FROM THE OFFICE OF PUBLIC AFFAIRS

Thank you for inviting me here today to speak on the state of the American economy and the Administration's economic priorities.

I have always been an optimist about the U.S. economy. Sometimes, like last fall, optimism seems like an act of faith. Other times, like today, optimism seems to be the obvious choice.

Our economy slowed sharply in 2000, with GDP growth rate and job growth rate declines beginning mid-year, business capital spending plummeting in late 2000, and accelerating declines in most indicators through mid-2001. By August 2001, however, I believed that we were already on track for a fourth quarter rebound.

Then September 11^th happened. Financial markets were shut down for almost a week. Air transportation came to a standstill. Consumer activities froze as families stayed home in front of their televisions, uncertain about the future. As a result, GDP fell an annualized 1.3 percent in the third quarter of 2001.

Even then, I remained optimistic, and that hope now appears justified. In spite of the terrorist attacks, our economy still grew in the fourth quarter, confounding doomsayers. The latest indicators show that our slow period last year was one of the shortest, shallowest downturns on record. There's no denying that the slowdown brought harder times for many Americans, and the President is dedicated to improving economic conditions for everyone. But those who relished the "R" word even this winter, some comparing 2001 to 1929, are going to be happily disappointed.

Based on my personal reading of the numbers and conversations with business people spread around the economy, I believe we are going to see continued improvement throughout 2002. Productivity growth will stay strong, if not always at the 2001 fourth quarter's record-setting rate.

Business spending will revive, as companies gradually restock the inventory pipeline. Consumers will grow more positive, as job-growth accelerates and the war on terrorism progresses. By year-end, I expect we will approach the 3 to 3.5% annual growth rate that the U.S. economy can sustain. And we will begin to see improvements in employment rates.

Why was optimism the right outlook, even in the summer of 2001? Why was the slowdown so short? Several reasons. The most important is that the United States has the most advanced economy in the world. Our economic structure, though not perfect, recognizes that the private sector drives growth. It offers the right incentives for entrepreneurs and business leaders to build prosperity, one job at a time, without undue government interference in the form of excessive taxation or intervention. Our government provides essential rule of law, enforceable contracts, and physical security with minimal corruption, while allowing relative openness to world competition and reasonably flexible labor markets. Our financial markets are the deepest and most liquid in the world, and they provide resilience and shock-absorption for all business sectors. They offer credit for expansions and flexibility in slowdowns, with less of the boom and bust that characterized our early history.

Our laws and our markets treat capital well, so capital from around the world likes to live here, not just visit. As a result, our cost of capital is the lowest in the world on a risk-adjusted basis. That means more entrepreneurs can pursue new ventures, companies can invest in productivity enhancing technology and research and development, and more families can afford homes and cars.

Another key reason for the quick recovery was the extraordinary timing of the President's tax cut last year. Passage of the tax relief plan in May 2001 put $36 billion directly into consumers' hands in the late summer and early fall, when they needed it most. In fact, that was only the beginning of the tax relief benefits. On March 6, USA Today reported on the front page that the tax cuts have already put $74 billion back into the economy since last summer, and average tax refunds were up 12% from the year before. In just the last few weeks the President signed bipartisan legislation enacting tax relief to boost job creation and unemployment benefits to help those displaced by the slowdown get back on their feet and back into productive work.

But tax relief doesn't just put cash back in consumers pockets. At the macro level, tax relief is a structural advantage for our economy. It increases incentives for growth by allowing individuals to keep more of the efforts of their labor. It also allows businesses to allocate more of their resources toward the most rewarding investment opportunities, thereby increasing productivity and growth potential. It's not that government spending does nothing for the economy-for some types of activities, such as the war on terrorism, it is the only option. But the private sector is the true engine of growth in our economy.

And, of course, we have to give credit to my friend Chairman Greenspan and the Federal Reserve. He cut interest rates faster and lower than any time in the past forty years, and that action appears to have succeeded in maintaining credit expansion and liquidity in the economy.

On the fiscal policy side, I know some of you have been grumbling about our expenses this year. It is true that we expect a small deficit for the next few years. The February Congressional Budget Office projections now put the ten-year government budget surplus at $1.6 trillion, down from a projection of $3.4 trillion last August. The August projection included the President's tax cut. The loss of $1.8 trillion in surplus since August is entirely attributable to reduced economic activity, increased spending for the war on terrorism, and "technical changes." In fact, technical changes account for $660 billion of the difference, exposing the fallacy of relying on 10-year point projections in a $10 trillion economy.

Ultimately, our policies cannot revolve around the roulette wheel of this month's projections. No one knows the distant future. What we do know is how to continue to improve the policy environment in our country.

The President put forward a budget this year that does exactly that. He laid out a serious plan to prosecute the war on terrorism and protect our homeland, maintaining fiscal discipline without sacrificing his commitment to education and other national priorities. The war on terrorism and homeland defense are top priorities, because physical security is the foundation on which all prosperity is built. This concept hardly requires elaboration.

We are in the right position. We are returning to economic growth in a safer and more vigilant atmosphere, and that growth will put us back into surplus in Washington. Some in Washington have that formulation backwards. They think surpluses create growth. The budget put forward by the majority in the Senate would increase spending and then raise taxes in the quixotic drive to return to surpluses at all costs. The tax increase is disguised with code words like "trigger" or "circuit breaker" - but it is a tax increase. And that's the last thing our economy needs as it reestablishes forward motion.

The House has passed a budget resolution reflecting the President's priorities. I hope we can move forward on that framework when Congress returns.

Restoring our growth is crucial not just to the lives of all Americans, but also to people in every part of the world. When the US economy grows, we create opportunities for people everywhere. And the President strongly believes we have a responsibility to spread freedom, opportunity and prosperity around the world. That's why he will continue to push for Trade Promotion Authority this summer, to open foreign markets to U.S. products and services and create jobs here at home. The House has passed TPA, and it is awaiting action in the Senate.

One of the policy initiatives closest to my heart is the President's plan to increase development assistance to poor countries while increasing accountability and effectiveness of all aid dollars. At the U.N. conference on world poverty in Monterrey Mexico last week, which I attended, President Bush committed our nation to improving living standards worldwide, to giving people the tools and materials they need to build prosperity for their children. Like the President, I believe that too many are born into poverty today, without hope for escape. Too many have been left behind, without enough food, or medicine, or education, without even the prospect of progress.

And for too long, the developed world has been content to make promises without expecting results. We have bragged about our spending, without measuring our accomplishments. Under the President's proposal, we will hold accountable rich and poor governments alike, to make a difference, not just a donation.

The President's new compact for global development recognizes that building lasting prosperity requires laying a solid foundation first. Without good government and sound economic policies, our work will sink into the mud of corruption and mismanagement. That is why the President's proposed Millennium Challenge Account encourages recipient governments to rule justly, invest in their people, and advance economic freedom. Countries that demonstrate a commitment to these principles will see the greatest benefit from the Challenge Account.

We know that increases in productivity-- the amount of value that each worker produces -- drive economic growth and per capita income. Economic growth creates better jobs, increased wages, and a higher standard of living for all. Thus, smart development dollars invest in activities that enhance productivity.

In other words, we want to encourage developing nations to enable the private sector as the engine for poverty reduction and economic growth, as it has been here in the United States. Our goal is nothing less than to free the potential of men and women around the world.

In short, I believe the outlook is bright for the United States, and for the world. Thank you again for your invitation today.