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For Immediate Release
Office of the Press Secretary
February 12, 2007

Press Briefing by Chairman Lazear of the Council of Economic Advisers on the 2007 Economic Report of the President
Room 450
Eisenhower Executive Office Building

      Fact Sheet: The Economic Report of the President
      In Focus: Jobs & Economy

1:43 P.M. EST

MR. FRATTO: Thank you all for coming. I apologize. I understand that some of your colleagues are still trying to make their way in downstairs, but because of Chairman Lazear's tight schedule, we're going to have to get started. You can let your folks know that we'll be releasing a transcript this afternoon. So we'll have that for them, and then we'll get to questions.

Chairman Eddie Lazear will lead off, but he's going to have with him two of his most trusted colleagues, Kate Baicker, who is a member of the Council of Economic Advisers; and the CEA's Chief of Staff Gary Blank will join Chairman Lazear up here. Chairman Lazear will open, and then will have an opportunity to go up for questions.

CHAIRMAN LAZEAR: Thank you for being here. Today we roll out the Economic Report of the President for 2007. My job is an easy one this year because the economy is strong. Last year's growth was stronger than the previous year. We saw growth rates of about 3.4 percent. Unemployment is low. Real wages are rising at a rapid pace, and the prospects for future wage growth remain very good. Inflation rates are lower than they were last year, and that, coupled with the raises that we've been seeing, mean that workers are receiving additional buying power -- and to give you an example, a typical family of four right now got about a $1,000 -- slightly over a $1,000 in additional buying power during the last year.

Our economy is also becoming more diversified. It's now being powered in part by stronger exports and investment in business structures, in addition to continued strong consumption. On the whole, we have a balanced, robust economy, and all the signs are good.

This year's report picks up on the theme of productivity growth, which has averaged 3 percent since 2001, well above the numbers from the two prior decades. Productivity growth is important and it's key, because it means that firms can pay workers higher wages. Indeed, real wage growth over any significant period of time is directly linked to productivity growth. For that reason, we must keep productivity growth strong.

And if you've looked through the Economic Report of the President, as you do look through it, you'll notice that not all of the chapters seem to link directly to productivity growth, but productivity is related to much of the report. Let me just very briefly take you through an overview. My guess is you haven't had a chance, in the short time that you've had this, to read the whole thing. So let me just give you a very brief overview of it.

The first chapter that follows the productivity chapter is on pro-growth tax policies. Taxes affect investment, and this chapter explores the ways by which the tax code can be changed to minimize distortions.

The next chapter is on Medicare, and that's perhaps our greatest long-run challenge on the budget front. It has implications for productivity in a couple of respects. First, large expenditures place pressure on the economy, as we search for ways to fund a growing government; and second, health is a very large and growing part of our economy, so efficiency gains that we can make in that sector will provide a source of productivity growth.

We also have a chapter on catastrophic risk insurance. Nine-eleven and the hurricanes taught us that we're not immune to large-scale disasters. Finding an efficient way to insure these contingencies is important. This chapter spells out how decisions we make at the government, both federal and state level, can affect individual decision-making. It is important to avoid inducing people to take actions that will put them in harm's way, will be costly to the government, and will undermine rational economic approaches that a private economy can provide.

The transportation sector chapter considers a couple of different topics. First, the President has made clear his view that diversified energy sources are important for national security. He has spelled out a variety of programs and a variety of ways that we can use to increase our independence of foreign sources of energy. And he's talked about that in both the State of the Union and state of the economy address.

But, additionally, productivity suffers when Americans waste time sitting in traffic on congested roads. We waste fuel, harm the environment, and use too much of the most precious resource, namely our time. So in this chapter we explore a few new ideas for dealing with problems of congestion, both on the level of the roads and air traffic.

Currency markets -- we talk about currency markets in one of our chapters because, in large part, productivity depends on well-functioning capital markets. Currency markets are the thickest and deepest of capital markets, and this chapter discusses different kinds of currency markets and how they work. The chapter is not about appropriate exchange rates, the discussion of which is left to the President and the Treasury, but it does talk about how currency markets function and how they work at a somewhat more abstract level.

We also know that international trade and, in particular, international investment has been key to capital formation and to productivity growth in the United States. The U.S. is the most desirable country for investment right now, and we are the most able to attract outside foreign direct investment and other investment because the strength of our economy and because of our prospects for the future. Foreign companies have invested in the United States and they provide high-wage jobs and efficient work environments that both contribute to productivity growth. Conversely, our multinationals that invest abroad are also among the best companies at home and are leaders in their industry.

The final chapter is on immigration. And immigration deals with another kind of capital, mainly human capital, which is one of the most important factors in productivity growth. The United States has always been blessed by being able to attract among the most talented people in the world. Immigration policy has a direct impact on that inflow.

The President has discussed a comprehensive immigration policy that links border security with work site enforcement and a temporary worker program. Well chosen policy can ensure orderly immigration that will continue to enhance the U.S. economy and productivity growth.

And I welcome your questions.

Q I have a question dealing with tax policy. It seems in your chapter that you are promoting this idea of partial or full extension of investment, perhaps a better approach than rate reduction in investment. I wonder if you could elaborate on that.

CHAIRMAN LAZEAR: Sure. Most economists like expensing as a method for encouraging future investment. in large part, because there's a lot of bang for the buck. And what we need by bang for the buck here is that when you expense capital you give firms strong incentives to invest because you affect new capital, primarily, and you don't affect old capital as much.

So what happens is, if you lower corporate tax rates, you do have some benefits to corporations, no doubt about it. But it tends to have a smaller effect on investment. So if we were thinking in terms of investment and making the economy more efficient as we go forward, usually economists tend to favor this expensing approach. And that I think is what's discussed in the chapter. It's not so much a choice of one or the other in terms of benefiting one group or another group. It's simply a question of how does one create the most investment incentive for a given amount of tax --

Q Well, you do put this in terms of incrementals -- reform of the tax -- so is this a shift in your approach, versus when the tax reform panel came out, they were looking for comprehensive reform?

CHAIRMAN LAZEAR: I don't know that it's a shift. I would say that the tax panel's approach, perhaps the main focus of the tax panel, at least with respect to the growth and investment tax, which there were two, as you probably recall, within that tax panel report -- and the growth and investment one, the main -- probably the main component of that was full expensing of capital. And it was for exactly the reasons that we just talked about -- that the view of the people on the panel, as well as most economists -- I think most public finance economists, most people who have thought about these issues for a significant period of time, is that if we're going to think about one thing that we could do that would have dramatic effects in terms of changing the level of investment, and changing GDP in the long run, that would probably be it. And that's why I think the focus was on that.

But, again, in this chapter, what we were trying to do is not so much advocate one particular proposal over another proposal, but rather to describe the different kinds of effects that we see associated with particular reforms.

Q You said that productivity growth is increasing, and if you look at it in five-year windows, perhaps; but it decreased in 2006. And I'd like you to explain why you can be certain it's not going to further decrease in 2007, and in the next few years, why this moderation won't continue, since many economists do see a big moderation in productivity.

CHAIRMAN LAZEAR: Productivity growth in 2006 I would describe as volatile, having been volatile, in the sense that the fourth quarter was a good quarter for productivity growth, the first quarter was a good quarter for productivity growth, second and third quarter were slower and that brought the average down. So we've still seen some volatility within the year. That's why I tend to prefer to look over a somewhat longer period -- I don't know if five years is the right number, but certainly not looking quarter by quarter.

The question, though, I think that you raise is a good one, and that is, as you look forward, what do we expect about productivity growth moving into the future? I would say that when I think about productivity growth in the future, I think about the fundamentals. I ask, do we have the kind of environment that is key to projecting an economy into a new regime in the sense of having higher levels of output, higher levels of wages, higher levels of capital formation.

And I think we do have that kind of an economy, because, again we have a relatively low tax economy, we have an economy that's open to trade for the most part, we've encouraged foreign investment, all of which have been important and instrumental in creating our economic growth. And I don't see any move away from that. And I think that we have to make sure that we don't move away from that. The President has been very strong in coming out both in favor of openness of trade and in keeping taxes low. As long as we continue to do that I think that we can maintain high productivity growth.

On the other side of that I think I would also add that when I think about factors that determine productivity growth, it's not only trade and taxes, it's not only physical capital formation, but it's also human capital formation. Human capital is absolutely crucial here. And it's important that we make sure that we have investment in human capital. Investments in human capital have been earning very high rates of return. We know that going to college is a great investment and has become an even better investment over the past 20 years. So we have to make sure that that continues to happen, and that we have the opportunities available to all Americans to take advantage of that.

Q So you think it will continue at a 3 percent rate? Is that what you think?

CHAIRMAN LAZEAR: Again, I wouldn't necessarily say 3 percent. But I would expect that we could expect to see high rates, perhaps not quite at the 3 percent level, but somewhere -- higher than 2 percent. I would expect somewhere closer to 3 percent. But again, we're always -- when we're doing this sort of thing, we're guessing on two numbers. The first number that we're guessing on is GDP growth, and the second number we're guessing on is labor force growth, because it's really the combination of the two that determines productivity.

So we have estimates on that, and I wouldn't want to have to bet too much on any particular estimate of productivity growth, particularly quarter-to-quarter. But if I'm thinking about long-term productivity growth and asking, do the fundamentals exist for persistent high productivity growth in the upper 2 percent range, I think we can still be there, again as long as we continue to maintain policies that are consistent with an open economy.

Q Two questions. The core inflation numbers in here, in the report, fall at 2.6 percent, which is well above the Fed's comfort zone. Does that imply that we assume a new broadening comfort zone from the Fed? And the second question: Wages and compensation as a share -- wages as a share of compensation flat through 2012 -- is that external factors that have been holding back wages now --

CHAIRMAN LAZEAR: The two questions -- first, in terms of the inflation rate, the core inflation rate, inflation was lower in 2006 than it was in 2005, but core inflation was somewhat higher, as you point out. I think that the Fed has been on that, obviously. They've made comments to that effect, and we're not really saying anything different from the Fed. We're looking at the same numbers that they look at.

The tradeoff has always been, of course, that you want to make sure that you have a strong economy while maintaining an economy that doesn't have too much inflationary pressure in it. And I would say that right now we're pretty close to hitting it right on the head. Whether we like slightly lower inflation, whether the Fed would like slightly lower inflation, perhaps. But we're not looking at an economy that has runaway inflation. None of the indexes that we've looked at suggest anything like inflation getting out of hand.

The Fed remains vigilant in terms of watching those numbers; that's their main job. And I think they've been doing a good job at it, and we have confidence in them and I'm sure that they'll maintain that.

Your second question was on wages. With respect to wages, I like to focus on two components of it, and you actually mentioned one in the first part of your question, which is inflation. The way I think about it is this: When I look at wages and try to predict what the economy is going to do, I think of nominal wages, and then I think about anticipated inflation. And this may sound a little bit technical, but I'll tell you why this is important.

When firms are deciding how much -- how large a wage to give to their workers, what they're thinking about is a nominal wage rate, like 4 percent, 4.5 percent a year, minus what they expect the inflation rate might be in that year -- like 2 to 2.5 percent. If they're giving 4.5 percent raises, and they're expecting a 2 percent inflation rate, then, implicitly what they're doing is giving what they think will be a 2.5 percent real wage gain.

That's what we've seen over the past year-and-a-half or so. If we look at nominal wages minus expected inflation, it's been somewhere in the range of 2 to 2.5 percent. And I would expect that to persist, again, because nominal wage growth has risen while inflation rates have declined. So if I'm looking forward and saying, how are firms thinking about this, my view is that firms are thinking, for the most part, that inflation is going to remain stable or decline slightly, and they're still willing to give ever-increasing nominal wage gains. And I think in large part, that's a reflection of the productivity that we saw over the past few years. So I think it is the combination of the two components that you raised.

Q In your chapter on currency markets, you talk about the difference between China's exchange rate policy and that of the other major industrial countries by setting a short-term interest rate target. And you have this line in here that says -- describing the difference between the two, you say, "Economic theory does not dictate a clear preference between the two." If there's no preference, why would the U.S. want China to change its currency policy?

CHAIRMAN LAZEAR: I'm not going to speak specifically to our choice over currency policy. Again, that's something that the Treasury Secretary has to speak about. But I will tell you what we mean in that chapter, and that is that if we look at a variety of countries -- like the United States, for example, there are periods during which we had relatively fixed exchange rates and periods during which we went to a floating exchange rate, or close to floating exchange rate. And what we've done by moving from one to another is allowing ourselves to have more flexibility over monetary policy. So countries have a choice over that, and that's something that they have to think through and have to decide about.

Now, the reason that we don't want to take a stand on that is because it's not really our role to take a stand on that. It is the role of the President, it is the role of the Treasury Secretary to express our view on how we should behave and perhaps how other countries should behave. Our goal in this chapter was simply to explain the effects of a variety of different strategies, and that's why we said we don't want to take a position on favoring one over another.

Q In the same chapter, you said one of the effects of the Chinese intervention is that it hasn't changed relative to real prices between the U.S. and China. If that's the case, isn't the trade balance unaffected by the intervention?

CHAIRMAN LAZEAR: Well, again, as we look forward, if we're thinking about how changing an exchange rate policy might affect -- might affect the balance of trade between one country and another, there are two factors. And the two factors that we talk about in here are the exchange rate and the inflation rate. And that's really the tension there. If you're going to play on the inflation -- I'm sorry, on the exchange rate, then you're going to have less control over the inflation rate, and vice versa.

If you want to have a flexible policy with respect to your inflation rate -- for example, you want to behave in a way where you target the interest rate -- then you can't simultaneously target the interest rate and pick an exchange rate. So that was what we were trying to get at by talking about the trade off between those two.

Again, that chapter is a slightly technical one, in the sense that it is at a somewhat more abstract level. So I know you'd like to -- you might like to have this apply to a particular country. That wasn't the intention, and in fact I don't think --

Q (Inaudible.)

CHAIRMAN LAZEAR: Well, again, we can talk about China, we can talk about the United States, we can talk about countries choosing a particular regime. We're trying to remain agnostic as to whether one is better or the other. Again, I would refer you to Hank Paulson or to the President, of course, for questions on the specifics.

MR. FRATTO: Let me just add a bit on that point. Many of you know me from my previous days working at the Treasury, and I'll just point you to this. What this chapter does, I think, is give a lot of academic rigor to some of the things that the Treasury Department and Secretary Paulson have said about how the exchange rate affects China's economy, in terms of their ability to affect monetary policy. So I would look at it that way, and look at it as a -- read this chapter and take a look at what Treasury has been saying. I think it will be a little bit enlightening.

Q Two questions, if I may. Firstly, you have an extensive discussion about how the tax treatments of capital, how important that is for the purposes of productivity growth. There seems to be a much greater emphasis on that than on any effect that income taxation would have on productivity. So I wondered if you could -- it's my understanding that a lot of economists do, indeed, feel that capital taxes are more directly relevant to the productivity question than income taxes. I wonder if you could comment on that?

And the second is, when you have a discussion of the trends in income distribution, you've noted -- others have -- in the recent period, post-1990, it's the middle that seems to have done not quite as well as anybody else -- the people at the bottom actually did better than the middle, as well. You say that the story to explain this is probably skill-biased technical change, and yet, as Bernanke pointed out in his speech a short while ago, it's hard to reconcile why the middle is doing worse than the bottom -- the explanation is technical-skill bias, technical change. Can you explain how you reconcile that in your mind?

CHAIRMAN LAZEAR: Two good questions -- not quite on the same topic, but I'll try to get them both. The first one, on why do we focus on capital taxation rather than on individual income taxation. I don't think we were trying to slight individual income taxation. We do think that's important, but that works in a slightly different way. First of all, it tends to work on small businesses, rather than on larger businesses, because most of that, as you know, works as a pass through and shows up on the individual's income tax return -- so if you have a partnership or a sub-chapter S or sole proprietorship, schedule C kind of thing, that will show up on the individual's income tax.

And so we do think there are some pretty significant effects there. But in terms of the total amount of capital formation, it probably isn't the bulk of what we're thinking about, and probably the other side would be the larger part of it.

On the income tax side, insofar as it affects the individual, we know that labor supply tends to be relatively inelastic, relatively insensitive to tax rates. That's one, at least in the short run, we know that that tends to be true. That said, we also know that investment in human capital is more sensitive to tax rates. So if you look at countries that have had very high taxes on the rich, it may not show up in the rich working fewer hours, at least in the short run, but what it does tend to do is it tends to stifle the incentives to invest in human capital. That's a big problem in countries that have capped the ability of individuals to earn at the top end, and that would probably be our major concern.

So when I think in terms of productivity growth, and when I think in terms of the incentive effects of the different kinds of capital taxation, I would probably focus more on the human capital side than I would on the labor supply side, when thinking of that.

In terms of skill-biased technical change, my answer to you there would be that there are two sides to this, there's supply and demand. So when we think about the middle -- and by the way, this is a bit speculative, because we don't have a large number of years of data here just yet. But one of the things that a number of people have suggested is that part of what we're seeing at the middle is a response to increases in labor supply at the middle. There were a number of cohorts, birth cohorts, right around 1960 that invested less in human capital than their predecessors and their successors, which is kind of unusual, because for the most part during the century education has been going up -- educational attainment is going up, but not for this particular cohort. And we can talk about the specifics of that another time, the details aren't important.

The point is that if that group was less likely to go to college, and more likely to stop at high school graduation, what you tended to do was flood the labor market with individuals at the high school level, and that would tend to push down wages. So you could still have skill-biased technical change pulling on the demand side, but because of this kind of bubble in terms of the number of people being supplied to the labor market at the high school level, that would tend to do that.

Now over time, that's going to go away. If this story is right, that should go away because subsequent cohorts are going to college. And in fact, we may be seeing some evidence of that in the most recent years of data, but it's very, very recent. There's only one year for which we have the kind of data to really look at that. And there does look like there may be some trend back in the other direction.

But, again, I don't want to speculate yet based on one year of data. It's just too early to tell.

Q Maybe I missed something, but I didn't see in your chapter on taxes any discussion of the alternative minimum tax. And it seems to me that that is an extraordinarily big and pressing issue. Why isn't it in there? And is that -- does it have anything to do with the fact that the administration doesn't seem to want to come forward with a push on overall tax reform?

CHAIRMAN LAZEAR: There's nothing -- there's nothing going on there with respect to the AMT. The AMT is a tax that, as you know, was instituted a long time ago for the purpose of taxing individuals who would otherwise not pay any tax at the very high end. And the problem with the AMT is because of the way it was structured, because of the lack of indexation and the specific formulas, it ended up hitting exactly the wrong people in the sense that it would tend to hit the middle class.

So what's happened over time is that Congress has enacted patch after patch after patch to take care of this problem. But we've done so only on an annual basis.

Now as we move forward, and when you think about the AMT, we know that it's not doing what it's supposed to be doing. We know that it's not an efficient tax, we know that it's not a well targeted tax. And currently we are hopeful that in the next year or two, that we'll be able to work with Congress and think about ways to remedy that.

When you remedy it, of course, you've got to figure out how you're going to raise the revenue that that would otherwise have raised. Now, the reality is we haven't been raising much revenue through the AMT because we've been patching it every year. And that's something that we'll have to work through as we move forward. But there was no attempt to ignore it for any strategic reason.

Q If I can just follow up on that, though. I guess my question is, this -- if you're going to talk about the economic policy issues that are confronting the country and the administration, it seems to me on the tax front, it would be hard to mention one that is bigger and more pressing than that. And so it just seems puzzling that you would just leave it unmentioned.

SECRETARY LAZEAR: Well, the focus of this chapter, remember, is pro-growth tax reform. And when we're thinking about pro-growth tax reform, again, I'd kind of revert to your colleague's question. If you think about what will affect growth -- I'm not saying that the AMT is not an issue, of course it's an issue, and it affects a large number of taxpayers, potentially.

But when we're thinking about the effects on growth, we're thinking about effects on capital formation, that was really the thrust of this chapter. It wasn't thinking about specifics in the tax code. There are many other things that we didn't discuss in that chapter that would be important. One of the things that the President was very keen on was simplifying the tax code. The tax code is a mess, as you know. It's been patched about 15,000 times since the '86 reform, and it would be nice to get that in some kind of a more sensible form then we have right now.

We didn't address that in this chapter, either, simply because it just wasn't the focus of the chapter. The focus was really on growth and productivity. Again, not that the AMT doesn't have some effects on growth and productivity, but it wasn't the direct focus of that.

Q If I could just jump back to productivity again. I know if you slice it and dice it in different ways, it can come up with different trends, but over the past four years, on an annual basis, productivity growth has been decelerating. What's going to stop that from happening over the next several years?

CHAIRMAN LAZEAR: Most of that growth deceleration is a business cycle phenomenon. So what happens when you come out of a recession, at the first stage of recovery, you tend to get very high rates of productivity growth, because you're getting more output with the same amount of labor. You have slack labor on hand, you can get additional output, so it shows up as very high productivity growth as part of the initial part of a business cycle recovery.

As you move into the more mature stages of a recovery, and you start hiring labor to get the additional output, productivity growth naturally declines. So I think what we've seen over the last five years is not something that we are worried about in terms of predicting future declines in productivity, but rather business cycle effects. I would revert to my earlier answer, which is that when I think about productivity growth as I move to the future, I really have to think about the fundamentals -- do we have the kinds of investment in physical capital and human capital and in technology that will allow productivity to grow? And I think so far we do, and as long as we continue down this path, there's no reason to expect that productivity will decline.

And, by the way, I don't think that view is just an administration view; I think that's the market's view, as well. If you look at the evidence, in terms of our people investing in the American economy, are they putting money in equity markets -- you just see that we're not the only ones that believe in productivity growth in the future.

Q In the chapter on investment, you point out that there's been some signs that inward FDI has been heading lower in recent years. You say that it might be systematic of deeper issues with respect to the attractiveness of the United States. Could you elaborate a bit on what those issues might be, and in particular, why this is sort of a warning that Congress might want to keep in mind as they go about reforming the CFIUS process?

CHAIRMAN LAZEAR: I think that's an excellent question. It's very important that we make sure that we don't discourage FDI. It has been an important force in making our economy more productive, and we have seen some declines in FDI over the past few years. Again, it's a relatively short time series, so it's pretty hard to know the particular reasons for that in this short period of time.

But I think the advice that you gave is one that I would also echo, which is that as we move forward, the last thing we want to do is discourage other investors in other countries from investing in the United States. We want investors to think that this is a good climate, not only individuals who live in this country, but individuals who live abroad. This is a good climate for investment, it is an economy that's stable, it is an economy that's growing, and it is an economy that's open. And as long as we continue to maintain that, I think that we will encourage that kind of investment. To the extent that we move away from that, I think it is problematic, and it would not be good for the American economy.

MR. FRATTO: On that subject, I think Deputy Secretary Kimmitt over at Treasury is delivering a speech today on that topic. You may want to look at that.

Q I must confess, I didn't read the report cover to cover, although I enjoyed what I did read. Did you mention Iraq and the effect that Iraq has on the economy? I'm wondering if Iraq is a stimulus or a drag, or why it doesn't seem to have had, to this point, a profound effect on the economy?

CHAIRMAN LAZEAR: The way we think about issues like Iraq is we think of them in terms of the general budgetary picture. Whether one spends on Iraq, whether one spends on one thing or another, is not quite so central to the economic picture. What is central to the economic picture, though, is whether we are spending too much.

And that's an issue of the budget deficit. The budget deficit has come down at a very rapid rate, much more rapid than predicted, and I think the primary reason for that decline in the size of the deficit is the fact that the economy has grown more rapidly. I mean, Congress has done a little bit in terms of spending restraint. We've made some progress there. But for the most part, the reality is that revenues have come in, and they've come in at a rate higher than we predicted. Why is that? Because the economy has grown at a rate higher than we predicted, and that's been good for the economy and it's been good for the budget deficit.

So when I think about these issues that have to do with the budget -- and the specifics, again, are not particularly crucial -- but the budget -- I think the budget implications are crucial. I'm convinced that the most important way for us to keep our budgetary situation under control and to move in a positive direction is to keep the economy growing.

I'm a big fan of the 2003 tax cuts, the tax cuts in general, but particularly the 2003 tax cuts. I think that if you look at the data, it's virtually certain that that at least was in part responsible for making the economy grow over the past few years. And I think that's, again, an important ingredient and something that we need to continue.

MR. FRATTO: There's time for one last question, if there is one.

Q I had a question about the fiscal chapter. You mentioned that one way to curb Medicare's cost would be to restructure this. And is this something that you're going to bring up in discussions with Democrats? I know that Paulson has engaged in conversations with Democrats on a long-term plan for entitlements. Do you think that this is something that should be part of these discussions and something that should be part of --

CHAIRMAN LAZEAR: Well, I can't speak for Hank, but I will tell you that we all agree that Medicare is a various -- very serious situation facing us, not only in the distant future, but also right now. And the reason it's facing us right now is that every time Medicare expenses go up, it puts pressure on the current budget, and pressure on the current budget means that it has to crowd out something else. So that's always an issue, and it's an issue that we're thinking about right now.

I know that Secretary Paulson is very concerned about this, and that we need to make sure that we move forward in talking with all the members of Congress. I think there is some openness and willingness to do that. And I know he's been working on it.

And, again, I can't really give you any specifics because this is more Hank's deal than my deal. But it's something that we're certainly not giving up on. We know this is a key problem, a key issue. And it's an issue right now, as well as in the distant future. So we're on it.

Q Is that a new proposal, though? I don't think I've come across this before, the idea of restructuring the other parts of Medicare, or is this something the administration has brought up before?

CHAIRMAN LAZEAR: I'm not sure I know specifically what you're referring to. So I could -- I could -- Kate, do you know -- do you know what Karen is talking about on that?

MS. BAICKER: There have been proposals to improve the efficiency of Medicare spending for many years. I think there's been an ongoing discussion between the administration and members of Congress about ways to improve the efficiency of the Medicare program, and that's about giving beneficiaries more choices over the way that they want to consume their care and making sure that people in different parts of the country have access to the same high-quality care and the same level of choices. And there are a lot of different ways you could approach that. And the ERP doesn't pick one particular way, but tries to lay out some of the features that would be helpful in improving getting more value out of the Medicare system.

CHAIRMAN LAZEAR: Let me just say one thing, and that is -- you just got to hear from Kate, who has been instrumental and one of the architects of many of the health care proposals that this administration has been putting forward. I'd also like to thank Gary Blank, who is the Chief of Staff in Council of Economic Advisers. The reason this book exists is in large part a result of Gary's efforts. He's the one who makes the trains run on everything, but in particular on the Economic Report of the President. So we owe him our thanks and gratitude.

MR. BLANK: Our apologies for the trains not running on time in getting folks here.

CHAIRMAN LAZEAR: Yes, we do apologize for that.

Thanks very much.

END 2:20 P.M. EST

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