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THE WHITE HOUSE

Office of the Press Secretary

PRESS BRIEFING
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 this.

Certainly, there were many positive developments going on in the private sector when we took office; there had been modernizations, there 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 rates.

The deficit reduction that was projected there and the turnaround 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 grow tremendous strength while actually having interest rates drop. So that 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 more demand, and yet there to be a drop in long-term interest rates is very, very much due to the change in the fiscal situation where the government becomes not an excessive borrower, but not even a borrower at all.

This 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 capacity 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, our economy has a greater ability to grow and create jobs without spurring inflation.

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 at 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 has 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 believe that the surplus should be reserved until we know how much is needed to 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, I'm 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, though 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 as 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 a $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 outstanding economic performance since then.

This area of green is the deficit reduction. Below the line here 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 percentage, 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 economic 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 happening by accident, it's happening because of policy decisions that were taken 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 showing a surplus now where we were showing a deficit in February. The story is largely on the revenue side. Revenues are higher and they're higher not 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 estimated 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 the 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 would 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 growing 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 to be. Janet will go through the economic assumptions in just a minute, but there are many, many different changes. It is a much smaller effect on the change since February than on the revenue side. In 1998, changes in revenues account for $45.9 billion of changes, and net -- the outlay changes account for $3 billion. So really the story of what's going on in terms of the changes since February is very much on the revenue side.

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 required to be issued by law by July 15th. There has been intense interest this 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 that 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 the economic assumptions underlying the budget. For the past five and a half years, this administration has built a record of forecasting that's 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 rosy scenarios. And the assumptions in this year's budget are similarly credible in they're consistent with the views of a consensus of economic forecasters.

As you know, the economy's performance over the past two years has 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 purposes 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 CPI; 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 questions?

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, inflation and long-term interest rates are all lower than we thought in February.

The shift to more moderate growth that's assumed in this budget is a recognition that by mainstream assumptions, growth has been exceeding the pace that can be maintained on a sustained basis without some eventual tendency for upward inflationary pressure. Having said that, I would quickly want to add that our assumed real growth rate is certainly not the best that the administration believes that this economy can achieve; certainly, the outcome could be better than we have anticipated.

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 in place what's needed, the solid foundation we need for sustained economic growth and rising living standards, and that is evident in a recent 2.9 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 happened?

MS. YELLEN: Well, the 2 percent over three years is really a reflection of our assumption that by mainstream standards, unemployment 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 inflation.

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 trend --

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 and 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, it's 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 increasing inflation.

Q May I ask a political question? Congress and the administration juggle priorities all the time. Why, if we have budget surpluses as far 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, no, absolutely not, that's a lightning rod, we can't touch it, then why did 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 you 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 what we're saying is that what you have to do is make sure that you not only 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 else 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 look 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 solve 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 there, 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 done, and then we can start a national debate.

Q Let me follow up if I may, Gene. Just two points. Number one, if you could get an accurate estimate this year of how much it would cost to save Social Security, would the Administration then be amenable 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 which way the surplus might be used for a comprehensive Social Security fix that has bipartisan support, isn't shooting straight with you. We don't know.

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 and 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 wants to do. But isn't the different that the family is dealing with its own 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 because its going to take us a while to figure out, rather than give you your money back.

MR. SPERLING: Hold it. What people are we talking about here? You put the words "government" in our -- that was your phrase. We as a 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, but in terms of our long-term generational deficit.

We think that before one goes off on other priorities, one should make sure that we have a sustainable path, so that people right now who are entering the work force know that there is a sustainable and strong 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 is 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 the future.

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 correct?

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 terrible 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 have 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 Security fix.

The worst thing would be we get into a bidding war on tax cuts or 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 President is going to use all of his power, his full power as President to ensure that we do have that fiscal restraint and that fiscal discipline to reserve the surplus until we have a bipartisan, long-term Social Security fix.

Q Gene, the Republican side says you're releasing this midsession 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 very beginning have served us very well. We made very clear that there is potentially better numbers that would be available -- that was true two years ago, four years ago, six years ago. But we make policy not based 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 Security 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 will be very difficult to characterize these as pessimistic numbers.

Q Does this assume passage of the tobacco tax cut the President's recommending?

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 throughout the economy.

Q May I follow on the --

MR. LEW: It includes the spending, so we don't get any benefit from that.

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 it seems to me they always pay a lot of attention to this number. Couldn't 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 it's 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 really 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 also 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 debt and act like it's nothing, doesn't mean anything?

MR. LEW: We never act like it doesn't mean anything. Obviously, one of the reasons for the 1993 economic program and all of the actions that have lead to the remarkable deficit reduction that we've seen come to a head today was because we needed to stop the growth in the national debt. We've accomplished that. We are not going to see the debt held by the public growing under this economic forecast, this budget forecast.

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 invest in other important national priorities. And that's a healthy debate to 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 don't 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 at $39 billion, but the national debt will only be reduced by $35 billion?

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 to be losses. So for the purpose of scoring the credit budget it is much less.

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 debt 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? If so, it is really reasonable to expect that the business cycle has been evicted?

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 been 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 best 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 say, 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 the things that often lead to a recession like rising inflation, high inventories, financial sector imbalances, don't see any of those things, don't anticipate a recession, but we're surely not assuming the business 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 a 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 moment with a 4.3 percent unemployment rate. And our expectation going forward is that we will continue to see solid growth; that the Asian crisis will 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 growth.

But we have a very strong economy. We've got consumer confidence 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 benefit to most people would out strip the benefit of direct tax cuts?

MR. SPERLING: I think that in the positive situation that we hope to have, which would be that we have a long-term Social Security fix, if there is still surplus available, I think that there would be a tremendous national debate about exactly those questions. And there are 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 to shore up Medicare; others would talk about the benefits to overall debt reduction and making it easier for our government to bear its overall benefits. Some will talk about investing in education and obviously tax cuts will be prominent.

One thing that is important, though, to recognize is that in some 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 out there, but in all of them they're increasing net national savings. And 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 is, 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 net national savings has come through fiscal discipline. So I think that's 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 -- (laughter.)

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 gains --

MR. SPERLING: Trying to predict hypothetical future economic situations -- you just got done talking about a situation in which some 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 amount of money. For the final payments on the 1997 calendar year liabilities, 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 so 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 wages.

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 than capital gains.

THE PRESS: Thank you.

END 2:08 P.M. EDT