March 14, 2006
JS-4115

The Honorable John W. Snow
Prepared Remarks
America's Community Bankers
Annual Government Affairs Conference

Thank you so much for inviting me here today; it's always a pleasure to come to this conference and to work with your group.

I want to talk to you today in large part about the importance of investment for building a strong America.

You are at the forefront of investing in America's local communities. You're doing great work. Loans to small business and home mortgages literally build communities from the ground up. You invest in financial education. Your work in partnership with the government to fight the financial war on terror helps keep our financial system safe. You are such an important part of your customers' lives and of the economic fabric of this country. Community banks, including many of ACB's members, form the backbone of our local communities. You understand the businesses in local communities and are vitally important for ensuring that credit for investment continues to be made available in your communities.

I can't imagine an America without community bankers, and I deeply appreciate what you do.

The country is moving in the right direction now, economically, and you're part of that success. With nearly five million new jobs created in the past three year--two million of them in the last year alone--and unemployment at a very low rate of 4.8 percent– that's lower than the average for the 1970s, 1980s and 1990s--there is much for you and your customers to be proud of and optimistic about.

Looking back, there can be no question today that well-timed tax relief, combined with responsible leadership from the Federal Reserve Board, created an environment in which small businesses, entrepreneurs, and workers could bring our economy back from its weakened state of just a few years ago.

Importantly, tax relief encouraged investment, which has ultimately led to job growth. The American economy is now unmistakably in a trend of expansion, and those trend lines can clearly be traced to the enactment of pro-growth tax relief.

In the past two years, the economy has generated more than 170,000 jobs per month, and that includes the two-month slowdown in job growth in the aftermath of Hurricanes Katrina and Rita. In the past 32 years, new claims for unemployment insurance have almost never been as low as they have been so far this year, the only exception being the peak of the high-tech bubble from late1999 to early 2000.

Good, steady job growth is no surprise, given that GDP growth was three and a half percent last year. Private forecasters, like the National Association for Business Economics and others, are expecting very strong growth to continue this quarter.

The American economy proves to be on solid footing. The question that those of us in government must look at now is this: what can we do to continue these positive trends?

The answers as I see them: First, keep taxes lower on both investment and incomes. The conference committee on tax relief reconciliation is considering this matter now and I have been strongly urging them to keep tax rates low. We must protect and nurture our economic growth – not put it in jeopardy with tax increases.

I know that, in your business, you see the economic benefits of investment every day. Money for business expansion or development improves the communities where it's invested. So I'm sure it's no surprise to people in this room that since the implementation of a lower, 15 percent rate on investment capital in May of 2003 we have seen a remarkable turn-around in the economy. After nine consecutive declining quarters of real annual business investment, we have had 10 straight quarters of rising business investment. This business expansion led to a substantial increase in employment, as I just mentioned – nearly five million new jobs. There can be no question that we need to keep the tax rate on capital gains and dividends where it is; a tax increase would be a terrible mistake. While many factors contributed to the improved performance of the economy, the tax reductions on capital have been at the heart of the progress we have seen.

Extending the lower tax rates on investment capital is just about at the top of the Administration's priority list for Congress right now, but there is a critical matter before Congress that must be resolved this week, before they go out.

As bankers, you know that it's essential to any investor that you meet your financial obligations. Timely action on the debt ceiling this week, before Congress leaves for recess, is critical to assure financial markets and investors that the integrity of the obligations of the United States will not be compromised, nor will even a risk of such compromise be countenanced.

As you well appreciate, the "full faith and credit" of the United States is a unique and precious asset. It says to investors around the world, "your money is safe here." Accordingly, any effort to use this "must pass" legislation as a means of achieving leverage on other issues should be set aside and avoided.

We have to remember that current federal borrowing needs today are simply the product of past decisions. While we always welcome a debate on budget priorities, swift action on the debt limit must still be taken this week. There should be no doubt over whether the government will be able to pay its bills on time, this time next week.

I look forward to working with members of Congress to ensure that the bill to increase the debt limit is not encumbered with extraneous matters that could needlessly delay its timely enactment. I am urging members of Congress in the strongest possible terms to resist coupling an increase in the debt ceiling with other issues. Rather, they should vote to raise the ceiling this week. It would be unthinkable for them not to take action.

I talked just a moment ago about how important investment in the United States is to creating plenty of good jobs.  In fact, it has been an essential ingredient behind our recovery.  But as you know, questions have now been raised about how best to handle investments in the U.S. that come from overseas.

As we work with Congress on how to improve this process, we would all be well-advised to take a lesson from the senior Senator from my home state of Virginia: John Warner, an unquestioned champion of U.S. national security.   His approach to this matter has been a calming: "Let's look at the facts."

As I travel the country, the fact is I often encounter local officials who report with pride on a recent investment in their community-a new plant, a new headquarters, a new research facility-that was built by investors often from outside the U.S.  In fact, Governors, Mayors, and Members of Congress for example, normally announce with great pride when a company is locating in their state, bringing good jobs and new tax revenues. Often, there is fierce competition among states for these investments that can breath new life into a community-perhaps a community where you live.  The officials understand the employment power of investment-whether is by U.S. companies, or in this case from investors abroad.

Indeed, 5.3 million U.S. workers alone - that's the equivalent of 4.8 percent of total private non-agricultural employment - are directly employed by U.S. affiliates of international companies.   These tend to be well-paying jobs, too.  International companies support an annual U.S. payroll of $318 billion, with average compensation per employee of nearly $60,000.  And this doesn't count the multiplier effect as all that spending moves through other businesses in local communities.

Direct investment from overseas can bring in new research, technology, techniques, and skills.  And of course it contributes to U.S., state and local tax revenues.  This kind of trade and investment are good for America, and good for its workers.   It can also help U.S. companies penetrate international markets and therefore increase U.S. exports.  After all, 95% of the global market lives outside the U.S.  We need to keep our doors open or risk having the doors of the world closed to us.  Clearly, the American people stand to lose a great deal if investment stops flowing into the U.S. from willing investors.

As you know, Treasury chairs an interagency committee that reviews foreign investments that may affect national security, like the recent ports deal - the Committee on Foreign Investment in the United States, or CFIUS.   As we enter into the debate over its reform one point must stand clear:  National Security is our top priority, and the only consideration in the CFIUS process.  CFIUS includes, with equal standing, the arms of government charged with protecting America's national security, homeland security, and law enforcement.  This is not a question of a trade-off between investment and security.  We have never made that trade-off and the CFIUS review process exists to make sure that there never is such a trade-off. 

It is vital that we avoid taking steps in the name of national security that instead are isolationist, having the effect of choking off vital investments in America.  For example, some have called for automatic investigation of any investment that could affect "economic security" – that's a very vague concept and would create uncertainty, which could chill investment.

An example of such an approach in practice is what France calls their "economic patriotism" policy. Here's a chilling example: When Pepsi, an American company, recently sought to purchase Danone, a French yogurt company, the government of France said "non." Yogurt-making is an essential national industry, they ruled.  And so France no longer allows international investment in the "critical" French yogurt business.  Clearly economic isolationism is not the way to go, as it would threaten opportunity and prosperity for Americans, and billions of people all over the world.

This Sunday, the Washington Post, a publication that I do not ordinarily quote, summarized the central question of this issue succinctly: whether this incident "exposed a strain of American economic nationalism that will prompt other nations to pull back from making investments in, or doing business with, the United States." 

We will be working with the committees handling the legislation to discuss changes and updates they are considering. To work towards a sensible outcome that is in the best interests of our great country, we believe the reform of CFIUS should be guided by the following principles:

• Further integration of national and homeland security interests for a post 9/11 environment;
• Continuation of a welcoming stance towards investments in the United States because it creates good jobs for American workers;
•  Preservation of that which works about CFIUS with improvements and updates where needed, while maintaining the integrity of the decision-making process.

 In implementing these principles, we will work to:

Update the scope of national and homeland security considerations;

• Preserve the professionalism and independence of CFIUS intelligence and security reviews, and protect sensitive proprietary information provided by companies;
• Strengthen scrutiny of CFIUS cases involving state-owned companies;
• Strengthen the President's authority to enforce CFIUS actions;
• Expand notifications of decisions to Congress so that it can fulfill its important oversight responsibilities.

All the while we must remember that investment and security are not opposing forces. They are not in conflict. There is instead an inherent consistency between our national security interests and a strong US economy. A growing, productive and efficient economy gives policymakers the resources needed to pursue US national interests such as national and homeland security.

As we work together to keep America strong, thank you for all that the nation's community banks do investing in local communities to make them prosper.

I thank you for the work you do, and the chance to speak to you today.