Printable Version

The President's Economic Reforms

Tuesday, December 19, 2006

An Address to the Center for National Policy by Treasury Secretary John Snow

October 26, 2005

[As prepared for delivery]

America has the most flexible, resilient and dynamic economy in the world. I want to talk to you today about the President's positive economic reform agenda, designed to ensure that America continues its premier economic position in the years ahead.

I appreciate the work you are doing at the Center for National Policy to encourage innovative thinking and ensure that the best ideas rise to the top of the national debate. What you do helps to ensure that those ideas become the basis for the policies that then benefit the citizens of this great country -- and that's an important contribution.

Today the U.S. economy is the envy of the world. We have been through an absolutely remarkable quarter century of growth and prosperity with rising standards of living for our citizens and, importantly, interrupted by only two brief and shallow recessions. This has occurred despite the fact that the US economy has been subject over that period to a whole series of jolts and shocks:


Despite all of this, the American economy has rolled along and absorbed the blows and moved to higher levels of output and per capital income without a financial crisis. Our economy has become remarkably flexible, adaptive and responsive with internal shock absorbers that allow us to take external blows, adjust and keep moving forward.

The question is: How has this come about?  What made this possible? Chairman Greenspan, Ben Bernanke and others point to the remarkable resiliency and flexibility of the American economy, but how did our economy become so flexible and resilient? The American economy wasn't always so flexible and adaptive.

The answer lies in actions taken decades ago to move large parts of the American economy out from under government controls and to put in place a policy framework that made sure that new and emerging industries -- growth industries -- responded to the marketplace, not government.  It is important that government continuously review the obstacles that get in the way of the economy's performance, things that make the economy rigid, inflexible and incapable of changing and adapting.

Thirty years ago I was privileged to serve in another Republican administration under another far-sighted President who recognized the need for continuous reform. That President, Gerald Ford, ushered in the modern era of deregulation and I found myself at the Department of Transportation making the case for removing regulation from various modes of transportation - railroads, motor carriers, barge lines, passenger airlines, air freight and so on. What we started under President Ford came to fruition under President Carter to the great credit of both men.

But the deregulation movement went way beyond transportation and has included major sectors of the American economy - communication, electricity and financial services to name three key areas. Spurred on by this new deregulated environment, the American economy responded in an extraordinary way.  Nowhere was this more evident than in the financial markets, where today we see a vast array of new products facilitating the whole disintermediation process, moving capital much more efficiently from savers to investors, and providing a whole array of instruments to hedge risk. The developments in financial service markets are extraordinary. Securitization in its many forms, the many developments in the home mortgage market, the development of hedge funds, derivative and hedge devices, credit swaps and credit derivatives, are just a few examples.

Today, we are reaping real benefits from the deregulation reforms. Consumers have far lower prices and far greater choices. Likewise, 30 years from now, our children and grandchildren stand to enjoy a higher standard of living, if we can capitalize on the President's leadership and advance his bold and forward-looking economic reform agenda.

Today I'd like to tie together four broad areas of economic reforms that will set U.S. workers and businesses on a path to compete and win in a fiercely competitive global economy.

First, we are fighting for lower, simpler taxes because we appreciate that lower taxes spur the engine of innovation and entrepreneurship that drives our economy and creates jobs, and ultimately leads to higher government revenues. But low taxes must go hand in hand with fiscal discipline, because excessive government spending creates a burden on the economy, and robs Americans of the opportunity to use their own money as they best see fit. Furthermore, the burden of taxation that is too high and too complicated reduces our ability to compete.

Second, we are working to improve health and retirement security for American workers and retirees, because our citizens should have the opportunity for peace of mind through all phases of life.

Third, we seek to maintain a vibrant and strong financial sector, because it is the very underpinning of a strong and growing economy. Our financial markets are the gold standard for safety and soundness, and the deepest and most liquid in the world. We must ensure that America remains the best place in the world for people to put their money.

And, finally, we embrace trade and open markets because they will produce rising living standards for us and a more secure world.

I'd like to give a little more detail on each of these key reforms, beginning with fiscal discipline and taxes.

Fiscal Discipline and Low Taxes

Low taxes and a strong government balance sheet are not mutually exclusive.  The two go hand in hand. 

When the executive and legislative branches look at the impact of the federal budget on the economy we should be guided by the President's message that tax dollars must be spent wisely, or not at all.

This is a difficult job, as there are clearly legitimate needs, particularly in the wake of recent devastating natural disasters, and the need to protect the homeland. But there can be no doubt that there are limits in terms of the impact of government budgets on the strength of our economy. Deficits, while understandable in current circumstances, are nonetheless unwelcome and should be avoided. Excessive deficit spending can lead to higher interest rates, and slower growth.

 Fiscal responsibility gives us a competitive edge, and that is very much on the minds of Administration leaders as we look at our budgets to tightly control spending. That is why we are encouraging efforts in Congress as we speak to cut excessive spending. Those efforts are to be applauded.

The respect for taxpayers dollars, let me add, must be exercised both on the spending end and the collection end. President Bush pushed Congress to give Americans taxcuts when our economy was struggling, and the economic results have been outstanding - strong GDP growth and job creation. Our citizens, and therefore our economy, responded in a fundamental way to a lighter tax burden. And the result of their efforts has increased the revenues flowing to the federal government. Lower tax rates lead to economic growth, which produces more government revenues. That is why it would be exactly the wrong time, as some have proposed, to raise taxes. The American people and the economy would likely respond in kind, with GDP and job losses. I don't mean to belabor the basic principles of economics, but rather to emphasize the Administration's commitment to and appreciation of those principles, and the irrefutable results.

The collection of revenues not only means the amount, but also the method of collection, for its level of complexity actually acts like an additional tax, taking billions of dollars out of the economy. American taxpayers and businesses in fact spend an estimated $130 billion dollars in lost time and money trying to comply with our increasingly unwieldy tax code. That's $130 billion in resources that could be used to create jobs, invest in new business, or spur consumer spending. The $130 billion burden our tax code places on the American people is a drag on economic growth and our international competitiveness as well as simply being an unnecessary weight for Americans to bear

Next Tuesday, the President's Panel on Tax Reform will release its report, containing both an analysis of the current tax code and two suggested structures for a new code that is simpler, fairer and encourages economic growth. I look forward to receiving that report, evaluating the options it presents, and later making a recommendation to the President on fundamental tax reform.

Spending control, combined with lower tax rates, and a simpler, more pro-growth tax code are a potent reform recipe for jobs, growth, and higher incomes for future generations of Americans. 

Taxation and spending, and their relationship to the health of our economy, also lie at the heart of another set of reforms that the Administration is dedicated to: greater security for the health and retirement needs of Americans.

Health and Retirement Security

As America's society ages, the President has rightly been in the forefront of reform to increase the health and retirement security for America's workers and retirees. You know the math-you've heard me and the President talk about before. As the baby boomers enter retirement, the combination of rising cost of health care costs, and the declining number of workers to retirees, both stand to swamp not only the federal budget, but also sap our national income. Well-intentioned policies of the past are already raising the cost and reducing the availability of health insurance, and if private pension reform is not enacted - and it must be done right - pension systems that workers have grown to rely on will leave millions at risk. And we must save Social Security, so that our children and grandchildren have the foundation of a secure retirement that so many now enjoy.

Some significant reform of health care policy has already been achieved - namely the advent of Health Savings Accounts and legal reform that will help tame the rising cost of health care - but there is much more to be done. The Administration wants to continue to empower consumers to make their own choices, inserting competitiveness into the health care marketplace that is sorely lacking today. Individuals and small groups - like the employees of small businesses - have been ill served by the current system and reforms must address their needs first. This would include allowing small businesses and civic and community organizations to band together to negotiate lower-priced health insurance for their employees through Association Health Plans (AHPs) and providing a tax credit for contributions to the HSAs of small business employees.

When discussing small business and health care, it is important to note that addressing their needs go far beyond a noble effort to help the "little guy." Because small business is actually the engine of our incredible economy. To them we owe the majority of new job creation and American innovation. When small business loses its competitive edge, America loses its edge.

A small business that enjoys success will grow, and it will increasingly offer greater benefits to its employees... like pension plans. This is a positive occurrence, but in recent years the flaws in the pension system, and the federal government structure that protects workers, have been revealed. Reform in this area must be thoughtful and deliberate, but not put off for another day. President Bush has proposed a comprehensive pension reform to ensure that companies' promises to their workers will not be broken in the future. Central to the proposed reform is better, more market-sensitive accounting, which will ensure that corporations actually put aside the funds needed to make good on their pension promises. Other key measures involve an increase in premiums paid to the Pension Benefit Guaranty Corporation (to strengthen the PBGC's finances and to reflect market insurance rates), new transparency requirements (so that workers will know if their employers are making good on their obligations), and restrictions on the ability of firms with underfunded plans to make new promises to workers. These commonsense measures for defined benefit pensions will help to strengthen an important pillar of our retirement system, company-based pensions.

Another critical pillar of our retirement system is also in serious need of reform. As all of you well know, Social Security is on a financially unsustainable path. Reforming the system will address some critical long-term economic issues. It will help address the looming unfunded obligations which threaten the fiscal outlook.  Another key to reform is stopping the practice of the government writing itself IOUs, while spending dollars intended for Social Security on unrelated programs. This has to stop.

That's why the President wants to let younger workers put their Social Security dollars in personal accounts - the ultimate "lock box" for their hard-earned retirement dollars.

We also need to make the program solvent. Progressive benefit growth, which would bring the program about 70 percent of the way to solvency, is another important element of the President's proposed changes. It would mean that the lowest income seniors would have the fastest-growing benefits while benefits for those who are more well off grow more slowly, with protection from inflation.

Americans rightly expect rising incomes in their working years, and a safe and secure retirement. Health, pension and Social Security reform are all essential reforms to address that concern. Without addressing their problems and embracing fiscally responsible solutions, each of these future risks carries the potential to deeply wound our economy and our ability to compete. 

Strong and Secure Financial Markets

The very foundation of a strong and growing economy is a vibrant and healthy financial system-one that efficiently allocates savings to the highest and best investment opportunities. This "disintermediation" process lies at the heart of economic growth. A healthy market must also have plenty of "shock absorbers" like futures markets, derivatives, and hedge funds, to build deep, liquid capital markets that spread risk and therefore will help to cushion the blows of economic shocks.

While my general belief, and a guiding principle for this Administration, is that our economy does its competitive best when government leaves it alone, there is also of course a need to look for and punish those who are abusing the system and/or outright committing fraud.  Such behavior is a direct assault on our way of organizing economic activity.  Fraud is totally antithetical to our system, which simply cannot function unless strong anti-fraud rules are enforced.

Revelations of widespread misconduct that rocked the investment world in the spring of 2002 led to the need for fairly immediate reforms on that front. The scandals threatened to destroy this nation's confidence in corporate leadership and in those entrusted to safeguard our system of corporate capitalism, so considering the context in which it came about, Sarbanes-Oxley actually was in most respects quite a measured response. Despite its celebrated status as the most far-reaching capital market legislation since the creation of the SEC in the thirties, the fact is it essentially reaffirms established norms and codes of corporate governance, albeit with criminal penalties. I know the President was proud to sign this essential reform legislation.

More often than not, reaffirming those norms and codes - versus over-policing or burdening capital markets - is going to be the course of action that will protect, not harm, our economy.

Our national system of housing finance is a critical portion of our financial markets, so I want to speak briefly about reforms that we believe are necessary in that area as well.

Our housing finance system needs to remain strong and healthy so that it can continue to make mortgage credit available and provide financing opportunities for new homeowners. The Administration has therefore proposed reforms that are intended to ensure greater regulatory oversight, enhanced market discipline, and appropriate capital requirements for Government Sponsored Enterprises (GSEs). As we consider these reforms, we are guided by two core objectives: the need for a sound and resilient financial system and increased opportunities for home ownership, especially for less advantaged Americans.

In light of the recent events at the GSEs, the need for meaningful reform has become even more clear.  As we originally outlined in detail in 2003, the regulator for the GSEs should have powers comparable in scope and force to those of other world-class financial supervisors and fully sufficient to carry out the agency's mandate. The regulator must have clear general regulatory, supervisory, and enforcement powers with respect to the GSEs. These powers must include the authority to set both minimum capital standards and risk-based capital standards; the power to assess the entities for independent funding outside of the appropriations process; and the ability to place a failed GSE in receivership.

In order to protect against the systemic risk posed by the housing GSEs' mortgage investment business, the Administration also recommends that limitations be placed on the size of the housing GSEs' retained mortgage investment portfolios. After the appropriate phase-in period, given the overall advances in securitization, the large amount of data available on mortgages, and the increased sophistication of mortgage investors, we believe that our capital markets will readily adjust without any loss in mortgage availability.

Our primary goals in developing our GSE reform proposal are to promote the strength and resilience of our housing finance markets, lessen the potential for systemic risk, and continue our progress in meeting the mortgage credit needs of all our Nation's homebuyers. To accomplish those purposes, the fundamental elements of reform that the Administration has proposed are essential.

The Importance of Trade and Open Markets

So far I've primarily addressed what we can do at home to help us compete abroad. But what about our active engagement with global markets, with our trading partners and those with whom we hope to trade? Simply put, we do not operate as an isolated country, and we must always resist inclinations to do so. History tells us that economic isolationism would be a recipe for failure. An open economy that embraces trade and open markets will be a successful one, period.

When discussing the benefits of international trade, I am reminded of a speech that Tony Blair gave where he said that "The pace of change can either overwhelm us, or make our lives better and our country stronger. What we can't do is pretend it is not happening."

He went on to chide those who say that we ought to stop and debate this phenomenon. He said, "You might as well debate whether autumn should follow summer" and then pointed out that the emerging growing economies are not debating it. They are seizing it and all of its possibilities and opportunities.

China, India, Brazil and our close neighbor, Mexico are among the countries that are doing so, which is why they are the countries on my schedule of international travel this year. In Brazil and China I have witnessed this year the great power of good economic reforms for the people of those countries as well as for the citizens of the nations with whom they trade. I look forward to similar visits to India and Mexico before the year is over.

I'm proud to say that this Administration has embraced, and continues to pursue, free trade agreements. The President put the purpose of free trade well on the day he signed CAFTA: "[T]o keep our economy growing and creating jobs, we need to open markets for American products overseas. All of us understand that strengthening our economic ties with our democratic neighbors is vital to America's economic and national security interests. And all of us understand that by strengthening ties with democracies in our hemisphere, we are advancing the stability that comes from freedom."

A vibrant global economy is, indeed, in all of our interests. And making the benefits of growth available to each and every one of our countries depends on free trade. Tariffs, subsidies and trade barriers are unnecessary impediments to growth. President Bush laid out a very clear message on trade in September at the United Nations: A successful conclusion of the Doha Round will bring benefits for every country - and particularly for the developing world. Trade in services in particular can greatly benefit developing countries, providing knowledge and infrastructure to facilitate economic growth and create jobs. This is especially true in the case of financial services. An efficient, well-regulated financial sector is a key element for achieving economic growth and stability in developing countries, and we are deeply involved in advancing that agenda at the Treasury, in partnership with my counterparts in the G7 and G20 nations.
 

Bold and Forward Looking Reforms

Time doesn't allow me to address other key areas of reform that President Bush is advancing including education, immigration and energy policy.  In all of these areas the President has shown strong leadership for reform. 

In the tradition of Presidents Theodore Roosevelt and Ronald Reagan, President Bush has advanced a bold and far-reaching reform agenda for America.

By tying together this bold and forward looking economic reform agenda, all aimed at a dynamic, resilient and competitive American economy, I hope to have underscored the basic fact that President Bush understands that responsible government can't stand still. It must move forward and address the obstacles and risks to rising growth and prosperity.

Certainly this does not mean that it has to grow, or that we can spend our way through every problem. Just the opposite, in fact. Government needs to adjust, shift or simply get out of the way in most cases. And that type of reform is the most challenging of all. But we embrace it and we will not grow weary of pursuing it.

Thank you for having me here today.

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