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Office of the Press Secretary

For Immediate Release March 5, 1999
                          PRESS BRIEFING BY 
                          The Briefing Room   

11:50 A.M. EST

MR. SIEWERT: As you know, the Labor Department had some new figures on the unemployment rate and job numbers today. Briefing for you on that today will be Janet Yellen, Chair of the President's Council on Economic Advisors; and Mr. Gene Sperling, my former boss, Director of the National Economic Council.

MS. YELLEN: Thank you. Today's employment report indicates that the economy remains on a path of strong, non-inflationary growth. Non-farm payroll employment rose a robust 275,000 in February; and, now, since January 1993, the economy has created 18.1 million jobs and 16.8 million of those jobs are in the private sector.

The unemployment rate in February remained essentially unchanged, edging up slightly to 4.4 percent, from 4.3 percent in January. The unemployment rate has now been below 5 percent for 20 months without any sign of inflationary pressure. And our nation's continued and long-lasting strong labor market is benefitting all Americans, and that includes historically disadvantaged groups.

Even with this strong labor market, inflation remains in check. Average hourly earnings rose a tenth of a percent in February, and over the past 12 months average hourly earnings have increased 3.6 percent over a period when consumer prices rose about 1.75 percent. What that means is that American workers are experiencing strong, real wage gains while inflation remains tame.

In February, employment was up sharply in construction and retail trade, while manufacturing employment fell. Most other major sectors posted moderate gains. Reflecting the weakness in the world economy, manufacturing employment fell 1.8 percent during the past year, but job losses in this sector have been offset by strong gains elsewhere. Over the past 12 months, for example, employment in computer services rose 13 percent, and employment in engineering and managements services are up 7 percent.

Recent indicators suggest that the United States economy remains on a healthy course. Despite the challenges that face the U.S. economy, with the recent international financial turmoil, the United States economy is likely to continue, during the first part of 1999, on a path of solid growth with low unemployment, low inflation, solid job gains and improved living standards for American workers. Thanks.

MR. SPERLING: I'd just like to make a couple of comments concerning some of the initial information that was given out yesterday by Chairman Domenici and Chairman Kasich on the Republican budget framework. I'd like to note what appears to be favorable about their budget outline, and what appears to provoke very serious questions.

What appears to be favorable is that over the last two years, this President, in both State of the Unions, has made a major call to the United States people that in this era of surpluses we focus on saving surpluses to meet our Social Security and Medicare challenges, and in particular, in this last State of the Union, focusing on paying down our national debt in a way that would help us strengthen the solvency of Medicare and Social Security.

To the extent that the Republicans are joining the President's call for setting aside a significant amount of the surplus for debt reduction, we welcome their joining the President on this focus on debt reduction. We find that to be welcome news. However, there are serious questions that remain.

First, as of this moment, there has been no commitment that we have seen that any of the benefits of this debt reduction would actually flow to strengthening the solvency of Social Security. The President's plan has been scored by the independent actuary of Social Security as extending solvency to 2055, even if it relied solely on debt reduction until 2049. As of this moment, we have not heard really any word from the Republicans that any of the benefits of debt reduction would go to strengthening the solvency of Social Security. And that is a serious question that needs to be examined and discussed.

Certainly, debt reduction is very good for our economy, increasing savings, increasing growth, giving us greater cushion to handle what may come down the road. But to the degree that it makes room -- greater room for us to handle challenges in the future, we want to lock in that some of those benefits from debt reduction would go to Social Security and Medicare. So far, the Republicans remain silent on giving any assurances in this area.

Secondly is the issue of Medicare. The framework that is being outlined says that all of the so-called off-budget surpluses, the surplus is coming from Social Security, should be set aside. They suggest that for over 10 years. We for over 15 years lock in an amount that is actually equal to more than that off-budget surplus for Social Security. So ours is a guarantee over 15 years for an amount that is more than is -- about $60 billion more than the off-budget surplus.

In addition to that, however, the President allocates $686 billion for strengthening the solvency of Medicare until the year 2020. As we said, our preference is to use those surplus funds in combination with real Medicare reforms that would make the program more modern and competitive and allow for prescription drug benefit. But we are adamant that we need to have 15 percent of the surplus set aside for Medicare.

Right now, with the Republican framework of having the so-called on-budget surpluses, the surpluses that do not involve any of the Social Security payroll taxes -- with all of that going to tax cuts, that leaves nothing so far for Medicare, even though we know that the Medicare trust fund will go -- become insolvent in 2008, just nine years from now.

Now, clearly, we need to have reforms in Medicare, but no one should be allowed to believe that we could extend the solvency of Medicare until 2020 without any of the surplus being set aside. It would require virtually 20 years in a row of Medicare growth per person at 2.8 percent, less than half of the growth in the private sector, almost below the inflation growth. It would require almost 40 percent less than projections. Clearly, this is not plausible, and it's hard to think of something that would be more irresponsible, fiscal policy, than for us to look at an over $4.5 trillion surplus over the next 15 years and allow all of that to be committed to other things when we know Medicare is running out of money by the year 2008.

So, again, the cupboard remains bare for Medicare in the Republican budget and the silence on setting aside the surplus for Medicare needs to end.

Related to that is the question about their tax cuts. If you look at the Congressional Budget Office numbers, there is not any significant on-budget funds until 2002. That provides concerns that if the Republicans are calling for significant tax cuts in the year 2000, we would be very concerned if they would be resorting to gimmicky tax cuts that would be designed simply to bring in funds simply to meet a gap. We don't need that kind of gimmick. And so this is one of the things that I think everyone should be looking out for. It is clear under their framework that they cannot afford any significant real tax cut until 2002. And so anything that comes before that should get the closest scrutiny from all policymakers.

But perhaps more concern is that if the commitment to having all of the on-budget surpluses, if that is their commitment, as has been expressed at times, goes to tax cuts of some form, that would lead to draining away funds of as much as $250 billion to $300 billion a year in the 10th through 15th year of the budget. That is money of which significant amounts need to be allocated toward Medicare. We, right now, allocate $686 billion towards Medicare. That comes out to about $350 billion in the first 10 years and $335 billion in the last five years. Again, if all of the additional funds are going to the tax cuts, where is there any resources to insure that the solvency of Medicare can remain strong, and that there's a possibility of having real reforms that include prescription drugs?

Finally, the fourth serious concern goes to the discretionary budget. If again, the commitment is that all the on-budget surpluses go simply to tax cuts, one has to struggle to imagine how they can put together a discretionary budget over the next five years. It seems that already there's commitments to having an additional $15 to $20 to $25 billion for defense. That would have to be made up, then, in the out-years with that equivalent amount of cuts, and -- on the discretionary side.

And Senator Domenici has talked about even having special education increases. If this is the case, it's going to be very hard to imagine how they are going to put together a budget over the next five years that deals with health care, research, crime, environment, other areas of education, without significant reductions.

So, summing up, we applaud the degree that they have joined the President's call for saving a significant amount of the surplus. I think this shows how much the President has defined the fiscal agenda over the next two years, for the need for saving, for debt reduction, for putting our country in a position to meet the retirement challenge of Social Security and Medicare in the future. But we have serious questions as to whether any of the debt reduction benefits will be allocated to Social Security, whether there's any funds for Medicare or not, whether the tax cuts in the out-year will compete and drain away the funds needed for Medicare, and how they can put together discretionary budget under their outline that does not lead to serious reductions in key areas -- in health care, education, environment and fighting crime.

Q So where do you go from here? Is there room for compromise or is this a no-win situation?

MR. SPERLING: Oh, there's no question that we should be able to work in a bipartisan way to meet these challenges. Again, many of the Republican leaders have joined the President calling for 62 percent of the surplus to be reserved in some form for Social Security -- we just haven't actually seen a commitment on how that would be done.

We've seen now some suggesting that it would go to debt reduction, as the President suggests, but, again, their silence as to how any of the benefits of debt reduction would actually go to strengthening Social Security.

Q More specifically, if the Republicans meet the administration's proposal on Social Security, and are dedicating enough to paying down the debt, are you saying that there's no room -- are you ruling out negotiation over Medicare so that they can try to make good on their pledged proposals of tax cuts?

MR. SPERLING: No, what we've been calling for is to reserve 77 percent of the surplus for Social Security and Medicare. That clearly allows for substantial funds to be available and to be discussed as to how they should be allocated among tax cuts -- whether it's our USA account or other tax cuts they're proposing -- military readiness, and key issues like education, discretionary spending.

It just seems to us, as a basic test of fiscal responsibility, that you first need to set aside enough to meet your existing gap in Medicare and Social Security, which we believe is 77 percent of the surplus, before one goes on to doing whatever spending or tax initiatives anyone might prefer. First you do what you have to do before what you want to do. First things first. And when you have a foreseeable, clear Social Security and Medicare challenge coming down the road, we're saying you should be allocating 77 percent of the surplus over the next 15 years for Medicare and Social Security.

It's amazing that we have not heard a single word of agreement from the Republicans that they want to set aside any of the surplus for Medicare. I would remind you that Chairman Domenici last year spoke of Medicare first, and suggested that tobacco revenues should go first to Medicare. Chairman Domenici is one of the great fiscal leaders over the last 15 years, and I think that, to be consistent with that commitment, he and others should join us in calling for both setting aside 15 percent of the surplus for Medicare, and doing that in the context of important reforms that would modernize Medicare and allow room for prescription drugs.

Q Gene, Republicans and even some Democrats have said that they don't trust the President on the issue of Social Security, and they've demanded that he come forth with a plan for the reforms that will include the tough choices that will need to be made. I'm wondering what is the rationale for the President not coming forward with a plan?

MR. SPERLING: Well, as you recall, many people suggested that the President come forward, we just would like you to come forward. So the President came forward at the State of the Union -- to the surprise of some, not to us -- with a bold framework for allocating the surplus for Medicare and Social Security. And so far we have not seen anyone come forward with the type of commitment he has.

The President has a plan that has been scored at getting to 2055, to extending Social Security solvency to 2055. The President was very clear in the State of the Union that to get to the 75-year solvency there would need to be a bipartisan process that would require both sides get together and make some tough-minded choices.

Now, let me be clear. I am not necessarily recommending that either side should go out alone on some of the more tougher controversial choices that could end up politicizing the debate. I think in the past things have worked better when there's been a process where people could agree together in a bipartisan way on some of the tougher choices.

However, a threshold matter should be that we should be at least setting aside enough of our surpluses to make reform viable in both Social Security and Medicare. And I do think that we are still waiting to hear from the Republicans that some of the $4.5 trillion in surpluses over the next 15 years should be set aside for one of the nation's most important programs that we know is running out of funds by the year 2008.

Q Aren't you at some point, if you've set aside 77 percent, shifting some money from general revenues to trust funds that are supposed to be paid for by the payroll tax? And are you allowed to do that?

MR. SPERLING: First of all, by paying down our national debt to the degree the President is, the President will be dramatically reducing the net interest cost that our government pays out. That will be freeing up additional general revenues for decades that can be used.

What we're arguing is that we are one nation, we have a large expected surplus over the next 15 years, and yet, we have a large Medicare and Social Security gap over the next 50 or 75 years. It just is basic common fiscal sense that we should seek to set aside, at least for a one-time measure, some of those surpluses so that we can meet a future challenge.

And I think that that basic notion of saving these surpluses, as opposed to consuming them, so that there is less burden the next generation to meet the retirement challenge is very consistent with the goal of not simply draining existing funds for Social Security. We are paying down the debt in a way that will free up interest costs and increase revenues through higher growth by increasing savings and debt reduction.

Q Following up on that, the Republicans seem to be saying that Medicare right now -- I mean, to put more money into Medicare without reforms is to throw good money after bad, and that if you use your plan, that you're going to be decreasing the pressure on the government to come up with these reform plans. What's wrong with that argument?

MR. SPERLING: Well, I would turn it around. I do not think that there will be an opportunity for viable Medicare reform if we have not allocated any of the surpluses to going forward.

Let's remember that we had, in the 1997 balanced budget agreement, nearly $400 billion in Medicare savings over 10 years -- fairly significant savings. One of the reasons those were difficult was because, truthfully, we all waited until it got rather close. Having the additional surpluses allows one to strengthen the solvency and be able to do reforms in a reasonable and prudent way.

I think it's just -- you know, when somebody says money doesn't matter for dealing with the solvency of Medicare, that's just not plausible. This doesn't need to be an either/or choice. The President's very clear we should have Medicare reform, we should have bipartisan Medicare reform, but first let's set aside -- let's make a commitment to set aside. We haven't even heard a commitment that they would set aside funds for Medicare in any form. In fact, we've heard repeatedly that all of the on-budget surpluses would go to tax cuts. That comes directly at the expense of putting aside any money for Medicare.

Again, how can you imagine a Congress in the year 2003, 2004, dealing with very difficult measures, and wondering why a previous Congress allocated $4.5 trillion of the surplus and didn't leave anything for a foreseeable Medicare shortfall coming in 2008?

Q On your comments from before about neither side should stand alone in making these tough choices -- does that open up, once again, the possibility of a Medicare commission?

MR. SPERLING: Well, the Medicare Commission is finishing their work right now, and I do not know what the exact outcome will be. What I will say is the following: Whether or not the Medicare Commission comes to a -- whatever report they come to, this President will read the report, he will work with his advisors and he will come up with his own view of how to go forward on Medicare reform. And he is committed to wanting to have bipartisan Medicare reform, with the assistance of 15 percent of the surplus that will modernize Medicare, but will assure that there is a defined benefit that people can count on in Medicare, even as we are doing things to make it more -- to have more competition and to reduce cost pressures.

Q Gene, the plan last year on Social Security was that you'd have a year of discussion and then you'd follow that up with a summit early in this year between the White House and congressional leaders on Social Security. You had the meeting in December to discuss Social Security. What happened to the summit and where are you going now --

MR. SPERLING: No, I think what we said was that we were going to reserve 100 percent, that we were going to have bipartisan forums and that we would end those with a White House conference. We also said that during that time period the President would encourage people to come out with ideas, and to the degree that people had different reform options of any form during that time, we would try to encourage an atmosphere that derailed the third rail mentality and let people put forward their ideas.

I think we carried through with that clearly, both reserving 100 percent to the surplus. We stuck with that, even the highway bill, even pressure on the tax cut. We did bipartisan forums, regional, as we said, where we had full participation. And then we had a fairly -- a significant White House conference with 48 members of Congress evenly divided from both Democrats and Republicans. And then the President came forward in the State of the Union and started the debate by putting down a fairly significant framework on Social Security.

We now are -- I think all sides are now engaged in studying what the President has done, studying different options and looking for where a consensus could possibly be reached to move forward.

Q It was repeatedly said last year that at the end of that discussion period you would all get together and meet and try to come up with some kind of a plan.

MR. SPERLING: I don't think that that's correct, that there was like -- that there was a kind of summit where everybody got together and cut a deal type of agreement. I think what we referred to is there would be a White House conference; then we wanted to get going earlier in the year. And the President did that by announcing a serious framework on his own in January -- 19th -- and as we expected, by stepping up forward, we have taken enormous scrutiny on everything we've put forward.

Many of the people who encouraged us to put programs forward and said that they would just want to analyze it and discuss it have been very critical. That's fine. We wanted to start this debate. Clearly, the President has defined the agenda; clearly, we've seen from the Republican proposal that they are joining the core notion of the President's call for saving the surplus for debt reduction -- we hope. But we want to see more on how we actually would extend the solvency of Social Security and Medicare, and so far the details are few on that side.

Clearly, in order to have this kind of bipartisan process, there needs to be give-and-take. The President has put out a framework; we need to see how Republicans and Democrats are shaping up on their ideas, and then what the possibilities for moving forward are -- either through the normal committee structure or through a process that could emerge over time.

Q Gene, you talk about fiscal responsibility in saving the surplus, and yet the President's plan for relief to Central America would actually tap the surplus. And on the other hand, the Republicans are busy finding offsets for the package. Aren't they being more consistent with the President's ideas on Social Security than the President?

MR. SPERLING: The Central American emergency is about as classic and undisputed an emergency as there is. It is one of the worst natural disasters in this part of the world. It has cost nearly 10,000 people their lives. The infrastructure in some countries, 40-50 percent has been destroyed. This is a classic emergency in which we felt we were working in good faith to put together funds. I think it's very unfortunate that now there has been some effort to relitigate some old battles from last year, instead of being able to move forward on what is uncontroversial and clearly the classic type of emergency spending.

Clearly, there are times when you hit a gray line on what's an emergency and not. I don't think -- I think this is clearly an emergency and it should be the type of thing that we can come together for in a bipartisan way, and we hope that's what will still happen.

Q Will the President veto the Republican version of Central American relief?

MR. SPERLING: You know I'm not going to get into hypothetical veto threats. We think this is a classic emergency with strong -- very strong humanitarian concerns. It's important to all Americans. It's important to many of the Hispanic-Americans with relatives in these countries. But I think to all Americans with humanitarian concerns, they recognize this is a classic emergency in which we should put politics aside. We're hoping that's what will take place.

Q Thank you.

Q Gene, a couple questions on the USA savings account? When do you expect to have more details on the universal savings accounts?

MR. SPERLING: Sometime this month.

Q Is the Wall Street Journal piece accurate today, on how they characterize that?

MR. SPERLING: I'll wait until we put it out. I think that it was generally, generally accurate. I don't want to vouch for all the specifics that they had in there.

Q Going back to the unemployment numbers real quick, why are the numbers for --

MR. SPERLING: Let me have Janet take that.

Q Okay. Going back to the unemployment numbers quickly, why are the African American and Hispanic numbers historically low right now? Is there -- are you citing any reasons?

MS. YELLEN: We've had an enormously strong labor market, with unemployment falling now for a long period of time, to levels that we haven't seen in 30 years. And that has benefitted disproportionately groups that have found it harder to gain employment in the past. And, to some extent, African Americans have had high unemployment rates, and they've seen unusual benefit from our strong labor market.

The same holds true for Hispanics. And wage gains, as well, which I didn't mention this morning, but over the last few years we have seen really spectacular gains in wages for blacks, for less-educated workers, for Hispanics, for recent immigrants. This is -- you're seeing the great benefit of a strong economy and continued strength in the labor market.

Q Quickly, following up on that, where does the homeless population fit into these unemployment numbers? Do you cut them off at a certain point where they're not calculated in, the homeless?

MS. YELLEN: This is the civilian, non-institutional population. In principle, they should -- I think in principle they should be --

MR. BRAUN: The survey addresses -- people without addresses won't be in the survey.

Q So that means that the numbers are kind of off, then. I mean, the homeless --

MS. YELLEN: They may not be counted fully in these numbers. They'd have to be surveyed.

Q I guess you noted that the unemployment rate has now been below 5 percent for 20 months. What does that do to your current thinking of NAIRU and how long will this go on --

MS. YELLEN: Keep revising down our estimate of NAIRU, we like to stick with the notion that at some point a labor market can become so tight and the demand can so outstrip supply that wages and compensation can be driven up to the point of putting cost pressures on firms which are inflationary.

So that's a general principle that I think applies and we've seen it in the past. But we sure keep revising downward our estimate of where that point is where we hit it, because we certainly haven't seen any evidence of inflationary pressures and it's right -- in view of that, we don't see cost pressures increasing on firms, we've seen real wage gains along with productivity. And that suggests that each year we revisit this we're likely to be thinking about revising it down further.

Q How can the economy accommodate this type -- can you just go over those reasons again, why inflation isn't cropping up from this tight labor market?

MS. YELLEN: Well, I think the issue of why NAIRU has declined is one that is stumping economists. And I can't pretend to give you a full answer here, but there are workers, clearly, who want to work, who have found it difficult in the past to gain jobs. And they, clearly, are being drawn into the labor market, gaining employment in record numbers. And firms are managing, we've seen very impressive gains recently in productivity.

And when you think about inflation, what matters is whether or not wage increases or compensation increases are in line with productivity. And productivity has been doing extraordinarily well; it's been rising at 2 percent a year for the last three years, leading at least some people to ask the question, is trend productivity now higher.

We've had extremely strong investment as a consequence of the President's deficit reduction plan. Capacity is ample and I think when you see we don't have pressures on capacity utilization, that's also working to hold inflation down.

Q Thanks.

END 12:21 P.M. EST