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For Immediate Release
Office of the Press Secretary
February 13, 2006
Press Briefing by Dr. Katherine Baicker and Dr. Matthew J. Slaughter on the 2006 Economic Report of the President
Eisenhower Executive Office Building
1:33 P.M. EST
DR. SLAUGHTER: Good afternoon, and thank you for coming. We are pleased to announce the release of the Economic Report of the President, an annual report of the Council of Economic Advisors for 2006.
The report reviews the state of the economy and the economic outlook, and discusses a number of economic policy issues of continuing importance. Across its eleven chapters, the report highlights how economics can inform the design of better public policy and reviews administration initiatives.
And I should say, Chairman Ben Bernanke was involved in the early stages of formulating the concept of this economic report, but -- he had recused himself from participating in formulating that administration's economic forecast.
The American economy enters 2006 with continued strength and flexibility; 2005 saw fourth consecutive year of expansion for the U.S. economy, with real GDP growing at 3.5 percent for the year as a whole, despite the headwinds of near record energy prices and damage from several powerful hurricanes.
The administration forecast for 2006 foresees continued strong economic performance for the United States on many dimensions. This forecast, which is detailed at the start of the report, projects real GDP growth of 3.4 percent. Payroll employment growth during 2006 is projected to average 176,000 jobs per month, a pace projected to keep the unemployment rate at a low 5 percent. And CPI inflation is forecast to fall to 2.4 percent.
Underpinning U.S. economic strength has been productivity growth, well above the historical average. Year-on-year growth and output per worker hour in the U.S. non-farm business sector has averaged nearly 3.5 percent over the past four years. In turn, this productivity growth has been driven by two main forces. One is the innovation efforts of research and development and related knowledge discovery. The other is the competition in, and flexibility of U.S. product, capital, and labor markets that help transform innovations into the new products and processes in the marketplace that ultimately support rising incomes for workers and their families. The recently announced American Competitiveness Initiative aims to strengthen public support for productivity, and thus America's ability to compete in the global economy.
DR. BAICKER: The continued competitiveness of the U.S. economy depends crucially on the strength of the workforce. Promoting a flexible and skilled labor force through improved access to high-quality primary and secondary education, through attracting the world's best and brightest to American shores, and through investment in the continuing education and retraining of the workforce will ensure that the United States remains a leader in the rapidly changing world economy.
Even as living standards rise, Americans are increasingly concerned about the rising cost of health care. Both public and private spending on health care has risen at a rate faster than inflation and faster than wage growth. Americans need access to affordable, accessible health care that's high-quality and high-value. Perverse tax and insurance incentives have led to inefficient use of our health care resources, straining public budgets and private budgets, alike, straining employers, straining workers. Promoting a stronger role for consumers can help create a health care system that is more affordable, more transparent, and more efficient, where our health care dollars go further.
This can be accomplished by strengthening health savings accounts and by ensuring that patients and their doctors have access to the information that they need to ensure that they get the health care that is best for them.
The Economic Report of the President provides an analytical backdrop supporting the President's agenda, which includes restraining government spending, making health care accessible and affordable, making tax relief permanent, creating an economic environment that encourages innovation and entrepreneurship, continuing to open markets to innovation and to American goods and services, and reducing America's dependence on foreign oil by diversifying our energy supply. These policies will help maintain the economy's momentum, foster job creation, and ensure that America remains a leader in the global economy.
We'd be happy to take your questions now.
Q In your chapter about the tax code changes, you mention that the conclusions of the tax panel were something that you wanted to study further. And one thing that you wanted to look at was the transition costs. And I'm just wondering if you could be more specific about what the transition issues are that you're most concerned about and that you need to study further.
DR. BAICKER: Treasury is currently studying that report, and the report contains a number of different possibilities for a comprehensive tax reform, including the possibility of moving the U.S. from an income-based tax system to a consumption-based tax system. And that involves a lot of changes in the tax code, both about the base of what's taxed, income or consumption, and the rate at which it's taxed -- the rate structure -- and the differential taxation of different kinds of income or different kind of consumption that creates distortions that are really taxing to the economy, but are really costly for economic growth.
So a number of proposals have already been considered and are in the process of being implemented, such as dynamic scoring, which is one way of more accurately evaluating the consequences of different tax system, figuring out what their impacts will be on the economy and thus choosing among the alternatives with the best information possible. Also making the income and dividend tax reduction permanent would be a step towards the end of double taxation of investment that's a drag on economic growth.
Q On the tax issue, you mentioned two aspects of it, consumption-based and dynamic scoring. If you take them in turn, do you think it will be possible to demonstrate that tax cuts do pay for themselves and can reduce the deficit with appropriate scoring? And in terms of consumption-based -- do you guys think that's a good idea?
DR. BAICKER: Thinking about the implementation of dynamic scoring -- this is something that the Department of the Treasury will begin to undertake and will certainly evaluate all of the issues involved in how you do that scoring, getting input from the world experts on that. So that's something that I hope will be implemented by the mid-session review.
As to what the result of the dynamic score of any particular proposal would be, I certainly couldn't speak to that in advance of the proposal. The goal is to figure out those effects as accurately as possible, and they're certain to vary from tax proposal to tax proposal.
As for your second question, moving towards a consumption-based, certainly the double taxation of interest and dividend taxation has been a drag on economic growth, and the reduction of those taxes we've already begun to see the rewards from. A lot of the economic growth that we're benefiting from now, and the future growth, is due to investment in productive capital, and we want to encourage that kind of investment.
Q How do you see the increase of high energy prices in your projection?
DR. SLAUGHTER: High energy prices are an important consideration, both for households in terms of their spending patterns, and also for business investment. And so, going forward, impacts on both consumer spending in 2006 and business investment decisions in 2006, that's definitely one dimension on which energy prices need to be considered. In formulating the economic forecast in particular, those types of prices we take from futures markets. And so we kind of incorporate the best guess of markets that are out there for what the future prices will be.
Q So what is the impact going to be, then?
DR. SLAUGHTER: Again, higher energy prices -- we know that in 2005, that was an important force, for example, it was straining the real income growth of American households. So there were higher rates of price inflation over 2005 than many people were forecasting. And so households had to expend a greater share of their total budget spending on energy, for heating their homes, for filling up their automobiles. And going forward in 2006, that will be one of the important considerations to think about, is to what extent high energy prices continue to be a force for straining consumption growth.
Q Will it? What do you think?
DR. SLAUGHTER: The projections for a futures market is that energy prices are going to remain high, and so, relative to earlier years, there's an expectation that, again, the greater share of household expenditures will fall on energy and related spending. The perspective, again, for energy prices is that in the past four years energy prices, for example, benchmark crude oil prices in world markets have increased about threefold.
Q So what will that do to consumer spending in the year ahead?
DR. SLAUGHTER: The administration's forecast is that for overall GDP growth in 2006, will be about 3.4 percent. That's consistent with -- blue chip estimates right now is also at 3.4 percent. Consumption spending will be one of the forces contributing to economic growth during the year. And if you'd like particulars, I guess I would refer you to the forecast chapter in the report.
Q I'm sorry, these mikes and cameras don't read, only you do. That's why it would be helpful for you to state it.
DR. SLAUGHTER: So, again, consumption -- if we look at 2005, economic growth in 2005 of 3.5 percent was driven by a number of important forces like in previous years. Consumption spending was one of them; business equipment investment was another one; export growth was another one. And our forecast for 2006 is that those different components of aggregate demand will continue to increase again, leading to a result of GDP growth of about 3.4 percent in 2006.
Q You talk in this chapter on capital flows about how the pace of inflows is going to moderate. I wonder if that -- is that possible without a decline in the dollar?
DR. SLAUGHTER: It might be. The exact adjustment mechanisms are difficult to foresee, and historical experience for the United States and many other countries is that current account imbalances tend to adjust themselves through a wide variety of market-based and policy-based changes. So, if we think about the United States current account deficit, it has been rising in recent years. That rate of growth is probably going to slow at some point in the future, and the current account balance may actually become smaller as a share of GDP than it is right now.
The exact mechanisms through which that happens remain to be seen. Adjustment of the dollar may be one of the mechanisms. We know that in recent years the dollar has declined relative to most other currencies. It strengthened a bit in 2005. So it will remain to be seen what will happen going forward.
Q So how much of a moderation in those inflows do you expect? And if 6 percent of GDP is usually high, then what would be a better figure?
DR. SLAUGHTER: I don't have an exact figure on that. I think what's important to keep in mind is, as the chapter in here talks about, that the global imbalances that the world is seeing right now in terms of current account and related capital account imbalances, is the outcome of a number of economic forces in the United States and in many other countries around the world.
So, for example, one of forces that has been contributing to the rise in current account deficit for the United States in recent years has been a faster rate of economic growth in the United States than of that in many of our other major trading partners, such as Japan and Germany. So, going forward, one market-based outcome that would help ameliorate these imbalances that we have right now would be faster economic growth in many of our trading partners.
Q Documents suggested that -- not suggested -- stated that the U.S. growth the last couple, several years is much more than the growth of Europe and Japan combined -- I think I saw a line on that. In terms of -- and you're also forecasting continued growth in subsequent years, at roughly the same level, I assume. At what point will that overseas growth increase and not become a factor in terms of not helping with the balance of payments problem? You can state that in cleaner language if you want, but I think you get it.
DR. SLAUGHTER. Sure. The forces that will support faster economic growth in other countries, I think a major policy challenge again -- two of the countries that are talked about in the chapter are Japan and Germany. Both of those countries have experienced declining investment demand in the private sector in recent years as one of the major forces that's been accounting for the current account surpluses. So, in terms of stimulating economic growth through the channel of increasing investment demand by firms in those countries, that presents a set of challenges that both countries' policymakers, I think it's accurate to say, have been dealing with in terms of underlying structural reform and labor markets, for example, to enhance labor market flexibility in those countries, to increase the attractiveness of capital investment by firms there.
Q How do you factor in the impact of the valuation of Chinese currency versus U.S. currency, in terms of its effect on the U.S. economic picture?
DR. SLAUGHTER: The chapter talks about China as another country. Their current exchange rate mechanism has been a force that has been contributing to the accumulation of foreign reserve assets by their central bank. The U.S. Treasury right now has been involved in ongoing discussions with Chinese officials to think about a broad set of market-based reforms in financial markets, of which currency reform would be one piece.
Another force that's contributing to the high savings rates in China is high savings by households, savings because in part they do not have the depth and liquidity of capital markets that we in the United States enjoy to help finance purchases by households of things like durable goods, pension savings, and also health care spending. So thinking about what are the different forces that reduce the external savings for China, the chapter talks about both market-based and policy-based changes in China.
Q If I could just follow up on one of the things that you mentioned -- do you see any change in the U.S. -- in the rate of saving in the United States, which has been fairly low?
DR. SLAUGHTER: When you think about U.S. savings, in multiple chapters, actually, in the report talk about thinking about it from the perspective of there's savings by firms in the United States, retained earnings, which has actually been quite high in recent years; and then there's savings by government and savings by private households. So fiscal reform in the United States that would tend to bring down fiscal deficits would contribute in some degree to improving the current account balance, although it talks about how that's definitely not a dollar-for-dollar transition there.
And I think also you're referring to declines in household saving rates. That's a longstanding feature of the U.S. economy going back at least a couple of decades. And so the set of policy changes that might better support and foster savings by households, I think it's fair to say is an ongoing discussion.
Dr. Baicker earlier had talked about tax reform, and I think one of the broad hoped-for goals of the tax reform panel was thinking about tax regimes that would provide a different and perhaps more supportive set of policies for savings by households.
Q On the participation rate, you mentioned that it seemed to peak in the '97-2000 period, and that you're sort of projecting some decline further as the population ages, and that sort of thing. So are you saying now that the participation rate has recovered as much as it's going to recover, at 66.0?
DR. SLAUGHTER: I think, going forward, the projections -- consistent with the projections of a lot of private sector forecasters -- are that if you take it, for example, broke it up between males and females, male labor force participation rates are expected to continue the gentle decline that they have for quite some time; female labor force participation rates, which had been increasing for decades in the U.S. economy, have probably reached their peak and, if anything, may start to fall back gently in the future.
So those underlying demographics are some of the important forces that underlie the projection that the rate of growth of the labor force -- employment in the labor force is going to be decelerating in the coming years.
Q And the participation rate then is as high in this current cycle as you think it's going to get, if you're projecting some decline? That would suggest that you think the United States is close to full employment now.
DR. SLAUGHTER: I think the United States does seem to be near full employment based on the traditional economics definitions. There's no kind of law of physics that says what the exact -- on unemployment rate is, at which we're at full employment. But in January the unemployment rate was reported at being at 4.7 percent, which is quite low by historical standards.
Q Can you talk some more about health care? We seem to hear more and more, including from you, about so-called consumer-based, and I have yet to have anybody explain to me -- if I go to the doctor, I say it hurts here, what choice do I have to shop around?
DR. BAICKER: Right now part of the problem with the health care system is that the choices you make to spend out-of-pocket are tax disadvantage relative to things that you consume through your employer-provided insurance. So the motivation behind -- part of the motivation behind consumer directed health care is to let you choose the form of health insurance that you want, that suits you the best, which may allow you, then, more choices to make over your initial spending in the health care system.
So, for example, if you go to your doctor now, you don't know the cost of the different options on the table to you; you're doctor may not even know the cost of the different options. They depend on what your health insurance is, they depend on what rate your doctor is charging your health insurer. You don't have the tools you need to make a good decision. So increasing the price and quality information available in the health care system would go a long way towards allowing you to make better decisions.
Now, the second component of that is for you to have more control over those health care funds. If you have the health savings account that lets you decide whether to spend those dollars on health care or on other family priorities, and you have the information that you need to make a wise decision, then there's evidence that suggests that you will consume less health care, but health care that is more valuable for you. So you'll put your health care dollars toward the services that are best suited to you, rather than a generic set of services that are catered to the insurance company overall, or to the health care system overall.
So that holds promise for making our health care dollars go further. And it doesn't require that every consumer be paying for every dollar with out-of-pocket funds, or with funds through health savings accounts. It only requires that enough consumers have motivation to get that information, and that the information is available, that the health care system, as a whole, will have the incentive to provide care that's higher value, not just more care. And that will also spur the development of cost-saving technologies where there's no incentive to develop those cost-saving technologies today.
Q The only part that I understood was that I have the option of a higher deductible. That I understand. But if I go and say, I've got an ache right here, I don't understand what I can choose.
DR. BAICKER: So you do need more information. You need more information from your doctor about the options that are available to you. Your doctor needs more information about the efficacy of those different options.
So along with that greater price and quality transparency should come the greater use of health technology, health IT, such that doctors have access to the most current information about the efficacy of different treatments, and so that any doctor that you go to has full information about your condition, about the medications you're taking, about tests you've had in the past. There's evidence that a significant fraction of diagnostic testing done today is duplicative, because doctors don't have access to results of the test that you took last week in another facility. The greater use of health information technology would prevent that, which would, again, make your health care dollars go further and would give your doctor the best information to help advise you.
So consumer-directed health care does not mean that you're out on your own making decisions without your doctor's advice. It means that you and your doctor are deciding together, rather than being constrained by a particular tax-favored insurance policy or by the choices made by your employer, rather than the choices that you and your doctor and your family members make together.
Q I have a couple of questions on tax reform. In the report, of course, you mention the two approaches taken by the panel, whether it's simplified or modified consumption tax. But you also mention in here how Treasury, itself, has been looking over the -- to a comprehensive business income tax that aims to integrate personal consumption -- personal and corporate. Is that an approach that you think should also be under consideration when the President reviews tax reform?
DR. BAICKER: So what all of these approaches have in common is reducing the distortions induced by really unequal tax treatment of different kinds of investments, financed in different ways, made by different entities. Those distortions induce corporations to do things that they would not otherwise do because they're not otherwise profitable. And so those changes in behavior are really costly to the economy, because they reduce investment and they reduce the productivity of each investment made, because corporations and individuals are no longer deciding on the basis of where their dollars make the greatest investment. They're deciding based on that, plus differential treatment in the tax code. So any tax plan that simplifies that and that stops the discouragement of investment in productive opportunities with increased economic growth would be advantageous to everyone.
Q But Treasury Secretary Snow is supposed to be reviewing the proposals that this panel is sending to him. But will he also be open to looking at additional ways of reform, such as a CBIT?
DR. BAICKER: I cannot speak for Secretary Snow. I know that they are carefully reviewing the report issued by the panel, and I look forward to their recommendations based on that.
Q And then only one other question. Treasury did announce the establishment of a new office of dynamic analysis, and I guess my question goes to the actual proposals, when they do come out, on tax reform -- they're supposed to be revenue-neutral. Now, will that be revenue-neutral defined by static scoring, or by dynamic scoring?
DR. BAICKER: Dynamic scoring will be used as a supplement to static scoring to give policymakers better information about the long-run effects of the different policies on the table. Official scoring will still be done with static scoring.
Q But in terms of meeting your definition of revenue-neutral, is it possible that the administration might say it's meeting that definition based on dynamic, even if it might not be based on static?
DR. BAICKER: So the tax panel was charged with coming up with recommendations that were revenue-neutral using static scoring, and that's what they've done.
Q Is that what the President, though, might, when he comes forward with his proposals, use, or might he use instead dynamic scoring in terms of saying, these proposals meet the definition of revenue neutrality, even if it might not, under the static scoring? I mean, why else is this office being set up?
DR. BAICKER: Dynamic scoring gives us information that we do not currently have. So dynamic analysis is forecasting what any particular tax reform would do to the economy overall. Then dynamic scoring takes that one step further and figures out what the effect of that growth or reduction in growth in the economy would do to tax revenues, so -- just to define my terms more clearly.
That office will provide information that we do not have about the long-run effect of particular policies on the table, and that information can be an important component for policymakers in choosing among the options on the table. Static scoring will still be used for official scoring of all of those proposals.
Q You said that you can't apply dynamic scoring to future unknown tax proposals. Can you apply them to, say, 2001 and 2003 tax cuts and come up with any kind of a reasonable conclusion about what revenue effect those tax cuts had?
DR. BAICKER: Certainly that can be done, and I can't do it standing here, but there is ample evidence that reductions in the taxation of investment income have yielded economic growth. More specifically than that, I wouldn't feel comfortable doing.
Q You said the dynamic scoring initiative may be ready before the mid-session review?
DR. BAICKER: Dynamic analysis, actually.
Q Dynamic analysis. Would the tax reform suggestions be ready by then, as well?
DR. BAICKER: I don't know the timetable that Treasury is using. Those questions should be directed to them.
Q You were speaking about the desirability of eliminating differences or discrimination in different types of income in terms of taxation. Is that your goal, to treat income or to treat all these various tax bases essentially the same so there's no difference in how they're treated?
DR. BAICKER: I think the goal of sound tax policy is to raise the revenue needed for national priorities in the best way possible. How do we define the best way possible? Well, you want to encourage growth, you don't want to distort choices made, but you want to take into account the distributional implications and the implications, for example -- of consumption of different goods might factor into what the optimal tax structure would be.
So, certainly, the implication of taking those things into account is not a uniform, flat rate applied to every dollar, but anything that moves in that direction reduces distortions that may be costly to the economy.
Q If the goal is to get rid of distortions, then why not, say, eliminate the mortgage interest deduction, which certainly steers a lot of people in the direction of purchasing real estate, houses, things like that? I mean, obviously, there's a conscious choice that they make, but that's a good thing, that's a good distortion. Which are the good distortions and which are the bad distortions?
DR. BAICKER: I certainly wouldn't want to pick and choose particular provisions in the absence of a plan for a comprehensive reform of the tax code, such as those that were suggested by the tax panel. So the underlying principle, that reducing costly distortions is a good thing, stands. What the costly distortion -- as you point out, some distortions may be to the benefit of society, and some may not. So taking that into account steers you towards certain policies and away from others. But considering one in isolation might not bring you to the right conclusion.
Thank you all, very much, for coming.
DR. SLAUGHTER: Thank you all, very much.
DR. BAICKER: Please get your copy of the ERP.
END 1:58 P.M. EST