THE WHITE HOUSE
Office of the Press Secretary
For Immediate Release
May 26, 1998
The Briefing Room
NATIONAL ECONOMIC ADVISOR GENE SPERLING,
CHAIRPERSON OF COUNCIL OF ECONOMIC ADVISORS JANET YELLEN
AND ACTING DIRECTOR OF OFFICE OF MANAGEMENT AND BUDGET JACK LEW
1:25 P.M. EDT
MR. TOIV: Good afternoon, everybody. This afternoon to brief
on the President's announcement of the 1998 and future surpluses are Gene Sperling, the President's National Economic Advisor; Janet Yellen, who is the Chair of the President's Council of Economic Advisors; and the latest in a long line of extraordinary OMB Directors, Lack Lew.
Q How does Mr. Lew spell his last name?
MR. TOIV: He spells it L-e-w.
MR. SPERLING: This is a very short person-friendly podium today.
I don't know how you're going to do, Jack.
Today, with our midsession review exhibits as strongly as ever
before the dramatic turn around in the fiscal situation in the United
States. When we came into office the Congressional Budget Office put
out their January 1993 projections. This was taking into account all
the things we knew about the economy, about the fiscal situation in
January of 1993. The Congressional Budget Office projected that in
this year we would have a $357 billion deficit. Now we have projected a
$39 billion surplus. That is a turn around of virtually $400 billion.
In the year 2002, that same Congressional Budget analysis of
January 1993 projected a $579 billion deficit. We are now projecting
a $148 billion surplus, a $727 billion turn-around.
Q What year was that?
MR. SPERLING: That was for 2002. This has clearly been a
dramatic change for our country. It couldn't be at a more opportune
time, the fact that the United States is a bulwark of economic
strength and discipline at this time. It's obviously very important for the world economy with all of the things going on.
We now look out into the future instead of projecting hundreds
and hundreds of billions of dollars, trillions of deficit, as Jack will
show you with his charts, we actually are projecting a $495 billion surplus over the next five years, and almost $1.5 trillion surplus over the next 10 years. I think the important thing to understand -- and it's
important because it is important for the path we need to take going
forward -- is the cycle, the virtuous cycle that has helped promote
Certainly, there were many positive developments going on in the
private sector when we took office; there had been modernizations,
had been a lot of restructuring to make companies more competitive,
there had been a blossoming of the information technology revolution,
but we basically faced a world of slow growth and very high interest
The deficit reduction that was projected there and the
where the government, rather than being seen as borrowing 60 percent
60 percent of the money available to the American public, private
citizens, now not taking any money, has had a dramatic effect on
interest rates. And what's been remarkable is, it's allowed us to
tremendous strength while actually having interest rates drop. So
on Election Day of 1992, 30-year interest rates were 7.65, even though
the economy was weak.
Today, after we've seen the private sector grow 3.7 over a five
year period -- 3.7 -- and overall growth 3.1 percent, we've actually
seen those long-term interest rates drop from 7.65 to 5.84. That
remarkable ability for the economy to get stronger, for there to be
demand, and yet there to be a drop in long-term interest rates is
very much due to the change in the fiscal situation where the
becomes not an excessive borrower, but not even a borrower at all.
has led to remarkable investment, probably the best investment boom in
our nation's history. We've had five years in a row, for first-time
ever, where investment has grown at over 10 percent, productive
investment -- so it has been 12.2 percent over those five years.
What does that mean? With that continued investment the
of the economy has grown over 4 percent the last three years in a row.
What this means is that with the capacity growing with deficit leading
to lower interest, leading to more investment and greater capacity,
economy has a greater ability to grow and create jobs without spurring
This has been tremendous not only in terms of the deficit, in
terms of bringing in more revenues, which then bring the deficit down
even lower, and then bring interest rates even lower. This is the
positive cycle. And what we exhibited all through the '80s was the
negative cycle. Now we're seeing the positive side and positive news
brings on more positive news.
What we've also seen is that as the economy has gotten strong,
employers had to reach out to people who have been on the fringes and
bring them in and recruit more people so that we're seeing the lowest
levels of Hispanic unemployment rate on record; African-American
unemployment is at it's near lowest.
So we feel that the economic vision the President has had of
fiscal discipline, of stressing open markets and investing in people
the same time has been the right vision, and it's one we want to go
forward with. And we want people to understand why this economy has
gotten better -- what the government's role in contributing to that
been. Because it's not just about who gets credit in the past, it's
about what is the right type of policies that should steer us forward.
Obviously today we wanted to stress one more time that we
that the surplus should be reserved until we know how much is needed
fix our long-term Social Security challenge. And that's a rock solid
pledge of this President and this administration, and it's one that we
are stressing with every announcement of good news.
With that, let me introduce Janet Yellen, our Chair of -- oh,
sorry, let me actually introduce our Acting Director -- twice now --
Acting Director of OMB, except this time he's on the way to being the
official OMB director, Jack Lew, who will go through his charts,
not as many as Frank would have.
MR. LEW: That's the nicest thing anybody has said to me in a
long time. (Laughter.)
As the President said a few minutes ago in the Rose Garden and
this picture shows, this year we will run a surplus. It will be the
first time that we've run a surplus since 1969, and it will be the
largest in dollar terms in U.S. history. The surplus in terms of the
size of the economy will be .5 percent, a half-percent of GDP in 1998.
Q What's the size of the surplus?
MR. LEW: Thirty nine billion dollars in 1998.
Q I ask because the President said, you know, the projection was
$350-billion deficit, he said $357. The President said $500 billion
$495 billion --
MR. LEW: This picture actually tells that story, and this is a
picture that I think is familiar to many of you because it's one we've
been using for the last few years. What's changed is we've performed
better than we predicted.
The large number, whether it's $340 or $357, depends really on
whether you're using OMB or CBO numbers, but it tells the same story.
It shows that we would have been at a $350 billion deficit but for the
economic plan, but for the deficit reduction in 1993 and the
economic performance since then.
This area of green is the deficit reduction. Below the line
is the surplus. Where we are in 1998 is $39 billion, and the surplus
grows as we go out into the out-years.
The story of how we got there is, I think, a little more
complicated and it's worth remembering that it's not just all in the
revenue side. In each of the six years, each of the six budgets that
President Clinton has put forward, spending has dropped as a
government spending has dropped as a percentage of GDP. Government is
becoming a smaller and smaller percentage of the economy. So while
receipts have gone up, and that's largely due to the very good
conditions, outlays have come down, and they've met in the middle and
that's where you hit balance. It tells a story that it's not
by accident, it's happening because of policy decisions that were
and the policy decisions that have worked.
What the midsession review does is, it updates our forecast from
February when the budget came out. And I thought I would just run
through very briefly what's changed since February and why we're
a surplus now where we were showing a deficit in February. The story
largely on the revenue side. Revenues are higher and they're higher
because of tax increases, they're higher because the economy is
performing very well, incomes are up and when incomes are up, more
revenue flows in. It shows up in withholdings, it shows up in
tax payments, and as the Treasury Department projects forward, there's
no reason to see that falling off in the next few years. That's why
numbers continue to be good, not just in 1998, but in 1999 and beyond.
One way to underscore that this is not a tax increase-driven
effect is, if we look at the tax burden on families, if we look at the
median family, the family right in the middle of all families, we
see that the tax burden of that family is the lowest that it's been
since 1976. If we look below that, at a family that is at a half
median, that's a lower income working family, its the lowest that it's
been since 1965.
The typical taxpayer is better of not just because of the tax
rates; the typical taxpayer is better off because real wages are
for the first time in a very long time, and because interest rates are
down -- and when you refinance your home, as many of us has, you see
that your payments go down, not up.
The other side of the coin is out-lays. When we have inflation
moderating, out-lays go down somewhat from where they were projected
be. Janet will go through the economic assumptions in just a minute,
but there are many, many different changes. It is a much smaller
on the change since February than on the revenue side. In 1998,
in revenues account for $45.9 billion of changes, and net -- the
changes account for $3 billion. So really the story of what's going
in terms of the changes since February is very much on the revenue
One question that people have asked a lot is, why are we putting
out the midsession review now. It is a little early for those of you
who have followed midsession reviews in the past, but they are
to be issued by law by July 15th. There has been intense interest
year in the up-to-date numbers on the deficit. There's been an
attention focused on daily revenue receipts, the daily Treasury
statements, in a way that one hasn't seen in the past.
We waited until the April filings had been counted. And as soon
as we were in a position to take a snapshot that was meaningful and
would give us the ability to look forward for the rest of the fiscal
year, we stopped and we did our midsession review. We think that this
is the right way to continue the debate, the policy debate, for the
balance of this year, and it shows the most accurate picture that we
have of the state of the budget and the state of the economy.
The President made very clear, and Gene repeated just a few
moments ago, that our position is unwavering. We want to save the
surplus until we fix Social Security first. What we've done now is
we've put out our best measure of what that surplus is, and we think
that the immediacy underscores the need to get on with the issue of
dealing with Social Security and then having to debate over what else,
if anything, to do with the surplus. With that, I would like to ask
Janet to come and go through the economic assumptions.
MS. YELLEN: Thank you, Jack. Well, my role is to talk about
economic assumptions underlying the budget. For the past five and a
half years, this administration has built a record of forecasting
based on credible economic assumptions. Our forecasting team has been
committed to ensuring that our budget balancing efforts would be based
on realistic assumptions about the economy's performance and not on
scenarios. And the assumptions in this year's budget are similarly
credible in they're consistent with the views of a consensus of
As you know, the economy's performance over the past two years
been simply extraordinary: real GDP growth averaged 3.8 percent over
the past eight quarters, the highest growth rate in nine years; and
we've had an unemployment rate below 5 percent for the last 10 months;
we've had 3 million jobs created just this past year -- and all of
that's been accomplished while inflation has declined to its lowest
level in over 30 years.
Now, although growth has exceeded our expectations in recent
years, our belief is that it would not be prudent for budgetary
to count on a continuation of growth at the recent extraordinary pace
that we've seen. So looking ahead, we're projecting real GDP to
continue to grow but at a slower, 2 percent annual rate over the next
three years -- over the next three years with an increase up to about
2.4 percent after that.
At the same time, the unemployment rate is projected to edge up
about two-tenths of a percentage point per year, as measured by the
inflation is assumed to edge up slightly over the next three years.
After 2001, real GDP growth is projected to resume our assumed trend
growth rate of 2.4 percent for forecasting purposes, and the
unemployment rate stabilizes at 5.4 percent.
Q Why so low in the next three years?
MS. YELLEN: We are -- can I just finish and then I'll answer
Our economic projections are very similar to those in the budget
that we released last February. The differences stem largely from
integrating performance that's been better than we expected during the
past two quarters. So compared with where we thought we were going to
be, right now the level of output is higher and unemployment,
and long-term interest rates are all lower than we thought in
The shift to more moderate growth that's assumed in this budget
a recognition that by mainstream assumptions, growth has been
the pace that can be maintained on a sustained basis without some
eventual tendency for upward inflationary pressure. Having said that,
would quickly want to add that our assumed real growth rate is
not the best that the administration believes that this economy can
achieve; certainly, the outcome could be better than we have
I'd just conclude by saying that I believe that the
growth-oriented economic policies that this administration has put in
place -- and Gene's described them very well -- have clearly paid off;
that deficit reduction plan, beginning in 1993, is what I think has
created this strong economic performance we're enjoying now. We have
place what's needed, the solid foundation we need for sustained
growth and rising living standards, and that is evident in a recent
percent increase in real wages, which is the largest in 25 years.
Did you want me to -- having quit there --
Q I'm interested in why suddenly it's down to 2 percent? What's
MS. YELLEN: Well, the 2 percent over three years is really a
reflection of our assumption that by mainstream standards,
is very low and most forecasters believe that ultimately, the labor
market is sufficiently tight, that there could be a tendency over time
for inflation to rise. So standard forecasts assume a period of
slightly below trend-like growth as the unemployment rate edges up
marginally back toward a level that would be consistent with stable
Q You had 3.8 percent?
MS. YELLEN: We have, and --
Q If you -- is here, you're way above it. Why suddenly decide
that you're going to be below it?
MS. YELLEN: Our assumed trend -- and as I said, this is not the
best that I think this economy can do, and certainly the President has
worked very hard to put in place a whole variety of policies to raise
trend growth. However, for the purposes of this forecast, emphasizing
we don't want to build a forecast on rosy scenarios, is 2.4 percent
Q Do you think the Fed is going to raise interest rates?
MS. YELLEN: No, I certainly don't want to comment on the Fed
whether or not it's likely to raise interest rates. We're assuming,
going forward, very solid growth, slightly below trend -- trend is
assumed to be 2.4 percent -- toward the end of our forecast period,
2.4 percent, and the slightly below trend growth over the next three
years represents very tight labor markets, an assumption that we will
edge back to a situation consistent with stable growth without
Q May I ask a political question? Congress and the
juggle priorities all the time. Why, if we have budget surpluses as
as the eye can see it, why don't we talk about tax cuts this year as
well as talk about Social Security this year? And if the answer is,
absolutely not, that's a lightning rod, we can't touch it, then why
the President even broach the subject today?
MR. SPERLING: The President today restated what our policy has
been from the start. What we've said is save Social Security first.
What we've said is that the surplus should be reserved until you know
how much of that surplus may be needed as part of a long-term Social
Security fix. We've always acknowledged that if you're able to fix
Social Security and the surplus funds still existed, that there should
be a national discussion on what should be done best with that after
fix Social Security. And certainly that national discussion should be
open to tax cuts, as well as Medicare or paying down the debt or
critical investments -- that's part of the national debate.
What we've said is the day that we should start legislating on
that or considering legislating on that is the day after we fix
long-term Social Security. And I think it's actually a very simple
philosophy, and I think one any family could appreciate, which is that
you do what you have to do before you do what you want to do. And
we're saying is that what you have to do is make sure that you not
have your fiscal house in order right now, but that you have your
long-term retirement security there. And what we're saying is this
should come first. This is part of true fiscal discipline. This is
part of setting your long-term fiscal house in order. And when you've
seen how much you need to do that -- how much of the surplus is needed
to do -- then you can talk, start having the discussion about what
could be done.
And I should say that I think that there is a smart political
logic in this, and it is the following. We, as a country, have a
tendency to kick our long-term problems down the road. If you don't
have to deal with it one year, if you can kick it down 5 or 10 years,
you do. And then the problem is much harder to fix then and people
back and say, why didn't people try to fix it earlier.
So we have done, I think, the right thing by saying, let's put
some pressure on all of us to do the right thing early when we can
Social Security in a way that could be less burdensome because we're
acting early. So let's say to everybody, if there's surplus out
if you think it should go for other priorities --whether they're tax
cuts or Medicare or debt reduction or new investments in education --
whatever it is, let's save Social Security first. Let's get that
and then we can start a national debate.
Q Let me follow up if I may, Gene. Just two points. Number
if you could get an accurate estimate this year of how much it would
cost to save Social Security, would the Administration then be
to talking about tax cuts this year? That's number one. Number two
MR. SPERLING: Let me just answer that, because the answer is
clearly, absolutely not because our philosophy -- because anyone out
there who tells you that they know how much of the surplus and in
way the surplus might be used for a comprehensive Social Security fix
that has bipartisan support, isn't shooting straight with you. We
This is going to be hard, difficult, but crucial process of
packaging a long-term bipartisan solution to Social Security. So our
point is until you know how much and in what ways the surplus might be
needed for long-term Social Security fix, we shouldn't be draining it
for other priorities. And that is our position. Others can disagree,
but it's the position the President put out in front of the American
people in the State of the Union and we've stood by it at every step
we'll continue to.
Q Could I take issue with one more point? You said any family
would get it's financial house in order first and then do what it
to do. But isn't the different that the family is dealing with its
money. You, as the government, are dealing with other people's money.
You're saying, we'd like to hold onto your money a while longer
its going to take us a while to figure out, rather than give you your
MR. SPERLING: Hold it. What people are we talking about here?
You put the words "government" in our -- that was your phrase. We as
people, we are recommending that we as a people would be well advised,
and we believe it would be the right thing to do, to get out fiscal
house in order -- not just in terms of balancing the current budget,
in terms of our long-term generational deficit.
We think that before one goes off on other priorities, one
make sure that we have a sustainable path, so that people right now
are entering the work force know that there is a sustainable and
Social Security system out there, and we're talking about what our
belief is what is best for the American people. And we believe --
others can disagree -- we believe what's best for the American people
to reserve the surplus until we know how much of it is needed to make
sure that every generation's Social Security is strong and solvent in
Q Based on the President's timetable for fixing Social Security,
you couldn't even know the answer to the question of how much money is
needed for Social Security before well into next year. Is that
I mean, he's not even sitting down with members of Congress until
December. So you're saying that no matter what, no discussion of tax
cuts this year, because the answer to the Social Security question
cannot be known at this -- based on this --
MR. SPERLING: It is our view that -- and I think one shared by
people who care about Social Security in both the Democrat and the
Republican side -- that the best way for us to get long-term Social
Security fixed is to try to do it starting after the elections in a
bipartisan process. So obviously, unless something unexpected were to
happen, we would not entertain tax cuts that drain the surplus, that
waive the pay-as-you-go budget rules and drain the surplus. We should
reserve it until we know how much is there.
And that is not such a terrible thing. Why is it such a
thing that we, as a country, after we've turned our fiscal situation
around and because of the strength of our economy, because of the
strength of the confidence in our economy that is very much due to the
fiscal discipline we've had, because we now are fortunate enough to
a surplus early -- I don't think it's such a terrible thing or a
terrible hardship for us as a country to say we're going to restrain
ourselves from draining that surplus until we put our long-term fiscal
house in order. I think that's wise, fiscal and prudent policy and I
think it will be the policy that best leads to long-term Social
The worst thing would be we get into a bidding war on tax cuts
anything else, we drain the surplus, and then we come back in '99 and
we're all saying, well, maybe we could have had a long-term Social
Security fix if we had just showed some restraint. Well, this
is going to use all of his power, his full power as President to
that we do have that fiscal restraint and that fiscal discipline to
reserve the surplus until we have a bipartisan, long-term Social
Q Gene, the Republican side says you're releasing this
review two months early to kind of low-ball the surplus estimate and
influence the tax debate. You should have surpluses in June and
September because of quarterly tax payments. Isn't this surplus
actually likely to be a lot bigger than $39 billion?
MR. SPERLING: I'll let Jack take that question.
MR. LEW: The numbers are done in the same basis that all of our
economic projections have been done. We've found that using the same
kind of conservative, prudent assumptions that we've used from the
beginning have served us very well. We made very clear that there is
potentially better numbers that would be available -- that was true
years ago, four years ago, six years ago. But we make policy not
on what our hopes are, it's based on what our prudent assumptions lead
us to believe.
If our goal was to simply put out a marker and accomplish
something along the lines that you've described, arguably, we should
have pumped the numbers up, not kept them down, because we would be
saying that the number was $X-billion more and all of that was on hold
pending Social Security reform.
Our position is really very simple. It doesn't matter if the
number is $39 billion, $29 billion or $59 billion. We're saying, save
every penny; save all of the surplus until we deal with Social
first. So we have no real incentive to drive that number one place or
another. These numbers are reflecting both our economic and technical
work that, as all of our past budgets have, which lead us to these
numbers. It's within the general range that CBO has talked about for
'98. I think if you look at the out-years, if anything it's a little
bit higher than CBO in terms of the surpluses.
There's a lot of differences in terms of how we view the
sustainability of the revenue numbers we're looking at. I think it
be very difficult to characterize these as pessimistic numbers.
Q Does this assume passage of the tobacco tax cut the
MR. LEW: This is a re-estimate of the President's budget so it
does assume the policy in the President's budget. The revenue numbers
that you're looking at, though, that are driving the changes are
re-estimates of baseline revenues because there's really no tax policy
change and they're being estimated.
Q I thought you guys have always said the tobacco money has
nothing to do with how big the surplus would be.
MR. LEW: That's basically what I've just said.
Q I thought you just said it does assume that all the policies
MR. LEW: No, it's a re-estimate of the President's budget
overall, but these numbers are not being driven by those tobacco
policies. These numbers are being driven by what's happening on the
revenue side, which really is a reflection of higher incomes
Q May I follow on the --
MR. LEW: It includes the spending, so we don't get any benefit
Q I didn't really understand the explanation for why do it early
this year. You said people are paying more attention this year, but
seems to me they always pay a lot of attention to this number.
you have had a more accurate figure if you waited another month? And
also, what are the 5 and 10 year numbers?
MR. LEW: The question as to accuracy at some point, whether
May or June, you have to stop the clock and the single most important
fact is what were the receipts in April. That really is the event --
the payments at tax filing time and the estimated payments coming in
after that -- that are driving the revenue numbers.
The snapshot we take of other areas of government spending
don't change that much from May to June. Usually we're in an
environment where there's so much going on in terms of policy debate
that we sometimes don't get to it even in July. This year, there was
the ability to do it, it was the right thing to do because there was a
lot of speculation. And the speculation was not entirely wrong, so
we're confirming some of the speculation. But the speculation was
unbounded, and we though that we should put our best numbers out there
so that the debate, as it goes forward over the summer, is informed by
our best knowledge of where the economy is and where the budget is.
Now, which long-term numbers were you asking for?
Q Five and 10 year.
MR. LEW: But which number?
Q Oh, the surplus number.
MR. SPERLING: $495 over five and $1.477 trillion over 10.
Q Why is cutting into the national debt never mentioned?
MR. LEW: Excuse me?
Q Why do we tolerate trillions and trillions in the national
and act like it's nothing, doesn't mean anything?
MR. LEW: We never act like it doesn't mean anything.
one of the reasons for the 1993 economic program and all of the
that have lead to the remarkable deficit reduction that we've seen
to a head today was because we needed to stop the growth in the
debt. We've accomplished that. We are not going to see the debt held
by the public growing under this economic forecast, this budget
As Gene mentioned a few minutes ago, the choice now is after we
fix Social Security first, do we reduce the debt further or do we
in other important national priorities. And that's a healthy debate
have. We've turned the corner. It is a very different debate than:
what do we cut to balance the budget? And it doesn't mean that we
ask the questions about the national debt. It is precisely what we
should be doing after we fix Social Security first.
Q What is the debt now and what do you project it to be in 2002?
MR. SPERLING: The public-held debt in 1997 was $3.771 trillion.
And for this year now it is projected to go down to $3.746.7 trillion.
That's a remarkable event in our country's fiscal history to actually
have a reduction in the level of publicly-held debt, and that's what
having a surplus means.
Q -- the 35 number?
MR. SPERLING: There is a little technical -- it has to do with
the start-up of the student loan program.
Q Gene, the national debt number is over $5 trillion; isn't it?
Q I'm slow on these things. So the budget surplus is projected
$39 billion, but the national debt will only be reduced by $35
MR. MINARIK: It's the -- to raise cash that is used for the --
Q Where did the $4 billion go?
MR. MINARIK: It's cash that is used for the direct student loan
program. We need that cash to lend to students --
Q Why is that not --
MR. SPERLING: Because it's not a -- the new program hasn't been
fully matured yet, so it --
MR. MINARIK: What we score as an expenditure under that program
is expected losses from failure to repay the loans.
MR. LEW: We don't assume that all the student loans are going
be losses. So for the purpose of scoring the credit budget it is much
Q -- against a potential loss, although you don't think you'll
have that size of a loss?
MR. LEW: But that would have been there with or without the
deficit reduction. It was an event that is part of the budget cycle.
MS. YELLEN: And the difference between the 5.4 gross federal
and the 3.8 that is held by the public is what's held by other
government accounts, particularly Social Security.
Q Does the President's prediction of surpluses as far as the eye
can see also depend on economic expansion as far as the eye can see?
so, it is really reasonable to expect that the business cycle has been
MR. SPERLING: Let me just make one quick comment and then I'll
turn to Janet, which is that we obviously have had 3.1 percent growth
over the last five years, and as we said, private sector growth has
3.7 percent. Budget assumptions does not put us necessarily in the
place of as if we were simply an investor. We're trying to give a
long-term assumption that assumes there will be ups and downs in the
economy, so we don't expect that there will be 2.2 percent or 2.4
percent every year.
But if you just predicted the upside, you would then rightly
what if there was a downturn. And so you predict a long-term number
that you think will be sustainable and accurate over a long-term,
assuming both the ups and downs in the economy.
MS. YELLEN: I would just elaborate on what Gene said by saying
that although there's not the slightest reason looking forward to
imagine that we're going to have a recession, I mean, if you look at
things that often lead to a recession like rising inflation, high
inventories, financial sector imbalances, don't see any of those
don't anticipate a recession, but we're surely not assuming the
cycle is dead; likely, out there, there's another recession. And if
there is a recession, then likely tax revenues are lower than we would
have anticipated spending higher.
But an important point is that whether to be a recession at some
undetermined future time, that's likely to be followed by a period of
above-average growth as we get back to potential output. And so over
forecast as long as this, there is reason to think even with a
recession, things would average out. And as I mentioned earlier, our
assumptions about growth and the economy is sustainable trend pace of
growth. I believe we're really on the conservative side. If you were
going to fault them, there are many out there who would fault us for
being conservative. And, of course, there is upside risk and we're
doing what we can to make those numbers higher.
Q In the economic assumptions, you said the trade deficit shaved
nearly 2 percentage points off of first quarter throughout this year,
which is still really strong at 4.2 percent. If the Asian financial
crisis turned around, is there a real danger that the economy could
overheat suddenly? I mean, if you had 6 percent growth in the first
quarter instead of 4.2, that would be a pretty alarming figure.
MS. YELLEN: Labor markets are, I think, quite tight at the
with a 4.3 percent unemployment rate. And our expectation going
is that we will continue to see solid growth; that the Asian crisis
lead to a drag, probably not as large a drag as we saw in the first
quarter;, but throughout 1998 we expect net exports partly because of
the Asian crisis, partly for other reasons, to be a drag on our
But we have a very strong economy. We've got consumer
numbers this morning, and those confidence numbers remain near record
highs. Both consumption and investment spending are growing very
robustly. And together I think our economy can absorb the likely drag
from the Asian crisis, but keep going forward in a solid way. That's
what we're assuming in the forecast.
Q If you let the surplus ride and accumulate the benefit in the
economy, like long-term interest rates, is it possible that that
to most people would out strip the benefit of direct tax cuts?
MR. SPERLING: I think that in the positive situation that we
to have, which would be that we have a long-term Social Security fix,
there is still surplus available, I think that there would be a
tremendous national debate about exactly those questions. And there
very powerful arguments on all sides. There are people who will say
that now that we've fixed Social Security, we should use these funds
shore up Medicare; others would talk about the benefits to overall
reduction and making it easier for our government to bear its overall
benefits. Some will talk about investing in education and obviously
cuts will be prominent.
One thing that is important, though, to recognize is that in
of these options you are saving the money in any case. And one of the
issues with Social Security is there is a lot of different proposals
there, but in all of them they're increasing net national savings.
if you're interested in what is going to affect the overall interest
rates on investment or homes, what really matters is not the exact
configuration of which account we put it in, but whether we're
contributing to our national savings rate -- the federal government
or is not.
And as you know, in our country we've had trouble increasing the
private savings rate, so virtually all of our success in increasing
national savings has come through fiscal discipline. So I think
exactly tied to the debate people have, and a lot of people will make
very powerful arguments for the benefits of either debt reduction or
saving it in some form as opposed to spending it or tax cuts.
Q If we have a bear market, would the fall off in capital gains
taxes significantly affect the surplus?
MR. SPERLING: You know, whenever new people come into the
administration, the economic team, we go through the "don't answer any
question that starts with `if there's bad economic news,'" so --
Q Well, it's a capital gains question. Let me rephrase it. How
much of the surplus -- have you got better numbers on the capital
MR. SPERLING: Trying to predict hypothetical future economic
situations -- you just got done talking about a situation in which
people -- I'm not saying the administration necessarily -- but some
people suggesting that slower exports in this particular circumstances
have actually moderated our growth pace. Trying to predict what one
particular element will have, not knowing how all of the other pieces
are, I think, is a fool's game.
So if anybody else wants to -- (laughter.)
Q How much of this is capital gains? How much of this surplus
this year is capital gains?
MR. LEW: We don't have a breakdown, do we?
MR. MINARIK: The tax surprise this year was only a modest
of money. For the final payments on the 1997 calendar year
relative to what we forecast was only about $12 billion.
Q I paid mine. (Laughter.) At least 10 percent of it.
Q If your forecast had already factored in change --
MR. MINARIK: Forecast had already factored in a strong market
that the forecast was relatively accurate. What is happening is a
combination of increase in final payments on 1997 and strong payments
on 1998 as we're going along, which includes not only estimated
payments on income from capital, but also withholding on income from
Q So it's not just capital --
MR. SPERLING: No, no --
MR. LEW: And to the extent you say carrying forward, it's
precisely because of that withholdings being higher and the estimated
payments being higher, which certainly suggests regular income more
THE PRESS: Thank you.
END 2:08 P.M. EDT