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

February 17, 1994

The Briefing Room

1:21 P.M. EST

DR. TYSON: Well, I thought it might be useful to have a little briefing today in honor of our birthday -- our birthday, that is, a year ago today, the President went before the Congress and announced the economic plan for the nation for economic renewal. And I think it's important in light of the numbers we got last night to recall how the economy really looked and felt a year ago when the President made his speech.

A year ago, the economy seemed to be mired in a stop-go or see-saw economic recovery. It was largely a jobless recovery. The civilian unemployment rate was over 7 percent. More than 9 million Americans were out of work. There was considerable downside risks. There was a sense that the economy held a lot of downside risk.

And, of course, this set of indicators and short-term problems was superimposed on the longer-term problem of the deficit, namely looking forward and saying, even if the economy were to try to get out of this anemic recovery, it was going to head on into a crash with an escalating deficit; that the deficit was going to grow if the economy expanded; and that this was going to cause an increase in borrowing needs for the government; push long-term interest rates upward; and strangle the efforts of the economy to grow.

So we had the long-term deficit problem and the shortterm economic recovery problem. And in that context, what the administration chose to do was very courageous. We came forward with a package which had as its key a credible deficit reduction program. Now, I want to emphasize that we tried to find a program that was large enough to have -- large enough -- so that it really would have an effect on financial markets and on the credibility of the deficit reduction effort; but at the same time not so large that it would really kill off the attempts of the economy to recover. It really was a balancing act, but it was a courageous balancing act because normally, significant deficit reduction plans are not introduced in slow economic circumstances, as the economy was in a year ago.

Since that time, we've argued and the case is laid out in the Economic Report of the President, which if you haven't seen yet, I advise you all to take a look at, we lay out the numbers here to point out that since that time, in that year, after the announcement of the plan, the economy really has moved from a see-saw recovery with escalating deficits over time to a sustainable expansion with deficits that decline relative to the size of the economy over time.

The numbers that we got yesterday, and there were two, suggest that sustainability of the recovery, or of the expansion, the sustainability of the expansion, and suggests that this expansion can be continued in a low inflation environment.

On the merchandise trade side, we got numbers yesterday showing the merchandise trade deficit in December fell to $7.4 billion. This was a sharp improvement from the average level of the previous nine months, which had been at $10 billion or over. Private analysts had expected that the December number would be in the range of $10.2 billion. Now, the sharp improvement in the trade deficit number for December means it's quite likely that there will be, certainly the trade figure for the fourth quarter of '93 is stronger than we thought. That suggests that, as far as the trade component of GDP is concerned, when we get a revision on fourth quarter growth rates it might suggest an increase in the growth rate for the fourth quarter GDP.

We will get a revision. We have a preliminary number we'll dealing with right now. There will be a revision. This particular report suggests an upward revision to GDP growth in the fourth quarter of last year.

On the consumer price side, the Consumer Price Index was unchanged in January. Falling energy prices helped to offset increases elsewhere. Private analysts had been expecting an increase of 0.3 percent; instead we got no change. Over the past 12 months the CPI increased just 2.5 percent. That's the smallest 12-month gain since 1987. And a number that many observers look at carefully, the core CPI, that is CPI excluding food and energy, increased just 0.1 percent in January. Over the past 12 months that's an annual rate of 2.9 percent, which is the smallest 12-month gain since 1983.

I want to indicate that these numbers suggest inflation remains tame. And it also suggests that perhaps this year we won't see the seasonal pattern of an increase in inflation in the first few months of the year that we saw last year. It doesn't confirm that we won't see such an increase in the seasonality, but it does suggest, at least the first observation, that maybe the seasonality concerns in the CPI won't be as great this year.

When we look at all this evidence, I would suggest --the conclusion I would like to leave you with is that the plan we introduced a year ago certainly seems to have to put the economy on the right course. We believe we should stay on this course and work to make sure that the plan continues to be implemented; work to make sure that the Fiscal Year 1995 budget proposal is in fact implemented by the Congress.

Thank you.

Q: On the merchandise trade report while the monthly total U.S. number looked okay, the bilateral deficit with Japan looked bad. And I was wondering, if we continue to have yen levels like we've had in recent days, a strong yen level, could we expect a certain percentage decline in that bilateral trade deficit just on the yen level alone if we don't have further changes in Japan policy?

DR. TYSON: Well, let me first say something about the overall trade deficit and then about the trade deficit with Japan. The overall trade deficit for 1993 was $115.8 billion, which is certainly more than it was in 1992 -- only $84.5 billion in 1992. Most of that shift has to do with diverging macro circumstances between the U.S. and its major trading partners. We were in a steadily increasing growth phase during this period. And many of our trading partners were not. And as a consequence, one would see the trade imbalance deteriorate.

Certainly macroeconomic issues are part of the explanation of the trade imbalance with Japan. And macroeconomic issues include the growth rate in Japan and the yen-dollar relationship, so that any trade deficit number between the U.S. and

its trading partners is affected by those kinds of macro circumstances.

Q: But if continue just with the yen level, that's kind of strong now, versus the dollar could you think that that element alone, we can see a reduction in that trade deficit; or do you see that, again, further policies have to be with that in order to --

DR. TYSON: Well, look, the Clinton administration's policy towards Japan is about opening markets in Japan. And that can be understood as an important policy that depends not just on macroeconomic circumstances in Japan; not just on macro-economic variables between the U.S. and Japan such as the exchange rate, but also on structural barriers to access to the Japanese market.

So regardless of what happens to the U.S./Japan trade deficit as a result of changes in macro-economic circumstances between the two nations, what is on the agenda in the framework discussions, the issue of structural barriers remains on the agenda and will remain on the agenda.

Q: But a strong yen impotent, then, as far as really reducing that trade --

DR. TYSON: No, that isn't what I said. What I said is that the trade imbalance between the U.S. and Japan, like a trade imbalance between the U.S. and any other country, is influenced in part by macroeconomic variables, which include the rates of growth in the U.S. and what ever country you're looking at and the exchange rate between the U.S. and whatever country you're looking at.

So it's not that the trade deficit is insensitive to that, at all. It's just that there are other issues on the table besides those macroeconomic concerns.

Q: Could you tell us, for those who don't cover this all the time, is this fodder for people -- these trade deficit figures with Japan -- is this fodder for people who say, get tougher with Japan and continue perhaps with -- or institute sanctions?

DR. TYSON: I would say the following: What was in the framework discussions included a set of macroeconomic concerns. That is, we were asking the Japanese to do things to stimulate the rate of growth of their economy and the rate of growth of domestic demand because we know from empirical work done on Japan and any other country around the world, that if Japan grows more rapidly, it will buy more products from the U.S. and from all of its trading partners.

So that was part of the framework discussion. Other things that are part of the framework discussions, or were part of the framework discussions, had to do with impediments to selling particular products in the Japanese market. So all of these things are on the table and will remain on the table. And I'm not sure -- I don't think that these numbers change the situation.

Q: the President also suggested that the economy would not recovery unless Congress adopted his stimulus package; it did not do. Does that imply that the economy was not in as bad shape as you thought it was at the time, or that interest rates are the key component of a recovery?

DR. TYSON: Well, I said here once before, and I probably can't do it as well as I did it before, so I'm going to be very short on this: What we -- how we defended the stimulus package a year ago was as an insurance policy. It was to say that if the economy did not respond as quickly as we hoped it would, if interest rates did not fall as much or as fast as we thought they might in

response to our deficit reduction package, we would have an insurance policy in place to help the economy get through that transition period. In the event we didn't need the insurance, but you never buy insurance after the fact; you buy it before the fact not knowing what will happen.

Q: In regard to the structural impediments in Japan, it seems to be -- you say several times in your report this week that Japan presents a special case. It seems to be saying, by the way, we're approaching these framework discussions that we're accepting the premise that they have a kind of a state-directed capitalism and we're asking them in these areas to say, since you're directing your markets in these areas, direct our companies in. Is that correct?

DR. TYSON: I certainly wouldn't say -- what I would say is that we can tell, both from a long history of anecdotes based on the efforts of individual companies to sell in Japan, such as was illustrated this Tuesday in the Motorola case, but also from very careful empirical econometric work that has been done in a variety of academics that relative to how other advanced industrial countries behave in terms of import penetration, Japan looks different. That's sort of the characterization of Japan as an outlier.

And what our trade talks are meant to do in part is to identify those areas in the economy where there are barriers and to work and negotiate with the Japanese for the removal of those barriers; but to negotiate in such a way as we have some standards by which we can measure whether progress is being made in reducing those barriers. And the dangers of negotiating without having standards of measurement in place, I think are well exemplified by the Motorola case that was discussed earlier this week.

Q: But when you put a numerical target on how much you want to increase the U.S. role in those markets, you are accepting the premise that the government is the one that's going to --

DR. TYSON: No, but that has been, I think, a persistent and almost willful misinterpretation by observers of what we're doing. We are not setting numerical targets for what the Japanese should buy. We are asking for -- and remember the framework asserted we had an agreement that we would negotiate agreements and that we would have quantitative or qualitative or both indicators to assess whether these agreements were producing results. That is not the same thing as a target. People want to shorthand that into a target, but there were no targets.

Q: There have been reports that you want 20 percent increase in U.S. auto part exports each year for the next four years. Is that incorrect -- we're not seeking that goal -- 20 percent auto parts --

DR. TYSON: You see, the thing is, that the issue of a target is whether or not the number that you set to assess progress is a binding number. And so that, I think the President said absolutely clearly last Friday, we were asking for negotiations which would lead to an agreement whereby over time the U.S. producers in whatever sector we were talking about would have market opportunities that were not otherwise available to them. We were also asking for a measure by which we could judge whether this process was underway. We were not setting a numerical target to judge whether the process was underway, but a measure by which we'd evaluate whether the process was underway.

And let me say again, the dangers to not doing that, seem to me, to be quite well revealed by what happened in the Motorola case, where we did not set such a standard.

Q: Why do you need that? You're already in a situation where you've been able to say to us any one of a number of times that Japanese market "X" is thus and such percentage closed to us; this one is more open to us. You obviously have numbers and ways of measuring openness of Japanese markets already. Why do you need something else?

DR. TYSON: The ones we have are the ones that we were discussing with the Japanese. I'm not sure -- what do you mean, why do we need something else?

Q: I don't understand what it is that you feel you need, that you feel you have to talk to the Japanese about that you don't already have.

DR. TYSON: Oh, we certainly have the -- you're absolutely right -- we certainly have and can judge on our own whether we feel progress is being made. Remember, the Japanese agreed with us last summer to negotiate a series of agreements in which we would agree together on the standards by which success or results would be measured. So we agreed with the Japanese we were going to do this. And then we were unable to come to an agreement on exactly which -- and by the end it was, if any such measures would be used. That was a clear move away from what we had agreed upon in the summer. Yes, we could have gone on and just said -- not had the framework. But, remember, we're talking about a framework negotiation which ended with both sides saying we failed to reach an agreement. That is right -- we reached an agreement on the framework; and then we were unable to reach an agreement on which, and I would say if any, because by the end the Japanese position was pretty much none -- which, if any, indicators would be used to judge success.

Q: Do you know about how nervous the Japanese stock market reacted to -- (inaudible) -- news? How about the possibility that you are asking too much too fast and by doing -- (inaudible) -- you push the Japanese economy over the cliff, which would be heavily counterproductive given the extent to which both economies, the Japanese and the American one, are intertwined.

DR. TYSON: I think that what -- if you actually look at the kinds of indicators we proposed, we were proposing trends over several years. Even in the case of the macroeconomic elements on the table, we were proposing trends for actions which would gradually reduce their global current account surplus. It would not do it overnight -- would do it in ways which were perfectly consistent with a continued improvement in the Japanese macroeconomic situation. We are cognizant that countries like Japan and ourselves and Europe go through cyclical ups and downs and difficult periods. We proposed qualitative and quantitative measures which were gradual and they had to do with trends, many of which we were simply asking the trend which had been in place to continue. We were actually not asking for an improvement in trend, but simply for a continuation of a trend which had recently developed. So I don't think there's any sense that we had that we were jeopardizing in any way the cyclical circumstances that Japan finds itself in.

Q: Before you leave, what kind of logical conclusions do you think the Federal Reserve should be drawing from today's economic data with regard to monetary policy?

DR. TYSON: Well, finally a question -- (laughter). Well, no, this is actually a double-edged sword since I rarely comment, if at all, on the Federal Reserve. I will simply say that I thought what was important to emphasize today was that we had two numbers here -- one number basically suggesting that if anything the fourth quarter of last year might be stronger than an already strong number that came in in a preliminary fashion; another number which

says that going into the new year, inflation remains at bay. Inflation remains tame -- inflation remains tame. And I think that if you look at these two numbers together, it suggests that we remain on course for a sustainable recovery with tame inflation. I assume that others will look at the numbers in the same way. I don't know, but I assume that others will --

Q: So you don't see any need to increase interest rates?

DR. TYSON: So I think that that's where I'm going to end.

END 1:39 P.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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