50
	one might use to translate this into real output.	23:54
	This results in a rather anemic expansion	23:58
	in comparison with what most of the forecasters	24:01
	are predicting going into 1975	24:04
	and what most of the policy goal people	24:08
	are saying is a policy goal.	24:10
	In particular he quotes, as we all do,	24:12
	the Council of Economic Advisor's own policy goal	24:15
	with respect to real output.	24:18
	He says they'll never make it	24:22
	without the tighter...	24:23
	Monetary policy.	24:26
	As a result unemployment will be on the rise.	24:30
	It may be 5% now but if one can believe Gordon's exercise	24:34
	it will be moving up in '75 to 6%	24:38
	and he even can get it up to 6.6%	24:43
	without stretching the pattern of past experience.	24:46
	Now what do you buy	24:51
	for this rather heavy burden?	24:54
	He spells out, he's done that in the Brookings Papers,	24:56
	what the actual human welfare costs are	25:00
	of the increased unemployment.	25:04
	And he says what do you buy?	25:06
	As far as 1974 and 1975,	25:08
	let's say between now and the end of 1975.	25:11
	In Professor Gordon's opinion,	25:15
	and it's an opinion worth listening to,	25:17
	you buy almost nothing.	25:19
	To speak in technical parlance,	25:22
	Professor Gordon believes	25:25
	that the short-run Phillips curve	25:28
	over the next year and a half	25:31
	is practically horizontal.	25:32
	So Arthur Burns is so to speak crucifying mankind,	25:34
	not on a cross of gold but on a cross of a	25:41
	severely limited rate of growth of the money supply	25:44
	with the effect that if you work out	25:48
	the cost and benefit equation	25:51
	there are very few benefits,	25:53
	almost no benefits on the side of inflation,	25:55
	you're gonna get just the increase,	25:58
	the improvement, the abatement in inflation	25:59
	that you were gonna get anyway.	26:02
	But you do get a tremendous loss in real output.	26:04
	Now what are we to think about this?	26:10
	First.	26:14
	I believe that I would want to augment his analysis	26:16
	by analysis of what happens after 1975	26:20
	because I suppose we would all agree	26:25
	that the initial conditions that you leave for in 1976	26:27
	are a bit different under one scenario of Gordon,	26:31
	the tight money scenario as against the one	26:35
	which he now advocates which is	26:37
	the accommodating money supply.	26:38
	That's point number one.	26:41
	Point number two, suppose somebody says	26:42
	well if you file this philosophy	26:44
	every time the economy is weak,	26:46
	this is a built-in recipe for secular inflation.	26:49
	I think Professor Gordon would answer	26:53
	in the following way, he would say	26:56
	we've had a once and for all increase in prices	26:57
	due to the OPEC oil monopoly,	27:01
	due to the crop failures,	27:03
	and that it is a better part of wisdom	27:06
	in a mixed economy when you have an exogenously produced	27:09
	jump upward in prices to a new plateau, to a new trend base.	27:16
	The Federal Reserve in that case should be accommodating	27:23
	rather than to try to roll back those particular prices.	27:26
	Now one wants always to look for the	27:32
	weaknesses in any analysis, I think that I would conclude	27:36
	the following.	27:41
	First I think we must realize the imprecision	27:42
	of any econometric estimates.	27:45
	So that although I had no quarrel	27:47
	with Professor Gordon's mean values	27:49
	and I share his concern that you won't do much	27:54
	about inflation but you will do something	27:57
	about creating stagnation, I think that there is	28:00
	a much wider dispersion around those means than	28:04
	most laypeople realize and even than some	28:08
	econometricians realize and if I were Professor Gordon	28:11
	I would emphasize that fact.	28:14
	Secondly I don't have very much confidence	28:17
	in those stability of those short-run money multipliers	28:20
	and I think that the economy could have	28:24
	greater underlying strength than is indicated	28:29
	in the Monte Carlo simulation exercise by Professor Gordon.	28:32
	Nevertheless, it is a reasoned argument	28:36
	which we should ponder over and which we would neglect	28:39
	to our peril.	28:42
-	If you have any comments or questions	28:45
	for Professor Samuelson--	28:47

Item Info

Title:

Tape 153 - Re-analysis of first quarter figures

Date:

1974

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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ark:/87924/r48912700
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Tape 153 - Re-analysis of first quarter figures

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