January 22, 2004
Greg Mankiw
Hello it is nice to be back here at Ask the White House. I look forward to taking your questions.....
Rick, from Cedar Rapids, IA
writes:
Today, my intermediate macroeconomics class at Coe College is discussing
the crowding out effects of deficit spending on interest rates and
investment, as laid out in your text (5th Ed.). Can you explain the
administration's interpretation of these effects in the context of the
current deficit? My class will be in session during this questionanswer
web event, so we will monitoring the discussion during class for a
response. Thanks,
Rick Eichhorn
Asst. Prof. of Economics
Coe College
Greg Mankiw
Hello Cedar Rapids, Professor Eichhorn and students at Coe College,
One textbook effect of deficit spending is to raise interest rates. There is significant debate among economists about how large this effect is. Nonetheless, it is prudent fiscal policy not to run large persistent budget deficits and indeed the President has the goal of reducing the budget deficit. He has said he would like to reduce the budget deficit in half over the next five years. He will accomplish this through more rapid economic growth, which will bring in tax revenue, and spending restraint. The President will release his new budget early next month, and you will see his plan to reduce the budget deficit in that document.
Let me also call your attention to the upcoming economic report of the President put out every year by the Council of Economic Advisers. It will be released one week after the budget.
elyse, from home writes:
How is our economy doing compared to last year? Is it better or worse?
Greg Mankiw
The economy has turned the corner after a few years of difficult times. When the President came into office, he inherited a series of contractionary shocks that led to a recession. These include the end of a stock market bubble, corporate governance scandals, terrorist attacks, and slow growth among our major trading partners, including Japan and much of Europe.
He responded with a series of pro-growth tax cuts, the most recent of which was signed in May 2003. We have started to see the benefits. Since the summer, the economy has created more than a quarter of a million jobs. The unemployment rate has fallen from a peak of 6.3 percent to 5.7 percent.
We expect to see this progress continue. Economic growth appears to be growing significantly above the historical average of 3.3 percent. There still are too many people who want jobs who are looking for work, but the economy is heading in the right direction.
Jenny, from Tennessee writes:
Lots of people accuse a bad economy on whoever the current president is
at
the time of a bad economy. Could you explain the economic cycle and how
the
current president's policies affect it? Thank you.
Greg Mankiw
As your question suggests, there are many things that affect the state of the economy. No President can perfectly control every economic fluctuation. The goal of economic policy in a free market economy is to create the framework so that private businesses can grow, prosper and create jobs. As I mentioned in my previous question, this President has had to respond to a series of adverse economic shocks. Yet by all indications monetary and fiscal policy has been successful in combating these shocks. The recession surely would have been deeper without the actions of the Federal Reserve and the President’s tax relief.
Michael, from Falcon Heights, Minnesota writes:
Hello Mr. Mankiw. First of all, I want to thank you for taking the time
to
answer our questions. My question is, I see certain basic things in the
economy that tell me if the economy looks like it is getting better or
worse,
the stock market going up and more jobs for example, what key indicators
do
you look at when you make your recommendations to the President on the
state
of the economy? Thank you sir.
Greg Mankiw
The economists here at the CEA monitor many sources of economic data. The most important thing to remember is that no economic statistic is perfect. When monitoring the economy therefore, we take all economic data sources with a grain of salt and look for the broad picture. Most of the news lately has been good although that is not certainly the case with every statistic, every day.
One index that we monitor is the Index of Leading Indicators which itself is a composite of ten other sources of data. That index came out today and showed an increase, pointing to continued economic growth.
Viren, from Mumbai, India
writes:
Do you agree with economists who say that outsourcing of jobs to countries
like India, China and the Phillipines actually benefits the U.S. economy?
Greg Mankiw
Economists are nearly unanimous that free trade is good for the world economy. That is, it is win-win benefiting both trading partners . This has been understood since Adam Smith’s “The Wealth of Nations,” published in 1776.
Outsourcing is simply the latest manifestation of free trade. We are all used to goods being produced abroad and transported here on ships. We are less use to services being produced abroad and being transported here over telephone lines or the Internet. But the basic economic forces are the same. When a good is produced more cheaply abroad , it makes more sense to import it than make it domestically.
This can be difficult for workers who are displaced and need to find jobs in new growing industries. But the economy overall benefits. Public policy needs to help workers find new jobs, not retreat from the principles of free trade that have benefited the US and economies around the world.
Paolo, from Italy writes:
Dear Mr. Mankiw, what will be the policy of the American government
about
the trade deficit? Don't you think it could be a big problem in the near
future to deal with? Thanks in advance, Paolo
Greg Mankiw
I view the trade deficit not as in a problem in itself but as a symptom of other developments in the economy. To some extent our trade deficit is a symptom of slow growth abroad. If Japan and Europe start to grow more rapidly, they will buy more US goods, which will reduce the US trade deficit. In addition, if Americans increase national savings, that would reduce our reliance on foreign sources of capital to fund US investment.
The President's policy is to increase national saving. One way is to reduce the budget deficit. Another way is to encourage private saving through expansion and simplification of tax-deferred savings accounts.
Jeffrey, from Minneapolis, MN
writes:
Mr Mankiw,
As a thirty-three year old male, I am concerned about the upcoming
generation of leadership and how we will handle the responsibility of
taking care of our elderly parents when we ourselves have a hard time
thinking about anyone other than "me". With the thoughts of rising health
care costs and potential rationing of health care in the future, how would
you advise generation x to prepare financially for this quandry?
Thank you.
Greg Mankiw
As a 45 year old male, I share many of your concerns. One of the major demographic changes we will see over the next several decades is the aging of the population, as the baby boom generation retires. Our current entitlement programs, social security and Medicare, will need to be modernized to make them sustainable for future generations. In last year’s budget the President called attention to the unfunded liabilities in these programs in a chapter aptly titled “The Real Fiscal Danger.”
That is why the President discussed Social Security reform in his recent State of the Union speech. It is also why, as the President fulfilled his campaign pledge, to provide prescription drugs for the elderly, he also sought to reform the Medicare system by providing more competition among providers and choice for senior citizens.
These reforms are an important step in the right direction but there is more work to be done.
Michael, from Notre Dame, IN writes:
With the Fed's reluctance to raise interest rates despite the current
red-hot economic expansion, what is the risk that inflation will creep
up
over the next couple years potentially damaging the economy?
P.S. Your textbook "macroeconomics" is the best Keep up the good work
for
the American people
Greg Mankiw
There is little evidence of inflation on the horizon right now. Part of the reason is good monetary policy. Another reason is rapid productivity growth, which has kept down unit labor costs. In the long run, inflation is primarily monetary phenomenon. I have every confidence in the Federal Reserve to maintain a low and stable inflation.
MICHAEL, from ATLANTA, GEORGIA writes:
MR. MANKIW, I AM SELF-EMPLOYED, AND AM VERY INTERESTED IN THE CHANGES IN
MEDICAL SAVINGS ACCOUNTS. COULD YOU PLEASE DISCUSS THESE CHANGES FOR
2004
AND THE BENEFITS FOR MY FELLOW SMALL BUSINESS OWNERS.
THANK YOU AND KEEP UP THE GREAT WORK
MIKE
Greg Mankiw
Hi Mike – Your “caps lock” key is stuck.
You are right that an important part of the Medicare bill involved health savings account. These provide expanded and simplified way for individuals to save in a tax preferred way for health expenses. People who purchase a high deductible health insurance policy will have access to these accounts and can use them for their out of pocket medical expenses. This is an important reform.
I should also note that the President has proposed further reforms in his State of the Union address. He recommended that the premiums for such health insurance policies be tax deductible to encourage more people to take advantage of health savings accounts.
To learn more about health insurance and the health care system in the US , please get a copy of the upcoming economic report of the President to be released in mid-February.
Laura, from Washington DC writes:
You have been a tireless advocate for repeal of the estate tax. I was pleased
to hear President Bush reiterate his commitment to permanence. While it is
up to the Senate to move the legislation, do you think there is a chance to
help so many family held businesses -- including many in the food and fiber
industries to move this year
Greg Mankiw
You are right that I have long been a supporter of the elimination of the estate tax. For my recent speech on this, click here.
The estate tax is in essence a tax on capital accumulation and as such it impedes investment and growth in productivity and living standards. The President has said many times that he would like to make its repeal permanent. And I expect you will see much discussion of this in the future.
Greg Mankiw
It has been great taking your questions again. I look forward to doing this again in the future. As a Bostonian, let me close by wishing the Pats good luck.
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