Bill Clinton photo

Press Briefing by Secretary of Treasury Lloyd Bentsen, Assistant to the President for Economic Policy Robert E. Rubin and Council of Economic Advisors Chair Laura D'Andrea Tyson

December 20, 1993

The Briefing Room

2:43 P.M. EST

SECRETARY BENTSEN: What we want to do is the year-end wrap up insofar as what has been accomplished during this year insofar as economics -- what this administration has been able to do.

I think first and foremost, it being able to break the budget gridlock between the United States Congress and the administration; to be able to pass a budget deficit package that's going to cut that deficit by some $500 billion over the next five years; and to stop and reflect back that the previous administration had four budgets in a row that were dead on arrival, and the one they finally got up to a vote was defeated by a vote of about three to one, with the majority of the Republicans voting against it.

So this has been a major accomplishment, and has had a substantial impact on interest rates and, particularly, long-term interest rates. To bring interest rates down approximately one percent, 30-year bonds, 10-year bonds and, in turn, see some of the lower short-term rates that we've seen in a long time, Those are very positive accomplishments.

Without a question, it's been the best trade year that we've had in a long time; to see us bring NAFTA to fruition and, in turn, my confidence that GATT next year will be passed because of what was accomplished by December the 15th and the administration playing a very major role in that; to see what's been done in the lessening of export controls; to try to help us in the sale of products; to see a President of the United States who would personally make phone calls to sell U.S. products abroad -- to take that kind of an initiative is a major one -- to see the kind of economic developments that we've put in that budget, for a 75-percent increase in small business expensing; new small business capital gains; empowerment zones; What we were doing insofar as trying to reward work and families, in doing what we did in the Earned Income Tax Credit -- those are all major positive things that have been accomplished.

To see a situation where -- in job increases, that we averaged 162,000 net increase in jobs a month since we took office, and that is compared to '92 being approximately double the amount per month that were being added in the way of new jobs.

Now, let me make some points to you here. When was the last time that you saw a Democrat who could stake his political career over a free trade agreement as this President over NAFTA? Who would have predicted a year ago that this administration would tackle one of business's number one concerns, that of deficit reduction? Who would have guessed that this President would have taken the kind of road he has done in making the trips to bring the APEC nations together in a meeting, to look at a trade area that is the fastest growing trade area in the world, to see what we can do to further, strengthen the economic ties there, and what we're trying to accomplish in that regard? Who would have expected a Democratic administration to propose cutting 252,000 jobs over the next five years, and bringing that one about? Who would have expected a Democratic administration that would take a recommendation out of the Grace Commission on the consolidation of regulations for the banking industry and trying to cut back there in the duplication and the conflicting regulations that we've had in the past in that regard?

So all of these things are positive things that we've seen, and this is an example of what we're looking at in the way of long-term interest rate cuts. And you can see how the rates started down at the election as they looked at what this administration, they thought, would do when we've seen the Clinton economic speech and see the drop in rates after that, to see what happened after the House vote and then after the Senate vote, and the further decline in those kinds of interest rates. Those are positive things that are attributable to the work of this administration.

To look at a situation where the Financial Times, on January the 6th wrote: "The U.S. Treasury prices roared ahead on growing hopes that the Clinton administration will take a tough line on tackling the budget deficit."

Modesty almost keeps me from saying this one, but The Financial Times -- (laughter) -- "attributed investors' hopes to Sunday's comments by the new Treasury Secretary which suggested the White House views cutting the deficit as a top priority for us."

Here's one out of The Wall Street Journal: "Bond rally roars ahead on the Clinton proposals." These are positive things that have resulted in this increase in jobs because interestsensitive industries, such as cars, such as homes, have really reacted. To see the kind of return in investor confidence and consumer confidence that is taking place and to see business investing as much as they are today in equipment to increase productivity; to see as situation where we've got the kind of cushion where we have been able to control inflation, where you have additional capacity available for utilization; to see the fact that unit labor costs are staying low because of increased productivity that is taking place during this administration in its first year -- all of that adds up to what I think is a very positive result for the economy and which, in my opinion, will lead to a long-term sustained growth with low inflation. And that's the objective, I think, of not just this administration, but I think it's the objective of the Federal Reserve in addition.

I defer to my friend, Bob Rubin.

MR. RUBIN: Thank you, Lloyd. Lloyd Bentsen and I were talking the other day about something or other, and he said that in 35 years of being in government, he'd never seen people work as well together as they have in this administration. It really has made an enormous difference both in the kind of decisions that we've reached and the ability of the President to see all considerations that relate to a decision and the ability to get things done, as in NAFTA, where once a decision was made, everybody in the administration got behind it and drove it. What reminded me was just seeing Lloyd. (Laughter.)

Let me now turn to the economy, if I may. When President Clinton was elected, he obviously was elected in large part because of enormous problems with the economy. And I can remember the very first meeting we had with him, the core economic team, was January 7th in Little Rock. We met for six-and-a-half hours. We discussed the economy, what was going on. The basic view that he expressed was that he inherited a mess and that he was going to face it and deal with it.

He was presented with a number of scenarios and different frameworks with respect to which he could then go forward. And some of them were ones that involved relatively little attention to the deficit and they were, obviously, politically a lot easier. And then the most difficult was one that involved a very serious getting hold of the deficit, but it was also the politically most difficult. And we spent a lot of time -- people who were politically grounded spent a lot of time explaining to him how difficult politically this would be to accomplish.

I remember at the end of the meeting, he turned around to us and he said, "I've made my decision. We have a mess. We have got to deal with it. I'm willing to take the political heat and we've got to go forward." I think that was really a seminal moment not only for the administration, but for the economy.

I particularly remember during that discussion a subdiscussion of what would happen if we didn't deal with the deficit. The point was made that until the deficit got under control, you could not have a sustainable recovery because every time you started to have better economic conditions, that would fuel inflation expectations. Inflation expectations would increase interest rates, and interest rates would choke off the economy. That was one of the points that he related to when, at the end of the six and a half hours, he turned around and said, "I know these are tough decisions. I know they're going to be politically hard. But this is what I'm going to do." And that really did set the direction, as I say, not only for the administration, but I believe for the economy and for the country.

We spent this year putting in place the components for the President's broad-based, long-term economic strategy. And Secretary Bentsen referred to various components of this -- opening markets, trade, deficit reduction, investments in education, infrastructure and the like, the health care plan that is now in the process of being worked through the political processes, and regulatory review and simplification. And all of that really comes down to the here and now, to the current conditions of the economy.

Let me make two comments on that. There is absolutely no question in my mind -- I spent 26 years on Wall Street, almost all of which was involved in major -- basically running major trading operations -- there is absolutely no question in my mind that without the President's deficit reduction program, long-term rates would not be anywhere near as low as they are now. I can remember somewhere during the course of this talking to a member of the Senate who was very sophisticated financially, and he said, "Do you think we'll ever see rates below seven percent?" And I said, "Well, I suppose it's possible, but we haven't seen them that low in a long, long time. It could only happen if you have a real deficit reduction program and if the financial markets accept it as such." And that is what the President developed, it's what he put in place, and the financial markets recognized it for what it was. And as a consequence, you've had the long rate that we've had.

I think the long bond was something around 776 at the time of the election. It's around 630 right now. Those were not rates that people on Wall Street would ever had anticipated seeing a year ago. And I can remember that because I was -- or say a year and a half ago -- and I can remember that very well because I was there.

Let me read you a couple of things, if I may, and they were from comments that various firms have made on interest rates, the economy, and what's caused the sort of economic condition that we now have. Lehman Brothers, November 1, 1993: "Clinton at this juncture can point to both the financial markets and the real economy and assert that his prescriptions are performing as intended." Merrill Lynch, March 1, 1993, much earlier in the process: "The President's men" -- men and women, it should have said, but -- "the President's men keep pointing to the bond market, and well they should. The stunning bond rally that greeted the President's budget proposals will provide far more economic stimulus," and then it just goes on.

The end of that particular comment was, "If the administration and its congressional elites live up to their promises, bond yields may remain near current levels and the President will claim credit for stimulating the economy. If they don't, the bond market vigilantes will make them regret it." I think that's exactly right.

Alan Greenspan, July 20, 1993: "Should that expectation of financial markets that the plan will be passed be thwarted, then I think the markets will react in a negative fashion."

Those are not political comments, those are financial analysts, or in the case of Chairman Greenspan, the Chairman of the Federal Reserve Board -- and that's Greenspan on the public record.

One final comment from me on all this. I also don't think there's any question but what the President observed back in our January 7th meeting was correct -- that not only did you need lower interest rates to stimulate economic activity, but if you hadn't dealt with the deficit, then you could not have had sustainable recovery; that you would have had a constant process of stop and go, of choking off. It was a very tough process politically to deal with the deficit, and that why the system hadn't dealt with it for so long. But it had to be dealt with if we were ever going to get ourselves in a position we could have sustainable growth over the long-term. And that's why you had to have a President who was willing to put in place a long-term economic strategy, stick with it, and make it happen.

Let me conclude by saying that I really do believe we are very much on the right track. I think this will get fed, as Secretary Bentsen said, by the trade agreements, by the investments in education, training and the like, and all the other things the President is trying to do. All that, in turn, will build confidence. So I think there are a lot of reasons to think that we really could have sustained growth for a long period of time. You know, it will go up and down some and move around, and Laura will talk more about that when she gets up, but basically, we have positioned ourselves because of the President's long-term economic plan for sustained growth over the long-term in a way that we could not possibly have had without that plan.

DR. TYSON: Let me just put some underscoring or underlining -- most of the points have already been made. First of all, I think going back to that January 7th meeting, it's important to emphasize that when we discussed the mess that the economy was in or we discussed the economic mess that we confronted, we distinguished really a short-term mess and a long-term mess -- not unrelated, but you can make the distinction.

The short-term mess was basically the economy had for quite some time been growing in a sputtering see-saw fashion, much too slow to really generate significant employment prospects. So we had a sputtering, jobless economic recovery. That was a short-term problem.

We also had a long-term problem. The long-term problem was, looking ahead, we saw projections -- everyone saw projections -- that if the economy tried to gain momentum, if it tried to grow more rapidly, it was going to hit a wall. And the wall was deficit, rising deficits, even as the economy recovered, and a rising debt-toGDP ratio, even as the economy recovered.

Now, that wall would, we believe, stop the economic recovery. It would make it impossible for a sustained period of expansion in the economy. It condemned the economy to a period of fitful and sputtering economic growth, and furthermore, it would also condemn the economy over the long run to continued stagnation in real incomes.

Basically, the long-term problem which the economy confronted was deficits and debt eating up the resources of the economy, taking away resources that could be used for private investment, which is the key to long-term growth in incomes. So we had to solve the long-term problem in order to consolidate the shortterm expansion and pick up its pace, but also to deal with the longterm issues of living standards in the United States. So they were related problems.

We, therefore, had to make some very tough choices in a quite inhospitable economic environment. And I want to emphasize the courageousness of the choices, because I think what -- the credibility -- we now talk about our deficit reduction plan as being a credible plan. Credibility meant big, it means specific, and it meant involving tough choices on the revenue side as well as on the spending side.

And I see the response of financial markets, which Secretary Bentsen referred to in his chart -- we're doing a similar chart like that for the Economic Report of the President. We also heard it in terms of the comments of the financial observers, both from the press and from the financial markets themselves. The vote of confidence was in long-term interest rates. The credibility of the package did result in the market saying, yes, we're confident that this is a big enough package, a specific enough package and a tough enough package to really get the country on a different course.

So the first major economic story of 1993 was really the decline in long-term real interest rates, occasioned by the announcement and then the passage of the deficit reduction package. That led to the lowest long-term interest rates in a generation. And that led to a change in the short-term situation.

We have gone this year, in 1993, from a sputtering, seesaw, jobless period of recovery to, we believe, a sustained economic expansion with job creation. That is what happened in the second half of 1993. And how did it happen? It happened because the interest-sensitive parts of spending -- residential construction, consumer durables and producer equipment and plant and equipment -- surged in response to lower long-term interest rates.

In a normal period of growth in this economy, those interest-sensitive parts of spending account for something like a third of GDP growth. We are now in a situation where they're accounting for 100 percent of GDP growth, if you look over the second half of this year. So it really wasn't interest-sensitive, or an interest-driven economic expansion. So, again, the changes from seesaw, sputtering, jobless recovery to a sustained expansion with jobs.

Now that's the short-run change. That's what happened in 1993. But I don't want us to take our eye off of the long run, because we were dealing with a long-run issue here -- it's the issue of what happens to U.S. living standards and to family incomes and to the average American as they work harder in this society. That all depends on a sustained period of getting the deficit down, getting the debt under control, keeping long-term interest rates down and getting more investment in this economy. And we have set the economy on a path to do that.

And finally, we've added to this long-term prescription a vast new set of global trading opportunities by accomplishing what will be looked at as the most successful year of trade liberalization in the nation's economic history.

Thank you.

SECRETARY BENTSEN: Do you have any questions?

Q: What do you do for an encore? (Laughter.)

SECRETARY BENTSEN: What a question.

Well, first the implemention of GATT has to be accomplished, and that will be a fight, getting that through the Congress. But I'm optimistic that that will be done. Second, working at closer ties with the explosive growth that we're seeing insofar as Asia. And that's where most of the growth in our trade exports has been over the last two years -- with the economies of Europe generally flat and that of Japan. So pushing on that one.

For example, we'll also be having a hemispheric meeting with the Latin American countries where that's the second-fastest growing area, and again, in trying to see that we push for opening of markets. We will continue even with GATT and its agreement. We will not stop with continuing to push for the opening of markets, things like financial services that we think much more has to be done than we've achieved thus far.

Q: When is the hemispheric meeting?

SECRETARY BENTSEN: Yes, it will be next year. I don't have the date on that.

Q: Could you talk a little bit about the budget issue, meeting today and this week with the President? It looks like that you're not going to have anywhere close to the kind of investment package that you had hoped. How serious is that problem, do you think, for fiscal '95?

SECRETARY BENTSEN: Well, obviously, it's a matter of concern, and what you're doing in coming to this budget is putting an absolute emphasis on meeting the targets and cutting that deficit substantially. And it will not be easy in bringing that about.

But what we have really going for us in investment and stimulus -- when they state that 10 basis points is $10 billion, you're looking at $100 billion worth of stimulus. And what you have seen is a very encouraging investment in equipment by business. And, in turn, we have seen an increase in productivity that is more than making up for any increase in labor costs. So it keeps unit labor costs very competitive for us.

But I think that what you're also seeing in this regard is anticipating the concerns that we'll have out there four and five years from now as we see costs starting up again and trying to see that that's taken care of through health reform. So that will be a major target for us.

MR. RUBIN: Can I add one thing?

SECRETARY BENTSEN: Yes, by all means.

MR. RUBIN: Let me just add one comment, if I may. The investment agenda, as you know, is directed at the long-term capacity in the economy -- training, infrastructure, things that if we don't get done, we're not going to be in a position to compete in the years ahead. Although we won't get everything that the President would liked to have had because of the enormous constraints involved in deficit reduction -- it's a very tough process -- we are also making a lot of tough cuts. And the result is we're reordering the priority of the budget. And when this budget comes out, I think you'll see, actually, that we've done pretty well on investments, but by taking a lot of pain and getting the lower priorities down.

Q: Can I just ask one follow-up? The House Democratic Study Group put out a study recently saying that discretionary spending under Clinton would actually be lower than under President Bush on the domestic side. How do you see the domestic agenda coming out given these budget caps?

MR. RUBIN: I go back to what I said before. And the President actually said this during the campaign and ever since, which is that the key is reordering the priorities in the federal budget and it is not an easy thing to do. And he took a lot of heat on some of the things he did in the first round, and when you see this budget come out, you'll see he's done the same thing again. But we are slowly but surely -- well, not so slowly -- but we are with some sureness reordering the priorities within the federal budget. And that is really the key to getting this done.

Q: What do you mean by that?

MR. RUBIN: I mean less of the things that he feels are not as strongly related to the long-term economic growth of this country, particularly the capacity of -- building the capacity of the country. Education, training, all the things that go into productivity -- doing more of the things that feed that and less of the things that don't feed that.

SECRETARY BENTSEN: And of course, there's some interesting things, too, in addition, that we put in this time, the President did, insofar as encouragements for investment: What he did for small business, in increasing the investment tax credit by some 75 percent. What he's also done insofar as the capital gains rate for new budding initiatives and venture capital, in particular. That is a very strong incentive for those types of companies.

Q: read correctly into your statements that the onus for continued investment is going to be on private business because of the incentives you've already provide rather than on government to provide additional ones?

SECRETARY BENTSEN: Well, the government has provided some additional incentives but finally, it gets back to private enterprise and what they do. And I think what you see today is American business more competitive than it had been in many years. And you're seeing the cost of capital for them so much better than it was five and 10 years ago when you situations where the Japanese would have a one percent rate and then they'd have some warrants out there with a conversion factor to some business that was selling at a 100 times earnings. And now you're seeing rates that, on long-term capital, are very competitive with the Japanese and with the Bundesbank.

Q: Dr. Tyson, you talked about how interest-sensitive the recovery is. What level are you looking at, in your opinion that, if interest rates go up it would choke off the growth that you're talking about?

DR. TYSON: We, and I think other forecasters right now, for the foreseeable future, and really for the entire period of our economic package have in mind a growth path which keeps us, at least through next year, in the three percent range.

I want to say one thing I didn't mention -- and I'll get to your question -- which is, this particular quarter, there's an increasing amount of evidence that we may actually do better than three percent, but it has to do with some special factors which are likely to be short-lived.

What we foresaw as a result of the entire strategy was that the economy would sustain, on average, about three percent growth over the second half of this year and through next year, and then sort of inching down a little bit, but within the 2.7, 2.8 range. What that means, we're assuming, is that since we've fundamentally changed the borrowing needs of the government, we've fundamentally changed the course of the deficit relative to the size of GDP, and we've fundamentally changed the course of debt relative to the size of GDP.

We anticipate that the U.S. economy will behave interest rate-wise more similarly to what its long-term historical experience has been, which is real long-term rates in the vicinity of three percent, and not in the vicinity of four percent, as was the case in the 1980s. So, basically, the whole package leads us to think that we will go through the next several years in that kind of interest rate environment.

Q: Can I follow on that point for any of you? As you look to the future, what are the factors out there that you're most concerned about that could derail this recovery?

DR. TYSON: Well, I would say that there are always risks to a forecast. There are risks that you underestimate the growth potential or the growth, of course, of the economy -- you either overestimate or underestimate it. I would say if you thought about what possible risks were out there, you would say perhaps what happens in the rest of the world, that right now we and other forecasters are predicting that there will be recovery in Europe sometime in the middle of next year -- middle to the end of next year. And that recovery in Japan may occur slightly later, but certainly by the end of next year. If that doesn't happen, then clearly our forecasts may prove to be a little off.

The other thing I would say -- again, I see absolutely no sign of this. But the thing that you always put in was if there are some perhaps exogenous change in underlying inflationary pressure. We don't see any, but I would put that -- I don't see a single piece of evidence on this, but you would sort of put that in.

On the other hand, if I'm going to talk -- if you've asked me to talk about the risks to being overly optimistic, I would say there are a number of things which suggest the economy might do better than three. Just the fact that inventory sales ratio is at a -- such a low suggests -- and the fact that the work week is at such a high; these are both at historic highs -- suggest that employers may be on the verge of a significant increase in employment and production.

And we don't have -- when you look back at the fourth quarter of last year and the first quarter of this year, you saw that growth was high in the fourth quarter and then fell in the first quarter. We don't see that scenario being repeated because -- although fourth quarter growth may be a little higher than we expect for special factors, we see that all of the indicators, the broadbased indicators of strength in all the areas of spending now, in the employment picture as well, that all of those things suggest the economy will continue to grow into next year.

Q: Can I just ask you about the long-term interest rate forecast? You saw long-term interest rates at what level?

DR. TYSON: This was -- I gave you a kind of real longterm interest rate projection. I mean, what we're -- if you look in our forecast, what we're --

Q: At three percent?

DR. TYSON: This is real. Real. Adjusted for inflation. This is not -- don't go out there and sort of -- and the rates are going to three percent. The historical long-term rate in this country over long periods of time has been in the vicinity of three percent. And that's where we're getting back to now. So the actual long-term nominal rate will obviously be reflecting also the inflation rate. But we see that if you have a very different course of deficit behavior over a long period of time, that should fundamentally change the long-term interest rate outlook.

Q: You haven't mentioned disturbing political trends in North Korea and Russia. What happens to your calculations if things go from bad to worse in either of those places?

SECRETARY BENTSEN: Those are the wild cards. You can't anticipate those.

Q: Can you give us a sense of how much the tax increase will affect growth -- sort of modify that?

DR. TYSON: We have -- our growth forecast, as I said, is basically through that period of time at three percent. There are a number of reasons why we don't expect it to have much of an effect.

Number one, there was a fair amount of income shifting into 1992, so the retroactivity may not have as much a bite. Number two, this is -- the income tax part of this is very much at the very top of the income distribution where we don't anticipate a major change in the spending behavior. There may be a change -- a shortterm change in the saving behavior, but not a short-term change in spending behavior.

There is the possibility of the installment plan method of paying the extra tax burden, which would spread out any effect over time. And finally, of course, the gasoline tax increase happened to occur in an environment of falling oil prices, so that this is -- the falling oil prices are obviously another factor that we believe has been a factor behind the -- partly responsible for the improving performance of the economy and could continue through next year. It all depends on what you assume about what happens to oil prices.

Q: Could I ask you about the schedule for appointment to the Federal Reserve to replace Mr. Angel? Can you tell us where that stands?

MR. RUBIN: Yes. We will make that when we're ready. Is that helpful?

Q: Not at all. Do you know roughly when?

MR. RUBIN: I don't know, Jim.

SECRETARY BENTSEN: I'll tell you, we have narrowed it substantially, but we are not ready to announce it yet.

THE PRESS: Thank you.

END3:15 P.M. EST

William J. Clinton, Press Briefing by Secretary of Treasury Lloyd Bentsen, Assistant to the President for Economic Policy Robert E. Rubin and Council of Economic Advisors Chair Laura D'Andrea Tyson Online by Gerhard Peters and John T. Woolley, The American Presidency Project

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