Dr. Gregory Mankiw
Hello. I'm happy to be here. I just left a meeting with the President and a group of leading outside economists. There is a consensus among the group that the second half of the year will show stronger growth than the first half and that a large part of the credit goes to the President's Jobs and Growth Tax cut plan.

Joshua, from Bloomfield Hills, Michigan writes:
Mr. Chariman, Why is the economy marginally growing while the Job market continues to go down? What is the President's Job's and Growth package doing if any?

Dr. Gregory Mankiw
Over the past year, the economy has been growing but growth has been well below its potential. As a result, unemployment has been rising. To get unemployment back down, we need to get growth up. And that is precisely the goal of the Jobs and Growth tax cut. The tax cut will put more money into people's pockets and stimulate consumer spending and at the same time it will lower the cost of capital by reducing the tax rates on dividends and capital gains. These provisions together with expensing for small businesses and bonus depreciation will stimulate investment spending.

Ronnie, from St. Louis writes:
How is a deficit of this size manageable?

Dr. Gregory Mankiw
It is a textbook principle of prudent fiscal policy that deficits are an appropriate response in times of war and recession. The lingering effects of the recession and the increase spending for the war on terrorism are exerting a large influence on the budget today. As a percentage of GDP current deficits are about 4.2 percent. Deficits of this size have been experienced six times in the past 20 years, so the economy can certainly handle them. Under the President's budget proposals the deficit will shrink over time so they should not present a long term problem.

Sam, from Cambridge, MA writes:
Why haven't low short and long term interest rates stimulated business investment and economic growth?

Dr. Gregory Mankiw
The economy has experienced several adverse shocks over the past several years, including the collapse of the high-tech bubble, corporate governance scandals, terrorist attacks, the uncertainties associated with the Iraq war and slow growth abroad. All of these things have tended to put downward pressure on the economy. Offsetting these factors have been expansionary monetary and fiscal policy. Interest rate cuts and tax cuts both tend to expand aggregate demand and economic growth but they are only two of many forces that affect the economy.

With the new tax cut going into effect this month for many workers, the forces of expansion will get stronger which is why we are expecting higher growth in the second half of the year.

Kevin, from Rancho Palos Verdes, CA writes:
Mr. Greenspan just announced that he was ready to cut the interest rate further. Unemployment is at an all-time high. The federal government is reporting a record deficit. Despite all this, the president just signed a tax cut that would pretty much ignore the plight of the poor. When is he along with your staff, I assume going to do something to help the people?

Dr. Gregory Mankiw
Kevin, thank you for your question. You raise some important issues. First of all, the unemployment rate is not at an all time high, but it is certainly higher than we would like. The federal deficit is high in nominal terms but the correct way to look at it is relative to the size of the economy. As a percentage of GDP, the 4.2 percent deficit we now face is not at all unprecedented. The Jobs and Growth tax cut is aimed at putting people back to work and increasing the pace of long term economic growth. This will benefit everyone. One of the fundamental lessons of economics is that the burden of a tax is not necessarily borne by the person who sends a check to the government. When the government cuts taxes on capital such as the recent dividend tax cut, more capital will be accumulated, productivity will grow more quickly, and as a result wages will rise. Even workers who will never own a dividend paying stock will benefit.

Tommy, from DC writes:
How important are retail sales statistics?

Dr. Gregory Mankiw
The CEA monitors many statistics to see how the economy is doing. Almost every day we are writing a memo to the President to inform him about the recent data. Retail sales statistics are one measure of aggregate spending that gives advance warning about total consumer spending in national income accounts. Consumption represents about 2/3 of GDP and is therefore quite important to keep an eye on. Yesterday's retail sales data were strong and we expect them to get stronger in the coming months as more consumers see higher take home pay as a result of the recent tax cut.

Jonathan, from California writes:
Dr. Mankiw, What are the risks of the growing underfunded entitlement programs to the economic security of Gen X'ers?

Thanks - Jonathan

Dr. Gregory Mankiw
The President's budget called these unfunded liabilities "the real fiscal danger." There is no doubt that modernizing Social Security and Medicare for future generations is one of the great fiscal challenges we face as a nation. The President is well aware of this challenge and is ready to meet it. He has stressed the importance of personal accounts in Social Security. Moreover, as we add a prescription drug benefit to Medicare, the President has advocated reform of the system to include greater choice for seniors and competition among private providers.

Stan, from Tacoma writes:
What is the difference between the Council of Economic Advisors and the National Economic Council? If both organizations work for the President, then what happens if there is a disagreement? Fist-fight?

Dr. Gregory Mankiw
Steve Friedman, the Chair of the National Economic Council, was a college wrestler so thankfully it never gets down to physical fights. The NEC is the coordinating body for economic policy. By contrast, the CEA is staffed with PhD economists and serves as policy analysts. The two organizations work quite closely together and are -- to use the jargon of economics -- complements rather than substitutes. I start each day by seeing Steve Friedman at a 7:30am senior staff meeting where we coordinate our activities. Our two staffs work closely together on all issues of economic policy. The CEA also works with the National Security Council on international economic policy issues and with the Domestic Policy Council on important domestic issues such as education.

Anonymous, from NY writes:
What was your favorite school subject? What kind of a student were you?

Dr. Gregory Mankiw
As a student in school, my favorite subjects were math and science. But I always had a deep interest in public policy. When I took my first course in economics in college in 1976, I saw that the subject combines the analytic emphasis of math and science with a strong emphasis on public policy. I was a good student as long as the subject matter interested me. But I was often less-disciplined if the subject matter did not spark my interest. I was particularly weak in foreign languages and barely made it through a year of college Russian.

Prital, from Washington, DC writes:
The Consumer Price Index has stayed unchanged in May and just went up 0.2 in June. Is the CPI the best indicator we have of the risk of deflation in the economy, and is there such a credible risk? What are some of the main actions that the Federal Reserve can take and what are the initiatives the administration can take to help ensure America doesn't face deflation?

Dr. Gregory Mankiw
You are right that inflation and deflation are largely monetary phenomena, and the Federal Reserve is the first line of defense. But more rapid economic growth which we are forecasting for the second half of the year should also increase the demand for most products and help prevent deflation. Overall it is a good thing that we don't face inflation in the economy and I'm confident that monetary and fiscal policy makers will prevent us from facing deflation in the future.

Ersa, from Manila writes:
What does N in your name stands for?

Dr. Gregory Mankiw
This is a very frequently asked question and I wish I had a clever or funny answer. As it turns out the N stands for Nicholas, but if you have a better answer for me to use in the future, I'd be happy to steal it.

Dr. Gregory Mankiw
Thank you all for participating. It has been a true pleasure and honor to work with this President and his economic team. In fact, I'm off to lunch with my fellow team members which we regularly hold to monitor the progress of the economy and economic policy. Economic forecasting is far from a precise science but I am heartened by the fact that there is near unanimity among private forecasters that the economy is poised to rebound. There is no doubt in my mind that the President's policies deserve a large share of the credit and soon millions of American families will be reaping the benefits. Hope to do this again soon.

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