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Skriven 2006-02-13 23:42:14 av Whitehouse Press (1:3634/12.0)
Ärende: Press Release (0602135) for Mon, 2006 Feb 13
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Press Briefing by Dr. Katherine Baicker and Dr. Matthew J. Slaughter on the
2006 Economic Report of the President
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For Immediate Release
Office of the Press Secretary
February 13, 2006

Press Briefing by Dr. Katherine Baicker and Dr. Matthew J. Slaughter on the
2006 Economic Report of the President
Room 350
Eisenhower Executive Office Building


˙˙˙˙˙Economic Report of the President
˙˙˙˙˙In Focus: Jobs and Economy

1:33 P.M. EST

DR. SLAUGHTER: Good afternoon, and thank you for coming. We are pleased to
announce the release of the Economic Report of the President, an annual
report of the Council of Economic Advisors for 2006.

The report reviews the state of the economy and the economic outlook, and
discusses a number of economic policy issues of continuing importance.
Across its eleven chapters, the report highlights how economics can inform
the design of better public policy and reviews administration initiatives.

And I should say, Chairman Ben Bernanke was involved in the early stages of
formulating the concept of this economic report, but -- he had recused
himself from participating in formulating that administration's economic
forecast.

The American economy enters 2006 with continued strength and flexibility;
2005 saw fourth consecutive year of expansion for the U.S. economy, with
real GDP growing at 3.5 percent for the year as a whole, despite the
headwinds of near record energy prices and damage from several powerful
hurricanes.

The administration forecast for 2006 foresees continued strong economic
performance for the United States on many dimensions. This forecast, which
is detailed at the start of the report, projects real GDP growth of 3.4
percent. Payroll employment growth during 2006 is projected to average
176,000 jobs per month, a pace projected to keep the unemployment rate at a
low 5 percent. And CPI inflation is forecast to fall to 2.4 percent.

Underpinning U.S. economic strength has been productivity growth, well
above the historical average. Year-on-year growth and output per worker
hour in the U.S. non-farm business sector has averaged nearly 3.5 percent
over the past four years. In turn, this productivity growth has been driven
by two main forces. One is the innovation efforts of research and
development and related knowledge discovery. The other is the competition
in, and flexibility of U.S. product, capital, and labor markets that help
transform innovations into the new products and processes in the
marketplace that ultimately support rising incomes for workers and their
families. The recently announced American Competitiveness Initiative aims
to strengthen public support for productivity, and thus America's ability
to compete in the global economy.

DR. BAICKER: The continued competitiveness of the U.S. economy depends
crucially on the strength of the workforce. Promoting a flexible and
skilled labor force through improved access to high-quality primary and
secondary education, through attracting the world's best and brightest to
American shores, and through investment in the continuing education and
retraining of the workforce will ensure that the United States remains a
leader in the rapidly changing world economy.

Even as living standards rise, Americans are increasingly concerned about
the rising cost of health care. Both public and private spending on health
care has risen at a rate faster than inflation and faster than wage growth.
Americans need access to affordable, accessible health care that's
high-quality and high-value. Perverse tax and insurance incentives have led
to inefficient use of our health care resources, straining public budgets
and private budgets, alike, straining employers, straining workers.
Promoting a stronger role for consumers can help create a health care
system that is more affordable, more transparent, and more efficient, where
our health care dollars go further.

This can be accomplished by strengthening health savings accounts and by
ensuring that patients and their doctors have access to the information
that they need to ensure that they get the health care that is best for
them.

The Economic Report of the President provides an analytical backdrop
supporting the President's agenda, which includes restraining government
spending, making health care accessible and affordable, making tax relief
permanent, creating an economic environment that encourages innovation and
entrepreneurship, continuing to open markets to innovation and to American
goods and services, and reducing America's dependence on foreign oil by
diversifying our energy supply. These policies will help maintain the
economy's momentum, foster job creation, and ensure that America remains a
leader in the global economy.

We'd be happy to take your questions now.

Q In your chapter about the tax code changes, you mention that the
conclusions of the tax panel were something that you wanted to study
further. And one thing that you wanted to look at was the transition costs.
And I'm just wondering if you could be more specific about what the
transition issues are that you're most concerned about and that you need to
study further.

DR. BAICKER: Treasury is currently studying that report, and the report
contains a number of different possibilities for a comprehensive tax
reform, including the possibility of moving the U.S. from an income-based
tax system to a consumption-based tax system. And that involves a lot of
changes in the tax code, both about the base of what's taxed, income or
consumption, and the rate at which it's taxed -- the rate structure -- and
the differential taxation of different kinds of income or different kind of
consumption that creates distortions that are really taxing to the economy,
but are really costly for economic growth.

So a number of proposals have already been considered and are in the
process of being implemented, such as dynamic scoring, which is one way of
more accurately evaluating the consequences of different tax system,
figuring out what their impacts will be on the economy and thus choosing
among the alternatives with the best information possible. Also making the
income and dividend tax reduction permanent would be a step towards the end
of double taxation of investment that's a drag on economic growth.

Q On the tax issue, you mentioned two aspects of it, consumption-based and
dynamic scoring. If you take them in turn, do you think it will be possible
to demonstrate that tax cuts do pay for themselves and can reduce the
deficit with appropriate scoring? And in terms of consumption-based -- do
you guys think that's a good idea?

DR. BAICKER: Thinking about the implementation of dynamic scoring -- this
is something that the Department of the Treasury will begin to undertake
and will certainly evaluate all of the issues involved in how you do that
scoring, getting input from the world experts on that. So that's something
that I hope will be implemented by the mid-session review.

As to what the result of the dynamic score of any particular proposal would
be, I certainly couldn't speak to that in advance of the proposal. The goal
is to figure out those effects as accurately as possible, and they're
certain to vary from tax proposal to tax proposal.

As for your second question, moving towards a consumption-based, certainly
the double taxation of interest and dividend taxation has been a drag on
economic growth, and the reduction of those taxes we've already begun to
see the rewards from. A lot of the economic growth that we're benefiting
from now, and the future growth, is due to investment in productive
capital, and we want to encourage that kind of investment.

Q How do you see the increase of high energy prices in your projection?

DR. SLAUGHTER: High energy prices are an important consideration, both for
households in terms of their spending patterns, and also for business
investment. And so, going forward, impacts on both consumer spending in
2006 and business investment decisions in 2006, that's definitely one
dimension on which energy prices need to be considered. In formulating the
economic forecast in particular, those types of prices we take from futures
markets. And so we kind of incorporate the best guess of markets that are
out there for what the future prices will be.

Q So what is the impact going to be, then?

DR. SLAUGHTER: Again, higher energy prices -- we know that in 2005, that
was an important force, for example, it was straining the real income
growth of American households. So there were higher rates of price
inflation over 2005 than many people were forecasting. And so households
had to expend a greater share of their total budget spending on energy, for
heating their homes, for filling up their automobiles. And going forward in
2006, that will be one of the important considerations to think about, is
to what extent high energy prices continue to be a force for straining
consumption growth.

Q Will it? What do you think?

DR. SLAUGHTER: The projections for a futures market is that energy prices
are going to remain high, and so, relative to earlier years, there's an
expectation that, again, the greater share of household expenditures will
fall on energy and related spending. The perspective, again, for energy
prices is that in the past four years energy prices, for example, benchmark
crude oil prices in world markets have increased about threefold.

Q So what will that do to consumer spending in the year ahead?

DR. SLAUGHTER: The administration's forecast is that for overall GDP growth
in 2006, will be about 3.4 percent. That's consistent with -- blue chip
estimates right now is also at 3.4 percent. Consumption spending will be
one of the forces contributing to economic growth during the year. And if
you'd like particulars, I guess I would refer you to the forecast chapter
in the report.

Q I'm sorry, these mikes and cameras don't read, only you do. That's why it
would be helpful for you to state it.

DR. SLAUGHTER: So, again, consumption -- if we look at 2005, economic
growth in 2005 of 3.5 percent was driven by a number of important forces
like in previous years. Consumption spending was one of them; business
equipment investment was another one; export growth was another one. And
our forecast for 2006 is that those different components of aggregate
demand will continue to increase again, leading to a result of GDP growth
of about 3.4 percent in 2006.

Q You talk in this chapter on capital flows about how the pace of inflows
is going to moderate. I wonder if that -- is that possible without a
decline in the dollar?

DR. SLAUGHTER: It might be. The exact adjustment mechanisms are difficult
to foresee, and historical experience for the United States and many other
countries is that current account imbalances tend to adjust themselves
through a wide variety of market-based and policy-based changes. So, if we
think about the United States current account deficit, it has been rising
in recent years. That rate of growth is probably going to slow at some
point in the future, and the current account balance may actually become
smaller as a share of GDP than it is right now.

The exact mechanisms through which that happens remain to be seen.
Adjustment of the dollar may be one of the mechanisms. We know that in
recent years the dollar has declined relative to most other currencies. It
strengthened a bit in 2005. So it will remain to be seen what will happen
going forward.

Q So how much of a moderation in those inflows do you expect? And if 6
percent of GDP is usually high, then what would be a better figure?

DR. SLAUGHTER: I don't have an exact figure on that. I think what's
important to keep in mind is, as the chapter in here talks about, that the
global imbalances that the world is seeing right now in terms of current
account and related capital account imbalances, is the outcome of a number
of economic forces in the United States and in many other countries around
the world.

So, for example, one of forces that has been contributing to the rise in
current account deficit for the United States in recent years has been a
faster rate of economic growth in the United States than of that in many of
our other major trading partners, such as Japan and Germany. So, going
forward, one market-based outcome that would help ameliorate these
imbalances that we have right now would be faster economic growth in many
of our trading partners.

Q Documents suggested that -- not suggested -- stated that the U.S. growth
the last couple, several years is much more than the growth of Europe and
Japan combined -- I think I saw a line on that. In terms of -- and you're
also forecasting continued growth in subsequent years, at roughly the same
level, I assume. At what point will that overseas growth increase and not
become a factor in terms of not helping with the balance of payments
problem? You can state that in cleaner language if you want, but I think
you get it.

DR. SLAUGHTER. Sure. The forces that will support faster economic growth in
other countries, I think a major policy challenge again -- two of the
countries that are talked about in the chapter are Japan and Germany. Both
of those countries have experienced declining investment demand in the
private sector in recent years as one of the major forces that's been
accounting for the current account surpluses. So, in terms of stimulating
economic growth through the channel of increasing investment demand by
firms in those countries, that presents a set of challenges that both
countries' policymakers, I think it's accurate to say, have been dealing
with in terms of underlying structural reform and labor markets, for
example, to enhance labor market flexibility in those countries, to
increase the attractiveness of capital investment by firms there.

Q How do you factor in the impact of the valuation of Chinese currency
versus U.S. currency, in terms of its effect on the U.S. economic picture?

DR. SLAUGHTER: The chapter talks about China as another country. Their
current exchange rate mechanism has been a force that has been contributing
to the accumulation of foreign reserve assets by their central bank. The
U.S. Treasury right now has been involved in ongoing discussions with
Chinese officials to think about a broad set of market-based reforms in
financial markets, of which currency reform would be one piece.

Another force that's contributing to the high savings rates in China is
high savings by households, savings because in part they do not have the
depth and liquidity of capital markets that we in the United States enjoy
to help finance purchases by households of things like durable goods,
pension savings, and also health care spending. So thinking about what are
the different forces that reduce the external savings for China, the
chapter talks about both market-based and policy-based changes in China.

Q If I could just follow up on one of the things that you mentioned -- do
you see any change in the U.S. -- in the rate of saving in the United
States, which has been fairly low?

DR. SLAUGHTER: When you think about U.S. savings, in multiple chapters,
actually, in the report talk about thinking about it from the perspective
of there's savings by firms in the United States, retained earnings, which
has actually been quite high in recent years; and then there's savings by
government and savings by private households. So fiscal reform in the
United States that would tend to bring down fiscal deficits would
contribute in some degree to improving the current account balance,
although it talks about how that's definitely not a dollar-for-dollar
transition there.

And I think also you're referring to declines in household saving rates.
That's a longstanding feature of the U.S. economy going back at least a
couple of decades. And so the set of policy changes that might better
support and foster savings by households, I think it's fair to say is an
ongoing discussion.

Dr. Baicker earlier had talked about tax reform, and I think one of the
broad hoped-for goals of the tax reform panel was thinking about tax
regimes that would provide a different and perhaps more supportive set of
policies for savings by households.

Q On the participation rate, you mentioned that it seemed to peak in the
'97-2000 period, and that you're sort of projecting some decline further as
the population ages, and that sort of thing. So are you saying now that the
participation rate has recovered as much as it's going to recover, at 66.0?

DR. SLAUGHTER: I think, going forward, the projections -- consistent with
the projections of a lot of private sector forecasters -- are that if you
take it, for example, broke it up between males and females, male labor
force participation rates are expected to continue the gentle decline that
they have for quite some time; female labor force participation rates,
which had been increasing for decades in the U.S. economy, have probably
reached their peak and, if anything, may start to fall back gently in the
future.

So those underlying demographics are some of the important forces that
underlie the projection that the rate of growth of the labor force --
employment in the labor force is going to be decelerating in the coming
years.

Q And the participation rate then is as high in this current cycle as you
think it's going to get, if you're projecting some decline? That would
suggest that you think the United States is close to full employment now.

DR. SLAUGHTER: I think the United States does seem to be near full
employment based on the traditional economics definitions. There's no kind
of law of physics that says what the exact -- on unemployment rate is, at
which we're at full employment. But in January the unemployment rate was
reported at being at 4.7 percent, which is quite low by historical
standards.

Q Can you talk some more about health care? We seem to hear more and more,
including from you, about so-called consumer-based, and I have yet to have
anybody explain to me -- if I go to the doctor, I say it hurts here, what
choice do I have to shop around?

DR. BAICKER: Right now part of the problem with the health care system is
that the choices you make to spend out-of-pocket are tax disadvantage
relative to things that you consume through your employer-provided
insurance. So the motivation behind -- part of the motivation behind
consumer directed health care is to let you choose the form of health
insurance that you want, that suits you the best, which may allow you,
then, more choices to make over your initial spending in the health care
system.

So, for example, if you go to your doctor now, you don't know the cost of
the different options on the table to you; you're doctor may not even know
the cost of the different options. They depend on what your health
insurance is, they depend on what rate your doctor is charging your health
insurer. You don't have the tools you need to make a good decision. So
increasing the price and quality information available in the health care
system would go a long way towards allowing you to make better decisions.

Now, the second component of that is for you to have more control over
those health care funds. If you have the health savings account that lets
you decide whether to spend those dollars on health care or on other family
priorities, and you have the information that you need to make a wise
decision, then there's evidence that suggests that you will consume less
health care, but health care that is more valuable for you. So you'll put
your health care dollars toward the services that are best suited to you,
rather than a generic set of services that are catered to the insurance
company overall, or to the health care system overall.

So that holds promise for making our health care dollars go further. And it
doesn't require that every consumer be paying for every dollar with
out-of-pocket funds, or with funds through health savings accounts. It only
requires that enough consumers have motivation to get that information, and
that the information is available, that the health care system, as a whole,
will have the incentive to provide care that's higher value, not just more
care. And that will also spur the development of cost-saving technologies
where there's no incentive to develop those cost-saving technologies today.

Q The only part that I understood was that I have the option of a higher
deductible. That I understand. But if I go and say, I've got an ache right
here, I don't understand what I can choose.

DR. BAICKER: So you do need more information. You need more information
from your doctor about the options that are available to you. Your doctor
needs more information about the efficacy of those different options.

So along with that greater price and quality transparency should come the
greater use of health technology, health IT, such that doctors have access
to the most current information about the efficacy of different treatments,
and so that any doctor that you go to has full information about your
condition, about the medications you're taking, about tests you've had in
the past. There's evidence that a significant fraction of diagnostic
testing done today is duplicative, because doctors don't have access to
results of the test that you took last week in another facility. The
greater use of health information technology would prevent that, which
would, again, make your health care dollars go further and would give your
doctor the best information to help advise you.

So consumer-directed health care does not mean that you're out on your own
making decisions without your doctor's advice. It means that you and your
doctor are deciding together, rather than being constrained by a particular
tax-favored insurance policy or by the choices made by your employer,
rather than the choices that you and your doctor and your family members
make together.

Q I have a couple of questions on tax reform. In the report, of course, you
mention the two approaches taken by the panel, whether it's simplified or
modified consumption tax. But you also mention in here how Treasury,
itself, has been looking over the -- to a comprehensive business income tax
that aims to integrate personal consumption -- personal and corporate. Is
that an approach that you think should also be under consideration when the
President reviews tax reform?

DR. BAICKER: So what all of these approaches have in common is reducing the
distortions induced by really unequal tax treatment of different kinds of
investments, financed in different ways, made by different entities. Those
distortions induce corporations to do things that they would not otherwise
do because they're not otherwise profitable. And so those changes in
behavior are really costly to the economy, because they reduce investment
and they reduce the productivity of each investment made, because
corporations and individuals are no longer deciding on the basis of where
their dollars make the greatest investment. They're deciding based on that,
plus differential treatment in the tax code. So any tax plan that
simplifies that and that stops the discouragement of investment in
productive opportunities with increased economic growth would be
advantageous to everyone.

Q But Treasury Secretary Snow is supposed to be reviewing the proposals
that this panel is sending to him. But will he also be open to looking at
additional ways of reform, such as a CBIT?

DR. BAICKER: I cannot speak for Secretary Snow. I know that they are
carefully reviewing the report issued by the panel, and I look forward to
their recommendations based on that.

Q And then only one other question. Treasury did announce the establishment
of a new office of dynamic analysis, and I guess my question goes to the
actual proposals, when they do come out, on tax reform -- they're supposed
to be revenue-neutral. Now, will that be revenue-neutral defined by static
scoring, or by dynamic scoring?

DR. BAICKER: Dynamic scoring will be used as a supplement to static scoring
to give policymakers better information about the long-run effects of the
different policies on the table. Official scoring will still be done with
static scoring.

Q But in terms of meeting your definition of revenue-neutral, is it
possible that the administration might say it's meeting that definition
based on dynamic, even if it might not be based on static?

DR. BAICKER: So the tax panel was charged with coming up with
recommendations that were revenue-neutral using static scoring, and that's
what they've done.

Q Is that what the President, though, might, when he comes forward with his
proposals, use, or might he use instead dynamic scoring in terms of saying,
these proposals meet the definition of revenue neutrality, even if it might
not, under the static scoring? I mean, why else is this office being set
up?

DR. BAICKER: Dynamic scoring gives us information that we do not currently
have. So dynamic analysis is forecasting what any particular tax reform
would do to the economy overall. Then dynamic scoring takes that one step
further and figures out what the effect of that growth or reduction in
growth in the economy would do to tax revenues, so -- just to define my
terms more clearly.

That office will provide information that we do not have about the long-run
effect of particular policies on the table, and that information can be an
important component for policymakers in choosing among the options on the
table. Static scoring will still be used for official scoring of all of
those proposals.

Q You said that you can't apply dynamic scoring to future unknown tax
proposals. Can you apply them to, say, 2001 and 2003 tax cuts and come up
with any kind of a reasonable conclusion about what revenue effect those
tax cuts had?

DR. BAICKER: Certainly that can be done, and I can't do it standing here,
but there is ample evidence that reductions in the taxation of investment
income have yielded economic growth. More specifically than that, I
wouldn't feel comfortable doing.

Q You said the dynamic scoring initiative may be ready before the
mid-session review?

DR. BAICKER: Dynamic analysis, actually.

Q Dynamic analysis. Would the tax reform suggestions be ready by then, as
well?

DR. BAICKER: I don't know the timetable that Treasury is using. Those
questions should be directed to them.

Q You were speaking about the desirability of eliminating differences or
discrimination in different types of income in terms of taxation. Is that
your goal, to treat income or to treat all these various tax bases
essentially the same so there's no difference in how they're treated?

DR. BAICKER: I think the goal of sound tax policy is to raise the revenue
needed for national priorities in the best way possible. How do we define
the best way possible? Well, you want to encourage growth, you don't want
to distort choices made, but you want to take into account the
distributional implications and the implications, for example -- of
consumption of different goods might factor into what the optimal tax
structure would be.

So, certainly, the implication of taking those things into account is not a
uniform, flat rate applied to every dollar, but anything that moves in that
direction reduces distortions that may be costly to the economy.

Q If the goal is to get rid of distortions, then why not, say, eliminate
the mortgage interest deduction, which certainly steers a lot of people in
the direction of purchasing real estate, houses, things like that? I mean,
obviously, there's a conscious choice that they make, but that's a good
thing, that's a good distortion. Which are the good distortions and which
are the bad distortions?

DR. BAICKER: I certainly wouldn't want to pick and choose particular
provisions in the absence of a plan for a comprehensive reform of the tax
code, such as those that were suggested by the tax panel. So the underlying
principle, that reducing costly distortions is a good thing, stands. What
the costly distortion -- as you point out, some distortions may be to the
benefit of society, and some may not. So taking that into account steers
you towards certain policies and away from others. But considering one in
isolation might not bring you to the right conclusion.

Thank you all, very much, for coming.

DR. SLAUGHTER: Thank you all, very much.

DR. BAICKER: Please get your copy of the ERP.

END 1:58 P.M. EST

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