FROM THE OFFICE OF PUBLIC AFFAIRS

I am an optimist about the U.S. economy. Let me tell you why. In 1977, after working for the federal government for 15 years, I moved to the private sector, affording me a front row perspective on the U.S. economy and on many other countries of the world economy as a product supplier. Let me remind you of the circumstances then. At that time and through the early 1980s, our situation was characterized by a struggling economy - relatively high unemployment rates, high inflation and high interest rates and a general sense that we were being eclipsed by Japan and that Russia was probably our equal.

If you fast forward to today and look back you see a U.S. economy that has had a remarkable period of income and productivity growth while Japan has had 11 years of average growth of less than 1% and Russia's economy by their own reckoning is the size of Portugal's.

Why the change? We have an enabling economic structure - not perfect, but as compared to other economies it is truer to the fundamentals that are necessary to economic growth and rising living standards. Our government system provides the rule of law, enforceable contracts and minimal corruption, buttressed by a relative openness to world competition and flexibility in our labor markets.

The energies of the private sector were awakened by the realization that we were slipping. We stopped complaining about low wage rates and subsidized products in other places and focused on winning the world as it was. And we have prospered.

Robust growth and prosperity began in the early 1980s, and hardly flagged until the year 2000. In the last half of the 1990s we grew at an unsustainable rate. The excesses of the dot-coms and telecom began a correction, first seen in order rates in mid-2000. By December of 2000 we were clearly in a correction phase that deepened through the first half of 2001. The Federal Reserve responded with rate cuts and Congress passed tax reform which began releasing money to the taxpayers on July 23^rd.

I believe we were headed for a recovery - a correction without a recession - until our economy was basically shut down for a period following the attacks of September 11. The third quarter negative growth came as no surprise and those who crunch the economic models were certain the fourth quarter would be even worse, estimating 2.5% or even 3% negative growth. As I looked at the data and talked to people around the country I heard a lot of doom and gloom but when I asked business leaders about their own businesses I found they were taking action. As a consequence when the third quarter numbers were released I said I thought there was a possibility that the fourth quarter would show positive growth. Businesses were discounting product prices to move goods and services and they were pulling down rates of production to eliminate inventory. They also rethought capital spending plans. On balance they took the actions necessary to sharply improve productivity and together these actions produced a modest rate of real growth in the fourth quarter - a rate I expect with be adjusted up when the regular reviews are made.

The best of the best around the world take their ideas and made them reality - creating jobs and improving living standards of people everywhere. The leading edge innovators in every sector of the economy are miles ahead of their competition - and that large gap means there is immense untapped potential for improvement.

It is useful to remember how the improvement is realized. Last summer after the tax reform bill was passed, I met the owner of a small florist shop who told me he was hiring one new person because the tax reform freed up the money to do it. This is an important story that makes this point: job growth in this country occurs one at a time. And when we leave people with more of what they earn, they pursue their individual goals, creating jobs and developing products and processes that make our lives healthier and more comfortable.

This individual story links to an important observation about our fiscal condition. Those who think American workers are getting to keep too much of their own incomes after last summer's tax reforms don't realize we are looking at a tax system that will still take in 19% of the GDP compared to an average rate of 18% since 1945. I think they also don't understand that a vibrant growing economy is what produces the basis for taxes that can be used for shared public purposes. But most people do understand this, and that is the reason not many voices are calling for tax increases as our economy is only in the early stages of recovering to the 3-3.5% annual growth rates that will create jobs for the 1.4 million people who have been displaced in the last year, and provide jobs for each year's increment of new job seekers. As we get back to a good rate of economic growth, budget surpluses with reappear so long as we exercise discipline in federal spending. It is true that the President's budget plan for fiscal year 2003 would produce a modest unified budget deficit because of funding requirements for the war and homeland security, but we believe this is the correct balance for the current circumstances.

Our job in government is to continuously improve the framework for our economy. While our recovery is underway, there are significant obstacles imposed by government that slow its speed. The President doesn't want to sit still and wait for the recovery to gain strength - he wants to speed Americans' return to work. We are hopeful the Senate will act soon to take up a stimulus package as the President requested, to reduce the tax burden on job-creating investments. The Senate has voted to extend unemployment benefits, but I hope they will also see the need to vote to boost job creation.

The complexity of our tax code is a take away from our economic potential. Estimates of how much taxpayers spend complying with the tax code range from $70 to $125 billion a year. That's a lot of lawyers and accountants. The cost of their services has to be included in the price of products. I wonder how many of you think your food tastes better or your car performs better or your clothes fit better because of the added cost you pay to cover the cost of lawyers and accountants figuring out the tax code. Apologies to lawyers and accountants, but it would be great to have the need for a federal retraining program to convert you into product engineers.

We at Treasury are conducting a comprehensive review of the tax laws and their complexities, and the options for fixing some of the biggest headaches. We'll begin releasing these reports in the coming months. Did you know there are five different definitions of child in the tax code? You'd think it would be easy to know if you have a child living in your household or not. Guess again. And it doesn't end there. Take a look at all the provisions that allow for deducting different higher education expenses. Or all the different rules and requirements for various types of retirement savings.

It's not just individuals who suffer, either. Small businessmen have to read through indecipherable rules. Determining whether someone who works for you is an independent contractor or an employee can be an incredible headache. Small businessmen spend countless hours battling the IRS over timing of a deduction - not whether or not the cost can be deducted, just whether the deduction should be taken this year or next.

Our tax code is an abomination. And it is a drag on our ability to create jobs in this nation. I hope that by publishing detailed descriptions of these complexities, we can begin a cooperative effort with the Congress to undo some of these complexities that give individuals headaches and force small business to pay for tax advice instead of expanding their businesses and creating jobs.

Our agenda for prosperity encompasses other important policy objectives. The President has called on Congress to enact Trade Promotion Authority, 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. The President has also put forth a national energy strategy, to assure cleaner energy and stable prices. His plan would create jobs in the energy sector, and also in the technology sector as it spurs innovation to make our energy sources cleaner.

And now just a few words about a topical subject. Let me say that the subject is TRUST.

When publicly traded companies provide information to their shareholders or potential shareholders, there must be accountability for the accuracy and completeness of the information put forward. In the wake of recent events, the President asked me to work with Alan Greenspan, Harvey Pitt of the SEC and Jim Newsome of the CFTC to review the current requirements for disclosure and corporate governance, to assure that investors are getting the information they need to make informed decisions. We will make recommendations to the President in the coming weeks.

I start from this premise: with the highest position in an organization goes the highest responsibility. Let's tighten the meaning of what it means to be responsible. CEOs are the ones who know what's going on in their companies - there's no excuse for them not to know the position of the company and what variables will determine the company's future success. Every quarter the CEO should say I know what every investor needs to know and I've given it all to you. That doesn't mean investors should be forced to figure out what's important in a dense report the size of the NYC phonebook. The CEO should also identify the 5 or 10 most important things. And if there's negligence, there should be some recourse.

On a related subject, I believe government has no business telling Americans where they can and can't invest their money. And government can't ensure that no one ever makes a bad investment decision. What we can do, and should do, is make every effort to ensure that Americans have the skills to evaluate their savings and investment choices. We at Treasury are devoting serious attention to how best to improve Americans' financial literacy. I'm very pleased that Rosario Marin, the Treasurer of the United States, is going to lead an effort for us to make financial education part of the school curriculum for children everywhere - not as a separate course to take, but integrated into math and reading classes, so they learn at a young age the reward to saving and the costs and benefits of assuming debt.

Financial literacy is part of the foundation of a vibrant entrepreneurial economy - it ensures that everyone can join in and make the most of their ideas in a world where hard work is rewarded and capital flows freely to develop and implement good ideas.

Let me say again, as I did at the outset, I am an optimist about the U.S. economy and more broadly about our society. I believe the progress we will make in the next 25 years will dwarf the progress of the past 25 years. Together we can do it and together we will do it.