The following is the transcript of a press briefing by N. Gregory Mankiw, Chairman of the Council Of Economic Advisors, on the 2005 Economic Report of the President:
DR. MANKIW: Welcome, everyone. I'm Greg Mankiw, Chairman of the Council of Economic Advisors, and I'm here to discuss this year's Economic Report to the President.
As is always the case, the purpose of the report is not to propose new policy initiatives, but to analyze the state of the economy, looking back to where the economy has been and looking ahead to where the economy is likely to go and what issues are likely to arise.
This year's Economic Report features eight chapters. The first chapter in this year's report reviews the strong economic growth in 2004 and describes the administration's forecast for the coming year. The second chapter takes a longer look at the business cycle, reviewing the current recovery and comparing it to past ones. The other six chapters cover more specific topics: background information on the options for tax reform; the economics of immigration; the role of property rights and ownership and expanding individual choice and control; the importance of innovation in our increasingly information-driven economy; the global HIV/AIDS crisis; and the role of free international trade and raising living standards around the world -- and I encourage all of you to read it.
One purpose of the Economic Report is to provide background material for upcoming debates over economic policy. Last year, we had a chapter on Social Security, which is aimed at educating the public about the need for reforming the system. Several of this year's chapters are similarly aimed at educating the public about the economic challenges we are likely to face in the months and years to come.
Let me say a few words about the current state of the economy. As you know, the administration forecast discussed in the report was put to bed and released in December, but the macro-economic picture has not changed substantially since then. Looking at all the data, there's no doubt that the economy has been growing robustly since the summer of 2003, and there's every reason to expect the recovery to continue to be robust this year.
When I was a professor at Harvard, I used to tell my students in my macro-economics classes to keep an eye on three indicators of economic performance: GDP growth, inflation and the unemployment rate. And by all three measures, the economy is doing very well. GDP growth was 3.7 percent over the past four quarters, which is well above the historical average. Core inflation is running about 2 percent. And the unemployment rate of 5.2 percent is below the average of each of the past three decades.
Finally, let me note, as many of you have heard, that I will be leaving my position as Chairman of the Council of Economic Advisors. My two years of leave from Harvard is over and it's time for me to return to my family, my students and my books. It's been a great honor to work with President Bush and the very impressive economics team that he's assembled. I'll look forward to watching his second term accomplishments from the quiet of my Cambridge office.
I'm happy to take a few questions.
Q: The chapter on tax reform says that there are considerable benefits to working on a change within the current tax system. Does that signal that the President is leaning toward that approach? I know that the panel is going to study it and come up with recommendations, but is this -- is this a reflection of the President's current thinking on the issue?
DR. MANKIW: I think the President's current thinking is open-mindedness. As the chapter says many times -- the chapter is not meant at all to signal where the administration is leaning, because at this point, the administration is not leaning in any direction. The President has said that he wants tax reform, to make the tax code simpler because it's a vastly complicated system; he wants it to be fairer; and he wants it to promote economic growth. But within that broad mandate, he's very open-minded about different ideas.
And what the purpose of the chapter was to look at the different prototypes for tax reform that different people have discussed or proposed, and to look at the pros and cons of them. The chapter is not meant to lean one way or the other, but, really, to be a providence of an honest assessment of what the different options are. The chapter is really meant to be a starting point for discussion, to be sort of background information for anyone interested in the subject.
Q: On the chapter on immigration you point out that immigrants are sending back remittances to Latin America of $30 billion a year. You also point out that there are 34 million immigrants from all over the world -- not all of them come from South America. And the ones from Latin America are not in the -- you know, I'm making an assumption here they're not in the top-paying jobs. It would seem that they're sending back more than 10 percent of their income, assuming they're making minimum wage or more. Doesn't this suggest that there are a lot more immigrants from Latin America in the U.S. than show up in the official data?
DR. MANKIW: You're right that, sort of, illegal immigration is a problem and controlling our borders is a very important priority. The chapter on immigration is very much aimed at sort of discussing the economics of immigration. Immigration is an issue that obviously has social dimensions, has security dimensions, but also has economic dimensions. And the purpose of the chapter was to sort of weigh the cost of benefits of immigration and discuss why on net we're a stronger society by virtue of the immigrants that have come here and to provide background information as you go forward and debate the President's temporary worker program that he's proposed.
On the issue of remittances I'd just say, on a personal note, my four grandparents were immigrants from Ukraine. I remember my grandmother sending remittances back home, back to her family when I was growing up -- although, I don't remember her ever calling them quite that. But the tradition of workers coming to the United States and helping support their often much poorer families abroad is a phenomena that's existed for many, many decades in the U.S. economy, throughout U.S. history.
Q: In the tax reform chapter you say that taxes as a percentage of GDP are lower than the historical average, and you attribute that to the recession and recovery and to some economic stimulus that expired at the end of 2004. So what role did the larger tax cuts play in this? Are you saying that the decline in taxation as a percentage of GDP had nothing to do with the President's tax cuts?
DR. MANKIW: Oh, no, of course not. What we're saying is that the receipts as a percentage of GDP are affected by lots of things; they're affected in part by the permanent features of the tax code; they're affected in part by temporary features of the tax code, and one temporary feature in 2004 was bonus depreciation, which to a large extent just sort of shifts tax revenue forward, because when people take bonus depreciation early on they're taking less depreciation later, and, therefore, it's going to -- they'll be in higher tax revenue later; it's also affected by the state of the economy.
As you know, we saw a very big run-up in late '90s in receipts as a percentage of GDP. That was, to some extent, a reflection of the very strong stock market, of the high-tech bubble that generated lots of revenues in the form of capital gains and stock options. When the high-tech bubble collapsed in 2000, we saw the flip side of that, and receipts started coming in below what they otherwise would have been. And you can see this in sort of the CBO or OMB analysis of -- a lot of this was driven -- the change in revenues as a percentage of GDP was driven not by tax policy, but by economic and technicals.
But, of course, tax policy was part of it, so I wouldn't deny that sort of -- it's a combination of things driving the receipts as a share of GDP.
Q: I'm wondering what you think about what Chairman Greenspan said about Social Security private accounts, saying that they didn't, by themselves, add to national savings. Do you agree with that? And, if you don't, explain to us how they do add to the savings.
