Press Briefing by Telephone with National Economic Advisor Gene Sperling and Martin Baily

11:10 A.M. EST

MR. SPERLING: Hi, it's Gene Sperling and Martin Baily.

Q: Good morning.

MR. SPERLING: Good morning. Anyway, let me start for a minute and then I'll turn it over to Martin.

In the President's radio address today he wanted to put forward a very candid and straightforward assessment of the U.S. economy. He made clear that while no one could expect that an economy at this historic stage of the expansion could continue at paces of 5 to 6 percent indefinitely, that the bulk of the economic evidence shows that we are entering a period of solid -- with low unemployment and low inflation; and that the bulk of private sector experts support that conclusion.

When Martin speaks, he was going to go through the -- one of the things that we will mention, I just need to state is that the blue chip for December 10th we can talk about, but we have to understand that it is embargoed by them until 3:00 a.m. So any discussion of the December 10th blue chip should be embargoed until 3:00 a.m. So for tomorrow's papers, that would not be relevant, obviously; but for anybody putting something out earlier, the embargo is until 3:00 a.m. tomorrow.

The second thing that the President stressed in his radio statement is that there is nothing in the economic forecast that should lead anyone to abandon fiscal discipline and debt reduction that have such a key role in lower interest, higher investment and higher investment that has bolstered this economy, and that -- anyway, the President wanted to make clear in the radio address that there is nothing in the current economic forecast that should cause us to abandon the path of fiscal discipline and debt reduction that has been critical in creating a high invest, strong growth economy.

He also stressed that part of that economic formula has been strong investment in education and training, and that the recent claims by some of the high growth parts of our economy of the skill gap and the need to close that skill gap makes all the more important that we have a strong education component, along with debt reduction in having the pro-investment agenda.

In that light, the President is strongly engaged in trying to protect the crucial investments in education and training that were part of the October agreement on the budget. And we are still actively working to pass a budget that would protect vital investments in smaller class sizes, after-school, Head Start, entering college age, as well as still hoping to have a tax incentive plan that would spur investment in low-income communities and do more to increase private sector savings.

So with that, let me let Martin speak for a few minutes, and then we'll be open for questions.

MR. BAILY: Thank you, Gene. Well, as the President said, the economy really has been growing fast. He said, 5 percent over the last couple of years. Actually, if you look at the four quarters, through the second quarter of this year, the growth rate was actually 6.1 percent. Now, while the sustainable growth rate of this economy has increased, with faster productivity growth, I think virtually all economists and policy -- realized that some moderation in the pace of growth was necessary. And that's what we're seeing. So we were looking for moderation in the place of growth, and we're getting that.

Now, does that mean we're going to result in a hard landing? We don't think so. And some of the reasons for that are as follows: Core inflation remains low and stable. And I don't want to underestimate the pain that many consumers are feeling as a result of energy price. In terms of sustainability of this expansion, it's probably more important to look at core inflation, because that's got what's going to continue through once the energy markets cool off, which they're expected to do, through 2001. And that remains low and stable. So I think that's the first big sign.

The second is that productivity growth, which really has been key to the longest expansion and is a key to keeping it going, remains strong. In the third quarter, despite the fact that overall GDP growth was relatively moderate at -- (inaudible) percent, we had over 3 percent productivity growth -- I think it was 3.3. That's really an extraordinary number that we've got at this time. I mean, there was some press reports saying, wow, productivity growth has slowed down. I mean, that's an amazing thing to say, that we get 3.3 and suddenly think that's not such a good number. By all recent historical periods, that's a very strong productivity growth. And to get strong trend growth, again, is a key to low inflation and to keeping this expansion going.

I think other positives that we're seeing, some key components in investment that are still growing, non-residential structures, for example; vacancy rates, office vacancy rates are very low; business purchases of computers are still -- October, still looked good.

But perhaps the best -- I think most economists would say the best measure tells you where the economy stands is to look at the labor market, the employment reports. And the report for November, I think, was very reassuring. Unemployment was essentially unchanged; it was 4 percent. We got 148,000 increase in the private sector. If you kind of wanted to do a soft landing scenario, I think if you looked at employment growth, you'd see that in 1999, the average monthly growth in employment was 202,000. For the first six months of this year, it was 186,000. For the last five months, we've had 122,000.

So if you were looking for a soft landing, boy, that sure looks like a soft -- (inaudible) -- we're hoping to achieve.

Workers are continuing to get solid wage gains, so I think in terms of -- the bulk of the population here is seeing their wages rise, and while they have been affected by energy price increases, I think that's going to mean we go forward, continuing a continuing moderate consumption.

Now, as Gene mentioned, the blue chip is being released at 3:00 a.m. tonight, or tomorrow morning. It shows solid growth in the fourth quarter. They're looking for a 2.9 in the fourth quarter of this year. We're comfortable with that number. It might be 2.5, it might be somewhat higher than that. It might be based on the data that's come in so far, but certainly a good, solid growth rate in the fourth quarter. Their estimate for 2001 is 3.1 percent growth. And, again, that's obviously slower than we've had, and I think both consumers and the rest of us are sort of experiencing the transition, sort of 5, 6 percent growth -- (inaudible) -- the three percent growth and it's a little bit different. But 3.1 percent growth in 2001 would be a continuation of this expansion, a continuation of job growth, a continuation of income growth.

Now, we're aware of what's going on in this economy. We're aware that there are some signs that auto sales have dipped. We are monitoring the economy very closely. Obviously, you've all seen the speech that Alan Greenspan gave, I think which was reassuring of the markets. He's aware that the situation has changed compared to where it was in the first half of the year. And if it's necessary to make some changes to maintain this expansion, those changes will be made.

But at the same time, I think it's a mistake to overreact to the news of more moderate growth, to suggest that we need a major shift in policy path. I think that would be a big mistake. As Gene said, we've had a policy path that's really worked not just well, but just staggeringly well, and we should keep on that policy path . Thank you.

Q: Secretary Cheney and the Bush people seem to feel that we're on the cusp of a recession and that a tax cut will be necessary, presumably to create change and stimulation. How would you respond to that?

MR. SPERLING: I think that, first of all, the overwhelming number of private sector experts are projecting growth next year in the 3 percent range; indeed, in the blue chip coming out, only one of 50 -- only one of 50, even below 2.5. So, again, the overwhelming bulk of private sector experts see a period of solid growth and low inflation next year.

Secondly, the lesson of the last eight years has clearly been that the reality and the expectation of fiscal discipline has kept interest rates low and helped stimulate investment-led expansion. And a movement back towards the failed policies of fiscally reckless tax cuts easily lead to higher interest rates and lower investment that could set back the productivity and investment growth seen the last several years.

Martin, do you want to --

MR. BAILY: Well, I don't want to get into a political discussion, that's not something I want to do. But I think in general, economic policymaking should be made on a really calm, considered basis and not sort of blow in the wind with a short-run concern. I think we need to keep a steady hand on economic policy and that's what we've had -- Alan Greenspan I think also through the President and administration.

So let's not start overreacting to short-term news, because I think right now the economy still looks to be on track, and if action on a policy front is needed, I think it will be taken. But let's make sure we take the policy at the right time.

Q: Gene, even though the election is undecided yet, it appears that there's been a large support in the country for the kind of tax policy advocated by George W. Bush, which would be a large tax cut. What do you make of that, in the light of your argument for fiscal discipline?

MR. BAILY: Well, this administration has supported tax cuts, and the President has put forward a tax package. The Vice President has proposals for tax cuts. And so there is room for targeted tax cuts that will benefit lower and moderate income families, and will support the policy direction we're on, which is investment in education and helping people at the bottom of income distribution. But I would disagree with you. I don't think there has been widespread support in the country for the kind of very large tax cuts, designed mostly to help the people at the top of the income distribution. I did not read that as a result of this election, at all.

Q: Martin, we haven't had, really, tax cuts or increases for a couple of decades, that were directed primarily at stimulating demand. I mean, even the Reagan administration in the early '80s argued for tax cuts on a supply side basis, rather than a we need to stimulate demand. Have there been any episodes in the postwar period in which fiscal policy has been changed in a timely fashion, so that it would work in a counter-cyclical way?

MR. BAILY: Well, the record is not all that great. I mean, I think that the -- tax increase was helpful in an economy that was clearly overheating. But it should have come probably sooner. But I think it was helpful.

If I had known you were going to ask that question, as I probably should have, I would have gone back and looked. George Perry had a study in the Brookings Papers in which he reviewed fiscal policy actions, and it's my understanding that he did find that there was some examples of fiscal policy that had been helpful, although there were others that clearly weren't.

Let me put it in a current context. One of the benefits we've had of running these substantial surpluses is that we have, as Secretary Summers said, we have sort of reloaded the fiscal cannon. So if it were necessary to introduce a stimulus package, we have the room to do that without running deficits. But in my judgment, I think -- and in the judgment of our economic team here, this is certainly not the moment to be doing that. It's certainly not the moment to be contemplating sort of the very large, backloaded tax cuts. That's certainly not what we --

Q: Gene, I'm wondering, was the President's radio address in any way designed to kind of answer the comments of Secretary Cheney and others who say that the economy is spiraling downward and something such as a tax cut is needed to stimulate growth.

MR. SPERLING: It was not designed to answer any one person. I think that it was -- what it was, Kelly, it was doing what a President should do, which was give a candid assessment of where the economy was at. And he was straightforward, saying that growth could not -- should not be expected to continue at the exceptional 5 to 6 percent rates they have, but he also was offering the reassurance backed up by private sector experts that Americans should understand we are still in a very solid period of growth and expansion.

You know, people used to say that if you wanted a kind of -- a mark of a good economy it was when growth was over 3 percent and inflation was under 3 percent. Here you're looking at projection for 2001 where the growth for a year, in historic record breaking expansion, where growth is still expected to be over 3 percent, where inflation's projected to be 2.7 percent, and where unemployment is at rates in the low 4 percent that would have been unimaginable five, six years ago.

I mean, most -- I remember when we had the first 4.9 percent rate. When Janet Yellen announced that after a morning meeting, she started by saying, I'm going to announce an unemployment rate that starts with a number I never expected to see again in the rest of my adult life. So I think, Kelly, it's important for the President to give people a sense of perspective and that perspective is understanding growth can't continue at 5 or 6 percent forever, but also, that the overwhelming bulk of experts see a sustainable period of growth and expansion in the economy.

MR. BAILY: It's not just the Wall Street forecasters, but I was struck by the piece by Martin Feldstein who's close to Republican policymakers. He had a piece in The L.A. Times that I think also made the point that we're making an appropriate adjustment to more moderate growth.

MR. SPERLING: One of the things I would say, which is a bit curious, is that there do seem to be some on the fiscal side who want to talk up growth rates when CBO uses them to get high surpluses, and talk down the economy as a justification for large backloaded tax cuts. That's a little -- to say the least, a bit of inconsistency there.

Thank you. Bye-bye.

END 11:30 A.M. EST