Tape 65 - Fixed rate of growth for money supply

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-	Hello again and welcome	0:02
	as MIT Professor Paul Samuelson discusses	0:03
	the current economic scene.	0:05
	This biweekly series is produced by	0:07
	Instructional Dynamics Incorporated of Chicago	0:09
	and was recorded December 10th, 1970.	0:12
	Professor Samuelson, we have a couple of questions	0:15
	from subscribers this week.	0:18
	Our first question asks you for your opinion	0:20
	on the idea of a fixed rate of growth for the money supply.	0:22
-	In my view, a good deal of economic forecasting	0:27
	is implied by a decision made now ...	0:30
	firmly,	0:35
	and somewhat irrevocably to stick to any	0:37
	one course of monetary policy, say 5%.	0:41
	Now to illustrate this, let me give you	0:45
	two different answers which have been given by respective	0:50
	(mumbles) to what would happen	0:55
	if we stuck to 5% per annum	0:59
	in the money supply for the next	1:02
	couple of years, say, into the November elections of 1972.	1:08
	First, I have before me,	1:13
	the ...	1:16
	Federal Reserve Bank of St. Louis Orderly Economic Trends.	1:19
	This bears a date of release of November 30.	1:24
	It reached my desk on December 3rd.	1:29
	It's about as up to date as one can hope for.	1:33
	I should warn you that if you're a monetarist,	1:38
	it's very important to	1:41
	be using the right money supply numbers.	1:43
	As many of my listeners will know,	1:47
	we have just had a basic revision	1:50
	of the monetary statistics.	1:54
	When people, monetarist and non monetarist,	1:57
	thought that the money supply was growing at let's say 4%	2:01
	per year in some of the monthly intervals of 1970,	2:05
	according to the new destination,	2:10
	it was actually growing at a more rapid rate.	2:12
	This is not time nor the occasion	2:17
	for me to go into the conceptual differences	2:20
	between the new money supply numbers and the old	2:23
	and I think I should warn you that as far as I can tell,	2:26
	from this Federal Reserve Bank of St. Louis document,	2:29
	it is still using the old money supply numbers.	2:35
	If we keep the money supply growing at 5% per annum	2:40
	steadily, according to this monetarist analysis,	2:44
	real output will be growing in the first quarter	2:48
	of the year at a little less than 1.5%,	2:52
	in the second quarter at about 2%,	2:56
	then it leaps up for reasons that are unclear to me,	2:58
	to 5% just for the third quarter,	3:01
	falls back to 2 and 1/3%,	3:05
	and then in 1972	3:08
	the first quarter is just about 2%	3:12
	and then it's about 3% in the second quarter.	3:13
	Now notice that except for one transitional quarter,	3:18
	the economy throughout all this period	3:23
	is growing a good deal less than the 4+%	3:25
	increase in real output which we think to be needed	3:29
	just to keep unemployment constant,	3:33
	just to keep the gap constant.	3:36
	As a result on the basis of	3:38
	this particular policy recommendation,	3:42
	if you believe the answers of the monetarism,	3:45
	a la Federal Reserve Bank of St. Louis,	3:50
	the situation ...	3:54
	is not a very good one,	3:58
	I think, in the minds of most people.	4:00
	If most people are given the menu	4:03
	and I said, "This is the price you have to pay	4:05
	of keeping the unemployment	4:08
	right into the November elections of 1972."	4:10
	They will say, "Well, what do I buy for this?"	4:16
	Well now, in order to see what	4:18
	is bought by this very moderate program,	4:20
	let me quote to you what they expect	4:25
	to be happening to the GMP price deflator.	4:28
	Now here, I think in all fairness, I should warn you that	4:32
	the Federal Reserve Bank of St. Louis	4:36
	has one of the most pessimistic trade-off relationships	4:38
	between slack in the economy	4:44
	and moderation of the GMP price deflator.	4:46
	It happens to be rather closer	4:51
	to my own pessimistic estimate	4:53
	than it is to most change in GMP models.	4:55
	And if the parts I think are equally substantially	5:00
	from the more optimistic price ...	5:04
	flexibility hypotheses of most of the monetarist.	5:08
	Nevertheless, operationally, let's take the	5:13
	Federal Reserve Bank of St. Louis	5:16
	as one of the most successful	5:18
	forecasting devices of recent times	5:20
	and let's use it for policy purposes.	5:22
	Now, the GMP price deflator, which is in the fourth quarter	5:26
	increasing at about 4.6% per year,	5:32
	let's call it a little over 4.5%,	5:36
	goes down on this forecast to 4.4% in the first quarter	5:40
	or 4.3% in the second quarter,	5:45
	4.1% in the third quarter of 71,	5:48
	down, mind you, only to 4.0% at the end of next year,	5:52
	and then by the middle of 1972 it is down to 3.9%.	5:57
	Under this rather strong dose of deflation	6:03
	in terms engineered slack in the economy or retardation,	6:08
	unemployment increasing above 6%,	6:14
	you get, according to these calculations,	6:18
	only a very modest but steady downward drift	6:22
	in the rate of increase of the GMP price deflator.	6:26
	Many people conclude, once they see this menu of choice	6:31
	as presented to them by the regression model	6:37
	of the Federal Reserve Bank of St. Louis,	6:40
	that it is a bad bargain	6:42
	to buy a 5% increase in the price level.	6:45
	In the money supply, these are its consequences.	6:50
	Nevertheless, let me try a more ...	6:54
	optimistic possible outcome on you.	6:59
	Fortunately, I don't have to do any work	7:03
	because the questioner sent in	7:07
	what ...	7:10
	he said was his interpretation	7:13
	of the November 4th numbers	7:16
	of a professor, whom you will agree,	7:20
	is a distinguished monetarist and then with my	7:24
	good colleague, Professor Milton Friedman,	7:28
	who has a companion tape service	7:31
	like the one you're now listening to.	7:33
	Now, I won't vouch for the exact, actually, the figures,	7:36
	but I did play the tape back and looked at the numbers	7:41
	sent in to me by the subscribers, subscriber	7:43
	and did seem to me that they were a fair interpretation	7:47
	of what seemed to be implied by the words involved.	7:53
	Now Professor Friedman suggested, in a place of terms	7:57
	that this modest, moderate middle course be followed.	8:03
	A 5% ingrowth in the money supply	8:07
	all through 1971 and 1972,	8:10
	and in the hopes that this would work well,	8:15
	we would be in a good position for the remaining years,	8:18
	say of this half decade,	8:22
	to continue upon this simple policy,	8:24
	which everybody would recognize, would learn to expect.	8:27
	Now, what did he think its cost would be?	8:31
	What did he think it would buy?	8:35
	He said that past experience suggests that although	8:37
	the narrow money supply grows by only 5%,	8:41
	the ...	8:44
	personal income or the money GMP	8:48
	couldn't follow in the quickening	8:51
	of the growth of money supply.	8:53
	It'd grow by more, namely by 7%.	8:54
	And so into 1972, he suggested for nominal or money income,	8:57
	that growth of 7%.	9:03
	Now what about real growth?	9:06
	He thought well, this would put the only in the form	9:11
	of a supposition, that perhaps by,	9:13
	coming to the end of 1972 or sometime in 1972,	9:17
	prices would be growing only at 2%.	9:21
	It's not clear to me in re-listening to the tape	9:25
	that this is flat-footed prediction.	9:28
	It certainly seems, to me, to be more optimistic	9:31
	than most estimates.	9:34
	It is, of course, greatly more optimistic	9:38
	than the monetarist estimates	9:41
	of the Federal Reserve Bank of St. Louis,	9:44
	but let's accept this as the the possibility.	9:46
	The subscriber then has ...	9:51
	indicated the arithmetic correctly,	9:55
	that the output will be growing at 5% in 1972	9:58
	and he interpolated back in 1971	10:02
	and got 2.5% yield of growth of output,	10:04
	not that it's that much different from the	10:09
	Federal Reserve Bank of St. Louis estimates.	10:12
	The subscriber also conveniently	10:15
	supplied me with some estimate gap.	10:19
	He warned me, this was very crude,	10:22
	but he said on the supposition that the gap	10:24
	is now about 4%, that is that we're ...	10:26
	4% below our potential.	10:31
	He then calculated how much the gap widens	10:34
	when you grow only 2.5% when you should grow,	10:37
	I'd say, 4 and 1/3% and he has a gap in 1971 of 5 and 3/4%.	10:40
	And in 1972 ...	10:46
	that inches upward up to 6%.	10:49
	Of course in the year following 1972,	10:52
	if we continue the scenario, the gap narrows.	10:55
	But in 1973, 5 and 1/4% in 1974 and 4 and 1/3%.	11:00
	It's not until 1975 that you're below the present gap,	11:06
	which is about 4% and you're down to 3.5%.	11:12
	It's hard for me to know what this means	11:16
	in terms of unemployment,	11:17
	but I've tried to fill in the column	11:19
	which was not filled in.	11:21
	And if unemployment in the fourth quarter of this year	11:23
	is about 5.6%, say, call it 5 and 2/3%,	11:26
	then in 1971 on the base of this kind of estimate,	11:31
	it can hardly be other than, say, 6.5%,	11:36
	and in 1972 it's still inching upward	11:40
	in the first part of the year.	11:45
	So you reach a peak of about 6 and 2/3%	11:46
	by my very rough calculations and then it goes down to 6%,	11:49
	it goes down to 5.5%, and then by 1975 you're down to 5%.	11:52
	Well now, look at that and ask yourself ...	11:58
	or ask the man in the street or ask the congressman,	12:04
	"Are you willing to pay that particular price?"	12:09
	I want point out to you that there's considerable optimism	12:13
	in this estimate on what to buy	12:16
	in the way of inflation control.	12:19
	It's not an optimism that is buttressed by	12:21
	the majority of the other people	12:25
	who make the same calculation.	12:26
	But let's take it at that level.	12:29
	To ...	12:33
	condemn the system to as much unemployment and slack	12:36
	as we now have, right into 1975 is asking a very great deal	12:43
	of the forbearance of a democracy in judgment.	12:49
	If the package is very clearly labeled	12:54
	so that you know completely what its contents are	12:58
	and if they're anything like the scenario that	13:02
	is indicated here, I think that it would be a	13:05
	rather hard one to sell.	13:09
	Now ...	13:12
	a couple of caveats.	13:15
	First, perhaps the numbers are not ...	13:16
	quantitatively, precisely what your favorite monetarist,	13:22
	if you have a local,	13:28
	would say are the consequences of 5% increase.	13:29
	I hope they're in the ballpark of what	13:33
	is indicated by those who recommend the package.	13:37
	That's point one.	13:39
	Secondly, it's quite possible for somebody to say,	13:41
	"Let's be realistic. We're living in a	13:45
	false world of illusion and unreality.	13:46
	People are somehow thinking that you can simultaneously	13:50
	solve the Phillips Curve dilemma when you can't	13:54
	and so bite the bullet and accept unemployment."	13:57
	I can agree in a measure with such a viewpoint.	14:02
	I think that people have been kidding themselves.	14:05
	No one is kidding themselves more than those who were	14:08
	standing by the game plan	14:13
	late in 1969, early in 1970	14:16
	as it became very clear that the optimistic game	14:19
	was just not feasible in terms	14:22
	of the current American economic institutions.	14:24
	When the time comes, more inflation does develop,	14:28
	because one doesn't accept this province,	14:32
	I think that ...	14:35
	those who have proposed a more expansionary policy,	14:38
	like myself, will be criticized as having caused inflation.	14:42
	Speaking for myself, if this was the choice	14:46
	that was actually available,	14:50
	I will not accept that criticism.	14:52
	I will not, I will point out	14:55
	a lesson in realism that there was no other choice	14:58
	if one was not willing to have the amount of unemployment,	15:02
	which were promised by the advocates	15:06
	of the opposite position.	15:07
	However, I now want and concluding	15:10
	this particular discussion, to make a substantive point	15:12
	that is well brought out by the scholars.	15:17
	Do you notice how critically	15:21
	the wisdom of a 5%, steady, the money supply,	15:25
	made it depend in my exposition, our ability to forecast.	15:32
	Because there may be some listeners	15:37
	of this tape and there may be some people in Congress	15:41
	who would utterly reject	15:44
	the Federal Reserve Bank of St. Louis menu.	15:47
	If they believed in it, but might be tempted to	15:53
	believe in the alternative menu.	15:58
	Particularly, since the Federal Reserve Bank of St. Louis,	16:03
	if we take it literally,	16:07
	tells us that you don't buy very much in 1973, 1974, 1975	16:08
	by this policy.	16:14
	Mind you, this is not a once and for all investment,	16:15
	in which you purge the system of its inflationary evils	16:18
	and then go on to a ...	16:22
	rather long life, inflationless prosperity.	16:25
	I mean, it's not that if you believe the models	16:30
	of the Federal Reserve Bank of St. Louis because	16:34
	they most fully adapt that it's not until	16:36
	1985,	16:40
	1990,	16:42
	that the full harvest of the investment	16:44
	made now does come in.	16:47
	Well, my point is that the answer to these questions depends	16:52
	very critically on our ability to forecast.	16:57
	I don't think that the last year, last two years	17:01
	has added in ...	17:05
	to anybody confidence in the ability of	17:08
	economists of any other equation to forecast accurately	17:10
	and yet, good policy depends upon the forecast.	17:15
	I draw one lesson from it.	17:20
	Whatever is good policy, whether it be on the modest side,	17:22
	whether it be on the expansionary side,	17:26
	whether it be on the rather tough mind	17:28
	and contractionary side, you should not	17:31
	take an advance to any one, simple	17:35
	predetermined path of how the money's supposed to grow.	17:40
	For example, if I bought the second version of monetarism	17:45
	and then found at the quarter or so	17:50
	that the Federal Reserve Bank of St. Louis results	17:52
	were being produced, I would definitely depart from it.	17:56
	Well, if you're gonna do that,	18:01
	if you're always setting a course	18:02
	in order to depart from it,	18:04
	then come speak to me, you're back in the camp	18:06
	that I've always been in, namely,	18:10
	that you have to use the best intelligence and information	18:13
	that is given to you, you in this case being the	18:17
	Federal Reserve Board in Washington.	18:22
	You have to (mumbles) from its staff and correct	18:25
	the information from the Federal Reserve Bank of St. Louis	18:28
	by information analysis from Cambridge, Massachusetts,	18:32
	by information and analysis from Chicago, Illinois.	18:35
	You have to make your best probability guesses	18:39
	as to what the economy looks to be like	18:42
	in the next three months, in the next six months,	18:45
	in the next nine months and then you have to decide whether	18:48
	it needs a push in the upward direction,	18:52
	a push the downward direction,	18:54
	or it should be just about on course if you	18:56
	do your best in that way,	19:01
	you're gonna make lots of mistakes,	19:03
	but I think from most of the simulation experiments	19:05
	that I have done with a GMP model,	19:09
	both of the monetarist type and of the Keynesian type,	19:12
	you do get smaller, least squared,	19:18
	smaller squared error if you follow the flexible policy	19:24
	than if you follow the stationary policy.	19:29
	Now, that's not a tautology.	19:33
	I'm not saying that you follow the best flexible policy	19:35
	and then of course you could do better than the other	19:38
	because it's easy to put a pattern of unforeseen error	19:41
	in the simulation experiments so that	19:47
	a stationary policy is better	19:51
	than an attempted countercyclical policy.	19:54
	Indeed, there are patterns of errors	19:58
	in which you should have perverse monetary policy	20:01
	because that actually reduces the deviations	20:05
	from full employment and	20:08
	some weighted average of that deviation	20:11
	from full employment where I'd say,	20:15
	with some weighted average of deviations	20:17
	from reasonable price stability.	20:19
	However, I've said enough, I think,	20:22
	to indicate what seems to me,	20:24
	analytically, to be the way that one	20:26
	feels one's way towards a desirable policy	20:30
	and I hope that in a non-polemical way,	20:34
	I've given my answers to the subscriber's question	20:39
	as to why I would not, at this time,	20:43
	be prepared to put down my vote in favor of a policy.	20:47
	Just keeping the money supply growing	20:53
	at some agreed upon figure like 5%.	20:56
	Now this is a good question that has been asked	21:00
	of me by a subscriber.	21:03
	He says, "Would you tell us what the	21:06
	new radical economics is all about?	21:11
	What's the difference between the new left and the old left?	21:14
	What are some of the economic tenants and positions	21:18
	of this particular group?"	21:22
	I'll try my hand at doing so.	21:25
	It's not an easy task because the	21:28
	militant students in many of our universities are	21:35
	not very articulate with the pen.	21:40
	If like me, you take things in the eye	21:43
	and you're used to reading John Stuart Mill	21:47
	and Adam Smith and Alfred Marshall	21:51
	and Lord Kames and you're also, on occasion at least,	21:54
	used to reading Karl Marx and Friedrich Engels and	21:59
	Lennon and Rosa Luxemburg,	22:03
	there's a certain way that you	22:06
	absorb knowledge and information.	22:07
	Well unfortunately, I cannot refer my subscriber to	22:09
	any important credence on radical economics.	22:14
	This itself says something about the nebulous	22:19
	character, perhaps, of the ideology by the new left.	22:25
	However, let me drop some names.	22:31
	We do have Monopoly Capitalism	22:35
	by Paul Baran and Paul Sweezey.	22:37
	This is, if not a bible of the new left, it's a sacred book.	22:40
	The late Paul Baran, who was a professor	22:45
	of political economy at Stanford, also wrote a ...	22:48
	a book on economic development.	22:53
	I think it's The Political Economy	22:54
	of Backwardness or of Growth.	22:56
	He has a very considerable (mumbles),	23:00
	particularly, I find, among Latin Americans,	23:03
	among African students of economics.	23:05
	I daresay, in Southeast Asia, Baran's book is	23:09
	read with a great deal of interest.	23:15
	Outside of the realm of narrow economics, there is	23:19
	Herbert Marcuse, who until recently was a professor	23:23
	at the University of California, San Diego.	23:28
	He went from (mumbles) to La Jolla, California	23:30
	just before the retirement age and he was kept on there	23:36
	for many years until at the age of 70 he was finally,	23:39
	I think through some political pressures, terminated.	23:42
	I must say that I do not find the doctrines of	23:47
	Dr. Marcuse very appetizing	23:51
	but let me tell you a little bit about them.	23:53
	First, he says things which students	23:59
	would be very happy to learn.	24:01
	He says that throughout the revolution,	24:03
	but that it needn't be the work of the working classes,	24:06
	in fact, you can't depend upon the working classes	24:10
	to have a working class revolution.	24:12
	You need to be guided by an elite.	24:14
	The elite is not the conspiratorial revolutionists of Lennon	24:17
	but rather they are none other than the students,	24:21
	students and assistant and perhaps an occasional,	24:26
	an artist, dramatic professor shall lead the (mumbles).	24:29
	It's necessary to have such a revolution because	24:35
	we live in a repressed society.	24:37
	What does the test to repress it?	24:41
	Well, I'm not sure, but the very openness of our society	24:42
	is a blandishment to ...	24:48
	being opposed to a revolution.	24:54
	So the openness of our society,	24:55
	the tolerance which we all have	24:57
	is something which is impressive.	25:00
	My (mumbles) very clearly that	25:05
	in the good society which he would run,	25:07
	he and people like him would decide what it was	25:10
	that was good for people to read	25:13
	because otherwise there would be	25:17
	the repressiveness of tolerance.	25:19
	Now, I don't think I'm being fair in my description	25:21
	but it's amazing how hard it is to be unfair	25:24
	to a view like these.	25:27
	If you've made a few changes	25:30
	and attributed these quotations to Adolf Hitler,	25:31
	you could of course get ...	25:36
	denunciations of the fascist mentality that's involved here.	25:40
	A further point,	25:47
	the new economics,	25:50
	I don't mean the new economics, the radical economics,	25:52
	the new left economics is	25:55
	part of what might be called youth culture.	25:58
	We don't know how important this new youth culture is	26:02
	and when people, young people particularly,	26:05
	profess to not wish to pursue materialistic ends.	26:10
	Marketing experts, who have studied the youth,	26:16
	have discovered, apparently, that there isn't	26:18
	such a great market there as people had thought.	26:20
	There is a, well, as we've seen very little market	26:23
	for certain kinds of clothing,	26:26
	there's quite a market for music,	26:28
	there's quite a market for travel,	26:30
	although many of the young people	26:32
	around Cambridge do not spend anything for subway rides	26:35
	or for streetcars because they found other ways.	26:39
	Nice, pretty girls have no problems, apparently,	26:43
	in accepting rides	26:46
	and this is done as a regular matter.	26:51
	How deep this goes, we don't know whether this is,	26:54
	so to speak, the wild oats, the one sows from 18 to 23	26:57
	before getting on the corporation organization chart.	27:03
	It's not clear.	27:08
	I would not be prepared, myself,	27:09
	to dismiss it as a complete flash in the can.	27:11
	Obviously, the majority of the world	27:14
	will go either way of the world.	27:16
	But if a ...	27:18
	very	27:21
	able and articulate minority will not,	27:23
	this, too, has an effect upon the majority.	27:27
	My time is about up.	27:30
	Let me simply say that the new left is a very romantic left.	27:32
	Its heroes are losers.	27:39
	Guevara, for example, not Lennon, not, certainly not Stalin,	27:41
	certainly not the Soviet bureaucracy.	27:47
	Sometimes Mau but sometimes even the Chinese bureaucracy	27:49
	receives (mumbles).	27:54
	To put it simply, they are against bureaucracy	27:58
	and they're also against the market.	28:01
	This does seem like a very romantic view.	28:02
	It can lead in only one direction,	28:05
	namely to anarchism, can lead only to Robinson Crusoe.	28:06
	It can lead only to the notion,	28:11
	some kind of a romantic (mumbles) in which	28:13
	the division of labor is extremely simple and spontaneous.	28:15
	I conclude, therefore,	28:19
	that it is best at knowing what it doesn't like	28:21
	but that in some regards it has to be regarded,	28:26
	to use Lennon's term, as an infantile disease,	28:30
	a bit like measles,	28:33
	you hope that the infant will get over it.	28:34
-	If you have any comments or questions	28:36
	for Professor Samuelson, address them to	28:38
	Instructional Dynamics Incorporated.	28:40
	166 E. Superior St., Chicago, Illinois, 60611.	28:42

Item Info

Title:

Tape 65 - Fixed rate of growth for money supply

Date:

circa 1970 to circa 1971

Contributor:

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

Subject:

Format:

audiocassettes

Language:

English

Digital Collection:

Paul A. Samuelson papers, 1933-2010 and undated

Source Collection:

Paul A. Samuelson papers, 1933-2010

Series:

Economics Cassette Series: Paul Samuelson

Rights:

Limited Re-Use

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RL10082-CS-0065
ref2269_e9w
samuelsonpaul
duke:325088
pstau001065
ark:/87924/r4gh9br8v
8b7e364f-1bf3-4bcb-bd0d-cf05225c9808

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Tape 65 - Fixed rate of growth for money supply

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Economists' Papers Archive

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