Press Briefing by Chair of Council of Economic Advisers, Laura Tyson
The Briefing Room
1:10 P.M. EST
MR. MCCURRY: Good afternoon everybody. I think as many of you are aware, there's some impressive economic news that we'd like to talk about today, in an interesting way also sets up a discussion of the President's participation tomorrow in the working session on welfare. So I've got two guest stars that I'm glad to have with me today. And we'll start with Dr. Laura Tyson, Chair of the Council of Economic Advisers, to talk about the economic issues. She will then turn it over to Secretary Shalala, who can tell you more about tomorrow's session on welfare reform.
Q: Is she going to head the national economic policy?
MR. MCCURRY: Say again.
Q: Can you take a couple quick questions?
MR. MCCURRY: No, we'll keep it running. That's fine.
DR. TYSON: Do you want me to take some questions before Donna, and then turn it over to Donna?
MR. MCCURRY: Yes.
DR. TYSON: That probably makes the most sense.
Yes, I'll take some questions before I turn it over to Secretary Shalala.
Let me just begin with an overview statement here. There's a written statement -- I'll just sort of emphasize the main points.
According to the economy's advance report today, it is an advanced report and it is subject to revision, the economy grew at 4 percent in 1994. That's the finest performance on growth in a decade. At the same time, inflation, as measured by a fixed-wage GDP deflator, which is a standard way of measuring overall inflation, was only 2.7 percent. When you put that combination together, 4 percent growth and 2 percent inflation, and you go back in history and you look for a period of time of comparable economic performance, you have to go back 30 years. So this is really the soundest or the healthiest combination of strong growth and modest inflation we've seen in 30 years.
When you look at the expansion itself, you see great strength, continued strength in spending on capital equipment, which increased at 17.6 percent. And you see robust spending by consumers. Consumer durables in particular were strong last year. They increased by 8.5 percent.
Now, these increases in intrasensitive parts of the economy. Consumer durables spending is intrasensitive, and capital equipment spending is intrasensitive. The strength looks even more remarkable in light of the fact that there were significant increases in interest rates last year. The strength of the spending suggests that high levels of business confidence, high levels of consumer confidence, and growing disposable incomes were really the source of the spending strength.
Now, residential investment, also an intrasensitive part of the economy, one began to see in the second half of the year a slowdown in that sector of the economy. It was a strong overall performance over the year, about 8 percent, but it declined at an annual rate of 4.3 percent in the second half of the year.
This very strong performance by the private sector, if you look now into public sector spending, in particular federal government spending, you see that federal government spending declined by 5.4 percent in terms of real federal purchases in 1994. During the past two years, federal government spending declined by 5.4 percent in terms of real federal purchases in 1994. During the past two years, federal spending on goods and services has declined at an annual rate of nearly 7 percent. So this is really delivering on the promise of scaling down the government, of restructuring and reinventing the government.
I just would conclude by saying, what you have here is a combination of modest and stable inflation rates, strong investmentled growth, impressive gains in employment and gains in income; and those are the building blocks for gains in living standards. Even so, I want to point out -- and this is an important way, I think, of combining these two presentations -- even so, in an expansion which was arguably the strongest in a generation, many Americans did not participate fully. On average, wages increased at just about the rate of inflation, so American workers saw no significant real gains in their income -- many American workers saw no significant real gains in their income. Many American families, therefore, saw no significant real gains in their family income.
In addition, the most recent numbers we have do suggest that a record number of Americans remain in poverty, and 40 percent of those Americans are children. So clearly what you have here is, I think, a conclusion that a strong economic expansion is a necessary condition for improving the living standards of Americans, but it's not a sufficient condition for capturing everyone. We have to do many other things. We have to worry about -- and that's why we have our middle-class agenda, but it's also why we have our welfare reform agenda.
Q: Do the statistics that came out today help make the case that the relationship between growth, employment and inflation has changed and that some new look at that in terms of interest rates is a good idea?
DR. TYSON: Well, without talking abut interest rates one way or the other, let me say the following. We have asked ourselves the same question. There is the question that if you look at 1994's performance, which is very strong on output growth, very good on inflation, very good on unemployment, does it suggest somehow that there have been structural changes in the economy which really will allow it to follow a different kind of possible trajectory in the future?
We looked at that. One year can't allow you to draw a firm conclusion. In point of fact, however, the one year, when you look at it in terms of, say, the past 15 years, I would say, you can't -- it looks -- it's obviously an outstanding year, but you could not conclude on the basis of one year that the structural changes have fundamentally changed the economy. Therefore, what you would conclude and what you will see in all of the forecasts out there and what was even apparent in our forecast in the summer -- and I'm not by any way suggesting what our future forecast is, but we have a forecast out there in the summer -- most forecasters think the economy's growth rate this year will moderate somewhat; that a 4 percent growth rate is a growth rate which the economy can sustain in a year in which the unemployment rate comes down nearly a percentage point. But if the unemployment rate doesn't come down another percentage point, and that would be hard to achieve, then the growth rate is itself likely to moderate somewhat.
Nonetheless, for the economy to grow as most forecasters are predicting over the next year, at an excess of 2.5 percent is very good economic performance. It will mean continued progress on employment. It will mean keeping the unemployment rate down. It will mean keeping the inflation rate down.
Q: But you're still looking. But the suggestion is, though, that there -- is it not, that there may have been some fundamental changes?
DR. TYSON: I would say that at this point to say there may have been would simply be to say that this year, 1994, was, in those particular dimensions, the best in 30 years. But one year would not lead you to make a -- to draw a fundamental conclusion that the economy has changed in some dramatic way.
Q: Dr. Tyson, do you believe that passage of a balanced budget amendment would choke off government's ability in the future to keep an economic recovery like this going or to keep new recessions from --
DR. TYSON: Well, like, I believe, most economists, I do not support a balanced budget amendment because I believe it's bad economic policy. And I think it's bad economic policy because it makes it -- it essentially takes a feature of the current budget system which is the automatic stabilizers, and it forces fiscal policy into an automatic destabilizing mode.
So if the economy slows down for reasons of, say, an external shock, something happens in the world economy which has a negative effect on the U.S. economy, the government deficit automatically gets larger because tax revenues go down and government spending on things like unemployment compensation and food stamps goes up. And those two features actually moderate the downturn somewhat. What a balanced budget amendment forces the Congress to do is to take actions which actually make the downturn worse.
Q: Could you answer this question as an economist as opposed to a political person?
DR. TYSON: That's mostly what I try to do here.
Q: Try to answer this as an economist, if you can.
DR. TYSON: Do not think my answers are --
Q: No, no, no, because it'll sound like a political question but maybe as an economist you can answer it. If the economy is in such great shape -- better than it's been in a decade -- and in '92 Clinton ran on the assumption that it was the "Economy, Stupid," why is he so unpopular and why did the Democrats do so badly last year?
DR. TYSON: Well, I would -- my economic answer would be -- and that's the only answer I have -- I emphasize the macroeconomic performance of the economy. And in this press statement it says very clearly this is the finest macroeconomic performance in the economy in a generation. And you measure macroeconomic performance by things like inflation rates and aggregate growth rates and unemployment rates. What those numbers do not get at is what's happening to incomes of average working Americans.
And I noted in my statement, in my oral statement, that wages on average have just about kept pace with inflation. There's -- very small gain. Many wage categories have shown no gain at all, and some have declined. And then you have the fact that the evidence on family incomes suggests that many Americans are keeping -- are seeing increases in family income from increases in employment but not increases in family income from increases in the earnings on the job.
And I think all of those kinds of statistics have to be put into the picture in order to try to understand how the average American might feel when they hear, gee, the economy is doing so well, and they try to translate that into their own pocketbooks.
Q: Dr. Tyson, what problems do you --
DR. TYSON: Where's this voice? I just can't see where it's coming from. Okay.
Q: What problems do you forecast for the U.S. economy as a result of the situation in Mexico if the situation there continues to deteriorate? And not only with Mexico, but after you finish with Mexico, add in Canada also, the situation there?
DR. TYSON: Well, the situation in Mexico and it's implications to the United States depends very much on what happens with our efforts with the Congress. We have made a strong case, and it's been supported by the bipartisan leadership, of the need for a temporary loan guarantee to get the Mexicans through what is really a short-term liquidity crisis. If the Mexicans get that support and can get through this temporary period, then I think they -- as you know, yesterday was announced an International Monetary Fund stabilization package of $7.7 billion, which is a record package. I think Mexico has developed a package of dealing with its macroeconomic problems which now will have an international stamp of approval with substantial funds, and that should allow Mexico to get through stabilization and continue on a very sound medium-term growth path, which we believe it's on.
So in that scenario, with the loan guarantees, the IMF plan going into action, I think the crisis would be addressed, and Mexico will continue on a sound growth path. It's important for the United States because we do have 700,000 jobs tied up with the Mexican economy in terms of exports to Mexico. And we do have a --we do have at issue of immigration from Mexico. And we do have a desire for both economic and political -- economic liberalization and political democracy to continue in Mexico.
Q: economic models, what would be the impact if the situation there continues to deteriorate?
DR. TYSON: In what we have done is basically to do two kinds of scenarios. In one scenario is a scenario in which Mexico does not get loan guarantee, is forced into a default situation, is unable to attract additional private sector capital of an amount to let it get back on this medium-term growth trajectory. And in that case what we assessed was over the next two years, it could take about a half a percentage point off of U.S. growth.
If -- but the situation could be worse. And I think that's important to emphasize. We have from the beginning said this is a crisis which has the possibility of spreading to other global -- to other emerging markets. In that kind of scenario, it's our view that you might end up, in a worse-case scenario of many markets being involved, a full percentage point off of U.S. growth over the next two years. So that's the kind of analysis we've tried to do.
MR. MCCURRY: -- last one, and then we'll --
DR. TYSON: I don't know who to deal with. Yes.
Q: I wanted to you ask you quickly, do you believe that the minimum wage could be increased beyond $5 and not have a harmful impact on jobs?
DR. TYSON: Look, we, as you know, do not have a specific proposal out there. We have been talking in the neighborhood, as it's been reported, of $5 an hour. And in that neighborhood, our assessment of the literature and of the empirical studies that have done on this, would suggest that it would have a very beneficial effect on income growth with a negligible effect on employment levels.
I'll take one more, because I --
Q: The favorable inflation performance in 1994, is it likely to be as favorable in 1995, given where the economy's at? And also, can you also address the question, some private economists said today that they thought the composition of the fourth quarter figures suggest that growth may be slower early this year.
DR. TYSON: Right. Okay, on the -- let me start on the composition and the fourth quarter. In the fourth quarter, I think one of the issues people are going to look at now is there was a very large component of inventory investment in the fourth quarter numbers. Unfortunately at this point in time, everyone knows something about those inventory numbers, which is they are based on very partial information. And they are subject to large revision. The revision could either confirm the notion that a lot of growth in the fourth quarter was inventory related, or it could come in in such a way that in fact you get a revision upward in retail sales and so you get more final demand.
I think all we can say right now is that the inventory level -- the inventory investment in the fourth quarter was quite large and is subject to large revisions. One can't tell at this point whether it was voluntary, involuntary or whether it would be revised away.
The only certain thing you see in the numbers over the last two quarters is a slowdown in residential construction. That shows up. As far as what will happen to inflation next year, again, without directly giving our new forecast, I think it's absolutely been consistent in our forecasting from the very beginning and in almost all the private sector -- I think all the private sector forecasts I have seen -- to predict a small increase in the inflation rate in 1995. But we are starting from a level of less than 3 percent, and so the small increases bring the forecast I have seen into the range of 3 percent to 3.3 percent, which by recent history standards -- by standards of the last 25 years, would actually be another year of very fine performance on inflation as well.
Thank you very much.
END1:24 P.M. EST
William J. Clinton, Press Briefing by Chair of Council of Economic Advisers, Laura Tyson Online by Gerhard Peters and John T. Woolley, The American Presidency Project https://www.presidency.ucsb.edu/node/269930