Tape 53 - An economic look at 1970

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-	Hello again and welcome as Professor Paul Samuelson	0:02
	of MIT discusses the current economic scene.	0:04
	This biweekly series is produced	0:08
	for Instructional Dynamics in Chicago	0:09
	and was recorded on June 29, 1970.	0:12
-	I think today is a very good time,	0:16
	we're at mid-year, so to speak,	0:18
	to take a fresh view at the state	0:21
	of the American economy to try to guess	0:23
	how it's gonna develop in the last half of 1970	0:26
	and, perhaps for the first time, begin to peak	0:30
	around the corner and into the new year of 1971.	0:33
	So, let's use the next four quarters	0:38
	as our focus of emphasis and interest.	0:41
	I should report in the beginning	0:46
	that in the last couple of months,	0:48
	since I last took a detailed look	0:50
	at the gross national product numbers,	0:53
	there must be, discerned in the data,	0:58
	a certain degree of deterioration.	1:03
	The outlook today, if you talk	1:08
	to a typical Washington economist	1:10
	or to a typical New York corporation economist	1:13
	or to a typical academic economist,	1:18
	looks to be a bit more bearish	1:22
	or a bit more pessimistic.	1:24
	All I mean by those adjectives is	1:26
	that that guesses are for lower numbers than earlier.	1:28
	We've had, in the intervening couple of months,	1:36
	a very considerable stock market drop.	1:39
	There is no conclusive evidence	1:43
	that that stock market decline is behind us	1:45
	and that we are now on the rise.	1:48
	We've had, in this period, a considerable increase	1:53
	in interest rates, in yields as measured,	1:57
	say, by longterm bond flotations.	2:00
	We thought, some of us, that perhaps	2:07
	in January, the peak in interest rates had been reached	2:09
	but that peak is now at least 50 basis points lower	2:14
	than where we are currently.	2:19
	Furthermore, in the intervening two months,	2:22
	there has certainly been a considerable increase	2:24
	in apprehension on the part of lenders.	2:28
	The specific incident which has triggered off	2:34
	a great deal of concern has been the bankruptcy	2:38
	or near-bankruptcy of the Penn-Central railroad system.	2:42
	This is, perhaps, our largest railroad system.	2:47
	It was the result of the merger of two lines.	2:50
	I can remember, just a few months back,	2:54
	12 months, 20 months back, brokerage letters saying	2:57
	that to buy that stock was the greatest bargain	3:02
	of the ages because it owned so much real estate	3:05
	and so forth and the economies of the merger	3:08
	were going to be so very considerable	3:10
	but you can now buy that stock for a fraction	3:12
	of a fraction of what its price was	3:16
	at the time of those brokerage letters.	3:20
	This has caused a tremor of concern	3:24
	to spread, not only through the Wall Street community,	3:26
	but through lenders of all types.	3:30
	In particular, it was not very long ago	3:33
	that if you were a corporation	3:36
	of any size at all, you could go	3:38
	into the commercial paper market	3:40
	and you could issue commercial paper	3:42
	and all of the lenders thought of commercial paper	3:45
	as commercial paper, one name is about as good	3:48
	as another and there was no Moody rating	3:51
	of these different varieties and you could qualify	3:54
	for a very favorable rate.	3:58
	It was a high interest rate by historical standards,	4:01
	but a low rate in comparison with other avenues of finance.	4:03
	Suddenly it's been realized that all corporations	4:10
	are not alike and when Penn-Central is in trouble,	4:12
	then an awful lot of other railroad companies,	4:18
	a lot of other marginal corporations come into suspicion.	4:21
	Not only weak sisters but in addition,	4:26
	the strong often go with the weak,	4:32
	for example, Chrysler Motors, I don't suppose	4:34
	that there's any real cause for concern	4:37
	that it is any real trouble, in terms	4:39
	of liquidity but after the Penn Central,	4:42
	a rumor spread up that Chrysler was in trouble	4:46
	and this resulted in changes	4:49
	in the prices of Chrysler's securities.	4:53
	The important thing is that that rumor	4:56
	wouldn't have sprung up earlier	4:58
	and it wouldn't have been believed earlier,	5:03
	but now the market seems ready to believe	5:06
	in anything and everything.	5:09
	Now I don't want to go in particularly,	5:11
	except as it's germane to the outlook ahead,	5:15
	into the various reasons for the deterioration	5:18
	of the last couple of months.	5:23
	I believe that the uncertainty incident	5:26
	to the war in Indochina must bear a considerable share	5:30
	of the causation for the deterioration in the stock market.	5:37
	Markets do not like uncertainty,	5:42
	and people like to go, at least temporarily,	5:44
	into cash when the political situation seems threatening	5:47
	and uncertain and that seems to have happened.	5:50
	Similarly, the increase in yields	5:56
	in the bond market is perhaps to be explained	6:01
	by political uncertainties, but also,	6:04
	by the fact that the relief from the pace	6:07
	of inflation has been very slow in coming	6:12
	and has, up until now, been of a very modest degree.	6:16
	It takes a considerable amount of faith	6:23
	plus very high-precision eyesight	6:28
	to be able to say that the rate of increase in prices	6:31
	has now gone beyond its peak.	6:37
	I think it has but I don't assert that	6:41
	with any great confidence because I can remember one	6:44
	of the greatest experts on the timing of business cycles,	6:49
	on reference peaks and troughs and so forth,	6:54
	I only like to name people when I can call attention	6:57
	to their triumphs of forecasting,	7:02
	but this particular person,	7:04
	who is a very knowledgeable person	7:06
	in university life told me, almost a year ago	7:09
	that the reference peak in the rate	7:15
	of inflation had now been reached.	7:18
	Well, he was wrong and he was in very good company	7:22
	because very few people would have suspected	7:27
	that, at the end of last year and at the beginning	7:30
	of this year, you would have a new quickening	7:32
	of the rate of inflation and I believe	7:34
	that this has had something to do with the tightness	7:38
	of credit as measured by the yield basis	7:43
	of new corporate issues.	7:49
	The most solid fact upon which to base a change	7:55
	in forecast, with respect to the future,	7:59
	has been that, at long last, the plant and equipment	8:02
	expenditures intentions by businessmen,	8:06
	as reported in the official survey, at long last,	8:11
	that has come down and has come down rather substantially.	8:15
	I've mentioned this in an earlier tape,	8:18
	that instead of 10 1/2%,	8:22
	and that 10 1/2% number we now learn	8:24
	was never a genuinely correct number	8:26
	because there was some sort of a clerical error,	8:30
	apparently, in the survey.	8:32
	So perhaps, let's say, it should have been 9 1/2%,	8:34
	but the last survey shows 7 1/2% and there is reason	8:37
	to think that what so many people	8:44
	have been waiting for, for so long a time,	8:48
	namely, a drop in plant and equipment investment,	8:50
	may now be in the cards.	8:57
	I say a drop because, although 7% is an increase	8:59
	over the previous calendar year,	9:05
	it's not much of an increase above	9:07
	what we've already reached and	9:11
	most of us, I think, expect that if businessmen now	9:16
	say 7 1/2%, this is part of a process	9:19
	of reappraisal on their part of their own intentions	9:23
	and that there will be a shortfall.	9:27
	There has been a shortfall in recent quarters,	9:30
	between what businessmen said that they would do	9:35
	and what they have actually done.	9:38
	Now, there are plenty of paradoxes here.	9:42
	If I tell you in one breath that inflation	9:45
	and the expectations have been increasing	9:50
	for the last three or four years	9:52
	and that this helps to explain	9:54
	why the bond market yields are so very high,	9:56
	because the real rate of interest hasn't changed	10:01
	very much but you must add on to the real rate	10:04
	of interest, a premium, for the expected change	10:07
	in the price level.	10:12
	Well, if I tell you that in one breath	10:13
	and then tell you, in the next breath, report	10:16
	that plant and equipment expenditure	10:19
	has surprised all the experts,	10:21
	every equation I know for predicting investment has failed	10:23
	in the last two or three years.	10:28
	If you jiggered up your equation	10:32
	so that it finally came into agreement	10:34
	with the facts in one period, then you paid	10:36
	for it in the next period.	10:39
	And generally speaking, we have not been able	10:41
	to understand on the basis of previous patterns	10:43
	of behavior and reasonable	10:45
	and plausible profitability considerations,	10:47
	why businessmen were so keen to invest.	10:51
	In this connection, I ought to say something	10:57
	about plant equipment expenditure outlook.	10:59
	I heard a very interesting presentation	11:04
	by Professor James Tobin of Yale University,	11:07
	calling attention to this paradox,	11:12
	that people are apparently expecting more inflation,	11:15
	as judged by, well, what you, as a listener	11:19
	would think about the situation,	11:23
	knowing how much prices have been rising	11:25
	since 1966, I think that you, yourself	11:27
	would expect there to be more inflation.	11:31
	But, although there's been inflation	11:34
	in costs of equipment, Professor Tobin has pointed out	11:36
	that the actual value the market puts	11:40
	upon existing equipment has been going down	11:44
	and I think he would ask, and it's a good query,	11:48
	how do you reconcile that with inflationary expectations?	11:52
	That people keep marking down what they will pay for	11:57
	and what they will take for good plant and equipment.	12:02
	So that you have had, since 1968, a drop	12:06
	in the market valuation of real machinery and plant,	12:12
	at the same time, that the reproduction cost	12:20
	of that machinery and plant has been going up	12:24
	and going up at an undiminished rate.	12:28
	That gap needs to be explained.	12:31
	I think Professor Tobin would say that past experience	12:35
	would have suggested that if people	12:38
	really expected inflation, they would give	12:39
	a high present value to the existing plant	12:43
	and equipment but they haven't seemed to do so.	12:48
	My only contribution to resolving the paradox is	12:53
	that, for better or worse, people act	12:58
	as if they think that inflation ahead	13:02
	is not going to be good for profits.	13:06
	And I now should say money profits.	13:09
	And they take inflation to be a bearish stock market factor.	13:11
	Now, I don't know whether that's rational or not.	13:21
	It is rational if it's correct	13:24
	that the inflation which we are facing,	13:26
	have been facing, is primarily a cost inflation.	13:31
	Profits have deteriorated and anybody	13:35
	who two months ago had a certain forecast	13:41
	with respect to profits, if you now talk to him,	13:43
	it is extremely unlikely that that forecast	13:48
	of his should be for as high a figure for profits.	13:51
	In other words, most of the forecasts	13:57
	for profits have now been written downward,	13:59
	the numbers have been written downward.	14:02
	Let me address myself now	14:04
	to how substantial is the quantitative revision	14:05
	for the rest of this year.	14:10
	And let me do it in terms of some numbers	14:14
	that I gave to you earlier.	14:16
	I gave you my best forecast for calendar year 1970	14:19
	was $982 billion, this was in March.	14:27
	That's three, four months ago.	14:32
	And if I now had to give a similar number,	14:36
	a corrected number, I would not choose	14:42
	to stick by 982, I would want to lower that.	14:45
	And I might wanna lower it to the general order	14:49
	of magnitude, let's say of 977.	14:53
	Now perhaps I'm overreacting in dropping it	14:58
	by a full $5 billion to the Penn Central news	15:02
	and to the stock market and to the fact	15:06
	that we are still involved, until a day,	15:09
	in the Cambodian invasion.	15:14
	And when I report back in detail to you,	15:19
	say two months from now, I will say	15:23
	that this was a matter of momentary panic	15:25
	and that I should not have made	15:29
	so drastic a revision downward.	15:30
	However, let's put the number 977 down.	15:34
	That means that the last half of the year will,	15:42
	in all likelihood, show an increase in real output.	15:48
	But it suggested that increase in real output,	15:52
	in the last half of the year, is not likely	15:56
	to be at as much as a 2% annual rate.	16:00
	In other words, if real output grows	16:08
	by 1% between the middle of the year	16:10
	and the end of the year, that is consistent	16:14
	with the kind of forecast that I'm giving.	16:18
	2% annual rate, perhaps at an earlier time,	16:21
	I would have expected that rate	16:24
	to be more like a 3% rate.	16:25
	The second change which I ought	16:32
	to call to your attention that I discerned	16:34
	among forecasters like myself,	16:37
	I'm emphasizing the changes in the standard forecast.	16:41
	There are, however forecasts of others	16:46
	who have been lower all along,	16:50
	who have not had a need to revise their forecast	16:52
	because they find the reality is coming	16:56
	into the range that they had been forecasting all along.	16:59
	I've often mentioned what the Wharton School computer model	17:05
	at the University of Pennsylvania,	17:11
	as formulated by Professor Lawrence Klein has been doing.	17:14
	Let me simply say, and you can pick this up	17:19
	if you are a reader of Business Week,	17:22
	which reports periodically on their forecasts	17:26
	or if you are a subscriber to their service,	17:28
	which anyone can be for a modest fee,	17:31
	that the Wharton School is having a pretty good year.	17:36
	They spoke about the middle 70s, 970s,	17:41
	a long time ago and things have shaped up	17:47
	pretty much in line with	17:53
	what their model would have expected.	17:55
	The same is true of the more optimistic	17:58
	of the monetarists, the all-out pessimists	18:03
	among the monetarists who look for a flat first half	18:07
	of the year, in money terms,	18:11
	I think have not a squared error that one would envy	18:12
	but monetarism, like general GNP forecasting,	18:20
	has a considerable spread among its devotees.	18:25
	Its mean has been less than the spread	18:31
	of the non-monetarists, the mean of them.	18:34
	But there's been quite a spread	18:40
	and those monetarists who were on the high side	18:42
	among the monetarists, are pretty much in line	18:44
	with the numbers that I'm now talking about.	18:49
	So that's the general order of magnitude	18:53
	of the decline as far as the rest	18:58
	of this year is concerned.	19:00
	What I think is perhaps more interesting is a trend	19:02
	that I discerned about the first half of 1971.	19:07
	One of the reasons that people are more pessimistic,	19:15
	if pessimism is the right adjective,	19:18
	pessimistic is the right adjective to use.	19:22
	It depends on what your goals are.	19:25
	If you're trying to fight inflation,	19:26
	then everything that I call pessimistic	19:28
	might be considered to be the height of optimism,	19:30
	exactly what the doctor ordered.	19:32
	So let's just talk about lowness.	19:34
	One of the reasons though for people	19:36
	to be giving lower numbers with respect	19:38
	to the future is that the very few people now	19:40
	expect that when we reach the trough,	19:46
	we will have a nice, strong expansion in real terms.	19:50
	1971 is beginning to look, in these forecasts,	19:58
	like more of the same.	20:01
	And more of the same is bad from the standpoint	20:03
	of, let's say, a trigger-happy trader	20:06
	or investor, interested in profits and in equities.	20:11
	Because it is not clear from the regressions,	20:16
	from the surveys, that the ground is being laid	20:23
	for a strong, healthy advance in real terms.	20:30
	So looking four quarters ahead,	20:35
	it looks as if, by the middle of next year,	20:38
	just a year from the time that I'm now talking,	20:41
	we will, in real terms, be a good deal below	20:44
	what people were forecasting for that same date,	20:49
	let's say, in the forecast made	20:53
	at the beginning of this year.	20:55
	Now, I have not seen any new monetarists' forecasts	20:59
	for 1971, it's a little bit early for them.	21:06
	And you know that the rate of growth	21:11
	of the money supply, since the low point	21:14
	of that time series in February,	21:19
	has been rather rapid.	21:21
	Now, I don't think that most of the monetarist experts	21:24
	or non-monetarist experts expect the money supply	21:27
	to be growing all through 1970, the rest of 1970,	21:31
	at rates like eight and 9%, just because,	21:37
	for a short period of time, if you put your ruler	21:41
	between a low point in the money series,	21:44
	let's say in February, and a high point,	21:46
	at the beginning of the summer, you got such numbers.	21:50
	If you did get such numbers throughout the rest of the year,	21:55
	then the monetarists would, I suppose, begin	21:58
	to part company with the kind of consensus	22:03
	that seems to exist at the moment	22:07
	about the outlook and would themselves say	22:09
	that 1971 was going to be a very strong year.	22:12
	They might, however, in using the word strong,	22:16
	put the major emphasis upon strong	22:19
	in terms of inflation, of paper price increases,	22:22
	of increases in nominal income	22:26
	and not necessarily strong,	22:28
	at least equivalently strong, in terms of real output.	22:32
	Now I would like to put in perspective	22:37
	what a change in the outlook	22:43
	of the magnitude we've been talking about,	22:46
	probably should be interpreted to mean.	22:48
	One of the reasons why people are now beginning	22:55
	to be aware of the inadequacies	22:58
	in terms of real growth and in terms	23:02
	of unemployment, say, of the first part of 1971,	23:04
	is not because of some new deterioration	23:08
	in the outlook for 1971, so much	23:12
	as that we're just getting close to that time.	23:15
	Before now, it didn't seem very worthwhile	23:20
	to try to peer so far ahead into the future	23:23
	and so people just didn't talk about 1971.	23:26
	You might say we were ostrich-like, not looking at that	23:29
	but I think it's a very defensible thing.	23:33
	There would be very little point in my wasting your time	23:35
	or my time in talking about 1972	23:37
	and 1973, because the causal factors	23:40
	upon which the evolution of those periods depend	23:43
	are not yet discernible.	23:46
	Well, 1971 is getting closer and the economists tend	23:49
	always to look about four quarters ahead,	23:52
	which I think is about as far	23:56
	as anybody's vision can usefully extend.	23:59
	That's one factor, the other factor is the deterioration	24:07
	that I've been speaking about.	24:10
	This deterioration means, for example,	24:13
	that unemployment numbers of above 5% are now the mode.	24:17
	The last numbers that I know were 5%	24:26
	and only the Wharton Model, for reasons	24:30
	which I do not understand, is optimistic	24:35
	that that's about the peak.	24:39
	The Wharton Model, as I recall, shows unemployment	24:41
	not getting worse than this 5%,	24:44
	and in fact getting a little bit better,	24:46
	almost from the next quarter on.	24:48
	Well that's not the typical model.	24:51
	You now are getting people beginning to talk	24:53
	about 5 1/2% and even 6% rates of unemployment.	24:56
	But the biggest change, I believe,	25:02
	is not in the number 982 to 977	25:06
	or even somebody else's 972.	25:11
	The bigger change is in the apprehension	25:16
	about downside risk.	25:19
	You are getting a more skewed	25:22
	probability distribution downward.	25:26
	People, in terms of betting odds,	25:29
	are more concerned that this recession	25:33
	might get considerably worse and	25:37
	if it does get considerably worse,	25:42
	then the numbers that I've given you	25:45
	do not do justice to it, in fact,	25:47
	in that case, the numbers of monetarists,	25:49
	you recall the 965 billion forecast for the year,	25:53
	even if that number is not realized,	25:59
	still, it will have been a useful number	26:02
	for somebody to have taken seriously	26:08
	at an earlier date.	26:10
	This is the possibility and this is	26:11
	what a Penn Central bankruptcy,	26:13
	for example, has done, one of the things that it's done.	26:16
	I ought then, in just a minute,	26:21
	to say that during the Great Depression,	26:23
	Herbert Hoover was criticized for many things	26:27
	but one of the things for which,	26:30
	in my judgment, should we give him credit	26:32
	is that he did start and push	26:34
	the Reconstruction Finance Corporation,	26:36
	which did an awful lot to shore up	26:38
	the capital structure of the nation.	26:41
	And I find it rather sad that Congressman Patman,	26:45
	I can't say he's playing politics	26:50
	because this is his politics,	26:52
	this is the way he has always believed,	26:53
	that he has made such a fuss	26:55
	about having the government bail out Penn Central.	26:57
	I think it is the duty of the government	27:02
	to bail out, in the interest of the community,	27:04
	these financial situations and I think the whole history	27:07
	of the 1930s would have been different	27:11
	if we had done more about that.	27:14
	Of course, you have to have a due safeguard	27:16
	that the public purse not be saddled	27:19
	with the debts of private embezzlement	27:21
	or profligacy, but I would think	27:24
	that that could be worked out.	27:27
	Let me conclude by giving you my opinion	27:32
	of what ought to be done at this time.	27:35
	I try to spare you editorializing,	27:36
	but that's an interesting topic.	27:38
	I think that, at this time, the concern	27:40
	about inflation should, for the moment,	27:44
	take second place to the concern	27:46
	about the deepening of the recession.	27:48
	And therefore, I think the Federal Reserve	27:50
	should be concerned with liquidity,	27:53
	should let the money supply grow more rapidly	27:55
	than it ought to let the money supply	27:58
	grow throughout the year.	27:59
	After the turn in business is very clearly established,	28:01
	then I think the Federal Reserve can reverse its field	28:08
	and sop up some of the excess money.	28:13
	But we'll talk more about that next time.	28:15
-	You've been listening to MIT professor, Paul Samuelson,	28:18
	discussing the current economic scene.	28:21
	If you have any comments or questions,	28:23
	address them to Instructional Dynamics Incorporated,	28:25
	166 East Superior Street, Chicago, Illinois, 60611.	28:28

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Title:

Tape 53 - An economic look at 1970

Date:

circa 1970 to circa 1971

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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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Tape 53 - An economic look at 1970

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