Thank you. We come together at a special moment for the American economy. Times in many ways are better than they have been in a very long time. If we as a country families, businesses and government are to take maximum advantage of this moment, it is crucial to understand how we got here, not to take today's good fortune for granted, and to make prudent choices for our economic future.
I want to focus today on the strategy for maximizing the growth in the economic well being of Americans, because this has to be the primary aim of any Treasury Department. The performance of our economy is crucial because it determines not only the earnings of our citizens and the profits of our businesses, but a range of other national goals: from, for example, reducing crime to maintaining a strong national defense.
Clearly the performance of the American economy cannot be separated from the performance of the global economy. As I have often stressed, the right international economic policy is a critical component of our overall economic strategy. But with the domestic choices we face in the next several months I shall concentrate today on our domestic economic strategy.
I. A Momentous Change
I think it is fair to say that economic discussions at the beginning of the decade did not even remotely foresee the situation today.
- Today's forecasting debates are about how low unemployment will go and how fast productivity will grow not about how high unemployment would remain and how long the productivity slowdown would last.
- Today's question is how to handle projected Federal budget surpluses not how to prevent budget deficits from spiraling completely out of control. And financial experts worry about too few Treasury bonds for liquidity, not about too many bonds crowding out other issuers.
- Today there is a concern that there may be cases in which markets are overvaluing distant revenue prospects. A decade ago the consensus was that financial markets were forcing dangerous short termism on American business.
- Today the world looks at the United States and worries whether it will use its global power well, not whether it will be overtaken by its major industrial trading partners.
These new developments reflect an economy that is in many ways new and also a new national economic strategy.
Dynamism and flexibility
It cannot be an accident that communism, planning ministries throughout the developing world and large corporations run by command and control all ran into a brick wall in the same decade and had to be restructured. New technologies have forced profound changes in the way economic life is organized putting a higher premium on flexibility and greater penalties on attempts at centralized coordination.
In this new environment, Americas traditions of flexibility and market competition have served us well.
- They helped to ensure that US companies were forced early to undergo painful re-engineering, permitting them to emerge faster and stronger in their fields.
- They have helped to channel funds to new industries through a venture capital sector in which entrepreneurs may raise their first $100 million before buying their first suits.
- They have helped to create a post-industrial economy where Americans are leaders in almost every area: from fast food to accounting, from management consulting to retailing, from higher education to mass entertainment.
A new macro-economic paradigm
These factors have helped to build an economy that is new in many ways. But a new economy could not emerge except on a foundation of old virtue. Our economic success has been made possible by President Clinton and Vice President Gore's determination to forge a new national consensus in support of sound macroeconomic policies.
- Respect for the independence of the Federal Reserve has enhanced its credibility and so helped us as a nation to achieve price stability and maximum output.
- Consistently recognizing that a strong currency is in our national interest has helped us to hold down inflationary pressures and capital costs.
- Most important of all, the Clinton-Gore Administration has established a new paradigm for the management of our nations budget, with enormous cumulative benefits for our economy and our citizens.
It has become a commonplace to remark on how exceptional todays 4.2 percent unemployment rate is relative to any expectation at the beginning of the decade. It is no less remarkable that today, after 8.5 years of expansion, long term interest rates are around 2 percentage points lower than they were at its start.
This has much to do with why the expansion has been investment led, capacity creating and long lived, with capacity utilization even today not far from historic norms. Real investment as a share of GNP is today higher than it has been at any time in the postwar period. Along with the opportunities created by information technology, this strength can be traced to the dramatic changes we have seen in our budget policies.
Economic doctrine must adapt to economic experience. The Keynesian idea that budget deficits can stimulate demand and increase output in an economy with high unemployment producing well short of its capacity in an environment of excess savings and no threat of inflation does capture an important truth. But at the same time, it has become clear that in an economy plagued by low savings, where output is not chronically constrained by demand, systemic budget deficits raise capital costs and so retard growth and lower employment.
Structural deficit policies give rise to vicious circles. With underlying deficits and rising debts and interest burdens, deficits tend to lead to rising interest rates and so to falling investment and slowing growth, which reduce revenues further, increase deficits and start the cycle again. This process leads to steadily decreasing national saving and deteriorating economic performance what we saw in the late 1980s and early 1990s.
On the other hand, surpluses give rise to a kind of virtuous circle of declining debt, increasing national savings, lower interest rates, and rising investment and growth leading to further fiscal improvement and a continuation of the cycle.
While there are many other factors, and difficult issues of causation, it bears emphasis that the strongest years of post-World War II economic performance the period up to the mid-1970s coincided with a falling ratio of debt to GDP and high national savings. By contrast, the weakest years from the mid-1970s until the early 1990s were ones in which the debt ratio was on the rise.
These considerations have shaped the Clinton-Gore Administrations economic policy choices: with its focus on deficit reduction and more recently, on achieving a continuing surplus. Indeed, American savers have had to absorb more than $1.7 trillion less in government debt since 1993 than they would have if the budget projections made in that year had been realized. That is more than $1.7 trillion dollars available for new investment in Americas future.
While projections always need to be treated with great care, the complete elimination of our $3.5 trillion national debt is now within prospect over the next two decades. That is, it is in prospect if we make the right choices today.
II. Domestic Economic Priorities
History is important for the understanding that it affords but equally for the humility that it imposes. Just as the world in 1999 looks very different from the world of 1989, so too did things look very different in 1989 than in 1979 and so, just as surely, will 2009 look very different from today.
We cannot know what our economy will look like a decade hence. What we do know is that we are now enjoying a very prosperous moment. The reality for all of us for companies, for households and for government is that we cannot be complacent or take these good times for granted. Indeed, complacency can itself be a threat to good times if it leads to excessive borrowing or lending, unsustainable spending plans, or a failure on the part of consumers, businesses or government to recognize the uncertainties that are inevitable in economic life.
This suggests some core priorities for economic policy:
1. Drawing Down Debt
Nothing is more important to maximize the prospect for continued expansion than continuing the fiscal strategy that brought us to this point by assuring that the lions share of projected unified surpluses are used to pay down debt.
Paying down the debt supports long-term growth and prosperity in four ways:
- First, it maintains the virtuous cycle we have worked so hard to achieve, providing for high rates of investment and capacity growth that maximize productivity growth and reduce inflationary pressure.
- Second, by raising the pool of domestic savings, paying down debt avoids the painful choice we would otherwise face between reducing domestic investment and increasing even further our reliance on foreign finance and the trade imbalance associated with that reliance.
- Third, debt reduction is tantamount to a tax cut for families, because it reduces future interest and principal repayments that the government would otherwise have to make. Federal interest costs in 1999 will be close to $230 billion: more than the Federal government will spend on Medicare, and five times as much as it will spend on education and training. Reduced debt also means lower interest rates, which in turn means lower borrowing costs for American families: a one percentage point reduction in long-term interest rates translates into more than $250 billion in mortgage savings over the next decade alone.
- Fourth, paying down debt re-loads the fiscal cannon, preparing the government to respond to future contingencies such as recessions or threats from overseas. And, as recent economic history around the world reminds us, an improved fiscal position reduces a countrys vulnerability to changes in international market sentiment. A strategy of paying down debt also reduces our vulnerability in one final sense: it assures our fiscal health even if, as has happened too often in the past, fiscal projections must be substantially revsed.
For all these reasons, the most constructive thing that we can do as budgets are debated is to assure that the currently projected surpluses are not dissipated by new tax or spending commitments.
As President Clinton has recognized, we as a country can do much to assure our future fiscal health by making sure that more than $2 trillion that we will accumulate in the Social Security and Medicare trust funds over the next 10 years goes to promote net reductions in Federal debt that are not offset elsewhere, and that as much as possible that money helps to strengthen the commitment that these programs represent to our seniors.
2. Setting Fiscal Priorities
Paying down debt has to be our first fiscal priority because it is the best fiscal action that government can take to help keep the economy driving forward. But even having achieved a framework in which debt can be expected to remain on a downward path, we face crucial choices on taxes and expenditures choices that need to be addressed to a future in which we cannot take today's prosperity for granted.
That is why we believe that the Presidents approach is the right one and why we have such grave concerns about the approach that is reflected in the budget proposals that were passed by the Congressional majority in the summer.
The right choices for an uncertain future are:
- Meeting our long-term commitments by ensuring the long-term solvency of Medicare and Social Security. No prudent company would believe that a health care program that was the right one for its employees 34 years ago was likely to be the right one for them today or that an unfunded, unreformed pension system was the right one to carry the company through to a period of sharply rising retirement rates.
by ensuring the long-term solvency of Medicare and Social Security. No prudent company would believe that a health care program that was the right one for its employees 34 years ago was likely to be the right one for them today or that an unfunded, unreformed pension system was the right one to carry the company through to a period of sharply rising retirement rates. by ensuring for the continued adequacy of everything from the National Parks to the Secret Service, at a time when the federal workforce is today 14 percent or nearly 700,000 smaller today than it was in 1993. The Treasury department alone now has 9,000 fewer employees than in 1993. in science and basic technology, in a modern defense system and, above all in education. At a time of unprecedented national prosperity it is wrong that there are schools where children have to eat lunch in shifts beginning at 9 am, and where the electricity system is too old for children safely to plug in a classroom computer.
- Maintaining our core public services by ensuring for the continued adequacy of everything from the National Parks to the Secret Service, at a time when the federal workforce is today 14 percent or nearly 700,000 smaller today than it was in 1993. The Treasury department alone now has 9,000 fewer employees than in 1993.
- Making limited strategic public investments in a 21 st Century America in science and basic technology, in a modern defense system and, above all in education. At a time of unprecedented national prosperity it is wrong that there are schools where children have to eat lunch in shifts beginning at 9 am, and where the electricity system is too old for children safely to plug in a classroom computer.
Logic and history both demonstrate that budget surpluses premised on unrealistic expenditure plans simply will lead to budget deficits as unfeasible spending cuts fail to materialize. President Clintons budget framework lays out a prudent approach for addressing the nations economic priorities. And it does so in a context of continuing the decline in the size of government that we have overseen since 1993.
Within the budget framework that President Clinton proposes, domestic discretionary spending will be reduced by around 10 percent in real terms by the end of ten years given conservative inflation projections. This is hardly the revival of big government. It is a continuation of the credible and responsible budgeting that has been the hallmark of the past 7.5 years.
The place for tax reductions
What about tax reductions? The Administrations framework shows how it is possible to: pay down debt on a large scale, thereby reducing future interest costs; strengthen Social Security and Medicare; and provide for the maintenance of basic government services all while providing for targeted tax cuts that help families meet basic needs, from child care to caring for an aging parent. And at a time when our nations personal savings rate is negative and 70 million American lack access to tax favored saving, making savings preferences more widely available, such as through the President's Universal Savings Account Proposal, should be top priority.
The President has made clear that he will veto the tax cut that passed the Congress in the summer. Large tax cuts would deny the nation the full benefits of debt reduction that I have described and, depending on economic circumstances, they could force deep and dangerous cuts in core government or Social Security and Medicare. Indeed, projections that assume robust spending on national defense and separation of the Social Security Trust Fund suggest that the tax cuts on the scale envisaged by the Congressional majority could lead to real cuts in non-defense domestic discretionary spending of close to fifty percent by the end of ten years.
Is agreement possible? Yes, if all sides can agree to put what we all know are first things first: that we assure that our debt is paid down, that Social Security and Medicare are protected, and that core government is provided for.
If we can accept these things, we can then reach agreement on a tax cut that fits into the framework. This would be best. But the countrys interests would be far better served by paying down debt this year and not making future commitments than by making unbalanced and nearly irreversible commitments to either large scale new spending or tax cuts outside of an agreed framework.
3. Building the Right Market Environment
The right fiscal and monetary policies can lift a large burden from our economy. But without additional public actions to support the market system as it evolves, we will not be able to realize our full economic potential.
We have in many ways moved to a new paradigm of public policy in recent years: one based on supporting not supplanting the market, on using neither the invisible hand nor the heavy hand, but the helping hand of government. This approach maximizes the results our economy delivers for American families.
Let me illustrate this new strategy with three examples of areas whether Treasury has been active and will need to be more active in the future:
- At a time when information technology is transforming our economy, we are confronting 21 st century market challenges with the right kind of regulation regulation that seeks to harness market forces not to distort them. That is the approach we should take to modernizing our financial system in a way that safeguards privacy and strengthens communities, and to developing a financial architecture that maximizes the benefits and minimizes the risks that modern financial innovation can bring.
- At a time when labor shortages have replaced chronic unemployment as the primary labor market problem in many parts of our country, and when we have come to a greater appreciation of the dangers of long term dependency, we have made and must continue to make great progress in strengthening support for the working poor. Under 1984 policy, low-income working families would have been eligible for about $5 billion in aid in 1999; actual expenditures this year are likely to be nearly ten times that. This is in substantial part thanks to successive increases in the Earned Income Tax Credit.
- A final illustration is the use of market incentives to bring capital and private entrepreneurship to distressed urban and rural areas that mainstream businesses and investors might otherwise have overlooked. The most recent example is the Presidents New Markets Initiative, which focuses on catalyzing new equity investment in these areas and strengthening technical assistance for new businesses, in addition to helping to provide greater access to credit.
These are encouraging examples of how this new approach can make the new economy work for people. But, with forty million Americans still without health insurance, and when a child born in some parts of this city is still less likely to live to the age of five than a child born in Shanghai here, especially, we can ill afford complacency.
III. Concluding Remarks
I began today by remarking on how different economic policy discussions at the end of this decade were from the discussions at its start. No doubt much of what seems evident today will seem much less clear years from now. But if we can act to preserve the economys flexibility, to reduce the debts that we bequeath our children, to fund our continuing obligations and to effectively pursue the public purpose of making the economy work for people if we can act to achieve these things we will have taken the right advantage of this special moment. Thank you.