Obama budget director Peter Orszag and Council of Economic Advisers chair Christy Romer briefed reporters Monday night on the administration's Mid-Session Budget Review. The briefing was embargoed for release until 9:30 a.m. Tuesday.
The full transcript is below these highlights:
* 10-year deficit projection grows from $7 trillion to $9 trillion
* Admin says higher 10-year deficit due to deeper recession, mounting interest payments on national debt
* Admin. argues higher 10-year number reinforces case for health care reform rather than undermining it -- saying lowering federal health care costs will reduce the deficit and aid economic growth
* Projects average unemployment for 2009 0f 9.3%
* Projects average unemployment for 2010 of 9.8%
* Projects unemployment rate of 10% in 4th quarter of 2009 and possibly through some or most of 1st quarter of 2010
* Projects Gross Domestic Product for 2009 of -2.8%
* Projects Gross Domestic Product for 2010 of 2.0%
* Projects Gross Domestic Product for 2011 of 3.8%
* Projects Consumer Price Index for 2009 of -0.7%
* Projects Consumer Price Index for 2010 of 1.4%
* Projects Consumer Price Index for 2011 of 1.5%
The full transcript of Orszag and Romer's opening remarks and subsequent questions and answers begins here:
THE WHITE HOUSE
Office of the Press Secretary
For Release 9:30 a.m.
Tuesday, August 25, 2009
PRESS BRIEFING BY
CHAIR OF THE COUNCIL OF ECONOMIC ADVISERS CHRISTY ROMER
DIRECTOR OF THE OFFICE OF MANAGEMENT AND BUDGET PETER ORSZAG
ON THE MIDSESSION REVIEW
Via Conference Call
7:05 P.M. EDT
DIRECTOR ORSZAG: As you know, the Midsession Review updates the administration's economic forecasts and budget projections. The forecasts are based on data that reflects how severe the economic downturn was in late fall of last year and the winter of this year. Our economic assumptions reflect that and are now in line with those of other major forecasters. Christy will be saying more about our economic projections in a couple minutes.
Our budget projections are also in line with others, including the projections that the CBO has made earlier this year. So for those of you who follow the evolution of budget figures closely, there's not a lot of surprises here.
Relative to our previous numbers, the Midsession Review shows a smaller 2009 deficit, but larger out-year deficit. Let me explain briefly why. First, with regard to the 2009 deficit, we now expect that the policies put in place to repair the financial system would cost taxpayers less than originally expected. In particular, we have decided to remove from the budget the financial stabilization placeholder that was originally included in our February and May documents and that seemed prudent earlier this year. We've also lowered our estimate for the expected cost of FDIC bank rescues. And the result of these changes is a $262 billion improvement in the projected 2009 deficit.
That deficit is now projected to be $1.58 trillion, or 11.2 percent of GDP.
Second, with regard to the out-year deficit, the changes are driven primarily by changes in economic assumptions -- and again, Christy is going to talk at more length about those. But what happens as you revise the economic projections to reflect the deeper recession that has occurred is that certain spending programs such as UI benefits and food stamps automatically increase and revenues automatically decline. And although this is helpful in stimulating demand in the short term, it also leads to higher medium-term deficits, both directly because the jumping-off point is different than it was before, and also indirectly, because it adds the interest costs on a higher accumulated debt.
Over the next 10 years we expect to add $2 trillion to the projected deficit, compared to our last projection made on February's economic assumption, and it brings the total 10-year deficit for the 2010-2019 period to a little over $9 trillion, in particular $9.05 trillion -- largely in line with CBO's June projection of the administration's.
The out-year deficits hover in the range of 4 percent of GDP, higher than desirable. It is worth noting, however, that by 2019, the difference between revenue and non-interest spending -- that is what is known as the primary deficit -- is well under 4 percent of GDP and is actually 0.6 percent of the economy. The bulk of the deficit, therefore, in 2019, for example, reflects interest payments, which, in turn, almost entirely reflect the cost of the debt accumulated in the past and the need to run short-term deficits to help the economy recover from the most severe downturn since the Great Depression.
Whatever their cause, the administration is very concerned about these out-year deficits, and getting those deficits under control is a top priority of the administration. We're in the midst of the policy process surrounding the fiscal year 2011 budget, and that process will include proposals to put the nation back on a fiscally sustainable path. I'm not going to comment on any specific regarding the policies that will be part of that fiscal year 2011 budget, but let me make a few general comments.
First, since it's desirable to allow the deficit to increase during an economic downturn, deficit reductions -- (inaudible) --on the out-years after the economy has recovered. Importantly, the first step is to stop making those long-term deficits worse, which is why the administration supports statutory pay-as-you-go legislation so that any new tax or entitlement initiatives are fully paid for.
I note that if we had abided by this approach during the previous administration, the projected 10-year deficit would be $5 trillion smaller. In other words, more than half of the projected deficits over the next 10 years are directly attributable to the failure to follow pay-as-you-go rules in the past.
In addition to avoiding making the problem worse -- and as many of you heard me emphasize in the past -- in order to make forward progress on starting to fill in that hole, the key thing we need to address is the key driver of our long-term deficits, which are health care costs. If we slow the rate of health care spending by just 15 basis points per year -- that's .15 percentage points per year -- the savings for Medicare and Medicaid equal the fiscal impact from eliminating the entire 75-year deficit in Social Security.
We simply can't put the federal government back on a fiscally sustainable path without slowing the rate of health care costs in the long run, and that's why the administration is insistent that health care reform be not only deficit-neutral over the next 10 years, but also leaving and putting in place structural changes that will lead to reductions in the deficit thereafter.
So let me be very clear. I know there are going to be some who say that this report proves that we can't afford health reform. I think that has it backwards. (Inaudible) -- -- the fiscal gap is precisely why we must enact well-designed and fiscally responsible health reform now, health reform, again, that is deficit-neutral over the next decade and reduces it thereafter. Given the long-term nature of that problem, we simply can't afford to wait.
Beyond pay-as-you-go rules and addressing health care in a fiscally responsible way, there are additional steps that will be necessary. We've already put forward a variety of measures -- for example, reform to government contracting. And we will have a lot more to say about other measures as part of the fiscal year 2011 budget.
With that, let me turn it over to Christy for further discussion of our economic -- (inaudible) --.
MS. ROMER: Great, thank you, Peter.
So I thought I would first just remind everyone of the process that was followed in coming up with the administration's forecast. It is an interagency process. It involves the Council of Economic Advisers, OMB, and the Department of Treasury. Our goal is always to come up with the best, most accurate forecast that we can, subject to the information that we have. We also aim not just to represent our opinion, but to represent the best of the professional consensus.
Second, the other thing I need to let you know is that the forecast was locked in in early June, so that does tell you that it's, even at this point, some two months old. The most concrete manifestation of that is we did not have the comprehensive NIPA revisions for the GDP statistics, nor did we have the quarter two numbers for GDP when we made this forecast.
All right, well, with that as background, obviously there are -- any time you do a forecast you make revisions to it, and there are several changes. Most importantly, we advised downward our estimates of GDP growth in both 2009 and 2010. Our year-over-year numbers are now -2.8 percent for 2009 and +2.0 percent in 2010. These, as Peter suggested, are very consistent with the consensus forecast.
This downward revision reflects new information that we -- and all forecasters -- received earlier this year about the severity of the crisis in the United States and in our trading partners. This very much reflects the deterioration in the baseline forecast -- lower estimates of the effect of the various policy measures that we've put into place.
I should also say that we do still expect positive GDP growth by the end of this year -- that is, we expect that the turning point, the economy on a better trajectory, but of course, full recovery and a return to employment growth will take longer.
We do predict a period of sustained above-normal growth in the period 2011 through 2016; then settling down to normal long-run growth of 2.5 to 2.6 percent. This is, again -- that estimate for long-run growth is very much equal to the consensus. It's the same as the numbers you will see in the Board of Governors Monetary Policy report where they give their longer-run forecast. It is slightly higher than the Congressional Budget Office, but we think very accurate.
We also, in our economic assumptions, tend to have a significant upward provision in the unemployment rate. We are now predicting, again for an annual average, the unemployment rate of 9.3 percent in 2009, and 9.8 percent in 2010. We do predict that unemployment will reach 10 percent at least for some months or some quarters in this period.
The deterioration or the rise in the unemployment numbers reflects two things: obviously the deterioration in the GDP forecast. This recession was simply worse than the information that we and other forecasters had back in last fall and early this winter. But it also does reflect the fact that it's been an unusual recession for the labor market; that the rise in the unemployment rate has been exceptionally large even given the very large falls in GDP. And that's certainly consistent with, for example, the rise that we've seen in measures of productivity. So this has been an unusual recession and unfortunately, one of the consequences has been unusually high rates of unemployment.
In conclusion, the main thing I want to stress is, of course, the uncertainty in any forecast. None of has a crystal ball. When we made our first forecast back in December and January, it was a time of great flux, the economy was deteriorating rapidly. We are making this forecast also at a time of great flux, when the economy, by many accounts, appears to be stabilizing. But inherently around such times of flux, there's particularly large amounts of uncertainty. So all that we can promise is that we have done the best that we can with the data that we have, and we will also always say that when confronted with new information, we will take that into account and revise our forecast, as we are doing here with the Midsession Review.
Q Christina, could you give us the numbers for the Consumer Price Index, please?
MS. ROMER: Yes. So I have -- the Consumer Price, they're now predicting for 2009 -0.7, that's the annual average. And for 2010, 1.4; for 2011, 1.5. And is that enough, or do you want me to keep going?
Q That's sufficient, thank you.
Q Christina, this is Major Garrett. And, Peter, I'll have a question for you in a second. When you said positive GDP by the end of the year, did you just mean in quarter four, obviously not for the Q1 to Q4?
MS. ROMER: Absolutely, yes. Yes, certainly I'll give you the Q1 and Q4 number that we have for 2009 -- from Q4 2008 to Q4 2009 is -1.5. -- given what we've seen in the first quarter of this year. But we obviously -- the net for the year is going to be down. But we are predicting positive GDP growth by the 4th quarter.
DIRECTOR ORSZAG: This is Peter -- as are the vast majority, and as you all may know, 94 percent of the blue chip are predicting that the trough will be reached before the end of this year, and therefore you will get positive growth before the end of this year.
Q Do you have a Q4 for 2009 projected number?
DIRECTOR ORSZAG: We don't give out the quarter-by-quarter number.
Q Okay, so for from Q4 of '08 to Q4 of '09 it's -1.5, correct?
MS. ROMER: Yes.
Q Okay. Now, Peter, obviously you found it purposeful to remove the placeholder that you had for the financial rescue. Has there been a need in your mind, based on anything that CBO has calibrated to adjust the placeholder you'd have for health care either up or down?
DIRECTOR ORSZAG: Well, no -- again, our reserve fund --
Q I know it's a reserve fund, I'm sorry, to use the term of art.
DIRECTOR ORSZAG: -- a little north of $950 billion, and that's still consistent with what we believe is the appropriate amount to be put on the table.
Q Thank you.
Q Peter, does the budget still include the $624 billion in expected revenues in cap and trade?
DIRECTOR ORSZAG: Yes, it does. But again, to be clear, the net impact on the deficit from that is effectively zero because we assume that that is returned in various forms to the consumers and to various investments.
Q I mean, I understand when you're saying that the major difference in out-year deficits is because of the change in the economic forecast. Is there -- does the change in the economic forecast also result in a change in the cost of the stimulus -- is that part of what's driving up the 2010 deficit?
DIRECTOR ORSZAG: There have been some minor changes -- there are some -- for example, there are a variety of things that are actually running somewhat higher than originally projected for the Recovery Act, including unemployment benefits, food stamps, and energy grants that are included under the Recovery Act. So that's partially a reflection of the downturn being more severe than, for example, CBO anticipated when the Recovery Act was enacted.
Q Do we have a sense of what the overall cost -- the Republicans are claiming that the overall cost of the Recovery Act may now be well over $900 billion. Do you have a sense of that?
DIRECTOR ORSZAG: I don't have a figure to give you. That sounds slightly high to me, but the additional costs are certainly in the tens of billions above what was originally projected.
Q Could I get your forecast for GDP in 2011, and also ask on the -- when you see unemployment pushing above 10 percent? You said you saw it going up for a few months or quarters, but I wasn’t quite clear when.
MS. ROMER: All right, so let me give you -- so this s the GDP growth, again, year over year, but it was -2.8 in 2009, +2.0 in 2010, and +3.8 in 2011.
Q What was the last one, Christina? I'm sorry -- 2011 was --
MS. ROMER: Plus 3.8. And then in terms of, again, we don't give -- we don't put out the quarterly forecast, but I think I won't be giving anything away. It's in the fourth quarter of this year that we expect it to peak, which, again, fits with unemployment being a leading indicator -- or a -- (inaudible) -- indicator, sorry.
Q I had a question about the stimulus impact on GDP growth. I mean, obviously you're revising downward. But can you talk about what impact you're seeing? Different economists have different predictions of what the contribution to GDP growth is. Can you tell me what the administration thinks? Is it doing what you predicted, and when do you think you'll see a peak impact?
MS. ROMER: Yes, and I would actually -- I gave a speech a couple of weeks ago, which you can find on the CEA Web site -- of what we've been thinking about stimulus. We also will be putting out our first quarterly report to Congress in -- I think it's the 10th of September is when it's due. So we will certainly be on the record with that.
But absolutely, it is coming -- one, the money has certainly been going out at least as fast as we had anticipated when we made estimates. What I cited in the speech that, you're right that there is -- a lot of people have numbers out there, but they're much in a pretty consistent range. Most of the -- I think the good private forecasters think that the Recovery Act added between 2 and 3 percentage points to real GDP growth in the second quarter of this year. I think that's a very realistic estimate.
And then in terms of when the effect peaks, I think it's going to depend at some level about how quickly the money is going out the door. Certainly as things are going, I think it is going out, if anything, as I suggested, more rapidly than we had anticipated back when Jared Bernstein and I did our estimates. And so we may see the peak effect sooner than, say, the end of 2010, which is what we had predicted back in the transition.
One thing to keep in mind about the effect of the stimulus, is ramping -- the spending is ramping up somewhat, and so then that obviously makes the effect get bigger. Also the composition of the spending is changing, so the things that we could get out quickly were the state fiscal relief, the tax cuts. What you see over time is a larger fraction of the spending taking the form of government investment, which by almost all estimates have the biggest oomph in terms of GDP and employment. And so that's part of why we anticipate it ramping up.
DIRECTOR ORSZAG: If I could just add one thing quickly. If you look back at what GDP was doing, say, in the last quarter of last year, first quarter of this year, running at declines of 5 to 6 percent, and then compare that to, say, the second quarter of -1.0 percent, and given the private sector forecasts that are out there suggesting the Recovery Act added 2 to 3 percentage points to economic growth, a very significant part of the improvement in the sense of slowing the rate of decline can be attributable to the Recovery Act, as you can see from that comparison.
MS. ROMER: Absolutely.
Q Back to the unemployment data, just to refine something a little bit. Can you give us a sense when you see steady decline in the unemployment picture?
MS. ROMER: Yes, I think the -- so let's say, realistically what people are -- we and almost everyone are forecasting, again, positive GDP growth by the end of 2009. And then, of course, what matters is how fast it is, that until you get GDP growth above, say, what we think of as normal, say 2.5, 2.6 percent, the unemployment rate continues to rise. And so what we are predicting is that the unemployment rate will stay probably about 10 percent in the beginning of 2010, and then start to come down.
Q I see. Thank you.
Q Just a quick question. Are you giving projections for what the GDP-to-deficit ratio is going to be, what we're going to see in terms of that figure?
DIRECTOR ORSZAG: Yes, I think we said it's part of the document that -- part of table S-1, which you all should have gotten. At the bottom there is a line that shows the budget totals that are a share of GDP.
Q Thank you.
Q Sorry, Peter, I sort of missed the point you were making about the deficit in 2019 being largely driven by interest. Could you say that again?
DIRECTOR ORSZAG: Sure. The deficit in 2019 -- and actually, this is a good segue from Deborah's question -- is 4.0 percent of GDP. That can traditionally be split into what's called the primary deficit -- that is the deficit outside of interest -- and then interest payments. Out of the 4 percent of GDP deficit, the primary deficit is only 0.6 percent of GDP. So non-interest spending and revenue are not quite but almost in balance, and therefore the bulk of that 4 percent of GDP deficit reflects 3.4 percent of GDP in interest costs. And that in turn reflects primarily that accumulated in the past, plus the impact of the economic downturn and the steps necessary to address it.
Q To what extent do you think your interest cost estimates are -- properly reflect the possibility of higher interest rates -- or the probability of higher interest rates as we go forward? (Inaudible) -- that there could be a vicious cycle of rising deficits and rising --
DIRECTOR ORSZAG: You're breaking up a little bit; I think we got the question, and I can answer and then Christy could add. Several points. First, the projections include a anticipated increase in, for example, the 10-year Treasury note from -- the yield on it from a projected 3.6 percent average this year up to 5.2 percent in 2012 and thereafter. That partially reflects the abnormal situation in which we currently find ourselves, in which there's been a flight to safety and investors have turned to Treasury securities as the basic asset.
As risk appetites increase, there is a normal upward pressure, and as economic activity picks up, there's normal upward pressure on interest rates. And so, Ed, what I would say is that the projections include -- incorporate some projected increase in long-term interest rates, and beyond that, again, financial markets are sending perhaps the best guess as to their views on the evolution of fiscal policy, and I would just note again that even long-term interest rates are currently quite low. I don't know if Christy has anything --
MS. ROMER: I think Peter got it exactly right. I do think -- we do have interest rates going up to what we think of as much more historical norms, and they are unusually low because of the flight to safety that we saw in the financial crisis. But certainly the budget projections do have a substantial rise in interest rates to more normal levels.
Q Great, thanks a lot.
Q Two questions, if I can get away with that. Firstly -- and sorry if I missed these on the page -- but in summary table S-1, are you giving us a projection for your debt to GDP -- national debt to GDP overall?
DIRECTOR ORSZAG: Yes. So at the very bottom of table S-1, I think the best number for that is the debt held by the public net of financial assets, which is the very bottom line of the table, and it gives you that as a share of GDP.
Q And so with that going to 68.9 in 2019, I'm assuming that that is a record.
DIRECTOR ORSZAG: No, actually, debt as a share of GDP was much higher than that, for example, during World War II. But I'd again come back and say one of the reasons that we, as part of the fiscal year 2011 budget process, will be putting forward additional measures that reduce those out-year deficit is to achieve a lower level of debt to GDP than contained in these projections.
Q And the second one was -- I think you made the point that these numbers are a little stale. There's been a revision to the GDP and Q2, which showed that the economy hadn't done as well. What is that -- I mean, how is that going to shape -- I mean, that presumably is to the downside of your forecast.
MS. ROMER: No, I would actually say, in fact, the GDP -- for example, the quarter two GPD number that we actually got was a less severe fall than we had been predicting. And I think that would -- you see that when you look -- you will see a comparison of our numbers with, say, the June or July blue chip forecast. We're more similar and they're a little more optimistic for the August blue chip, because they had the new GDP numbers.
DIRECTOR ORSZAG: Well, another way of making the same point is -- and just to your question, because you may have in your mind there are downward revisions that happened for 2008 -- that part -- the downward part of the NIPA revisions are already implicitly reflected, for example, in the technical adjustments for the fiscal year 2009 deficit. The only piece that we're sort of missing was the more recent -- the second quarter numbers, which are actually better. So if anything, the net result is that the figures we're presenting here err on the conservative side.
Q Thank you very much.
MS. ROMER: You can see the Midsession Review does have a table where we tried to factor in how the NIPA revisions would affect our somewhat -- the assumptions that we made before they came out.
Q Does that mean you guys are expecting maybe slightly better news from CBO tomorrow?
DIRECTOR ORSZAG: We're not going to try to guess what CBO will say. One cautionary note that I would just invoke is that the headline figure from CBO is going to be a baseline number, which is a different concept than the administration's policies. So you should anticipate for that reason that they will show a much lower 10-year deficit figure than the $9 trillion figure that we're releasing today.
Q But if they do their alternate scenario, that would presumably be higher than the deficit number you're releasing today, right?
DIRECTOR ORSZAG: Again, their most recent estimate of our policies was $9 trillion, exactly in line with what our estimate is tomorrow. I'm not going to guess at whether they've gone up or down, but I would anticipate that any movement would not be hugely substantial in any estimate of our budget.
You have to also be careful about -- the alternative scenario is not going to give you a precise estimate of administration policies, so just a note of caution in going through that alternative scenario table.
Q Because your numbers assume only some of the Bush tax cuts extended and that sort of thing, right?
DIRECTOR ORZSAG: Exactly.
Q Do your numbers incorporate the additional or unexpected paybacks from banks of TARP money? Because I believe your initial projections didn't expect as much of a payback as you received. Is that correct?
DIRECTOR ORSZAG: Yes, they do, they do reflect that. And again, a significant part of the improvements for 2009 in the projected deficit is not only the -- obviating the need for the financial stabilization placeholder, but not only TARP results but also the FDIC numbers have improved relative to their earlier projections.
Q How much of the TARP payback do you think --
DIRECTOR ORSZAG: We can get you those exact figures. I don't have them off the top of my head.
KEN: Okay, great. Well, thank you very much, everybody. Again, this is embargoed until 9:30 a.m. tomorrow morning. And then once the report will be up on the OMB Web site, if you have more questions, of course, at that point, give us a call.
Q Okay, and could I ask one more quick question about the TARP thing? This is very technical.
DIRECTOR ORSZAG: Absolutely.
Q I that TARP was scored on a credit reform act basis, and that the money in and money out didn’t affect deficit projections. Is that not right?
DIRECTOR ORSZAG: No, that is correct, but to the extent that the history evolves in a way that is either better or worse than the initial credit subsidy rate, it will affect the projected deficit.
Q Got you. Okay, thank you.
DIRECTOR ORSZAG: Great, well, thank you very much. Have a great evening. And for those of you with the President, enjoy.
END 7:35 P.M. EDT