Transcript: Remarks by Council of Economic Advisors Chairman Alan Krueger on Obama’s FY2014 budget
Edited by Jenny Jiang
Transcript of remarks by Alan Krueger, Chairman of the White House Council of Economic Advisors, on President Barack Obama’s FY2014 budget. The press briefing was held on April 10, 2013.
Let me say a little bit about the process that underlies the forecast in the budget as well as some of the key components of the forecast.
The forecast is made jointly by the Council of Economic Advisors, the Office of Management and Budget, and the Treasury Department in what’s known as the “troika process”. The purpose of making this forecast is to enable the agencies to calculate spending and revenues.
We concluded the forecast in the middle of May. So it’s about 5 months out of date. Sorry – I apologize. We completed the forecast in the middle of November so it’s about 5 months out of date today.
We make the forecast under the presumption that the President’s budget and policies will be put in place. That means that we assumed that the sequester would not take effect. The budget replaces the sequester with a much smarter set of spending reductions, which would be much better for the economy.
So bearing that in mind, the forecast is a little bit out of date. On the other hand, I think if you compare our forecast to private sector forecasters or the Congressional Budget Office – their more current forecast – we are still in the ballpark.
Over 2013, we’re projecting GDP growth to be 2.6%. Now again, that’s assuming the sequester doesn’t take effect.
The Congressional Budget Office has calculated that the sequester will reduce GDP growth by 0.6%. Our own internal estimates are very similar. So that suggests that GDP growth will be around 2% this year if the harmful sequester remains in place.
That implies that overall economic growth in 2013 will look a lot like economic growth in 2012. 2012, as you know, we added 2.2 million jobs.
But the disappointing thing is that the economy is poised to grow more strongly – that’s why we’re projecting stronger GDP growth absent the sequester.
The reason why we think the economy is poised to grow more strongly – there are a number of reasons – but most importantly the housing sector finally appears to have turned a corner. Households are a lot further along in the de-leveraging process. Corporate balance sheets are still quite strong. All of those conditions suggest that the economy is in a position to do a lot better going forward but unfortunately, the sequester is a step backwards.
Over the full 11 years that we forecasted – so that’s 2013 through 2023 – the average GDP growth rate is 2.8%. That’s above what we think the long-run potential growth rate for the economy. That’s because there are slack resources as a result of the economic crisis. The long-run potential growth rate for the economy we put at 2.3% to 2.4%. Our projection is actually quite close to the Congressional Budget Office and private forecasters. The 2.8% figure that I mentioned for our forecast on average over those 11 years compares to 2.7% for the Congressional Budget Office, so very similar.
Let me next turn to the unemployment rate. The unemployment rate average 7.8% in the last quarter of 2012. It has since come down to 7.6% last month in March. We project the unemployment rate to fall to 7.5% by the end of this year, to average 7.5% in the last quarter of 2013, and then to come down half a percentage point over each of the next 3 years. So it’ll be 7% in 2014 – at the end of 2014; 6.5% at the end of 2015; 6% in the last quarter of 2016.
If we were to update the forecast today, that’s one component that we might change slightly. The unemployment rate has come down a bit faster than we expected when we made the forecast. When we made the forecast the unemployment rate was 7.9%.
Last year, we saw the unemployment rate come down considerably faster than what our forecast had been, and I wouldn’t be surprised if we are off in the same direction this year, in other words, if our forecast is conservative.
On the other hand, I should note that our forecast exactly matches the average of private sector forecasters in the blue chip that was released this morning.
Inflation is projected to be 2.1% over this year and to average 2.2% over the entire 11 year period that we forecasted. And again, that’s also very close to the Congressional Budget Office and to private forecasters.
Let me conclude by saying there are, of course, risks to any forecast.
On the downside, the sequester, I believe, is a risk to our forecast. As I’ve mentioned, we did not assume that the sequester would be in place. No one wants the sequester to be in place. I think it’s widely recognized as bad policy, and that’s expected to shave around 0.6% off of GDP growth this year. The European debt crisis remains a threat to the economy. Geo-political tensions from around the world also remain a threat.
I like to be balanced so on the upside there’s potential for our forecast to surprise on the upside. And there I would say – I hate to call them risks – they’re opportunities. On the upside are strong corporate balance sheets. If we lift some of the uncertainties that’ve been weighing on the economy because of budgetary issues and manufactured crises that have been causing uncertainty, that could help. There remains pent-up demand for durable goods, particularly for cars. And as I mentioned earlier the housing market has been stabilizing nationwide. We’re seeing price – home prices growing nationwide, although some parts of the country are lagging behind. So I think all of those are reasons why the economy is stronger this year and why there is potential for the forecast to be a bit conservative this year.
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