FROM THE OFFICE OF PUBLIC AFFAIRS

I am happy to be here at your Workshop. Your work in the venture capital and the secondary markets, which are essential in translating innovation in information technology and telecommunications into actual businesses and your experience with the policy and regulatory issues that effect these industries, provide you with a deep sense of what telecommunications and the Internet can mean for the American economy. I share your enthusiasm for these increasingly important components of our economy.

Economists tell us that despite soaring sales figures and market valuations, the jury is still out on whether the Internet is merely a major new technology in one sector of the economy, such as the automobile or television were in an earlier time, or whether it indeed will change the world, as the Industrial Revolution did in the 19^th century. In 1870, America's steam engines delivered 1.2 million horsepower to America's manufacturing firms. By 1939, sixty years later, the electric motors that replaced them gave factories 45 million horsepower-an increase in "muscle power" of forty times, or five per cent a year. In the forty years since electronic computers replaced electromechanical calculators, the number of computers has increased from 2,000 to 200 million worldwide, and there has been an increase in information processing power of one million times. This comes to 35 per cent a year.

The products and processes based on this computer power are changing the way we buy, the way we sell, how we communicate with one another, how we entertain ourselves and educate our children. They are making businesses far more efficient in the way they design, manufacture and market products. They are even changing the nature of what constitutes a product. We are moving from an economy in which the symbolic product was an ingot of iron, a barrel of oil or a bushel of grain to one in which the symbolic product is gene sequence, a line of computer code, or a logo. As Chairman Greenspan has often said, in such a world goods are increasingly valued for the knowledge that went into them rather than for their physical weight.

In this economy, information technology has been the largest single factor in the remarkable increase in productivity, which has given us a high rate of GDP growth with very low unemployment and low inflation. It has helped make the United States a high performance economy, powered by technology, driven by ideas, rewarding the value of innovation, flexibility and enterprise and attaining ever better living standards for its people.

Let me give you just one example. Between the end of World War II and the start of the 1990s, our economy went through eight recessions. In almost every case, when economists looked back with their analytic tools, they concluded these were what they called "inventory recessions. Business firms had overstocked. When they discovered this, they cut back on orders. This cut in spending rippled through the economy, reducing consumer spending, reducing investment, and forcing layoffs. The economy declined until firms decided to stock up on inventory again.

With information technology, companies can fine-tune their inventories through "just in time" purchasing and other techniques. Inventory recessions should be a thing of the past. This does not mean the business cycle has been repealed. There are other factors, including new ones, that could cause our economy to run aground. But it shows how technology has been instrumental, not just in creating new ways of living and new economic opportunities, but in solving some of the most persistent problems of our economy.

The movement of information technology to the center of the American economy came about in part because of the dynamism of the American financial system. In the 1980s, tough-minded economics, driven by investors who looked hard at the bottom line, forced our companies to restructure and reengineer years before those of other countries. This allowed them to emerge faster and stronger in their fields and, in the 1990s, to more readily adapt new technology as an integral part of their businesses. An open, flexible and extremely entrepreneurial venture capital sector has channeled needed funds to new industries. It was also the result of an outpouring of traditional American ingenuity. The number of patents granted to our inventors has increased over l40 per cent over the last decade, and now stands at over 150,000 a year. And it came about because an increasing number of workers have been willing to invest longer hours, acquire new skills and accept pay increases more in line with the success of their companies than ever before.

However, our ability to exploit these new opportunities depended critically on President Clinton and Vice President Gore's determination to stop a generation of public borrowing and forge a new national consensus around sound budget policy. Structural deficits give rise to vicious circles. They tend to lead to rising interest rates, and so to falling investment and slower growth, which reduce revenues further, increase deficits and start the cycle again. This is what we saw in the late 1980s and the early 1990s.

Surpluses generate a kind of virtuous circle of declining debt, increasing national savings, lower interest rates and rising growth and investment. American savers have had to absorb about $2 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 $2 trillion dollars available for new private investment in America's future. As a share of GNP, real investment today is higher than it has been at any time in the postwar period. We need to continue to exercise fiscal discipline, and retire debt, to keep the longest economic expansion in our history going strong.

The traits of the new economy will have other implications for public policy. For example, the "weightless" goods it produces usually have very high initial fixed costs and low, even zero marginal costs. It can be compared to publishing a book, cutting a record or marketing a new pharmaceutical product. In the new industries, success may have greater potential to become self-perpetuating, as growth leads to rapid declines in prices, and so to further expansion in the market and further growth.

Moreover, networks become increasingly important. The first fax machine could do very little. With one hundred fax machines, ten thousand connections are possible, and with ten million machines the possibilities are limitless.

For these reasons, we should strive to enlarge our markets-at home and internationally- as much as possible. Their development should not be slowed or distorted by unnecessary regulation. That is why we worked to pass the Telecommunications Act, and the right kind of Financial Modernization Act last year. That is why we are doing what we can to keep our own markets open to trade, and to open up the largest market in the world, China, by granting it Permanent Normal Trade Relations status and supporting its entry into the World Trade Organization.

It also points to increasing the size of our markets here at home, by making sure everyone is a part of this vibrant economy. Half a century ago, this meant ensuring that every home had electricity and running water and a telephone. It continues today in our work, through "First Accounts" and other initiatives, to ensure that every American has access to a bank account. This sounds like a small step, until you realize that in this age of the Internet, an estimated 15 per cent of U.S. households still do not have a bank account.

And the needs of the new economy surely make the case for public support for scientific innovation. It was the National Science Foundation and DARPA, just as much as the Bell Labs and Xerox PARC, that kept the infant Internet alive. We have increased our national science and technology budget for seven successive years. The 2001 budget commits an unprecedented $43 billion to science and technology research.

We cannot know what this new economy will look like a decade from now. What we can know is that we are enjoying a very special moment, a moment that confers a special responsibility on public policy to work to broaden the base of our prosperity, and minimize future risks.

I would like now to discuss two issues that are particularly within the purview of the Treasury Department: electronic payments and internet taxation. Despite the expansion of the Internet into so many areas, there is no legitimate option at this time for businesses to pay each other over the Internet. Most e-commerce shoppers use credit cards which involve a 2-6% expense to the seller. For shoppers, credit cards only work on line for certain classes of payments. A college student who successfully bids on this weekend's basketball tickets on eBay has to spend additional money to FedEx his check to the seller. According to one study, in 1999, consumers spent $19 billion on-line. But the amount they ordered off-line after doing their browsing on-line came to $103 billion.

In the physical world, parties can pay each other directly using cash and checks in a peer-to-per fashion. In the electronic world, existing payment mechanisms must be processed through central bank hubs and mainframes before payments or payment obligations can be delivered to a payee. One of the greatest attractions of the Internet is the way it makes possible person-to-person communication and commerce even where the people have no prior relationships and the geographic distance between them is great. Our current systems simply were not designed to support this type of dynamic commerce.

To narrow this gap, payments need to be accompanied by the kinds of documents that allow one to purchase, collect and store data electronically. We need an efficient, standards-based mechanism for exchanging information across different automated processes. Buyers, sellers and financial institutions also need to know with certainty that their orders were received and payments logged. Even E-mail still lacks much of the certainties traditional mail offers - guaranteed delivery, return receipts, guaranteed time-stamping, change of address information.

Because the Treasury Department handles 85% of the government's payments, we have focused our efforts on improving electronic payments. We have been quietly working on some revolutionary pilot programs to use the new technologies for this purpose. We have introduced smart cards that function as cash. At military training sites and at US bases in Bosnia, for example, soldiers now receive their pay on smart cards. Merchants on these sites are equipped with the tools to accept payments from the cards. As a result, Treasury's Financial Management Service is now the largest producer of financial smart cards in the country.

We are using electronic checks to pay some of our vendors. The Treasury creates an e-check on a PC, digitally signs it and securely emails it to a payee along with remittance information. The payee verifies the digital signature and strips off the remittance information. It then digitally endorses the check and e-mails it to its bank for deposit. The bank validates the endorsement digital signature and presents the items for payment to the bank on which it is drawn. Our partners in this test include banks, technology companies, DOD and major Defense vendors.

We are exploring the use of electronic cash. It allows transactions to be consummated instantly with no clearing or settlement and no involvement by a financial intermediary. The first use will be in buying computers on-line.

Introducing changes to the payments system is a long-term proposition and raises complex policy issues, but these pilots can teach us a great deal. The Treasury, along with FMS and the Bureau of the Public Debt will continue to build on our pilots through an "electronic per-to-peer payments" effort. We plan to share with industry the lessons we learn at a conference or another forum that will allow stakeholders to address barriers to financial e-commerce on the Internet. We shall also launch additional initiatives to help develop the tools and find the models that will bridge the internet payments gap.

The other issue is internet taxation. The Supreme Court decided, several years ago in the context of mail order sales, that it would impose an unconstitutional burden on interstate commerce for one state to ask a seller physically located in another state to collect a sales tax on its behalf. As a result, purchases made on the Internet, although in fact still subject to a tax (called a "use tax") in practice they enjoy virtual tax-free status because the seller is not obligated to collect the tax - as long as the seller does not have a physical presence such as a store or a warehouse in the purchaser's jurisdiction.

Many state and local government officials are increasingly concerned that if electronic commerce continues to grow exponentially, as it has been, the tax base that supports our schools, our police and firemen, and other essential services will be seriously undermined. Sales taxes currently account for one third of state and local tax collections. Main-street businesses are concerned about the unequal playing field - if a book bought in one of their stores is taxed while one bought on-line is not taxed in most cases it will grow increasingly difficult for them to compete. However, Internet businesses return to the issue of the burden that would be imposed if they were forced to collect sales taxes. They point out - and rightly so - that the enormous complexity of current state and local sales and use taxes would indeed make it excessively burdensome for a remote seller to have to collect taxes in multiple jurisdictions. The current network of sales taxes is so diverse and complicated-- there are over 6,000 separate taxing jurisdictions, each with its own definitions and rules.

The Internet Tax Freedom Act, passed in 1998, did not create these problems nor did it solve them. It attempted to solve a different set of problems. Internet businesses were increasingly concerned that states would see them as a new cash cow and would impose new, discriminatory taxes on the Net or might tax access to the Internet. The Internet Tax Freedom Act imposed a time-out on these new types of taxes on the Internet for a period of three years, which expires in October 2001.

The Administration opposes any kind of discriminatory taxation of the Internet. We support a permanent ban on taxes on access to the Internet. We also support a permanent moratorium on customs duties on electronic transmissions. We strongly support the growth of Internet commerce. We want to encourage people to go on line, not discourage them. This is important as we wish to eliminate the "Digital Divide" President Clinton has spoken of, where low income people are left out of the new economy, unable to gain the knowledge and acquire the skills they will need to improve their circumstances.

On the issue of taxing sales made on the Internet- as opposed to access to the Internet - the Internet Tax Freedom Act created a congressionally-appointed Commission which holds its last meeting in Dallas in just over a week. Discussions have been held in the context of the Commission that I hope have started to bridge the gap between the states and some members of the business community, helping each to see the valid aspects of the others arguments. But whatever the outcome of that Commission, it is clear that any answer -- short of repealing the sales tax and replacing it with another revenue stream to pay for police and education -- has to involve simplification of the current sales tax systems-- the same issue that the Supreme Court identified in its decision several years ago.

Fundamentally, the issue of how e-commerce will contribute to the building and maintenance of our 21^st century public services and institutions is a critical one - and a delicate one. It must be settled through painstaking conversations between affected parties. We cannot rush to judgment on these complex issues.

The industries you invest in and work for will benefit from sound economic policies which strengthen and open markets for you in this country and around the world. We value your continued input on all these issues, and I appreciate the opportunity to speak to you today.

Thank you.