Paul Samuelson, the Nobel Prize-winning giant of modern Keynesian economics, died today at the age of 94. A few months ago, Atlantic Business writer Conor Clarke interviewed Samuelson about how the economics field failed to prepare us for the financial crisis and the Great Recession. Here is Part One of that interview. You can read Part Two here. And you should. Samuelson is one of the most influential economists of the Post-WWII era, and this is a brilliant, informative and entertaining interview.
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.
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. 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.
I finally spoke with Dr. Samuelson yesterday morning. (Then my crummy RadioShack recorder -- caveat emptor -- spent yesterday afternoon trying to destroy the file.) Sameulson is an energetic 94 years old and the conversation ran for about an hour, so I've decided to break the transcript into two parts. I'll publish part two tomorrow morning.
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.