FROM THE OFFICE OF PUBLIC AFFAIRS

Thank you. It is good to be back. I remember well, in the 1980s and early 1990s, the debates here at the Council on Competitiveness when American competitiveness lagged. Today, it is fair to say that our situation has changed.

In many ways, if the challenge for the US as it considered the global economy when this Council was formed was our relative economic weakness, the challenges we face today are more bound up with our relative economic strength. It is these that I would like to focus on today:

I. The Domestic and International Challenge of More Balanced Global Growth

The recent economic performance of the US has given us much to be proud of. But we should never be satisfied or complacent. As satisfying as our progress is, we all need to maintain an awareness that the risks and uncertainties of life continue - and that some part of our apparent strength in our economy may come from the wealth effects of an exceptional period of rising equity prices, which may not be fully explained by the rise in productivity and estimates of future earnings.

This highlights the importance of maintaining and strengthening the features of our economy that have contributed to our recent success. We must work to maintain the flexibility and dynamism of our markets, so that US firms can continue to seize the opportunities that new technologies and global integration bring. And we must continue to bring more Americans into the productive economy. When jobs are looking for

people as much as people are looking for jobs, helping people get from welfare to work, or promoting family-friendly workplaces - these and other "social policies" become crucial economic policies, because they expand the effective supply of labor and help to reduce potential inflationary pressures.

Of crucial importance in maintaining the expansion is addressing the closely related issues of more balanced global growth and the US current account deficit. The rapid growth of the US relative to the rest of the global economy, our relative attractiveness as a destination for investment, and our relatively low rate of national savings have given rise to global external imbalances that must now be a matter of concern. Our current account imbalance, at $339 billion last year, or 3.7 percent of GDP, has more than doubled since 1997, and private sector forecasters are not predicting any reversal in 2000.

When, as it does in the US, a large imbalance reflects a period of strong growth relative to the rest of the world, and relatively high investment in our productive potential, it is unlikely to pose an immediate threat to our economic well-being. Indeed, quite the reverse. But as Secretary Rubin pointed out frequently, a large and growing current account deficit is not something that can be sustained indefinitely. Such a deficit can also give rise to protectionist pressures, and distort the domestic pattern of economic activity.

As a matter of arithmetic, the current account deficit depends on the difference between national investment and national savings - and, equivalently, on the difference between imports, and exports plus net interest payments. Thus, the imbalance can be solved either by higher national savings or by lower domestic investment - and either by growth in demand for exports or by a decline in the growth of imports.

It is overwhelmingly in our interests and those of the global economy that the adjustment takes place through a combination of higher national savings and higher exports. A healthy adjustment process will thus have a domestic and an international dimension:

• The domestic dimension must be efforts to raise the rate of US national savings.
• The international dimension must be support for more open and faster growing markets overseas.

By raising the rate of US national savings, we can expand the scope for investment to be funded domestically rather than by borrowing from overseas. This imperative applies to both public savings and personal savings.

The restoration of fiscal discipline since 1993 has played a crucial role in helping to sustain the current expansion. American savers have had to absorb more than $2 trillion less in government debt since 1993 than they would have if the budget projections made in that year had been realized. As a result of this fiscal turnaround, the net national saving rate of our country has almost doubled in the last seven years to 7.3 percent. That increase is welcome. But it is still too low, relative to other major industrial economies today and relative to the rates we achieved in the 1950s and 1960s.

This underlines the crucial importance of preserving fiscal discipline by continuing to pay down debt within a framework that helps us strengthen Social Security and Medicare and helps us meet our long-term commitments to Social Security and Medicare recipients. This will maintain the virtuous cycle we have worked so hard to achieve, providing for higher rates of domestically funded investment and capacity growth that can also maximize productivity growth and reduce inflationary pressure.

At the same time, a large part of the improvement in public savings in recent years has been counteracted by a precipitous decline in personal saving, which, at less than 1 percent of GDP, is now lower than it has been since the Great Depression.

How can we help American families do what is so clearly in their interest and in the national interest? Economists have increasingly come to the recognition that savings behavior is affected by more than financial incentives. Habit formation, social promotion and steps that influence tastes can all have an enormous impact. In that sense, savings - like life insurance - is sold, not bought.

That is why Treasury last week welcomed the launch of a national coalition of America's leading financial education groups, the National Partners for Financial Empowerment, to spread financial literacy in America. We are also taking several more direct measures to influence individuals' savings behavior:

• By strengthening firms' and employees' capacity to make the case for saving. Two thirds of pension tax expenditures go to families in the top 20 percent of the income distribution while just 12 percent go to families in the bottom 60 percent. Our proposed Retirement Savings Accounts, or RSAs, would offer a powerful new saving incentive for people who receive little tax benefit from saving under existing law. We are also working to enhance the incentive for small businesses to offer pension plans.
• By making it easier for individuals to save through payroll deduction. We recently issued a ruling that will allow automatic enrollment in 401(k) plans for current employees without those employees having to take the initiative to do so themselves - although they obviously will be free to opt out. In our FY2001 budget we have proposed to extend these benefits more broadly.
• And by offering savers other types of safe investment. Indexed bonds have proved immensely popular since they were launched in 1997 because they offer immunity against the uncertainties of inflation. Building on that program, the recent launch of the index savings bond, the Series I Savings Bond, has proved an instant success.

III. The Need for Open and Growing Global Markets

Looking beyond our shores, a more balanced and thus more enduring global recovery will rest on three core elements.

1. Faster, Investment-led Growth in Europe and Japan

The improvement in the prospects for the growth in Japan, and Europe, especially, is welcome. It is, however, noteworthy that even with a stronger pace of recovery in these economies - the imbalance in global growth has changed very little. While it accounts for less than half of the G7's total GDP, in the past three years the US has accounted for more than three-quarters of the growth in G-7 real demand. On current forecasts, the US will still account for about two-thirds of real demand growth within the G7 this year.

Fortunately, the goal of achieving greater balance in growth coincides with a goal that policy makers in both regions have now firmly embraced: building economies that can attract increased investments in new markets and technologies.

The heads of European Union governments, in their Special Council in Lisbon last month, set themselves a target that is ambitious, but must be considered achievable on the basis of recent experience: raising growth in the EU to an average of 3 percent and creating 20 million new jobs, by embracing the Internet age.

There have lately been impressive signs of a new European economy. The total market capitalization of Frankfurt's Neuer Markt is now close to $200 billion - compared to nothing just three years ago. And European companies are taking the lead in cutting edge sectors such as digital television and "m-", or mobile-, commerce.

Yet, Europe's leaders are right to see important obstacles in the path of more durable rapid growth, and to see structural reforms as crucial to overcoming them. Removing barriers to employment growth has to offer significant potential at a time when 61 percent of working age Europeans, on average, are employed, compared to 74 percent in US and 78 percent in Denmark.

The right kind of macro-economic environment will also be crucial if growth is to come through rapid investment rather than export growth, as has too often been the case in the past. Macro-economic policy will need to promote a domestic demand-led expansion and to accommodate the increased potential for growth that more decisive structural reforms would promote.

While the situation in Japan is brighter than it was a year ago, the weakness of the economy continues to be a concern. There have been some positive signs, and we can all hope that the worst is past and that growth will resume this year. Yet it is impossible to dismiss the GDP contraction in the second half of last year, despite the limitations of Japanese statistics. In short, while Japan has taken a number of important policy steps, it is far from clear that a sustained recovery is at hand.

Japan needs to use all the tools of macroeconomic and structural policy to support demand until a self-sustaining recovery in domestic demand is assured. Beyond this, Japan needs to keep working to restructure its banking system - including more aggressive disposal of non-performing assets - and make further progress on market-opening deregulation. It remains the case that successive deregulation efforts since 1993 have made headway in few areas outside the financial, telecommunications, and retail sectors. Yet the visible benefits of even this limited progress underscore how large the ultimate returns could be.

The necessary adjustments for more balanced growth in Europe and Japan are the mirror image of the necessary adjustments in the US. Our rate of national savings needs to rise as the current account deficit adjusts, and the counterpart to that increase in savings should be increased investment in Europe and Japan.

2. A Strong and Sustainable System for Promoting the Flow of Capital to the Emerging Market Economies

US businesses, workers and farmers have an enormous stake in the emerging market economies pursuing strong economic policies, and being able to attract the capital and expertise that they need to be growing trading partners for the US. Put simply: the faster these economies can develop and grow, the greater the chance that our own economic strength can be sustained.

Already, more than 40 percent of our exports go to developing countries. And as we saw in 1998, adverse economic and financial developments in these economies can put our own growth and prosperity at risk.

• That is why we must continue to take the lead in the global effort that has come to be called the reform of the international financial architecture - so that the flow of capital to the developing world can be both strong and more sustainable than it has been in the past.
• That is why we must work to support efforts to build a stronger and more transparent global financial system - so that investors and governments have the information they need to pursue policies and investments that will yield the highest long-term return.
• Most fundamentally, that is why we have such a stake in the effectiveness and global reach of the international financial institutions - so that they can work to help countries to avoid financial crises such as those in Asia, and so that they have the capacity to respond effectively to such crises when they occur.

At a time of relative economic strength and imbalanced global growth, what has been true for more than 50 years is even more true today: that no country has a greater commercial and broader economic stake in encouraging the creation of open and growing global markets than the US. This is an ongoing commitment that we must continue to make as a nation, not a single battle that will be one or lost. But a number of upcoming decisions will provide important tests of our capacity to stay on the right track. One of these is whether Congress votes to grant China Permanent Normal Trading Relations (PNTR) status and essentially support its entry into the WTO.

The case for doing so rests on three pillars.

• First, there are the direct and commercial benefits of the market opening agreement that we concluded with China last fall. As part of that agreement, Chinese tariffs will fall by 50 percent or more in the space of five years, and other import barriers either eliminated or greatly reduced, in a wide range of sectors that are important to us. For example, China will participate in the Information Technology Agreement (ITA), eliminating all tariffs on computers, semi-conductors and other high-tech products.
• Second, there are the economic and broader benefits of promoting economic and social change in China. In signing this agreement and entering the WTO, China is locking into place a more rapid process of market opening and economic reform, and moving to join a global rules-based system. We have an enormous stake in supporting that decision, both because it will help support faster growth in China - and higher future demand for our products, and because, in the era of the Internet, it should help to catalyze institutional and social changes that promote core US interests and values.
• Third, there is the ultimate enhancement of America's national security interests that comes from integrating China more closely with the community of nations. As President Clinton has said, if we have learned anything in the last few years, from events in Russia and elsewhere, it is that the weaknesses of great nations can pose as a great a challenge to the US as their strengths. Our long-term strategy must be to encourage the right kind of success in China: to help it grow into a strong, prosperous and open society. We have a much greater chance of having a positive influence if we welcome it into the broader global system.

More broadly, we continue to see trade liberalization as a crucial part of successful economic development and poverty reduction in the developing world. That is why we are working hard to pass into law both the African Growth and Opportunity Act and the enhanced Caribbean Basin Initiative. Each of these represent modest but important steps toward expanding our partnership with these countries, bringing them into the broader global economy, and promoting the broad economic reform and accelerated growth that they desperately need. They should not be difficult steps for a nearly nine trillion dollar economy to take.

Let me conclude with the thought with which I began. Our relative economic standing in the global economy has changed dramatically since the days when this Council was founded. That turnaround in our performance must be a source of pride. But it cannot be a cause for complacency - and we must beware the risks that our very success could ultimately set in train. As Chairman Greenspan emphasized in the fall of 1998, the US cannot long be an oasis of prosperity in a more integrated global economy.

That is why it is so important for us to work to expand our productive potential and raise the rate of national savings, so we will be less dependent on foreign borrowing to finance a high rate of domestic investment. And that is why it will be so crucial to support more open and rapidly growing markets overseas. In that sense, US support for a strong and more integrated global economy is probably the best forward defense we could have for the greater US competitiveness we have worked so hard to achieve. Thank you.