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Ärende: Press Release (0602136) for Mon, 2006 Feb 13
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Teleconference Press Briefing by Dr. Katherine Baicker and Dr. Matthew
Slaughter on the 2006 Economic Report of the President
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For Immediate Release
Office of the Press Secretary
February 13, 2006

Teleconference Press Briefing by Dr. Katherine Baicker and Dr. Matthew
Slaughter on the 2006 Economic Report of the President
Via Teleconference


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

3:42 P.M. EST

DR. SLAUGHTER: Hi, this is Matt Slaughter, from the CEA.

DR. BAICKER: And I'm Kate Baicker.

DR. SLAUGHTER: And we welcome everybody to this conference call on the
release of the 2006 Economic Report of the President. We apologize for the
logistical snafus earlier today for everyone.

Kate and I thought we would take a few minutes and open just by offering a
brief overview statement of the ERP, and then turn it to -- we welcome your
questions after that.

So here at CEA we are very pleased to announce the release of the Economic
Report of the President and the Annual Report of the Council of Economic
Advisors for 2006. This report reviews the state of the economy and the
economic outlook, and also discusses a number of economic policy issues of
continuing importance. Across its 11 chapters, the report highlights how
economics can inform the design of better public policy and reviews
administration initiatives.

And I should say at the outset, too, former Chairman Ben Bernanke helped
participate in the formulation of the broad themes of this report but, in
particular, did not participate in the formulation of the administration's
economic forecast, which is at the outset of this report.

The American economy enters 2006 with continued strength and flexibility.
Two thousand five saw a fourth consecutive year of expansion for the U.S.
economy with real GDP growing at 3.5 percent for the year. The
administration forecast for 2006 foresees continued strong 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.

DR. BAICKER: The continued competitiveness of the U.S. economy depends on
the strength of its workforce. Promoting a flexible and skilled labor force
will ensure that the United States remains a competitive leader in this
rapidly changing world economy. Even if living standards rise, Americans
are increasingly concerned about rising health care costs. Promoting a
stronger role for consumers can help create a health care system that is
more affordable, transparent and efficient. This can be accomplished by
strengthening health savings accounts and by ensuring that patients and
their doctors have the information that they need to get the health care
that is best for them.

This report provides an analytical backdrop for the President's agenda,
which includes restraining government spending, making tax relief
permanent, making health care more affordable and accessible, creating an
economic environment that encourages innovation and entrepreneurship, 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.

On that note, we're happy to take your questions.

Q Hi Kate, Hi Matt. In the section on the capital accounts surplus you put
a lot of emphasis on the factors in the foreign countries that are
generating these large inflows of capital to the U.S., and you sort of cite
a lot of the positive things about the U.S. attract this capital. But I see
very little attention given to either our budget deficit or the level of
the dollar, which a lot of private economists say have to play a role in
any sort of, like, correction of this imbalance. Could you explain that,
why you have given so little attention to those factors?

DR. SLAUGHTER: I think there's attention given to a wide range of factors
in that chapter's discussion of the global imbalances, where we try to
provide the global perspective by talking about what are the sources of
imbalances between savings and investment, not just in the United States,
but in many of the large current account surplus countries that the U.S. on
net is borrowing from. So in particular, this discussion of economic
conditions and policies in Japan, in Germany, in China and Russia, which
are four of the biggest net lenders to the United States.

In terms of the market-based and policy-based adjustments going forward
that might reduce the size of the U.S. current account deficit, you're
definitely right that on the U.S. side, focusing on the different sources
of savings in the United States is one of the key areas where changes in
the future could materialize. So we know that private savings by firms has
been quite high in recent years, so it's likely that any net increase in
national savings for the United States would either come from households or
from the government sector. And so in the government sector that would be a
reduction in the fiscal deficits that we see at the federal level, where
again the pass through, as the chapter discusses from that to the current
account, is far less than dollar for dollar, and then on the private side,
thinking about different incentives to possibly raise the long-standing
decline in savings rates by American households.

Q I didn't see the report, and I'm just wondering what your forecast is for
interest rates, because I was talking to the realtors today, they see a 6.9
percent mortgage rate by the end of the year for a 30-year mortgage. Do you
see rates going that high?

DR. SLAUGHTER: The interest rate forecast that -- thanks for that question,
by the way. The interest rate forecasts that we have are largely taken from
market forecasts. There's a time when the administration -- when we
finished formulating the forecast, which was based on data as of
mid-November of last year.

So going forward, for example, we have 10-year interest rate forecast for
2006 at 5 percent, and then gradually increasing in the coming years, such
that by 2011 we'd have 10-year Treasury note interest rate forecast at 5.6
percent.

Q I had a question about China. I wonder if you could clarify your view on
whether China is moving quickly enough toward currency flexibility or
whether, you know, you think their economy could handle a more -- whether
the pace that they're on now, this sort of gradual pace, is an appropriate
one or whether you think they could move more quickly?

DR. SLAUGHTER: Thank you for that, Brendan. The chapter, again, on current
account balances talks about policy reforms in China and emphasizes that
when you think about the broad set of policy reforms that China probably
needs to facilitate current account adjustment, but also just economic
development there. Currency reform is one dimension of that reform. They
have a broader set of financial market reforms that are probably needed
going forward to prevent deeper and more liquid capital markets for firms
and for households.

So for example, one of the things that has been driving the current account
surplus that China has had in recent years has been that the rate of
national savings has increased and outpaced the rate of increase of
investment by firms in China. And a big component of that has been
household savings. There's a large amount of precautionary savings that
happens among Chinese households to save for purchases of the households of
durable goods, and also to finance spending on health care expenditures. So
those are a couple of examples in which a deepening of capital markets in
China, on many dimensions, is going to facilitate a broader, more balanced
set of demand growth going forward, where private demand by households, in
particular, plays a more prominent role.

Now, again, coming back to the particulars of exchange rate policy, the
administration has been engaging Chinese officials for many months now on
the need to have currency reform be one broader component of financial
market reform in that country.

Q I want to ask a question, a little bit off point, on your energy chapter
and the President's declaration that the nation is addicted to oil. It
didn't have much talk on cellulose to ethanol. Current ethanol production
is a drop in the bucket to our consumption. Do you make assumptions on
whether there's going to be a concerted effort -- either conservation,
higher CAFE standards? It didn't seem to give a whole lot of attention to
where that might be going over the shorter -- if I read it right, you see
ethanol and oil sands as the only non-conventional oil that might survive
at a lower price structure. Can you shed some light?

DR. SLAUGHTER: Sure. So the energy chapter, I think presents a broad
perspective on energy markets, where one of the key themes throughout the
energy chapter is talking about how we have very different energy markets
in the United States, in terms of petroleum-based products, natural gas,
electricity generation. And there's differences across those markets in
terms of the different underlying technologies and sources of supply, the
nature of demand, and what are the market intermediaries that transmit and
kind of match suppliers with demanders.

So to take one example, again, with the broad goals of energy policy for
the United States to try to have energy available at prices that are
relatively affordable, but also stable, a big difference that's highlighted
in the chapter, for example, between petroleum markets and natural gas
markets is that natural gas markets are much less tradable across boarders,
so of the total national consumption in the United States of natural gas,
only about 15 percent is imported, in contrast to our petroleum, of which
about two-thirds is imported.

The chapter then talks about how also, at different points, consistent with
the President's recent discussions and policy initiatives on energy, that
broadening the diversification of the sources of supply of energy going
forward, policy probably has a role there, to the extent that there are
some early-stage technologies that probably have a need for government
support, to the extent that the public returns, the social returns from
those early stage investments are probably better -- probably higher than
the private returns. And so there's a role for government support for the
diversification of energy supplies on that broad front.

Q Another question which isn't really in the Economic Report of the
President, but I'd just like to ask you a little bit about some fiscal
policy issues. Can you tell me to what extent you think a tax cut can pay
for itself, like if you cut taxes a dollar, how much of that dollar will
you get back in revenue? Do you think you can get a full dollar back, or
more than a dollar?

DR. BAICKER: Hi, this is Kate Baicker. Thanks for the question. Certainly,
the effect of different tax cuts on revenues and on economic growth depends
on the particulars of the tax cut -- how it affects the tax base, what the
rates are, the relationship between that tax structure and other taxes that
already exist in the economy.

The broader point that dynamic analysis of different tax programs would
yield different pictures of which ones are most cost effective and what the
different revenue yields are is one that's well taken. And the Treasury
will be implementing dynamic analysis by the mid-session review.

Now the difference between dynamic analysis and dynamic scoring, just to be
clear, is that dynamic analysis takes account of the effect of tax changes
or spending changes on GDP and the macro-economic performance. Dynamic
scoring then goes one step further and incorporates those changes into
revenue forecasts. So the first step is dynamic analysis, figuring out how
different policies would affect the growth of the economy, an that's a
really important first step, because it yields a more complete picture of
what any given policy would do, and allows policy-makers to make a more
informed decision.

Q The White House has said that the 2003 tax cuts have generated more
revenues than they cost. What is the evidence of that?

DR. BAICKER: I would defer to the Treasury for specifics on revenue
estimators of different proposals. And thinking about the different
implications for economic growth of those policies is something that
they've put as a high priority. I would leave it at that.

Q I was somewhat intrigued by your chapter on taxes and -- you know, taxes
and international comparison. Are you saying in there that you -- that
there is a need to reduce corporate tax burdens in the United States in
order to bring them back into -- back on a par or on par with our major
competitors?

And I was perplexed about one thing, I was kind of startled, actually. Your
charts -- you had two charts in that section. And just eyeballing it, it
certainly looks to me like the corporate tax burden in the United States is
actually below the OECD average. And even the -- there's a chart about
rates -- seems to be U.S. rates, maybe average rates, corporate rates, are
below average. This is actually different from the line that I have often
heard from many corners that say, our tax rates are too high.

DR. BAICKER: So the broader point that the U.S. tax system looks very
different from that of other OECD countries is, indeed, true. And we rely
much more heavily on a personal income tax than other nations do as a
fraction of our revenue sources.

The other key point that the chapter makes about the corporate income tax
is that distortions induced by having different rates of taxation on
different forms of investment and on different sources for that investment
leads to distortions in the economy that are very costly. Corporations
spend a lot of energy finding the highest value investment under the
current tax system, which induces lots of distortions between retained
earnings and earnings abroad versus domestic earnings and different forms
of investment and reducing those distortions by a better integration of the
tax system would yield economic gain.

Q So are you -- two questions. One, are you saying -- is the report saying
that we need to reduce the corporate tax burden? And, two, am I missing
something when I look at those charts that show the tax burden of the share
of GDP being lower in the United States than many countries? I don't have
it in front of me, but the rate chart, also, put us below the OECD average.

DR. BAICKER: Indeed, our overall tax burden is lower than many of our OECD
counterparts. And the more specific question that you asked about the
corporate income tax rate, the chapter and our discussion doesn't
particularly favor one particular raft of tax reform proposals. While
they're thinking about comprehensive tax reform, some of the important
factors to consider are the distortions induced by differences within the
tax code of the treatment of different kinds of income, and highlights the
fact that double taxation of dividend and capital gains earnings does,
indeed, reduce investment and, thus, economic growth in the future. So
those are important components of any comprehensive tax reform.

DR. SLAUGHTER: And just to build on it, if I could. One of the themes
that's talked about in the context of corporate taxation I the chapter is,
in recent decades, we've seen many countries around the world reduce their
corporate tax rates and also change policies to make more liberal flows of
capital in and out of those countries. And so with increased capital
mobility across borders, when we think about what are the -- the
constellation of policies that attract mobile capital to the United States
as opposed to other countries, over time, the relevance of tax
differentials, like any other policy differentials, is probably growing.

Q I was curious, in your report on the low savings rate, if you had seen
any real economic consequences from that yet? And, secondly, the fact that
the savings rate keeps declining and going into negative territory, can
that at all be seen as evidence that the dividend and capital gains tax
cuts haven't worked as hoped to boost investment and eventually long-term
growth?

DR. BAICKER: One of the main concerns with the savings rate in the U.S. is
the preparedness of the U.S. population for retirement, especially as the
population ages and as the leading edge of the baby boom generation nears
retirement age. One of the points that the chapter you're referring to, I
believe, makes is that, in fact, the savings of the current cohort, or the
current generation of people preparing for retirement looks very similar to
the personal savings of past generations, so that, in fact, they are no
less prepared for retirement in terms of personal savings.

Now, that doesn't mean that there are no risks to retirement security.
Social Security plays an important role in maintaining the income of people
who are in retirement and ensuring that that system is stable and
financially solvent for generations to come will have a big effect on their
preparedness for retirement, as well.

The second threat to their retirement security is defined benefit pension
plans and the potential insolvency of a lot of plans. It's important that
those promises made to future retirees by corporations are, in fact, kept.
And so the administration supports reform of the PBGC rules for evaluating
whether plans are actually saving enough for the future benefits of their
retirees and ensuring that that component of retirement security is intact,
as well.

Q What about the fact that we have a negative savings rate, or a very low
one? I mean, isn't that at all evidence that the dividend and capital gains
tax cuts are not producing that supply-side effect that was hoped?

DR. SLAUGHTER: I think that the chapter on savings rates and retirement
preparedness offers some analysis to look at this decline in the personal
household savings rate. And as the chapter talks about again, this has been
going on since around the early 1980s. So this is kind of a long-term
secular feature of the U.S. economy.

One of the forces that seems to lie behind the decline in personal savings
rates is rising wealth for household. So part of the analysis talks about
how, with rising household wealth, thanks to appreciation of equity prices
and real estate prices, in particular, over the past 10, 20 years, that has
been a force that's been raising the net worth of American households. And
many households, all else equal, then, given the rise in their wealth,
don't put as much of their current income into savings flows as they used
to.

Q I wanted to ask both of you to address what you believe is the outlook
for housing prices in the United States. I didn't see anything specific
about house prices in the report going forward. Did you expect them to go
up, or go down? What's your expectation for this year, and then the years
following?

DR. SLAUGHTER: The rate of home price appreciation in the United States in
the past four or five years has been above historical trend. I think most
averages that I see are about 9 percent per year rate of home price
appreciation. That's likely to slow in the future. And so slowing rates of
price appreciation, no one has a crystal ball to understand exactly how or
when or in what markets.

But most historically previous home price appreciation run ups in the U.S.
economy have evolved by having slower rates of price appreciation in the
future that allow incomes of households to, in some sense, catch up with
the home price appreciation so that affordability of homes comes back
closer to historical levels. And I think that's a likely scenario playing
out for the U.S. economy as you move into '06 and future years.

Q On your table on the supply side components of real GDP growth projecting
ahead to 2011, on page 44, you showed a growth rate in productivity
declining from the end of 2005 to 2011 for roughly a percentage point from
3.6 to 2.6. And, yet, the rate of economic growth is actually going up,
from 2.8 to 3.2, and the difference is accounted for by, I guess, increased
hours.

So two questions. Why is the rate of productivity growth going down? What
explains it? And I'm a little bit surprised that employment hours are
growing as rapidly as they are, in contrast to this previous period from
2001 to 2005. Do you want to elaborate on that a little bit?

DR. SLAUGHTER: Sure, sure. I'd be happy to take both those. First, on the
deceleration of productivity growth, one of the -- one of the strong
features of the U.S. economy in recent years has been, I think it's fair to
say, largely unexpected acceleration of productivity growth and output per
worker hour that U.S. economies enjoyed in the past four years.

So we had this productivity acceleration that began around 1995 in the U.S.
economy, that's actually in that table there if you're looking, from about
1.5 percent per year to an increase of about a percentage point to about
2.4, 2.5 percent per year. A pleasant economic outcome in recent years has
been that has accelerated even further by about another percentage point,
to well above 3 percent per year.

The forecast, like other parts of the forecast going forward, is
conservative by assuming that the rate of productivity growth will
decelerate back to the -- from the high levels that we've had now. I think
it's fair to say it would be a pleasant surprise, on many dimensions, if
productivity growth of recent years were to continue at the rate that it
has been. But the forecast has a deceleration, just to bring it more in
line with historical trends.

And on hours dimension, I think in part the logic there was recent years
with the slight decline in hours of persons in the overall non-farm
business sector was quite atypical, relative to previous decades. And so
projecting going forward, again a bit more of a return toward historical
norms there.

Q Is it possible that the aging of the workforce, though, is going to lead
you into a slower labor force growth?

DR. SLAUGHTER: It's going to lead to a deceleration, I think, on many
counts, of growth of the overall labor force. Again, I think it's fair to
say we don't have clarity for sure knowing exactly how that broad
demographic trend will feed into particular labor force participation
decisions of in or out of the labor force, and also on hours decisions of
people, as well.

Q Again, I'm reading press reports, I didn't get the original copy -- but
looking at China's currency, the language seems very diplomatic. It doesn't
call for, you know, float your currency, period. It's more liberalization,
greater flexibility in your exchange rate. Why are you couching it in such
diplomatic terms? Do you believe that a full float isn't in the best
interests of China or the U.S.? Or do you think that's the best you can get
from China?

DR. SLAUGHTER: Thanks for that. I'll defer to the long-standing precedent
to speak on particular currency issues for the administration to the
Secretary of the Treasury, and the Treasury Department more generally. Our
perspective at CEA, in discussing global imbalances and the role of China,
was to take a bit broader perspective, again. And I'll circle back to the
theme of, China has had some -- has played a role in accumulating savings
that they are lending to the rest of the world, both through a mix of
policy decisions -- and you cite their current currency regime -- but also
a set of kind of market-based decisions, in particular the savings
decisions of households.

And so going forward, as China continues to grow and become more closely
integrated into the world economy, a broader engagement of market-based
reforms, not just in currency markets, but in a wide range of their
financial markets, is probably going to be a helpful development.

Q And does the report compare -- a better approach. Would we be more
competitive if we cut corporate taxes than we would be, say, if China
floats its currency to a greater degree? Do you get into that?

DR. SLAUGHTER: I think that one -- in echoing the President's recent
discussion of the American competitiveness initiative, the report in many
different chapters -- for example, in the international trades chapter,
talks about the role of productivity growth as being a strong indicator of
the competitive stance of the U.S. economy overall. And so thinking about a
broad spectrum of policies across international trade, across tax, with an
eye to thinking about what are the different mix of policies that are going
to support ongoing productivity growth that American firms and their
workers can generate for the U.S. economy.

Q This is a question about financial services. I haven't had an opportunity
to read the chapter in great detail, but you talk about trying to balance
between over-regulation and under-regulation in financial services, and you
talk about some of the Basel new standards for trying to manage risks. I
noticed that one of the Federal Reserve governors gave a speech about this
recently and raised the question about how well risk is being managed, some
of the commercial real estate concentrations. It doesn't get into
derivatives in this particular speech, but you mention that, too.

Is it your sense that -- you've mentioned the benefits of derivatives as
perhaps contributing to fewer fluctuations in the financial sector, but are
we, in fact, shifting these risks to places where we just don't recognize
them as well? Or do you think we've got this under control?

DR. SLAUGHTER: Thanks for that interesting question. The financial services
chapter, as you point out, does highlight the important and rising role
that the financial services sector plays in the U.S. economy. Financial
services by matching innovative ideas and investment opportunities in new
technologies would pool the savings -- plays an important role in fostering
economic growth. There's substantial evidence for the U.S. economy over
time by looking at the history across different U.S. states and evidence
across countries of that link between financial development and economic
growth.

And, again, there was evidence that by creating new methods of sharing and
pooling risk, that development of financial services also supports greater
stability in economies.

That said, two of the broad policy challenges in financial services that we
highlight in the chapter, one of which is always adequate protection for
consumers, the financial services, and the second, as you alluded to, was
maintaining sort of a soundness and stability of the overall financial
system.

So we talk about particulars there on the latter point of the Basel II
Accords, building out from the Basel I Accords, and also talk about another
recent example in the United States of the proper regulation for GSEs, for
example.

Q And was it your sense that we have struck that balance with the Basel II
Accords, the balance between protection and not stifling the development,
the economic gain that you had from sophisticated financial system?

DR. SLAUGHTER: I wouldn't want to speak on behalf of the Federal Reserve
and the other regulators of the U.S. financial system. I'd say just in
general that the Basel II Accords, their implementation is an ongoing
process, and it remains to be seen kind of -- and, again, here I would
defer to officials at the Federal Reserve and other organizations -- on the
proper way to implement the three pillars that are envisioned in the Basel
II Accords in terms of mandatory verus voluntary participation level of
disclosure of information in those types of particulars.

Q What should we be looking for as that goes forward?

DR. SLAUGHTER: Again, I guess I would defer to the guidance provided by the
Federal Reserve in particular on their sense on the participation of the
financial entities that they're regulating, and their happiness both with
participation and the desire to impact on and fostering stability of the
overall financial system and minimizing the threat of systemic risks.

Q So you're actually not prepared to say how well you think we've struck a
balance between regulation -- over-regulating on the one hand, and exposing
ourselves to too much risk on the other?

DR. SLAUGHTER: The chapter aims to present those broad sets of issues in
the context of providing an input for those types of policy questions by
emphasizing the benefits of financial innovation with the good goals that
are achieved by thinking about the proper financial regulation regimes.

Q Just to follow up on my colleague's question on assumptions, your
immigration chapter didn't talk about levels. Can you talk a little bit
about where you see -- I think the Social Security actuaries and a lot of
other government agencies are working off those, or 800,000 -- kind of a
steady 800,000 -- is that your assumption for immigration? And whether that
factors in, in any way to the productivity numbers?

DR. SLAUGHTER: Thank you for that. Our assumptions about labor force growth
are built on historical patterns and protections going forth from, in part,
from the Census Bureau and data that we have collected over time. I do not
think we have any particular assumptions built in about growth in overall
population and labor force from natives, as opposed to immigration inflows.

DR. BAICKER: But to build on that, the immigration chapter that you
mentioned does, indeed, discuss the important contribution of immigrants to
the U.S. economy, in particular, high-skilled immigrants to innovation and
science and engineering in the U.S.

Q The reason I ask is because it's hard to find any reliable estimates, but
it seems at a time when the baby boomer retirement picking -- picking up
steam and one presumes a smaller workforce, it seems odd that the actuaries
keep estimating they have flat 800,000. I'm wondering if you guys have any
thoughts on how realistic that is.

DR. BAICKER: Certainly, the economic report of the President doesn't aim to
create new estimates of some of these big components of the U.S. economy,
rather to build on mainstream estimates of those to discuss different
policy options on the table. So there's no divergence from the standard
assumptions in here.

Q Thanks.

DR. BAICKER: Great. We're ready to wrap up.

DR. SLAUGHTER: And we appreciate all the questions from everyone, and thank
you very much for participating.

END 4:16 P.M. EST

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