obligated 2.0 around this time 2009 the shot that just hit the economy that was possibly worse than the shots that precipitated the onset of the great depression. my predecessor christie romer pointed out the stock market fall in 2009 was similar to the fall of 2008. but the home prices were considerably larger as a result five times larger at the onset of the great recession as the onset of the great depression. we have also documented ways that the shock was worse. while we are still digging

out there is no question a great deal of progress. adding 2.4 million jobs marks the third consecutive year of job growth from february 2010 private employment has risen in 47 consecutive months for a total of 8.5 million jobs. we think of the ups and downs with the employment data. you can see steady consistent job growth at a pace of about 190,000 private sector jobs didn't november december the resawed job growth faster than that pays. december and january it did not come up to that average

for a variety of things whether the whether seasonal factors or normal boy is sid measurements that bounces around from month to month with that moving average has barely changed. with that volatility of jobs numbers is very much in line with the magnitude of that probability prior to the recession. the progress the last year was notable in part be coz of the steep decline in the federal budget deficit was the major had planned. the next figure shows the largest for your reduction of the deficit mobilization of world war ii. ended fiscal year 2009 has fallen by 5.seven percentage points cheapie and nearly

half of that happened of the last fiscal year alone. the private sector continued to power through the spending caps of 2011 of the payroll tax holiday is indicative of the economy. of those such help to bring about the deficit reduction as a balanced approach to making progress to sustainability there were necessarily compounded by the sequestration in march and with the shutdown in october it took a large bite out of fourth quarter gdp growth as well. i will say more about fiscal policy and a moment but that it would be considerably

less of a head wind in the years to come. before i move on to the more forward part of my talk i want to make one last point about the economy's progress to put it in a context of what we have seen at around the world with recovery from financial crisis. we know it is longer, harder, the more difficult and with that regard to prepare the united states to compare to the 11 other countries that winters systemic financial crisis as identified and what you see with the working age population and.it within four years which is considerably faster than the

normal ted years verses' historic data. is a major -- the measure of the important ones not just the recovery act with the jobs measures that followed including the payroll tax cut a and additional investment. this was fading with the additional measures getting cumulative lead nine-point 5% gdp growth so those numbers are very consistent with the cbo has estimated. with all other additional measures showed in the red.

and to complement the broader policy with the rescue of housing. and the efforts of the federal reserve. they have made substantial gains in the last five years. while many challenges remain including recent weather disruption and some turbulence there is a number of reasons to be optimistic about the economy. cyclical development like headwinds isn't finances are likely to contribute to a recovery in the near term at the same time be emerging trends declined with the rates of health cost growth with the technological progress was sustained growth into the future.

>> the most predictable of reason for optimism in 2014 is the drag from fiscal policy of. >> a bipartisan budget agreement of the discretionary sequester in january then will live to a portion of the cuts during the preceding year. while congress could do substantially board -- more i will outline some of what that is the economy is unlikely to say anything that is that the federal level 2013 the deficit continues to cut down the economy considerably was. in addition fiscal headwinds

appear to be easing well. the second cyclical factor is household finance seeing wealth wipe down as result a large degree of progress has been made in 2013 real per-capita household wealth was a percent of the decline reflecting gains of housing starts prices one is a striking statistic is the debt service ratio the estimate required payments on mortgage and consumer debt as a sheriff disposable oh come -- in combat fell nine-point 9% to the lowest

since the day it began in 1980 down 13% since 2007. further improvements of household finances have expanded access due credit to contribute to a strengthening of consumer spending. to take a vintage of the fact we're continuing to build houses and the auto stock is on average as old as it has been. the aggregate statistics on household wealth paid to pitcher too many have not shared. they have a larger fraction of wealth in their home relative to equities but they have not recovered as sharply from a larger

fraction of the wealth and i will talk more about that issue. three trends helping the economy today the first that has gotten significant and deserved attention is a dramatic increase of energy production but it is important to understand with the shift of energy that represents not just for our economy before america's security as well. current projections became the world's largest producer of oil and gas 2013 of saudi

arabia in russia. domestic production from crude oil rose for the first time since 1995 and further increases of domestic production over the coming years. natural gas production and continue to rise in 2012 of more than 20% over the last five years. but the progress is not limited to oil and gas. great strides have also been made with energy efficiency. wind and solar power have doubled since the president took office while consumption has fallen over this time in stronger fuel economy standards with cutting edge technologies

have led to the latest vehicle fleet ever. but it directly to make united states more attractive for multinational firms industries like manufacturing. the president recently announced of the energy sector to reduce its dependence on foreign oil sources. the "state of the union" address the president announced his intention with the new executive action to improve the fuel efficiency to help localities attract investment covered by natural gas. the second structural trend i want to talk about is a

slowdown in the energy boom is just as important to our overall economy. bennett it is in part to get over the affordable care attacked it is understandable to the cyclical state of the economy to reverse itself set clear it has become that this is a structural future of the economy. but the next figure shows just how striking for the

development is that the real per-capita health care expenditures 2010 through 2012 lovely this year we have data shows the slowest growth they have on record the wingback to 1960 in the preliminary data 2013 shows the slowdown continues that year as well. the council of economic advisers wrote an incentive report about the explanation for this trend. one of the points is merely a and after a fact there are three reasons for that. first the slowdown is persistent even though the economy has recovered. we see a larger slowdown of medicare them private health insurance. that is notable because as

others have stressed medicare is not very cyclical and the fact it slows down is not related to the economy. finally to put into quantities and prices that tends to be cyclical or to raise cost sharing prices historically have been much less cyclical and much of the slowdown has been in prices measured in the pce or the spread of consumer price inflation. it is increasingly clear at least an important part of a structural phenomenon. that slowdown started before the affordable care act was

passed and factors like a long-term trend of higher cost sharing with blockbuster drugs played a role. there is no question some of the already implemented features include the reduction and private insurers as well as payment reforms incentivize better patient outcome contribute to this trend. a look at the cbo estimates the hca would save $70 billion of medicare but spread out over the years from 2010 through 2013 that alone accounts 0.two percentage point reduction with the growth of the health expenditure over this period. if you add to that spillover that follows the medicare payment model of the total

contribution is 0.5%. because of this that deficit dialect over medium and long term has improved. employers are likely to see significant benefits as there is less pressure on compensation cost and at least in part be passed on to workers. with higher wages. the third emerging trend presents a major opportunity for long-term growth with it technology particularly the it is widely available to the broad band network and a capacity to allow mobile devices to take advantage. 2009 through 2012 in new investment grew more than

40% of 21 billion through 30 billion now with the availability of fraud period. the infrastructure is that the center of a vibrant ecosystem that has more fun design mobile app development with the technologies and sectors and public safety and entertainment and more. of of with the slowdown of health care cost growth in of the rise of domestic energy production are major reasons to be upbeat about the prospects in the coming years. now with these opportunities still facing a several decades along challenges our growth.

to put this into context the next chart shows the history of of our total productivity for the last 60 years. growing at 1.8% per year in the wake of world war ii. says pent-up military part public investment like the interstate highway system. a dramatic slowdown of productivity growth on a worldwide basis after 1973. subsequently started with the new economy in 1990 productivity growth increased substantially 1.2 percentage but not rising at the pace we had seen in the years after world war ii.

while the growth rate of total factor productivity is critical to the central the projected slowdown in the growth of the america's workforce due to the aging of the population gives a greater emphasis on the productivity growth going forward. productivity growth slows 1974 through 1992 the overall was partly masked with what the working age population of women into the work force. we look forward for such favorable demographic trends for whatever shortfalls' we have that is why productivity investment is

likely to be as critical. let me turn to the agenda to strengthen economic growth than the goal is to fold to continue to return the economy to its potential to appear getting closer and closer to the unemployed rate unacceptably high but much lower than anyone would have forecasted and jericho. at the same time we also need to see increase of long-term growth. fortunately many policies of the president's agenda would return the economy to its potential. let me talk about some of the major elements of the proposal.

first the president is right thing to the discretionary level what was agreed upon with the right and maria agreement. just juicy how hard one dash just to see how hard it is to right at that level the president also is opposing on top of that the opportunity of growth to make additional investments split between defense and nondefense priorities focusing on early childhood education and national security head of financing with of balanced package of tax loophole closers and spending reform over the next 10 years. the president continues to

look for ways to make a more sustained investment and one of the highest priorities in that regard is infrastructure. the president will once again propose a reauthorization plan. at the same time we are not waiting for congress to act. in 2011 the president issued an executive order for more transparency and accountability in did the greeks and months ahead -- ahead building on that to make sure they're getting started as quickly as possible. at this saves time to push that infrastructure package to reform the business tax system that will also benefit the economy.

business tax reform cuts the top rate at 20% and broaden the base in the process excipient the economy potential that would skew investment decisions. that tax reform would be revenue neutral transitioning to the new system raises the one time revenue and that is what we would use to finance the one time investment with infrastructure. in addition to physical capital to re-education and training. to give incentives to improve cater 12 curriculum to make college more affordable the president has repeated the call for every

child with the opportunity to attend high quality preschool. but it could make a profound difference in decades to come at the same time to focus on every aspect from preschool all the way through job training programs to apprenticeships is. among the most enhance productivity is immigration reform added basic level it would help to counteract that slower growth of the of labor force from a planet based green card for four board individuals earning advanced degrees to stay here after they graduate. what is exciting not that it

just expand the work force but also the per-capita gdp by expanding total factor productivity growth. research has found happening twice the rate of the citizen even after the representation immigration from native his ventures defied the variations is tied to changes. more over immigrants are more likely to start a business. the cbo affirmed this view would it pass the immigration bill with total factor productivity would be

a full percentage point higher in 2033 under the legislation. these could translate into significant economic outcomes 40 percent of the fortune 500 companies started there. borrow they tried to attract on to procurers and entrepreneur to the united states which right to sell in the other direction with the free trade agreement with europe and the trans-pacific partnership said gdp has the most significant trade negotiation in one generation because it has 12 countries hatter home to a combined 793 billion yen to account for 40 percent of global gdp.

. . it does come down in the short run, come out and the long run, that will be declining his share of the economy for the next several years, but after 2018 net debt will start rising is a share of the economy which is are we will be putting forward

more balanced measures on both the revenue side and the expenditure side to assure that that debt is continuing to decline as a share gdp. a lot of you are focused on, understandably, on agriculture growth which is what i have been focusing on so far. it does matter as well have echoed the shared. matters. you work for companies the sold to consumers and the income matters. matters for the short run recovery. matters for the sustainability of our economy over the long run and for the political support of the type of market oriented growth in hansen policies. that's why they guy room like that is a -- is important to reflect on just how large income inequality has bell of the last

several decades and why is important to take steps to make sure that this growth the we have been talking about a share. one of the steps is raising the minimum wage bill which has declined more than one-third from its peak in the 1960's. in addition to that, the president has proposed other measures to help us join the middle-class including expansion of the air and income tax credit for workers without children and in addition to the immediate steps the president has set out of range of ideas to invest in education and quick workers for the skills they will need for years to come, measures that help us grow and help ensure that that growth is widely shared. so in conclusion, i would say that the challenges we face are substantial. we continue to have some of the short run challenges, but the bigger ones are the ones that have been building up over the

last decade, the slower productivity growth in the postwar years and the increase in inequality. a lot is in place to have more stability and certainty. i think that by itself will be a major help to the economy, but they're is a lot more the weekend should do. i would describe some of that ambitious agenda in my remarks here today and would be happy to discuss more of it in answer to any questions you may have. [applause] >> ken simonson. one of the most unborn things that its share of economic advisers can do is educate an advocate for good, federal statistics. we have seen in the last year

that bls nba have both had to discontinue important programs. we hear that the export price index may be next on the chopping block or other important series. hope he will appeal to stick up within the white house and to the extent that europe probably the charter of the importance of finding those properly and maintain the independence of this bill is a cease. >> i take it there is not a lot of debate over that topic in this room. you're not going to get in the debate from the either. i would just say that it is generally -- we like to think of ourselves as focusing on the national interest. but to the degree we have a constituency in a pro way is

federal data and it is important deal with in l.a. say is our put it in the context of a broader budget. will the buyoff 60 percent of the sequestered which means of we will have 40 percent of a sequester this year. that is on top of already tough spending in the budget control act. with that we are on track to having discretionary spending the lowest as a share of the economy since we started recording discretionary spending in 1962. and with that comes a lot of choices that we would rather not be making. this -- there are certainly going to be difficult choices, the budget when it comes to the potential difficult choices and just about every area of the budget. so part of it is figuring at how to do the best the probably can't with your limited resources and with the even worse choices might have been. part of that is seeing what we

can do to expand those resources and in particular if the sequester continued been bought of a fraction. they have not dead yet done that. if you have the full sequester it would force even more painful choices potentially. but thank you for your point. >> financial. can still alive the memories i was going to make the same point in to appreciate. on a broader and for search for question, and the president's proposal image and corporate tax reform which has bipartisan support and immigration reform are which is critical for many companies in the trade talks. what are the chances of any of that getting done this year before this present lease? >> we're going to do everything we can to push him toward. i think there's certainly a

reduced legislative appetite in this particular year, but the look of something like business tax reform. over time you have seen an increase convergence in terms of what the rate is, broadly how you would pay for that rate. and even a certain commonality in idea when it comes to more controversial areas like have to deal with overseas earnings and taxation they pass that on a strong basis. and the camino, the strong constituency for it in the house , also a deep set of obstacles in the house. finally, i think the last one that was talked about was trade. we are working very hard to

negotiate those agreements. tipis be is far along and will be continuing. >> fantastically comprehensive presentation. an important piece that was not included in and out was the discussion of the collapse and labour force, which, as you know, we have lost essentially three full percentage point since 2007. and it strikes me that this is one of the most important economic developments in the united states in recent years. what set of policies in action or contemplation could help try to minimize the degree to which the extents of that chance out to be permanent.

roughly half of it is demographics. the other half since to be behavioral of various kinds. obviously some of the infrastructure to proposals by create demand from some of these back into the market. in utah and a larger sense? it can't just be about infrastructure with the labour market policy. >> i think that is a great question and certainly is one of the important things going on. i would divide the decline in the participation rate into three general areas. the first area which as you yourself just said is aging. that is it possible for about half. you can do a mechanical calculation of taking labor force participation rates in 2007 by age and gender groups. aging and the keeping of participation rates the same and you would have about the participation rate would fall by about one percentage point over

this time. you get the same results of the use the refresh but dissipation rates this year. so it is not. to which of those you are doing. that is about half of it. that was predictable a predicted a quarter of it is. something like it normally would be. this is the part that we expect that the employer rate comes down, the participation rate will go out. and anything that gives that the unemployment rate gets it done. the last quarter seems to be something a little bit to and from the normal cyclical pattern and if you look historically the thing that is different from the normal cyclical pattern seems to

correlate very well with long-term unemployment. so whenever is causing total compensation of unemployment to be tilted toward long-term unemployment relative to what it has been his starkly also seems to be contributing to that last quarter on the participation rate. and that is the one that we are, frankly, a little bit less certain about what will happen to it the one for. terms of the policy implications , i think these three parts of the participation rate all have different answers. to the degree they're is a demographic trend that does create challenges our economy in terms of growth, in terms of public finances, and one of the most powerful tools we have there is immigration reform. in addition, anything else all the people who wanted to need to work continue to work with up in that regard as well. the cyclical does not have any policy implication that is any

different than the observation that at six and a half% the upon the rate is unacceptably high. so investments in infrastructure , the additional i read it demand to get extended an insurance benefits to many of those are part of it. the last quarter we don't, as i said, understand as well. to the degree and is related to long-term unemployment anything until the of long-term unemployment is going to help respond to it. and in that regard we have been trying to use -- the president talked about his pen in his own for your action. he has been using his fallen that, being a lot of major companies and, having them about best practices for hiring long-term employed, and that should help with the last part of the participation rate, but we certainly need to continue to understand it better as well. >> thank you. >> david pritchard, purchase associates. thank you for your analysis and

know what. and also want to say that of all the things a you cover comprehensively, the two things missing in my mind by the lack of national savings, which has been zero for the last five years, the very weak investment and these two together are responsible, in my mind at least, for a major part of the subpar growth rate of a lousy real person up 2%. obviously we have population growth. some small productivity growth, but without more investment which can only result in a sustainable way with higher savings rates, i want to know why there is no more of a focus on savings rates. terms of policy we know that congress will do almost nothing because of extremists. both sides of the aisle are going to keep small baldy evanesces year. after that my question concerns will we're going to do sustainably to increase things with some kind of grand bargain for next year in terms of the

things that affect the participation rate. for example, can we raise the retirement age, reduce the entitlements, make sure that the low income worker after tax and after entitlement is much better off than the guy who does not work? until those things happen all of them together, sometimes hopefully next year, i don't see any possibility. i appreciate your response. >> in terms of investment, think of it, it had to choose i would think of it as following and being a function of the overall economy right now rather than being a driver of it. we have done some statistical analysis that looked at what some have said as a puzzle which is you have high profitability, high equity market valuation, a low-cost capitol, and yet investment growth has not been as fast as you might.

and what we have found is there is a simple explanation for that which is investment growth is a function to a large part of sales growth in aggregate demand and if we can get aggregate demand increasing in an investment should follow. and you know, as i was saying before, and reid demand last year faced a challenge in terms of the apparel tax cut coming awake, the sequestered going into affect, and other sharp sources of deficit-reduction. we don't have any of that in 2014. consumers are more be leveraged, have been by some measure on record since 1980. and as a result, i think we are in a stronger position for consumer spending this year. what we would like to see is investment following that. national savings is an important issue in its own right. i don't think it is an important

determinant of investment in the short run. i think it is an important determinant of the sustainability of our overall economy of the medium and long run. net national savings including the federal sector of the corporate sector and the individual sector which has actually risen a lot and lost couple of years. as a result we have seen our current account deficit as share of the economy fall to lost his been since the 1990's. i think that is the direction and the movement you would want to see for sustainability. terms of the of the policy issues you raised we're looking at a wide range of basic health, you know, continue to strengthen what we have. >> thank you. a quick follow-up. it is not on their trenary it demand killed but things other going to be sustainable to really be increasing.

>> okay. my question concerns immigration. the argument the economic argument that she mentioned with increased up to the inertia and patents seem to apply more to age one be expanding h1 be green cards for engineers and so forth, but the majority or a major focus of the legislation is the 11 million undocumented workers. i would like to ask about policies to move to a path to legal status, what you see as the economic benefits of that policy. >> i think the economic benefits of that policy very much centered around certainty. my guess is everyone in this firm has talked about howland certainly affects investment by businesses. the same thing is true for individuals. if you're not sure if you're going to be deported from this country you're not going to

invest as much education. you're not going to invest as much training. you're not trying to invest as much in the business. these are people who have been here. these are people who are going to continue to be year. maloof like to do is give them a pass the that they can have greater certainty. we are collecting taxes, but we are also in a position to, you know, invest more and make greater contributions to our economy.

time. so at this time i'd like to invite the presentation and we'll take some q&a hopefully right after he presents. thank you. >> thank you. it's great to be back at nabe. i'm afraid that i'm going to mostly stand here while i talk. rather than just focusing on the budget this morning i thought it would be useful to spend most of my time talking about cbo's perspective on the u.s. economic outlook and then i will wrap up by talking about the budget. i know your next session will go in to budget issues in greater detail. i want to try to address five questions. first, most importantly, how will the labor market evolve?

together with our budget and economic outlook released a few weeks ago, we released a separate report on the slow recovery of the labor market. so we'll start with that. then, i'll talk briefly about how rapidly we think potential output will grow, how rapidly we think actual output will grow. what the paths will be for inflation, interest rates, and the labor share of income. and i will wrap up by talking about the resulting projections for the budget. about the labor market. in our view, the slow recovery of the labor market largely reflects slow growth in the demand for goods and services. with a smaller role for structural factors. we think there is considerable slack remaining in the labor market, and specifically, we think the economy is about 6 million jobs short of where it would be if the unemployment rate was backed down to its prerecession level, and the labor force participation rate was back up to where it would be without the current cyclical weakness. so here's the unemployment rate.

graph through late last year. obviously it went up very sharply and has reversed a little more than half of its increase since before the recession. the net increase in the unemployment rate from the end of 2007 to the end of last year was about two percentage points. we think that of that roughly two percentage point net increase about one percentage point can be attributed to cyclical weakness in the demand for goods and services and thus in business' demand for workers. we think the other percentage point roughly can be attributed to struck oural factors of which about half we attribute to stigma and erosion of skills, arising from long-term unemployment, and the other half, to a decrease in the efficiency of matching workers and jobs at least partly from a mismatch in skills and locations. these are, of course, estimates, and rely heavily on our judgment, and on the empirical work we've been able to draw. but we try to quantify these

concepts, and i'll give you another several sets of quantifications as we go along to be concrete about what we think is happening. so with that -- with those structural factors we think that the natural rate of unemployment, the rate that would arise apart from the weakness in demand for goods and services, has gone up from about 5% before the recession to about 6% now. and as we look ahead, we see a natural rate declining, to about 5.25% by the end of the coming decade. which is our normal horizon for budget and economic projections. and we expect the natural rate to decline as those structural factors wane. we think the actual rate of unemployment will fall back down close to but not quite to the natural rate of unemployment. and i will explain that gap in just a moment. so by 2024 we think the unemployment rate will be 5.5%. and that difference of half a percentage point relative to what was the case before the recession, comes in two pieces in our analysis.

the first piece is about a quarter point remaining extra unemployment, remaining at higher natural rate of unemployment, because of the stigma and emotion of skills from long-term unemployment. so we think the natural rate will be about 5.25%. rather than the 5% it was before the recession. and this shows, i think, the very long shadow of having so many people out of work for such a long period of time. we also think there will be about a quarter percentage point gap between the natural rate of unemployment and the actual rate of unemployment. and that reflects what we expect to be a shortfall of output relative to its potential. let me explain that, that's a difference in our projection this year from our projections in past years. if you look back at the gap between actual and potential gdp that we estimate over the last several decades you can see that there is a lot more of that mass below the water line than above it. in other words, the shortfalls in output relative to its potential have been more frequent and larger than the

excesses of output over its potential during economic booms. on that picture is even more striking if one adds, of course, the last set of years of this -- of very long and sustained weakness in the economy. our projection going forward is that the output gap will narrow but will not entirely dissipate and we are simply taking our cue from the historical average. on average, over the past several decades, and indeed overall since the second world war, actual output has been a little below our estimate of potential output on balance. so we're not predicting any particularly cyclical events in the second half of our coming projection. but we're trying to allow for this average gap. okay. the other crucial and at least to us surprising feature of the -- aspect of the labor market over the past few years has been the participation rate in the labor force which as you know has fallen quite

distinctly, and fallen more rapidly since the recession started than the years before that. of the -- there's now been about a 3 percentage point decline in the unemployment rate from before the recession until the end of last year. and of that roughly three percentage point net decline, we attribute about half or 1.5 percentage points to long-term trends, primarily the aging of the population, and the move in the baby boomers in to retirement. another percentage point we attribute to the cyclical weakness in the demand for goods and services and people's choosing to stay out of the labor force, to leave the labor force, because they can't find jobs. because the job prospects are so poor. and we attribute about half a percentage point to discouraged workers who have dropped out of the labor force permanently. some of these folks have gone in to social security's disability insurance program, which a number of people going in has moved up very noticeably in the last few years. others have simply left the labor force to do other things

with their time. but we think that about half a percentage point on the participation rate of the decline can be explained by those folks who we think will not come back in to the labor force. in contrast the people who are out because of the cyclical weakness are people we expect will come back as job prospects improve. so our forecast for the labor force participation rate shows just a gradual downward trend over the next several years. that's the net result of two factors. the cyclical recovery that we expect in the demand for goods and services and thus the demand for workers will pull people back into the labor force, tend to pull up participation rate. but the demographic factors will continue to pull down the participation rate. so over the next fuhr years we think demographic factors will win that battle slightly and the participation will come down a little bit. beyond that point, once the cyclical recovery will be complete in our view, then the demographic factors are the crucial factors, and they push down the participation rate a

little more sharply. another piece of this story, though, that we also talked about in our report, which is the effects of federal fiscal policy. i'll come to that in a moment. so between 2007 and 2024 in our projection, the participation rate in the labor force will have fallen by five percentage points, and of that five percentage point decline, we expect about 3.5 percentage points to owe to the demographic factors. again, primarily the aging of the population, and the retirement of baby boomers. this is just the other side of the story i talk a lot about in terms of the pressures on the federal budget. as people move in to ages where federal benefits are much more generous. we think about a little under half our percentage point of that total five percentage point decline in the participation rate comes from discouraged workers who've left the labor force permanently. and the last about a percentage point we think owes to federal fiscal policy, the larger share of that stems from the

affordable care act and the reduced incentives to work that arise when people with lower income receive a benefit, which is then withdrawn as their income rises. the other part of this is the bracket, real bracket creep in individual income tax, as you know that individual income tax brackets are indexed for inflation, but we expect that real income growth will outpace inflation, and thus people will move gradually into higher tax brackets and thus face higher effective tax rates on their work. so if you put together the unemployment rate and the participation rate you can look at the share of the population that is employed. as you know this fell very markedly during the recession, and has essentially moved sideways since the end of the recession. as we look forward for the next four years, we expect that rate to edge up a little bit. this is, again, the cyclical recovery. in the increase in participation rate and decline in the unemployment rate, they tend to pull up the share of the population that's employed. but meanwhile, the demographic

factors are continuing to weigh on this share of the population. and after the cyclical recovery is complete, as we project, in about four years, then the demographic factors show through and we think the employment population ratio will tend to fall gradually. so that was a quick review of the labor market. let me off on to the other questions i raised. one is how rapidly will potential output grow? and the main point that i'd like to make sheer is to compare the history of the last 60 or so years with our projections for the coming decade. potential gdp grew we estimate by 3.25% over the last 60 years on annual average basis. we think we'll grow only a little over 2% over the coming decade. and nearly all of that slowdown can be explained directly by slower growth of the potential labor force. in the period of historical

average, we did not have the retirement that the baby boomer generation very much and moreover we had a very sharp run-up in women's participation in the labor force. from the '50s really into the late '90s. but that has now crested. and women between the ages of 25 and 54 now participation rate that is gradually falling, much like what the male participation rate of people that age has been doing for a number of decades. so with the waning of that big run-up in the participation rate among women and with the retirement of the baby boom generation we think the potential labor force will grow much more slowly, that also has consequences for the rate of capital accumulation in our view, and leads to much slower growth of potential output. actual output, we think, will catch up almost to potential over the next four years. we think the output gap will be down to just a quarter percent by the end of 2017, but actual output doesn't catch entirely up to potential in our projections

for the reasons i mentioned earlier, which is that over a long, historical period, actual output has averaged a little bit below potential output. so we're looking for, as i said, the output gap to close from about 4% at the end of last year, to about half a percent at the end of 2017 and in subsequent years, gdp growth averages 2.5% a year over the next decade under our projections a little above the rate of growth but potential gdp over that decade because of this period of catch-up. and you can see the catching up here. i should note this line separating the actual and projected falls after 2012 and before 2013 because this figure was taken from our outlook and we completed our economic projections before the bea released its estimate for the fourth quarter so that 2014 is the continuation of that flat segment. we look for gdp growth this year, next year and the year after to be a little above 3%. in each of those years and then

the catch-up period actual output growth proceeds to be in line with the growth of potential gdp. i don't want to skip these other important variables so let me talk a lit about each of them. the inflation rate, as you know, this is pce prices, pce inflation rate has fallen since the recession, has remained the core inflation rate has remained below the federal reserve's objective. we think looking ahead, inflation rate will gradually come back up. towards that objective, and will stay there for the rest of the decade. interest rates, as you know, the ten-year note rate has been moving up on average, since last year. we think it will continue to rise, and we look for the federal reserve to begin raising the funds rate in the second half of next year, second half of 2015. and those rates level out at about 5% for the ten-year rate, and 3.7% for the three-month

treasury bill rate. labor compensation growth has slowed very distinctly since the beginning of the recession. we think this is confirming evidence that substantial slack remains in the labor market. and as a result of that, the labor share of income has fallen, continuing downward trend that we've seen for a number of decades. as we look ahead, we think as the labor market strengthens, the compensation growth will pick up. and the labor share of income will rise. but it will, in this projection, still a decade from now, be a little below its average over the past 30 years. so we think part of what we've seen in the labor share over the last few years is a cyclical phenomenon that will be reversed. but we think the downward trend over the past several decades is a persistent matter that will not go away just when this downturn ends.

so, these economic projections, of course, are the base on which we build our projections of the budget. this picture shows federal deficits, and the few years of surpluses, the deficit has come down very markedly over the past several years. from about $1.4 trillion or nearly 10% of gdp in 2009, to an estimated roughly $500 billion, or about 3% of gdp in 2014 under current law. we think deficit will fall again a bit next year but will then rise. you can see, though, the deficits over the next decade stay close to 3% of gdp. which is essentially their average share of gdp over the past 40 years. but that similarity to the past is worth noting, but also in some ways, masks two important aspects of the budget that will

be very different than they've been in the past. so one of those aspects is the composition of federal spending. in this picture, these bars show social security spending as a share of gdp, 40 years ago, and our estimate for this year under current law, and then our projection for ten years from now. and you can see growth in social security exceeding growth in the economy. so a rising share of gdp being devoted to social security benefits. and that arises, of course, over the next decade from the aging of the population. we project it will be more than one-third more beneficiaries of old age and survivors insurance, ten years from now, than there are today. the major health care programs are raising even more dramatically. that stems from three sources. the first is the aging of the population. which will push up costs in medica medicare, of course, but also in medicaid. second source is rising health care costs per person.

that has been under way for a number of decades. that has slowed recently and our projections take on board that slowdown. but nonetheless we expect health care costs per person in the federal programs and the economy more generally will continue to rise faster than gdp per person. and the third factor here, of course, is the significant expansion of federal subsidies for health insurance under the affordable care act. in sharp contrast with the growth of spending for those programs, all other mandatory spending which basically refers to other benefit programs, we think will be smaller share of gdp over the next decade. than it has -- than it is now, or has -- was 40 years ago. defense spending is shrinking s relative to the size of the economy, given the caps on defense funding that are in current law. and nondefense discretionary spending. everything else the government does except for making interest

payments is also falling as a share of gdp under the caps on funding. if you take three right sets of bars here. everything the government does apart from social security, major health care programs and interest, the entire set of spending will a decade from now be a smaller share of the economy under our projections for current law than any point since at least 1940. so the growth of government spending, as you can see in the last set of bars i put up, stems from the growth in a handful of very large programs. while the rest of the t government's funding is a smaller share of the economy. the other way the future is different from the past is the level of the debt as a share from gdp. as you know, debt has surged upwards over the past half dozen years.

we project the debt will be as plat as a share of gdp for the next three years but then will begin to rise again, and in our longer term projections which we last updated last fall, that increasing debt as a share of the economy continues beyond the decade into future decades. so let me stop right there and see if you have any questions i can answer. >> thanks a lot. >> whatever you're more comfortable with. yes. as we know, we have cards in the audience. we can start with a question that this morning larry made the comment that it has casted a long shadow on the future.

my guess is in your projections, it will be interesting to hear your assumptions of our potential and how it's being estimated in your forecast. >> so relative to the projections of output that we had made in 2007. i wasn't at cbo at the time. but the projections the cbo had in 2007, we have now marked down our projection of outputs by a little more than 7%. this is a point that larry and others have noted. of that reduction of more than 7%, we attribute a little less than 2% directly to the deep recession and slowry coverry. so we think there's a one and three quarter percentage point reduction in output coming from the persistent effects on the lay bar market, particularly the effects of elevated levels of long-term unemployment in pushing people out of work and

discouraging them from looking for work have from the procession and also on productivity. that's 1.75 percentage points. the remainder, more than five percentage points of output comes in our assessment from a reconsideration of various trends that were under way, up to 2007. so it is not directly related to the recession and weak recovery, but it is a reassessment of -- from our perspective, in what the underlying growth rates of key variables in the economy are, and we actually have a report, which i hope will be out by next week, that explains and documents testimony other sources of revision. so we do think there is a long shadow from the recession and the weak recovery. but we also over this period have made a set of other changes in how we view the economy that are not so directly related. they're still, of course,

relevant to how much the economy will grow. so i don't want top minimize them. i want to distinguish them a little bit. >> we have a question. the ratio is down. does this indicate we are back at full employment and why not? >> so, i do not think it indicates we are back at full employment. the number of people looking for jobs real i have to the number of job openings is down from where it was a few years ago but still elevated to where it was in 2007. there are a lot of people who are measured as being unemploymented, seeking work, and we think many others who have left the labor force out of discouragement. but we can and projection will be back in the labor force by

improving job prospects. and as i mentioned before, one confirmed piece of evidence, the view of the labor market, is the behavior of compensation which has increased very slowly over the past several years. justing for inflation, hourly compensation is barely up now from what it was four years ago. and that is, in our judgment, strong sign of the labor market in which weakness of ghademand an important factor. >> how much of the slowdown in health care cost is durable? is that correct? durable? >> so the slowdown in health care costs in the past several years has been very pervasive. it has been in medicare and medicaid and in the private health insurance arena. we were at a long report last year documenting that within medicare it's pervasive. you can see this in payments for

hospital services, in payment for prescription services, in payments for prescription drugs. you can see it in regions of the country that have high health care costs and regions that have low health care costs. you can see it in the cost of patients who have high costs and patient who is have low costs. so it's a thorough going phenomenon. there's been some work outside of cbo on how much of the slowdown in national health care spending can be attributed to the weak economy and how much is left for other factors. and the range of estimated, and in our own analysis of medicare, we could not find a role for the weakness in the academy, although asset value by older americans. in our report, we quantity fy a number that we can do either to the weak economy or to other factors with we quantify. so we think and we talk at some

length in this report of the qualitative sense about structural changes in health care in the country. we think we have seen significant structural changes in the ways i think it's driven partly by realization on the part of health care providers. and to some extent patients that some health care does not necessarily very helpful in prove improving people's health. i think it also comes from a realization in the part of providers and beneficiaries that the cost, the amount of health care spending in the economy is really putting an incredible pressure on other goods and services that we would like to enjoy. and the realization on the part of people, as i said, in the system, that with those pressures of high health care spending they need to look for ways to provide health care more efficiently. so what we have done is to take them down considerably.

so relative to our protections four years ago, around 2020, it's down between 10% and 15%. and we lowered the rate of health care growth a little bit beyond this decade. however, we have not marked down the rate of growth indefinitely to match the slow rate of growth we've seen over the past several years. and when you look back at past experience with health care cost slowdowns, they have in many cases been followed by pickups in health care cost growth. so we think and moreover i would say that for all of the changes that are under way in the health insurance system, both the federal health insurance system and private health insurance, there's still a lot of parts of the system which payments are significantly on a fee for service basis.

so the incentive remains in many cases to do more services, to build more facilities. and in addition there is substantial amount of ongoing work and developing new drugs, new medical procedures, new treatments. so we think some of the underlying drivers of high health care spending will persist. so we've taken, as i said, am substantial signal and marked down our spending with pretty low growth rates over the next several years and then some return to somewhat higher growth rates again, maintaining a lower level of projected health care spending, but not expecting that the very slow growth of the past several years will continue np just that way going forward. in our view, that balances the risks. we look for our projections to be in the middle distribution of possible outcomes. if the slowdown we have seen the past several years really lasts indefinitely, there has been a larger structural change than we realized, then our projections will have turned out to be too

high. if there's a faster rebound because of lickly call factors or because of a stepup in the medical innovation and the desemination of new health care treatments and procedures, thean our forecast may look too low. we think we blangsed those risks. >> we have a couple of questions on employment. measuring structural unemployment. it's a gray area among economist ls. and how do you think youth employment and underemployment will affect economic growth? >> so those are good and hard questions. we've estimated the roles for cyclical and structural employment, looking at a variety of indicators and applying our judgment to that. the relationship between unemployed workers and job

vacancies, one can see a very pronounced shift. that says to us that there are important structural factors. at the same time as i mentioned, we see very weak growth of labor compensation. we see a lot of people looking for work who cannot find jobs. that says to us there are important cyclical factors as well. so by structural factors what we mean is just the people who are out of work for reasons not directly resolved by having stronger demand. stronger aggregate demand. so monetary policy and fiscal policy were more expansionary in some way, that could in principle take away the cyclical unemployment. it would not directly take away the structural unemployment. that's how we think about the differences and it's a term we use to refer to unemployment for structural reasons.

so we are seeing the natural wait ruz about six is the same thing as say ing half the unemployment is structural and half is sicyclical. the elevated rates of unemployment among young people are a very big concern. and we think that a number of people have been discouraged from working enough that they will not come back to the labor force. even as the labor market improves. so some of these are older people who decided to retire earlier than they would have otherwise. and their loss from the labor force is an economic loss for the labor market as a hole. and potentially a very serious social loss. we have other work under way. it's something that we're looking at more closely. >> here's another one on unemployment.

you elevate the unemployment rate based on historical observation. but isn't that because of the historical emphasis -- the historical emphasis on disinflation? does that make sense? okay. >> if you -- so the pattern that i showed, the pattern of output tending to fall short of potential on average, and it's a sloort of picture i could have shown of the actual unemployment rate relative to the natural rate. it tends to be above the natural rate. you can see the pattern if you slice the data a number of different ways. you can see it oefrz each of the past four or five bids cycles. going back 40, 50 years. you can also see it with the post war period. so the way we calibrated the gap was to look at the actual output

and the actual rates of unemployment se from the end of the second world war until today. on average over that period, the actual gdp has been half a percentage point below gdp on average. i don't -- not sure that's the right way to calibrate the gap. it looks over the last 40 years, you would find a gap. that's partly because the last dozen years. in the few business cycles proceeding that, output had fallen short of potential than it had in the first several post world war ii business cycles. so the calibration is unsirn but the pattern is clear enough we need to take it on board. we did this last fall and now in our ten-year projections.

>> we have a question on the probability that you use, does cbo attach a probability to the u.s. recession in the next ten years and what might be the impact on long term assumptions? >> so we do not have an estimated probability of recession at any point in time. the shortfall of actual relative potential could be an economy that does not have a recession. it never quite gets itself to full unemployment. or it could be the outcome that reflects a boom in the recession or various combinations. we're not trying beyond the next few years to project the particular cyclical pattern of the economy. we've never done that before. we're not trying to do that now. there are a lot of combinations of booms and busts that could

get us there. we took this phenomenon on board in our budget last fall. over a long period of time we have output below our potential. that reduces the tax revenue a little bit. so it is a factor making deficits and debt larger than the otherwise would be. >> well, doug, thank you so much for your time and your presentation. i would like to have everybody certainly give a great round of applause for his efforts. >> thank you. thank you. very nice to be here.