Tape 109 - The American economy, after Nixon's re-election
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- | Welcome once again as MIT Professor Paul Samuelson | 0:02 |
discusses the current economic scene. | 0:05 | |
This biweekly series is produced by Instructional Dynamics | 0:07 | |
Incorporated, and was recorded August 28, 1972. | 0:10 | |
- | My first task today is to make an admission. | 0:15 |
The second quarter GNP statistics have now been revised. | 0:20 | |
After they had first become available, | 0:28 | |
I suggested they would be revised. | 0:30 | |
And my suggestion was that when they were revised, | 0:33 | |
they probably would be revised on the downward side. | 0:35 | |
Actually, it turns out now that the second quarter | 0:40 | |
was even better than the initial report had suggested. | 0:44 | |
Instead of the 8.9% annual rate of real growth, | 0:50 | |
as first reported, being revised downward to something | 0:57 | |
less than that, it was revised up to more than 9%. | 1:01 | |
And the 2.3% initial report on price increase, | 1:06 | |
instead of being revised upward, as I had thought, | 1:14 | |
was in fact revised downward to 1.8%. | 1:17 | |
I'm very glad to make that admission. | 1:23 | |
My reason for thinking the figures would be revised | 1:28 | |
was, one, they were almost too good to be true. | 1:31 | |
And past experience has suggested that when you get | 1:34 | |
a sharp break in monthly or quarterly statistics | 1:38 | |
that seem almost too good to be true or almost | 1:43 | |
too bad to be true, you can bet with some confidence | 1:45 | |
that they aren't true. | 1:49 | |
But I had more to go on than that. | 1:51 | |
I had reports from different organizations, | 1:53 | |
such as Townsend Greenspan, that April had been | 1:56 | |
the strong month of the quarter, | 2:01 | |
that June had been somewhat weaker. | 2:03 | |
You remember the floods. | 2:05 | |
So I think that this is remarkable, | 2:07 | |
how strong the second quarter was. | 2:10 | |
I think that all of us should take this into account. | 2:14 | |
Not because one quarter is very important in and of itself, | 2:17 | |
but because the firmest base that any forecaster can have | 2:22 | |
for projecting numbers into the future | 2:29 | |
is where you stand now and how things are changing now. | 2:35 | |
I'm not recommending naive models of simple pushing forward, | 2:40 | |
a repetition of what has just been experienced. | 2:44 | |
But don't throw away, as an aid to yourself, | 2:47 | |
the continuity in the data. | 2:50 | |
And actually, most of the forecast that I'm beginning | 2:52 | |
to get, the revised forecast as they come in, | 2:56 | |
in each fortnight, are on the upward side. | 3:00 | |
Let me, for example, quote here, | 3:07 | |
from the Manufacturers Hanover Trust Company, | 3:11 | |
one of the largest New York banks. | 3:15 | |
I received on my desk on the 18th of August | 3:18 | |
their quarterly outlook report, | 3:23 | |
which is for August of 1972. | 3:28 | |
So I think that we can presume that it was prepared | 3:31 | |
in the first week of August. | 3:34 | |
This is signed by their Associate Economist | 3:39 | |
Erwin L Kellner, and consists | 3:42 | |
of a projection of the future. | 3:45 | |
Now according to the revised numbers, | 3:47 | |
1971 had 1050 billion GNP. | 3:52 | |
And the forecast | 3:59 | |
by this bank for 1972 doesn't simply add 100 billion, | 4:05 | |
the fashionable number, to 1050, | 4:10 | |
to come out with 1150. | 4:13 | |
But actually adds more like 104 billion dollars. | 4:16 | |
So that there is a 9.9% annual increase in money | 4:21 | |
or nominal GNP for the year. | 4:26 | |
So you can see that the numbers are climbing | 4:28 | |
and they're doing so on the basis of the revised data, | 4:31 | |
which give us higher base from which to spring. | 4:36 | |
Which also gives us a slightly more rapid rate | 4:39 | |
of growth in the quarters just prior to the second quarter. | 4:43 | |
But they also do so because the recovery | 4:49 | |
seems to be gaining in steam. | 4:53 | |
What about the year 1973? | 4:57 | |
That will show a slight tapering off, | 5:01 | |
9.2% money increase. | 5:04 | |
And as far as the real increase is concerned, | 5:07 | |
the real increase will be more than 6.5% for 1972 | 5:12 | |
over 71, according to this more optimistic | 5:16 | |
forecast, latest forecast, | 5:20 | |
6.6%, dropping to 5.9%. | 5:23 | |
As a matter of fact, in the second quarter of the year, | 5:28 | |
real output grew by over 16 billion. | 5:32 | |
These are 1958 prices. | 5:36 | |
You must remember that 16 odd billion here | 5:38 | |
is as strong as 30 odd billion on the nominal numbers. | 5:42 | |
For the quarter which we're now in, | 5:48 | |
we don't quite maintain that pace, 14.5 billion | 5:52 | |
in real terms, but that still is a whopping pace. | 5:55 | |
Then for the fourth quarter, 15.5 billion. | 5:59 | |
But then it's very interesting that as we go | 6:01 | |
into the next year, there is a very substantial | 6:03 | |
dropping off to 8.7 billion, 10.7 billion, | 6:07 | |
9.8 billion, and finally, perhaps ominously, | 6:12 | |
but let's not borrow trouble so very far ahead, | 6:15 | |
a 6.1 billion in the last quarter of the year. | 6:18 | |
It all adds up to 5.9% rate of increase for 73, | 6:22 | |
making it a darn good year. | 6:27 | |
A darn good year of advance, better than the four | 6:29 | |
and a quarter percent which we need | 6:33 | |
to keep unemployment level, | 6:34 | |
but not quite such a good year as 1972. | 6:37 | |
I think there's a moral here for the stock market, | 6:42 | |
and for earnings. | 6:45 | |
That this is indeed the summer of our content, | 6:46 | |
and if the stock market can not | 6:49 | |
respond to the earnings | 6:54 | |
figures now underway, | 6:57 | |
then its period of grace, | 7:01 | |
this period of summer, will begin to be behind. | 7:03 | |
It will begin to be moving into autumn in terms | 7:07 | |
of business cycle phase, | 7:10 | |
when you really can not expect such increases. | 7:14 | |
For example, let me find the profit number here. | 7:17 | |
The profit increase for 72 over 71 is forecast | 7:22 | |
by this bank to be a 21.4% improvement, | 7:27 | |
in 72 over 71. | 7:34 | |
That followed upon a 14.2% improvement in 71 over 70. | 7:36 | |
But remember, that 70 was a year of recession | 7:40 | |
and very poor profits. | 7:43 | |
What about the year following? | 7:45 | |
How will 73 do compared to 72? | 7:50 | |
They have a drop off in the profit increase to 14%, | 7:53 | |
but that still is an increase, | 7:57 | |
and that's a substantial increase. | 7:58 | |
Moreover, I think it's a bit more of an increase | 8:00 | |
than most of the forecasts into 73, | 8:02 | |
even those forecasts which have as much strength | 8:07 | |
in the real and nominal GNP. | 8:10 | |
To illustrate this, let me read off some numbers | 8:14 | |
from a table which I prepared just recently. | 8:19 | |
The editors of the Financial Times of London | 8:22 | |
asked me to give a round up on the current | 8:24 | |
American business scene. | 8:27 | |
This is something which I always do at New Years, | 8:29 | |
and occasionally I do in between. | 8:30 | |
Apparently, there's a great deal of interest abroad | 8:33 | |
in the American economy at this time. | 8:35 | |
So I jotted down what the real GNP estimates were | 8:37 | |
for a number of forecasts, and took an average. | 8:41 | |
And I came up with the number 6.5% real increase | 8:44 | |
in 72 over 71. | 8:48 | |
That is really a full half a percent or more | 8:53 | |
better than the fashionable forecast, | 8:58 | |
as that fashionable forecast was last December. | 9:00 | |
You'll notice that the fashionable forecast | 9:03 | |
is like the small hand of a clock. | 9:06 | |
You never see it changing, | 9:10 | |
but it very slowly does change. | 9:12 | |
So it's always right, | 9:16 | |
because it follows reality around. | 9:17 | |
Now I jest, because of course, | 9:21 | |
the clock sometimes is very wrong. | 9:23 | |
But my point is not to flatter it, | 9:27 | |
but to discount the fashionable forecast. | 9:30 | |
It isn't as good as it always seems to be, | 9:34 | |
because the people themselves have always edged | 9:37 | |
their numbers, after taking a peek | 9:39 | |
in the direction of reality. | 9:42 | |
Well 6.5%, that's very good performance in 72 over 71. | 9:43 | |
It still is five and two thirds percent | 9:50 | |
real increase in 73 over 72. | 9:53 | |
What about mid 73 to mid 1974? | 9:59 | |
I'm projecting farther than the Manufacturers Hanover Trust. | 10:03 | |
That goes down to about 5%, but even at that, | 10:08 | |
it still is for that period, above what's needed | 10:11 | |
to hold our own in terms of productivity change. | 10:15 | |
That is long run average productivity change, | 10:19 | |
and demographic labor force change. | 10:21 | |
The price level behavior is about 3.2% for 72 over 71, | 10:25 | |
sort of a consensus computer forecast. | 10:31 | |
But it goes up slightly, only slightly, | 10:34 | |
to 3.5% for 72 to 73. | 10:36 | |
And for mid 73 to mid 74, according to these | 10:39 | |
computer forecasts, it still is only 3.5%. | 10:43 | |
That I may say I don't quite believe, | 10:46 | |
but who am I to argue with the powerful | 10:49 | |
consensus of computers? | 10:53 | |
But let's turn to profits. | 10:56 | |
I put profits down, after looking at some of these numbers, | 10:57 | |
as rising by 20% in 72 over 71. | 11:01 | |
In 73 over 72, still by 14%. | 11:07 | |
But if we take mid 1973 to mid 1974, | 11:11 | |
I have to write down a range of profits going up | 11:16 | |
by only 6%, or down, down by as much as 10%, | 11:19 | |
according to different forecasts. | 11:24 | |
If what the stock market needs for a leap forward | 11:27 | |
of another 10, 20% in the index numbers of equities, | 11:30 | |
which by the way will take us way above 1000, | 11:35 | |
is the certainty of a profit rise, generally | 11:38 | |
for not 12 months ahead, but for several years ahead. | 11:43 | |
Then it isn't clear that in American history you | 11:49 | |
very often get such periods. | 11:52 | |
And this does not look as if it will be a period | 11:54 | |
in which you can project a profit rise | 11:55 | |
for several years in advance. | 11:57 | |
One other thing that I should comment on, | 12:05 | |
what about the election? | 12:09 | |
This is an election year. | 12:10 | |
What will the effect of the election be | 12:12 | |
upon the reasoned outcome? | 12:15 | |
I think that the major effect of the election | 12:20 | |
has already been felt. | 12:22 | |
The major effect of the election has been | 12:25 | |
the competition to get elected. | 12:27 | |
And this has caused the administration and Congress, | 12:29 | |
doing the tango together, to be very expansionary. | 12:34 | |
The orchestra accompaniment by the Federal Reserve | 12:38 | |
has also been quite expansionary and accommodative. | 12:43 | |
Now, we're moving closer and closer to the election date, | 12:48 | |
and so this effect of the anticipated election | 12:51 | |
will begin to move offstage, and we'll have to begin | 12:54 | |
to ask ourselves, "What about the effect of the election?" | 12:56 | |
Well let me comment on that. | 13:00 | |
First, I think there are definite signs | 13:03 | |
that the Federal Reserve Board is tightening up. | 13:05 | |
The way it will handle its primary approximate goal | 13:08 | |
of reserves available for private deposits, | 13:14 | |
it seems to me will be in the tightening direction. | 13:18 | |
The Supreme Court is supposed to follow | 13:22 | |
the election returns. | 13:25 | |
I think that the Federal Reserve follows the GNP returns. | 13:26 | |
And Dr. Arthur Burns would not want any more exuberance | 13:30 | |
in the economy than we now have. | 13:35 | |
Let me say that I usually want more exuberance | 13:38 | |
in the economy than Dr. Arthur Burns does. | 13:41 | |
But, I would agree with him in this matter, | 13:44 | |
that a 9% real rate of increase is too much of a good thing, | 13:48 | |
maintained for any period of time. | 13:55 | |
I would feel that the longevity of the expansion | 13:57 | |
would be increased and maximized | 14:02 | |
by having quarter to quarter changes of not more | 14:05 | |
than 7%, because not only will you run sooner | 14:09 | |
into a full employment bottleneck, | 14:14 | |
but I think you will begin to bounce back. | 14:19 | |
If you hit that bottleneck, that full employment ceiling, | 14:22 | |
with such momentum, there will be a tendency | 14:25 | |
for a turning point downward. | 14:28 | |
I would rather ease in to the high employment | 14:32 | |
milia than bump into it. | 14:37 | |
So, any time I feel that way, you can be sure | 14:41 | |
that the majority on the open market committee | 14:46 | |
of the Federal Reserve, which is more apprehensive | 14:49 | |
about the price increase than I have, which gives | 14:52 | |
more weight to that factor, and gives less weight | 14:55 | |
to unemployment, that they are for sure will be feeling | 14:58 | |
in a contractionary direction. | 15:01 | |
The same thing is true of course of the stance | 15:04 | |
of the President in this election year, | 15:06 | |
with respect to budget. | 15:09 | |
Part of his campaign will be to brand | 15:12 | |
the Democratic Congress as irresponsible spenders. | 15:14 | |
A cynic might say that the President has gained | 15:19 | |
a lot of the kudos from the prosperity which those | 15:22 | |
deficits have already produced, | 15:26 | |
but is willing to put the blame on Congress | 15:29 | |
for the inflation, or the threat of inflation, | 15:34 | |
which those deficits may in the future induce. | 15:39 | |
I think that's fair politics. | 15:44 | |
That's the sort of thing that's done all the time | 15:47 | |
on both sides, and we shouldn't be surprised | 15:49 | |
if that particular game is played. | 15:52 | |
Now, many new computer forecasts are coming in, | 15:57 | |
which suggest what's going to happen | 16:03 | |
if President Nixon is re-elected, | 16:09 | |
in contrast to what's going to happen, | 16:11 | |
or what is indicated to happen, | 16:14 | |
if McGovern is re-elected. | 16:15 | |
And I might just keep you informed on what | 16:18 | |
the latest reports show in that connection. | 16:22 | |
Before I do that, let me read to you from this | 16:29 | |
Manufacturers Hanover Trust Company forecast | 16:32 | |
that I mentioned, the final couple of paragraphs. | 16:35 | |
Theirs is not a computer forecast, | 16:41 | |
but it's careful GNP model built. | 16:42 | |
A preliminary look at 1973 suggests that another good year | 16:47 | |
is in store, although as the attached table indicates, | 16:50 | |
the rate of real growth may well begin to slow down | 16:53 | |
after mid year. | 16:55 | |
Well I've commented on that. | 16:56 | |
Nevertheless, total economic activity can reasonably | 16:58 | |
be expected to advance at least 9% next year. | 17:01 | |
Two thirds of it in real non inflationary terms. | 17:04 | |
The rate of inflation on average is expected | 17:08 | |
to be little more than 3%, while the jobless rate | 17:10 | |
should cross the 5% mark within the next 12 months. | 17:12 | |
Some more optimistic people would put | 17:16 | |
that happy date forward. | 17:19 | |
This cheery outlook is the same regardless of who wins | 17:22 | |
the November election. | 17:25 | |
Econometric analysis and political common sense | 17:27 | |
suggest that even if he were to be elected President, | 17:30 | |
none of Senator McGovern's economic policies | 17:34 | |
could seriously affect the economy, business men | 17:36 | |
or investors, in much under two years. | 17:40 | |
I think that that's a slight overstatement, | 17:43 | |
although it's an overstatement in a good cause, | 17:46 | |
resting with continuity in economic matters. | 17:49 | |
Actually, you remember the Chase Econometric Associates' | 17:53 | |
initial forecast said | 18:00 | |
that a McGovern victory | 18:03 | |
would be very hard on the GNP, real GNP, | 18:06 | |
and the profits in general indicators of prosperity. | 18:11 | |
This econometric horoscope was confirmed | 18:17 | |
by the qualitative discussion of Pierre Renfre, | 18:22 | |
who spoke about grass growing in the streets | 18:26 | |
if McGovern was elected. | 18:30 | |
Then the Wharton School model came in, | 18:32 | |
with a McGovern victory simulation, | 18:35 | |
and a Nixon victory simulation, | 18:41 | |
and that didn't show a very great difference | 18:43 | |
between the two candidates. | 18:46 | |
According to the Wharton School crystal ball, | 18:50 | |
it didn't really matter that much. | 18:52 | |
Then came the data resources, by Dr. Otto Eckstein, | 18:54 | |
and this one is interesting to watch | 18:58 | |
because Dr. Otto Eckstein is a Democrat. | 19:00 | |
And when he came in with the control solution, | 19:03 | |
which showed a considerable reduction in the GNP, | 19:08 | |
in the event of a McGovern victory, | 19:12 | |
this was considered to be quite weighty. | 19:15 | |
I think that Newsweek and Time commented on it, | 19:18 | |
because in a court of law, you know, admissions against | 19:20 | |
interest are always given a particular weight. | 19:23 | |
We will take a second look at Dr. Eckstein's figures. | 19:28 | |
Dr. Eckstein assumes that if McGovern is elected, | 19:31 | |
that he will be successful in introducing his | 19:34 | |
negative income tax, his family allowance plan, | 19:38 | |
which roughly speaking, we can characterize | 19:41 | |
as giving a thousand dollars minimum per person in a family. | 19:44 | |
The actual plan is more elaborate than that, | 19:48 | |
but it averages out I think to something like that. | 19:51 | |
Now, according to Dr. Eckstein, this is going to mean | 19:54 | |
that some people will work less. | 19:58 | |
They will have, he thinks, | 20:00 | |
good reason to do so, because they will be getting | 20:06 | |
income whether they work or not. | 20:09 | |
That's what we call, in technical economics, | 20:10 | |
the income effect. | 20:12 | |
And then I guess he assumes that the negative | 20:13 | |
income tax will have a marginal tax rate, | 20:16 | |
a positive marginal tax rate, algebraically, | 20:19 | |
of some considerable fraction. | 20:23 | |
And so the substitution effect, as its spoken | 20:26 | |
of in technical economic plans will also be working | 20:28 | |
against people taking jobs. | 20:31 | |
That second assertion, which perhaps I made overly strong, | 20:33 | |
is I think somewhat suspect because under our present | 20:40 | |
welfare system, it's very hard to say that there | 20:43 | |
is a low marginal tax upon effort. | 20:46 | |
There often is a very high marginal tax effect, | 20:51 | |
and it could be that a good negative income tax | 20:54 | |
will actually be an improvement in terms of incentives. | 20:56 | |
Well now, to the degree that the GNP goes down | 21:00 | |
because of this factor namely, that people will work less, | 21:03 | |
I'm not sure that the great scorekeeper will give | 21:08 | |
a flunk or a C mark. | 21:13 | |
If the right way of running the American Railroad, | 21:17 | |
the right way in terms of equity, is to have minimum | 21:21 | |
incomes as a matter of right, then we should be prepared | 21:26 | |
to accept the spending decisions of the people as far | 21:30 | |
as their own income is concerned. | 21:34 | |
Most of us do not say that when a man has | 21:35 | |
a $10,000 income, which he's earned, or 20, or 30, | 21:39 | |
that we're gonna dictate to him that he should not | 21:42 | |
like perfume and should like sauerkraut. | 21:45 | |
That's his income after taxes. | 21:49 | |
It's his right to spend it as he wishes. | 21:51 | |
We don't say he should work harder, or work less hard. | 21:54 | |
Similarly, if minimum income maintenance is a matter | 21:57 | |
of legitimate right, then we should be prepared | 22:02 | |
to accept the decisions of the populous in that respect. | 22:05 | |
Well let me move on, time is beginning to run out, | 22:10 | |
to some later computer forecasts. | 22:13 | |
The University of Michigan at Ann Arbor | 22:16 | |
has done on its computer a McGovern forecast | 22:19 | |
and a non-McGovern victory. | 22:23 | |
And there very surprisingly, | 22:27 | |
McGovern causes a reduction in GNP. | 22:29 | |
I say surprising not because I'm a Democrat, | 22:33 | |
but because as I study the University of Michigan | 22:36 | |
forecast, they really take seriously the notion | 22:39 | |
that McGovern is less of a spender than Nixon. | 22:44 | |
They have a 10 billion dollar reduction | 22:48 | |
in government expenditure if McGovern gets elected. | 22:50 | |
I wrote a postcard to my friends there, and said | 22:54 | |
they must have a sense of humor | 22:56 | |
to think that the constituents see that McGovern | 22:59 | |
stands for and all that we know about him | 23:02 | |
and about the Democratic party will in fact | 23:04 | |
result in an increase in unemployment because | 23:08 | |
of a unwillingness to spend. | 23:11 | |
Well, I mustn't have too much fun at the expense | 23:15 | |
of the computers. | 23:18 | |
Some of my best friends are computers. | 23:18 | |
But it's quite obvious that you need the filter | 23:21 | |
of common sense if you are going to get the maximum | 23:26 | |
amount of good from the plethora of computer forecasts, | 23:30 | |
which are now available to us. | 23:36 | |
Let me talk very rapidly now in the closing minutes | 23:40 | |
on what I think counts and what you should be watching | 23:43 | |
in forming judgment about the longevity of the boom. | 23:47 | |
I don't think you should concentrate on such items | 23:50 | |
as housing starts, rates of inventory accumulation, | 23:53 | |
or consumers' saving ratios. | 23:57 | |
I don't want to belittle the importance of each of these, | 24:00 | |
nor the importance of surveys of intentions | 24:03 | |
to make fixed investments in plant equipment. | 24:06 | |
But to me, the critical variable in forming a reasoned guess | 24:10 | |
of the expansion's longevity is going to be the behavior | 24:13 | |
of prices and wages. | 24:16 | |
The next recession, I think, like the last one, | 24:19 | |
will be made in Washington, not in Main Street. | 24:23 | |
Once Nixon is victorious at the polls, | 24:27 | |
and we should go along with the odds here, | 24:30 | |
any signs that the price level is again beginning to soar, | 24:34 | |
will I think drive him to cancel his new membership | 24:39 | |
in the club of kings. | 24:42 | |
Dr. Burns and Dr. Schultz will join him | 24:45 | |
in enjoining Congress to apply brakes | 24:48 | |
to the excesses of the boom. | 24:51 | |
And this will not be election year | 24:53 | |
putting the onus on Congress. | 24:56 | |
This will be a genuine message to Congress. | 24:58 | |
Therefore, as in the Eisenhower years, | 25:02 | |
fears of creeping inflation may well be the force | 25:04 | |
serving to abort the return to sustainful employment. | 25:08 | |
This will be in sharp contrast with the Kennedy Johnson | 25:14 | |
years, when at the slightest sign that the expansion | 25:17 | |
was faltering, activists' fiscal and monetary policy | 25:20 | |
tended to rewind the clock of advance, even at the risk | 25:24 | |
of accentuating the rate of inflation. | 25:28 | |
Now contributing to any post election deflationism | 25:32 | |
of this type would be any reinforcement of inflation | 25:36 | |
fears that might come from fears that the Smithsonian | 25:41 | |
currency agreement is breaking down. | 25:46 | |
It's my hope that a new Nixon team, | 25:49 | |
we've been promised a new cabinet, | 25:52 | |
would continue to listen to those Chicago advisors | 25:55 | |
who warn against making the dollar convertible | 25:58 | |
at the cost of sacrificing domestic prosperity. | 26:01 | |
To be overdramatic, one can only pray that the mistake | 26:05 | |
of Winston Churchill in 1925, | 26:09 | |
when he defended an overvalued pound in Britain, | 26:14 | |
will not be repeated in America during a second Nixon term. | 26:18 | |
Because in that case, we could pay sorely for that strategy | 26:23 | |
in terms of rate of real growth, in terms of unemployment | 26:30 | |
and in terms of general real prosperity. | 26:34 | |
- | If you have any questions on this topic | 26:38 |
or other topics of economics, address your questions | 26:41 | |
to Professor Paul Samuelson, at Instructional Dynamics | 26:44 | |
Incorporated, 166 East Superior Street, | 26:47 | |
Chicago, Illinois, 60611. | 26:50 |
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