Tape 72 - Reviewing 1971's first quarter: a preview
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- | Welcome once again as MIT professor Paul Samuelson | 0:02 |
discusses the current economic scene. | 0:04 | |
This biweekly series is produced by Instructional Dynamics | 0:07 | |
and was recorded March 22nd, 1971. | 0:10 | |
- | We are now coming toward the end of the first quarter | 0:13 |
but we won't know for some weeks after that | 0:17 | |
just how the GMP increased in the first quarter. | 0:20 | |
Putting together what signs are already available, | 0:25 | |
when is it that a person can say at this stage? | 0:28 | |
You'll remember that estimates for the first quarter | 0:32 | |
of 1971 as an increase over the last quarter | 0:36 | |
of 1970 ranged anywhere | 0:42 | |
from 25 to 35 billion dollar increase | 0:48 | |
in money terms. | 0:51 | |
That of course is a whopping increase. | 0:54 | |
But much of it, most of it, was expected | 0:57 | |
to come from the snap back of the General Motors strike | 1:01 | |
from the general auto complex related industries. | 1:05 | |
And some of it was expected | 1:10 | |
to come from the possible middle | 1:11 | |
of 1971 steel work stoppage | 1:14 | |
leading to advanced inventory hedge buying. | 1:17 | |
I was at a meeting last week in New York. | 1:22 | |
The Institutional Investors' meeting, | 1:26 | |
this is a very large annual affair. | 1:28 | |
Quite expensive. | 1:31 | |
In which various problems that interest money managers | 1:32 | |
are discussed. | 1:36 | |
I happened to be on a panel | 1:37 | |
in which the general economic outlook was discussed. | 1:39 | |
I was very lucky because my fellow panel member | 1:43 | |
was Dr. Alan Greenspan. | 1:46 | |
Who is of and perhaps it would be more accurate to say | 1:50 | |
is the Towns and Greenspan Consulting firm | 1:53 | |
and who also is an informal advisor to President Nixon. | 1:58 | |
He is an official advisor to, I believe the | 2:05 | |
Council of Economic Advisors and the US Treasury. | 2:09 | |
Just recently he's been put | 2:13 | |
on the Board of the Dreyfus Fund | 2:15 | |
and he's a relatively young, active, experienced, | 2:17 | |
articulate observer of the passing scene. | 2:20 | |
He said, and his words chilled that audience, | 2:23 | |
that the developments so far in the first quarter | 2:27 | |
are on the bleak side. | 2:33 | |
I don't recall whether he gave a number for the increment | 2:36 | |
but instead of being at the upper end of the range, | 2:38 | |
say 35 billion, a listener of Mr. Greenspan | 2:43 | |
might reasonably say that we will be | 2:48 | |
at the 27 billion increase, at the lower range. | 2:51 | |
In fact he said that if you purified the data | 2:56 | |
of any General Motors strike effects | 3:02 | |
it is even open to question whether | 3:06 | |
there is an upturn at all. | 3:08 | |
This discussion of course was in the context | 3:10 | |
of 10-66, and all that, | 3:12 | |
whether the indications | 3:16 | |
of the passing scene pointed | 3:19 | |
more or less in favor | 3:24 | |
of the rather high forecast by the government. | 3:26 | |
Or whether it pointed down | 3:31 | |
toward the more fashionable estimates. | 3:36 | |
Mr. Greenspan's testimony on this point was unequivocal. | 3:39 | |
He said that we have to do even better than we've been doing | 3:43 | |
to realize the fashionable forecast. | 3:47 | |
And he went down the line discussing retail sales, | 3:50 | |
discussing various components of the GMP. | 3:54 | |
It rather surprised me because he said automobiles aside | 4:00 | |
there didn't even seem to be any strength in retail sales. | 4:03 | |
Whereas I thought there was a little bit | 4:06 | |
of perceptible increase. | 4:08 | |
Not much, but a little bit. | 4:10 | |
I'll remind you that unemployment went down to 5.8% | 4:13 | |
in February but one has to notice | 4:19 | |
that it wasn't because employment went up. | 4:24 | |
And I mean up compared to the seasonal, | 4:28 | |
poor as all seasonal corrections are. | 4:30 | |
But rather that there was a shrinkage in the workforce. | 4:33 | |
The poor showing of employment in February | 4:36 | |
I had thought might be a reflection of great things | 4:41 | |
in the line of productivity. | 4:45 | |
But alas in lack for that hypothesis, | 4:47 | |
the Fellow Reserve Board Index of Production | 4:50 | |
actually declined in February. | 4:52 | |
I went back to look at some of the first quarter | 4:55 | |
forecasts earlier and most of them did not call | 4:57 | |
for anything like that in the February figures. | 5:00 | |
Mr. Greenspan pointed out | 5:05 | |
that all the housing starts are up. | 5:06 | |
The size of housing is down. | 5:08 | |
That is the size of the average unit. | 5:12 | |
So that the actual square feet being built | 5:15 | |
is by no means up commensurate with start numbers. | 5:19 | |
I suppose on the other side the dollar expenditures | 5:26 | |
have to be regarded as somewhat swelling | 5:29 | |
because of the steady increases still in the cost | 5:32 | |
of construction at the home building level and otherwise. | 5:36 | |
All in all it was not a speech destined | 5:42 | |
to make the group there happy. | 5:46 | |
In the mean time, not much news is coming out of Washington | 5:50 | |
which would buttress the administration's forecast. | 5:54 | |
There really has been a quiet on that particular front. | 5:57 | |
If I may presumably do so, let me tell you what I think | 6:01 | |
is the most powerful argument in favor | 6:04 | |
of the general direction | 6:06 | |
of the administration's earlier forecast. | 6:08 | |
First, let's not believe the administration budget numbers. | 6:11 | |
Let's assume that they will end up being in error | 6:17 | |
on one side. | 6:20 | |
I'm not now speaking of any conscious duplicity, | 6:21 | |
or even unconscious duplicity, | 6:24 | |
but just betting on overrides. | 6:25 | |
That makes it of course a new ballgame | 6:29 | |
and if you have, in my judgment, a large enough increase | 6:30 | |
in the full employment deficit, | 6:35 | |
which means a very large increase in the actual deficit, | 6:38 | |
much larger than the 11 and a half billion | 6:40 | |
that the president spoke of. | 6:42 | |
Then you ought properly to change your estimates | 6:44 | |
of GMP for the year. | 6:48 | |
And my opinion you should change them upward. | 6:50 | |
Secondly, no particular new numbers have been coming out | 6:53 | |
I believe on the side of giving one special new confidence | 6:57 | |
if you didn't have any beforehand, | 7:02 | |
in what I've described as the Arthur Laffer Model. | 7:04 | |
Which is a three equation system. | 7:07 | |
But whose principle equation involves an instantaneous | 7:10 | |
increase in the money GMP as a result | 7:14 | |
of an instantaneous increase in money. | 7:17 | |
Now it is true that if you look at the money numbers | 7:20 | |
in the last month or two, | 7:25 | |
the rate of growth of the money supply | 7:27 | |
which had been languishing well below what most | 7:30 | |
of us thought was the target of the open market committee. | 7:34 | |
That rate of growth has begun to increase. | 7:37 | |
Actually there's some technical reasons why the rate | 7:40 | |
of growth the money supply in the weeks ahead | 7:43 | |
might be expected to increase still further. | 7:47 | |
You will be acquainted with a lot of the difficulties | 7:49 | |
in defining the money supply. | 7:52 | |
How do you handle your dollar transactions? | 7:54 | |
Do you want a broad or a narrow definition | 7:57 | |
of the money supply? | 7:59 | |
Has Regulation Q interfered with various components | 8:00 | |
of the broad M2 definition? | 8:05 | |
Those problems are not what I have in mind, | 8:07 | |
although they are very important problems. | 8:09 | |
I have in mind the fact | 8:12 | |
that we still do not include government deposits at all | 8:13 | |
in the money supply. | 8:16 | |
I'm not prepared to argue | 8:17 | |
that if you have to have only one concept | 8:19 | |
of the money supply, | 8:21 | |
that concept should include government deposits | 8:22 | |
or should include government deposits on a par | 8:25 | |
with other kinds of deposits. | 8:29 | |
But I think it will be agreed | 8:31 | |
that it's very difficult to make seasonal corrections | 8:33 | |
in the money supply which | 8:37 | |
that part which doesn't involve government deposits. | 8:39 | |
Since there is a going back and forth | 8:42 | |
of billions of dollars between the money supply | 8:49 | |
which does not include bank deposits | 8:54 | |
and the government bank deposits themselves. | 8:56 | |
And I have the impression that this year | 9:00 | |
the slow down, some of the slow down, | 9:03 | |
in the seasonally corrected growth | 9:06 | |
of the money supply from October to the end of the year | 9:08 | |
and into maybe the beginning of the year | 9:12 | |
was due to the fact that there was a more than usually | 9:14 | |
seasonal acute buildup of government deposits themselves. | 9:18 | |
If that's the case, it's not at all unlikely | 9:23 | |
that there will be more than the usual seasonal spinning out | 9:26 | |
of those deposits. | 9:30 | |
As a result you should be warned | 9:33 | |
that the, for some periods of time, | 9:35 | |
short or longer, the money supply, | 9:38 | |
and I now speak of the narrowly defined money supply, | 9:43 | |
may find itself growing by numbers which look well gigantic. | 9:47 | |
Not by three and 4%, which disappointed people. | 9:51 | |
And not by the five or 6% which presumably the authorities | 9:56 | |
are aiming for, but we might witness some 9%, 10%, 11%, 12% | 9:59 | |
rates of growth the money supply | 10:07 | |
at least for short periods of time. | 10:08 | |
And if all that's afoot there is the reflux | 10:10 | |
from government balances to the rest of the community | 10:14 | |
that should not alarm anyone unduly. | 10:19 | |
And it shouldn't be given a very good weight. | 10:21 | |
Presumably over a longer cycle, | 10:25 | |
I mean from October to summer or certainly from October | 10:27 | |
to October, the ups and downs of the government bank balance | 10:32 | |
should wash out of the statistics. | 10:39 | |
And I think the important thing for the outlook | 10:42 | |
will be whether the October to October number | 10:46 | |
is in the general range of 6% | 10:49 | |
or whether it's in the general range of nine and 12% | 10:51 | |
or whether it's in the general range of 3%. | 10:53 | |
Those will make a very great deal of difference. | 10:56 | |
I'm continuing though to try to find | 11:01 | |
in the current situation | 11:04 | |
reasons to counter the slight short run pessimism | 11:07 | |
about the strength in the economy. | 11:15 | |
Which Dr. Greenspan as an honest observer | 11:16 | |
had to report just recently have been | 11:19 | |
in the particular numbers. | 11:23 | |
Dr. Geoffrey Moore who's the Commissioner | 11:25 | |
of the Bureau of Labor Statistics | 11:28 | |
and who used to be vice president | 11:31 | |
of the National Bureau, perhaps on leave, | 11:33 | |
National Bureau of Economic Research, | 11:35 | |
he was director of research there. | 11:37 | |
He has been a long time associate | 11:38 | |
at the National Bureau of Economic Research | 11:40 | |
of Arthur Burns. | 11:42 | |
He has worked with Arthur Burns | 11:44 | |
and Julius Shiskin. | 11:48 | |
Julius Shiskin was for many years in the Census, | 11:51 | |
but now is in the Office of Management and Budget | 11:53 | |
I believe, on timing relationships in the business cycle. | 11:57 | |
Those three names that I mentioned | 12:02 | |
are the three people who carried forward | 12:04 | |
the old Warren Persons ABC Barometer program | 12:07 | |
to its greatest degree of elaboration | 12:11 | |
in the search for leading indicators | 12:19 | |
which would help in predictions. | 12:20 | |
Well, Geoffrey Moore wrote a letter | 12:24 | |
to the New York Times, I'm sorry to say that the curator | 12:25 | |
of letters in the New York Times thought it | 12:29 | |
of such unimportance, that he or she did not put it first | 12:33 | |
and didn't put it in a prominent place | 12:37 | |
on the letter page. | 12:39 | |
It just is there along with all the other mail. | 12:40 | |
But Geoffrey Moore there gives an argument | 12:46 | |
which I think you ought to take seriously | 12:48 | |
because it's perhaps the most important reason | 12:50 | |
for giving any credence at all to the rather optimistic | 12:55 | |
or I should say rather expansionary numbers predicted | 12:59 | |
by the government. | 13:02 | |
What Jeffrey Moore did in effect was the following, | 13:06 | |
he said, "Write on a ticket what happened | 13:09 | |
in the first year of recovery after the 1948, '49 | 13:12 | |
post war recession. | 13:16 | |
How much did real output grow? | 13:18 | |
How much did money GMP grow? | 13:20 | |
On another ticket do the same for the period | 13:23 | |
just following the 1953, '54 recession. | 13:26 | |
On a third ticket do the same for the '57, '58 recession | 13:30 | |
and do the same for the '60, '61 recession." | 13:34 | |
I may add that some people might want him | 13:37 | |
to take account of the mini-recession of 1966, 1967. | 13:39 | |
"Write these down." | 13:47 | |
He actually made some more refined calculations | 13:48 | |
of previous peak to end of first year recovery | 13:50 | |
rates of growth. | 13:53 | |
"And put them in a hat, now draw tickets at random | 13:56 | |
from the hat," or what's the same thing, | 14:01 | |
draw all the tickets and average them out. | 14:02 | |
"And when you do that," said Dr. Moore, | 14:05 | |
"you will find that the 4.5% real output growth | 14:08 | |
forecast by the Council of Economic Advisors | 14:13 | |
and the President, and buttressed | 14:15 | |
by the Schultz-Laffer forecast are not at all out of line. | 14:17 | |
On the contrary, they're on the low side." | 14:21 | |
Somewhat the same story I think can be told | 14:25 | |
about the money magnitudes. | 14:27 | |
Dr. Moore has warned of course, | 14:29 | |
that there may be certain special features | 14:31 | |
of this recession, | 14:33 | |
I would myself take that warning very seriously. | 14:33 | |
But if you're willing to disregard any special features | 14:37 | |
of this recovery and regard it | 14:41 | |
as just a kind of random sample from that universe | 14:45 | |
then the government numbers can be justified. | 14:49 | |
I'll add that we have a good deal of information showing | 14:55 | |
that forecasters often are qualitatively correct | 14:58 | |
in the direction of their forecast. | 15:03 | |
But they tend to be a little bit timid | 15:06 | |
about the magnitude of their forecast. | 15:08 | |
They always shade towards a conservative side | 15:11 | |
so if real output is pretty surely going | 15:14 | |
to go up instead of forecasting say five or 6% | 15:18 | |
they play safe and forecast three or 4%. | 15:23 | |
And when you study their batting averages by hindsight | 15:25 | |
you find that both on the upside and the downside | 15:33 | |
they underestimate the quantitative magnitude | 15:35 | |
of the qualitative directions which they have themselves | 15:38 | |
correctly foreseen. | 15:42 | |
This is never more apparent | 15:45 | |
than in the first year of recovery. | 15:46 | |
So that particular argument | 15:50 | |
which I might mention has been documented | 15:52 | |
by Professor Onrei Tyle, | 15:56 | |
then in Rotterdam now at the University of Chicago, | 15:59 | |
that's also is reason for thinking | 16:02 | |
that we pessimists, we realists so called, | 16:03 | |
may have the laugh on us | 16:08 | |
and the government forecast turn out | 16:10 | |
to be completely correct. | 16:12 | |
I would think that the best argument for the government. | 16:15 | |
Do I think it a persuasive argument? | 16:19 | |
On the whole I don't. | 16:23 | |
I don't because there were some very special features | 16:25 | |
of this recession and I don't think | 16:28 | |
that these tickets in a hat represent | 16:31 | |
any sort of a random variation | 16:36 | |
around some systematically related | 16:42 | |
things which we call typical business cycles. | 16:46 | |
It seems to me that in order to have great confidence | 16:52 | |
in this particular method | 16:55 | |
you must be a subscriber | 16:56 | |
to a particular nonlinear theory of the business cycle | 16:58 | |
in which once God Almighty, or mother nature ordains | 17:02 | |
that you're in a recovery so that the National Bureau | 17:06 | |
can change the color of the stationary. | 17:10 | |
Then you are locked into a syndrome | 17:12 | |
that is pretty much automatic | 17:14 | |
and the same in its developments. | 17:18 | |
We know that in the human body | 17:23 | |
there are many such syndromes. | 17:25 | |
You touch a particular nerve in particular way | 17:26 | |
and you unleash a repeated set of operations | 17:29 | |
which can be duplicated in except | 17:33 | |
for small observational errors and minute changes, | 17:35 | |
there is great predictability. | 17:40 | |
And I'm not sure that I think the evidence is very strong | 17:42 | |
for such nonlinear theory of the business cycle. | 17:47 | |
To illustrate what I mean, | 17:50 | |
if you go back and make an actual simulation | 17:53 | |
or a thought experiment even, | 17:55 | |
as Mrs. Irma Adelman, Professor Irma Adelman | 17:57 | |
of Northwestern did some years ago | 18:00 | |
with her husband who's a professor of physics. | 18:02 | |
They used a model of the business cycle | 18:05 | |
something like Dr. Lawrence Klein's model | 18:08 | |
and they shocked it. | 18:11 | |
They put random shocks into it. | 18:14 | |
Which in their character were rather like | 18:17 | |
the theory which Professor Schumpeter | 18:20 | |
and Professor Shpetof on the continent, | 18:22 | |
Professor well, Kutveksal. | 18:25 | |
Alan Hanson had that investment opportunities, | 18:28 | |
innovations, railroad building, all such things | 18:31 | |
are like shocks operating upon a system. | 18:34 | |
When the Adelmans then simulated the course | 18:37 | |
of business behavior over a period of say a century | 18:40 | |
like the century from let us say 1860 to 1960, | 18:45 | |
they ended up with business cycles | 18:51 | |
very much like those that the National Bureau observes. | 18:53 | |
And they could find reference cycles, | 18:57 | |
they could find turning points, | 18:59 | |
they could work out the average duration | 19:00 | |
of the business cycle. | 19:02 | |
And the frequency distribution around those averages | 19:04 | |
were very much like that which the National Bureau observes. | 19:07 | |
I don't know what one can conclude from that. | 19:12 | |
I suppose one can conclude | 19:13 | |
from that the Klein-like macro models | 19:16 | |
are possible underlying mechanisms | 19:19 | |
that might be aping, or duplicating, | 19:22 | |
or illuminating the actual structure of the United States. | 19:25 | |
So I would think in a hundred years there'd | 19:29 | |
be some pretty serious structural changes | 19:30 | |
that are going on. | 19:32 | |
Well now in such a model it would not be the case | 19:34 | |
that you would get a terribly good predictions | 19:39 | |
of any one recovery from the universe of all recoveries. | 19:42 | |
There's something topologically about this process. | 19:48 | |
You don't know til after the fact | 19:51 | |
whether a particular little upbeat is a recovery | 19:53 | |
or whether it's just a false movement | 19:58 | |
in a stubborn recession. | 20:02 | |
And so the real question is | 20:05 | |
and in a way Alan Greenspan and the speech that I quoted you | 20:08 | |
throws open that question is | 20:12 | |
whether Jeffrey Moore's technique might not work out right | 20:15 | |
but work out right not for the period | 20:19 | |
of the government's forecast. | 20:21 | |
In other words not for the calendar year 1970 to '71, | 20:24 | |
which shouldn't be thought of | 20:27 | |
even as the first year recovery | 20:28 | |
but think of the, | 20:30 | |
as having hit bottom or turned up, | 20:32 | |
however you wanna call it. | 20:35 | |
And maybe you need some kind of a growth cycle terminology | 20:37 | |
to get, make this dating, | 20:42 | |
but suppose you put that date toward the end of November? | 20:44 | |
When the General Motor strike ended. | 20:49 | |
Then you won't find too many people | 20:53 | |
to doubt that 4.5% real growth is a reasonable figure | 20:56 | |
for November to the next November. | 21:00 | |
For that 12 months, but we're not talking | 21:03 | |
about the 10-65 forecast of the government. | 21:06 | |
We're talking about some hypothetical thing | 21:09 | |
which is very different from that. | 21:11 | |
Before I conclude talking about the current outlook | 21:14 | |
let me call to your attention the fact | 21:20 | |
that the First National City Bank | 21:22 | |
in one of it's recent monthly letters | 21:25 | |
has taken an optimistic view. | 21:28 | |
What the First National City Banks says in effect is this, | 21:31 | |
that consumption may be expected to save our bacon. | 21:34 | |
Or save the bacon of the Washington forecasters | 21:40 | |
because consumption will go up, will be strong. | 21:43 | |
The argument is put almost in a topological way | 21:48 | |
and as a totology is really uninteresting. | 21:53 | |
What it said as I recall, I don't pretend | 21:57 | |
that I have exactly in mind the wording. | 22:03 | |
I saw an advanced copy of it | 22:06 | |
and I didn't even have the final published version | 22:08 | |
but my recollection is it went something like this. | 22:12 | |
If you wait long enough consumption's gotta go up. | 22:14 | |
If you wait long enough consumption has to go up. | 22:18 | |
It's a completely uninteresting sentence. | 22:21 | |
Unless it's telling us something more | 22:26 | |
than what it literally says. | 22:29 | |
Because of course we know that consumption goes up | 22:31 | |
and down and we can suppose | 22:33 | |
that sometime between now and 1999, | 22:36 | |
consumption is going to go up. | 22:39 | |
A fair interpretation of what's being said there | 22:42 | |
is this, that because the money supply | 22:43 | |
has grown more rapidly in recent quarters | 22:47 | |
and because there is a lagged effect from a growth | 22:51 | |
in money supply to the growth of consumers liquidity | 22:55 | |
the First National City Bank | 23:00 | |
is betting upon a direct linkage, | 23:01 | |
a direct channel of causation from the money supply | 23:05 | |
to the consumption series. | 23:08 | |
They even, I believe, professed to see some signs | 23:11 | |
of a pick up in consumption in the early data. | 23:16 | |
Early 1971 data, that we shouldn't exaggerate this. | 23:21 | |
And as a matter of fact the Greenspan Report, | 23:24 | |
if it's reasonably on the beam | 23:29 | |
and admittedly he would be himself expect | 23:31 | |
to have more accurate numbers later. | 23:36 | |
That doesn't quickly suggest that we've come there yet. | 23:38 | |
I was hoping to find some regression equations | 23:43 | |
that I could replicate in my own computer | 23:46 | |
between of these consumption linkages. | 23:49 | |
'Cause one of the things I've been asking | 23:52 | |
of monitors and myself is let's get out in the open. | 23:54 | |
Let's find out what these linkages and channels | 23:58 | |
of monetary policy actually have been in the past | 24:00 | |
so we can make reasonable bets about the future | 24:04 | |
based upon them. | 24:08 | |
And I'm hopeful to learn something more | 24:10 | |
from a conference which the Federal Reserve Bank of Boston | 24:13 | |
is sponsoring on Nantucket Island in June, I believe, | 24:16 | |
on this general subject. | 24:19 | |
And I'm also hoping that the First National City Bank | 24:21 | |
has some pretty good regressions under its belt. | 24:25 | |
And that they'll see the light of day, | 24:27 | |
and form a memorandum or in the form of published articles | 24:30 | |
somewhere. | 24:34 | |
Now I want to comment on a letter that I received. | 24:35 | |
A growing number of corporations expecting a further squeeze | 24:39 | |
between low prices and higher labor costs | 24:42 | |
are resorting significant reductions in salaried personnel. | 24:44 | |
Is this drop in middle class income | 24:47 | |
and a fear of its extension causing a significant slow down | 24:48 | |
in the recovery? | 24:51 | |
If so, what can be done about it? | 24:52 | |
Well it's a real thing. | 24:53 | |
This recession's affecting middle class people. | 24:55 | |
I think it is making everybody apprehensive. | 24:57 | |
It may explain the high savings ratio in small degree. | 25:00 | |
And there's a great deal of sectoral distress. | 25:04 | |
But I would not say that by itself | 25:06 | |
this phenomenon is a factor of great macroeconomic | 25:08 | |
overall business cycle significance. | 25:12 | |
That's not meant as a hard-hearted statement. | 25:14 | |
It's just meant as a statement about significance | 25:16 | |
of quantitative numbers. | 25:20 | |
- | If you have any questions or comments | 25:22 |
for Professor Samuelson, | 25:23 | |
address them to Instructional Dynamics Incorporated. | 25:25 | |
Chicago, Illinois 60611. | 25:28 |
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