Tape 70 - Why are they laughing at Laffer

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-	Hello once 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,	0:09
	and was recorded February 19, 1971.	0:11
	Certainly the most important topic which	0:15
	economists are talking about today in connection	0:19
	with the current state of the American economy	0:22
	has to do with the controversial projections	0:25
	of what's going to happen in 1971 that have been	0:29
	made by President Nixon, and by his team generally.	0:33
	In my last tape, I discussed some of the comic opera	0:38
	aspects of these forecasts.	0:42
	It reads just like melodrama.	0:46
	Is the New York Times reporter correct,	0:49
	Leonard Silk, that a last minute telephone call	0:52
	went from the White House to the technicians	0:56
	and the counsel of economic advisors saying	0:59
	that your numbers of, let us say, one trillion	1:01
	and 52 billion, are unacceptable (inaudible)	1:04
	that must be increased for high reasons of state,	1:07
	or was there no resistance by the counsel	1:10
	of economic advisors and did that represent	1:13
	their best forecast?	1:15
Paul	A new element has been added in the	1:18
	equations since my last talk.	1:21
	Dr. George Schultz, who is the head of the new	1:24
	office of budget and management, and who is sometimes	1:28
	referred to as the number two President on the	1:32
	domestic front.	1:36
	Dr. George Schultz testified before the	1:38
	Joint Economic Committee, and he said no in effect,	1:41
	these rumors are not correct, it isn't the case	1:46
	that these are unscientific forecasts made for	1:49
	purposes of state.	1:52
	Rather, they represent the truth	1:54
	and the truth this	2:00
	time was not revealed by providence to people	2:01
	inside the counsel of economic advisors, at least	2:06
	the glad tidings did not first come there.	2:10
	But low and behold, in the office of the budget	2:12
	bureau itself, on the staff of Dr. Schultz himself,	2:17
	works a 30 year old economist, Dr. Arthur Laugher,	2:24
	who is on leave from University of Chicago,	2:30
	where he is an associate professor.	2:32
	Dr Laugher is the PHD, he is trained at Stanford,	2:35
	and he has a little model of the	2:40
	business cycle and of the current economic scene,	2:45
	and when he ran his little model through its paces,	2:50
	low and behold it came out with	2:54
	1,065 billion dollars of GMP for 1971.	2:57
	And if this is 15 billion dollars higher	3:08
	than the bulk of the	3:13
	estimates by New York bank economists,	3:16
	by corporation economists,	3:18
	by university economists, so much the worse for that group.	3:25
	Joseph Slevin, who is a very astute Washington	3:31
	corespondent, financial corespondent, who himself	3:36
	I believe writes one of the best inside government	3:40
	bond newsletters, and who has been known time	3:46
	and again for his pipeline to inside scoops in	3:49
	Washington,	3:54
	gave an interview, which was syndicated,	3:55
	I happen to see it in the Boston Globe,	4:03
	but it's appeared in newspapers all over the	4:08
	country, I understand, with Dr. Arthur Laugher.	4:09
	Dr. Arthur Laugher is 30 years old,	4:14
	he's a very confident young man,	4:17
	and he told Mr Slevin that darn right he had	4:21
	a model and darn right its the best darn model	4:25
	going, and he's ready to back his little model	4:29
	against anybody elses model.	4:34
	Moreover he has an impressive record of	4:37
	past forecasting because, I hope I am quoting him	4:40
	correctly, when candidate Reagan was running	4:43
	for governor,	4:51
	Laugher was offered seven to one money	4:55
	that this upstart, this pipsqueak,	4:59
	this traveling salesman, this broken down	5:02
	movie actor.	5:06
	I'm perhaps embellishing a little bit upon	5:08
	the interview, that he couldn't become governor,	5:10
	that he couldn't win the votes, and so seven to one	5:14
	money said he couldn't,	5:21
	and I don't know whether Mr. Arthur Laugher as	5:22
	he then was, before we was known as a PHD,	5:23
	had a little political model, which he was ready	5:24
	to back against all comers, but he took all that	5:27
	money, and he took away the money from the smart	5:29
	money.	5:31
	It's not a very cogent story.	5:32
	I'm told, I asked one of my political sciences,	5:40
	he said since Reagan was ahead 10% in the polls,	5:41
	I hope we're talking about the same election,	5:45
	the only remarkable part of the story is not that	5:49
	anyone would forecast his election correctly,	5:50
	but that you could find fools in the senior common	5:53
	rooms of universities who would be offering	5:56
	such kind of ridiculous money when they could do	5:59
	so much better in backing their idiocies,	6:01
	going right wholesale to Las Vegas.	6:07
	The most valuable function that I can perform	6:10
	for you as listeners,	6:14
	is to comment upon the structure of the Laugher	6:19
	model, to see whether there is perhaps something	6:23
	valuable in it, which does justify the estimates	6:27
	that President Nixon has made.	6:32
	Just yesterday, at the Brookings Institution,	6:38
	Dr. Laugher gave a presentation of his model	6:44
	to the assembled scientists there.	6:50
	It was not my privilege to be present,	6:54
	but I do have his basic equation for	6:59
	money GMP change.	7:06
	This is the heart of his model.	7:08
	This is the equation, from which by itself,	7:11
	the 1.065 trillion estimate of the administration	7:14
	can be derived.	7:20
	Let me read to you what the equation consists	7:27
	of, if some of you want to get a pencil	7:31
	and write it down, so much the better.	7:34
	The percentage change in GMP,	7:38
	is equal to a constant,	7:43
	that constant is .032.	7:47
	So I guess that means	7:52
	that this constant represents a 3% change	7:58
	in GMP before we add on anything for changes	8:01
	in the money supply.	8:07
	Then we add three constants which represent	8:11
	the seisms adjustment, which will not interest	8:14
	you, remember, that this is the season the	8:16
	unadjusted gross national product.	8:22
	I didn't even know that such a number existed,	8:24
	seasonally unadjusted because the GMP numbers are	8:28
	fabricated numbers, but if you turn to the July	8:31
	survey of business, of the Department of Commerce,	8:34
	you will find an obscure table.	8:38
	All the people for years, in the Department	8:41
	of Commerce, have always said don't put any	8:44
	store on these unadjusted numbers,	8:47
	the difference in the wheat crop,	8:50
	whether it comes in in Kansas early in June,	8:56
	or comes in late in June, can give farm inventory	9:00
	swings in these numbers, alterations of several	9:04
	billion dollars.	9:10
	But never less, lets take the equation as it is.	9:11
	After the seasonal corrected numbers,	9:14
	comes 1.1 times the current quarters	9:18
	percentage change in the money supply.	9:24
	No lag in that, whatsoever.	9:29
	And that is the only place in which the rate	9:32
	of change in the money supply occurs.	9:36
	And that is the heart of the equational system.	9:41
	However, let me go on to give you the rest of it,	9:43
	there is a little importance given to changes	9:47
	in government expenditures, and these are	9:52
	government expenditures, I think, on goods and	9:54
	services, and not those which the	9:55
	Federal Reserve Bank of St Louis reports which	9:59
	includes transfers, which doesn't really make much	10:02
	sense to be included in an equation like this.	10:04
	But the upshot of these several quarters for	10:07
	and al, counting the current quarter,	10:12
	of changes in the government expenditures,	10:14
	is a cancellation.	10:18
	There's a strong plus effect in the current quarter	10:22
	but there's a minus effect in the other quarters,	10:25
	and if you add them all up it practically cancels	10:28
	out to nothing in the longer run, that is,	10:31
	in the yearly basis.	10:35
	Then there's a strike variable, number of days lost	10:37
	because of work stoppages, which of course	10:41
	depresses our rate of growth of the GMP	10:44
	with the coefficient numerical value which I won't	10:48
	bother to give you.	10:51
	And then finally there's little kick from the	10:54
	stock market.	10:57
	The level of stock prices, say standard in poor	10:58
	stock prices, of last quarter, feed into the rate	11:02
	of change of the GMP of this quarter,	11:06
	with a coefficient of .068.	11:11
	Now, my notes are imperfect to whether that's	11:15
	the change in the stock prices, I presume that it	11:19
	its the change in stock prices,	11:23
	of the last quarter, but it might be the level itself.	11:26
	In any case I'm told that that doesn't do much	11:29
	of the business.	11:31
	Well, in order to make a forecast for the	11:34
	government, Dr Laugher has to assume what the	11:38
	Federal Reserve board is going to do with the	11:40
	money supply in 1971, and what it's going to do	11:42
	in 1972 if he's making the forecast up to the	11:48
	election time, and he's making a forecast upon	11:51
	which revenue estimates can be made.	11:55
	What shall we assume?	12:01
	Well he has the model in which he takes 4% in	12:01
	each of 71' and 72',	12:04
	and he has a model in which he takes 8%,, by the way	12:08
	4% of rate of growth of money supply, because of	12:13
	this powerful kick in the current quarter,	12:17
	and no other effect, you get an 8.2% increase	12:19
	in nominal GMP.	12:22
	Since he's fairly optimistic about the	12:25
	improvement in prices.	12:27
	That's much better, that's better than a 4% increase	12:29
	in real output, beyond what most people	12:33
	had been forecasting.	12:36
	For 6% in 1971 and 1972, he gets a 10.4% increase	12:40
	in the nominal GMP,	12:48
	and he goes on, considers a pattern of 8% in 71'	12:51
	and 6% in 72', and gets an even better result.	12:57
	In fact, this is really Santa Clause model,	13:02
	because we don't pay in terms of price inflation	13:06
	at all, for getting vast increases in real output,	13:08
	rapid reductions in unemployment.	13:13
	For example, the 4% increased to the money	13:18
	supply for the next two years, gives us prices	13:21
	rising at 3.4%, whereas if we step that up and	13:24
	heaven knows why shouldn't we be nice to ourselves,	13:29
	the rate of increase in prices goes up 23.6%,	13:34
	and all of this, much down from the recent figures,	13:36
	which have been in the GMP deflator over 5%.	13:40
	This is a veritable dream world of a model.	13:45
	Now, you have to ask yourself, is it really	13:52
	possible that a modern government for more than	13:55
	200 million people is being run along these lines	13:59
	that a relative neophyte at the job of forecasting,	14:04
	using a untried method, which has never been	14:10
	approved particularly by any of the opposing camps	14:18
	that a number like his should change the destiny of	14:24
	man and of state papers.	14:29
	If somebody had told me about this,	14:33
	in a hypothetical way, I'd say it was a put on,	14:35
	that the whole purpose of this exercise is to	14:37
	discredit monitorist.	14:40
	That its to discredit reduced form estimation.	14:42
	It's a edict to bursiform, to show you that	14:46
	anything can be approved by such methods,	14:50
	and that some nefarious person who wasn't able	14:54
	to undermine the Federal Reserve Bank of St Louis	14:57
	model, lets say by honest, legitimate crit ism,	15:00
	and thinks that he'll do it just by humor,	15:03
	and indirection would create this model.	15:07
	When I saw these equations, the first thing	15:11
	that occurred to me is why don't we use currency,	15:14
	instead of the narrow money supply.	15:19
	Because lets make no mistake about it,	15:22
	a large part of the good fit of this model,	15:25
	and a large part of the instantaneous effect	15:28
	of the rate of change of the money supply,	15:32
	comes from the Christmas season.	15:36
	And currency we know is responds to the dreamy	15:40
	Christmas season, I presume even more acutely.	15:43
	I can't remember whether I mentioned on these tapes	15:49
	that I wrote a critique of	15:52
	monitorism and I wrote a critique of anti-monitorism	15:56
	in the same article for the Sunday Telegraph	16:01
	of London, and the anti-monitorist argument was	16:05
	by Professor Nicholas Calder of Cambridge University	16:10
	who is picking on Professor Milton Prigmant,	16:14
	and one of the points which he makes,	16:21
	which I regraded as such little interest	16:24
	and relevance, was precisely the Christmas	16:26
	variation in the money supply,	16:31
	coinciding with the Christmas upswing in business.	16:33
	Now, nobody thinks this is the Bank of England,	16:36
	or Arthur Burns of the Federal Reserve,	16:38
	that makes us all give presents,	16:40
	and to make it possible for 40% of all the retail	16:45
	business for the whole year to be done between,	16:47
	lets say the period of Thanksgiving and New Years,	16:51
	nobody thinks its the Federal Reserve which is	16:54
	causing that pattern, and so I considered	16:57
	Caldors proposal as a parody, and as a burlesque of	16:59
	the genuine core of truth that I understand to be	17:06
	in Professor Freedman's monitorism and certainly	17:12
	leading up my understanding of truth to be	17:14
	what is in the doctrine as he really believes in it.	17:18
	So I didn't even bother to divulge that,	17:22
	but if we were to take the Laugher exercises	17:25
	seriously, and I may say that I can predict	17:28
	that the most indignant people about this model	17:32
	will be the monitorists, they're the one who's	17:35
	joke, the joke is at their expense,	17:40
	the cream of the jest of course will be	17:47
	when we learn as we could learn in economics,	17:49
	being an inexact science, that the GMP	17:53
	is actually 1,065 for 1971.	17:56
	That would be the cruelest, unkindest cut of all	18:01
	because it shows that with ridiculous model	18:04
	that you can mimic the reality.	18:08
	Well, there's going to be a great deal of rejection,	18:13
	of the Laugher model, in fact that's going on	18:17
	already, except for Dr Schultz, the general	18:20
	word that I'm getting out of Washington is a	18:25
	repudiation of it and I give you as evidence,	18:28
	because much more important than inside gossip	18:31
	I assure you, is the weight of public evidence,	18:37
	I give you as evidence, just two days ago in the	18:43
	New York Times, there is a report of a speech	18:53
	by Herbert Stine, who is the	18:55
	second man on the council of economic advisors	18:57
	to Paul McCrackin, and Herbert Stine indignantly	19:00
	denies that the idiocy of 1,065 was forced	19:03
	upon the council by the White House,	19:08
	and it would be long I'd take it to infer that	19:14
	if the result of Schultz's boy Laughers model,	19:17
	but rather this was something which they had	19:21
	cooked up already by themselves earlier.	19:24
	Of course, if you read the fine print,	19:31
	it was cooked up earlier as a target,	19:34
	of what it would be hoped that we could achieve,	19:39
	what it would be nice to achieve, and ordinarily	19:43
	the grown ups do not make a forecast a reality,	19:47
	that which their dreams and fantasies and wishes	19:51
	dictate to be the targets.	19:55
	It's what Sigmund Froyd calls a reality principle	19:59
	that intervenes, I think after your six years	20:03
	of age and no longer toilet trained,	20:04
	you are toilet trained, then the	20:08
	brute facts of life are supposed to assert themselves.	20:14
	Now I knew that in the totalitarian countries	20:17
	of Eastern Europe and Asia, beyond the so called	20:21
	Iron Curtain, that we often get in five year plans	20:22
	complete fantasies which tell us more about	20:25
	the political pressures of the regime, and about	20:30
	the dreams and aspirations and reveries of the	20:33
	forecasters in which typically have little	20:40
	or no relationship to the intervening reality,	20:44
	but I didn't realize that the United States	20:47
	was at this stage of the game.	20:50
	I stand by the remark that I made in my last tape,	20:56
	if the GMP does work out to be 1,065,	21:01
	I as a crypto-positivist, will give credit to Mr Laugher,	21:07
	and to his model for having predicted it.	21:13
	I will not give any credit to the	21:16
	counsel of economic advisors annual reports,	21:18
	the economic report of the president,	21:21
	for having made a correct prediction,	21:23
	because you are going to read that report,	21:26
	and to read it carefully to see that they are not	21:30
	predicting the report,	21:32
	that they think that the GMP will be at this	21:34
	particular number, and if by inadvertence	21:38
	we get to that number, I will either penalize	21:40
	them for having made a prediction	21:43
	we will be there, nor I will give them credit.	21:46
	It'll be very difficult by my jurious method of	21:49
	scoring these matters for the present	21:55
	counsel of economic advisors to come out with	21:58
	any glory in connection with this years forecast,	22:01
	almost without regard to what does develop.	22:06
	What are sensible sober people saying about these	22:12
	particular forecasts,	22:15
	depends on I suppose who your friends are.	22:20
	We do have in the public record, that the business	22:23
	advisory counsel met, and they met after the	22:26
	optimistic government forecast came out,	22:30
	and they gave a forecast, and they gave a forecast	22:32
	which is much more in alignment with everybody	22:35
	elses forecast and with the governments forecast.	22:37
	I should warn you not to attach too much	22:40
	importance to that because in my experience	22:41
	the business advisory counsel forecast has	22:44
	always tended to be a little out of date,	22:46
	and you must correct them.	22:48
	For a time, their reports on earlier forecast,	22:51
	when things are moving fast, they tend to get out of	22:54
	date.	22:56
	Nevertheless, they tell a very different picture.	22:57
	Let me turn to another source.	23:02
	You will remember that in my year end forecast,	23:05
	and review of last year,	23:10
	I had reason to mention that about the best	23:13
	forecast for the year was done by a Republican,	23:15
	by an advisor to candidate Nixon.	23:21
	Allen Greenspan, of the Townsend Greenspan	23:26
	Consulting Organization, a very reputable organization,	23:29
	even if you aren't interested simply in macro-GMP	23:34
	forecast, but interested in loud detail,	23:37
	you as a corporation of some size or a bank	23:42
	could very well consider this service	23:45
	as one of the best services that you could buy.	23:50
	I was very interested then to see	23:55
	what their most recent forecast is,	23:59
	what Allen Greenspan's forecast is after the	24:01
	economic report of the president, and the	24:07
	budget, the message with all the new information.	24:09
	And I must report to you what	24:13
	its no doubt in the public record,	24:18
	and that is that Mr. Greenspan does not go along	24:20
	at all with numbers like those in the Laugher model.	24:25
	He has done what he always does,	24:29
	which is he adjusts his numbers for the most recent	24:31
	information, and since there have been increases	24:34
	in government expenditure, which have taken	24:36
	place, and which are planned to take place,	24:39
	he has in his best realistic estimates of those	24:42
	items, taking them into account,	24:47
	but my recollection is that he's moved up	24:50
	his number from 1,043 for the year, to 1,047	24:54
	for the year, which takes him a long, long way,	25:00
	from 1,065.	25:04
	Also, his detailed study on how prices are	25:06
	likely to move in the deflator has caused him to	25:09
	become just a little bit more pessimistic	25:14
	rather than a little more optimistic about how	25:16
	well we'll do for the next year, fourth quarter	25:17
	to fourth quarter, say with respect to rate	25:21
	of price increases.	25:24
	I'm balanced, therefore I would say that there	25:27
	is a credibility gap in the economic sphere,	25:33
	whatever there may or may not be in the military	25:38
	sphere, but that credibility gap has been	25:43
	accentuated this year by the unofficial	25:44
	documents that any of you who are in the	25:50
	money market, interested in bond prices	25:53
	and interest rates should	25:57
	assume as a matter of course,	25:59
	that the budgetary deficits actual is going	26:03
	to be larger than that which is important,	26:07
	and anyone who believes for example,	26:13
	that the level of unemployment at the end of	26:19
	this year is a key variable in telling us	26:20
	what's going to happen to next years election,	26:23
	November of 1972, should assume that the	26:30
	unemployment numbers biased upward, going on the	26:34
	basis of present evidence, we have no right to the	26:38
	optimism which is now shown.	26:42
	Finally for you any of you who are interested	26:45
	in profits,	26:49
	say a security analyst, and people generally	26:52
	interested in equity market,	26:56
	I don't think that it is a sober and reasonable	27:00
	best estimate of central tendency to assume	27:05
	that profits before taxes are going to zoom	27:08
	upward to 95 billion dollars, just in the next	27:12
	three or four or five or six quarters,	27:19
	so although the stock market is roaring,	27:23
	and though there are some very good reasons	27:27
	why the market might continue to go upward,	27:30
	and although there are some self fulfilling	27:36
	prophecy aspects of an increase in the stock	27:40
	market, it undoubtedly will have some kickback	27:41
	effects upon the economy, which will be on the	27:44
	expansionary side, although all those things are true,	27:47
	don't rush out to buy common stocks on margin	27:52
	based upon the correctness of these estimates.	27:58
	If you're going to do it, do it upon	28:00
	the basis of your own brand of idiocy or wisdom,	28:03
	rather than this particular last rather comical	28:07
	case os estimates which has come to us from the	28:13
	Potomac in Washington.	28:18
	Now I haven't any more time,	28:21
	but I was asked a question by one of our	28:25
	academic subscribers.	28:30
	This is from the University, and he said	28:34
	I don't think you've ever commented and certainly	28:39
	not on this series on the economic feasibility	28:42
	on a volunteer Army.	28:48
	Would you care to do that?	28:52
	I agree, I don't think I've commented on this,	28:56
	but I may have done so in one of my more	28:59
	discursive tapes.	29:02
	I do have an opinion on the problem,	29:04
	and my opinion in a nutshell is that	29:08
	a volunteer Army will not work.	29:11
	I mean by that, that there is no feasible increase in	29:15
	military pay, which will enable us on a voluntary	29:19
	basis to continue to have the armed services	29:26
	of the approximate size and being and readiness	29:31
	that we have had, and engaged in the same	29:36
	kind of actives we've been engaged.	29:39
	I may say that as a private citizen, that's one	29:43
	of the reasons I'm for it.	29:44
	I want to restrict the opportunities which	29:46
	Pentagon strategists and the White House	29:55
	strategists have because as a private non-economist,	29:58
	I think that our security programs are off-deemed.	30:04
	So that's my answer to your economic question.	30:11
	If you have any questions or comments, both pro	30:16
	or con for Professor Samuelson,	30:18
	address them to Instructional Dynamics Incorporated	30:20
	166 East Superior St, Chicago, Illinois, 60611.	30:23

Item Info

Title:

Tape 70 - Why are they laughing at Laffer

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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samuelsonpaul
duke:325093
pstau001070
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fc74856e-67fa-4f65-8126-b66626a67dc0

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Tape 70 - Why are they laughing at Laffer

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Economists' Papers Archive

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