Paul Samuelson, and his editors, are excellent sythesizers and explicators of economic theories developed by others in the past. But, at least as it has been reported, Samuelson was a vocal advocate, with a wide audience, of the idea that Keynsian deficits would stimulate growth at precisely the point when Milton Friedman was demonstrating that government spending was the chief drag on growth. This is not exactly surprising, since government's mandate is to direct resources according to the short-term needs of their constituents, not hard decisions like when to pull the plug on a money losing proposition for the sake of long-term growth.
In the interview copied below, Samuelson says that Greenspan should have been raising interest rates for the past 2 years. But, as Samuelson knows, falling inflation has raised short-term real rates of interest. As U.S. disinflation accelerates, and deflation pulls down East Asia, and Europe is finally beginning a (fragile) recovery, there is no case, imo, for raising rates now.
If there is too much liquidity in the securities markets, let Greenspan raise margin requirements -- there's no need to send the general economy into recession just to adjust the Dow to a level that the Fed is more comfortable with.
Finally, I feel Samuelson's kicking Japan when it is down is disingenuous. In the late 60's, he was trumpeting Japan's higher growth rate, and drawing graphs showing when Japan's GDP would pass that of the U.S. (right about now). What he didn't explain was how a seller could grow faster than their chief buyer, indefinitely. It seemed to me at the time that eventually the buyer's market is saturated, and then the seller must consume more, reducing the surplus available for growth.
Ever since China, and the rest of East Asia, began imitating this sell-at-a-loss-and-grow-through-increasing-output model of economic development, Japan has been moving sideways economically. Now he takes he really cheap shot by calling one of the best governed countries in the world one of the "worst". No doubt, he wants the government to spend more (for example, on propping up unprofitable banks), rather than cutting taxes, which is what would really unleash the productive capacity of the Japanese people.
But then, if taxes were cut, the Japanese people would not need technicians trained by those who see the world the way Samuelson does to make the big decisions -- because the people would be free to choose for themselves. The tip-off is his characterization of classical liberalism as "the radical right".
[Interview follows:]
Thursday May 21, 11:50 am Eastern Time
INTERVIEW--Nobelist Samuelson--Fed should tighten
By Isabelle Clary
NEW YORK, May 21 (Reuters) - Nobel Prize-winning economist Paul
Samuelson told Federal Reserve Chairman Alan Greenspan last week he
should tighten credit now or risk rising inflation down the road.
Greenspan clearly did not heed the advice of the first American to win
the Nobel Prize for economics, as the Fed kept the federal funds rate
unchanged on Tuesday.
In a Reuters interview, Samuelson also said U.S. stock prices are too
high and Greenspan is afraid to take steps that might cause a massive
stock market pullback.
GREENSPAN AND MONETARY POLICY
''Since the summer of 1996, my judgment has been that the Fed should
tighten up a little. I told Greenspan what should be done,'' Samuelson
told Reuters while commenting on his encounter with Greenspan at the
Boston Fed on Wednesday last week.
Samuelson, emeritus professor at Massachusetts Institute of Technology
(MIT), also serves as a consultant for the Fed and the Treasury
Department.
''The prosperity of the labor force is wonderful, but it is a fragile
thing and it could go away if we have too much demand pressure,'' said
Samuelson who advised Greenspan to tighten to ''stretch out that
prosperity.''
''He (Greenspan) is a little scared to tighten because who wants to go
down in history books as the Fed chairman who caused a big market
slide?'' Samuelson said, referring to the U.S. stock market as well as
Asian markets. ''But it's not good to paint yourself in a corner.''
Samuelson noted that in a decade under Greenspan the U.S. central bank
''has done well in walking a tightrope between too much demand and too
little.''
The Nobel-Prize winner also praised Greenspan's predecessor, Paul
Volcker, who ''deserves credit for breaking the back of the stagflation
of the 1970s.''
THE BRAVE NEW WORLD
Samuelson's argued that the economy has been operating at too high a
rate for its long-term good, necessitating higher interest rates.
The MIT professor, whose work encompasses business cycle behavior and
market efficiency, does not believe in new hypotheses suggesting the
economy's noninflationary speed limit has somehow risen dramatically.
''I do not believe that the evidence of economic history and
contemporary statistics or the different competing notions about sound
mainstream economics justify any such belief,'' Samuelson said of the
notion of an economy that would never run into production constraints or
meet a downturn.
''When you have a strong bull (stock) market, it is customary for people
to believe we live in a new era. It happened in the 1920s when the
business cycle was said to be dead or in (former President John)
Kennedy's Camelot period.''
STOCKS
Samuelson expressed concern about the level of the U.S. stock market and
investors' hopes it will rally forever.
''I believe you can have over-exuberance at a stable price level,''
noted Samuelson who said low current inflation alone does not justify
strong stock gains.
''It's not really a healthy thing for a large number of stock owners to
believe they'll average 30-percent returns on their securities for the
next three years ... as they did in the past three years,'' Samuelson
said. He added that raising margin requirements for stock ownership may
be a good idea.
''Greenspan did not want to do this because he believes that things have
unintended consequences,'' Samuelson said. ''He's afraid that if he
raised margin requirements, this could kick back in the opposite
direction (bolstering investor confidence).''
PRODUCTIVITY AND SUPPLY-SIDE EXPERIMENTS
The Fed's restraint -- only one 25-basis-point rate hike since February
1995 -- at a time of high growth and declining unemployment has some
economists wondering if the Fed is running an experiment to see how fast
the U.S. economy can grow before displaying inflation symptoms.
''There is a belief, still a minority belief, that the U.S. productivity
potential in the (Microsoft Corp. Chairman) Bill Gates era is somehow
bigger than anybody is able to measure,'' Samuelson said.
''Our ways of measuring services productivity are very crude. This was
the central axiom of the radical right supply-siders in 1981,''
Samuelson noted. ''Give growth a chance, make your mistake on the easy
side because there is a great hidden potential, and you'll unleash great
ventures and everybody will benefit. There is very great danger on
acting upon that. I don't want to get short-term benefits and pay for it
with a long-run reversal.''
CENTRAL BANKING
Samuelson supported the Fed's dual mandate to seek maximum growth and
employment as well as fight inflation.
''Inflation is an extremely important signal a central bank should be
observing, particularly at a time of high prosperity. It's a completely
wrong philosophy, like the one that is going to guide the new European
central bank, to think of only one thing, the price level. God gave us
two eyes, one to keep on the price level and the other on production.''
JAPAN
Samuelson also criticized Japan for its inability to fix the financial
and economic problems plaguing the world's second-largest economy.
''I regard Japan as the worst self-governed country in the world. The
bureaucrats there never knew much and never learned anything. There is
no good sense in the corrupt and faction-riddled Diet. There is no
leadership at the Prime Minister level,'' Samuelson said.
''The saddest thing is the (Japanese) electorate does not have a clue
about where to go. They even objected to rescuing the banking system."
|
