As prepared for delivery
PORTLAND, OREGON - I want to thank Mayor Adams for that introduction and for encouraging me to visit Portland. And thank you, Melody, for hosting this event.
It is a pleasure to be here at the Portland City Club to talk about the challenges facing the American economy.
How is the U.S. economy doing today?
The economy is gradually getting stronger, and we have come a long way since 2008, but we still have a ways to go to repair the damage caused by the crisis. And we face some tough challenges, including many that preceded the financial crisis.
The U.S. economy has expanded at an average annual rate of 2.5 percent since the summer of 2009. The private sector has added about 4.1 million jobs since job growth resumed.
Importantly, growth has been led by the private sector and by investment and exports.
The balance sheets of businesses are strong. The economy is more productive than before the crisis. Investment in equipment and software has risen by 33 percent over the past two and a half years.
Exports have grown 24 percent in real terms over the same period.
The growth has been relatively broad based, with increases in manufacturing, energy, agriculture and high tech, offsetting the continued weakness in housing and construction, and the contraction in government services and employment. American companies are starting to move production back to the United States after decades of offshoring.
We are making significant progress in working through the excesses and imbalances that helped cause the financial crisis.
Household debt is down almost 20 percentage points relative to income and is roughly back to 2004 levels. Financial sector leverage is down substantially, and credit is expanding. Housing and commercial real estate construction are starting to pick up after five years of contraction. Americans are saving more than before the crisis, and our budget deficit has started to decline as a share of the economy. We are borrowing less from the rest of the world; relative to GDP, our current account deficit is now half the level it was before the crisis.
These encouraging improvements in the economy are the direct result of the crisis response strategy put in place by President Obama, alongside the Federal Reserve and the FDIC, to put out the fires of the financial crisis, restructure the automobile industry, and restart economic growth.
The President has also put in motion another set of crucial changes.
Millions of Americans now have health care with better coverage because of the Affordable Care Act, and health care costs are rising less rapidly. We are becoming more efficient in how we use energy, more reliant on clean energy sources, and less dependent on foreign sources of energy. And in communities across the country, we are seeing promising reforms in education to improve the quality of teaching in science and math and to reduce the cost of and improve access to higher education.
We still have a lot of work to do to repair the damage from the crisis and get more Americans back to work. And we still face some risks ahead. We still live in a dangerous and uncertain world, with Europe confronting a severe and protracted crisis. The world is engaged in a critical struggle with Iran, which has added to upward pressure on oil prices. And at the end of the year, we face a so-called fiscal “cliff”—the simultaneous expiration of tax cuts and large across-the-board cuts in spending. That cliff presents a risk, but it also provides an opportunity for bipartisan agreement on reforms to restore fiscal sustainability.
These challenges are significant, but the shifts that have taken place in our economy make us better prepared as a nation to face them and better prepared to do so than many of our competitors.
Nonetheless, the pace of economic growth has been slower than the average of past recoveries. Why hasn’t growth been stronger?
Most significantly, growth has been slowed by the headwinds that follow all financial crises—as consumers bring down debt, banks reduce excess risk, and we work through the excess investment in real estate. We were also hit by a series of external shocks in 2010 and 2011—the crisis in Europe, the disasters in Japan, and higher oil prices. And the threat of default during the debt limit debate last summer caused substantial damage to consumer and business confidence.
These have been the central challenges to economic recovery. Without the external shocks of the last two years and without the damage from the threat of default, economic growth would have been significantly stronger.
The alternative claims offered to explain the moderate pace of recovery—regulation, taxes, and the size of government—are not supported by the evidence.
· We are putting in place tough reforms of our financial system and new rules to improve fuel efficiency and to prevent pollution that threatens public health. But the cost of these rules is tiny as a share of GDP, and small relative to the broader benefits, using the same cost benefit analysis used by the previous Administration. Overall, business profits are higher than before the crisis, private sector investment is growing faster than the economy as a whole, and credit is expanding—not what you would see if regulations were “killing” growth.
· Taxes are at their lowest share of the economy in 50 years. The President has proposed tax reforms that would expand incentives for business investment and increase effective tax rates modestly for the top 2 percent of individual taxpayers. Under these proposals, revenues would rise by a little more than 1 percent of GDP above the historic average.
· Federal employment is shrinking as a percentage of the workforce, and state and local spending is being cut. Projected deficits are falling not rising. Long-term interest rates and inflation expectations are low.
The acute damage caused by the financial crisis hit an economy already suffering from a slow burning mix of formidable long-term challenges.
These challenges include: The failure of our education system to keep up with the rest of the world. A long period of stagnation in the real median income. Diminished confidence in the ability of Americans to exceed the economic achievements of their parents. A substantial ongoing shift, over the last 25 years, in the risk and cost of health care and retirement security away from employers and to individuals. A deteriorating public infrastructure. The erosion in our fiscal position in the last decade. And poverty rates much higher than in any economy with comparable wealth.
Confronting these problems is the most important economic policy challenge facing the nation.
We can all be in favor of smarter regulation, more efficient government, lower future deficits, and more simple tax system, but these simple desires do not add up to a strategy that meets the challenge of the moment. They do not amount to a plan for a stronger, more competitive economy, with broad based gains in income. A credible strategy for economic growth requires a willingness to do things, not just to cut things.
The President’s strategy combines actions to help speed the economic recovery, along with reforms and investments to lay the foundation for stronger future growth.
As we focus on the future, it is important to recognize that to better position us to deal with future challenges, we have to strengthen growth now, get more Americans back to work, and repair the remaining damage from the crisis. To do this, the President has proposed actions to help Americans refinance their mortgages, to expand exports, to help get teachers back to work, to give businesses tax incentives to hire, and to prevent interest rates on student loans from doubling this summer.
But we also have to continue to work to put in place a stronger foundation for future economic growth. Investments in education, to help Americans compete in the global economy. Investments in innovation, so that our economy can offer the best jobs possible. Investments in infrastructure, to reduce costs and increase productivity. And reforms to improve incentives for investing in the United States—including reform of our business tax system.
These investments and reforms have to come as part of a carefully designed, balanced package of long-term reforms to restore fiscal sustainability.
Like the Bowles Simpson recommendations and every other bipartisan deficit reduction plan, the President’s approach combines spending savings across the government with tax reforms that would raise a modest amount of revenue.
These reforms would be phased in over time to protect economic growth and give Americans time to adjust. They would cut roughly two-and-a-half dollars in spending for every dollar in revenue raised. The spending savings would build on the cuts put in place last summer, with reforms to programs like farm subsidies and changes to make Medicare and Medicaid more financially sustainable.
The tax increases would fall only on the top 2 percent of individual earners. The tax reforms would lower the corporate rate and eliminate inefficient tax preferences for businesses, improving long-term incentives for investment and research and development in the United States.
Most of the savings from spending cuts and the revenues from tax reform would go to reduce our long-term deficits to the levels necessary to start to reduce the overall debt burden as a share of the economy. But the President believes it is essential, as we reduce our long-term deficits, to expand investments that will help increase long-term growth and improve opportunity. Investments in areas like education, public infrastructure, and research into new technologies to fight disease and improve energy efficiency.
Overall, by combining tax reforms with spending savings, the President’s plan will reduce deficits without cutting deeply into the safety net for low-income Americans, without undermining our national defense, our ability to improve education, or our commitment to health care security for retirees.
Remember, the basic arithmetic of fiscal and economic policy is not political. There is no Democratic or Republican fiscal math. If you try to restore fiscal balance without a penny of additional revenue, then you have to cut deeply—too deeply—into critical functions of government.
Just one example—the cost of extending the Bush tax cuts for the top 2 percent of earners for the next decade is about one trillion dollars. Tax cuts don’t pay for themselves. You have to pay for them. We can’t afford to borrow the money to extend those tax cuts, and we won’t agree to cut benefits for senior or cut investments in education to pay for those tax cuts.
We face some very tough challenges. But they are manageable challenges for the United States. And I prefer our challenges to those of any economy anywhere in the world.
We can afford the investments that are important for future growth. We can adjust to the changes that will be compelled by the need to bring our long-term deficits down.
As we face the tough economic choices ahead, remember that Americans are still living with the damage that is the legacy of the financial crisis of 2008, and we have a ways to go to repair that damage.
When you listen to the debate about taxes and Medicare and Medicaid, or when you hear politicians insist that they will protect even the most fortunate Americans from higher taxes, remember that even before this crisis, about 20 percent of children in the United States were living in poverty and about 40 percent of children were born to parents covered by Medicaid.
Remember the great American achievements of the GI Bill, universal primary and secondary education, Eisenhower’s national highway system, the scientific advances produced by government-funded research.
Remember that the fortunes of children born in America today, the quality of public schools they attend, the quality of health care they receive, the chance they have to go to college, still depend significantly on the wealth of their parents and the color of their skin.
But also remember that we are a country of great strength and resilience. We have successfully navigated the most dangerous phase of the worst economic crisis in generations. We need to bring the same creativity and force and sense of national purpose to the challenges ahead. And that will require better choices from our political system. No economy can be stronger over time than the ability of its political leaders to come together to make tough decisions.