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Al Hubbard
Al Hubbard
Director of the National Economic Council

July 30, 2007

Al Hubbard
Last Friday, we learned that during the second quarter of 2007, the economy grew at a 3.4 percent annual rate. Real Gross Domestic Product has now expanded for 23 consecutive quarters, or nearly six years. The economy is now 17 percent larger, after inflation, than it was when President Bush took office.

The most encouraging aspect of the most recent 3.4 percent GDP growth was how balanced growth was across the various accounts: consumer expenditures provided about one percentage point; non-residential investment (equipment, software, etc) provided one percentage point; net exports provided slightly more than one percentage point; government spending added a percentage point; and GDP growth was reduced by half a percentage point due to the slowdown in housing. So growth came from all sectors and was not dependent on consumer spending, as was the case many times in the past. Even the subtraction caused by housing was somewhat encouraging in that it only subtracted half a percentage point instead of the full percentage point subtracted in previous quarters.

So we not only had a strong number, but also a balanced one. Our economic health is also reflected in our strong and growing labor market, with 4.5 percent unemployment and 40 out of 50 states with unemployment rates below the average for the 1980s and 1990s.

With that, I am happy to take your questions.

Kim, from Kentucky writes:
Hi Mr. Hubbard, I believe that Social Security needs to be overhauled and was wondering whether this option was still being explored by the Bush Administration? With a change in Congress it may be tougher than ever to get any consensus, but can you discuss the current status of this? Also, if Pres. Bush's proposal on Social Security succeeds, how will this affect balancing the budget by 2012 or would it happen sooner? Thank You

Al Hubbard
Thanks for your question on such an important issue, Kim. The President remains committed to strengthening Social Security for future generations. Entitlement spending is our nation’s primary fiscal challenge. Next year, the first members of the Baby Boom generation will retire. This will mark the beginning of a dramatic increase in Social Security outlays, which will exceed Social Security’s tax revenue by 2017 and bankrupt the system before today’s young workers reach retirement age.

The President proposed a budget that eliminates the deficit by 2012 without raising taxes and begins to address our unsustainable entitlement growth. This budget includes the President's proposed Social Security policies. By contrast, Democrats proposed $205 billion in new spending and did nothing to address the explosion in entitlement spending.

The President is willing to work with anybody – Republican or Democrat or independent – to solve the problem. The President is ready to open a dialogue on this issue without preconditions on what could be proposed or discussed. If we do not act to fix Social Security now, the only solutions will be dramatically higher taxes, massive new borrowing, or sudden and severe cuts in Social Security benefits or other government programs.

Harpreet, from Fort Worth,Texas writes:
Dear Sir, The economic condition of the United States seems like it is at a stagnant position. We have become a country where in we are not only importing goods and services but it seems like a lot of investment is being exported out into other countries. Developing countries are benefitting from our investment and their gain is inevitable.

My question is what does the government have in mind for the future. Are we a strong enough economy to be able to sustain ourselves for the next 1000 years: Are we stressing enough on education for our kids, why is that countries like India and China have brilliant scientists and their numbers increase everyday and ours seems to be the same for where they have been. Are we becoming an economy that is emptying out our own pockets for achieving short term goals and not looking into the long term? Can we see ourselves in the future as we see ourselves today. Our researching enough for resources in our own country? Should we consider putting restrictions on companies that invest in other countries more than 50 of their total investment? Are we taking enough measure for economic security? Thank you for your time, sir, Harpreet.

Al Hubbard
I appreciate your concerns, Harpreet.

America’s economy is strong and getting stronger, due in large part to its openness. The President believes American workers can compete with anybody, anywhere, so long as the rules are fair. The President has worked to open up markets around the world so our farmers and entrepreneurs and manufacturers can sell our products around the world. Since President Bush took office, we have added free trade agreements with 12 countries, and seven more are in the pipeline. Interestingly, while our free trade agreement partners only account for roughly 7 percent of global GDP, over 40 percent of U.S. exports are shipped to our FTA partners. This suggests that American exports will grow significantly as trade barriers are dismantled.

The positive contribution of exports was reflected in the second quarter GDP figures. Real exports of goods and services increased 6.4 percent in the second quarter, while real imports of goods and services decreased 2.6 percent. As a result, net exports contributed 1.18 percentage points to the 3.4 percentage point second quarter GDP growth – far more than contributed by consumer purchases, for example.

The United States also remains the world’s premier destination for investment. In 2006, the United States ran the largest net investment surplus in history, as foreign investment in the U.S. exceed American investment abroad by $804 billion. Millions of U.S. jobs depend on foreign investment.

To maintain our competitiveness, the President proposes keeping taxes low to reward risk-taking and entrepreneurship, reauthorizing No Child Left Behind to ensure Americans have the education necessary to compete, and partnering with state and local governments and colleges and universities to promote new levels of educational achievement and economic productivity through the American Competitiveness Initiative.

Brian, from Ardmore writes:
Why is the cost of living increasing, and yet services such as Disability Income that are a need to survive for some people not keeping up with the changes. An example of this is my family. Here in Oklahoma rent is anywhere from $500 to $800 a month - I pay $550 a month for rent. Electricity costs, natural gas, gasoline, increasing - and milk went from $2.99 a gallon to over $4 a gallon. If we have a strong economy why is it that those who need it are so weakly supported? We're just surviving - and my wife has complained "we're not living". Thanks, Brian.

Al Hubbard
Thanks for the question Brian. The U.S. economy went through quite a bit over the past several years – the stock market collapse, the 9/11 terrorist attacks, and the crisis of confidence caused by corporate scandals. That’s why the economic data since the President’s tax relief was fully implemented has been so encouraging. Since August of 2003, the U.S. economy has added 8.2 million net new jobs, the economy has expanded at an annualized average rate of over 3 percent, and wages are now increasing rapidly. According to recent data from the Bureau of Labor Statistics, average hourly earnings increased by 1.3 percent after inflation over the 12 months ending in June. That means an extra $794 of purchasing power for a typical family of four (two wage earners). This data series is specifically for production and non-supervisory workers, about 80 percent of the workforce. The supervisory workers who tend to earn more are not included.

By keeping tax rates low and controlling spending, the President believes the positive economic news will continue.

John, from Weston, CT writes:
It's known to all that the farm bill provides unecessary---and unhealthy--subsidies for things like corn syrup. I support the President's stated intention to veto this legislation, and would like to

know how you think it should be changed to better reflect the needs of the economy and the pursuit of a healthier America.Thank You.

Al Hubbard
Thanks for your support, John. The Administration appreciates the progress that the House Agriculture Committee has made in drafting a new farm bill and the Committee’s willingness to work with the Administration. Unfortunately, in several areas the Committee’s bill moves backward.

The President proposed a farm bill that represents a reform-minded and fiscally responsible approach to supporting America’s farmers and ranchers. The President believes that the time has come to move forward with a farm program that is market-oriented and considers more than commodity prices alone when determining the appropriate level of government support. The President believes the farm bill reauthorization should increase conservation programs that protect our natural resources and focus support on renewable energy that will help to reduce annual gasoline use by 20 percent in ten years.

The Administration’s 2007 farm bill proposals would spend approximately $10 billion less than the 2002 farm bill spent over the past five years, which is consistent with the President’s plan to eliminate the deficit in five years without raising taxes.

In addition, the Administration is working with America’s schools in pursuit of a healthier America. Recognizing that schools can and should play a role in supporting healthy lifestyles for school-age children, the USDA is partnering with States and local schools to promote the availability of healthful foods and encourage physical activity.

Michael, from NYC writes:
Mr. Hubbard, how would you respond to the contention that a weak dollar is a sign of a weak economy?

Al Hubbard
I defer any question about the dollar to Treasury Secretary Hank Paulson, but I can tell you that the U.S. economy is strong and growing stronger. Since the President’s first tax relief went into effect, the U.S. economy has expanded by more than 1.7 trillion after inflation – an amount larger than Canada’s and Sweden’s combined. Job growth remains solid at 145,000 jobs per month so far in 2007 and the unemployment rate is low at 4.5 percent, below 4.9 percent average of the late 1990s.

Cliff, from Brimfield Ohio writes:
Director Hubbard: One side says yes, the other side says no. YesNo is the housing slump having an effect on the economy? And what part does it play in the GDP? The President does not BUILD, BUY or SELL houses but is he keeping an eye on the issue or at least aware of it? Thank You

Al Hubbard
Thanks for your question, Cliff. Yes. The President’s economic team follows the data on housing very closely. Residential housing had been subtracting an average of 1 percentage point from GDP growth for the previous four quarters. This subtraction from growth fell to 0.49 percentage points during the second quarter of 2007. Data also show housing starts have returned to historical norms. So I think there is reason to be guardedly optimistic that the housing market is returning to a more sustainable long-run path.

leon, from arlington va writes:
I make good money, but I find myself switching jobs every few years. To be honest, I can't imagine working for the same company for 30 years, so I'm okay with the challenges posed by a new job. As a mobile worker, why can't I have one retirement account and one insurance account. When I switch jobs, I would negotiate how much tax free income my new employer would put into my two accounts. I would also be allowed to put tax free money into my two accounts.

The way things work now, I have to pick from my employers health plan or pay for my own coverage with dollars that will then be taxed. Also,many times I must wait 6 months to 1 year before I can put pre-tax dollars into my 401-K.

How is this fair to a modern day worker?

Al Hubbard
Thanks for your interesting observations, Leon. According to the Department of Labor, about 55 million to 57 million workers (or four out of every 10 workers) left jobs and took jobs in 2005. The President recognizes that much of the law related to pensions, health care, and other employee benefits was devised with a much different economy in mind. As you suggest in your question, when these 55 million Americans switch jobs, they must also switch their health care and their pension system as well. In addition, the plethora of individual savings accounts, each subject to different rules regarding eligibility, contributions, tax treatment, and withdrawal, creates complexity and redundancy in the tax code. Taxpayers must determine their eligibility for each account separately and then must decide which plan or plans are best for them given their circumstances.

The President has proposed addressing today’s job mobility in 2 ways. First, the President has proposed a standard deduction for health insurance. The current tax system provides an unlimited tax break for employer-provided health care, but leaves Americans not insured through their employer to purchase health care with after-tax dollars. Since people who buy health insurance on their own receive no tax benefit, they often pay 50 percent more than it would cost to get the same policy through their employer. The size of this tax subsidy has eliminated the individual market as a realistic alternative for anyone who is offered insurance by their employer, making the individual market artificially thin and inadequate. Under The President’s proposal proposal, a family with health insurance will get to deduct $15,000 from their income and payroll taxes. If you’re single, it works the same way, except the deduction is $7,500. This would eliminate the employer-sponsored bias, improve the performance of the individual market, and expand options for workers who switch jobs.

Secondly, the President has proposed Retirement Savings Account (RSA) to consolidate all of the different types of current law IRAs into a single account. Individuals could contribute up to $5,000 per year (or earnings includible in gross income, if less) to their RSA. In addition, instead of exceptions for penalty-free early withdrawals, a new account, a Lifetime Savings Account (LSA) would be created that could be used to save for any purpose, including retirement savings, health care, emergencies, and education.

Jessica, from New Jersey writes:
Do you see the Fed's level of oversight involvement changing as it tries to address future concerns about subprime lending?

Al Hubbard
Thanks, Jessica. The Federal Reserve closely monitors the markets and the safety and soundness of the financial system. Recently, the Federal Reserve has spent considerable time examining the issues associated with subprime lending. During recent testimony before Congress, Chairman Bernanke affirmed the Fed's commitment to take action. Chairman Bernanke stated that the Fed is reviewing mortgage disclosure practices and that the Fed will propose new requirements. Chairman Bernanke also committed the Federal Reserve to examining its authority to prohibit certain unfair or deceptive mortgage practices. Finally, Chairman Bernanke announced that the Federal and state banking regulators will undertake a pilot program that will create a joint supervisory program to examine mortgage finance companies and mortgage brokers of banks and thrifts.

Al Hubbard
Thank you very much for your questions. I had a lot of fun participating in today's session and hope you enjoyed it as well. We look forward to further evidence of our economic strength when the employment report is released by the Department of Labor this Friday. Thanks again.