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Jun 17 2009
An Interview With Paul Samuelson
I've spent the last six months, off and on, trying to interview Paul Samuelson. Samuelson has a long list of accomplishments -- A John Bates Clark Medal, a Nobel Prize -- that I won't try to recap here. But by most accounts he is responsible for popularizing Keynesian economics in Post-Second World War America, and I wanted his thoughts on the current administration's fiscal policies and the modern Keynesian resurgence.
The first part of the conversation is mostly economic history -- the rise and fall (and rise) of Keynes, the influence of Milton Friedman, and the era of Alan Greenspan. Part two covers current events -- the need for a more stimulus spending and how his nephew (one Larry Summers) is doing running the economy. My questions are in bold.
So is it time for the Keynesians to declare victory?
Well I don't care very much for the People Magazine approach to applied economics, but let me put it this way. The 1980s trained macroeconomics -- like Greg Mankiw and Ben Bernanke and so forth -- became a very complacent group, very ill adapted to meet with a completely unpredictable and new situation, such as we've had. I looked up -- and by the way, most of these guys are MIT trained; Princeton to MIT or Harvard to MIT -- Mankiw's bestseller, both the macro book and his introductory textbook, I went through the index to look for liquidity trap. It wasn't there!
Oh, I used those textbooks. There's got to be something in there on liquidity traps.
Well, not in the index. And I looked up Bernanke's PhD thesis, which was on the Great Depression, and I realized that when you're writing in the 1980s, and there's a mindset that's almost universal, you miss a lot of the nuances of what actually happened during the depression.
I am regarded as a Keynesian. My book, which over a period of about 50 years sold millions of copies, for the first time brought home -- not only to advanced Ivy League places but also to community colleges and high schools -- the gist of the Keynesian macroeconomic system. I thought it would be a success because it was one Keynesian book by Lorie Tarshis, which for reasons I've never understood got completely tarred by a kind of a fascist group, and by Bill Buckley, as unsound and so forth. And unfairly that book never got a good chance. He had actually been a student of Keynes.
And my book came along and swept the field, and set a pattern so that every time somebody -- this is just scuttlebutt -- so that every time some economics textbook writer sued another textbook writer for plagiarism, it never got anywhere because the judge would just say, 'it's all Samuelson lite,' so to speak.
Anyway. Things swept so badly that I had distrust -- after 1967, let's say -- of American Keynesianism. For better or worse, US Keynesianism was so far ahead of where it started. I am a cafeteria Keynesian. You know what a cafeteria catholic is?
I think so. Someone who picks and chooses the bits of the doctrine that they find agreeable.
Yeah. I might go to mass every week, so I'm a good catholic, but I don't regulate my family size the way the Pope would like to.
So which bits of the Keynesian doctrine do you not take out of the cafeteria?
Well, let me give you a bit of boring autobiography. I came to the University of Chicago on the morning of January 2, 1932. I wasn't yet a graduate of high school for another few months. And that was about the low point of the Herbert Hoover/Andrew Mellon phase after October of 1929. That's quite a number of years to have inaction. And I couldn't reconcile what I was being taught at the university of Chicago -- the lectures and the books I was being assigned -- with what I knew to be true out in the streets.
My family was well off but not rich. I spent the four years I was an undergraduate working on the beach. And it wasn't because I was lazy; it was because my freshman class would go to a hundred different employers and wouldn't get a nibble. That was a disequilibrium system. I realized that the ordinary old-fashioned Euclidean geometry didn't apply.
And I applauded when the major members of the Chicago faculty -- maybe even a few years before Keynes's general theory -- came out with a petition to have a deficit-financed spending without taxation in order to create a new increment of spending power. And I was for that. And Franklin Roosevelt, who was not a trained economist, and who experimented and made a lot of mistakes, in his first days, by good luck or good advice got the system moving. It was in a sense an easier problem because the pathology was so terrible.
He would go to Warm Springs Georgia. And that county -- a pretty sizeable one, this is the old south -- there were maybe three to ten people with enough income to file an income tax return. So, when along came the WPA, the PWA, and a little later the Reconstruction Finance Corporation, you could be very sure that those monies spit out by government-- not from airplanes in the air, sending newly printed greenbacks, but essentially the equivalent of that -- would be spent.
I don't know if you know the name, the professor E. Cary Brown wrote kind of the definitive article in the American Economic Review on what had been accomplished by deficit spending that was sustained. And his numerical findings were that there were no miracles -- it was about what you'd expect -- but it worked. And so I developed I guarded admiration for Keynes. And I say guarded because I don't think he understood his system as well as some of the people around him did.
Anyway, this swept the field for a number of decades. And then, when the 1970s came, with very heavy supply side shocks -- the quadrupling of OPEC oil prices overnight, a rash of bad harvests, and the terrible price/wage control system contrived by Arthur Burns and Nixon 17 months before the election in order to ensure that they won. All these things added up. And Keynesianism, if it was thought to promise perpetual prosperity, became disparaged.
When the king dies you need a new king. Guess what?
Milton Friedman?
Milton Friedman. Friedman had a solid MV = PQ doctrine from which he deviated very little all his life. By the way, he's about as smart a guy as you'll meet. He's as persuasive as you hope not to meet. And to be candid, I should tell you that I stayed on good terms with Milton for more than 60 years. But I didn't do it by telling him exactly everything I thought about him. He was a libertarian to the point of nuttiness. People thought he was joking, but he was against licensing surgeons and so forth. And when I went quarterly to the Federal Reserve meetings, and he was there, we agreed only twice in the course of the business cycle. .
That's asking for a question. What were the two agreements?
When the economy was going up, we both gave the same advice, and when the economy was going down, we gave the same advice. But in between he didn't change his advice at all. He wanted a machine. He wanted a machine that spit out M0 basic currency at a rate exactly equal to the real rate of growth of the system. And he thought that would stabilize things.
Well, it was about the worst form of prediction that various people who ran scores on this -- and I remember a very lengthy Boston Federal Reserve study -- thought possible. Walter Wriston, at that time one of the most respected bankers in the country and in the world fired his whole monetarist, Friedmaniac staff overnight, because they were so off the target.
But Milton Friedman had a big influence on the profession -- much greater than, say, the influence of Friedrich Hayek or Von Mises. Friedman really changed the environment. I don't know whether you read the newspapers, but there's almost an apology from Ben Bernanke that we didn't listen more to Milton Friedman.
But anyway. The craze that really succeeded the Keynesian policy craze was not the monetarist, Friedman view, but the [Robert] Lucas and [Thomas] Sargent new-classical view. And this particular group just said, in effect, that the system will self regulate because the market is all a big rational system.
Those guys were useless at Federal Reserve meetings. Each time stuff broke out, I would take an informal poll of them. If they had wisdom, they were silent. My profession was not well prepared to act.
And this brings us to Alan Greenspan, whom I've known for over 50 years and who I regarded as one of the best young business economists. Townsend-Greenspan was his company. But the trouble is that he had been an Ayn Rander. You can take the boy out of the cult but you can't take the cult out of the boy. He actually had instruction, probably pinned on the wall: 'Nothing from this office should go forth which discredits the capitalist system. Greed is good.'
However, unlike someone like Milton, Greenspan was quite streetwise. But he was overconfident that he could handle anything that arose. I can remember when some of us -- and I remember there were a lot of us in the late 90s -- said you should do something about the stock bubble. And he kind of said, 'look, reasonable men are putting their money into these things -- who are we to second guess them?' Well, reasonable men are not reasonable when you're in the bubbles which have characterized capitalism since the beginning of time.
But now Greenspan admits he was wrong.
Because we had, instead of three standard deviations storm, a six standard deviation storm. Well, we did have something unprecedented. I think looking for scapegoats and blame can be left to the economic historian. But, at the bottom, with eight years of no regulation from the second Bush administration, from the day that the new SEC chairman -- Harvey Pitt -- said 'I'm going to run a kinder and gentler SEC,' every financial officer knew they weren't going to be penalized.
Self regulation never worked as far as macroeconomic events -- whether we're talking about post-Napoleonic War business cycles or the big south sea bubble back in Isaac Newton's time, up to today's time. The pendulum just swings back in the other direction.
About that pendulum. Has macroeconomics learned anything in the past 30 or even in the past 70 years?
Well, I will say this. And this is the main thing to remember. Macroeconomics -- even with all of our computers and with all of our information -- is not an exact science and is incapable of being an exact science. It can be better or it can be worse, but there isn't guaranteed predictability in these matters.
What has pleasantly surprised me is that because of the Obama political sweep we've got some very rapid interventions beyond anything that the Eccles Federal Reserve even dreamed of in Franklin Roosevelt times, and that's why I think we're a little bit ahead o the European Union in the state of our recovery.
On the other hand, I think the popular view -- if I count noses -- is that by the end of this year even, or by 2010, recovery will have set in. That's a very ambiguous thing. Things could get better -- things could even get better such that the National Bureau committee that officially dates these recessions will say that the recession officially ended in something like December 2010. That could be misleading, because it could be completely consistent with continuing decreases in employability, an adverse balance of payments, and a move of both the consumer section and the investing section towards non-spending -- towards saving and hoarding. I don't think we would enjoy a lost decade, like the two lost decades the Japanese had.
However, if you need a framework for these things, then you can't do better than the 1965 Hicks/Hansen version of the Keynesian system, which is pretty clear cut on how a central bank can, by diddling its discount rate up and down judiciously, lead toward a period of great moderation rather than the terrible ups and downs of the 20th century.
Samuelson image via MIT economics page. Thanks to Brad DeLong for letting me know who Lorie Tarshis is, along with the proper spelling of his name
Henry Ford said, "History is bunk." Even more cynically, Napoleon said, "History is a set of fables agreed upon."
Both had a point.
But back in the early 1930s, during the Great Depression, President John F. Kennedy's father, Old Joe Kennedy, made two fortunes betting that stocks would keep falling and unemployment would keep growing.
He disbelieved in early New Deal recoveries.
By contrast, the leading U.S. economist at Yale, Professor Irving Fisher, after (1) marrying a fortune; and (2) earning a second fortune by inventing a profitable visual filing system, nevertheless ended up losing no less than three fortunes!
The story of these two opposites illustrates how and why economics can never be an exact science.
Joseph Kennedy Sr. was a tough and crafty speculator. Apparently he sold stocks short from 1929 to, say, 1931 or 1932.
Professor Fisher early on first lost his own fortune when the stocks he bought went bust. So he restudied the Wall Street and Main Street statistics.
Admitting that he had been too optimistic, Fisher wrote a new book. In it he admitted his previous error. But his new book said: The stock market is now a bargain.
Alas, his heiress wife's assets collapsed under this guidance. Stubborn Fisher persisted in his optimism. He went on to advise his sister-in-law, the president (I believe) of Wellesley College, to stay with stocks! This time she balked and fired him as investment adviser.
While Fisher was going broke, Joe Kennedy persevered by selling short the stocks that still were falling. No paradox.
However, as the New Deal recovery program finally began to succeed, Kennedy Sr. left the stock market and bought the Chicago Merchandise Mart Building -- the biggest structure in the world at that time.
Which speculator was right? And which was wrong between these two well-informed giants? No sage can answer that question.
This is the second part of my interview with Paul Samuelson. I posted part one yesterday. Part two is a little more all over the place. We discuss fiscal stimulus, the current administration, behavioral economics, the risk of inflation, and Dr. Samuelson's relationship with Larry Summers. Skim milk makes an appearance, and so does Greg Mankiw's textbook (again).
I have very lightly edited the transcript for clarity, but otherwise it is an exact rendering of our conversation. My questions in bold.
I have very lightly edited the transcript for clarity, but otherwise it is an exact rendering of our conversation. My questions in bold.
I have a couple of questions about the current debate. Do you think large fiscal stimulus should be controversial? And would you like to see more of it? Would you like to see a second or third stimulus, depending on where you start counting?
Well, in the first place, the E. Carey Brown analysis stressed that one shot spending gives you only one-shot response. It's gotta be sustained. The way we got out of the 1929 Great Depression in the US -- and this happened not only in the US but also in Germany and each place in which there was almost a third unemployed --- was heavy deficit spending. It was not clever Federal Reserve policy, because early on the Federal Reserve had shot its bolt when we came near to liquidity trap.
I'll speak from some experiences. My father in law was president of a national bank in Vernon, Wisconsin, population 4,100 as of the last Census. His was the only bank in the first week after Roosevelt's bank holiday that was allowed to reopen. Why? Well, he knew every borrower and he knew better than they did what they could afford and what they couldn't afford. And so he came into the situation with a clean balance sheet.
You think 'Great, because we preserve the monetary supply in the system, right?' Not great. Because the average person did not go out spending and lending freely. He bought treasury bills for as little as half a percent per annum. So the system was frozen without these supplementary expenditures, where the WPA competed with the PWA and with the reconstruction finance corporation. For really depressed situations, unorthodox central banking is needed.
We're almost getting there. In one of Greg Mankiw's articles, he said that maybe when the interest rate gets down to zero and it's threatening to be negative, you should give a subsidy with it. Well, that's what fiscal policy is!
By the way, I don't want you to think that I think that everything for the next 15 years will be cozy. I think it's almost inevitable that, with a billion people in China wide awake for the first time, and a billion people in India, there's going to be some kind of a terrible run against the dollar. And I doubt it can stay orderly, because all of our own hedge funds will be right in the vanguard of the operation. And it will be hard to imagine that that wouldn't create different kind of meltdown.
Last thing. Mea culpa, mea culpa. MIT and Wharton and University of Chicago created the financial engineering instruments, which, like Samson and Delilah, blinded every CEO -- they didn't realize the kind of leverage they were doing and they didn't understand when they were really creating a real profit or a fictitious one. There 's a lot of causality in economics, even though it's very far from an exact science.
A question about the exact science stuff before going back to policy questions. One of the things for which you are most famous is for writing the Foundations of Economic Analysis, which as I understand it attempted to bring a kind of mathematical uniformity to the field --
Well, I would say a mathematical searchlight --
Okay, what's the distinction there? I'm curious what you think about some recent developments in economics, some of the movements that are hot right now -- like behavioral economics, part of which wants to challenge the notion of humans as utility maximizing rational agents.
In my view behavioral science describes an extremely large and important part of the modern picture. However, whenever the economy turns in a very irrational way, that can create opportunities for very rational speculators to make a profit. So you can still get some approximation on the micro level of an efficient market. But there never has been a true macro efficient market. You just have to look at the record of economic history the ups and downs. Bubbles are self-generating.
And I'm not sure most of the people that get caught up in the middle of a bubble can be described as irrational. It seems pretty rational to buy a house and flip it in the next few weeks at a profit when that's been happening for along time. It works both ways.
The crowd mentality is maybe not rational.
Well, let's put that differently. It's not optimal. It's what it is. You have to cope with people. Now, if all the people had gone to the Wharton School and become very sophisticated that doesn't mean the society in which they lived and operated would be incapable of having a business cycle or bubbles. They're self generating.
So are people utility maximizing and rational and can we make sense of interpersonal comparisons of utility in a mathematical way?
No. But you know, people say, 'greed has suddenly increased.' But it isn't that greed's increased. What's increased is the realization that you've got a free field to reach out for what you'd like to do. Everybody would still like to retire with a satisfactory nest egg in real terms. And the tragedy of this unnecessary eight-year interlude is that much of what has been accumulated is gone and gone forever. And no amount of pumping is going to bring back into reality what were ill-advised overextensions of bridges to nowhere and housing developments for which there was no effective demand.
With the Foundations, I looked around for the best bicycle in town. It wasn't perfect, but it was better than what had been assigned previously.
Back to some middle-term and long-term policy questions. Even if it makes sense to think about deficit-financed government demand stepping in and replacing a drop off in household demand, do you worry about the rising deficit and the potential risk of inflation? There's been a lot of articles on this in the past two weeks -- Paul Krugman and Niall Ferguson and others.
I think it would be surprising if, down the road -- not in the long long run but in the somewhat short run -- we don't have some return of inflation. On the other hand, I'm of the view that if we come out of this with some kind of temporary stabilization at least, and the price level is let's say 10-12% above what it was before we got into the meltdown, I think that's a price I would be willing to pay!
Unfortunately, after World War One -- in 1925 when the British tried to put the pound back to the 1914 level against Keynes advice -- it turned out that Keynes was very right and a lot of the subsequent grief in the British empire traces to that wrong decision. I'm against inflation, but what I worry about is continuing, galloping, self-reinforcing inflation. I would not try to roll things back to some sacred earlier price level.
And China .. You've written some about that. How real do you think the threat of a run on the dollar is? Some people, like your nephew Larry Summers has said that there's kind of "balance of financial terror" there -- that it's not in China's interest to see a big decline in the value of dollar denominated assets.
Well first let me say that I have big admiration for Larry Summers as an economist. However, when he was at MIT as an undergraduate, he never took a course of mine!
But I think he was wise. If he had people could always say, 'well, he's traveling on someone else's steam.' There's a Chinese wall between him and me. Any view he expresses and any view I express -- there might be some overlap, but there's nothing synchronized.
So you're not in touch with him now?
No.
Certainly, some of the reasons the Chinese have stuck with huge amounts of reserves in very low interest rate US assets has been to keep the export led program that they espouse in existence. They can still succeed there by taking the reserves out of prime zero-interest stuff and putting it in our general stock market and so forth, the way Dubai and some of the other countries are beginning to do. So I think we've got -- in the long term -- a lull in our favor, but it's a lull in our favor that, rationally, is probably not going to persist.
I just have two more questions. First, when I told people that I was going to talk to you this morning, the question that came up most had nothing to do with economics and was usually some variation of "how are you still doing stuff at 94?" What's the secret?
Well, I'll tell you! Luck. My female genealogy is very favorable. My aunts and so forth all lived into their 90s. My male genealogy was deplorable. And for the first 35 years of my life there was no treatment for hypertension. So part of my brashness was probably, "If I'm going to do something I better do it early." But my very good internist at MIT said 'hey, we can do something about that now.' And luckily I picked someone at the very good lab at Boston University Medical where some of the original anti-hypertensives and anti cholesterol medication and so forth was developed. So I'm a tribute to the advance of modern medicine.
However, I'll take a little credit for helping it along. I switched to skim milk when everyone said it was crazy. And I was always pretty well off. You know what happiness is: 'Having a little more money than your colleagues.' And that's not so tough in academic life.
Very last thing. What would you say to someone starting graduate study in economics? Where do you think the big developments in modern macro are going to be, or in the micro foundations of modern macro? Where does it go from here and how does the current crisis change it?
Well, I'd say, and this is probably a change from what I would have said when I was younger: Have a very healthy respect for the study of economic history, because that's the raw material out of which any of your conjectures or testings will come. And I think the recent period has illustrated that. The governor of the Bank of England seems to have forgotten or not known that there was no bank insurance in England, so when Northern Rock got a run, he was surprised. Well, he shouldn't have been.
But history doesn't tell its own story. You've got to bring to it all the statistical testings that are possible. And we have a lot more information now than we used to.
Are you happy with the way economics is being taught now? You've mentioned Greg Mankiw's textbooks.
Well to say that I've read them would be an exaggeration. I looked into them, and I was disappointed that they were so bland. [Laughs] No, he's a gifted writer. But an economist with a facile pen isn't necessarily an overnight expert on the likelihoods in our inexact science.
But an economist with a facile pen isn't necessarily an overnight expert on the likelihoods in our inexact science.
Samuelson seems more forgiving of his own gross errors than he is of others. In 1973 he predicted that the Soviet Union's economy would outstrip the US economy. In 1976 in his tenth edition of Economics he wrote that it "is a vulgar mistake to think that most people in Eastern Europe are miserable." (In 1980 he removed “vulgar”). In 1989, he delivered this chestnut: "The Soviet economy is proof that ... a socialist command economy can function and even thrive."
Milton Friedman loudly and ardently opposed communism and its atrocities. Communism is responsible for tens of millions of dead people, which makes Arnold Beichman, who catalogued Samuelson's idiotic mistakes, more forgiving than Samuelson is of Friedman’s more innocuous eccentricities when Beichman writes , “It seemed to me utterly incredible that an otherwise great economist could parrot idiotic Marxist propaganda.”
And for all us males, lets remember that Samuelson remained silent despite direct requests to support the end of the draft. Friedman led that fight in Congress and the White House.
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