Paul Samuelson passes away

A Young Paul Samuelson - 1950(source: Yale Joel for Time & Life Pictures, Getty Images.
Downloaded from New York Times, Dec 14 2009)

Paul Samuelson was before my era—I wasn't even born back then—but he is arguably the most influential Keynesian other than Keynes himself. A left-leaning economist who is not shy to tackle the establishment, he was heavily influential in the field of economics. He, like Keynesian economics in general, was very influential in the 1950's and 1960's, but fell out of favour in the 1970's and 1980's. With the re-emergence of Keynisianism after the recent collapse of Monetarism, I suspect Samuelson will end up being more influential than even during his peak.

The New York Times has a good article, written by Michael Weinstein, summarizing Samuelson's influence on economics. Here is an excerpt:

His most influential student was John F. Kennedy, whose first 40-minute class with Mr. Samuelson, after the 1960 election, was conducted on a rock by the beach at the family compound at Hyannis Port, Mass. Before class, there was lunch with politicians and Cambridge intellectuals aboard a yacht offshore. “I had expected a scrumptious meal,” Mr. Samuelson said. “We had franks and beans.”

As a member of the Kennedy campaign brain trust, Mr. Samuelson headed an economic task force for the candidate and held several private sessions on economics with him. Many would have a bearing on decisions made during the Kennedy administration.

Though Mr. Samuelson was President Kennedy’s first choice to become chairman of the Council of Economic Advisers, he refused, on principle, to take any government office because, he said, he did not want to put himself in a position in which he could not say and write what he believed.

After the 1960 election, he told the young president-elect that the nation was heading into a recession and that Kennedy should push through a tax cut to head it off. Kennedy was shocked.

“I’ve just campaigned on a platform of fiscal responsibility and balanced budgets and here you are telling me that the first thing I should do in office is to cut taxes?” Mr. Samuelson recalled, quoting the president.

Kennedy eventually accepted the professor’s advice and signaled his willingness to cut taxes, but he was assassinated before he could take action. His successor, Lyndon B. Johnson, carried out the plan, however, and the economy bounced back.

...

In the classroom, Mr. Samuelson was a lively, funny, articulate teacher. On theories that he and others had developed to show links between the performance of the stock market and the general economy, he famously said: “It is indeed true that the stock market can forecast the business cycle. The stock market has called nine of the last five recessions.”

His speeches and his voluminous writing had a lucidity and bite not usually found in academic technicians. He tried to give his economic pronouncements a “snap at the end,” he said, “like Mark Twain.” When women began complaining about career and salary inequities, for example, he said in their defense, “Women are men without money.”

Remarkably versatile, Mr. Samuelson reshaped academic thinking about nearly every economic subject, from what Marx could have meant by a labor theory of value to whether stock prices fluctuate randomly. Mathematics had already been employed by social scientists, but Mr. Samuelson brought the discipline into the mainstream of economic thinking, showing how to derive strong theoretical predictions from simple mathematical assumptions.

One the ideological followers of Samuelson, Paul Krugman, made an interesting blog entry today, quoting some text from Samuelson's 1948 textbook (I took out some text and bolded some text):

But here’s Paul Samuelson, from pages 353-4 of his 1948 textbook:

[paragraph edited out by Sivaram]

By increasing the volume of their government securities and loans and by lowering Member Bank legal reserve requirements, the Reserve Banks can encourage an increase in the supply of money and bank deposits. They can encourage but, without taking drastic action, they cannot compel. For in the middle of a deep depression just when we want Reserve policy to be most effective, the Member Banks are likely to be timid about buying new investments or making loans. If the Reserve authorities buy government bonds in the open market and thereby swell bank reserves, the banks will not put these funds to work but will simply hold reserves. Result: no 5 for 1, “no nothing,” simply a substitution on the bank’s balance sheet of idle cash for old government bonds. If banks and the public are quite indifferent between gilt-edged bonds — whose yields are already very low — and idle cash, then the Reserve authorities may not even succeed in bidding up the price of old government bonds; or what is the same thing, in bidding down the interest rate.

Even if the authorities should succeed in forcing down short-term interest rates, they may find it impossible to convince investors that long-term rates will stay low. If by superhuman efforts, they do get interest rates down on high-grade gilt-edged government and private securities, the interest rates charged on more risky new investments financed by mortgage or commercial loans or stock-market flotations may remain sticky. In other words, an expansionary monetary policy may not lower effective interest rates very much but may simply spend itself in making everybody more liquid.

Paul Krugman correctly observes that this is very close to the current situation. Bank reserves have been skyrocketing, just like during the Great Depression. Krugman follows up with this chart, which has been beaten to death in the blogging world (interestingly both the deflationists and inflationists argue that the skyrocketing reserves supports their stance), showing the current state of affairs.

IANAE (I Am Not An Economist) but I don't share Samuelson's latter point where he suggests that yields on high quality bonds won't decline. (Do note that I am not criticizing Samuelson per se since I might be taking his words out of context (I'm referring to tiny portion which was quoted by Krugman, which came out of a book that may be referring to some scenario that doesn't correspond to what I'm talking about.))

I haven't taken any position but I'm pretty much in the camp that believes US government bond yields will decline. During the Great Depression, the yields did decline (although there was a fake sell-off in government bonds in the middle of all the chaos in 1931.) I think the mistake Samuelson makes—a mistake made by many left-leaning individuals—is that he is expecting the government to influence the market participants. I, although left-leaning, on the other hand, do not think the government needs to influence anyone; market participants will bid up government bonds on their own due to market forces. If asset prices fall (i.e. deflation), market forces will bid up high-quality government bonds (contrary to some out there, US government bonds are still the highest quality bonds of any large, liquid, issuer.)

In any case, this is going way off topic but it does show how intelligent Samuelson was, if his writings in 1948 eerily parallels the present market behaviour. As recently as two years ago, nearly everyone would have considered it ludicrous if one said that American banks would be sitting on one trillion dollars of excess reserves. Yet it has happened—this in the land of capitalism where American banks were considered to be some of the best on the planet.


For those that missed it, you may want to check out this interview by The Atlantic that I linked to a while ago. Great stuff, especially if you are left-leaning. Interestingly Samuelson is related to Lawrence Summers but liberals like me respect Samuelson but not a big fan of Summers.