The President kicked off last week's Summit of Eight with a paean of praise for U.S. prosperity, pushing it as a world model. Paul Samuelson and Herb Stein analyze the reality his praise.
They speak with Paul Solman of WGBH-Boston.
PAUL SOLMAN: Last week President Clinton kicked off the economic summit in Denver with effusive praise for the American economy, which he was pushing as a model for the whole world.
PRESIDENT CLINTON: We host our partners at a time when America's economy is the healthiest in a generation and the strongest in the world. Our economic success is a strategy that all of you have participated in. It is born of the dynamic center that has kept America moving forward for more than two centuries, a new American economic approach that required us to puncture myths and push past yesterday's stale debates, that enabled us to move earlier and more strongly than most other nations into the new global economy.
PAUL SOLMAN: The numbers tend to bear out the President and have received plenty of notice; inflation running at a 10-year low of 2.2 percent; unemployment down to a 24-year low, 4.8 percent; the stock market hitting all time highs, though today it dropped 192 points; job growth strong; even some signs that economic inequality is narrowing a bit. So we thought we'd take the long-term view by asking two long-term economic thinkers.
Nobel Laureate Paul Samuelson of MIT has advised Democrats since the 1940's and is considered by many the most important economist of his generation. Herb Stein of the American Enterprise Institute was chairman of the Council of Economic Advisers under Republican Presidents Nixon and Ford.
And, gentlemen, it's a real pleasure to have you both here. Professor Samuelson, is the President right to boast?
PAUL SAMUELSON, Nobel Economist: President Clinton has proved that Aristotle is right. You know what Aristotle said.
PAUL SOLMAN: Not exactly, no.
PAUL SAMUELSON: Whom the gods will trip up they first make boastful. And the Dow Jones Index took due notice, and today it spilled 192 points.
PAUL SOLMAN: Well, let's not get to that just yet, if you don't mind. I mean, exactly how robust is the American economy, the Dow Jones left aside for just a minute?
PAUL SAMUELSON: The American economy has surprised us. We pinch ourselves, and we say, what went right? Now, we've had some pretty good management from the Federal Reserve. We are doing a lot of the right things for the long run point of view, but after you've said that, you have to say we've been extremely lucky and secondly, I think there are some changes that are going on in the American labor force which deserve a lot of the credit--not in Congress--not in the White House--and we have in America--this is my private diagnosis--a rather cowed labor force because of the downscaling which has taken place.
PAUL SOLMAN: Let's get to that in a minute. Mr. Stein, what do you think? Does the President have the right to boast here?
HERBERT STEIN, Economist: Well, I think the United States has the right to boast. I don't know that it belongs to Mr. Clinton particularly, but we have a very well functioning economy, and I think we can be very pleased with it. It has--it has its problems. It has its problems today, and it has some problems looking ahead to the future. But I think that we--I think the main thing that has happened is that we have corrected or at least passed through a period of serious mistakes and are back to a more usual functioning of the American economy.
PAUL SOLMAN: How real is this boom? I mean, are you--are you blown away by it, surprised, excited?
HERBERT STEIN: Well, I'm pleased. I'm not terribly surprised. I think it shows that some of the estimates that economists made previously were not correct, but those economists--those estimates were very uncertain anyway. We had all these estimates by economists about how much unemployment you would have to have in order to keep the inflation rate low and stable. But those turned out to be wrong this time. But they have turned out to be wrong in the past.
PAUL SOLMAN: Did you--were you right, or did you call this? I don't remember you calling this.
HERBERT STEIN: I was right, because I said I don't know. That's always--you're always right if you say that. But I didn't believe it when anybody said that the natural rate or the rate we couldn't get below was 5.5; that they really knew that, because I went through a period in the early days of the Nixon administration when we thought the rate was 4 percent, and that if we could just get a little bit above 4 percent, we would get the inflation rate down. Well, that turned out to be wrong. And we have not been very good at estimating that.
PAUL SOLMAN: All right. So let's talk about why it's happening. You were talking about the cowed labor force. What do you mean?
PAUL SAMUELSON: Well, Pat Buchanan, who is not a deep-thinking economist, touched a nerve in the Republican Party and in the country at large that people have a scared feeling in the pit of their stomachs. We're running a little scared in American society today. Now, this is not paranoia. It used to be the case if you graduated from the Harvard business school or from the Ivy League, from the big 10 universities, you got a good job; you were set pretty much for life; just by getting older, you got some promotions. That's gone.
We're in a much more ruthless, competitive economy. Some of it's due to international competition. A lot of it is due to a new, more intense competition at home. And that has made people very reasonable in terms of the wage bargain. In the 1950's, we had three recessions within two terms, and the steel industry was not competitive; the automobile industry was doing bad, but those were two very bad-acting cost industries.
PAUL SOLMAN: And that drove up inflation when people got higher wages.
PAUL SAMUELSON: Yes. About half of the 1950's inflation, one of the studies showed, could be traced to those two indexes. If they'd been equal to the average, you wouldn't have had half of the inflation. Well, that's not happening now. The bargaining power of people who are lucky to have jobs which are better than some other people who might fill those jobs has gone down immensely.
PAUL SOLMAN: Well, let me ask Mr. Stein. Mr. Stein, do you think that the fact that the American economy or the allegation that the American worker is scared explains a lot of our current stability, prosperity?
HERBERT STEIN: Well, it's very hard to show that, and the figures that the polls of about what the American worker thinks are not very reliable. I think one thing that has happened is that we have substantially changed the expectation of inflation in America so that employers realize it's not going to be so easy to pass on wage increases; workers are not so demanding of wage increases because their cost of living is not rising so rapidly; and I think that is a fundamental thing that has happened. Of course, the power of unions has diminished.
It has diminished for various reasons, including international competition. I think one thing that's happened is in a sense almost everybody's overpaid; that is, almost everybody is paid a high--now getting a higher compensation than he could get in the next job that he went out to look for, so people are very reluctant to demand more of their employers, to run the risk of being laid off.
PAUL SOLMAN: Let me give you a couple of the things that the Clinton administration takes credit for here. The deficit, what about that? We've always heard that if the deficit went down, things would do better. Clinton says, I take credit for that having happened.
HERBERT STEIN: Well, I think things will be better since the deficit went down, but I don't think it has anything to do with our present situation; that is, I don't think it has anything to do with the happy combination of low inflation and low unemployment. I think the deficit's problem is a problem for the long run, for the rate of growth of the economy, and that is a problem that still looms ahead of us, despite what has been done recently.
PAUL SOLMAN: What about free trade, Professor Samuelson? Clinton also takes credit for that and says he's opened up trade, and that's one of the reasons that we're growing as fast as we are.
PAUL SAMUELSON: Well, our standard of living has risen maybe about a third from the freeing up of trade in recent years, but we haven't let that result in mass unemployment as could have happened.
PAUL SOLMAN: And as people predicted. Some people, critics predicted.
PAUL SAMUELSON: Well, yes. If you remember the NAFTA discussions--so the important thing is we've been able to have enough effective demand and as yet--
PAUL SOLMAN: People buying stuff.
PAUL SAMUELSON: Substantially anyone with modest skills has had a chance to have them exorcized. Now, I know Herb because I know exactly the generation you're from. You and I shared the distinction that we were four years in college in the same time, in the Great Depression, and you were more of a go-getter than I was because I had no job during that period, but I understand you had one day's job. But it's not like that out there now. And that's the way the economy used to work. We hope it's much more like the textbooks wish it would be. Now, I don't think it's guaranteed to be a new era forever.
PAUL SOLMAN: Well, that's the question I want to ask. I mean, what would it take for the economy to go haywire, Mr. Stein? I mean--
HERBERT STEIN: Well, one thing that could happen would be that you would outgrow the generation of Samuelson and Stein and Greenspan and get a number of people who had not lived through all these problems and would repeat some of our past mistakes. What I most worry about in that direction is that we will think well, now we can pump up the economy without any risk of inflation. I hope before we finish, we will turn to what I think is our really big problem here, which is the existence of a rather steady number of very poor people, and particularly of an underclass in this society that a society as rich as ours ought not to have.
PAUL SOLMAN: Let's get to them in a second because that's an important point, but what about the second largest drop in stock market history today? I mean, does that betoken people who have forgotten the past and--or have been condemned to repeat it?
HERBERT STEIN: No. I would think the enormous rise might--that we've had so far this year might be token people who have forgotten the past, but--
PAUL SAMUELSON: Actually, everything's very big now. A 192 drop is not in meaningful percentage terms the second largest one day--
PAUL SOLMAN: Because as a percentage of the total.
PAUL SAMUELSON: A one-day drop.
PAUL SOLMAN: Suppose it went down 2,000 points, would you get worried Professor Samuelson?
PAUL SAMUELSON: I believe--I want to be constructive. I believe that Chairman Greenspan was right to say--and that's what he was saying very broadly in his hint--that I have a concern for the price level; I have a concern for the unemployment level, but I also have a concern that if America should get into a bubble like the Fed and the Japanese, who paid very severely in the 1990's for what happened in the 1980's, I think that could be an unhealthy thing. So I am not going to bring out the ashes and dark clothes because the market dropped one day 192 points.
PAUL SOLMAN: Do you think the market is going to continue to go up? I know. I shouldn't have asked that. I shouldn't have asked it. Mr. Stein, I'll ask you something else. Get back to your inequality point. Is that a major economic problem for this country?
HERBERT STEIN: No, I don't think it will. It's a major personal problem. It's a major social problem. So I don't know what it means to say it's a major economic problem, but I don't know really whether the roots of it are economic. That's another aspect of the thing, and I would like to concentrate not on the 15 percent of the American people who are in poverty but the 2 percent who are living in areas where there is endemic poverty, where there is lots of crime, where there are lots of school dropouts, lots of dependency. It seems to me that's where we ought to address ourselves.
PAUL SOLMAN: You know, Professor Samuelson, the French at the end of the session, summit session, one of the French people there said, how can you have a country where 2 percent of the adult population is incarcerated? That's the kind of percentages that Mr. Stein was talking about. I mean, does that make you feel better? Or do you think that's an economic problem for us? This is the last question.
PAUL SAMUELSON: Since you brought up the French, I have to tell you that my heart sank when I heard the words of the new French prime minister and what the French proposal was to get France out of their problem. It--the most important thing was to cut the hours and--
PAUL SOLMAN: They're still acting as if they can do it the old-fashioned way.
PAUL SAMUELSON: Very, very old, old-fashioned way.
PAUL SOLMAN: Okay. Well, thank you, gentlemen, both very much.
