Press Briefing by Edward Lazear, Chairman, Council of Economic ...

MR. FRATTO: Good afternoon, everyone, thanks for coming. We have Ed
Lazear, Chairman of the Council of Economic Advisers, is going to talk
about the release of the Economic Report of the President. Ed will have an
opening and then be happy to take your questions. Thanks.
CHAIRMAN LAZEAR: Thank you. The President has just signed the Economic
Report of the President for 2008. The Economic Report of the President is
a detailed summary of the economic issues and policies that face our nation
today. Although not every topic worthy of consideration can be covered in
one volume, we believe that those covered in this report are among the most
important.
The report begins with a summary of the macroeconomic situation. Economic
growth over the four quarters of 2007 was 2.5 percent, slightly below that
of the previous year but still solid, given conditions in housing and
credit markets. Going forward, most forecasters expect the first half of
2008 to have slow, but positive, growth, followed by a pick-up in the
latter half of the year. The stimulus package just passed by Congress that
will be signed by the President shortly should help ensure against risks in
the economy.
This year's most significant economic events revolved around housing and
credit markets. An apparent under-pricing of risk was revealed first in
mortgage markets, and later in a variety of credit markets. The President
was quick to respond to these issues by focusing on borrowers through
programs like FHA Secure, suspension of the tax liability on mortgage
write-downs, and HOPE NOW programs. Additionally, the Federal Reserve
acted to pump liquidity into the market. Some credit markets have become
more stable since the acute tightening that occurred in the summer.
One very positive development this year was increases in exports that has
occurred. Net exports shifted from reducing GDP growth to being a
significant contributor in 2007. In large part, this resulted from growth
in the economies of our trading partners, from our own productivity growth
and from changes in the terms of trade. We remain committed to open trade,
which has beneficial overall effects on the economy.
At the same time, we are cognizant that not all Americans benefit to the
same extent from open trade policies. The President continues to support
programs and reforms in programs like Trade Adjustment Assistance that help
those whose jobs are displaced as a result of trade.
Health care has been an important focus of the President. The President's
plan for standard deduction would remove the disadvantage felt by consumers
who buy their health care outside their employers. It would allow
consumers to benefit from cost saving in the plan that they choose and in
the amount of medical treatment that they purchase. It would help provide
coverage for several million uninsured and it would encourage competition
that will drive costs down. Government-paid Medicare costs are a
significant threat to fiscal stability and the President's plan is a step
in the direction of bringing these costs down.
This year's report provides a number of observations on taxes. First, the
ratio of tax revenue to GDP in 2007 was 18.8 percent, which is above the
40-year historic average of 18.3 percent. Second, failing to extend the
President's tax cuts will have adverse consequences for the economy. Low
taxes are important for creating an environment conducive to continued
economic growth. Equally significant is that allowing the tax cuts to
expire will result in 116 million Americans facing tax increases of an
average of about $1,800. Finally, the tax cuts help move to a more
efficient tax system with respect to saving and business investment.
Our infrastructure is an important factor in economic growth. One chapter
explores the current state of our roads, bridges, railways,
telecommunications and aviation systems, and explores policies in these
important areas.
Alternative energy is also a major thrust of the President's policies. The
20-in-10 legislation that he proposed in last year's State of the Union was
passed by Congress. This legislation will move us in the direction of
energy security, and also will help reduce the growth of greenhouse gas
emissions. The President believes that technology is an important part of
the solution, and the United States is a leader in producing new
technologies.
Finally, this year's Economic Report of the President contains a chapter on
economic statistics. Economic statistics are also part of our
infrastructure. They guide policy and private market decisions, as well,
and we have an obligation to make sure that they are accurate and as
informative as possible. It's important to maintain the continuity in
economic statistics and to make sure that they remain relevant in a
changing economy, by keeping pace with new sectors and new technologies.
This report contains the usual statistical tables that have come to be a
staple for policy makers, researchers and businesses. We hope you find
this year's report informative. Thank you, and I welcome your questions.
Q The chapter on exports notes that that's one of the bright spots in
the economy. It identifies one of the causes of the increase in exports as
the change in terms of trade, or, in other words, the weakness of the U.S.
dollar relative to where it was before. Secretary Paulson frequently
comments on how a strong dollars in the U.S. interest. How do you
reconcile the benefits of a strong and a weak dollar at the same time?
CHAIRMAN LAZEAR: Well, as you probably know, we are not -- the only people
who speak about the dollar per se are the President and the Secretary of
Treasury, and I really can't comment on our dollar policy. I can certainly
comment on the factual issue that you raised, which is the notion that
terms of trade have changed over time. And if we look back at the exchange
rates in 2001 and compare them to exchange rates today, they are different.
And what that implies, of course, is that American goods have become
cheaper and that imported goods have become more expensive over time.
That's just a fact. That's not a policy statement, that's the reality.
In addition to that, there have been other factors that we think are
equally important in driving export growth, and that would be primarily the
growth in our -- the economies of our trading partners. That's an
extremely important factor. To a first approximation, a 1 percent growth
in the economy of a trading partner translates into a 1 percent growth in
their demand for our goods and services, as well. And so when our trading
partners are growing, that's good for our economy.
The third factor that I would talk about just in this same context is that
one of the nice things that's happened over the past few years is that
productivity growth has been quite strong. When productivity growth is
strong, it means that American goods become cheaper, and even at a given
exchange rate, our goods become more competitive as a result. And that's
been another factor that's driven our export growth.
Q In the report you say that the period of somewhat slower than normal
growth that began in 2007 is likely to continue into 2008. Is the White
House's forecast of 2.7 percent growth for '08 still viable, and why or why
not, at this stage?
CHAIRMAN LAZEAR: Well, we only do our forecasts twice a year, so we really
only have two formal forecast point -- we have the mid-session review and
the annual forecast. The last forecast was done in November. So the 2.7
percent that you're referring to comes from November. Obviously there have
been new data since that point that might alter our forecast that you'll
see coming next time. I don't want to foreshadow that or tell you where
it's going to be because, obviously, we don't know where we'll be at that
point and we'll have new data even between now and the time at which we
issue that forecast.
But if we look at the forecast of professional forecasters -- those not in
the government, but outside government -- those numbers have come down to
some extent, but most of those outside forecasters are still predicting
positive growth, albeit slower than the growth that we've seen over the
past couple of years.
Q So you see no reason to dispute those figures?
CHAIRMAN LAZEAR: Which figures?
Q The private sector forecast.
CHAIRMAN LAZEAR: Well, again, what I would say is that there are a variety
of outside figures. Forecasts have a significant range to them. Some are
quite high -- in fact, I saw one that was extremely high for the third and
fourth quarter of this year. That's possible, but that creates a lot of
variance to these sorts of things. And again, I wouldn't want to pick one
or the other and place too much weight on any one of them.
But I think the bulk of the forecasts, again, are predicting strong --
sorry, positive growth and stronger growth in the second half of the year.
I think that's the general consensus right now.
Q Having said that, do you think we're going to go into a recession or
are in a recession right now?
CHAIRMAN LAZEAR: The answer is, I don't think we are in a recession right
now, and we are not forecasting a recession. We are forecasting slower
growth. There's no denying that the growth that we had in the fourth
quarter of last year was significantly lower than the growth that we had in
the third quarter. Now I just remind you that we had similar growth rates
in the first quarter of last year, and those similar growth rates were
followed by two very strong quarters. So these things are somewhat
volatile.
I am not suggesting that we expect that in this quarter we'll see the same
kind of growth that we saw, say, in the third quarter of last year -- we've
had some issues, obviously, in terms of credit tightening, in terms of the
housing markets. And that's the reason why the President was very active
in pushing through the stimulus package, which we're very pleased about. I
think we got that in record time. We think that's insurance against risks
on lower economic growth, and we think that will help a good bit. We think
it should help immediately, because businesses will build those
expectations into their plans, and we expect that will help the economy
even in the very near term.
Q Two questions. One on the labor -- page 38. You talk about long-term
unemployment up and median duration up as well. Can you talk a little bit
about why these continue to trend up for a number of years, and whether
it's reflective of the kinds of jobs that have been created, or something
else is at play?
And then the section on housing, you talk about FHA and HUD, and how HUD --
the HUD loans dropped so precipitously, to 40,000, I think; that
corresponded with that huge jump in private label issuance and
mortgage-backed securities, et cetera. Realistically -- and it advocates
price -- risk-based pricing. Wasn't the whole private-label market
risk-based pricing to begin with? And what would be different now under
risk-based pricing for HUD? Do you think that the private-label is going
to go away and that's going to replace it?
CHAIRMAN LAZEAR: Okay, good. Two good questions. Let me just scribble
down -- they're quite detailed, let me make sure I get the first one here.
On the first -- on the second one, let me go to that first, about HUD. We
think that FHA reform is important and will be useful for a variety of
reasons. If you look at places like California right now, the FHA business
in California is essentially shut down, and the reason for that is obvious:
Houses in California are much more expensive than they are in the nation
as a whole, and so what happens is that these limitations on FHA's ability
to insure those loans has differential impacts in certain regions of the
country. So making FHA loans be a bit more sensitive to local conditions
we think is a good idea.
We also think it's a good idea to allow the insurance rates to reflect the
relative risks associated with different kinds of loans. That seems to
make sense. That's what private markets do, and to the extent that FHA is
competing with private markets, we think that a system that mimics at least
to some extent what we see out there is probably something that will
enhance efficiency, and that's why we think that will be a good step, as
well. So we think these FHA reforms can actually be quite helpful in terms
of moving the market in the right direction.
On your first question, in terms of the labor market and duration of
unemployment -- right now, unemployment duration, if we look at long-term
unemployment, it's about where it was in the mid-'90s. So in terms of the
proportion of individuals who are facing long-term unemployment, it's about
the same as it was in the mid-'90s, and actually lower than throughout most
of the past few years.
That said, long-term unemployment is always a major concern. It's one of
our most serious concerns because you always worry about individuals who
remain chronically unemployed. That's a big problem. Obviously if you're
unemployed for a week or two, you get a new job, and you get a new job at
approximately the same wage rate or sometimes a higher wage rate, that's
less of a concern. So that's something that we always monitor, and we're
certainly keeping our eye on those numbers right now.
Q Any explanation for it as to why -- why it's trending up?
CHAIRMAN LAZEAR: Well, again, I would say it hasn't really -- this
particular number that I'm talking about has not trended up. It's
basically where it was in the mid-'90s, so I don't see a particular trend
in that number at all. Now, there are differences in the labor market. As
we see a move to services, one of the things that we know has changed over
time is that the -- both the labor market and the economy as a whole has
become less cyclically-sensitive, simply because those sectors tend to be
less cyclically-sensitive. So you do see some changes over time, but those
are long-term trends, rather than something that you'll notice in any one
year or even eight-year period; it tends to be something that happens over
20 or 30 years.
Q I know you're not forecasting a recession, but a lot of Americans look
at the fourth quarter figures, they look at the stock market, they look at
the shrinkage in the job figures in the fourth quarter, and they say, well,
I'm worried about it. Are they wrong to be worried about it?
CHAIRMAN LAZEAR: Well, we look at those numbers too, and that was the
motivation, of course, behind the stimulus package, because of the concerns
out there -- and it wasn't just the public's concerns, it was our concern
that there are some factors that suggest some potential weakness in the
economy. We were worried about lower growth, and as a result of that, we
decided that it was the right time to act.
We believe that the stimulus package that was voted on last week will be
quite effective in ensuring against these downside risks, and we think that
they will keep the economy from slipping into lower levels of growth. And
again I think that our forecasts are realistic, they're consistent with
what you're seeing out on the street, as well. I think this is -- we're
moving in the right direction.
I should also mention, by the way, that the Federal Reserve has also acted
to change their monetary policy stature over the last few weeks, and in a
pretty aggressive way, and that will also contribute, we think, to the
economic picture.
Q Are you saying that you were -- that they were right to be concerned
about that, but those two steps -- the Fed, and what you have done --
should take care of those concerns?
CHAIRMAN LAZEAR: Well, again, I don't want to make a normative statement
about whether the Fed is right or wrong; the Fed is independent, and they
make their own decisions. It is a factual matter that they cut rates
pretty aggressively over the past month. Simply if you look at it compared
to historic rate cuts, that's a fact; it is a big rate cut. We believe
that, coupled with the stimulus, will have an effect on the economy.
Q Congress is planning to advance a second stimulus package in a few
weeks. First of all, given the timing, would you even agree that it would
be a stimulus package? And whether or not it has a stimulative effect, is
the administration willing to consider additional measures?
CHAIRMAN LAZEAR: We think the proposal that we put out a few weeks ago,
and it was acted on last week, is the right thing to do. We think 1
percent of GDP is about the right number -- it's slightly higher than 1
percent, but we think that's an effective stimulus. We think it will have
the desired effect. And that was the policy that we thought was
appropriate. We still think that policy is appropriate and we'll stick
with that.
Q When you pass that stimulus package, aren't you pretty much
handcuffing the Fed in terms of how low they can lower interest rates?
CHAIRMAN LAZEAR: Again, I don't want to comment on what the Fed can or
cannot do. I'm not even sure I follow your -- follow the logic of your
question. I'm sorry.
Q Well, if you're stimulating the economy and you're pumping more money
into --
CHAIRMAN LAZEAR: I think I know where you're going. Okay. I'm sorry. I
think you're question is whether we have to worry about inflation, and I'm
not sure if that's the question -- but that's a question that I would pose
and I'm certainly willing to talk about. (Laughter.)
Currently, inflation rates are in the moderate range, and there are a
variety of indexes that people look at, but in the low 2s if you look at,
say, the PCE deflator, which tends to be the number that the Fed looks at.
That is still within the range where I believe that both the government,
the fiscal policy and monetary policy still have sufficient flexibility.
We're not talking about handcuffing either of the various -- the two policy
instruments for dealing with that. Obviously, we always worry about
inflation. Obviously the Fed always worries about inflation; that's one of
their two mandates, and so they're not going to ignore that. But right
now, things seem to be okay.
Now, again, I would not argue that all prices have been stable. We know
that energy prices, in particular, and food prices have also gone up at a
pretty significant rate. And that's a concern for a couple of reasons:
One is, it's a concern just for the macro economy, as you point out; but
it's also a concern because those are two components of consumption that
tend to affect the poor disproportionately. They tend to consume a
relatively larger share on food, and a relatively larger share on energy.
So that's always a concern when those prices go up.
And we think some of the policies that we've put into place will help
address that, in particular, the energy policies that we're talking about
will get to some of these energy cost issues at least over the longer haul.
One could always argue we should have started them 10 years ago, 15 years
ago, things would be cheaper now. I wish we had. We haven't. But it's
better now than not doing it at all.
Q Ten years ago, when people talked about unemployment going down below
6 percent, they were very worried about inflation, and it caused a sense of
panic. Now, at 5 percent inflation, we're worried that we're in recession
-- 5 percent unemployment -- worried about that we might be in recession.
What has changed fundamentally in the economy that has put us in this
position?
CHAIRMAN LAZEAR: Well, again, I would argue that the 4.9 percent
unemployment that we have right now still reflects a relatively tight labor
market. Obviously last month's labor market numbers were not as strong as
we've seen for the past -- actually, for the past four years or so. And
that's something that we're going to keep watching. But at an unemployment
rate of 4.9 percent, we still see tightness in the labor market.
I think that the concerns that the economy has, that people looking at the
economy have, are concerns that we share, as well, which is we know that
the housing market has been negative, and it's been negative for a couple
of years now. We also know that we face some tightness in credit markets,
and that those credit markets are working their way through a variety of
issues, one of which is the under-pricing of risk. I think that, in
retrospect, it's pretty clear that people had the wrong notion of what was
the appropriate risk premium. And those things take some time. As the
structure adjusts, it's going to take some time to work through that.
So I believe that that may be a source of concern. It was certainly a
source of concern for us, and it was one of the reasons why we favored
being aggressive, taking the steps right now to enact the stimulus package.
But again, with the stimulus package, I think that ensures us against some
of these downside risks, and I think the economy will continue to grow.
Q I guess what I'm trying to figure out, what has changed in the economy
that we no longer worry that a low unemployment rate, like 6 percent, will
cause a burst in inflation and excessive tightness in the economy? Now
we're looking at 5 percent unemployment and we think, gosh, we may be in
recession. What fundamental shift has taken place in the economy in 10
years?
CHAIRMAN LAZEAR: Well, I don't know whether a fundamental shift has taken
place in the economy. Again, I don't think we want to be complacent about
even a low unemployment rate. Obviously, anytime people are unemployed we
worry about that. And that was the reason that I gave the answer before,
particularly about long duration unemployment, which is a particular
concern if it gets out of hand. Right now it is not and, as you point out,
4.9 percent unemployment is low. That's not a major concern either in
terms of the macro economy, but obviously we always get concerned when any
Americans find it difficult to find work. And that may be the source of
the concern, but, you know, again it's something that we always pay
attention to.
Q Do you still think that the official forecast for unemployment this
year is going to turn out about correct and -- by the end of the year,
given that there does seem to be additional slowing that's happening, at
least in the first half of this year?
And second question related to that is, as you know, one of the big
arguments on the stimulus package was whether to extend unemployment
benefits. If it were the case, if we have a really slow couple of quarters
here and we have an uptick in longer-term unemployment, would you say that
the arguments have improved in favor of offering an additional 13 weeks?
CHAIRMAN LAZEAR: In answer to your first question about whether the
forecast is right or not -- I mean, the forecast was somewhere around 5
percent, somewhere around high 4s, and that's about where we are right now.
Whether we remain there, of course, is something that we'll have to see
how that plays out over the next couple of months.
But, again, you know, I hate to keep referring to the stimulus package, but
I think that the stimulus package, coupled with the Fed rate cuts, are
significant in terms of their effect on the economy, and we estimate that
the stimulus will have the effect of increasing jobs by about a half a
million above the number that would have been the case in the absence of
that. So that's a pretty significant number, and that would have a pretty
significant effect on the unemployment rate.
So it is certainly consistent and by no means unreasonable that we would
have numbers that are consistent with our forecast from November. Again,
you know, we will update our forecast at the usual time, and keep you
posted on how that looks, but, again, no reason that we would think that we
would be way off.
On the second question about extended unemployment benefits, extension of
unemployment benefits has never occurred when the unemployment rate was
below 5.7 percent. And usually, if you look at the historical record, it's
somewhat closer to 7 percent. So it would be unprecedented to extend
unemployment benefits at a time when the unemployment rate is 4.9 percent.
That also is true given that the duration of long-term unemployment is
still relatively low. And again, as I had mentioned earlier, kind of
middle level of 1990s is about the same. So it would be -- it would really
be unprecedented to go that route at this point.
Q Can I maybe jump back into his question. I think what he was asking
is what has changed in the economy -- if I'm not wrong, the answer is our
perception of what maximum unemployment without an inflationary effect
would be. And the 7 percent figure you just listed, would that suggest
that maybe we're in a time where it would necessitate the extended
unemployment because our perception of maximum employment has also shifted?
And then the question I really wanted to ask: Where do you -- the home
price, as an economist who happens to be the CEA head, how far do the home
prices still have to drop -- 6.5 percent on the Shiller Index -- aren't we
putting a floor -- with the stimulus package, by getting -- raising loan
limits, aren't we at risk of putting a floor on prices that haven't reset
completely?
CHAIRMAN LAZEAR: Okay, you guys are giving me two questions at a time
here, so you're making me write everything down, make sure I remember this.
First, with respect to unemployment rate, what you're referring to I guess
is the so-called NAIRU, Natural Rate of Unemployment Without Inflation,
non-accelerating inflation rates of unemployment. Many people think those
have dropped. Again, that depends on the models that you estimate. There
are very sophisticated models behind these kinds of indexes. And some
might argue that that rate has dropped. But again, even if we go with the
most aggressive notion of what is a high unemployment rate, 5.7 percent,
we're still quite a ways from that right now. So 4.9 percent -- I think by
anybody's measure, 4.9 percent is still low unemployment. Remember, that's
well below the average that we've had over -- the historical average; it's
below the average for the '90s, the '80s and the '70s, each taken
separately.
So we're still at low rates of unemployment. And again, that doesn't mean
that we're not worried about people who are unemployed. We surely are; we
always worry about people who are unemployed. That's one thing. It's
another thing to institute a policy -- a significant policy change that
would extend unemployment benefits beyond the normal level.
Now let me get to your second question, house prices. I'm not going to --
obviously, I'm not going to give you market advice on whether to speculate
on homes or not. I think most people believe that the housing market
declined more than we expected. I would have to say, in honesty, if we
looked back a year ago most people who were looking at the housing market
would not have forecasted that it would fall as much as it has since then.
Whether it will continue to fall I think remains to be seen. It is
difficult to believe at some point that it's going to continue to fall,
because once you get to lower and lower levels, it's just much tougher for
that to take as much off of GDP as it did before. First of all, it becomes
a smaller part of GDP, and second, as it gets closer to lower and lower
levels, it's harder for it to fall by a significant amount.
So I would say going forward, eventually this has to bottom out. I think
most probably would have expected that to have started to happen right now.
Last quarter we know housing was a significant drag on GDP growth, and it
will continue to be, at least for the first quarter, simply because there
are lags. So once you see housing starts down, it takes some time for
investment to play out. And so it will be a drag for the first quarter and
probably into the second quarter of this year, even if things were to
bottom out right now.
Q Back in March, the great debate was, will this housing crisis spill
over into any other sector, and economists were divided, and of course by
August we knew it was spilling into the financial sector. Now, if you pick
up the papers you're reading about corporate debt market seems to be under
pressure. Is your forecast assuming no more spillover, or have you
actually taken into effect possible spillover into corporate debt and other
marketplaces?
CHAIRMAN LAZEAR: Well, when you say "spillover," I guess I would say
that's still a debatable point. The fact that we saw some distress in
other credit markets does not necessarily mean that it was a spillover from
the housing market. It could have been, but it could also be a reflection
of the same underlying phenomenon. I think most market observers believe
that most of what we've seen in terms of credit markets reflects the
under-pricing of risk that occurred over the past couple of years, that
happen to have shown up first in mortgages.
Okay, so it showed up first in subprime. That doesn't mean that subprime
necessarily was the cause of what we saw in other markets. It's just a
reflection of the same forces perhaps showing up there first. And my guess
is that will be something that will be debated by academics for the next 10
years to come.
Is it over? You know, who knows whether it's over. I think the good thing
that has happened in credit markets is that many firms have recognized
their losses and, in addition to that, they've been able to raise capital.
I think that's the most encouraging sign -- that firms have suffered some
distress and financial markets, no question about it, but after they've
declared those losses they've been able to go out and raise capital and to
start again. And that's what's most important, I think, going forward.
Q I didn't see any mention in the book of the $9 trillion national debt.
What level of concern does the Council have about that?
CHAIRMAN LAZEAR: The national debt is always a concern, although we tend
to look at the public debt, rather than the national debt. I think the
public debt is a number that, at least to my mind as an economist, is more
informative, because it's the debt held by the public. The national debt
includes inter-governmental transfers, so when one department lends money
to another department, that shows up in the national debt. But the public
debt is still --
Q But the money doesn't exist, right?
CHAIRMAN LAZEAR: But the public debt is still a relevant number. And if
you look at the number on the public debt, the public debt is about 37
percent of GDP, which is kind of on the average that we've seen
historically. It's the number that we tend to look at in terms of whether
the deficit is too high or not too high.
When the deficit is below about 2 percent to 2.5 percent of GDP, depends on
the growth rate, but when it's about 2 percent to 2.5 percent of GDP, what
that tends to mean is that the ratio of the public debt to GDP tends to
fall over time. If the deficit gets larger than that, then that tends to
drive up the ratio of the public debt to GDP. And obviously, large
deficits that tend to drive that public debt up relative to the GDP are a
significant concern in the long run.
The thing that I would point to is that certainly not only by historic
standards, but also by the standards of other major countries that are in
the comparison group -- look at the other G7 countries -- we're still in
pretty good shape in terms of our public debt to GDP ratio, because -- I
think it's only one country has a slightly lower ratio than we have. And
so we're still in relatively good shape.
That said, we are never complacent about the deficit. And that's why the
President has laid out his plans to try to cut the deficit to zero by 2012.
We believe that we can still do that. We believe that the stimulus, which
will obviously increase the deficit for next year, is a one-time shot; it's
an investment worth making. It does increase the public debt, national
debt as well, no doubt about it. But again, it's a cost that we think is
appropriate to bear right now, because of its investment in long-term
growth.