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President George W. Bush
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Welcome to "Ask the White House" -- an online interactive forum where you can submit questions to Administration officials and friends of the White House. Visit the "Ask the White House" archives to read other discussions with White House officials.

Dr. Edward Lazear
Chairman of the Council of Economic Advisers

August 9, 2007

Dr. Edward Lazear
It is a pleasure to be here today to share my thoughts with you on the nature of the current economy. I appreciate all of the interest shown by the many questions submitted. There are so many questions that I will only be able to answer a small sample of them, but I will try to select questions that are representative of the issues raised by a number of you.

Larisa, from Washington writes:
I'd like to know how the cost of the War in Iraq will affect the American people in the next ten years.

Dr. Edward Lazear
The cost of the war in Iraq, like any other cost, affects the budget, our expenditures, and therefore the amount of resources that we must take out of the economy and put into government. It is generally believed that unanticipated expenses like those going for wars or natural disasters should not be financed completely out of current tax, but that some of it should be done in a smoother fashion over time by borrowing. The issue, of course, is always how much borrowing should be done and whether the government borrows too much relative to financing it in the current year. The easiest way to judge this is to look at what happened to interest rates. When the government borrows too much, interest rates go up and this places negative pressure on investment. Right now interest rates remain low by historic standards, which suggests that the deficit is not a major concern. Indeed, the U.S. deficit is low by historic standards at only 1.5 percent of GDP. In fact at this level, the number that economists worry most about which is the ratio of the public debt to GDP (how much we have in outstanding loans relative to the size of our economy) is falling every year. Indeed the public finances of the United States are quite healthy both in comparison to our past and in comparison with most other nations in the developed world.

Charlotte, from Boston writes:
Did you see Cramer's meltdown on MSNBC the other day? What do you think of his assertion that the feds aren't doing anything to help the mortgage market?

Dr. Edward Lazear
I won’t comment on Cramer directly, but the mortgage market has been an important issue and is the focus of many of the questions that I have received today. The mortgage market has certainly gone through some changes as it does when interest rates rise in general. What makes this one different is the focus on the sub-prime market, which is a relatively new phenomenon at least in terms of its importance in the mortgage picture. Still the sub-prime market is small part of the total mortgage market, and the sub-prime loans that are delinquent are an even smaller part. The Federal Reserve estimates that less than 1-1/2 percent of the total mortgage market is delinquent right now, and less than 1 percent is in foreclosure. Obviously, that is of no comfort to those individuals who are in the process of losing their homes, and we believe that lenders should work hard to try to find ways to allow individuals to repay their mortgages and maintain their properties. Probably the most important that the government can do at this point is to ensure transparency and enforce the laws against predatory lending and fraud. When new mortgage instruments become available, it takes time for people to learn about them, and this has caused some people to take on loans that they probably should not have taken. A number of regulatory agencies including the Federal Reserve are currently looking at this issue to determine whether certain lending practices should be prohibited so that future situations do not arise that have similarities to today’s problems.

GREGORY, from TORRANCE, CA writes:

Dr. Edward Lazear
It is clear that the real estate market has been the soft spot in the economy for the past year to year and a half. Despite this, the economy has been able to maintain growth and very low unemployment rates. Housing starts right now are at about the same level as they were last October, which is about the average level for the 1990s. We have come down from the extremely high levels of building in the residential market that occurred a few years back, but this is probably a re-balancing that is healthy and has occurred in a way that has been, for the most part, orderly. Markets tend to be stable when the economic fundamentals are good and we believe that the fundamentals remain strong. Interest rates are still low by historic standards, we are able to maintain an active labor market with growing jobs that for approximately 4 years now, and we see wages rising. In addition, the current situation is very different from that was prevalent in the late 90s when the dot/com boom was occurring. Companies are earning real profits, and there remains significant liquidity in the market with available cash for investment. All of these conditions suggest a positive climate for investment in the United States and in most of the specific markets as well.

Kim, from Kentucky writes:
Hi Dr. Lazear, I am greatly concerned about the inability of Congress to pass the 12 spending bills prior to going on their August recess. I see it as irresponsible for elected officials to potentially leave budgetary aspects of running our government in jeoprady and it shows a general disregard for managing the people's money properly. Theoretically, what would happen if these bills are not passed before the deadline in September? Thank you

Dr. Edward Lazear
The President agrees with you that Congress should have acted more rapidly. He sent his budget to them with ample time and they did not act on it. But acting is insufficient. It is crucial that Congress stay within the top-line numbers that the President has proposed. It is impossible to be good stewards of the taxpayers' dollars if we do not act responsibly on the spending side.

Lisa, from Chicago, Illinois writes:
Can America survive without being a country which does not manufacture goods? We do nothing but consume and jobs continue to go abroad... What can America do to increase its GNP in the future?

Thank you,

Lisa :o)

Dr. Edward Lazear
The notion that the United States does not manufacture goods is simply incorrect. It is certainly true that we have a smaller proportion of our workforce involved in manufacturing, but that is the case because manufacturing productivity has gone up so dramatically so that we can produce more goods with fewer people, which allows those people to move into other industries where the demand has increased even more rapidly. To give you some numbers, in 1950 we employed about 14 million workers in manufacturing and produced about $250 billion worth of goods. Today we employ almost exactly the same number in manufacturing, and we produce over $1.5 trillion worth of goods. In other words, output in manufacturing has gone up six times, while labor has remained constant. As a result, the service sector has been able to grow without putting downward pressure on manufacturing output. In fact, this is true of all developed countries. The developed countries of the world vary slightly in the proportion of their workforce involved in services, but in all developed countries, the vast majority of workers are producing services rather than goods. Incidentally, the same thing happened in agriculture one hundred years earlier. Around the turn of the century, approximately half of our labor force was producing farm products. Today, around 2 percent are employed in agriculture, but our agricultural output is much greater than it was in 1900 despite the fact that we have a small fraction of the number of people employed in that industry. Additionally, many service jobs are high paying jobs. The growth areas tend to be in health, communication, and other technology fields, as well as finance, real estate, and insurance. All of these industries provide valuable services that make people live better and do so at lower cost today than they did in the past. People in these industries tend to be high wage people, and wages have been growing in the United States for the typical American worker.

To keep GDP growing, it is most important to maintain a fluid and active economy with low unemployment and deep capital markets. The primary tools are keeping tax rates low and keeping our economy open to trade in both goods and services, as well as capital flows from abroad.

Vinny, from NY writes:
Do you feel that it is proper and responsible for any of the governors of the Federal Reserve Banking system to comment on current stock market direction? My question should be posed in light of the significant influence that the Governors have on market conditions. IE: A comment on an overactive market could bring about significant negative impact to that same markey...

Dr. Edward Lazear
I won’t comment on the statements by the Fed, since they are an independent body. But I will comment on the substance of your question. Market volatility has been up over the past month. There are a number of indexes that economists look at, one of which is the VIX and it is higher than in the recent past, but not at the extreme levels that we saw a few years back. To put this in perspective, the stock market has seen movements of 2% up or down about 130 times since 2000 (incidentally, they are almost evenly divided between ups and downs). Since July we saw three movements of that magnitude, so this is slightly higher than the average for the past 7 years, but only slightly so. While volatility has been up, the market still has yielded reasonable returns over the year and liquidity is still available. My view is that the market depends over any reasonable period of time, primarily on fundamentals and not on statements made one way or another on any given day.

Janet, from Vermont writes:
Thank you for taking the time out of what must be a very busy schedule to answer my question. It seems that now that people have maxed out both their credit cards and their equity, the high cost of living, i.e. gas, food and housing prices, are taking their toll. Do you see any bright spot on the horizon for us working class?

Dr. Edward Lazear
There is no doubt that rising gasoline prices take their toll, particularly on individuals at the lower end of the income distribution who spend a disproportionate share of their income on energy. Fortunately, energy prices have come down over the past few weeks, with gasoline now at $2.89 a gallon on average, down from its peak of $3.26 in May. The main bright spots for the working class are the key labor market statistics. Jobs have been growing steadily for the past 4 years, and the unemployment rate is low—indeed below the average for the past 4 decades. Additionally, wages are growing for the typical American production worker, and real buying power for the average family of four has gone up by about $800 over the past year. It is a bit ironic that individuals in polls often say that their personal financial situation is better than it was a year or two ago, but that they think that the economy is weak. In fact, the economy is very strong right now, coming off a quarter of high growth, high profitability in investment, high job growth, and positive wage growth. The main mechanism through which the typical American worker improves his or her lot is by seeing wages grow. Wage growth depends almost exclusively on productivity growth, and productivity depends on worker skills, investment in capital and machines, and on efficiency of our economy. Our economy tends to be among the most efficient in the world because it remains flexible and robust. Despite many shocks that we have suffered over the past few years (e.g., 9-11, corporate scandals, hurricanes) the economy has continued to grow, the labor market remains strong, and workers’ wages are growing solidly.

Dr. Edward Lazear
Let me thank you all for your contributions to “Ask the White House.” I apologize to those of you whose questions I was unable to answer. In the meantime, you can get more information on-line at CEA’s website here: /cea Thank you again for your interest in what we are doing, and I look forward to talking with you in the future.

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