FROM THE OFFICE OF PUBLIC AFFAIRS

Good afternoon.

It is my pleasure to join the Confederation of British Industry today, on my way home from a week-long visit to Afghanistan, Pakistan, and the G-20 meeting in India.  I know many of you do business in the United States, and I will touch on the state of the U.S. economy.  I would also like to consider, more broadly, the role of productivity in the U.S. and the world economy, and in your respective industries.

The past two years have been full of shocks and surprises for those who participate in American business – shareholders, employees, and executives alike. We've suffered through the demise of a dot-com fantasy, terrorist attacks on New York and Washington, and discoveries of corporate fraud.  Pile those on top of a slowdown already present when President Bush took office, and you have a recipe for a bumpy economy.

Nonetheless, the United States has been working its way back to steady growth, and we’ve made progress.  Our system – private and public sectors – has adjusted to the new conditions.  We’ve been making a recovery throughout this year, demonstrating the flexibility of the American economy.  Flexibility in the sense of resilience and adaptability. 

On the policy side, the U.S. Congress has passed President Bush’s  proposals for a homeland security department, terrorism risk insurance, tax relief and job creation stimulus.  The U.S. Federal Reserve, for its part, has cut interest rates sharply, averting a potential credit crunch.  Early next year President Bush will propose new action for economic growth and job creation.

It is the private sector, of course, and not the government, that produces economic growth.  Our policy proposals have been aimed at reigniting the engines of growth.  The recession was relatively shallow. 

 The tougher part has been building broad-based momentum throughout the economy.

 Some sectors have been doing quite well, such as housing and auto manufacturing, while others, such as commercial airplane manufacturing and airline services, have lagged. 

Inflation remains low, there has been steady growth in real incomes even during the recession period and inventories are lean.

At 5.7%, unemployment remains lower than its average during the 1990s, but payroll growth has been erratic, and we believe we can and will do better.

Productivity is the key.  Productivity growth has been extraordinarily good, up 5.3% over the past year, the best rate since 1983.  Rapid productivity growth has contributed to the biggest decline in unit labor costs since the early 1960s, which in turn will prove valuable for restoring profits, containing inflation, and ultimately for accelerating employment and income growth.

Productivity growth is a leading indicator of quality of life and human progress.  Indeed, the economic progress of civilization – higher standards of living, higher incomes, greater personal freedom, fulfilling work opportunities – derives from advancing productivity.  That’s been true since the early days of the industrial revolution here in Manchester. 

If you study the economic history of the 300 years since then, it is easy to see that there is no absolute limit on world economic product.  Economic prosperity is not a sleight of hand – one man or woman taking from another.  Economic prosperity is an act of creation.  The world’s economic bounty is limited only by our imagination – our ability to conceive new ideas for value creation and to make those ideas into reality. 

Productivity comes from the development and deployment of ideas -- discovering and implementing better ways of doing things.  One of the reasons I am optimistic about the future of the world economy is there is such a large gap between the productivity of the very best performers in every industry and everyone else.  This gap represents productivity improvement potential that requires only initiation; not the discovery of new knowledge!   

Rather than focus on national policies today, let me take this down to a company-specific level for you.

During the 80s, I worked for International Paper.  Early in my time there, we put together a detailed analysis of our competition.  In doing that analysis we found that Japanese corrogated container plants were producing 13 tons of boxes per hour, while our plants were producing 9 tons per hour.  I wondered what they were doing better.  I went to Japan to visit those factories, and I started asking questions. 

One of the most important factors in corrugated container manufacturing is the moisture content of the paper.  The ideal moisture content in the paper is 5% -- everyone agreed on that -- but what the Japanese had discovered was that the size of the range around the ideal 5% level mattered greatly.  By controlling to a range of 4 - 6% instead of the typical 2 -8% range, they were able to achieve a 50% productivity advantage over their competition. 

Needless to say, we implemented a quality control process that narrowed our moisture content range to the Japanese level.  Just by implementing an idea -- the idea that moisture variance matters -- we made a big gain in productivity.

In every industry in the world, from agriculture to aerospace, there is a huge gap between the best practices of the leading firms and the practices of the great majority of producers in that industry.  As the ideas pioneered and employed by the industry leaders diffuse to the rest of the competition, the followers catch up.  As the rest of the industry adopts the old best practices, the industry leaders must develop new ways to stay ahead.  Competition drives innovation, and innovation becomes productivity, which in turn creates higher wages and more jobs.

The potential for deploying ideas to make huge productivity gains exists around the world.  In my travels as Treasury Secretary, and before that in private industry, I’ve seen that truth for myself in countries as diverse as Russia, Ghana, India, Brazil and China.  And I’m sure you have all witnessed it as well.  The best ideas can come from anywhere, and the secret to competitive success is staying open to new ideas, no matter where they come from. 

Competition drives the constant search for new ideas.  Many U.S. firms are world leaders in their industries because they are forced to compete every day.  That’s true domestically because we have one of the freest economic structures in the world, with great flexibility to move capital and other resources to their most productive uses.  The future of global growth depends on other nations around the world expanding their economic freedom as well, so that the United States isn’t the sole engine for the world economy. 

We have taken steps in the last two years to stem the economic downturn and reverse it.  The rest of the world has to act as well.  It is every government’s responsibility to take actions that unleash the potential of its population for innovation and value creation. 

Imagine a world in which the largest economies are growing at their potential.  Imagine the opportunity that growth would create for people in the less developed parts of the world, through trade opportunities, new technology, and investment capital.

International competition also enhances domestic growth, and the spread of productive new ideas.  In the 1970s and early 1980s, U.S. manufacturers marveled at Japan’s efficiency, and many thought we had lost our edge for good. 
But the openness of the U.S. economic system forced us to think harder, to learn from the best practices of firms like Toyota, and to learn from each other as well.  The competition from Japan shook us out of our malaise.

The lessons of those days cemented my belief that the world economic system should eliminate trade and tariff barriers.  Not only because open trade gives consumers around the world more choices and better prices, but because open trade spurs innovation and productivity growth.  Competition forces the deployment of good ideas within industries and across them; within nations and among them. 

Consider it this way: the huge productivity gap between industry leaders and the rest of the pack is like a proven reserve of human potential.  The same is true between nations, because we know that all humans have the same capacity for achievement.  The knowledge exists, it simply needs deployment. 

For me, that’s a source of great hope and confidence.  It’s not just a matter of faith that your individual companies, and our economies as a whole, can achieve new heights.  It’s a matter of fact. 

Thank you.