Council of Economic Advisers Blog

  • Second Estimate of GDP for the Fourth Quarter of 2014

    Today’s estimate of fourth-quarter economic growth affirms the strong underlying trend of the largest and most persistent components of output, while reflecting downward revisions to more volatile sectors. The combination of personal consumption and business fixed investment—known as private domestic final purchases—grew at a somewhat faster pace than in the third quarter, indicating the same positive trend. Meanwhile, the more volatile and transitory factors that boosted growth in the third quarter subtracted from it in the fourth. Overall, today’s report is consistent with a wide range of indicators showing further labor market strengthening, increasing domestic energy security, continued low health cost growth, and resiliency in the face of slower growth in the global economy. The President’s approach to middle-class economics would build on this growth while helping to ensure that our recovery is widely shared with all American families.


    1. Real gross domestic product (GDP) grew 2.2 percent at an annual rate in the fourth quarter of 2014, according to the second estimate from the Bureau of Economic Analysis. The report reflects especially strong consumption growth, an upward revision to business fixed investment, and continued residential investment increases. At the same time, the large third-quarter increase in Federal defense spending reversed, and inventory investment was revised down (see point 2). Overall, real GDP has risen 2.4 percent versus the fourth quarter of 2013.

  • Taking Action to Unlock the Economic Contributions of Americans-in-Waiting

    The President is continuing to take action, within his legal authority, to fix our broken immigration system.  Today, the Administration announced a final rule that will allow spouses of certain high-skilled workers to contribute to the economy while they wait to obtain lawful permanent residence status (or a “green card”) through their employer. America needs a 21st century immigration system that lives up to our heritage as a nation of laws and a nation of immigrants—and that grows our economy. This change, as well as the other actions announced by the President this past November, will do just that.

    The President’s Council of Economic Advisers (CEA) has also released an updated report on the economic impact of the President’s executive actions, which are now estimated to boost the nation’s GDP by as much as $250 billion over ten years, due in part to increases in the size of the American workforce and to increased innovation from high-skill workers. These actions will also increase the productivity and wages of all American workers, not just immigrants, as evidenced by a large body of academic work cited in the CEA report.

    By finalizing this rule, the Department of Homeland Security (DHS) is taking an important step forward in executing the President’s immigration executive actions and locking in these economic benefits. The changes included in this rule will—for the first time—allow employment authorization for the spouses of certain high-skill workers who are here on H-1B visas, as long as those workers have begun the process of applying for a green card. This rule change, which was recommended in a “We the People” petition to the White House, will empower these spouses to put their own education and skills to work for the country that they and their families now call home.

  • The Effects of Conflicted Investment Advice on Retirement Savings

    Americans’ retirement income is derived from many sources, including Social Security, traditional pensions, employer-based retirement savings plans such as 401(k)s, and Individual Retirement Accounts (IRAs). While this landscape is familiar today, it reflects a dramatic change from the landscape 40 years ago. The share of working Americans covered by traditional pension plans—which offer a guaranteed income stream in retirement—has fallen sharply. Today, most workers participating in a retirement plan at work are covered by a defined contribution plan, such as a 401(k). Importantly, the income available in retirement from a defined contribution plan depends on both the amount initially saved and the return on those savings. The shift from traditional pensions to defined contribution plans raises important policy issues about investment responsibilities and the roles of individual households, employers, and investment advisers in ensuring the retirement security of Americans.

    Defined contribution plans and IRAs are intricately linked, as the overwhelming majority of money flowing into IRAs comes from rollovers from an employer-based retirement plan, not direct IRA contributions. Collectively, more than 40 million American families have savings of more than $7 trillion in IRAs. More than 75 million families have an employer-based retirement plan, own an IRA, or both. Rollovers to IRAs exceeded $300 billion in 2012 and are expected to increase steadily in the coming years. The decision whether to roll over one’s assets into an IRA can be confusing and the set of financial products that can be held in an IRA is vast, including savings accounts, money market accounts, mutual funds, exchange-traded funds, individual stocks and bonds, and annuities. Selecting and managing IRA investments can be a challenging and time-consuming task, frequently one of the most complex financial decisions in a person’s life, and many Americans turn to professional advisers for assistance. However, financial advisers are often compensated through fees and commissions that depend on their clients’ actions. Such fee structures generate acute conflicts of interest: the best recommendation for the saver may not be the best recommendation for the adviser’s bottom line. 

    CEA’s new report The Effects of Conflicted Investment Advice on Retirement Savings examines the evidence on the cost of conflicted investment advice and its effects on Americans’ retirement savings, focusing on IRAs. Investment losses due to conflicted advice result from the incentives conflicted payments generate for financial advisers to steer savers into products or investment strategies that provide larger payments to the adviser but are not necessarily the best choice for the saver.

    CEA’s survey of the literature finds that:

    • Conflicted advice leads to lower investment returns. Savers receiving conflicted advice earn returns roughly 1 percentage point lower each year (for example, conflicted advice reduces what would be a 6 percent return to a 5 percent return).
    • An estimated $1.7 trillion of IRA assets are invested in products that generally provide payments that generate conflicts of interest. Thus, we estimate the aggregate annual cost of conflicted advice is about $17 billion each year.
    • A retiree who receives conflicted advice when rolling over a 401(k) balance to an IRA at retirement will lose an estimated 12 percent of the value of his or her savings if drawn down over 30 years. If a retiree receiving conflicted advice takes withdrawals at the rate possible absent conflicted advice, his or her savings would run out more than 5 years earlier.
    • The average IRA rollover for individuals 55 to 64 in 2012 was more than $100,000; losing 12 percent from conflicted advice has the same effect on feasible future withdrawals as if $12,000 was lost in the transfer.

    The conclusions of the report are based on a careful review of the relevant academic literature but, as with any such analysis, are subject to uncertainty. However, this uncertainty should not mask the essential finding of this report: conflicted advice leads to large and economically meaningful costs for Americans’ retirement savings. Even a far more conservative estimate of the investment losses due to conflicted advice, such as half of a percentage point, would indicate annual losses of more than $8 billion. On the other hand, if conflicted advice affects a larger portion of IRA assets than the $1.7 trillion considered here—or if the estimate were extended to other forms of retirement savings—the total annual cost would exceed $17 billion.

  • The 2015 Economic Report of the President

    This morning, the Council of Economic Advisers released the 69th-annual Economic Report of the President, which reviews the United States’ accelerating recovery and ways to further support middle-class families as the recovery continues. The economy is recovering from the Great Recession at an increasing pace, growing at an annual rate of 2.8 percent over the past two years, compared with 2.1 percent over the first three-and-a-half years of the recovery. The speed-up is especially clear in the labor market, where job gains have reached a pace not seen since the 1990s. But it is essential that a broad range of households benefit from the United States’ resurgent growth, so this year’s Report focuses on factors that are important to middle-class incomes: productivity, labor force participation, and income inequality. The President’s approach to economic policies, what he calls “middle-class economics,” aims to improve each of these long-standing elements and ensure that Americans of all income levels share in the accelerating recovery.

    Below are some highlights from each of the seven chapters in this year’s Report:

    Chapter 1 reviews the progress of the recovery and explores the long-term factors that drive middle-class incomes. The U.S. recovery has accelerated in terms of both output and employment, with job growth rising 30 percent faster in 2014 than in 2013 (Figure 1-2). Indeed, the unemployment rate has fallen to levels that, as recently as 2013, were not expected until after 2017. These labor market improvements have begun to translate into wage gains for middle-class workers, but nevertheless, this recent progress cannot make up for decades of sub-par middle-class income growth. The chapter provides historical and international context for middle-class income growth and the three key factors that influence it: productivity growth, changes in labor force participation, and income inequality. The increasing strength of our current recovery provides an opportunity to address these long-standing challenges, and the President supports a wide range of policies, detailed in this Report, that will strengthen all three key factors.

  • The Economics of Big Data and Differential Pricing

    This morning, the White House released an update to the big data working group’s May 2014 report on big data, describing progress in implementing the working group’s recommendations throughout the government. As part of that process, the Council of Economic Advisers released a new study on big data and differential pricing.

    Differential pricing is the practice of charging different prices to different customers. Economic textbooks typically refer to this as “price discrimination.” Everyday examples include discounts for senior citizens at the movie-theater and higher priced tickets for last minute business travelers.

    Economists have studied differential pricing for many years, and while big data seems poised to revolutionize pricing in practice, it has not altered the underlying principles.  Perhaps surprisingly, those principles suggest that differential pricing is often good for both firms and their customers. When prices reflect a buyer’s ability to pay, sellers can often serve customers who would otherwise get priced out of the market, as with need-based financial aid for college students. Price differences can also reflect the cost or risk of serving different customers, which can discourage inappropriate risk-taking and expand the size of the market. 

    The benefits of differential pricing indicate that it can play an important positive role in the overall economy. However, our report also explains how discriminatory pricing can pose difficult trade-offs and present serious concerns about fairness, especially when consumers are unaware of how sellers are using information about them, or when pricing is based on factors outside of individuals’ control. One way to limit to unfair or inaccurate applications of big data in this context is to give consumers increased visibility into the types of information that companies collect, and more control over how it is used, as proposed in the President’s Consumer Privacy Bill of Rights.

    Big data allows companies to collect more information about customers and use it to create new kinds of measures, raising the likelihood differential pricing will become more common and more personalized over time. Our review of differential pricing online revealed that companies are presently experimenting with three broad pricing strategies: (1) experiments that randomly manipulate prices to learn about demand; (2) efforts to steer consumers towards particular products without altering their prices; and (3) using big data to customize prices to individual buyers. Research on the prevalence of these pricing practices suggests that experiments and steering are common at some web sites, while cases of personalized pricing remain limited. Nevertheless, there is some evidence that personalized pricing could prove very profitable, providing strong incentives for companies to continue experimenting with these tools.

    Our report also finds evidence that big data and related technologies can empower individual buyers. In the online environment, for example, many Internet browsers have privacy settings that allow users to control their personal information. Buyers can also use tools like price tracking and comparison web sites, or even a simple search engine, to seek out the best available price. For example, the chart below shows the relative frequency of Google searches on the term “best price” and how it is strongly correlated with the holiday shopping season. Partly because of these tools, and the competition they foster, Americans are using the Internet to shop in rapidly growing numbers.

    Differential pricing in high-stakes transactions such as employment, insurance or credit provision can raise substantial concerns regarding privacy, data quality and fairness. In these settings, big data may facilitate discriminatory pricing strategies that target consumers based on factors outside their own control, or run afoul of antidiscrimination provisions in existing laws such as the Fair Credit Reporting Act or Civil Rights Act. Here too, however, big data can be a tool that works for consumers. For example, where the law protects specific groups against discriminatory pricing, big data can be used to conduct audits for disparate impact that help detect problems, both before and perhaps after a discriminatory algorithm is used on real consumers.

    Given the speed at which both the technology and business practices are evolving, the CEA report on Big Data and Differential Pricing provides only a first look at a set of issues that will keep economists, engineers and policy makers busy for many years. The long-run challenge in this area is to promote the use of big data and differential pricing where they help to expand markets, while preventing unfair discrimination based on sensitive information that consumers may not understand they have revealed.

  • The Employment Situation in January

    With today’s strong employment report, we have now seen eleven straight months of job gains above 200,000—the first time that has happened in nearly two decades. We are also seeing nominal wage growth exceed the latest inflation readings, but additional steps are still needed to overcome the long-standing challenges affecting wages and family incomes. America is poised for another strong year, and so it is critical to avoid brinksmanship and unnecessary austerity, and instead to make investments in our future growth. That’s why earlier this week the President released a budget proposal that will help hardworking families make ends meet, while boosting America’s productivity and giving workers the tools they need to secure well-paying jobs in the 21st-century global economy.


    1. The private sector has added 11.8 million jobs over 59 straight months of job growth, extending the longest streak on record. Today we learned that total nonfarm payroll employment rose by 257,000 in January due to a 267,000 increase in private-sector employment. Private-sector job growth was revised up for November and December by a combined 149,000 jobs, so that over the past twelve months, private employment has risen by 3.1 million, the largest twelve-month gain since 1998.