New Challenges Facing U.S. Economic Policy After September 11

 3:00 P.M. EDT

MODERATOR: Good afternoon. Welcome to the Washington Foreign Press Center. We're pleased to have with us today the chairman of the White House Council of Economic Advisers, Dr. Glenn Hubbard. He'll offer some opening thoughts on how the events on September 11th have changed or had an impact on U.S. domestic and international economic policy. And then he will take your questions. Thank you, Mr. Hubbard.

MR. HUBBARD: Thank you. I just wanted to make a few comments at the outset and then mainly have a conversation with you. It's fair to say that before September 11th, the U.S. economy was in a fairly pronounced growth slowdown. I think before September 11th, most economists in the private sector, in a view we would have shared in the administration, had the U.S. economic recovery beginning in the fourth quarter of this year and then accelerating into next year.

The events of September 11th changed that outlook. The third quarter that just happened, and the fourth quarter in which we are now, are likely to be particularly adversely affected by the events of September 11th. I'll be more specific about that in a moment, with the economy, again, recovering in 2002.

To think of the events of the 11th from an economic perspective, in addition to the terrible human tragedy of the events, I think it's useful to think about two factors that would contribute to a slowdown. The first would be, for lack of a better term, supply shock to the economy; that is, the events of the disaster raised costs of doing business in a number of important ways.

Perhaps the most visible evidence of this was the disruption of aviation in the aftermath of the shock. Since then, there's disruptions in other sectors of the economy, beyond travel and tourism; for example, disruptions in insurance markets and in financial markets generally.

For this first component of economic damage, it's no accident that the administration's first economic response in the aftermath of September 11th was to focus on improvements in security, in aviation, to address issues of the cost of insurance in the private sector, and, of course, early on, in the immediate few days after the attacks, to address the smooth functioning of financial markets. Each of these responses by the administration, in concert with regulatory agencies and the Federal Reserve, was designed to mitigate this supply-shock effect on the U.S. economy, and those activities continue.

There's a second feature of the attacks insofar as they reached the economy that I think is both more troubling and potentially more long-lasting, and that's the effects of the attacks on confidence of households and businesses. These kinds of losses of confidence can manifest themselves in several ways. One would be just increases in risk aversion; that is, a lack of interest in taking risky projects for firms or for households becoming more cautious.

If one looks at private-sector forecasts, I mentioned that a recovery is predicted by most forecasters in 2002. There is, however, a range of forecasts in the private sector, and some of those forecasts are more pessimistic about the recovery of confidence of businesses and households in 2002, others more optimistic.

Seeing such a distribution of forecasts, the president had made statements in the Rose Garden a couple of Fridays ago outlining his views for a confidence-building growth insurance package for the economy. Keeping in mind the confidence issues that I just raised, the president stressed for businesses the importance of an investment incentive. If the attacks had, as one of their collateral economic damages, raising required rates of return on investment projects, the movement toward expensing, as more generous depreciation allowances would go the other direction, help firms invest.

The president also proposed eliminating the corporate alternative minimum tax, which, just to make a long story short, acts as a kind of pernicious tax during downturns.

On the household tax side, the president had indicated his support for accelerating tax cuts that were already in place from the tax action the Congress had taken earlier in the year, and the president indicated his support and flexibility on tax packages that would provide immediate temporary assistance to low- and moderate- income households.

As that tax package was put out by the administration, some caveats and concerns were put out at the same time. We believe that that package of proposals provides the best punch of stimulus for the economy. We are also concerned about packages that are significantly more expensive; that is, the president, in his remarks in the Rose Garden, highlighted the importance of long-term budget discipline.

We believe that the package the president discussed and is being discussed in some ways on Capitol Hill is fiscally responsible and does provide an important boost to the economy. And that's, in a nutshell, where policy in the U.S. is at the moment.

Looking around the world, of course, events in the U.S. further complicate growth pictures elsewhere in the industrial world, with the greatest weakness being in Japan, but weaker conditions in Europe as a result of the attacks as well.

So with those as kind of very quick introductory remarks, I'd be delighted to take any questions that any of you might have.

MODERATOR: Let's start over here. Please wait for the microphone and identify your name and organization.

Q My name is Mark Shovan (sp). I'm from NRC -- (inaudible) -- from the Netherlands. How long do you think it will be tenable to go forward with the 10-year tax package? And if further tax cuts are being adopted, how will that be affordable, given the war costs, given recession, given the total outlook?

MR. HUBBARD: Well, let's break your question up into some parts. The idea behind the president's package was to provide a short-term stimulus to the economy with tax items whose costs trailed off toward zero over time. So let's take the business side, the expensing provisions.

What is expensing? It's simply faster capital recovery. It moves up depreciation allowances that would have taken place early on. So there's an up-front cost but a negligible long-run cost; the same with accelerating the rate cuts. Remember, the rate cuts were already on the books. The question is pulling them forward. So the president deliberately chose a package of policies that had a short- run stimulus but not a long-run cost.

There is a deeper sub-text to the question you raise that I want to make clear. When we have budget surpluses in an economy, whether it's the U.S. or any other economy, that's a reflection of a healthy private economy, not the other way around. And it's not budget surpluses that, in and of themselves, presage healthy economies. It's the other way around. And I think that was the key interest was to make sure that the path of recovery continued.

MODERATOR: Over here.

Q (Inaudible) -- from China Economic Daily. Could you comment on the impact of the war fighting terrorism on the U.S. economy?

MR. HUBBARD: Sure. I think there's at least three elements. One is the supply-shock, if you will, element that I mentioned; that the existence of the war, the causes for the war, if you will, exert a cost on businesses. In terms of the costs of fighting the war on terrorism, obviously the increased defense spending would divert funds from other sources. At least current projections have that as being relatively modest, given the overall budget outlook for the United States.

The other feature is what's the effect of the war on terrorism on productivity growth? The fountain, if you will, of the economic blessings in any country is the long-term productivity growth. And the quickest way to scrutinize economic assumptions anywhere is to look at the productivity-growth assumptions. So one question is, what effect would this have on productivity growth?

Our own computations at the White House indicate that even a fairly significant enhancement of domestic security might reduce the long-term productivity growth in the U.S. by no more than a tenth or two-tenths of a percentage point. That is not confetti, but nor is it the end of the world. So, again, these are important effects, but we don't think that they're large enough to disturb the long-term fiscal position of the government.

MODERATOR: Back here on the side.

Q Barry McKinnon (sp) from the Toronto Globe & Mail. I have two quick questions. One is, what's your view of war bonds? And secondly, do you anticipate any negative effects of the dramatically stepped-up security, particularly at land borders, the northern border?

MR. HUBBARD: Well, to your question about war bonds, I think that they may offer a way for giving people more of a sense of involvement. They're probably not going to be an important part of the fiscal financing picture for the government. I would say that it's not a central issue. It's not a harmful issue, but not a central issue for financing.

On the northern-border questions, this has been an area of increased activity for Customs, not just at the northern border but the southern border as well. As many of you know, early on after the attacks, the queues at particularly the northern borders were very long and disruptive of manufacturing activity. Those queues have been reduced significantly at most border crossings.

And indeed, Secretary O'Neill will be making a tour later this week and the beginning of next week to examine northern-border Customs issues. So while those aren't back to their September 11th in terms of wait time, there's been a great deal of work with companies on the northern and southern borders to help and an increased willingness to be flexible; the use of state police, for example, or National Guard to supplement the Customs presence on the borders.

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MODERATOR: Next we'll go here.

Q (Inaudible) -- AFX News. Mr. Hubbard, one of the central concerns among private-sector forecasters has been the extent to which consumers are going to increase their savings rate in order to pay off fairly large debt levels, particularly, as you mentioned, with the blow to confidence. What is your outlook? How long a period do you see a rising savings rate and thus a constraint on demand? And how many periods also of recession do you see for the U.S. economy?

MR. HUBBARD: Well, let me take the end of your question first. I think it's too soon to tell whether the economy is formally in a recession, if you mean the national bureau's official definition. It is certainly true that the fourth quarter will be very weak, and likely weak in terms of consumption as well.

I think the reason most private forecasters have 2002 as a marked recovery is they don't see consumers retrenching into 2002. I think that's premised on two things. One is a rebound in the growth of disposable income, part of which comes from improvements in the economy, part of which comes from tax cuts that are already in place.

And then the second premise is that asset prices remain at or above their current levels. While everyone is focused greatly, of course, on the stock market's movements, it's important to understand that the housing market, which is more important for more households in the economy in terms of their asset positions, has held up relatively well. I think it's those twin premises of income growth and asset markets that bolster most private economists' positions for '02.

MODERATOR: We'll take a question in the middle there.

Q Akeo (ph) Fuji from Nikkei Newspaper. I have two questions. One question is, even federal government is pushing toward -- (inaudible). Some state government is cutting their fiscal spending due to budget shortfall. So some say some concern of offsetting those fiscal stimulus from the federal government, offsetting -- (inaudible) -- by their government.

And second question is, how do you see outlook of Japanese economy after the terrorist attack?

MR. HUBBARD: Well, to take your questions in two parts, on the fiscal-stimulus issue, it's important to remember that it's not just the tax package that's being debated in the economists. There's actually a fair amount of fiscal stimulus coming from two other sources. One was, again, the tax cut already in place that's being phased in this year.

The second is the rather large increases in spending that were in the immediate aftermath of the attack, by which I mean the emergency supplemental spending for the New York City area, temporary increases in spending in aviation, security and defense and so on. So that amount of fiscal stimulus is quite large by the standards of the state and local budget cuts.

On the issue of the Japanese economy, I think the Japanese economy was weak before the attacks. And doubtless the attacks couldn't have helped matters. I think the central issue in Japan is the speedy resolution of what I think of as a non-performing-asset problem; that is, reconciliation of loan problems in the banking system and deleveraging on the corporate side. And toward that end, I think the Koizumi administration is pursuing the right avenues of reform. And I think the more quickly those avenues are pursued, the more quickly recovery comes in Japan.

MODERATOR: Let's come up here to the front.

Q (Inaudible) -- Argentina. As you know, Argentina was going through a very difficult period even before the attacks, and now it's still worse. I wanted to know two parts. One is, what will happen with the plan that the Treasury had on debt restructuring, voluntary debt restructuring, first? And second, why did the Office of Management & Budget decide to downgrade the (risk?) rate?

MR. HUBBARD: Okay, let me take your two questions. The second one I'll qualify a little, because I'm not sure quite what you mean. But on the first, I obviously can't comment generally on policy toward Argentina at the moment, but it is the case that the Argentine government continues to pursue a variety of fiscal reforms and talks closely with the IMF and with the Treasury. More than that, I really can't officially comment on.

I think when you're talking about the OMB, you mean the Ex-Im Bank's downgrading?

Q Yes.

MR. HUBBARD: I think that was just an issue of what they perceived to be credit risk in Argentina.

Q (Inaudible) -- in the frame of the inter-agency, you know, (rate?), the -- (inaudible).

MR. HUBBARD: Right, but it's really an Ex-Im Bank decision. I don't think it, you know, represents any overall shift in policy on behalf of the United States.

MODERATOR: Next question here.

Q (Inaudible) -- Press Trust of India. Could you speak a little about the impact on the developing countries?

MR. HUBBARD: Sure. I mean, I think there are two issues there. One is obviously that the impact on the industrial world has an immediate impact on developing countries through trade. The flip side of that, I think, is to suggest the enhanced desirability, if you will, of pursuing a more open trading system from which developing countries would get a large benefit.

One of the reasons that the president has renewed his interest in the pursuit of the WTO round coming up, and in particular for trade promotion authority within the United States, is to realize those benefits from trade. Not only does improved trade generate large benefits in the U.S. economy, but would generate very significant benefits in most developing economies, too. So I think it's a two-edged issue there. There's the immediate negative feedback, but it also suggests the great positives of pursuing a new trade round.

MODERATOR: We've got time for about three or four more. We'll go all the way to the back.

Q Good afternoon. My name is -- (inaudible) -- with Central News Agency. The Federal Reserve has cut interest rates eight times this year. But that's the reason why the -- (inaudible) -- goes from 3.9, 4.9, to zero percent right now. But one of the rates that affects most consumers is the credit-card rate, which has still been very high. Does the White House recognize the fact that Federal Reserve rate cut has very little impact on the credit-card rate? And do you believe that the Federal Reserve needs to do more in terms of lowering interest rates?

MR. HUBBARD: Well, first, I can't comment on monetary policy because the Federal Reserve is independent of the government. On the question of credit-card rates, there are a variety of reasons why credit-card interest rates are sticky with respect to movements in the federal funds rate.

I think that households do benefit substantially from the Fed's rate cuts. A lot of the boom in mortgage refinancing has been what has helped the balance-sheet positions that this gentleman had referred to in his questions. So I think they have a very powerful effect on households.

MODERATOR: Back up front.

Q My name is Andrei Sitov (ph). I'm with the Russian news agency TASS. I wanted to clarify a point. You were famously quoted as the first official who publicly said the 'r' word and said that American economy is likely in a recession. So now you seem to be saying something different, that it's too early to tell. I just wanted, from a person who, as probably some others, is not really an expert on finance, I wanted to make sure I understand what you are saying correctly. How likely is the recession in the American economy, and how long will it be, in your opinion?

Second of all, obviously being from Russia, there will be a summit in a couple of weeks between the two presidents. As an adviser to President Bush, do you believe there is an economic or finance issue that he should take up with Putin?

MR. HUBBARD: Well, just to take your questions in turn, what I had said when I was quoted as using the 'r' word is essentially saying the same thing I said here, that the probability of a recession has gone up substantially since September 11th.

In the U.S., the reason it's hard to, quote, "know" is there's not a set definition for recession. There's an organization of which I'm a part in my other life as an academic called the National Bureau of Economic Research that formally calls recessions on qualitative bases. A common rule of thumb is something like two quarters of negative GDP growth. And the probability of that has gone up substantially since September 11th.

The duration of any downturn, should there be one, I think, would be quite mild. Most of the private forecasts have growth in the first quarter of next year at about one and a half percent, accelerating to over three and a half percent in the second half of next year, in sort of a consensus from the private sector.

I expect that the president would take up a number of economic issues, including financial cooperation, in the war on terrorism; a number of issues having to do with banking and securities markets, primarily.

MODERATOR: Go back there.

Q I'm Karen Hendriksen (sp) with the Swedish daily -- (inaudible). I wonder if you could comment a bit on unemployment and whether that could be a really destabilizing factor if it goes up after these firings in the tourism industry, for instance.

MR. HUBBARD: Okay. Well, just let me break that question up into two parts. The president is extremely concerned about the employment situation. The unemployment rate tends to rise in an economy as long as you're growing less than potential. And we clearly are in the United States, predicting that the unemployment rate would continue to rise in the near-future.

The president early on put out a displaced-worker package which not only has more generous unemployment insurance benefits but created something called national emergency grants, which would be flexible mechanisms for governors, state officials, to deal with unemployment problems that may be specific to their own state.

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MODERATOR: Back up here.

Q My name is -- (inaudible) -- correspondent for China -- (inaudible) -- daily. The U.S. government has raised serious fiscal and monetary policies to stimulate the U.S. economy, but -- (inaudible) -- the trade policies. Can you name some specific measures the U.S. will take to stimulate the U.S. economy? Is there any possible change of the trade policies toward China? Thank you.

MR. HUBBARD: Well, as I mentioned, the president is keying on the introduction of a new trade round, and Ambassador Zoellick will be leading our discussions there. And the ambassador has had discussions recently with the Chinese government. And the U.S. looks forward to continued trade liberalization. Indeed, probably the most important stimulus that we could take right now for the U.S. and for the rest of the world is reducing trade barriers in agricultural and industrial products.

MODERATOR: Okay, let's see if we can get two or three more in real fast. The gentleman there.

Q (Inaudible) -- Nikkei Newspaper. I just want to follow up on monetary-policy questions. I understand you don't want to comment on monetary policy, but I'd like to ask some questions on the effectiveness of monetary policy. I think it is fair to characterize that the U.S. economy is now under the process of adjusting excess investment or excess capacity so far, even before September 11th attack. Under these circumstances, some economists say that the effectiveness of monetary policy is very limited compared to a normal situation. How do you evaluate these effectiveness issues of monetary policy?

MR. HUBBARD: Well, let me start by saying that it's too early to tell in data, from the most recent Fed easing, what effectiveness measure there is. I mean, there's a 12- to 18-month lag statistically between the onset of an expansionary monetary policy and its effects in the economy.

I would dispute that monetary policy isn't effective in the current environment. Let's think about how it might be. The effects on refinancing and the balance sheet that came up in a question back here are very powerful on the household side. And I see no reason to believe there won't be effectiveness on the business side.

Our internal calculations of any capital overhang is that it's quite modest and limited to certain sectors of the economy. And let's remember that investment is not always adding to capacity. It can be changeover of plant and equipment, the installation of new technologies. It's not just expanding capacity. So I think monetary policy is likely to be quite potent over the next 12 months, or at least nothing I see would tell me otherwise.

MODERATOR: Let's take this gentleman here and then the one in the front.

MR. HUBBARD: Okay.

Q Good afternoon. My name is -- (inaudible) -- Broadcasting Corporation. I want to ask about the relationship between -- (inaudible) -- new terrorism and the economy. To date, three people died of anthrax, and many people still hesitate to use airplanes, and some people are refraining from going to shopping on the shopping mall. (Inaudible) -- terrorism might lead to a contraction of U.S. economic activity? And, if so, how do you prevent it?

MR. HUBBARD: Well, that is exactly one of the channels I mentioned in my introductory remarks that is a way a terrorist attack can disrupt an economy, and that is why the administration has focused so much on security and health measures; the aviation security, the improvements in public health and public safety.

The airlines are already recovering pretty rapidly in terms of passenger seat miles. The issue of consumer spending, we'll have to see more data over the next two months to know; similarly with the mail. While the mail has slowed up, within the past week there has been a great deal of logistical work, even within the Postal Service, on the rerouting of mail and the ways to improve the safety of mail delivery.

MODERATOR: We'll go to the side. I'm afraid we're going to have to make this the last one.

Q (Inaudible) -- Universal. Just to be precise, and back to the borders, when you mentioned the possibility of using National Guard or state police, are you referring only to the northern border or to the southern border?

MR. HUBBARD: To the southern borders as well.

Q Yes. Will this be only a Customs duty, or could include things like immigration and things like that?

MR. HUBBARD: Well, the formal requests need to come from governors of states. When I've done calls with the governors on the southern border, I know that in Arizona there's been a great deal of concern about this across the board. But it's really individual governors who would make the requests to the federal government.

MODERATOR: Thank you all very much.

MR. HUBBARD: Okay, thank you.

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