Press Briefing by Director of National Economic Council Gene Sperling, Chair of the Council of Economic Advisors Martin Baily, Treasury Secretary Larry Summers, O.M.B. Director Jack Lew on the F.Y. 2001 Budget

Presidential Hall

10:53 A.M. EST

MR. SPERLING: Thank you. This is the President's 8th budget presentation, but it reflects the same single strategy that the President spoke of since he ran for office in 1992, and that same, unified strategy is a two-part fiscal strategy that both promotes private investment through reducing the deficit and debts, to increase our savings and keep interest rates low to spur private-sector investment; and secondly, keep public investments in our people, in education and training, in science and research.

Seven years ago, the President spoke about this two-part investment strategy. There was some skepticism from both sides. On one hand, those most concerned with improving opportunity and reducing poverty were skeptical a strategy that focused on deficit reduction and fiscal discipline would actually rebound the to benefit of all Americans. And secondly, there was skepticism on the other side that investments in education and training were anything more than social spending.

I think that over the last seven years there has been an increased convergence to the view that the President and the Vice President have laid out that one needs both a strategy of increasing private and public investment.

In terms of private sector, we have seen that the dramatic turnaround in our fiscal situation has indeed had a dramatic impact on the investment climate in our country. Consider this year alone. This year, the deficit was projected to be $455 billion by CBO when we came into office. We now project a $167 billion unified surplus. That means in one single year, there are $622 billion more available for private investment -- a $622 billion larger pool of capital and savings that can be used for the private sector.

There's no question that that turnaround is part of the reason that we've been able to have the exceptional growth of nearly 4 percent over seven years, with dramatic investment, seven years in a row, of over 10 percent for the first time in our history -- and yet long-term interest rates have gone down, not up. Clearly, the turnaround in our fiscal situation has helped create the circumstances for that investment-led recovery, and the ability for us to keep growing with investment productivity and capacity leading, and allowing growth to go on without hitting inflation.

But what we've also seen, in answer to some of those who are skeptical initially, is that this type of fiscal discipline has benefited Americans throughout the income spectrum. We've seen that as the expansion has gone on, a steady expansion with fiscal discipline and smart monetary policy has led to an expansion in which businesses have had to reach out more than ever to the fringes of the work force, and have brought opportunity in dramatic form to more and more Americans, so that the African American unemployment rate has gone from 14.2 percent to 8 percent; the Hispanic unemployment rate from 11.6 percent to 6.4 percent.

If you include the earned income tax credit, there are 7.7 million less Americans in poverty than there were. And all quintiles, from the bottom 20 percent to the top 20 percent, have grown at about the same income rate, so that growth has been shared in a way that was not the case in the expansion of the 1980s.

On the other hand, for those who were skeptical about the importance of investment in education and training, one does not hear that skepticism anymore. In fact, any meeting with business leaders, one of the first issues that will come up now is the skills gap, is our education issues. One doesn't have to be in a meeting with high-tech or other business leaders for more than 10 minutes where the discussion is, indeed, about what more can be done to improve our schools, to improve training, to improve investments in research and development.

The President and the Vice President, while having to bring down the deficit, have every single year pushed forward on an investment strategy. And step by step, over seven years, that investment strategy has been quite significant. So that even with this fiscal constraint, Head Start, that was at $2.7 billion when we came into office, has already gone up to $5.6 billion, and with our budget, would be more than doubled to $6.6 billion.

If one had told you we would go from $290 billion in deficits to $167 billion in unified surplus, but that a program like Head Start would be more than doubled at the same time, that would have seemed very difficult. But it's a reflection of the commitment to this two-part strategy.

Dislocated workers, at 517 million when we came into office, has already tripled -- already tripled. The earned income tax credit is doubled, largely due to the expansion of 1993. And again, the President comes forward this year with another significant expansion of the earned income tax credit.

Children's health, at $48 billion over 10 years in the '97 Balanced Budget Agreement, to allow 5 million poor children to get health coverage, is now increased again this year with an even larger commitment, to try to have that many low-income adults also get health care so that we could reach a goal of 10 million people who are uninsured being covered.

Education technology, closing the digital divide, an issue that hardly existed -- the government spent $23 million on it -- we now spend 30 times that much, and that doesn't even include the e-rate.

So as we go forward, the President seeks to put forward a budget that continues this balanced approach between fiscal discipline, reducing our debt, and yet investing in the key investments in our people and R&D that, both together, will lead to a productivity agenda by both increasing private sector investment and investing in the skills of our people.

That is why, as we look at the initiatives, whether on the tax cuts or on the new initiatives, all of this should be done within the context of the fiscally disciplined plan that pays off our debt by 2013, and an effort to extend the solvency of both Medicare and Social Security. There is no reason that we can still not make significant efforts this year on both the Social Security and Medicare front.

We would still like to go forward with a bipartisan effort that could get us to 2075 on Social Security, but at the least, we should do a bipartisan down payment which takes the bipartisan agreement to take the Social Security surpluses and pay down the debt, and use that interest savings to at least keep Social Security solvent to 2050.

We are even more hopeful on Medicare reform, both in terms of the commitment of the surplus, that Jack will explain, to Medicare, but also in terms of real reforms and choices and prescription drugs to modernize it.

Finally, I think that one of the positive things you've seen from this administration -- and I think to a large degree from the Congress as well -- has been a rejection of the old rosy scenario -- a rejection of trying to inflate our projections by inflating growth numbers beyond what people in the private sector expect. But we should be wary of a new rosy scenario -- the rosy scenario in which people pretend there's over a $1 trillion larger surplus, not by inflating the growth numbers, but by assuming completely unimaginable and unrealistic cuts in domestic programs from education to veterans to agriculture. If you're assuming a $1.9 trillion surplus based on the assumption that you're going to cut 30 or 40 or 50 percent of key programs in the future, that is unrealistic, and that essentially creates a rosy scenario surplus that we should reject.

If we do that, taking the surplus we have, the surplus estimates we have, or the one that the Congressional Budget Office laid down at -- their current services one, which they came in at $838 billion -- if we're in that ballpark, we will be in a fiscally sound ballpark going forward.

If you will excuse me for a second, this is our last budget presentation we'll have of this, and I do want to just very briefly thank some people who made extraordinary efforts. This was the quickest and most difficult budget we had to put together since '93, because the budget did not end until November 22nd. But besides the great efforts that Jack Lew and Sylvia Mathews, who's done just a fantastic job not only putting the budget together, but in joining Jack on the negotiations -- all the PADs -- Barbara Chow, Elgie Holstein, Dan Mendelsohn, Bob Kyl, Michael Deitch, Sally Katzen and Josh Gottbaum; Joe Minirik, who's been a part of every single budget that we've done. And then Dick Emery and his staff, from Nancy Ridenour to Kim Nakahara, who just did yeoman's work on this.

If there is another hero in our process, it was Jon Talisman, the Acting Assistant Secretary for Treasury, who just did a simply remarkable effort in putting this together under just enormous constraints, with Len Burman, Joel Platt and Joe Mikrut on his staff.

I'd also like to thank on the White House, Jason Furman, Melissa Green and Jeanne Lambrew on our staff; the Vice President and First Lady's Office; Chris Jennings, as always; and Bruce Reed, who is the President's long-time Domestic Policy Advisor, who is the source and vision and many of the initiatives that are here, from crime to welfare reform to education.

So with that, I'd like to turn it over to Martin and we will return for questions when Jack is through. Thank you.

MR. BAILY: Thank you, Gene. I'm going to just set out briefly the economic assumptions that have been used to make the administration's forecast.

As the President said earlier and as Gene reiterated, the economy's performance in recent years has been dazzling. Real GDP growth was more than 4 percent the last four years, 4 percent last year; 2.5 million jobs were added to payrolls in the past 12 months, nearly 21 million since 1993. Strong real wage growth, 4 percent unemployment, and yet, inflation has remained low, supported by productivity growth that's been approaching 3 percent in the last few years.

This continuing good economic news, together with the revisions that have been made in the national accounts data, has caused us to revise the economic assumptions incorporated in the '01 budget, compared to those used earlier.

Throughout this administration, the forecasting team I think has built a record of using credible economic assumptions for budgetary purposes. We have been committed to ensuring the budget estimates are based on sound assumptions, broadly consistent with the views of consensus of economic forecasters.

We expect real GDP to grow at 3.3 percent in 2000 -- that's a year-over-year number -- 2.7 in '01, and that growth will average around 2.8 percent over the 11-year projection period.

The estimated real GDP growth is built on the assumption that productivity growth will average around 2 percent a year over that same period. This is above the trend of around 1.4 percent, 1.5 percent that existed for about 20 years after 1973. It's a bit below the pace of 2.5 to 3 percent we've had in the past few years, tries to set a level between those two.

Inflation of the GDP level is expected to be 1.6 percent in 2000, but to be about 2 percent in subsequent years. CPI inflation is to be fairly flat from what it is now, running at about 2.5 percent.

The unemployment rate is projected to be 4.2 percent in 2000, will edge up in subsequent years. These projections differ in fine detail from those of the Congressional Budget Office but, overall, are very similar, indeed. Growth of GDP, unemployment, inflation, those are all very similar assumptions to those that have been made by the Congressional Budget Office. The blue chip consensus forecasters have a GDP growth number for this year and next year that's about three-tenths of a percent higher. Again, that's very close to what we have.

The moderation in economic growth that's built into our forecast, compared to the last couple of years or so, is in large part from our view that the growth of consumption will slow. Personal outlays have grown faster than disposable income in each of the past seven years. We expect consumption going forward to slow to rates more consistent with the growth of disposable income.

The administration's economic team does not believe that real GDP growth of just under 3 percent a year going forward is necessarily the best that this economy can do. If the policies of fiscal discipline and investment in people and technology continued, growth could, indeed, be stronger than we are projecting. But there's tremendous uncertainty associated with any economic projections. This new forecast we're putting out does reflect the good economic news that we've had, but it maintains a realistic, maybe even a little conservative, view of the future, one appropriate for budget analysis.

Thank you.

SECRETARY SUMMERS: This is a budget that preserves our progress and builds our future. I want to comment on three aspects of it. First, debt reduction; second, tax measures to help working families; and, third, offset measures with respect to corporate tax shelters.

With respect to debt, this is a budget that, as the President indicated, provides for the elimination of the national debt by 2013. That is, in effect, a major tax cut, in two respects. It is a major tax cut because it removes the burden of the interest payments on $3.5 trillion from the American people, and ensures that principal payments will not need to be made in the future.

We are seeing very dramatically the benefits, in the form of lower interest rates. Each one percentage point reduction in the interest rate over 10 years is equivalent to an approximately $250 billion tax cut in the form of lower mortgage costs for American families. Reducing the national debt is taking a direct burden off the American taxpayers.

Second, the budget illustrates that while paying down the debt, while preserving and strengthening Social Security and Medicare, while providing for a prescription drug benefit, we can, if we are prudent, find room to assure that core government continues, and to provide tax reductions targeted to middle-income families. The budget contains $350 billion over 10 years in tax cuts for the benefit of American families. We will be highlighting -- discussing those tax cuts in detail at the Treasury Department this afternoon. Let me just indicate some of the major measures.

First, expansions of educational opportunity, building on the HOPE scholarship by providing for the college opportunity tax measure -- that will allow the deduction of as much as $10,000 in tuition costs for middle-income families. Second, making health care more affordable, including through a $3,000 credit for long-term care and, crucially, a 25 percent credit for those who have lost jobs between the ages of 55 and 64 and retired, and seek to buy into the Medicare program.

Third, support for working families through a large expansion of the EITC, to include families with more than three children, through making refundable the child and dependent care credit, and through in a targeted way reduction in marriage penalties and tax burdens for married workers with a general increase in the standard deduction.

Fourth, promotion of savings for retirement through a new program of retirement security accounts that is targeted at providing up to a two for one match from the government for the 70 million Americans who do not have a private pension, do not have a Keough plan, do not have a 401 K plan, and in most cases do not have an IRA. This is a program that will work directly through financial institutions and private employers to reinforce the incentive to save.

And, fifth, tax simplification through relief from the alternative minimum tax, allowing taxpayers to take dependency exemptions separate from that alternative minimum tax. The budget also includes tax measures to encourage philanthropy and promote energy efficiency and to improve the environment.

Finally, let me just say that the $350 billion in gross tax cuts are offset by approximately $100 billion and $96 billion in measures to curb a range of subsidies and to attack abusive transactions carried out by corporations. These measures include an attack on corporate tax shelters, including an excise tax of 25 percent on the fees of those who promote transactions that are deemed to be abusive.

We're not talking about loopholes or subsidies here. We're talking about transactions that are judged to be abusive and devoid of economic substance. The budget also includes proposals to go after transactions that take place in tax havens and to go after secrecy provisions in tax havens, and also includes a range of other issues, including one that is directed at strengthening the current regime where there have proven to be significant loopholes that allow individuals to renounce their U.S. citizenship and, in the process, renounce their tax liabilities.

All told, these tax measures can help American families even as we do what is most important for American families, which is pay down the debt on a substantial scale.

Jack.

MR. LEW: Thank you, Larry. I'd like to walk through some of the basics of the budget and start with what I think is really the basic story of this year's budget.

This year's budget is about balancing fiscal discipline with investment in the future. And I think in order to understand the importance of it, you need to do no more than go back and recall where we started out.

In 1992, when we were looking at the budgets for the first time, 1993, when we proposed our first budget, we saw a sea of red ink. It didn't stop where it stops now. The entire light green area was all red. We have paid off $2.5 trillion in terms of deficits that were projected that aren't there anymore. And it was the result of hard policy decisions in 1993 and 1997, and we've accomplished a great deal.

If we go to the next chart, this is the explanation of how we've gotten to where we are. Spending as a percentage of the government has come down in each year that President Clinton has put budgets forward. When he started, the government was roughly 22 percent of the economy. This year, it's 18.3 percent of the economy. For each of the next years in the 10-year window, it comes down from year to year. So what we've done is, with a smaller government as a percentage of the economy, with fewer workers, we're doing more. It's balancing fiscal discipline with prudent investments.

The next chart, which is very much like the chart the President used this morning, is the result of these efforts. You can see the mountain of debt built up, and we were looking at that line going up and up and up forever. The only reason it turned around, and the only reason it's coming down, is that we've taken the tough decisions.

And it's not projections anymore. What we've actually done -- in 1998, 1999 and this year -- is, we're paying down the debt -- $297 billion scheduled to be paid off by the end of this year.

The importance of this chart is that this is where we go if we stick to a policy of fiscal discipline. And when Gene was talking about the baseline, where we start this year has everything to do with where we end up. If you start with realistic, honest numbers, and make the tough decisions within that framework, we can get to paying off the debt by 2013.

But we can't pretend -- we can't go to numbers that no one really believes. Of the choices before us -- and I think the Congressional Budget Office did a service to the policy process by putting clear choices in front of all policymakers -- there's really only one realistic starting point. And that is to assume that we're not going to go down from where we were in 2000, and we're not going to be frozen for 10 years; that just as spending in 1999 went up 7 percent from 1998, just as it went up 3.5 percent in 2000, there is a need for some increase.

We've begun with -- over 10 years, the assumption the government will grow roughly at the rate of inflation. And that provides resources for all the investments that Gene was describing, to give us the ability, if we make the tough choices, to invest in education, to invest in environmental protection, to invest in national security, both in terms of defense and diplomacy, and all the other things that we've talked about. The alternative is going back to a fiscal policy that didn't work, that got us to the top of the mountain, but doesn't get us to the bottom.

If we can look at the next chart -- the President's budget allocates the surplus, and in any allocation of the surplus, it's really a question of priorities. We start with a $746-billion surplus. Now, we've allocated more than half of that to Medicare -- $299 billion is being put out, as this chart shows, to extend the solvency of the Medicare trust fund. When we began, we were looking at a Medicare solvency date of 1999. That was last year.

Because of the decisions made to date, and because of the economy, solvency is currently projected -- last year at the end of the year, was projected to go to 2015. With the solvency transfers that we've proposed, the $299 billion, we extend the Social Security solvency to 2025.

In addition to the solvency transfers, we have, as we've described, a prescription drug policy which, net, costs $98 billion. And that $98 billion includes prescription drugs and the coverage initiative that we were discussing earlier for older workers without Medicare.

The total cost of the Medicare initiative is larger, is $168 billion, but there are offsets within Medicare that make up the difference. They're prudent stewardship of the program that will increase competition.

The third piece in the Medicare area is a $35-billion reserve for catastrophic drug coverage. That is a new proposal, it's something that we think is a very important addition to the prescription drug benefit. Overall, we've allocated $432 billion to Medicare.

If we can go to the next picture. In the area of Social Security, what we've done is, we've taken all of the interest savings after 2010, we're paying down the debt by reserving the Social Security surplus, and some of the non-Social Security surplus, and we're saying that all the interest savings that we get from saving the Social Security surplus should be put back into Social Security trust fund, beginning in 2011. That would have the effect of extending Social Security solvency to 2054. It actually goes to 2050 with the transfers alone, and then another four years, because of the equity investments that we've proposed.

The next chart shows how this works. It's really, I think, in a lot of ways, a good summary of what fiscal discipline has enabled us to do. When we started in 1993, we projected that when we got to 2010, interest payments would be 23 cents out of every federal dollar. Based on the budget we're putting forward today, when we get to 2010, only 3 cents out of every dollar will be going to interest. That difference is what makes it possible for us to extend the Social Security solvency to 2054. And it's the benefits that we get from paying down the debt by saving the Social Security surplus.

As Larry Summers described, we do have a tax cut. It's a $256-billion net tax cut -- that's the portion that comes out of the surplus. We also have offsets in the tax areas so that gross is just over $350 billion.

I think that the decisions that are made this year on the budget will really boil down to two: how large is the surplus and do you start with realistic, honest numbers that we can actually work with, not just this year, but in the future; and, secondly, how do you allocate that surplus.

We believe we've started with the right assumptions: conservative economics, spending projections that are realistic, that we can live with. If you start with projections of a larger surplus, it means one of two things -- either you're making assumptions about discretionary spending that mean cuts that we would not defend and I don't think would be defended in Congress. That means the savings either won't occur -- and if they don't occur, then we're spending more -- or they do occur, and there's very bad policy outcomes. I think the definition of fiscal discipline in a time of surplus is being realistic about where you start, and then making the tough choices.

Within the surplus, if we start at the right point, we think that the $746 billion that we project, and the $843 billion that CBO projected, are very close. In terms of 10-year projections, they're really as close to the same as you can get when different people prepare very complicated forecasts. If we're in that range, we have to make the tough choices; if the tax cut grows, it's got to push something else out.

We've put forward proposals that largely put the resources into Medicare. That's a policy debate; it's a debate over priorities. We think we've sized the tax cut right; we think we've sized the Medicare investments right. And we look forward to a debate this year where those issues can get worked out so we can do the business of the American people. It's all about having a balanced program that does both fiscal discipline and prudent investments.

And I think now we're ready to take your questions.

Q: Jack, could you just -- or maybe Larry could just give us one example of one of these abusive transactions that you're going to be eliminating?

SECRETARY SUMMERS: Businesses who lease a -- who buy a Swiss city hall and lease it back to the town in Switzerland with a properly designed maintenance contract are changing nothing of substance. The Swiss canton still does its business in the Swiss city hall, but the effect is an assertion of significantly reduced tax liability.

Another example is an individual who expatriates from the United States, but borrows against his funds that are kept in the United States, and so in effect, is able to take his money out of the United States through that borrowing transaction on which there's ultimately a default.

Q: By what terms do you increase discretionary spending in real terms next year for FY 2001 --

MR. LEW: Well, those are different questions. The discretionary budget for 2001 is 3.9 percent above the discretionary level in 2000. It's just over 1 percent above inflation. And just to put it in perspective, '98 to '99 was 7 percent growth; '99 to 2000 was 3.5 growth. So this is on par with last year; it's not as big as the increase from '98 to '99. Over 10 years, the growth in discretionary spending is just slightly below the inflation level. We actually have $32 billion, $33 billion of savings compared to an inflation-adjusted baseline.

Q: If I could follow up, so, next year, you assume a real increase in discretionary spending. Then, after that, you assume it will be below inflation.

MR. LEW: We actually, for the out-years, have assumed exactly inflation beginning in, I believe, 2005 or 2006.

Q: But by what rationale? There was an increase last year. You were proposing -- then your rationale is that it will never happen again.

MR. LEW: No, there is an increase in every year. There's no year in which discretionary spending goes down. Frankly, what we're doing in this year's budget is restoring levels in some programs, we're putting forward initiatives that will be -- if they're maintained in the future -- will be accommodated in the budget.

And there is a need, over the 10-year period, to have some constraints so that we don't go back to just spending without limits. What we've proposed is not to eliminate spending limits. What we've proposed is to put in place a new set of limits that Congress and we can work with and that can be enforceable over 10 years.

Q: Congress last fall shifted something like $32 billion spending into like 2001. I understand that's being dealt with somehow. Will you walk us through how that's being --

MR. LEW: Yes. There's actually -- in the budget that tries to do that. And rather than go through each of the numbers, I would refer you to the chart. But let me explain the rationale behind it.

Starting work on this year's budget was an extraordinarily complicated task, because it took us several weeks to figure out where things ended up last year. Budgets had reached a level of complexity that taxed even the most technically expert, in terms of trying to understand why spending patterns were following the course they were following.

You have to remember, a dozen different decisions that were made for no purpose other than to technically comply with spending limits when, in fact, the spending limits weren't being complied with. We tried to undo that. We tried to put all the spending back where it belongs so that the things that were done in 2000, pushing it into out-years were put back into 2000, so that we reversed and corrected the gimmicks that, frankly, made the budget impossible to understand.

We think it was not the right way to do it. We offered offsets last year that we thought were the right way to do it, that would have been straightforward. But the result was, we think, one that needed to be corrected. We have taken care of the needs for 2001, while correcting what we think were the gimmicks from 2000 and previous years.

Q: Does the 3.9 percent, does that include tobacco and undistributed --

MR. LEW: No, tobacco is not being used as an offset for discretionary this year. It is in the budget, and I'd like to say just a word about our tobacco policy. We've tried in this year's budget to have it stand on its own, as it really should, as a tobacco policy. We have shifted from an excise tax to a lower excise tax combined with a very strong youth penalty, which is designed to make it not be profitable to sell cigarettes to children.

We hope that this policy works, and we hope that over time the revenues diminish. But most of the money that we're assuming in the budget comes from the youth penalty. We have not tied it to discretionary spending. It is in the budget; it's part of the overall budget, but it is not linked to the discretionary levels.

Q: Jack, could you talk a little -- coming back to Medicare, to the offsets that you mentioned, you said the Medicare piece was $68 billion, but the true cost is -- you know, one of the sectors out there that's complained much about your policies is hospitals and nursing homes, et cetera. Are they going to howl at this --

MR. LEW: Let me describe the policy, and let me let others react as they will. What we've tried to do is really two things. First, to modernize the program, to increase the competition, particularly on the fee-for-service side. And those are savings that are important not just as an offset for prescription drugs, but to bring the program where it should be in the 21st century. The savings from there, I think, will be relatively less controversial. They're very much along the lines of bipartisan recommendations over the last couple of years. And we're hopeful that we can get that done as part of a prescription drug package.

The other savings we have really come after the expiration of the Balanced Budget Act, when there are some constraints on the growth of costs through provider reimbursement limits. There's never been a time when we've had unconstrained reimbursement growth. The Balanced Budget Act -- there were some measures taken last year to constrain some of the savings in response to some of the concerns expressed by providers.

But as we look out beyond the Balanced Budget Act we have, as fiscal stewards, a responsibility to keep an eye on program growth and there are moderate constraints that are less than the constraints in the past that we think are realistic and correct. I'm sure there will be a long debate on it, but those are the two categories of savings.

Q: What does the term "unified surplus" mean, and what is the number for the Social Security fund surplus?

MR. LEW: The unified surplus is all of the spending and receipts of the federal government, taken together, and it's the bottom line, the next result. In 2001, we're looking, after all of our policy, at 184 as the -- I'm sorry, that's the debt reduction. The baseline unifying surplus is 171, before any policy. The Social Security portion, the off-budget portion, is 160.

We've taken all of the Social Security surplus and set it aside and in the short-term, we're using it for debt reduction -- that's what's enabling us to bring interest payments down. And beginning in 2011, after we've reduced the interest payments, we then have transfers of general revenue and Social Security to extend solvency.

Q: Jack, on the bringing interest payments down, one has the sense that they will be coming down because of your budget plan, but on the other hand, the Fed keeps ratcheting interest rates up. So does it just come out to a draw on interest rates, or do you see them really coming down?

MR. LEW: Well, as you know, we don't comment on the Federal Reserve Board policy, but what I can say about our fiscal policy is that over the last seven years, it's had an enormously salutary effect on the economy. It has made it, I think, both in terms of business investment and economy that made capital available for private initiative. In terms of monetary policy, our fiscal policies accommodated what would have been very, very good monetary policies.

Overall, we have continued on the path we've been on, and I would defer to my colleagues with more economic credentials to go into more detail.

MR. BAILY: Well, I'll just make a quick comment on interest rates. We basically don't try to forecast interest rates going forward. We do know that the fiscal discipline has the effect of keeping interest rates down. We've seen the evidence of that. In this expansion, for example, real interest rates have been 30 percent to 50 percent lower than they were in the 1980s, so you can absolutely see the effect of the different fiscal environments on interest rates.

What we're projecting going forward is 5.2 percent for the three-month interest rate and 6.1 percent for the 10-year. What we tend to do is at the point where we're doing the forecast, we look at what interest rates are, and we basically flatline out from that, and we don't try to make a projection. We simply assume that they will remain at the level they are at.

SECRETARY SUMMERS: Can I just clarify one thing? There is the effect of the budget on interest rates, which will be to reduce interest rates below what they otherwise would have been. But, more important, if you're not in debt, when interest rates fluctuate, your cost doesn't change very much.

Right now, at this debt level, a 1-percent change in interest rates over time costs the federal government about $35 billion a year. When we get to 2005, and the debt is closer to $2 trillion, a 1-percent change in interest rates would only cost the federal government $20 billion. And by 2013, a 1-percent change in interest rates won't cost the federal government anything.

So the clear point is that by reducing -- that was the first of the two tax cuts. I described how debt reduction was a tax cut for two reasons -- because you didn't have to pay interest and principal, and because debt reduction reduced the level of the interest rate. The really important point about this budget is that it reduces the amount of debt.

Q: The President today is taking credit for a historic shift from deficits to surplus, and certainly we understand the political prerogative there. As an economist, though, sir, how much of this good news would you say is attributable to a decade of cheap oil, 10 years after the Gulf War, and a decade of peace dividend, 10 years after the end of the Cold War?

SECRETARY SUMMERS: I think our progress reflects a number of factors, and I think it's like the blades of a scissors. Without each of them, we would not have had the progress.

One certainly is the information technology supply shock that Vice President Gore likes to talk about. The Vice President emphasizes how, in the 1970s, we had one key input -- oil. The price went way up, and it flowed through the whole economy, and what you saw was stagflation, more unemployment, more inflation, slower productivity growth. And in the 1990s, we've had one key input -- information and information technology go way down in price. I have not yet thought of a good antonym for stagflation. But we've had lower unemployment and lower inflation and much more rapid productivity growth.

But we wouldn't have been able to realize all those benefits if we hadn't had room for substantial investment; if we hadn't had the double-digit growth in investment that Gene and Martin talked about; if we hadn't had room for all of that information technology investment. And what made it possible for us to have the room was the fiscal progress that we made.

You know, there's a lot of what economists call positive feedback, what others call rolling snowballs, in these things. Before 1993, we had a dynamic of rising debt, higher interest rates, slower growth, less revenues, higher interest rates and the whole thing went round again and productivity growth and economic performance were deteriorating.

Through what we did in 1993, we changed from that vicious cycle to a virtuous circle. So while, ultimately, credit goes to American workers, American businesses and the force of information technology. I don't believe we would have unlocked that energy without a decisive change in our country's fiscal policies. And I think what is conspicuous in evaluating that decisive change is what the forecasts were, not just of our fiscal picture, but also of our national economic performance picture in the early 1990s, when it had become a commonplace that the Cold War was over and Europe and Japan had won.

Q: Mr. Summers, the excise tax on Wall Street firms selling abusive tax shelters, can that be done administratively, or do we need Congress to pass some kind of a new law?

SECRETARY SUMMERS: You added the word "Wall Street" -- there are many located in many different places and in different businesses who are involved.

I want to be very clear, we are not talking about the entirely legitimate business of providing tax advice. We are not talking about the entirely legitimate activity of seeking within the law to minimize tax liability. We are speaking about abusive transactions marketed with confidentiality arrangements, devoid of economic substance where the strategy is to just hope that no one notices. To levy the excise that I referred to would require legislation. I expect that, as in the past, over the next several months we will be taking a number of regulatory and administrative measures with respect to the question of corporate tax shelters, which has become an increasing concern to those concerned with the integrity of our tax system.

Q: Was your Swiss example a real world example?

SECRETARY SUMMERS: Yes.

Q: Quickly, on the flow on your revenues, the tax receipts are about even over the first five years or so, with the second five years. But on the tax cut side -- you all have criticized Republicans for doing this in the past -- you've got about $100 billion in tax cuts in the first five years, and then the total going to $350 billion over the second. Isn't that exploding in the out-years -- using the terms you all have used to criticize Republicans with that?

SECRETARY SUMMERS: I'm glad you asked that question. The tax cuts are significantly larger in the second five years, rather than in the first five years, because the various of the proposals are phased in. They're phased-in both for administrative reasons and, frankly, they're phased in because there are larger projected surpluses in the second five years than there were in the first.

The sharp distinction between these tax cuts and the tax cuts that we were in the past and will in the future be sharply critical of, is that these are fully phased in and are then stable at between 2005 and 2010. If you look at the numbers for 2008, 2009, 2010, you'll see that the taxes are basically in a stable pattern. That is very different from, for example, one of the tax bills last year in which you are looking at a cliff between 2009 and 2010, and another cliff between 2010 and 2011. There is no growth except growth with the economy that is pushed beyond the window in our tax proposals.

Q: How well did you -- these tax loophole closures last year? You're saying you have a gimmick-free budget or fewer gimmicks. And why do you expect it to be better this year, when presumably, all these people will be contributing to campaigns?

SECRETARY SUMMERS: Let me first say that one of the objectives of our proposal is to move towards a gimmick-free tax system in which we don't have abuses. I don't know what the prospects for their passage will be. I would say this, though. If they are passed, we will have a fairer tax system, we will have fewer resources of our economy diverted into unproductive pursuits; and if they are passed, we will have more room for tax cuts for American families that are consistent with paying down the debt and strengthening Medicare and Social Security.

There is a choice, in part, to be made between protecting tax shelter activities, and providing benefits for health care, for education, and to help American families save.

END 11:40 A.M. EST