ON-THE-RECORD PRESS CALL
BY CEA CHAIRMAN KEVIN HASSETT,
AND CEA MEMBERS, RICH BURKHAUSER, TYLER GOODSPEED, AND CASEY MULLIGAN
ON THE ECONOMIC REPORT OF THE PRESIDENT
Via Telephone
10:00 A.M. EDT
MS. SLOBODIEN: Hi, everyone. Thank you for joining us for this morning's conference with CEA Chairman Kevin Hassett who will be discussing the Economic Report of the President.
I'm going to turn things over to Kevin. But before I do, just want to remind everyone that this call is on the record and we will be taking questions after Kevin and the members are finished with their remarks.
CHAIRMAN HASSETT: Yeah, thank you very much Rachael. And thank you all for joining. You know, it's a big day for us here at the CEA because we've put out -- I think this is the 73rd Economic Report to the President.
MS. SLOBODIEN: Yes.
CHAIRMAN HASSETT: I think I counted those correctly. And it's filled with lots of data and tables and charts that help people understand the current state of the economy and what we expect that the state of the economy -- how it will evolve over the next few years.
I'm joined here by Rich Burkhauser, who's a member of the Council of Economic Advisers and our top labor economist; Casey Mulligan; and Tyler Goodspeed as well. And they're going to be talking about a few specific topics that they helped coordinate in the ERP.
I would appreciate it that if you would like to have an on-the-record quote from me after they speak, if they say something that you would really like to talk to me more about, that -- in the Q&A period, that you reach out and do that. But the whole call is on the record.
And with that, to talk about our outlook -- why it is, what is, what our record has been, and how it relates to the tax cuts -- I'll hand it off to Tyler Goodspeed, first. Tyler.
MR. GOODSPEED: Yeah, well, first of all, part of Economic Report to the President is to reflect on the year in review, and one of the aspects of the year in review is to evaluate how our forecast stacks up against how the actual economy performed.
And so, back in 2017, the administration produced a forecast of real GDP growth during the four quarters of 2017 to come in at 2.3 percent. And then, real GDP growth last year we forecasted for 2018 would come in at 3.1 percent, and in actuality, in 2017, real GDP growth was 2.5 percent, and in 2018 it came in bang on our forecast at 3.1 percent.
So one of the encouraging signs is that we were the first administration since the troika of the Office of Management and Budget, Treasury, and the CEA started making long-run forecasts. We were the first administration on record to have experienced economic growth that met or exceeded its own forecast in each of its first two years in office.
I think you have a slide in front of you that shows -- no, okay. It's on Twitter.
So there is -- you can also look at what actual GDP growth was versus what it would have been had pre-2017 and pre-Tax Cuts and Jobs Act trends continued into 2017 and into 2018. And what we see is that, had the economy grown at the preceding pace of the expansion -- since the end of the recession -- GDP growth in 2017 would have been about five-tenths of a percent lower than it actually was. And in 2018, real GDP growth would have been about 0.9 percentage points below what it actually was.
And also, again, when we look at sort of the residual between what growth in investment was versus what the trend projection would have been, we can see that, in terms of venture capital deals, in terms of real capital spending by businesses, we see that the investment was really growing at a pace much above the pace of the preceding expansion.
And actually, encouragingly, with respect to CEA's own internal models, we saw that investment was pretty much rising above trend at the exact pace that we were predicting on the basis of our user cost of capital model.
CHAIRMAN HASSETT: That's right. And going back to the debate of the fall -- this is Kevin -- that when the cost of capital went down about 9 percent -- you have to average it across assets and investment across assets -- if you include the equipment surge of the fourth quarter, it increased it about 9 percent, which is kind of an old economist rule of thumb that that's about what you ought to expect to happen in a macroeconomic model. That's the favorite textbook model.
And so we got a capital spending boom and economic growth, just as we anticipated. And one of the things, though, that we emphasized, really, ever since Rich Burkhauser and I got here is what that meant for workers. I had done some work that had looked at the impact of capital formation on wages, and Rich has spent his career studying just about every corner of the labor market’s literature.
And so, now, Rich is going to walk you through just a few quick fun facts about what’s been going on in the labor market, in terms of jobs, job creation, and wage growth.
MR. BURKHAUSER: Right. So the surge in the GDP last year that Tyler just talked about has also resulted in a surge of employment, most especially in blue-collar employment. And we tracked that looking at manufacturing, specifically durable goods manufacturing. And when you look at those numbers and look at trends of past elections, based on trends from '13 to November of 2016, we find that by February of 2019, we're at 301,000 jobs above trend in durable goods manufacturing, which is steel machinery, computers, autos, which are the heart of blue-collar employment.
If you then look at -- you can look at that and say, “Well, yes, but how can that lead to future increases in growth, because aren’t we running out of workers because the unemployment rates are at record lows?" And the answer to that is to look, really, at what’s been happening. And this is really a very encouraging sign for the future.
If you look at where workers are coming from -- that is, if you look at all the workers in a given period, say, last month, and ask what were those workers doing in the previous month, you can tell whether workers are just simply continuing their work or whether they’re coming from the unemployed; whether they’re coming from out of the labor force.
And what we’ve seen -- in 2018, there was an influx of workers coming off the sideline. In the fourth quarter, 73 percent of the flow into employment came from this out of the labor force, rather than from unemployment. And over the period since the beginning of the Trump administration, 71 percent of people coming into employment are coming from out of the labor force versus coming from unemployment. And that’s above the second term of the Obama administration, where it was 66.5 percent, and the first term, where it was 63 percent. So this suggests that there is plenty of jobs, plenty of workers on the sidelines able to come off.
The other good news that’s moving them off the sidelines is that nominal wages grew by 3.4 percent over the last 12 months, and that’s the fastest pace since 2009 and the seventh straight month above 3 percent. In 2018, the lowest wage earners saw the fastest growth, well above the median.
CHAIRMAN HASSETT: Yes. And thanks so much, Rich. And, in addition, we have a big extension of our earlier work on official measures of poverty, and, you know, what they include and don’t include and how it could be measured better. And I think you all quite remember that we put out a paper -- gosh, I guess it was about last summer -- on that topic. And there’s a big update that’s now a chapter in the Economic Report that Rich worked a heck of a lot on.
And I think that the headline from that poverty chapter is that, if you include transfer programs and the safety net programs, that poverty has actually dropped significantly since President Johnson declared the war on poverty, and that we need to think about what the next war on poverty would be. And we argue that it needs to be a war for self-sufficiency.
And, with that, then, I’m going to turn now to a discussion of regulation. Regulation is a thing that’s been a clear focus of the Trump administration. Deregulation has been a main instruction for Cabinet Secretaries from the President. Of course, the problem for we economists is that measuring regulation can be quite difficult. And we have a chapter that goes into how one might do that and develop some measures of regulation, drawing on our own work and work done by people down in OIRA.
And Casey Mulligan is going to walk you through a little bit of our work on regulation.
MR. MULLIGAN: If you have the chart on the Twitter, or Figure 2-3 in the Economic Report, we show how the President’s regulatory budget, which is a brand-new thing in the United States, which puts a cap on the amount of costs that can be created by new regulations, we see that that budget resulted in decreases in regulatory costs three years in a row, as opposed to the past, where there was substantial increases to regulatory costs year after year after year.
And this is making a real difference in people's lives. It's raising wages by raising productivity, and it's reducing costs for the number of products that consumers buy. So it's reducing living expenses for families.
And we show in this chapter how, really, the whole of the regulatory budget is greater than the sum of the parts because these different regulations add together and kind of compile on each other.
One of the areas where we see some of the effects of deregulation is in the energy area. If you have, again, on the Twitter, or Figure 5-3 in the Economic Report, we discuss various energy production measures and we have a picture of oil production, which has really been amazing. Deregulation is a part of the story there. Deregulation both in energy and in banking, because bank loans are an important part of that industry.
Also, technological innovation in some of the world market conditions have contributed here, but the amazing result is the United States oil production has passed all the countries in the world -- passed Saudi Arabia, passed Russia -- and we're producing like never before.
A third area that we featured in the Twitter deck is the prescription drugs scenario where there's been deregulation on the generic products. So, when products come off patent, there's an opportunity for generic companies to come in, but there was a lot of red tape there and we cut that back. And now a lot of generic companies are coming in, lowering the prices for consumers in an amazing way. A 5 or 10 percent drop in consumer prices relative to the previous trend we've seen already, and we expect to enjoy more of that going forward. So that's real money that families are saving.
CHAIRMAN HASSETT: Yeah. Thanks a lot, Casey. And yeah, we're about to finish up, so if you have questions you can start to think about them.
I'm going to talk just briefly about two other chapters in the Economic Report. One is, we have a chapter on artificial intelligence and what it means for the American worker, and also, how evolution and cyberspace has impacted cybersecurity.
And I think that that chapter is filled with a heck of a lot of new analysis that should be ample food for thought for how ready the economy is for potential cyberattacks and also how ready America's workers are for the potential disruptions that come from machines learning and more and more spreading that machine talent out into places that were previously inhabited only by human workers.
I think that the headline from the AI chapter -- from the AI part of that chapter -- is really that there are a lot of different scenarios. But one that we expect will be very important will be very similar to the Uber scenario where the Uber software made it so that taxi dispatchers were no longer needed and that cars themselves are much more efficient. And so you might have expected that job employment would go down in this sector because there would be no dispatchers and the cars are more efficient so that there would be fewer drivers.
But the elasticity of demand for Uber rides and Lyft and, of course, other similar apps was so high that the employment, as we document in the chapter, actually skyrocketed in that space without people seeing lower wages. And so we think that the technology area holds a great deal of promise going forward.
And the final chapter is an update on our work that also we put out a draft paper on in earlier in last year on capitalism and socialism and how to think about, you know, what they are and what they aren't. And for that chapter, one of the things that we've done is flesh out the history of the CEA in this space and talked a lot about how the early CEA, in particular, led a big national debate about exactly how we have to organize our economy.
And we point out right in the introduction, on page 13, that this is kind of a requirement given to us by the '46 Act that established the Council of Economic Advisers. You know, our job is to send out a report that sets forth the administration's program for achieving the chartered purpose of -- and now I'm going to quote it -- "creating and maintaining, in a matter calculated to foster and promote free competitive enterprise and the general welfare, conditions under which there will be afforded useful employment opportunities, including self-employment, for those able, willing, and seeking to work, and to promote maximum employment, production, and purchasing power."
That's a pretty clear charge in the '46 Act. And the very first Economic Report of the President which we talked a lot about in that chapter took that seriously, and we do as well.
With that, I thank you all for your attention and for joining us on the call. And we'll now open it up for questions. And for that, I will hand it back to Rachael, who will connect people and introduce them to us.
MS. SLOBODIEN: Great. We're ready to take the questions now.
Q Thanks very much. Can you explain why you focus attention on durable goods manufacturing in an economy that's pretty heavily service-oriented?
CHAIRMAN HASSETT: Well, I think that we've, of course, in the Economic Report of the President have -- how many charts? I don't know if we've counted them. But I think whatever it is you might like to see, there's probably a number for you in there somewhere.
But we think that the goods producing sector is one of the places that was hardest hit in the past couple of decades by both the fact that we were the highest tax place on Earth and so it's shifting jobs overseas. But also, if you read like the literature by Professor Autor or Professor Shaw, that also local geographic distress was often set off by the closing of factories in part because China entered the WTO. And so there are pockets of the country where distress basically rose to unacceptable levels and stayed there.
And one of the objectives of the President is to return prosperity to those places, both by making the country as a whole an attractive place to do business, and also to funnel money specifically to Opportunity Zones through the new tax code -- tax provisions on Opportunity Zones.
But our view is that the capital formation that has been stipulated by the tax cuts is -- the biggest story for that is in blue-collar manufacturing jobs because those are the people whose productivity depends so crucially on how many machines and what quality of machines they have to work with. And so that’s why.
But you're right that service sector jobs are important too. Wages of the service sector are about the same as wages in the manufacturing sector. And so we don’t we disregard services altogether. But I think that the revival -- the service sector was doing great as President Trump came into office; it's still doing great. But the blue-collar -- traditionally blue-collar registries were not, and they seem to have significantly inflected.
Thanks, Scott. Do we have another question?
Q Thanks for taking my questions. Mr. Hassett, do you still support a carbon tax and see it as a "no regrets policy" to reduce greenhouse gas emissions? And have you broached the topic at all at your time in the White House?
CHAIRMAN HASSETT: You know, this call is about the Economic Report of the President, and I have written a lot about the economics of carbon taxes, and how they work and who pays them. My academic record in that space is clear, but, you know, conversations I have or don’t have with the President are deliberative and subject to executive privilege, and so I can't discuss that at this time. But there is a lot of discussion of the energy sector. There's a whole chapter on the energy sector in the Economic Report.
Q Hi, it's Yamiche. Thanks for making the call. My question is for Chairman Hassett. You said that the next war on poverty would be a war on self-sufficiency. Experts I've talked to, and organizations, say that most people receiving assistance or welfare or SNAP benefits are seniors or disabled, or caring for persons and seniors who are disabled. Most people who can work are working. There is a small fraction of people who aren’t. So what is the "war on self-sufficiency" actually?
CHAIRMAN HASSETT: Not "war on." "War for." (Inaudible.) We felt that this was --
Q Yeah, sorry, war "for" self-sufficiency.
CHAIRMAN HASSETT: But, you know, there's ample evidence that work is rewarding and fulfilling. And this is something that, if you look at the Economic Report, that President Johnson spoke movingly about. And I think that, absolutely, improving our trading programs, and so on, is a key focus of the Trump administration because it's -- people who are self-sufficient, have, in surveys, about twice the happiness of people who are not that controlling for how many resources they have.
And work requirements were -- you know, that was a bipartisan issue under President Clinton. And I think that it's important to emphasize that these work requirements are humane. If there is someone who really can't work, then they can apply for a waiver for a work requirement, and many, many people get them. And the people that make those decisions are great public servants.
But in terms of the proportion of able-bodied workers that could potentially work in the labor force -- your question seemed to assert that that was zero, but that's not really correct. In fact, Rich knows those numbers. Rich, could you just inform people about those numbers? And it's in page --
MR. BURKHAUSER: 407. Chapter 9.
CHAIRMAN HASSETT: 407.
MR. BURKHAUSER: Yeah, so, first of all, we're really only talking about work requirements for working-age people without disabilities. And if you look at people on Medicaid, SNAP, Housing, and TANF, about half the people that who are on those programs are able-bodied and of working age.
And the good news is these are for numbers in December 2013, which is the most recent data we had, but there's been an increase in the number of -- a decrease in the number of people on these programs moving into the labor force. Our view is that we actually need these folks in the labor force. They are the folks who are going to allow us to continue to have economic growth. And I think people would rather work than not, and we want to give them the opportunity to do that.
CHAIRMAN HASSETT: Yeah, and the final thought on this is that there is really nothing more frustrating than applying for a job and getting rejected over and over. And we understand why, in the very weak economy that followed the Great Recession, so many people got discouraged, and we're incredibly heartened by the fact that so many people are reconnecting.
And, you know, despite the fact that that's happening, we think we can do a lot better by thinking about rational and humane work requirements and where they could improve our programs.
Rachael, back to you for the next question.
Q Hello, this is Toby Capion from EWTN. My question has to do with quarterly earnings reports. President Trump previously showed support for switching from quarterly earnings reports to semiannual reports, and I just want to know where does that proposal stand and do you support it?
CHAIRMAN HASSETT: You know, there is no discussion of that in the Economic Report of the President. I have not been updated on the latest movement in that space. I'm sorry. I don't have anything to add.
Q Good morning all. Thanks for doing this. So a lot of the recovery that you guys celebrate over the last couple of years has to do with government investment in some sense: increased government spending on defense, as well as a large tax cut. Do you think that more of that needs to happen in order for this recovery to be sustained, either in the form of large infrastructure investment, another tax cut, or other forms of stimulus?
CHAIRMAN HASSETT: Yeah, so thanks for that question. And, again, in the tax paper we specifically go into your question in great detail. And the basic idea is that, when you cut taxes and make the United States a more attractive place to locate investment, then it takes a while for all the factories to be built, and the people to be hired and trained, and the electricity to be turned on, and so on.
And so then we expect that the surge that we've gotten in the corporate sector and in the manufacturing sector from the cuts and taxes on businesses, that those will continue to create growth and jobs for some time. And the discussion -- if you turn to page 40 or look at the charts on page 41, the discussion in the tax chapter goes into, sort of, gory detail about the literature that suggests that that's the way we ought to think about it.
And so, I think that -- you know, some folks have said that, "Oh, sure, we did have 3 percent growth but that was a sugar high." And our view is that it's really not a sugar high at all. A sugar high would be: We spent a lot of money on Twinkies and now we are sorry we ate all those Twinkies, and we don't have money left.
But this is -- we actually cut taxes to encourage people to build new factories. And we had new factories last year. We're going to get more new factories this year, but we're also going to get the output from the factories we built last year as they turn them on.
MS. SLOBODIEN: Okay, I think we have time for one more question.
Q Hi, thanks for taking our calls. So the administration pretty much is promising an economic boom that's going to last for years. How much, though, has your data and research actually taken into account that, you know, there are signs of global economy slowing and most analysts are predicting a recession in 2020?
CHAIRMAN HASSETT: Yeah, thanks. So, first, there is a discussion of where's the outlook in the Economic Report, and I would point you to that. And you're right that data go up and data go down, and the odds of us having another year where we hit the number exactly are probably pretty low. But I think that there's ample room for optimism.
The room for pessimism is in part what you said, that this slowing around the world could accelerate, which would put downward pressure on demand for our exports and that could be negative for the outlook. I think that we're watching closely, especially in Europe, which seems very close to recession, in part because of the uncertainty over the Brexit.
But if we run the numbers, there are so many positives that are basically, you know, the residual effect of going from being the highest taxed place on Earth to being an attractive place. You know, that is a big -- that's a fundamental shift in the economy, in the economic outlook, and it's not one that reaches its complete fruition after one year. And so we're pretty confident that the momentum that we're carrying into this year will continue.
And I think that the idea that we would have a recession next year, it's certainly not impossible. Recessions very often happen and few people see them coming. But it would be very unusual for such a thing to happen given the maximum amount of capital spending and new capacity that's being brought online.
With that, I thank you so much for your attention and for opening up the ERP. We put so much work into it. And I look forward to having you reach back to us if you have any follow-up questions.
I think Rachael is going to finish up the call and talk about how that might work.
MS. SLOBODIEN: Thank you. Just a reminder, this was on the record. And please do reach out to us through the White House Communications Office if you have any additional questions. Thank you.
END 10:29 A.M. EDT
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