Tape 11 - The 10 Percent Surtax, the 1969 Economic Report, Is a New Crisis Coming?

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Interviewer	Instructional Dynamics Incorporated	0:02
	welcomes you to another in a continuing series	0:03
	of commentaries on the current economic scene.	0:06
	With us again for the week of January 20th	0:08
	is Dr. Paul Samuelson, professor of economics	0:11
	at the Massachusetts Institute of Technology.	0:14
	Professor Samuelson, one of our subscribers	0:17
	has sent in some questions in the hope	0:19
	that you will answer them.	0:21
	"We are an investment counseling group,"	0:22
	says the this question, "Much interested	0:24
	in general economic predictions.	0:26
	As we listen to your tapes, and those of Pro. Freedman,	0:28
	there is much that you are agreed on.	0:31
	But we are occasionally puzzled by	0:33
	possible differences in opinion.	0:35
	Our first question then is whether you agree	0:38
	with Pro. Freedman with floating exchange rates	0:39
	in some form are desirable and are likely	0:42
	within the next year or two, and also	0:44
	do you agree with what seems to be his	0:47
	cheerful analysis that the sliding peg	0:48
	would encounter no serious difficulties from speculation?	0:51
Paul	Let me do my best with this question.	0:54
	There are many points of overlap between	0:58
	my own analysis and that of most present-day economists.	1:03
	And there are many points of overlap	1:08
	between my analysis and that of Pro. Freedman.	1:11
	There are some differences, I suppose that	1:14
	our listeners are most interested	1:17
	in the reasons behind our disagreements	1:20
	rather than just in the views expressed.	1:25
	With respect to the first question,	1:28
	I'm very happy that this is a question	1:30
	upon with I can express a great deal	1:32
	of agreement with Dr. Freedman.	1:35
	I do think that the flexibility	1:37
	of exchange rates are desirable.	1:41
	I think that there was a fatal and fundamental flaw	1:43
	in the Bretton Woods Agreements of 1944	1:47
	and we have come to recognize that,	1:51
	namely that in a world where people will not	1:55
	play the rules of the Gold Standard game,	1:58
	will not automatically inflate and deflate	2:01
	a domestic economy in order to provide flexibility.	2:06
	It is anomalous to keep exchange rates inflexible.	2:12
	Now, I've expressed this agreement that we need more	2:16
	flexibility with Pro. Freedman,	2:19
	and I would go farther,	2:21
	I'd like to pay a personal tribute to him,	2:23
	as he said a couple of weeks ago on his tape,	2:27
	he was a lone voice crying in the wilderness,	2:31
	in favor of floating exchange rates just a few years ago.	2:33
	Well, he's no longer in the wilderness,	2:37
	the bulk of the academic economic fraternity	2:40
	has gone over to his general view.	2:45
	And I think that this is a tribute	2:50
	to the cogency of his analysis.	2:54
	Now, I say some measure of flexibility is desirable.	2:59
	This could be in the form of a crawling peg,	3:07
	with widened gold points around the crawling peg.	3:09
	I speak of gold points but I mean just import	3:15
	and export points even if we had no Gold Standard system.	3:18
	And as far as I'm concerned, I would like to see	3:25
	more experimentation with floating exchange rates.	3:30
	Although I don't insist upon having the practical	3:33
	men of the world become converted	3:37
	in a short time to that viewpoint.	3:38
	However, what I think is desirable,	3:42
	and what I think is likely are not always the same thing.	3:46
	I believe that the men of affairs	3:49
	in the central banks and finance ministries	3:52
	of the world are slowly being persuaded	3:55
	by events and the logic of academic economists	3:58
	toward looking more favorably upon the flexibility,	4:04
	but they are riding a tiger,	4:08
	and they don't know how to get off that tiger.	4:10
	And so as purely betting man I wouldn't be so sanguine	4:12
	that what is desirable will come about in the near future,	4:16
	which means in a year or two.	4:23
	Now I don't say that Canada might not again	4:24
	have a floating exchange rate	4:27
	or one or another small country,	4:28
	let's say Denmark as an example.	4:31
	But the question is whether any	4:34
	key currencies will be floating.	4:35
	My candidate, a year or two ago,	4:39
	for a floating exchange rate was the pound, itself.	4:41
	But the price that was exacted apparently,	4:45
	to support the pound against speculative capital movements	4:48
	by the powers that be and the group of ten,	4:52
	apparently precluded the pound, the British,	4:55
	from having that particular option.	4:59
	So, I guess I wouldn't at even odds,	5:03
	bet upon floating exchange rates	5:06
	within the next year or two.	5:10
	That doesn't mean that I disagree with Pro. Freedman,	5:11
	in his implied belief that we're going to have	5:15
	one or another major crisis in the next year or two,	5:17
	I would suppose that in the next two years	5:21
	the old Farmer's Almanac's proper odds are	5:24
	we're going to have about one and a half crises,	5:26
	one of them serious, certainly.	5:29
	And probably there'll be some realignment of exchange rates.	5:32
	I don't believe the authorities have exhausted	5:35
	all the remedies that are available to them.	5:38
	For example, the use of exchange controls	5:41
	has just been broached and just been begun	5:46
	in many of the deficit countries.	5:48
	And although it may lack wisdom,	5:51
	to push exchange controls harder,	5:53
	that certainly is a weapon in the arsenal of the authorities	5:56
	and it's the kind of weapon which in emergency times	6:00
	becomes very appealing because it does have	6:04
	some short run effectiveness.	6:07
	Let me, finally, go to the last part	6:09
	of the international question.	6:12
	Do I think that a sliding peg will encounter	6:17
	some possible problem from the standpoint	6:20
	of speculators?	6:23
	We don't have any real experience with this,	6:26
	and I won't pretend that I've thought through	6:28
	all of the intricate analytical aspects of the question.	6:33
	But, let me just think aloud, so to speak,	6:39
	off the top of my head and give some views.	6:42
	First, I assume that a sliding peg means that	6:47
	the exchange rate could adjust downward or upward	6:51
	about one percent per year, or two percent per year.	6:56
	One and a half percent.	7:01
	There are a dozen different devices	7:02
	that will determine exactly	7:05
	where in that range the peg would move.	7:07
	You may say in the beginning,	7:11
	"What's the importance of one percent,	7:13
	or one and a half percent?"	7:16
	Well that isn't very important.	7:17
	You'd have to be a real elasticity optimist	7:18
	to think that a small change in exchange rates	7:21
	of that magnitude will itself have	7:24
	great equilibrating efficacy.	7:27
	But, that's only one or two percent per year.	7:30
	And in a decade, one or two percent per year	7:34
	is the equivalent to ten or twenty percent.	7:39
	And I don't suppose, most econometricians	7:42
	after they think about the problem	7:46
	will be of the opinion that,	7:47
	in well-run countries at least,	7:50
	and mind you, floating exchange rates	7:53
	or sliding pegs are no substitutes for discipline	7:55
	and for making sure that you do run your country well,	7:59
	in any case, that in well-run countries	8:03
	the equilibrium change in exchange rates	8:06
	needed for equilibration, needed to repair that	8:09
	fundamental flaw in the Bretton Woods system	8:12
	is probably not more than 10 or 20 percent per decade.	8:15
	Now, if you're a country like Chile or Brazil,	8:20
	undergoing constant inflation greater	8:22
	than the rest of the world	8:24
	then obviously this moderate change in the peg	8:25
	will not do the trick but nothing will.	8:32
	And I don't direct my remarks to such countries.	8:35
	I do direct my remarks to countries like Germany,	8:39
	and to countries like the United States.	8:45
	Germany, in my opinion, has had an over-valued currency,	8:47
	excuse me, an under-valued currency.	8:51
	And the United States has had for a dozen years	8:53
	or so an over-valued currency.	8:57
	This relationship between the mark and the dollar	9:00
	drifted slowly into this disequilibrium	9:04
	and I think the sliding peg could very well	9:08
	have handled that particular problem	9:10
	as far as the magnitude of the changes concerned.	9:13
	How would this have worked if in 1955 we'd had	9:15
	a sliding peg between the common market countries	9:20
	and the United States?	9:23
	We have no experience, but I conjecture that	9:25
	this is the way that things would have happened.	9:29
	In 1955, we were probably poised between	9:32
	the dollar shortage, when the dollar was under-valued,	9:36
	and the dollar glut, when the dollar was over-valued.	9:39
	And so, if it had been introduced at that time	9:42
	that would have been a pretty good time	9:44
	perhaps to have made that reform.	9:45
	For a year or so, the exchange rate probably	9:50
	would have wobbled from day to day	9:55
	but within narrow limits,	9:57
	just the ordinary brownie in motion	10:00
	of good crops and bad crops and this rumor and that	10:03
	but with speculators alert to make money,	10:07
	by buying a currency when it goes down and is weak,	10:10
	because the dollar movement is a temporary operation.	10:13
	And this kind of scalping would tend to limit	10:17
	the amount of the change.	10:21
	However, because of our Cold War commitments abroad,	10:23
	because of our private business corporations learning	10:27
	that direct investment in the advanced countries	10:33
	of the common market in Japan,	10:37
	was extremely profitable I think that	10:39
	the sliding peg would have come into operation	10:42
	with the mark rising and the dollar falling.	10:44
	I'd like to leave gold out of this melodrama,	10:48
	because people find it more alarming	10:50
	if I depart from speaking about relative currency parodies	10:55
	and talk about gold but I suppose	10:59
	that if we had not had a two-tier price system	11:03
	at that time that probably the dollar	11:06
	would have declined relative to gold	11:10
	that is the $35 price per ounce	11:13
	would have gone up a little bit	11:16
	and in the case of the mark,	11:17
	the price of gold might have gone down,	11:22
	you might split the difference so to speak.	11:23
	I think this would have been a equilibrating direction,	11:26
	it would have been a substitute for many	11:28
	of our tyings of foreign aid.	11:31
	It would have been a substitute for the	11:34
	tying of our military aid,	11:35
	It would have been a substitute for the fiats	11:37
	which require the American armed services to buy	11:41
	things in this country even at a higher price.	11:43
	And I think we would have been in a better position today.	11:47
	But the force of the question of our subscriber is,	11:51
	"Would there be some problems from speculators?"	11:54
	Now I assume that if we had let's say	11:56
	one and a half percent ratchet on the sliding peg	12:01
	that the dollar would always have been	12:06
	throughout this period at the low end of that ratchet,	12:08
	And I think, therefore, that there would have been	12:12
	a slight tendency for speculators to pile on	12:15
	to the movement and to make the situation worse.	12:20
	The reason is, that that speculators could predict	12:24
	probably with considerable confidence,	12:28
	which way the peg would move.	12:30
	Now it is true, as I think Pro. Freedman may have said	12:32
	in one of his earlier tapes,	12:35
	that interest rates differentials	12:37
	within the United States could compensate	12:39
	for this advantage to the speculators	12:44
	in putting their chips on one of the currencies	12:48
	rather than the other.	12:51
	However, under the circumstances that I'm envisioning	12:52
	one of the main purposes of the sliding peg	12:56
	is to free domestic policy from the international restraints	12:59
	And so, in the sluggish late 1950's,	13:05
	it would not have been optimal domestic policy	13:09
	for us to have had higher interest rates than Germany.	13:12
	And so, I don't think that there is any warm comfort,	13:16
	there's only cold comfort in the notion	13:21
	that you could off-set the effects on speculators	13:23
	on the sliding peg by interest rate changes.	13:26
	If those are interest rate changes that we	13:30
	don't want for domestic purposes.	13:32
	Well, I don't pretend that this is a considered analysis,	13:34
	but let me conclude it by saying that	13:39
	I'm generally in agreement with Pro. Freedman,	13:43
	because this sliding peg with whatever	13:45
	little problems it might involve	13:47
	that I've just now discussed,	13:50
	involves those problems much less	13:52
	than a non-sliding peg which then has to give in a big way.	13:55
	And which gives the speculators a one-way gamble.	14:00
	Let's put it this way,	14:04
	under the Bretton Woods arrangements,	14:05
	when parodies get out of kilter,	14:07
	speculators can hope to make yields	14:10
	by bare-rate on a currency that are the order	14:14
	or magnitude of ten percent a year.	14:19
	Under the sliding peg,	14:25
	the speculator is perhaps guaranteed an easy	14:26
	one or two percent but one or two percent	14:29
	is small compared to what speculators	14:32
	are out for generally and this is only a minor debit item	14:35
	against the notion of the sliding peg.	14:39
	Now, I do want to put in a caveat	14:42
	after much reconsideration, it's possible	14:46
	that I would arrive at a different opinion	14:50
	because it just occurs to me as I am talking about it	14:53
	that letting a price move in the direction it ought to move	14:57
	but keeping it from moving as far as it ought to move	15:02
	might actually accentuate the psychological	15:05
	destabilizing effects of speculation	15:11
	and so a more detailed analysis might	15:15
	moderate what I've just now said.	15:20
Interviewer	Our second question then,	15:25
	Pro. Samuelson, is what do you think may be wrong	15:26
	about Pro. Freedman's qualitative prediction	15:29
	that the first half of 1969 will be as	15:31
	over-exuberant as 1968 was generally?	15:34
	And that the last half of the year's strength	15:38
	will depend primarily upon how tough the Fed gets	15:40
	in the next six months?	15:42
Paul	Well, this cannot be a complete love-fest here.	15:44
	We do develop some real differences of opinion	15:52
	between Pro. Freedman and myself.	15:56
	First, I don't think that my reading the facts	16:03
	would substantiate the view that the last half	16:09
	of 1968 has been as strong as the first half.	16:16
	I think the fiscal restraint has	16:21
	been working in some measure.	16:25
	Just this last week, we got the first estimates	16:28
	for the fourth quarter and they are higher	16:35
	than the estimates that the econometricians made in June,	16:38
	but they are statistically significantly lower	16:43
	than the actual facts as of last June.	16:47
	The GMP has increase 16.8 billion in the fourth quarter.	16:53
	If anything that's a bit weaker than I myself had expected.	17:00
	It's undoubtedly due to the fact	17:04
	that the poor Christmas retail sales	17:06
	turned out to be verified in the actual statistics.	17:10
	Consumptions was surprisingly weak.	17:15
	The savings ratio which I will remind you had been	17:18
	seven and a half percent of disposable income	17:23
	prior to the surcharge and which had mystified	17:26
	some of the experts by going down so much	17:30
	in the third quarter just six and a quarter percent,	17:32
	has now moved back.	17:36
	It has not moved back to seven and a half percent	17:38
	but those experts did not expect it to	17:41
	move back to seven and a half percent.	17:43
	It has moved back according to the preliminary figures	17:44
	to seven percent and that suggests that	17:46
	the fiscal restraint is having an effect	17:50
	even distinct from the rate of change of the money supply.	17:55
	So you know that mine is the more eclectic position.	17:59
	There is a measure of disagreement.	18:03
	Now similarly, I would expect going into the first	18:05
	and second quarter, well let me put it differently,	18:11
	I should be astonished if the first and second quarter	18:15
	of this coming year are as strong as the first	18:19
	and second quarter of the last year.	18:22
	And yet by looking at the rate of change of the money supply	18:25
	using any of the measures of the money supply	18:30
	which you cared to use,	18:34
	I see no qualitative rough method of estimation	18:36
	which would not justify a forecast qualitatively	18:42
	that the first half of 1969 would be at least	18:48
	as strong as the first half of 1968.	18:52
	I think at Las Vegas or down at	18:57
	the First National City Bank	18:59
	or at the the Harris's Trust Bank in Chicago	19:01
	you can get very good odds that will not be the case.	19:04
	In other words, those analysts who follow	19:09
	the data very closely and who generally lean	19:12
	towards monetarism, that is great weight	19:16
	upon the money supply,	19:20
	in fact are not betting in terms of monetarism.	19:21
	I saw the official forecast of the Harris Trust	19:25
	of which Dr. Barrell Sprinkle is Vice President,	19:32
	and that forecast for the year is a good deal	19:35
	lower than my own forecast.	19:38
	The private forecast of Dr. Sprinkle,	19:41
	who is not the economist in charge of the official forecast	19:48
	I understand to be a little bit higher than	19:52
	the official forecast but he is still, I believe, below me.	19:54
	Now concretely, I don't see how in making a judgment about	19:59
	the first and second quarter of next year,	20:05
	I can as a confirmed eclectic,	20:08
	fail to take account of the fact that	20:12
	the fourth quarter has shown an increase in inventory	20:15
	to ten billion annual rate from seven and a half billion	20:17
	in the third quarter.	20:21
	The strength of final demand,	20:23
	that is the strength of GMP after you purge it	20:25
	of temporary inventory changes	20:28
	declined considerably in the fourth quarter of the year.	20:31
	It declined, if I remember correctly, to something	20:37
	like 13, to 14 and a quarter billion	20:41
	from a previous quarter of 21 and a half billion.	20:46
	Now that has no certain implications for	20:49
	the first two quarters of the coming year,	20:53
	but I think it has certain probability hunches.	20:56
	And that is that this inventory was in part unwanted,	21:00
	it was accumulated because the retail sales were	21:07
	a little bit on the soft side in part at least.	21:10
	And therefore in a sense it is hanging over the market	21:14
	and it augers in the first half of the year,	21:20
	we may, we may I say, see inventory accumulation	21:24
	going to a lower rate.	21:29
	In any case, I put great store if you remember	21:31
	on the spread on the likely GMP increase of all the experts.	21:35
	And I said I was between 12 and 18 billion	21:41
	for the fourth quarter,	21:44
	this was befor the fourth quarter.	21:45
	And expressed my own view that it would be	21:49
	towards the upper end of that range.	21:51
	And justify my eclectic position said I would	21:53
	find it fantastic if it were to be 22 billion	21:58
	or more as a simplest reading of the money supply	22:03
	of figures would perhaps suggest.	22:09
	Well, we never have controlled experiments	22:12
	and we never can confirm and prove anything	22:15
	in economics by waiting until a quarter is over.	22:18
	We just have to take the bulk of a man's experience	22:21
	over a lifetime to form his judgment	22:24
	but such as it is we were well within that range	22:26
	of expert guesses and I think we'll be	22:31
	within the range of expert guesses for the current quarter.	22:36
	Now what are the range of expert	22:40
	guesses for the current quarter?	22:45
	I would suppose that it goes something like 8 to 16 billion.	22:47
	My own would be that we would probably be	22:55
	a little over the middle of that range.	23:00
	And I don't think that I could arrive at this view	23:04
	except by giving weight to non-money supply factors.	23:09
	Let me go on though, to soft pedal the disagreement	23:17
	by saying that I quite agree that what	23:27
	the Federal Reserve does in the next few months	23:30
	will be extremely important in connection	23:33
	with what happens in the of the year.	23:37
	But it is something that can be off-set	23:39
	by a fiscal policy and I think quite possibly would be.	23:41
	I may mention that we've had the	23:49
	State of the Union message by Pres. Johnson.	23:51
	It has confirmed the forecast that I made	23:54
	as to what he would have to recommend.	23:58
	There was a problem of political jockeying	24:01
	as to whether Pres. Johnson who was told by	24:04
	nine out ten of the experts he consulted	24:09
	that it was only prudent at this time to indicate that the	24:12
	ten percent of the surcharge probably should be	24:17
	maintained after the six month period,	24:20
	but he had the problem of politics	24:23
	that he didn't want to make that prudent suggestion	24:25
	and then to find that the facts had gone	24:30
	the other way and to have the new president	24:33
	make capitol that he had come in and he had managed	24:37
	to reduce taxes compared to the outgoing president.	24:41
	Mr. Nixon at this point had to make an agonizing decision,	24:44
	he had to call in all of his experts	24:49
	because one suspects Pres. Johnson put him	24:51
	on the spot behind the scenes and said,	24:54
	"My recommendation is going to be perhaps	24:58
	an imprudent one unless I get some backing from you."	25:00
	Well you can be sure that the measured backing	25:04
	for continuation of the surcharge unless	25:08
	we learn some important facts of the contrary	25:11
	which I understand President-Elect Nixon	25:13
	has been announced to have given,	25:15
	was given by Pres. Nixon only after let's say	25:18
	8 out of 10 of his advisors told him that the	25:22
	outlook does call for this.	25:26
	And their analysis was based on the premise that it does	25:30
	make the difference for overall inflation	25:34
	whether the taxes go up.	25:37
	In other words, they wouldn't agree	25:42
	with the analysis in the November	25:43
	St. Louis Federal Reserve letter	25:46
	which by statistical estimation	25:48
	came out with the conclusion that	25:52
	tax rates have no predictable affect	25:53
	upon the rate of increase of the GMP.	25:56
	I think we'll have to leave to another time	26:00
	the deeper economic analysis of why	26:02
	I think that fiscal policy variables have to	26:07
	regarded as having a predictable effect on the	26:11
	average on the state of aggregate demand.	26:16
Interviewer	Thank you, Pro. Paul Samuelson of MIT.	26:20
	If you have questions, comments, or suggestions	26:23
	please write us at:	26:25
	Instructional Dynamics Incorporated	26:26
	166 East Superior Street, Chicago, 60611	26:28