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Press Briefing by Laura Tyson, Chair of the Council of Economic Advisors

February 14, 1994

The Briefing Room

9:30 A.M. EST

DR. TYSON: Good morning. I'm happy to be with you today for the official release of the annual economic report of the President. We did a quick count before we came over. This is the 49th such report. As is traditional, it consists of two parts -- an annual message from the President to the Congress and the annual report of the Council of Economic Advisors. The latter report, the annual report of the Council of Economic Advisers, analyzes and reviews the economic developments and policy changes that have occurred during the last year and provides the administration forecast for the future.

This report represents the first comprehensive exposition of the administration's short-term and long-term strategy to maintain a prosperous American economy and to increase the living standards of all Americans. We have a White House press release -- let me just read a couple of paragraphs from that. When you look into the report, we find that the prospects for sustained economic expansion look far brighter than they did a year ago. We forecast the economy will grow at 3 percent in 1994 and will remain on track to create 8 million jobs over four years.

Growth of output increased steadily over the course of 1993. And we believe the expansion will continue. Consumer spending should remain healthy because of continued gains in employment and output. Investment spending should remain strong because of low long-term interest rates and increasing levels of demand. The recent strength in residential construction should also continue.

The economic report argues that the administration's deficit reduction plan has been a major factor in the decline in long-term interest rates between the presidential election of 1992 and the end of 1993. These lower interest rates sparked an investment-driven expansion, which was the source of dynamism for the American economy.

The fact that investment is leading the economic expansion is good news for future living standards because investment is the key to productivity growth and hence to real income growth for all Americans.

The economic report also lays out the rationale for the economy; for the administration's investment program -- investing in people, technology, defense conversion, infrastructure and the environment; and the administration's efforts to open foreign markets; to improve the efficiency of the government; and to reform the nation's health care system.

The report's divided into six chapters, which are described in the release. The release also contains 10 signs of economic renewal for the American economy.

I'm happy to answer questions on the report. I also want to introduce my colleagues, Joe Stiglitz and Alan Blinder, who are also here to answer questions. We wrote this report as a team effort. All the members of the CEA were involved until very late at night. And we want to make sure that all of the information here is completely represented. So Alan and Joe, as well as myself, are available for questions.

Q: Laura, how do you think the American consumers would be affected if there was a trade war with Japan?

DR. TYSON: I don't think that -- I think, as the President said on Friday, we are going to -- we are just in the process of looking at various options and various ways of responding to where we are in trade talks in Japan. So I think it's a little early to speculate on what will be done.

Q: Well, there's talk that tomorrow there might be some announcement on Motorola's inability to operate in Tokyo.

DR. TYSON: That case, the Motorola case, has an extremely long history, which really dates back, if you look at Motorola's efforts to sell cellular telephones into the Japanese market, to before -- in the early 1980s when Motorola made the decision to be involved in cellular technology and the decision to try to sell in Japan.

Thereafter, we followed a decade of efforts of Motorola to sell into this market. It happens to be that tomorrow is a decision day for looking at where we are on that issue. So I want to indicate that this is a very long case with a decision date for tomorrow. And I think we should wait and see what happens tomorrow.

Q: Dr. Tyson, if you read the report, the section on Japan, the way I read it, and maybe I'm wrong, is even if you eliminated all of the Japanese trade barriers tomorrow, it probably would only boost U.S. exports to the country by $9 billion or a little bit more than that. It doesn't sound like it would solve the trade deficit problem with Japan at all, even if you eliminated all of the trade barriers. So is the goal, the objective of eliminating trade barriers really worth it -- worth a trade war?

DR. TYSON: First of all, I really do not think we should be talking about a trade war at this point. There has been no action taken to indicate that we are the precipice of a trade war with Japan, number one. Number two, that $9 to $12 billion was an estimate of the effects on the bilateral trade imbalance if you eliminated formal and informal barriers to trade, many of which are not quantifiable. That does not include the effects on the U.S.- Japan trade imbalance from an improvement in the macroeconomic situation in Japan, something which was part of our framework request. Our framework request had both a macroeconomic component, asking Japan to take action to stimulate domestic demand, not just for the benefit of the United States, but for the benefit of the global economy, and efforts to address structural or sectoral barriers to import penetration in Japan -- again, not just for the United States, but for the global economy.

The $9 to $12 billion is an estimate of what might be the effect on the U.S. bilateral balance from sectoral and structural barriers. It does not include a macroeconomic component. That's number one. Number two, I would say that that estimate is an estimate of what we think we might be able to quantify. There is the long-term dynamic effect on competition, which is not easily quantifiable and not included in those numbers; which means, what is the effect of American and foreign producers over a long period of time from not being able to have access to one of the most competitive, dynamically growing economies in the world, and that is

the Japanese economy. True, right now they're in a very difficult cyclical situation. They're in the worst economic slowdown since World War II. But over a longer period of time, barriers to access in that market are extremely costly to the competitive dynamics of global industry. And that has an effect on U.S. producers as well as foreign producers. And the $9 to $12 billion does not capture that effect.

Q: Normally in something like trade, you would expect that the administration would strategically have planned, if we do "X", we've got to be prepared to do "Y". Why is it that in the talks with Japan, the United States does not seem to have a plan that would have been ready to be launched should the trade talks fall through, since it seemed clear for sometime that they were in serious trouble? And when you say, okay, we're not going to have an agreement with them, don't you think you should be prepared with what the next step is?

DR. TYSON: I think, first of all, I guess I disagree with the premise to some extent. I do not agree with the view that it was apparent for quite sometime that the talks were going to end in stalemate.

Q: All you had to do was pick up the phone. (Laughter.)

DR. TYSON: It's important -- well, for people who are in the negotiations, I don't think that was the perspective. In addition, if you look at the history of U.S.-Japan trade talks, and there have been many, they often have gone up right to the wire. So this was typical in that regard of a set of talks going right up to the wire. What was different in this case is that the U.S. decided that rather than crossing the wire with a cosmetic agreement and declaring that we had a set of agreements, we decided that we would not do that -- that for the first time really, we would make it clear to the American people that, we did not have an agreement that we thought met our needs and Japan's international responsibilities.

So that was what was different -- not that the talks went up to the wire, but that how we concluded at the wire.

Q: But the plan -- I mean, where was the plan for if the talks fell through?

DR. TYSON: We are in the process of developing what -- look, we have many options. The real question here is deciding which of the many options we have to exercise. So it's really an issue of ranking and doing an orderly ranking and execution of the options we have available.

Q: When will we know those options?

DR. TYSON: Well, we actually -- I don't know if we will have an official list of options. I think there will be a series of meetings and series of actions. And I couldn't give you an exact schedule. I can tell you that there's a meeting in a few minutes that Alan Blinder will run out to, but I cannot tell you any more than that at this point. That's the only thing I know in terms of a time framework right now is the time of the first meeting.

Q: Are you suggesting that if there's a decision on Motorola -- a narrow decision on Motorola tomorrow, that is not necessarily the start of a reaction on the bigger -- be seen as an isolated --

DR. TYSON: I think you should see the decision on Motorola as the culmina -- it was on a certain timetable, which existed before the framework talks and continues to exist through

tomorrow. And I think one should understand that action in terms of the very long history of Motorola's efforts to sell cellular telephones into Japan.

Q: Dr. Tyson, the section on employment is optimistic, but as recently as last week we saw a large corporate hit with -- AT&T. What is the forecast for these huge downsizings that the corporations continue to go through?

DR. TYSON: Well, I think one of the things we tried to do in the employment chapter -- and it's really demonstrated probably most effectively in the diagram on page 101 -- but there's also a long discussion of this -- is to try to assess whether or not the restructuring that's going on in the U.S. economy or the technological changes going on in the U.S. economy have in some significant way changed the relationship between output growth and employment growth.

Now, what we find and what this chart shows is that, in fact, we don't see a significant break between those -- that relationship. That is, employment growth is on the low side of what would be predicted from output growth, but not out of the bounds of what would be predicted from the historical experience of the U.S. economy during the post-war period.

Now, that evidence suggests that even as companies are restructuring, Americans are finding work at about the pace that would be predicted by the aggregate growth in the economy. They're finding work in different kinds of firms; they're finding work in firms that are restructuring but adding employment; or they're finding work in the development of new firms or in those firms which are not restructuring but are expanding. We tend to hear about the restructuring. We don't tend to hear about the creation or the development of new jobs in firms that are not restructuring or in firms that are just starting up.

Q: So is this trend of downsizing, though, going to continue in the coming year?

DR. TYSON: It is hard to know that. I don't think that what -- I think one should understand downsizing as part of a series of responses of the American business community to a couple -- to maybe three factors. One might be the balance sheet difficulties that many of them found themselves in by the end of the 1980s. Much of that problem has now been addressed, so that incentive to restructure may actually be weaker now than it was before.

A second reason for restructuring simply is the slowdown -- cyclical slow-down in the economy and the need to consolidate when the economy is expanding slowly. Well, now the economy's expansion has picked up pace and looks to be sustainable, so that incentive for restructuring may in fact be weaker.

Finally, there was the incentive to restructure based on the need to be more competitive internationally. The truth is that right now, U.S. companies look to be very competitive internationally as a result of changes -- long-term effects of a change in the exchange rate over time and as a result of the restructuring that has already gone on. So, again, it may be that we have seen much of the restructuring and we're -- but it's too early to tell. But the factors that one might elucidate or enumerate for restructuring seem to each have perhaps weakened.

Q: You devote a number of pages to the notion that higher tax rates, in fact, have not been much of a drag on the economy, contrary to certain other views that are now in the process of being retracted. But those who hold those views go on to say,

yes, but this new employer mandates, including on health care, are going to be a real drag on the economy. Would you address that?

DR. TYSON: Well, first of all, I want to make sure that people understand that if you move from one argument to the other argument, it doesn't mean the first argument was correct. The argument we take on head-on here is, do increases in tax rates increase or decrease the revenues from taxation? And we conclude that they increase the revenues from taxation. So, if people want to now move on to another issue because that issue is a dead issue, well, then, fine let's move on to the other issue. But we wanted to talk about the evidence on that issue.

As far as employer mandates are concerned, we reiterate in chapter four here our basic conclusion which we drew actually last August and September, which has since been verified -- or since been supported by many private sector organizations. And that is the view that our health care proposal is unlikely to have a significant effect on employment at the macroeconomic level. We have here repeated what we said last September, I believe, that the most one could expect in terms of an effect on employment from our health care proposal, is plus or minus a half a percentage point of employment -- plus or minus. It's important -- sometimes our opponents will only report the minus side of that. But we actually feel that in model runs we've done and others have done, there's at least the possibility that our health care reform by slowing the rate of growth of costs that the private sector pays for health care may, in fact, generate additional employment opportunities.

Probably, and this is what the overwhelming amount of economic evidence suggests and this is what most economists believe, probably as has been the case in the past, any change in -- whether it's plus or minus -- in the amount that the business community pays for health care will ultimately show up in a plus or minus on takehome pay for workers. That is, workers, if you look over time, workers have tended to pay for their own health insurance by variations in the amount of take-home pay available.

Q: Let me go back to some of the Japanese issues. You talk about the $9 to $12 billion figure -- how would you characterize that in terms of the impact on the job market? How does that translate?

DR. TYSON: I tend to think of -- I think one of the things we try to make absolutely clear in our discussion of trade here is that you can think the most important thing about trade is the effect it has on economic specialization and productivity and efficiency in the economy over time. As the U.S. economy moves towards fuller employment as a result of its own economic expansion, the issue is really going to be -- we want to continue to liberalize trade, regardless of how close the economy is full employment.

The issue is not job creation per se, it's the quality of jobs, it's the living standards of Americans, it's the specialization and productivity of American producers and the kinds of jobs that are available to American workers. So, I think that's really the issue for the long-term with Japan. That's why it's so important to open Japan's markets so that American producers who do have high quality, highly competitive goods can sell in that market, keep their competitive edge internationally and keep generating high quality jobs for Americans. So, I don't see it as simply a job count issue, I see it as a quality of job --

Q: Well, not simply, and I understand your point --but what are the job numbers?

DR. TYSON: We didn't really calculate them that way, because I think it's in -- I do think it's a misconception of why

trade policy is very important -- of why liberalization of trade is very important -- to focus on the number of jobs. I think one should focus on the quality of jobs and sort of the ability of -- and the living standards of Americans.

So, I mean, we could do one. You could do one on the basis of the sort of standard calculations of a billion dollars of exports creating somewhere between 17,000 and 20,000 American jobs. You can apply that to the $9 to 12 billion, do the multiplication, and figure out the number -- which I'm not going to do here because I'll undoubtedly get it wrong. (Laughter.) But that 's how you do it. I mean, if we were going to put a number in here, what we would have done is said a billion dollars of exports equals 17,000 to 20,000 American jobs; here's $9 to 12 billion of American exports, here's the number of jobs.

But I want to indicate also, we do point out -- and maybe I should just point out where that is -- on page 212, we do point out once the economy -- the American economy nears full employment, additional net exports can create upward pressure on prices as well. Even when the economy is at full employment, however, and even if trade liberalization increases both imports and exports equally, leaving net exports unchanged, the American economy will reap the benefits of freer trade in the form of greater production efficiency, lower prices and higher living standards. In other words, even if our trade agreement with Japan were to succeed when the economy were at full employment, and even if it meant both an increase in our exports to Japan and an increase in our imports from Japan, the U.S. economy would be better off. That's the correct way to think about the benefits of trade liberalization.

Q: In the mean time, as the dollar declines in value against the yen, what are your projections for the percentage of increase it will mean in terms of the cost of Japanese products in the U.S.?

DR. TYSON: I think for right now I would prefer not to answer any questions on the dollar-yen exchange rate. Although I do want to say that I think it's appropriate to think of this as a rise in the value of the yen.

Q: But does this factor in at all -- does it have any impact on your projections, then, for inflation in the U.S. and --

DR. TYSON: This would not have an -- look, it's important to emphasize here that the dollar has been relatively strong against the exchange rates of all of our other major trading partners. This is one exchange rate among many -- we have not done the -- I haven't done the calculations, but I would not anticipate it to have a significant effect at all on U.S. prices. This issue here is what it would do to the bilateral trade imbalance between the U.S. and Japan and also to the competitiveness of the U.S. and Japanese producers in third country markets where they're competing against one another and the relationship between the two exchange rates can have an effect on their price competitiveness in third country markets.

Q: risks to the forecast, then, the probability of stalling out consumer demand, what are the odds of that happening, do you think, first of all? And second, you also talked about the risk of perhaps 4 percent economic growth, and what impact would that have on your interest rate forecast? Two-part question.

DR. TYSON: Well, what we were doing there is really trying to identify for the -- for interested observers like yourself what the possible risk to the forecasts are. In point of fact, we did not sit down and sort of assess or attach probabilities to any of the individual risks. I mean, right now we are -- we are quite

confident with our forecast. It is very similar to the forecasts that are out there throughout the private sector and through such independent agencies as the Congressional Budget Office. So we really feel that the forecast is where we believe the economy will be. But we thought it was important to at least identify possible risks. There doesn't seem to be any evidence right now of any flagging of consumer confidence, for example, which might be one indicator that consumer spending might slow down. All we know right now is that the weather seems to be slowing consumers down.

And as far as the economy growing faster than 3, 4 percent or so, it's again I think a little early to make that conclusion. There were special factors at play in the fourth quarter of last year. They're well recognized. Everyone anticipates the economy would, as a result of the dying out of those special factors, settle down to a slower rate of growth, and we think that growth will be in the neighborhood of 3 percent.

Q: At one point in talking about the budget deficit -- suggest that additional aggressive further deficit cuts would be risky. In looking at the budget deficit forecast that came out last week both either using, without health care reform or with health are reform, the deficit by the end of the decade is still around $180 to $200 billion -- about 2 percent of GDP. If you get it down to that level, can we then declare victory? Is that enough? Or even if you do health care reform is another effort, another run going to have to be made at the budget deficit -- in the long-term?

DR. TYSON: Well, I would say right now, our view --what we were trying to argue here is that the economy seems to be on a good expansionary growth path. There is widespread agreement -- again, CBO mentions this, Alan Greenspan has mentioned it -- that the fundamentals for the economy look particularly strong compared to the past 20 to 30 years. We have just gone through introducing and putting in place a significant deficit reduction effort.

Our view is, let the economy absorb this; let the economy grow through this; and monitor it -- see where we are. There is no reason right now, it seems to me, to subject the economy to additional contractionary risk. We have the deficit going down relatively to GDP, and then stabilizing at a level which is below 1979 -- the last time we had levels of the deficit GDP ratio as low as this was 1979. The debt to GDP ratio instead of rising is now falling. It started rising in 1981, it rose through 1994. It's now on a downward path. So the economy's on the right path. And our view is we should let it continue on this path for sometime and deal with what is the source of rising deficits after the end of this century, which is health care. So that the appropriate way to think about the deficit problem is not as some abstract problem confronting the economy, but to think about it in terms of the source of the problem, which is health care.

Q: Over the long-term, however you want to define it, what is the biggest problem facing the U.S. economy?

DR. TYSON: The biggest problem. Well, we try to identify a number of problems in this report. I think it's important to emphasize that we think of the Clinton administration as having a comprehensive strategy to deal with a number of problems.

I think that as far as the deficit and debt problem, we've put the economy on the right track. And as I just said, I think we should continue down that track for awhile and make sure that we stay on that track, which is not an easy thing to do, and will not be an easy thing to do year by year. So I think that problem we have gotten under control.

We have, as far as the cyclical problem of the U.S. economy -- that is, the see-saw economic recovery, which after the 1991 recession -- 1990, 1991 recession -- the economy now appears to be on a sustained expansion path. So the problem of the short-term see-saw recovery seems to have been resolved.

We also talk about longer-term problems. And here I would say we've had disappointing growth in compensation. We've had disappointing growth in per capita real incomes. We've had disappointing growth in median family incomes. We've had absolute declines in family incomes -- real family incomes at the bottom end of the income distribution. And we've had what we call "growing disequalization" -- a growing earnings gap between those at that top and those at the bottom. We emphasized that the problem there is that the rewards to work are weak at the bottom; that income growth has been negative in real terms and that this is a real problem for the U.S. economy.

So I would say over the long-term, the fundamental challenge is restoring brisker growth to the compensation that Americans earn in their -- whatever occupation they have -- and to help those at the bottom get the skills and training they need to move up into higher quality jobs. That should be matched, of course, with a trade policy whose objective is, as I said earlier, to increase the opportunities for the U.S. to realize the advantages of a highly-skilled, technologically-advanced work force by moving increasingly into those kinds of sectors and those kinds of activities, which, in fact, generate high returns or high wages for American workers.

So those are the problems we really focus on.

Q: As you know, there's a move in Congress to resurrect the balanced budget amendment. How will that, if it passes, impact your projections?

DR. TYSON: Well, we have done a couple of things on that. As far as the economic report is concerned, we actually have devoted a discussion to why we think the balanced budget amendment is a bad idea for the U.S. economy, including the observation that if we try to balance the budget by 1999, as the current amendment proposal would have us, we do expose the economy to considerable downside contractionary risk. We estimate that long-term -- that it would take a decline in long-term interest rates of roughly three percentage points to offset the contractionary effect of such a large fiscal package by 1999.

Since a three percent long-term interest rate -- that's what it would -- you would need to get a three percentage point reduction, so you'd be down to three -- this seems quite unlikely. Complying with a balanced budget amendment seems likely to harm the economy, perhaps severely. And that is our position.

Q: Could you explain, in a bit more detail, the justification as you see it for setting specific numerical targets, or objective criteria, or whatever the specific -- I mean, isn't the point that if Japan obeys international trade rules, if it obeys GATT rules, isn't that essentially the end of the matter? You're all part of an international trading system -- if Japan obeys the international rules, what right does the U.S. have to act like a sort of schoolyard bully and simply say, you must meet this particular goal which we unilaterally set? And to put it into context, how would you react, for example, if France were to say, we have done an analysis, and we have found that the U.S. consumption of French wine is far lower than it ought to be -- (laughter) -- and we unilaterally set -- (inaudible) -- France unilaterally set a target of 25 percent of U.S. consumption of wine must come from France -- now how would you react to that? Would that be sensible? Would that be good economics?

DR. TYSON: I guess I could answer this briefly by saying, I would refer you to chapter six of the economic report, which devotes -- let me count them, since you've asked this question -- it devotes a considerable number of pages to demonstrating --let's see, one, two, three, four, five -- seven pages, which is quite a lot in this report, to identifying all of the reasons why we believe that Japan is an outlier. As you well know, the barriers to Japan's markets in the sectors we have identified are not the kinds of barriers which are currently covered by the multilateral system. The issue for the United States and other of Japan's trading partners is whether to allow those kinds of barriers to go unaddressed to what is, by some measures, the largest and usually is the most dynamic and certainly is one of the most technologically advanced markets in the world -- whether to just let that go because those barriers are not currently covered by GATT; or whether the U.S. and the U.S. trading partners should deal with Japan in a different way. Japan is an outlier in many respects, and the framework talks were an attempt to deal with the barriers that are not currently covered by the GATT system.

I might also refer you to my earlier work on this subject.

Q: Wouldn't it be better to get a G-7 agreement -- (inaudible) -- unilateral U.S. approach?

DR. TYSON: The Japan talks was an effort to -- the framework talks was clearly, in each step of the way, meant for multilateral opening. The U.S. never requested objective criteria as a share for U.S. products, never requested objective criteria as a share for anybody's products. Objective criteria were a measure of progress for multilateral opening to all of Japan's trading partners.

Thank you.

THE PRESS: Thank you.

END 10:00 A.M. EST

William J. Clinton, Press Briefing by Laura Tyson, Chair of the Council of Economic Advisors Online by Gerhard Peters and John T. Woolley, The American Presidency Project

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