THE WHITE HOUSE
Office of the Press Secretary
PRESS BRIEFING BY MARTIN BAILY, CHAIR OF THE COUNCIL OF ECONOMIC ADVISORS The Briefing Room
2:48 P.M. EST
MR. SIEWERT: Here to brief on the President's economic report is Martin Baily, Chair of the Council of Economic Advisors.
MR. BAILY: Thank you. I think there are some copies of the book available, and there is also a copy of the speech that I gave this morning at the Press Club, which gives a more extended version than I'm going to talk about here. I'm just going to try to hit some of the high points.
The first high point is the cover, which is a new design, and that's a change from tradition. This has been, really, a remarkable recovery. It's distinctive in a number of important ways. Unlike previous expansions, we really had an economy which has become stronger over time. You can see that -- can you actually see these charts, or do we need to move the --
Q Not really.
MR. BAILY: Not really? Okay. Let's see we can move those out front, and then I have to make sure I can actually see. One of the distinctive features about this expansion is that the economy has actually grown stronger during the course of the expansion. You can see here that the growth in GDP has actually been accelerating over time. It's averaged almost 4 percent since 1993, but it's been 4 percent or more in the last three years.
Unemployment has been declining. That's something that typically does happen in an expansion. But the thing that's very unusual is that core inflation has actually been declining, even though the economy has been so strong. So that's not -- was not true in 1980, it was not even true of the strong expansion in the 1960s to see low employment. We've reached four percent unemployment, but core inflation is down at 1.9 percent.
A second distinctive feature of this expansion is the way that productivity has behaved. What you typically get in an expansion is, you get a strong burst of productivity initially following the recession. Recession productivity dips, and then you get a kind of bounce-back in the first year or two of the expansion, and you can see that's the case in all three of these expansions.
But what typically happens and did happen in the '60s expansion and in the '80s expansion was then productivity growth started to tail off. Here, you can see that happening very distinctively. And in fact, in the last four years of the '80s expansion, productivity growth averaged less than one percent. This is in marked contrast to what's happened in this expansion, where productivity growth has actually been accelerating, and really over the last -- since 1995, we've had about 2.9 percent productivity growth. Things have been getting stronger. And that makes this a very unusual and very unique expansion.
If we can have the next chart -- another thing that's striking about this expansion as compared to the prior period from '73 to '93 is that in the prior period, we actually saw a decline in incomes for families in the bottom of the income distribution. And the increases, which were fairly anemic across the board, were only significant and positive for those at the top.
This is in marked contrast to what we had over the period '93 to '98 -- '98 is the last year for the census data, for which we have these numbers. But over that period you can see that almost all of the groups -- I shouldn't say almost; all of the groups -- actually had gains of about 10 percent over the five-year period. And in fact, the group at the bottom was the group that actually had the strongest growth in income.
If you could give us the next chart -- now, what are some of the reasons for this distinctive expansion? What makes this one different from some of the others we've seen? And particularly, what makes it different from the 1980s expansion? Well, obviously, we've had a lot of technological opportunities. This has been a period of exploding patenting, exploding innovation. Things that are now available that the private sector has generated a tremendous flow of innovation, and there's a chart in the report looking at some measures of that.
Some of that, of course, much of that is from the private sector, but there's also, I think, an indispensable role that policy has played there. There are many examples in which federal support of research and technology has contributed and been really indispensable to those technological developments and information technology and in biotechnology.
The second driver that's important for this expansion has been the fiscal policy, the real turnaround in fiscal policy. And again, this marks this period off from the earlier periods. You see again, particularly, if you compare this expansion with the 1980s. The structural budget deficit, which is here, that takes out the effect of the normal fluctuations of the business cycle. It says, let's adjust the economy -- this is the Congressional Budget Office -- adjust the budget deficit to some standardized level of unemployment and said, what would the deficit have been at that standardized level.
And what we find is that they were just out of control structural deficits in the 1980s. There was some slight improvement in the middle, but even in the last half of that expansion, there were fiscal deficits of three percent and more of GDP. The contrast is within this expansion, which started carrying over -- we carried over a lot of those deficits, but this has turned things around.
Now, how has that contributed to the distinctive features that I've just described of this expansion. Well, first of all, what it does, what we expect to get out of fiscal discipline is lower interest rates and stronger investment. We have the technological opportunities, but there were a lot of those around in earlier periods which did not seem to be paying off in the same way in productivity.
You have to get the chemistry of growth right. You have to get the pieces all together. You have to have the private sector and the technological opportunities, you have to have the support from policy to go with that. And what you look for in fiscal discipline is lower interest rates stimulating higher investment. We did get the lower interest rates. Interest rates, real interest rates, are 30 to 50 percent lower in this expansion than they were in the 1980s. And that has led to stronger investment.
That's the strong investment. You can see the real sharp turnup in investment. We've had growth of equipment and software investment of 12.3 percent since 1993; that's an extraordinary record of investment. That's been a big reason why the technology has come into the economy, why the productivity has been strong.
Another thing this has done for us is its increased capacity. If capacity gets short, if capacity is strained, that tends to trigger an inflationary spiral. In this expansion, capacity has remained very adequate. That has prevented margins from rising, and from inflation from accelerating. So I think you can see a direct link between the shift in policy, to the strong investment, to the strong productivity growth, to the strong inflation performance -- productivity is a direct help on inflation -- and also through the capacity, which holds inflation down.
If you could turn the page -- one other thing I do want to mention, and I'm going to have to look through my notes to find the right quote is, is one of the things that's striking is that many of the same people that were urging that we have a shift to fiscal discipline in the 1980s, that congratulated the President and the administration for the shift that took place in 1993 -- now, all of a sudden, some of those same people seem to be getting amnesia. They've forgotten what they said then. They've forgotten what they warned about, in terms of the dangers of running big deficits. They've forgotten what they said about the benefits of what would result if we turned that thing around.
It shouldn't have been a surprise. If you go back and look, in 1984, to the Economic Report of the President that was released in 1984, when Martin Feldstein was the Chairman of the Council under President Reagan, he wrote the following: The most important long-term effect of the perspective budget deficits would be to absorb a large fraction of domestic saving, and thereby reduce the rate of capital formation and the potential long-term growth of the economy."
So he warned back in 1984 of the adverse consequences of persistent deficits, persistent structural deficits, and he was right. And we're now seeing, I think, the effects, the benefits of having turned that situation around.
I want to mention now, to turn to a couple of the challenges that we have, because even though this economy is so strong, even though it's benefitting so many Americans in terms of bringing down poverty rates, in pushing up incomes, in giving us record low unemployment across the board for African Americans, and so on, there are still some challenges out there.
One of the challenges is to make sure everyone has the right skills that they're going to need to get good jobs going forward. This means improving our schools, making sure that we have access in our schools to let people pick up the skills that they need.
This chart shows both the success and the challenge. It shows the success we've had in making sure that almost all schools have Internet access, and I think that's a proxy for access to the tools -- some of the tools for the children to learn the new technologies. But there's a challenge there because just having the access doesn't always mean that the schools -- I mean, some of the schools are not in good shape. We don't always have the right teachers who know how to communicate these skills to children. So there's a lot that needs to be done there.
There are a number of initiatives in the President's budget that try to address this question. As you know, the Vice President has made the digital divide one of his concerns, and it is a major challenge going forward.
Let me take the next chart. But I want to perhaps just end here on a positive note, and that is, how long is this going to last? We don't know whether the surge in productivity is going to last indefinitely, but we're optimistic about it. We think it's coming from strong fundamentals. It's coming because this is a supply-led, a productivity-led expansion. And we think it has the potential to last because the potential of these new technologies is so strong.
This is a forecast of the growth of business-to-business e-commerce. Again, that's one proxy, one way of capturing the potential going forward for this technology to continue to give us a long expansion and an even longer expansion, and more productivity growth ahead.
Let me stop there and take some questions.
Q As you know, Dr. Baily, there are some economists who have challenged some of your conclusions on the equality -- the sort of income gap and the worth gap, from this expansion. Can you tell us how satisfied you are that this economy is sort of serving all spectrums of the society, and what the problems are in that?
MR. BAILY: Oh, I don't think we're completely satisfied. I think there's certainly still progress that needs to be made there. Remember that many of the initiative this President has put forward, and are in his current budget, are to try to work in that direction, to make sure that everyone shares in this expansion: the earned income tax credit, the increases in the minimum wage, and many of the other provisions for child care and so on, to make sure that everyone shares in that prosperity. Actually, the numbers you saw about income do not include the earned income tax credit. So that's actually over and above the gains that you saw in that chart.
In terms of wealth, the distribution of wealth is rather unequal. We know that the distribution of stocks is not equal across the population. But it is the case, now, that a very broad spectrum of Americans hold stock, and are really taking advantage of the tremendous gains that we've had in the stock market. We would like to see that continue, to make sure that all American families have an opportunity to share in the wealth, not just share in the income. As you know, there are initiatives in this budget to try to give incentives for saving for those at the bottom of the income distribution, to make sure they can start to share in the wealth as well as in the income.
Q Can you just describe more distinctly who you meant "has amnesia" and how that's manifesting itself?
MR. BAILY: I have just been reading a number of articles in the press suggesting, for example, that this is really a continuation of the expansion that started in 1982. And I think what is demonstrated here in these charts is that there is a very sharp difference in these expansions. In 1982, there was growth. A lot of it was sort of demand-led growth as tax-cut-induced spending plus defense spending increased demand. But you didn't have the corresponding increase on the supply side: productivity growth remained slow, capacity expansion started to grow at a crawl, inflation started to increase, the budget deficits continued, the structural deficits remained extremely large.
And then we went into recession. Somehow there's amnesia about that recession. In the recession that started in 1990, the unemployment rate went up to 7.8 percent. It remained at 7 percent or above for 21 months. There were a lot of people who lost their jobs during that period that I think would be a little shocked to hear that we didn't really have a recession back then. And that's the thing that I sometimes am hearing or am reading.
Q Also, Republicans say that overall revenue take by the government, taxes, is higher as a percentage of GNP than it's ever been, or been in a long time. Does that matter? If you do accept it as true, what has been the role of taxes in either maybe mitigating in some ways this expansion or has there been a role for taxes in what's happened over the last few years?
MR. BAILY: The tax burden on the great majority of American families has not been increased, and the increase in revenues is really largely driven by the strength of the economy. A lot of the increase in revenue, for example, comes from capital gains.
Now, it is a little odd to describe as a tax increase the fact that we've had very, very large increases in the stock market which have generated such enormous capital gains that some modest, rather modest fraction of that capital gain has accrued to the Treasury, so that -- of course, no one likes to pay taxes. I think the President, this administration is certainly looking right now at ways to make targeted tax cuts to benefit American families. But this obsession with making very large tax cuts that benefit overwhelmingly the very richest part of the population, the part of the population that has done extraordinarily well, that is something that we disagree with.
Q But whatever you want to call it -- and that's why I initially used the term "revenues" instead of "taxes," that the overall intake by the government, they say, is higher as a percentage of GNP than it's been -- without getting into sort of a political discussion about that, I'm wondering more as an economic matter, why hasn't that, if that is true, hindered this period of economic growth?
MR. BAILY: Well, remember that marginal tax rates are still substantially lower than they were in earlier points in economic -- since World War II. So we still do not have the very high tax rates, the 70 percent tax rates, that existed in the United States. So we still have a system that gives incentives to people. The capital gains tax rate is lower than that. So we still have an economy that gives incentives for work, and gives incentives for entrepreneurs to produce. And they've been doing so very handsomely.
Now, remember that we did have a big budget deficit. We have kept the share of expenditure; federal spending as a share of GDP has gone down, and is projected to continue to go down. So that, I think, we should point to. If people are talking about the burden of government, let's remember that the share of government is going down; it's not going up. Since we had to deal with -- since we inherited those deficits, we had to do something to balance the budget and get us into surpluses.
I think the other thing to remember is that we do have an obligation to the generation that's going to be retiring in this century -- we have a very large baby boom generation that's going to draw on Social Security, that's going to draw on Medicare. That's why it's appropriate -- one of the reasons why it's appropriate to be running budget surpluses now: because we need to save the Social Security surplus, we need to set aside Medicare funds, because we will be facing a tremendous amount -- tremendous number of people who are retiring. I think the number of people on Medicare is going to double as we go into this next century.
So it's not just a question -- I think what economists would do, would want to look not at any given year, but look at the tax revenues and burden over the future. And it's appropriate now, when the economic times are so good, and where we know we have Social Security and Medicare coming up, to make provisions for those things now.
Q In the report, you have stressed the importance of the recovery of foreign economies, to narrow the growing trade deficit. In that context, are you concerned with Japanese economy might be fading fast into recession, decaying?
MR. BAILY: Well, we certainly are concerned if the Japanese economy is heading back into recession. I think we are mostly concerned because of Japan; we feel that it is struggling economically, and we would like to see that turned around for the sake of the Japanese people.
Obviously, in terms of the whole world economy, Japan's economy is important to the whole world, and it would be a benefit to the rest of Asia, it would be a benefit to the U.S. if Japan were to recover. But in terms of the U.S. and the current account, we do anticipate some narrowing of the trade deficit and the current account deficit. We expect to see some moderation of consumption growth going forward. We think the stronger potential in Europe and in other parts of the world economy, so we expect to see U.S. exports growing.
In fact, over the last few months, exports have been growing more strongly. We had a period starting with the Asian financial crisis when U.S. exports were very flat. I think you're starting to see that turn around now.
Q Some Americans might have a hard time understanding, this one included, how things can be so good economically, according to the charts and so on, and yet, we still could not keep ourselves within those 1997 spending caps. Can you explain why that would be?
MR. BAILY: I think that the problem was that those spending caps were perhaps unrealistic as what could, really, as the level of spending that I think the American people want when we offer them a choice of what the programs, where the spending is going to take place. I mean, if you say, do you want cuts in veterans' programs, are you willing to take cuts in Medicare, people say, no, they don't want those cuts. But let me reiterate what I said earlier. I think the key thing here to remember is that the share of federal spending in GDP is going down, not going up. And we've got budget surpluses and the share of spending going down.
Q In previous expansions, there has been technological change, but it hasn't resulted in the type of effect that you're seeing now, because it didn't have the right chemistry, the right mix of programs. Is it your position that in previous expansions, if there were a better mix of government intervention or other events, that those periods of technological change could also have caused this type of economic growth that these other types of technological change would compare qualitatively to the Internet and what's happened with e-commerce?
MR. BAILY: It's possible that the technological opportunities today are grater than they were then, but I think it's clear that policy was really hindering the thing back then, was hindering growth, because when you have -- fiscal policy and deficits can be helpful in an economy which is weak, where demand is weak and you need a boost to spending; you can do that.
So I'm not against deficits or against using fiscal policy in all circumstances, it can be appropriate, but when you have an economy that's already generating a lot of investment demand, a lot of consumption demand, it's a great mistake to then have the government draining resources out of the economy, draining savings out of the economy, and I would agree 100 percent with what Professor Feldstein said back in 1984; this was a very dangerous thing to do, and it stood in the way of the growth in the 1980s.
THE PRESS: Thank you.
END 1:10 P.M. EST