INTERVIEW TRANSCRIPT

C-SPAN’S “NEWSMAKERS”

Guest: Edward Lazear, Chair, President’s Council of Economic Advisers

Reporters: Deborah Solomon, Wall Street Journal and Caren Bohan, Reuters

Moderator: C-SPAN

TAPE DATE: Friday, February 2, 2007

AIR DATE/TIME: SUNDAY, February 4, 2007 at 10 a.m. and 6 p.m. ET

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BEN O’CONNELL, HOST: This week on News Makers our guest is Ed Lazear, the Chairman of the President’s Council of Economic Advisors. He’s on leave from Stanford, where he teaches Economics. Previously, he taught at the University of Chicago and he’s the author or editor of nine different books on Economic Policy. Questioning him today; Deborah Solomon, from the Wall Street Journal, and Caren Bohan, from Reuters.

Mr. Lazear, first question, you’ve been in your current job for about a year now.

ED LAZEAR, PRESIDENT’S COUNCIL OF ECONOMIC ADVISERS, CHAIRMAN: Yes.

BEN O’CONNELL: What’s been your biggest challenge, moving from academia to the administration?

LAZEAR: Talking to reporters. No, realistically, I would say the largest challenge is taking what would be serious, hard-core economics and translating it into policy. There are many considerations when one comes to Washington that we have to think about, that are something – somewhat different from the kinds of things that you run into when you’re in academia. In academia, you can think about things in a somewhat more abstract manner. When you have to translate it into actual policy, you have to worry about the politics, you have to worry about implementation and those things make the job somewhat more difficult. But, it’s going – it’s been a great challenge and it’s been a lot of fun and I think my predecessors did a good job in kind of showing me the path, and I’ve tried to follow in their footsteps and try to do what they did.

O’CONNELL: Deborah.

DEBORAH SOLOMON, WALL STREET JOURNAL: Well, one question I think – one policy question that’s been on the minds of some people and that the President himself mentioned this week in his speech about the economy is the issue of income inequality and how the rich seem to keep getting richer and the middle, you know, moves a little, but doesn’t keep up. And so, I’m curious, you know, what is the administration – the budget comes out Monday – is there any new initiative or any proposal to help deal with income inequality or what can the government do to help with this?

LAZEAR: Income inequality is long-term issue, as you probably know, if you’ve looked at some of the numbers. This has been going on for about twenty-five years now, this widening gap. Most economists believe that the primary reason for widening differences between wages at the top and wages at the bottom are a reflection of skill.

Now, when you think about this for a minute, the fact that skills are now paying off more than they did in the past is actually a good thing. That’s not something that we’re unhappy about. That’s something that we’re actually quite happy about. What we know for example is today, the difference between a college graduate and a high school graduate is about seventy percent in earnings. In 1980 it was about half that.

So, what that tells us is that the return to this investment, this valuable investment of going to college is paying off now more than it did in the past and that’s a result of having the technologically advanced society. That’s the good side of it, we’re happy about that. The downside of it is not so much that wages are falling at the bottom end, but rather that wages have been pretty much steady at the bottom end and they’re not keeping up, and so what that means is that we have to ensure that all of our American citizens have the ability to invest in the kinds of skills that will enable them to participate in a growing and technologically advanced society.

Now, if you think back to the President’s first initiative in this respect and I’ll come to you’re – to you’re actual question in a moment, if you think of this first initiative, it was no child left behind. So, the President was on this right at the beginning. This has been one of the primary concerns of this administration and he felt that the way to deal with this was to make sure that everybody had the opportunity to invest in the kinds of skills necessary to advance in this economy.

In the State of the Union, he called for reauthorization of the no child left behind act. That bill will be up some time in the next year and we’re expecting that Congress will go along with that. We think it is a good bill. We’re hoping that they will take up the President’s request to do that and to bring in some additional money, as well. For example, enhance Pell Grants, is one of the things that the President has suggested.

There are a number of different specifics that are incorporated in the President’s policies, but these are for dealing with people at the lower end of the income distribution, people who are in disadvantaged schools. Those are the ones that we have to worry about. The top is doing just fine in terms of getting skills and getting themselves equipped to deal with the economy. But we can’t – we can’t neglect what’s going on at the bottom. That’s an extremely important component. And the President has been concerned about that from the start and hasn’t neglected it in the recent past, either. He’s going to push it forward in the next Congress.

CAREN BOHAN, REUTERS: Related to the issue of income inequality, the President weighed in this week on these enormous CEO pay packages.

LAZEAR: Right

BOHAN: And, I’m wondering, is there a role for government, beyond just insisting that these packages be made more transparent in addressing this issue?

LAZEAR: I think you’ve put it very well. I think the way the President thinks about it is this, the President does not believe that it’s the role of government to intervene in the wage setting or price setting process of private companies. And, that‘s certainly not what he was suggesting. What he was suggesting is the chair holders and boards of directors have responsibilities to be diligent in making sure that their compensation packages are in line with common sense. And that’s all that he was saying, but the roll of government is to ensure that deception, fraud, that that doesn’t occur and that transparency is there so that people know what’s going on.

Beyond that, I don’t think that the President would recommend that the government step in, in any heavy handed way and actually propose any form of specific corporate government. That’s for the corporation to decide on its own, as long as it’s consistent with open transparent policies that do not involve any deception.

SOLOMON: I’d like to just follow up on the income inequality question with a broader point. You talk about education and obviously that’s really important for people who are in school.

LAZEAR: Right.

SOLOMON: But, what do you do for, sort of the losers of globalization, the people who are low skilled, who are out of school and are basically seeing their jobs displaced because of trade? I mean, you don’t want protection as sentiment in the country and yet, one of the reasons you had the sentiment, is because people feel like their jobs aren’t secure. So, what can or should the administration do to help people on the low end who are post, you know, post school ages years?

LAZEAR: Absolutely, that’s an important point. We know that trade is a very valuable part of the American economy. We know that something like one in five jobs in the American economy is related in some way to trade and we also know, as the President pointed out, that only five percent of the world’s population is in the United States, the rest, ninety-five percent are outside.

So, I think consistent with your – with your premise, it is the case that we have to make sure that we’re open to trade and that we do have the kinds of policies that will encourage trade. That said, it is sometimes the case that there are losers and we can’t simply neglect those losers.

The President has talked about two things in the context of thinking about those people who are harmed by the impacts of trade. One is trade adjustment assistance; that was a bill that we’ve had in effect for a while now. The President called for reauthorization of that and for re-examining it to be honest. It’s not necessarily perfect in the way that it’s implemented. We might think about some ways that we can make it better, make it more suitable to those individuals, who are displaced by trade, and think about ways that it might be more helpful to them.

The second thing that the President has proposed are career advancement accounts, and those would be accounts that would allow individuals to invest in their skills by going back to community colleges, vocational training – a variety of different methods – that will allow them to move from one industry into another industry.

One of the things that I’d like to say about this economy, one of the strengths of this economy, is that it is a very dynamic economy; it’s a very mobile labor force. So American workers tend not to be locked into their occupations. They do move from occupation to occupation and they do move from industry to industry and that’s a good thing. It’s not so much that they’re being forced to move from industry to industry or from occupation to occupation, it’s that they have the opportunity to do that.

And, because the training system, and in particular the colleges and the educational structure in the United States. tends to create an environment where people pick up general skills. They do have the ability to move across occupations better than in other countries. That’s a strength in our economy. But we have to make sure that we extend that strength and we extend those general skills throughout the entire occupational distribution and in particular, to those individuals who are affected by trade.

I think the point that you made is extremely important. One of the worst consequences of having people adversely affected by trade is that you can get a backlash and then you get protectionism and that would be very detrimental to the economy.

BOHAN: On the subject of the budget which is coming out on Monday, the White House has set a goal of balancing the budget in five years. Now, the last couple of years, the White House has taken an approach of freezing domestic spending outside Homeland Security. And I’m wondering if you will likely be taking a similar approach this time?

LAZEAR: Well, obviously you know the budget is coming out soon so you’ll see all the details.

The one thing that I will tell you is that as least with respect to funding the Global War on Terror that is built into the budget. That’s going to be quite transparent in the numbers and that’s obviously a priority. And it’s obviously the President’s most important message.

You know, as you know, there’s more central to him than protecting the American public from terrorist attack and he is adamant that we make sure that we have the funding and the resources available for our soldiers to do that.

That said, obviously, you know, when you’re trying to keep down addition spending, keep to a top line on this, we have to make sure that we are able to balance some of the other needs in the budget and that’s what we’ve been trying to do.

So you’ll see the details of that next week. But I think the main message that I guess that I would try to get across here is that – and it is the point that you started with – and that is because the economy’s been so strong, it’s given us a bit more flexibility in terms of our ability keep our expenditure levels consistent with funding the Global War on Terror and still have the deficit coming down.

And that’s primarily a function not so much of the spending restraint on the other side. Although, I think it’s in part a result of that – but it’s primarily a result of the fact that the economy’s just taken off. And when the economy takes off, tax revenues come in. When tax revenues come in, the budget deficit falls.

So you mentioned, you know, meeting the goal of a balanced budget. You know, if you think back a couple of years, the President suggested that we try to cut the deficit in half by 2009, everybody kind of laughed and said, “Yeah, sure.” And then, you know, we got there three years early. And again, I think that was primarily a function of the very strong economy that we have.

BOHAN: But are likely to get an austere budget or relatively austere on the non-Homeland Security parts of the budget?

LAZEAR: Well, there’s no question that in order to make sure we cover all of the most important priority areas of the budget, we have to make sure that we are diligent in keeping control on other expenditures and the President’s budget, I think, will reflect that.

Now, you know, the details about which ones are going to grow more rapidly than others, I think that’ll fold out next week.

But obviously, you know, this is an issue.

I would actually put this more in the context of one of the primary concerns the administration has, namely entitlement spending. And the reason I talk about entitlement spending is that if you think about that, you think about Social Security, and you think about Medicare, most people when they think about that problem, think about it as a problem that’s somewhere off in the distance. You know, they’re thinking, “Yeah, 20 or 30 years, we know that there’s a problem out there but we don’t have to address it now.”

Well, that’s just wrong. And the reason that it’s wrong is for exactly the point that you raise, which is that every time every year as Medicare expenditures go up and Social Security expenditures go up, what that means is it puts pressure on the other parts of the budget.

If we have to fund one part in order to keep the total amount somewhere within reason, we know that we’re going to have to deal with other programs, things like education, other aspects of the budget that many people think, including us, are very important.

So one of the things that we really have to come to grips with is thinking about entitlements, in particular Medicare and Social Security, and dealing with that now rather than later because it’s already putting pressure on the budget.

SOLOMON: I’m going to follow up with the budget question. You know, there’s been some criticism in the past of the way that the White House has projected its budget going forward and I’m curious how you get to a balanced budget if you’re going to exclude the cost of the alternative minimum tax going forward?

Obviously, you said there’s going to be some funding for the Global War on Terror in 2008 and maybe a little in 2009 but it sounds like maybe not beyond that. I mean, isn’t most of it based on strong revenue growth? And if so, what happens if that revenue growth doesn’t materialize?

LAZEAR: Well, we think we’ve been very conservative, actually, in our predictions of revenue growth so the numbers that we built in and the numbers that we built in, in the past in terms of revenue growth, we’ve tended to understate the amount of revenue growth that’s happened. Again, that’s because the economy has been strong.

And I would say, by the way, that that’s consistent with what we’ve seen recently. And you know, if you think about the GDP numbers that came out in the previous week, what we saw of course, was that GDP was much stronger than most people expected, above market expectations.

The year, actually, finished ahead of where we thought we’d be. We ended up with 3.4 percent GDP growth, which was better than 2005. The reason that’s important and in the context of your question the reason it’s so important is because when GDP is growing, that translates directly into tax revenues.

So I think that this budget is a conservative budget. I think it’s a realistic budget. And I would not be at all surprised if things actually come in better than expected. But we want to err in that direction. Again, we think that we have to be somewhat conservative on this. We have to be prudent in the way that we forecast the numbers because you just don’t want to spend more than you have.

SOLOMON: But it only has a one-year AMT built in, right, not a long-term AMT fix?

LAZEAR: That’s correct.

And, you know, in the future, there might be more dramatic kinds of tax changes that would take place, not necessarily, you know, in the next couple of years but many people have pointed to some of the problems in the tax system. AMT is one but only one. There are a number of distortions. Some of the ones the President talked about in the healthcare initiative focuses on some of the distortions associated with the current tax structure.

So you know, thinking about the tax structure in general in the future and the way that it is designed, is something that, you know, this administration or future administrations might want to be doing.

BOHAN: You talked a lot about trade earlier and the impact of trade on workers. The President is pushing a revival of the Doha talks now.

LAZEAR: Right.

BOHAN: And in order to really move forward on that, he needs fast-track authority.

LAZEAR: Right.

BOHAN: Some key Democrats have said that they’re willing to give it to him but they want some conditions attached to that. Is that acceptable to the administration and do you think an agreement can be worked out?

LAZEAR: Well, I hope an agreement can be worked out. I don’t know the specifics of the conditions and I certainly don’t want to speak for the President on that. He makes decisions with respect to the details of how those things go.

But I think the more general point is that trade promotion authority is absolutely essential to pushing any kind of a trade agenda. What trade promotion authority does is it allows the President to negotiate a treaty and then have Congress vote on it up or down.

If he can’t do that, than our trading partners and our negotiating partners know that virtually anything they negotiate could be undone by the legislative process, which basically makes them uninterested in negotiating with us.

So it is essential. It’s not only this President that’s wanted it, it’s every President, really, has needed trade promotion authority to get something done.

So I think that it’s going to be a key ingredient. I sure hope that Congress is willing to authorize it. We sure don’t want to give up on the Doha round.

As you know, that’s been slow-going. It’s tough-going. Ambassador Schwab is doing an excellent job and she is certainly out there even as we speak, trying to negotiate and push the agenda forward. The President has spoken directly on this. I’ve heard him, you know, be extremely strong in his passion about trade and its importance to the American worker.

So I think that this is going to be key and we’re, you know, still optimistic. We still think something can be done here. But it’s tough and these, you know, the reality is if you look at the history of trade negotiations, it takes a long time. The Uruguay round took a long time. The Doha round is taking, you know, longer than we would hope.

But you know, we have to push it forward. It’s important, not only for use but it’s important for our trading partners around the world.

And just to build on that, I think of the Doha round as being one step in a much broader trade agenda. You know, the American economy right now, is primarily a service economy. Seventy-eight percent of our economy consists of services. Most of the trade negotiations, the Doha round in particular, our focuses on agriculture, which is about two percent of our economy, and manufacturing.

We’re very open in terms of manufacturing and agriculture right now. We have, you know, some tariffs but as compared to the rest of the world, we’re an open economy. And as a result, we get the benefits of much of the trade.

The problem is that in services, we are restricted and restricted in a very heavy-handed way from making our services available to other countries in the world. If we could open that up, some of the estimates there are as large as something like four percent of GDP so that we could have – we could actually gain four percent of GDP on a permanent basis if we could have complete free trade in services.

We’re great in information technology. We’re great in telecommunications. We’re great in distribution. We’re great in finance, insurance. There’s so many areas in which the United States dominates in terms of the provision of services that if we can open up those markets to us that would just be a huge windfall to the American worker and to American business.

And I think of the Doha round as being kind of a first step in that direction. We need to get that behind us, make some successes there so that our trading partners are willing to entertain a more dramatic opening up, not only in agriculture and manufacturing but also in services because that’s the future.

SOLOMON: Since you brought up tariffs I just wanted to ask a little bit about – you know the president talked about the state energy proposal in which he called for having 35 billion gallons of renewable fuel sources by 2017.

LAZEAR: Right.

SOLOMON: You know we have terrorists on imported ethanol because I have tax credits to people here to produce ethanol. This administration has been very clear about having market based solutions to problems so why does it make sense to impose a tariff on people who want to provide us with ethanol from outside and then provide money to people here who will probably not be able to even produce all of the ethanol’s that we needed and there will obviously be demand for it if the government is putting it’s muscle behind saying 35 billion gallons.

LAZEAR: The tariff and subsidy programs obviously are deviations from what most people think of as basic market principles – no denying it. The question is whether we are willing to tolerate those deviations and whether they have – sorry, significant adverse affects on the economy and in particular on distorting the economy.

The reason that the President has pushed hard for an energy policy and for government intervention into that pot – into that market is because he is concerned that the national security needs of the United States are so important that it requires that we take some action and take some action now.

He has also recognized that we want to do that in a way that limits any damage and any distortion to the American economy. Any time you will impose any kind of subsidy, tariff, tax, you name it – and of course hasn’t proposed taxes and is against taxes – but anytime you do anything like that that does create a distortion and what we’ve tried to do is design an energy proposal that will minimize the distortions consistent with the notion that we further the energy independence of the United States.

And I believe that the way the President is trying to structure the provisions I think that the distortions will be minimal but there are no question that there is a – there are some movements in a particular direction. We are looking forward to technological change that we hope will limit any damage to the American economy and we think we can do that.

We think that the technology has come in at rates faster than predicted. We’re hoping – as you know the President’s talked about cellulosic ethanol. That’s probably the future in terms of alternative fuels, at least the near future. In the very short future it’s ethanol, it’s corn ethanol but hopefully looking out a few years we’ll see something like cellulosic and other technologies – hydrogen.

Those are perhaps a little bit longer term, little further down the road but those are the kinds of new technologies that will allow us to get to a more energy independent economy and still do so without distorting the – without distorting the market very much.

SOLOMON: But would the administration support doing away with those tariffs and doing away with the tax credits? Is that under consideration?

LAZEAR: Well the – you know again the – some of these things expire on their own in a couple of years and then it will be for – it will be up to another administration and another congress to determine whether that happens.

You know again there’s always a trade off here. There’s always a tension because you’re trying to get to energy independence but you also want to have the market operate. I think to my mind and certainly to the President’s mind most of the action is done by the market. If you think about it, you know what happens when gasoline prices go up?

When gasoline prices go up that’s when ethanol because viable. If gasoline prices are very low ethanol and alternative fuels simply aren’t viable and there is no subsidy or tariff program that’s going to get you there. So most of the work is done by the market and I think the President recognizes that and appreciates that. It’s actually what he wants. He doesn’t want to distort, doesn’t want to be biased and favoring one particular technology over another.

His policies I think just give an additional emphasis to enhance energy and dependence. But again most of the works going to be done by the market and I think some of the policies that you’re talking about will have to be reevaluated in a couple of years.

O’CONNELL: We only have time for one more question. So Caren.

BOHAN: There is a new scientific report out today on global warming. In your view as an economist could any kind of cap and trade approach be made to work in keeping with safeguarding the health of the U.S. economy?

LAZEAR: The global warming report that you saw today is one that we have looked at. In fact 90 percent of the funding for the studies that went into that report were actually initiated by the President in 2001. So we certainly have been thinking about this since the start of the administration.

Climate change is a – is a key issue. The key thing with climate change is that climate change, unlike local pollution is a global problem. You know you can deal with – you can deal with pollution at the federal level, you an deal with it a state level, sometimes even at the city level if you think about, you know, places like Los Angeles and the pollution problems that they have there.

Unfortunately the climate change problem is not a local problem. It’s a global problem. And so there are policies that we can think about, but we do have to think about them in a broader context. and I think the President is evaluating that right now and thinking about those issues.

And we’re going to have to look at the reports. We’re going to have to think about this in the context of the economy. We have to do things that make sense in terms of climate change. But we also have to do things that realistic and bring into play the other key players in this, the key countries in this and those key countries are the ones that are growing most rapidly and will be responsible for a large share of the emissions as we move through the 21st century.

So I think people are – you know are very much aware of this. It’s a – you know it’s clearly going to be on congresses mind and the President is going to have – is going to be thinking about this stuff, is already thinking about it, has been thinking about it actually for the past few years.

So I think this is just more information. It’s good information. It narrows the range. That’s good news actually in terms of getting more certainty over the kinds of affects that we’re talking about. It allows us to think about more sensible policies and adopt a path that will be more consistent with minimal economic damage and also being responsible stewards of the environment.

O’CONNELL: That’s all the time we have. Ed Lazear is the Chairman of the President’s Counsel of Economic Advisers. Thank you very much for joining us.

LAZEAR: Thanks Ben, pleasure to be here. Debra, Caren thank you.

BOHAN: Thank you.

(BREAK)

O’CONNELL: We’ve been speaking with Ed Lazear, the Chairman of the President's Council of Economic Advisers. Both of you asked about the President’s remarks earlier this week about income inequality. How notable were those remarks?

SOLOMON: Well, I think the fact that he mentioned the words, “income inequality” – this is the first time I’d ever heard the President say those words. It was a big issue for many Democrats in the mid-term elections. And I think that their sensing there’s, you know, concern out there among the middle class about not getting ahead.

O’CONNELL: Now, have you heard anything policy-wise. You noted a shift in rhetoric, but what about in policy?

BOHAN: One thing I thought was interesting is that Mr. Lazear was very careful to make clear that it wants to take a free-market approach on the issue of CEO salaries. The President made – highlighted this issue in his speech on Wall Street this week, but Mr. Lazear made absolutely clear that he doesn’t see a role for government in regulating these pay packages.

O’CONNELL: And you both also asked about the budget. How much do you think this budget will differ from his previous budgets? Is this going to be more of the same, or could you get anything from Mr. Lazear’s remarks that may indicate that they’re going to go in a different direction?

BOHAN: He was pretty careful not to give away too much in what he said. It’s pretty clear that what the administration will propose on the domestic side will be fairly tight, however what is different about this budget that he didn’t talk about is that it’s going to be very heavy on spending when it comes to Iraq. It’s expected to be the biggest year yet for the Iraq spending bill.

SOLOMON: Right, and also, I mean, he did mention that they have this alternative minimum tax fixed just for one year, which means it’s a lot easier to get to a balanced budget when you’re predicting like he said, strong GDP, strong revenue growth, and, you know, taking out a $500 billion cost to the government and just sort of assuming it doesn’t exist.

So I think Democrats are going to be looking, you know, pretty hard at this budget, because one of the reasons they want to get to a balanced budget is so that they will expend his tax cuts, which expire in 2010. Now, he’ll be out of office, but he wants to leave with this his legacy, and they’re going to be scrutinizing it to see if this budget’s actually a real budget or if it’s using, you know, gimmicks, like Harry Reid just said.

O’CONNELL: Can you – can you briefly explain AMT for our viewers who don’t pay it?

SOLOMON: Sure. It’s say – we’ll, it’s going to hit about 33 million people next year, so a lot of people probably will be paying it. But it was intended for rich people – people I think with a million dollar salaries back in the 60’s, and it was never indexed for inflation, so it’s begun to hit more and more middle-class people. And I think last year it was four million, and this year’s it’s 23 million, and they do one-year patches to fix – you know, to fix this so it doesn’t hit as many, but it’s not a long-term solution. And unless they index it for inflation, you know, forever, it’s just going to keep hit, you know, more and more people.

O’CONNELL: What else did you learn from Mr. Lazear?

SOLOMON: Well, I also thought it was interesting he talked about the trade adjustment assistance, which is one of these programs that the administration has talked about in terms of helping people who are the losers of globalization. You’ve got, you know, low skilled workers who get displaced when their company shuts down because of imports from China, and what do they do? They don’t have high school educations. They have, you know, been doing the same job for 50 years. This program’s supposed to help them retrain.

There has been some concern that it’s not working as well as maybe it should have, and he mentioned – I think he said it’s not necessarily perfect. So it’s not that they’re going to reexamine that program and reauthorize it but maybe with some changes, and it’ll be interesting to see what they can do help – to help the losers of, you know, global trade.

O’CONNELL: Caren?

BOHAN: I also thought that he acknowledged their concerns. I thought it was interesting that he acknowledged the concerns about global warming in this report today. And he left the door open for some further policies on the subject. Didn’t really address the issue of the whether the administration would eventually come around to cap in trade, but he did leave the door open for additional policies.

O’CONNELL: Caren Bohan with Reuters, and Deborah Solomon with The Wall Street Journal. Thank you both very for joining us today.