FROM THE OFFICE OF PUBLIC AFFAIRS

Let me start by thanking Representatives Clayton, Etheridge, Hayes, Jones, McIntyre, and Watt for inviting me to talk to you today. I am pleased to have the opportunity to talk to this distinguished group of business and community leaders.

Today I would like to take a broader perspective and focus on what the next Administration - regardless of which party is in control - should do to confront the longer-term challenges facing the American economy.

We come together at a moment of remarkable success for the American economy. But this is not a moment for complacency. Prosperity and credibility are attributes that are rented, not owned. If we as a country are to take maximum advantage of this moment then we must face up to the big choices that will determine whether our long-term future will continue to be prosperous.

What are those big choices? Let me focus today on three:

• First, why it is critical that we make the right fiscal choices for the long-term health of the economy and why that means we must continue to pay down Federal debt.
• Second, how we should respond to what is "new" about the "new economy" with an effective national growth strategy.
• And third, what we can do to extend the circle of prosperity as widely as possible.

During the post-war period, the U.S. has made a major fiscal choice every decade or two. Some of those choices were made wisely, some less so.

• After World War II, we chose to redress the expansion of debt that had been used to finance the war and to bring us out of the Great Depression. The ratio of debt to GDP fell dramatically, helping to lay the foundation for the strong growth of the following decades.
• During the late 1960s we chose to finance expanded outlays on both "guns and butter" partly by relying on budget deficits. These deficits contributed to the over-heating of the economy which, in turn, contributed to rising inflation, higher interest rates, and a long period of slow growth of productivity and real wages starting in the early 1970s.
• In the 1980s we chose to increase spending significantly while cutting taxes. As a result, real interest rates increased to record levels, the rate of net investment declined sharply, productivity growth continued to stagnate and the stock of public debt almost quadrupled.
• And in the 1990s, rather than continue with the policies of the 1980s we chose to move strongly in the direction of fiscal discipline. In retrospect, that decision was a crucial building block for the prosperity that we currently enjoy. By adopting budget discipline, we have allowed roughly $2.5 trillion that would otherwise have been absorbed by government borrowing to have been invested in making America's economy more productive.

We again face major choices today, at a time when record economic strength is giving rise to substantial budget surpluses and the reduction of national debt held by the public. The question we face is whether to keep our country on a path toward eliminating publicly held debt, or to devote the bulk of projected surpluses to alternate uses instead.

The advent of a new economy fundamentally changes the stakes involved in the choice of our nation's fiscal policy. In a world that is rich with investment opportunities, and where investors can quickly understand the implications of changes of policies five and ten years out, the importance of running a surplus and pursuing prudent policies becomes much, much greater. That is why we have emphasized a multi-year approach, and one that focuses on protecting the Social Security and Medicare surpluses and paying down the debt.

Like tax cuts, reducing publicly held debt also delivers substantial direct benefits to the pocket books of American families:

• First, because debt reduction lowers the burden of future payments of interest and principal. For every dollar borrowed in the 10-year bond market today, taxpayers will pay a total of $1.61 in interest and principal.
• Second, because debt reduction helps to put downward pressure on long-term interest rates. We estimate that, as a consequence of our new path of fiscal discipline and the resulting reduction in interest rates, a typical American family with a mortgage of $100,000 would save around $2,000 a year on mortgage payments.

Debt reduction can provide these kinds of benefits to American families in a way that also supports the long-term strength of our economy at a time when the return on investment is probably greater than it has been in a very long time. The bottom line is that the more we save through debt reduction, the more that America's businesses will be able to invest in the technologies that will shape our future.

At the same time, we must take into account the changing nature of the American economy by adapting the institutions of our market economy to meet the challenges of the information revolution -- just as we re-defined these institutions for the industrial revolution more than a century ago. And that means understanding what is new about the "new economy".

Let me outline three key strategic implications of the new economy.

The most robust empirical finding about the new economy is that the return on investment in human capital has risen faster than the return on investment in physical capital. If investments in factories were the most important investments in the industrial age - the most important investments in an information age are surely investments in the human brain.

As Chairman Greenspan has so often emphasized, in such a world, goods are increasingly valued for the knowledge that is embodied in them rather than for their physical weight. Increasingly, our economic fortunes are determined by how much we know not how much we can lift.

We have an enormous opportunity now to perpetuate our prosperity in a knowledge-based economy by increasing our investments in the users and producers of information - and the most important contribution we can make is in education. The digital divide is a very important problem in America. And the greatest source of the digital divide is the inability to read.

• My children are fortunate enough to attend public schools with good teachers and good facilities. All kids should have those same opportunities. They should not be in schools where the classrooms are converted closets; where lunch begins at 9:45 because facilities are inadequate to serve all kids; and where the average elementary school is now 60 years old. That is why school construction is so high on the Administration's agenda. The President's proposal currently before Congress provides for the issuance of $24.8 billion in tax credit bonds over two years to build or renovate up to 6,000 public schools.
• One million teachers will retire in the next decade. To replace these teachers with the kinds of teachers we want, we need to make teaching a valued and honored profession and to pay our teachers well.

 Second, we should make markets as large as possible.

It is a characteristic of the "weightless" goods of this new economy that there will often be very high initial fixed costs and low, even zero marginal costs. In the new economy industries, growth has a greater potential to snowball. Success may have greater potential to become self-perpetuating, as growth leads to rapid declines in prices, and so to further expansion in the market and further growth.

This reality - that growing demand and growing markets and networks will tend to reduce costs and raise efficiency - makes successful economic management all the more important. It also points up the importance of making sure that we function with as large markets as possible.

The crucial implication for those of us in government is that policies that help to expand the size of markets in any way become that much more important. Deregulation becomes that much more important, to ensure that government is not preventing or distorting the development of fast-growing markets. For example, that is why we worked so hard to pass the right kind of Financial Modernization legislation last year.

Equally important, the information technology revolution highlights the enormous benefits that will flow from successful global economic integration. We stand at the hub of a world trading system. And the bigger that world trading system is, the more open it is, the more we will benefit from our position at its hub.

That is why we need to do all we can to keep our markets open, and to work to ensure that other countries open theirs:

• It will be crucial for the US to be a supporter of new trade agreements: that is why it was so important that we passed the Africa Growth and Opportunity Act, and the enhanced Caribbean Basin Initiative earlier this year. And that is why it is critical that the Senate follows the House of Representatives in enacting Permanent Normal Trading Relations status (PNTR) with China.
• For American global leadership to continue in this new century it will be crucial for to maintain support for strong and effective International Financial Institutions. At a time when only 4 percent of the world's population lives in the United States, achieving lasting and rapid growth in American living standards has to mean supporting development and higher living standards abroad.
• And it will be crucial for us to be prepared to respond to new global challenges. Notably: by playing our part in funding the expanded initiative for reducing the debts of the poorest countries; and by supporting global efforts to promote the development and dissemination of vaccines to eradicate infectious diseases such as AIDS, malaria and tuberculosis.

If we are to maximize our economy's productive potential, then it is also important that we work towards a more inclusive prosperity within America. In an economy where for the first time jobs are looking for people and not people for jobs, ensuring that no American is left behind is as much an economic as a moral imperative.

It says something about the US labor market today that companies are actually hiring planes to advertize jobs fairs in the skies over Baltimore Orioles games. It is a different world, indeed, from the one of a decade ago, when we debated the sources and causes of what was then referred to as "the jobless recovery." To write the next chapter of America's economic success story most effectively, we must leverage our nation's latent potential in all neighborhoods - including in the inner cities and rural areas.

Let me mention three ways in which this Administration is working with Congress to provide a more inclusive prosperity that will strengthen the economy as a whole:

• First, we have proposed an initiative that would make it much easier for low-income Americans to open basic electronic accounts. Building on the success of the Electronic Transfer Account initiative that extended low-cost accounts to recipients of Federal benefits, the First Accounts initiative, if funded by Congress, would invest $30 million in extending this opportunity to low and middle-income Americans who do not receive Federal benefits.
• Second, we have proposed an initiative that would provide incentives for businesses to invest in our low-income and under-served communities. The New Markets initiative, which has passed the House and is being considered in the Senate Finance Committee tomorrow, will leverage over $20 billion of new equity investment in our underserved communities and encourage investors to tap into the $700 billion in purchasing power that exists in America's inner cities and rural areas.
• Through its Bank Enterprise Award program, the Treasury's Community Development Finance Initiative Fund has granted almost $90m to the private sector that has already leveraged more than $1.8 billion of investment and lending by banks to projects in our low-income communities. This Fall, we are extending the scope of the BEA program to provide incentives for banks to offer first-time accounts to customers who do not receive Federal payments.

Let me conclude by emphasizing the importance of using what is new about the new economy to widen the circle of opportunity for everyone. Technology does provide Americans with remarkable opportunities. But they are not there for those who lack the basic means to take advantage of them. And it has been estimated that in America today, a child born of a single teenage mother who did not finish high school has an 80 percent chance of living in poverty at the age of ten. Male life expectancy in Washington, DC is several years below that in Mongolia or Belarus.

If our success is to continue, if our economy is to be what it has to be, and if it is to be a secure prosperity that we enjoy, then we as a country have to do more to ensure that all are included. That is why expanding support for the working poor through the Earned Income Tax Credit is so important. And that is why we need to expand programs such as Head Start and the Child Health Insurance Program so that every child starts out in life with the core essentials.

Equally, although technology is transforming our economy and our society we need to recognize that there are some things that many Americans would like to stay the same. As we work to build a modern financial system we have also to ensure that every consumer's right to privacy is properly protected. As we work to build a more global economy we have also to work to prevent a race to a bottom in the policies and protections that matter to us. As important as new markets, new technologies, and new global integration are, we have equally to recognize that their full potential will not be realized without the right kind of public purpose. Thank you.