October 31, 2005
JS-2997

The Honorable John W. Snow
Prepared Remarks to: the Detroit Economic Club

Good afternoon. I really appreciate you having me here today.  In 2003, I gave my first speech as Treasury Secretary to the Detroit Economic Club, and it's a real pleasure to be back here today.  Since I was here last, we have seen the economy on a remarkable path of growth.  Last week's encouraging advance GDP report for the third quarter was a reminder of the power of the inherent strength and flexibility of the American economy to help us deal with economic challenges.  In a quarter where the economy had to absorb the shock of massive natural disasters, we still grew at a healthy rate of 3.8 percent.

Fundamental to our economic strength has been the pro-growth policies the President has championed.  Lower tax rates for all taxpayers put money back in the hands of consumers. An increase in expensing for capital investment gave a boost to small businesses.  It's important to continue this growth that we make the tax cuts permanent.

It is also important that we exercise fiscal discipline.  The increased spending  required for hurricane recovery efforts make this all the more important.  We are currently on the path to cut the federal deficit in half by 2009, and while economic growth has helped the growth of Treasury receipts quite a bit, spending restraint is the necessary other-half to the deficit-cutting process.

Wise monetary policy from the Federal Reserve has also played a great role in keeping our economy strong.  Under Alan Greenspan's leadership, the Federal Reserve has played a significant role in plotting a safe course for the economy through some very difficult economic times.  Through the stock market downturn of the late-1980s to the currency crises of the 1990s and two recessions, Chairman Greenspan's deft hand at the helm of the Federal Reserve has been a key element of our economic success. 

I was pleased by the President's choice of Ben Bernanke to be his nominee as the next Fed Chairman.  I have enjoyed having the opportunity to work with Ben these past few months as he's served as Chairman of the President's Council of Economic Advisors.  His intellectual rigor and his deep understanding of the field of economics have greatly impressed me.  Ben's background as a respected researcher and  chairman of the Economics Department at Princeton University, as a member of the Federal Reserve Board of Governors and, most recently, as an economic policy advisor to the President, make him an excellent choice for this critical position.  Greenspan is not an easy act to follow, but Ben, I believe, will truly prove a worthy successor.

A low inflationary environment has been the key to global growth and prosperity over the last few years.  It is widely understood today that inflation is a monetary phenomenon.  It will fall to the Fed and other leading central banks of the world to continue to put in place the appropriate monetary policy to assure continued non-inflationary growth. 

Another key to continued economic growth is the flexibility of our economy.  One of the great virtues of a flexible economy is the continuous automatic adjustment process.  A flexible market economy is constantly adjusting to avoid large problems that require sharp corrections.  In this way the automatic market adjustment processes are like a tea kettle which, upon hitting the boiling point, continues to let off pressure.  Under a system of tight regulation and government direction of the economy, the rules and regulations can get far out of touch with underlying economic realities. 

In these cases, the underlying pressures will continue to build but without the automatic correction process taking place and without the regulators having a good feel for the fact that things are getting out of balance.  They will eventually see that they are out of balance, but by then the required correction will be large and potentially highly disruptive.  In other words, de-regulation by allowing markets to operate, reduces risks of major disruptions and thus promotes stability.  Imbalances are addressed automatically, so that in most cases no one is even aware that problems have been avoided – it is the tea kettle that did not blow up. 

The importance of economic flexibility was readily apparent in the aftermath of the recent hurricanes.  Despite very real shocks to the economy, GDP grew in the third quarter at a strong 3.8% pace.  Harsh reality means we will face disruptive events from time to time.  The best thing we can do is make sure that the U.S. economy and the global economy are able to absorb such shocks.

We have done that pretty well in the U.S. economy by adopting a far-reaching set of policies over the past three decades that have made the American economy much more flexible and much more resilient.  A priority for national policy makers must be to resist policy proposals that would introduce rigidity into the economy and instead to press on every front for policies to make the economy even more flexible.

Our tax system is one area where we have a real opportunity to increase economic flexibility.  The unwieldy nature of the American tax code is legendary.  As I'm sure you know, the President's Panel on Tax Reform will be presenting a comprehensive report to me tomorrow that details both the problems with the current code and suggested replacement structures for it.  I'm looking forward to receiving their report.

At Treasury, we'll be taking the Panel's report into consideration as we prepare to then give our reform recommendations to the President. 

There are challenges to our economy.  High energy prices are something that we are all thinking about.  The underlying strong fundamentals of our economy have certainly helped us to adjust to the rise in prices, but all the same, current energy prices are creating real headwinds for the economy.  They act like a tax on consumers, reducing their real purchasing power.  They also have an adverse psychological effect on consumers, making them more apprehensive and less positive about the economic outlook.  They also have adverse effects on the cost structures, operating income and cash flow of energy-intensive businesses.

While high energy prices are leading to a supply-side driven slowdown in the recovery, they have not derailed the recovery.  The world economy continues to grow at a strong clip, even in the face of the headwinds created by high energy prices. 

Unwelcome as they are, high energy prices lead to behavior changes by both suppliers of energy and consumers of energy, which set in motion a set of forces to moderate the high prices over time.  These are natural responses to higher prices.  High energy prices are a good incentive to develop both traditional and non-traditional new energy sources.  In addition, they provide a strong incentive for energy buyers to conserve and we see that happening already.

The energy bill that President Bush pushed for so hard and so long is finally law.  It will help over time and sends a good signal to the markets that our political processes work.  In the long run, this legislation will encourage conservation, increased production, and give incentives for developing alternative sources of energy. 

But we also need to promote greater access to our abundant energy sources.  We need to allow exploration in ANWR.  It can be done in an environmentally sensitive way.  We need to facilitate expansion of our refinery capacity in the U.S. which has become a real bottleneck for us. 

We also need to encourage nuclear energy investment. We need to speed up the regulatory process and create more certainty in it.  These are the ideas the Administration is working on today under the leadership of Energy Secretary Sam Bodman.

Another area of particular concern to businesses, and especially businesses in the Detroit area, are rising health care costs.  The Administration is exploring ways to address this problem.  It can be argued that the future fiscal condition of the federal government will be driven by rising health care costs.  In the private sector, employers can be reluctant to hire new employees because of steeply rising health costs.

One necessary reform to deal with this problem is to address frivolous lawsuits that clog up our courts and raise health care costs for everyone.  The courts exist to give citizens recourse, but every dollar spent fighting a frivolous lawsuit is a dollar that is not going to care for a patient or to reduce costs.  It is important that we turn the courts back into venues for legitimate claims and restrict the opportunity for junk lawsuits to tie up valuable time and resources.

We've also created Health Savings Accounts (HSA) to bring affordable health care within reach of more Americans.  Like super-charged IRAs for health care, HSAs are tax free savings accounts that can be used in conjunction with a high deductible health care plan to significantly reduce health care costs.  HSAs put consumers in charge of their own health-care choices.  If you have not already, I hope all of you consider offering an HSA option to your employees.

I talked earlier about removing government impediments to economic growth, and I want to point out that the importance of this applies to other nations as well. In other words, in a global economy the U.S. cannot continue to be the sole source of growth, nor can we continue to grow if we are isolated from the enormous number of potential customers that exist outside our borders. We look to other countries to improve their economies and to remove barriers to trade.  Trade is a two-way street.  While we believe in open trade, we believe in trade with rules that everyone must follow. 

I just recently returned from a trip to China where we had productive discussions about trade liberalization – in particular, greater access for financial services.  I believe financial services liberalization would help China achieve balanced growth, which is critical not just for China, but for the global economy. 

China's foreign exchange regime certainly is also extremely important.  Our views on this issue by now are well known: China and the global economy will both benefit from greater currency flexibility.  We will continue to press China to continue to make progress on reforming their foreign exchange regime.

But we can't forget that constant reform of our own economy is our highest priority if we want to remain the most dynamic economy in the world.  For our economy to continue to grow, we must keep it flexible, we must keep taxes low, and we must work with our trading partners to eliminate barriers to trade. 

Thank you so much for having me here. I'd be glad to take your questions.