White House ready to negotiate on budget caps

White House Council of Economic Advisers Chairwoman Janet Yellen indicated Wednesday that the Clinton administration stands ready to negotiate with Congress new levels for the spending caps imposed by the 1997 budget agreement.

While noting that President Clinton's budget for fiscal 2000 abides by the caps and pay-go rules, she added, "If Social Security reform can be achieved, the President has proposed some additional spending for military readiness, and education and research expenditures that would probably require revisiting the levels of the caps after that."

However, arguing that the caps had proved effective in enforcing fiscal discipline, she said the principles of capping spending and having pay-go rules should not be abandoned. "It seems to me that they could be useful and should stay in effect," she said.

Yellen made the remarks at an embargoed briefing for reporters where she discussed this year's Economic Report to the President, which was released today.

The report lists growth in the gross domestic product last year at 2.9 percent; an unemployment rate of 4.5 percent; and a 1.6 percent rise in the Consumer Price Index. It projects that growth of the GDP will moderate to about 2 percent over the next three years, then rise to 2.4 percent annually in the years following; Yellen described these forecasts as "conservative."

The report states that next year, even if interruptions related to the Y2K problem are serious, the total effect will not be substantial-instead causing inconveniences and losses in some sectors of the economy.

With the ratio of retirees to workers set to increase, Yellen said long-term prosperity can only be guaranteed if the country finds ways to raise the savings rate. "The natural solution, and perhaps the only solution, is to make workers more productive by increasing investment," she said. "Really the only way to accomplish that is to increase national saving."

The President's plan to harbor the surplus for Social Security and Medicare-while introducing Universal Savings Accounts-would "dramatically increase saving," Yellen contended. The GOP proposal for an across-the-board tax cut, Yellen argued, would subtract money that could be used for saving and use it for "current consumption."

But she and CEA member Jeffrey Frankel sought to defend the budget's lack of proposals for savings inducements this year. Frankel argued that strategies such as the use of individual retirement accounts allow "upper class people" access to favored accounts while freeing up other money for spending.