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Office of the Press Secretary

For Immediate Release July 31, 1997
                          PRESS BRIEFING BY

The Briefing Room

1:11 P.M. EDT

MR. TOIV: Good afternoon. Today we're happy to have Janet Yellen, who is the Chair of the Council of Economic Advisers, to talk to you about the state of the economy.

MS. YELLEN: Thank you. This morning the Commerce Department announced that real GDP is estimated to have grown at a 2.2 percent annual rate in the second quarter of 1997. That means that over the first six months of this year, GDP growth has averaged a solid 3.5 percent. Today's GDP numbers suggest that the economy continues to hum. Growth is robust. Unemployment remains low at 5 percent. Inflation is in check. Household wealth is rising. And consumer confidence surveys register record optimism. Growth of 3.5 percent for the first six months of the year is more good news in our good-news economy.

Booming business equipment investment -- it grew at about a 20 percent annual rate. It was the largest single contributor to the second quarter performance. This was somewhat offset by weaker growth in personal consumption following its strong growth in the previous two quarters.

With the recent budget deal between President Clinton and the Congress, we will continue on the responsible and effective course that's reduced our budget deficit by more than 75 percent in the last four years and has led to the four-year business investment boom that we have seen with business equipment investment growing at an average 11 percent over the last four years. I think that these soaring levels of business investment have contributed to our economy's strength and are helping to lay the foundations for future higher long-term growth. Let me stop there. I'd be happy to take any questions.

Q If things are as good as you say, what worries you?

MS. YELLIN: I've thought hard about that question. I'm one of the President's paid worriers, and so I'm always out there looking for things to worry about. My plate is not full at this point. I'm finding it hard to put things on the list. Some analysts have pointed to consumer debt as a possible problem. There have been some increases in charge-off rates and delinquency rates on consumer loans, but I think when you look at the overall situation of the household sector in our economy and the huge increases in net worth that we have seen, the confidence that consumers feel about the economy, and then put those numbers in the context of financial firms that have been very aggressively over the last number of years targeting what has been a very profitable business, I find that's something that, while worth monitoring, isn't very worrisome.

At this point in an expansion, it would be normal to worry about the possibility of an uptick in inflation, so I always have that on my plate as something to monitor, and I think we've been just remarkably fortunate that we have seen absolutely no increase in inflation with the economy booming as it has been with unemployment at decades-low levels. We haven't seen unemployment rates this low really since the late '60s. And yet, not only is inflation not increasing, most broad-based measures of inflation are declining. This morning, for example, we got some more good news in that the measure of GDP prices that was included in this morning's release increased at just a 1.4 percent annual rate.

So almost all measures of inflation continue to decline. And as one looks for problems on the inflation front, it's very hard to find them. So I find it little to worry about.

Q How do you think this new tax cut, especially the capital gains tax cut, will impact on the overall economic growth of the country?

MS. YELLEN: Well, there are disagreements about the extent to which capital gains tax cuts have the ability to stimulate economic growth. My own reading of the literature on that is that it's mixed. When I look at the overall tax bill in the budget package that was passed, I see a lot in it that is pro-growth. I think of this as a very pro-growth package. There are those who believe that capital gains tax cuts do have the potential to stimulate growth. I'm a bit more pessimistic about the odds that that part of the tax package will be pro-growth.

But simply completing the work of getting the budget deficit down, which is what's enabling private savings to flow into investment, that's one of the strongest growth-related parts of this package -- the education parts, the children's health. I consider all of that very much pro-growth.

Q Is there any economic benefit to the child tax credit?

MS. YELLEN: Well, I see the child tax credit really as targeted relief for hard-working families. We have an economy that's been doing well and generated gains, and have the ability to afford some tax relief at this point. And the President has made it clear that he wants to direct some of that tax relief at hard-working families that are trying to raise kids and to provide some tax relief there, and that's what I think is the major purpose of it.

Q Can it get better than this, and do you expect it to? (Laughter.)

MS. YELLIN: We've all been surprised in a way by how good things are, and I certainly hope that things can and will get better. I think we're trying to put the conditions in place, working on the fundamentals, so that things can and will get better, and, as I emphasized, keeping this investment boom going so that our children can enter workplaces that are equipped for them to be productive and making sure we invest in our children in education and in children's health. That's the way we can put in place what's needed, I think, to keep the good times rolling.

Q Are you at all concerned about the distribution of the gains in the economy? Because the 40 percent of Americans that are invested in the stock market are doing very well, the other 60 percent, real-wage growth is not terribly good and certainly is down significantly from 20 years ago.

MS. YELLIN: At this point, I would say that there are real wage gains for workers. Earlier this week, we had the release of the employment cost index, and wage and salary growth was running I think at about 3.3 percent pace, so with inflation, CPI inflation running at about 2.3 percent, workers have been experiencing on that wage and salary measure real gains in their incomes, so there have been some real gains there.

Now, a persistent trend in the economy since the last '70s has been slower real growth in the economy, at least as our statistics measure it, than we saw before 1973. So a productivity slowdown, at least as our statistics pick it up, has been something that the administration has wanted to put in place positive measures to deal with, and I think this budget agreement certainly tries to put in place the things that will rectify that problem: focus on education, focus on investing in children, and again, of course, investment so that our children can enter workplaces where they can be productive.

Q In the negotiations on the tax bill, the administration tried to keep the 20-year cost of that bill down below $500 billion, as I remember, somewhere around $480 billion -- first 20 years. My question is, at the time, the Archer bill, I think, was as high as $800 billion. Can you give us your estimate of where we're ending up, cost of the tax bill, for the first 20 years?

MS. YELLEN: I'm afraid I don't have any estimates of that at this time. We did look, though, as we went into the negotiations, carefully -- we don't have models that are capable of making good estimates of revenue changes beyond the first 10 years of a tax agreement, and it's not been typical, ever, to take those into account. So I would have to say that the kinds of estimates that we made and looked at were back-of-the-envelope calculations rather than firm, solid estimates that the Treasury is accustomed to. But it was something we thought we should be very sensitive to, that we not sign a tax bill that would explode the deficit beyond the first 10 years. And we did think hard about what we needed to make sure that we would not be signing a bill that would look good in terms of tax consequences in the first five or the first ten years and explode beyond that.

And, of course, when the President indicated early on that indexation for inflation and capital gains, it was obvious that that had the capacity to explode. It was unacceptable. We've had concern about features of back-loaded IRAs that could have the same consequence. And the Treasury folks have monitored that very carefully so that they are satisfied that the President will not sign a bill that will lead to ballooning deficits. They feel that they have been constrained in ways that will not cause that. But I can't give you numbers on that.

Q Just to get back to the earlier question about whether there are any worrisome developments on the horizon, what about developments abroad? We're supposed to be increasingly in the global marketplace. You've got currency turbulence in Southeast Asia. Japan is having still problems getting out of a slump. Western Europe is having a devil of a time with bulging deficits and very rocky road to single currency. All these things -- could they lead to adverse consequences for our exports and therefore the continued robust growth of this economy?

MS. YELLEN: Well, those are certainly -- everything that you mentioned are things that we need to monitor and are monitoring closely. It would be nice to see a more robust pick-up in growth both in Japan and in Europe. And we are certainly monitoring what's taking place in Asian currency markets and the possible ripple effects in world financial markets.

But if you were to ask for my assessment at this point as to whether or not those things are serious enough to impede the U.S. outlook going forward, I would not see those as a major influence. Yes, we are growing faster than our trading partners and as a consequence of that you see even in today's report that net exports have declined, they've been a drag on growth. But we've got an investment-led boom going on here, and we've got households in excellent condition and confident and able and willing to spend, and I don't think that the foreign events are significant enough to throw us off track.

Q Is there an expectation that growth in the second half will mirror the 3.5 percent you saw in the first half?

MS. YELLIN: I don't have a forecast. The administration doesn't do explicit forecasts except when we come to mid-session review, which I expect we will be putting out as soon as we can get the numbers together. The major reason that we do forecasting is for budget purposes, and we always try to be very conservative in what we do so that we're not basing our budgets on rosy scenarios. I think when we come out with the mid-session review, you will see the same kind of conservative assumptions there as well.

Q Some of the Republicans are making rumbles about yet another tax cut possibly next year. Do you see any economic danger in that?

MS. YELLIN: We've had no chance -- no discussion of that or chance to consider it. It would be hard for me to comment.

Q Going back to the international scene for just a minute, you're going to be meeting next week with Japan's economic planning minister.

MS. YELLIN: Yes, I am.

Q Are you going to bring up some of the things that you mentioned here just a few minutes ago to him? I don't know -- you're thinking of the current account surplus or -- what's going to be on the agenda for that meeting?

MS. YELLEN: Well, I think we're likely to have a broad-ranging discussion about economic performance in Japan and the United States. We're interested in the kinds of deregulation that Japan wants to implement in his proposed and financial markets and other sectors of the economy. And we're going to be looking to hear more about that. And conceivably, we will talk about the current account and what the likely future of that is as well. We're interested, of course, in the prospects for Japanese economic growth and what our colleagues in Japan have to say about how they see the prospects.

Q Is the savings rate still a cause of concern for government economists?

MS. YELLEN: Well, the national savings rate has gone up substantially as a consequence of the success of the administration and Congress in getting the budget deficit down. The private savings rate in the United States remains relatively low in comparison with many other countries in the world. And in that sense, we do want to make sure as we go out -- we have an aging population, the Baby Boomers will retire, and we want to make sure that their retirement is provided for. And so, in that sense, national savings and personal savings, private savings are a concern. But I think the federal government has done -- made a major contribution to raising national savings.

Q But interest from savings is still taxed as income not as a capital gains, right?

MS. YELLEN: Interest is taxed as income, yes.

Q Was there ever any concern or interest shown in changing that?

MS. YELLEN: Well, you know that there have been many proposals over the years -- fundamental tax reform that could change that. That wasn't a matter of discussion in the most recent round of negotiations.

Q Do you find that an inequity, inequitable position or situation?

MS. YELLIN: I wouldn't want to make a pronouncement on fundamental tax reform at this point. I think there are pros and cons when it comes to that kind of change; I don't think that it stacks up neatly as something that one can comment clearly on.

Q You mentioned earlier that you think the tax and budget bills will have a favorable impact on boosting the real income of wage earners. But over the last 10 or 20 years, we've seen a rather alarming growth in income inequality. The top has gone into the stratosphere and wage earners have barely kept pace. Even if wage earners were to do a little bit better under this package, isn't it a fact that those at the top are going to do even much, much better and, therefore, five or 10 years from now when we look back, we might see that this package contributed further to the inequality gap?

MS. YELLIN: The trend that you point toward in rising income inequality is certainly a disturbing, long-term trend that has been present in the U.S. economy, and I think the answer to that is education and making sure that our people have the skills they need to succeed in the workplace. And I believe that that's a key motivation for the President to focus on education, investing in children, so that they can succeed and the fundamentals that are causing that will reverse over time.

But with respect to the tax bill, I believe that this is a tax bill that makes a positive contribution toward mitigating that trend for working families. The President regarded it as a very high priority that the child credit should go to hard-working families with lower incomes who wouldn't have qualified for it under the various Republican proposals and he succeeded in getting it. And the largest portion of the tax relief in that bill goes toward education and children. And I believe when you look at the numbers, you will see that this is beneficial for working families. And if we were to look at after-tax incomes, I think you will see that this bill works to mitigate that.

Q You don't see the top going up even faster with the inheritance tax reduction, capital gains rate reduction, and some of the new IRAs?

MS. YELLEN: I think that the bulk of tax relief in this bill will go to working families. Yes, there are benefits to the top, I'm not denying that. But I think --

Q But my question is whether the benefits to the top are going to exceed the benefits at the bottom or even at the middle in terms of distributional impact.

MS. YELLEN: Well, from what I know now, we don't have all of the analysis done. But my guess is going to be that, just knowing what I know about the tax relief in that bill, that the biggest items in that bill are spending on education and spending on a $500-a-child credit that goes to middle income working families.

Q Ms. Yellen, you said that the economy is growing fairly strongly in the first half of this year. You also seem to say that this budget package will provide a growth stimulus to the economy. Why does the economy need a growth stimulus package at this time with most of the deficit reduction occurring in outer years when we don't know what the economy is going to be doing?

MS. YELLEN: Well, let me distinguish there between long-term and short-term impetus. The budget deficit has come way down and this package that process so that we will reach balance by 2002 if not earlier, depending on how the economy does.

So in terms of its impetus to spending or to demand in the economy, this is a bill that doesn't add demand impetus. In fact, over the years of this agreement, it takes it away and, in that sense, we're not stimulating an economy that is now close to full employment. So it doesn't stimulate growth in that sense. But what it does is put in place the fundamentals that will raise the economy's long-run potential to grow. Ultimately, what determines how fast an economy can grow on a sustainable basis is productivity growth, and it's that supply side of the economy, raising productivity growth through faster investment spending. How do you get that? The government's going to use less private savings to finance its needs and leave more for private investment, continuing the trends we've had, and education and children's health -- that's going to raise the economy's capacity to grow for decades into the future.

Q -- higher budget deficits next year and the following years and that's stimulus to the economy?

MS. YELLIN: We've not yet issued a mid-session review, but I think that when you look at the material that's been --

Q -- from the press office two days ago, predicted higher budget deficits next year and the following year.

MS. YELLIN: To make a forecast about a budget deficit in the future, we're making assumptions about what would happen to taxes and spending under some baseline agreement -- under baseline assumptions in which we don't have an agreement. So what we've said is, this is a deficit that would not have just disappeared on its own, and this budget agreement has resulted in large cuts in spending and savings and Medicare and net reductions -- savings that will make this deficit decline.

Q Did we give you any new stuff to worry about?

MS. YELLIN: You can put anything on my plate you can think of.

END 1:34 P.M. EDT