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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Title:

Tape 72 - Reviewing 1971's first quarter: a preview

Date:

circa 1970 to circa 1971

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/r49w09f68
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Tape 72 - Reviewing 1971's first quarter: a preview

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