FROM THE OFFICE OF PUBLIC AFFAIRS

Good morning.  It is a great pleasure to be with you today and have this opportunity to renew my ties with the CBI and so many of you that I knew from my private life where my days were filled with the same worries and concerns as yours are today.  It’s also very nice to be here with my good friend Chancellor Brown.

It’s been said before, but the relationship between the U.S. and the U.K. is a special one, in political, cultural, security and economic terms.  I’m going to focus on the latter, the economic terms, of course.  Not only is the U.K. a major market for American products and services, and vice versa, as well as a leading source of investment and joint venture opportunities in both directions.  The United Kingdom is also a bridge between the United States and continental Europe.  Working together, Chancellor Brown and I have helped to give the G7 finance ministers a newfound focus on productivity and economic growth.  Thus our relationship is even larger and more significant than the direct flows of trade and investment between our nations would suggest. 

People from the world of finance, commerce and industry share much in common whether their companies are based in the UK or the USA.  Under the relentless pressures of the marketplace, we are all compelled to worry about our cost structures, our competitive position, new opportunities for growth, building effective organizations, and creating shareholder value.  Even the most successful business people always keep on guard for the new products, the new technologies, and the new ideas that threaten their position. 

We all know that success depends on continuously getting better and better; that market positions of prominence are not foreordained; that profitable growth and rising shareholder value require relentless effort and infinite attention to detail.  Success depends on hard work and always being open to new ideas, new technologies, and new products.  The life of business is inherently restless and uncertain.  We talk about the virtues of competition in the abstract and we are all made better because of our competitors, but the fact is that competition makes sure that none of us have a quiet or tranquil life.  You know that from your years in business and I know it from mine.  And those realities of business life are a shared heritage of all of us who have made industry our calling. 

Let me say as well that the world is a better place because we don’t have the luxury of quiet life.  Because we are continuously forced to innovate, reduce costs and become more productive, business and industry are at the very center of the wealth creation process that does so much to enhance the prosperity and wellbeing of the world.  Our high standards of living and economic abundance depend deeply on business and industry generating jobs and the wealth, and the new products that change the world and make it a better place.  Across the globe people are striving to have higher standards of living, to know prosperity and abundance, and business lies at the very center of the process; it makes abundance and prosperity possible.

So I applaud you for what you do.

But the government also has a critical role to play.  Its role is to create an environment in which you can be successful -- not by propping you up, not by subsidizing you, not by protecting your market position.  Those strategies have been tried and they never really work in the long run.  No, government’s role is something altogether different.  Its job is to establish the conditions in which you can succeed, to allow you to earn the rewards for your best efforts and your best ideas; to give you the freedom to innovate, grow, adopt new technologies; and continuously hone and adjust production, including the relationship of labor to capital, to create wealth for your owners. 

Businesses need to be able to plan, and to plan they need to know with some certainty the rules of the game.  Government sets the rules of the game and they have an obligation to do so in a way that is open and transparent so that businesses can plan with a reasonable measure of certainty for their future.  Having spent a career in business I know that the great enemy of enterprise is uncertainty -- uncertainly with respect to tax policy, trade policy, regulatory policy, competitive policy – all areas where government plays a dominant role. 

Government also has responsibility to establish sound monetary and fiscal policy, to maintain the value of the currency and keep inflation and deflation in check.  At a bare minimum, government must protect property rights.  Capital is and must be cowardly.  It goes where it feels safe and protected and respected.  As stewards of capital, you know this to be the case and carefully assess “country risks” before investing capital.  This is a message that Chancellor Brown and I emphasize over and over to developing and emerging market countries. Enhanced prosperity in these countries depends upon foreign direct investment, which will only be forthcoming where property rights are honored.

Finally, government has an obligation to continuously assess the barriers to greater growth and prosperity and to take steps to eliminate them.  These impediments to prosperity are found in all economies and are widely observed: labor market policies that inhibit appropriate mobility; regulatory policies that add more to society’s costs than to its benefits; industrial policy that subsidizes non-competitive enterprises and frustrates the play of competitive forces; state pension plans that claim a disproportionate share of a nation’s capital and thereby frustrate private capital formation.  In the United States, I would add our notorious tort liability system as another example. 

Removing these impediments to growth and prosperity takes political will and political courage.  In the United States, President Bush has laid out an ambitious agenda for maximizing growth and job creation. He proposed a six-point plan to address these challenges, focusing on making health care more affordable and its costs more predictable; working to prevent frivolous lawsuits from diverting money from job creation into legal battles; working to build a more affordable, reliable energy system; streamlining regulations and needless paperwork requirements; opening new markets to high value American products; and working to make tax relief permanent, so businesses and families alike can plan for the future.  Achieving progress in these areas requires a significant degree of commitment and personal leadership from the President. 

It is clear to me that Prime Minister Blair and Chancellor Brown have demonstrated a remarkable degree of leadership and commitment to achieve productivity gains and sustained economic growth here in the United Kingdom.  I look forward to working with the Chancellor on our new joint initiative to encourage further achievements in our economies.

Leadership pays off.  As various private sector economists have remarked recently, the U.S. recovery has real muscle to it and is sustainable.  That is good news for us, but it is good news for the UK and the rest of the world as well. 

There can be no doubt about the fact that the last three years have been difficult for the U.S. economy as we have faced an unprecedented number of challenges beginning with a steep decline in economic activity that President Bush inherited.  As we look back on it there can be no doubt that the economy was in a decline as the new Administration took office.  Beyond that we have had to weather the terrorist attacks of 9-11, the dotcom bubble and the collapse of the stock market, which took $2 trillion out of our equity markets.  Then emerged the corporate scandals that shook confidence in our capital markets, a regional energy crisis, and two wars – Iraq and Afghanistan.  And of course all of this was occurring while the other major industrial economies of the world were weak.

I am often asked by my fellow finance ministers and others how the American economy could weather such shocks and still perform as well as it did.  The answer lies in the inherent flexibility and resiliency of the U.S. economy.

Things we did thirty years ago to deregulate our transportation sector are paying huge dividends today in making our economy more flexible and resilient.  Financial sector policies adopted years ago: deregulation of the fixed fee arrangement for brokers; opening up financial services to allow banks into non-banking financial services and vice versa; and the development of hedge funds and derivatives, which played a part in spreading risks and reducing their concentration in the banking sector.
 
Our basic labor market policy has been extraordinarily important in creating high degrees of labor mobility and avoiding labor market rigidities.  Over the course of many years the U.S. has adopted policies to make the economy more flexible, competitive and resilient, as we faced the unprecedented shocks of the last three years. 

With the economy coming back we are beginning to see positive signs on the jobs front as well.  Here again, it is important to put the jobs situation into context.  With the “bubble economy” of the 1990s, many firms in many industries expanded rapidly.  They had the wind in their sails and it looked like the clear path to profitability lay in growth.  And grow they did and expand they did. 

But the bubble burst and American industry found that it no longer had the wind in its sails.  Demand slowed markedly beginning in the latter part of 2000 and it only recently has begun to come back.  With the much weaker demand conditions, and unable to rely on growth to propel earnings, American business began to aggressively attack their cost structures.  For the better part of the last three years cost reductions, streamlining and reworking processes have been the focal point of management’s attention. 

Today our cost structures have been “leaned out.”   Our enterprises are much more productive, and as the economy rebounds that should produce much better earnings and free cash flow for U.S. businesses.  In fact, it is already beginning to happen as indicated by the earnings reports for the second and third quarters. 

Two things happened here that affected jobs.  First, having been burdened by over-expansion management has been reluctant to add additional workers until they are convinced that the strong demand conditions will continue well into the future.  And of course in the aftermath of the corporate scandals and new governance laws, American businesses became more cautious and risk averse. 

A second factor at work is the high productivity in American industry today, which means we can do more with less.  Higher productivity is a good thing.  It leads to higher real wages and greater disposable income.  It leads to better cash flows and higher profitability, which in turn drives equity values.  But it has also slowed down the job creation process. 

Fortunately, as I have said, we are entering into a much better environment for job creation and signs are pretty good that we have turned the corner. 

The more interesting question is: where will we find the jobs of the future?

We know that jobs are more abundant when people have ample disposable income.  Increasing people’s disposable income was a key objective of the President’s Jobs and Growth Bill.  We also know that jobs are tied to capital and the willingness of someone to invest.  In the United States there is roughly $100,000 of capital behind every job.  To create new jobs someone needs to have the incentive to invest and investment, of course, occurs when the expected returns exceed the cost of capital. 

By reducing the cost of capital the President’s plan is designed to encourage more investment and create new jobs.  Strong aggregate demand, ample disposable income, capital availability, and investment all have an important role to play. 

But regarding precisely where the jobs of the future will come from, I think the honest answer is no one knows for sure.  Jobs come from new ideas, from discovery, from innovations.  And by its very nature the innovations of the future are not known today.  What we do know is that new ideas, new discoveries, new technologies and innovation lie ahead of us if we take the steps to properly encourage the process of innovation.

I don’t know where new jobs will come from, but I know how they come: from capital and labor finding the most productive opportunities in the market, from new ideas and investors and innovators prepared to risk their capital and their efforts to create something new.  Essentially, what a prominent Scotsman from Kirkaldy – no, not Chancellor Brown -- Adam Smith! – called the invisible hand.

The policies that will create jobs faster and better are those that create greater flexibility in the economy – policies that acknowledge that elected leaders in a capitalist democracy are at their best when they let markets decide rather than trying to pick the winners.

I’ll share with you a figure that illuminates my point.  Over the past decade in the United States, around 30 million jobs have been lost every year, give or take a few million.  In fact, in the year 2000, when unemployment hit its lowest point in the decade, 33 million jobs were lost.  The key is that over the same period, about 30 million jobs were created every year, give or take a few million.  In some years the gain is slighter greater than the loss.  In other years the opposite is true.

Policymakers do best when they focus their efforts on policies that create a climate in which net jobs are created.  That means focusing on flexibility, openness, capital formation, and, ultimately, productivity.

When these conditions exist innovative ideas with flourish and entrepreneurs and  businesses will identify new opportunities for profits and move capital and labor to take advantage of them.  The result of that process is higher productivity – higher output per hour worked and per dollar invested, and over time that productivity creates higher living standards.  What this process provides is a continuous path from lower value activity to higher value work and keeping the economy open and flexible so that this process can work is the central role of economic policy makers. 

In well functioning economies new ideas are displacing old ideas; new management processes are displacing old management processes; new technologies are displacing older technologies.  And all the while productivity is rising, the standard of living is rising, and wealth is rising and people have the opportunity to lead more abundant lives.

That is the path of progress and looked at from an historical perspective the effects are staggering.  A century ago 40% of the U.S. workforce was in agriculture, at a time when our population totaled 40 million.  Today agriculture accounts for less than 2% of our workforce and we’re a nation of nearly 300 million people.  Imagine the United States today if with 40% of its workforce in farming.  Of course if that were the case we wouldn’t have the necessary workers for our huge growth industries such as information technology, biotechnology and healthcare.

It sounds nice in theory, of course.  But when you look closely it can be messy.  The process, when it’s working, constantly disrupts the status quo.  Let’s face it – aggressive entrepreneurs and businesses are constantly trying to put their competition out of business, and if they’re successful, the competition goes looking for new work. 

At the same time, businesses that pursue a new opportunity are taking a risk.  They often fail.  The key is that they learn, and try again.  The secret of American economic success in a sense is failure – or perhaps the fact that we allow people to fail and start over again.  If it were easy to exploit new opportunities, they wouldn’t be opportunities for long. 

Those who take the risks – with their time, money, and reputations, must be able to claim their reward when they succeed, and claim their lessons when they fail.  A lot of people learned lessons in the dotcom boom and bust, for example.  Some succeeded, but most did not.  But there is no stigma in America for having worked for a start-up company that failed. 

With all this economic disruption, the perpetual temptation of government, which naturally caters to the status quo, is to block change.  Think about that.  Vested interests always have a greater stake in the past than the future.  The past created them, and keeps them where they are. 

But a wise government has to balance those interests with a vision for the future.  It needs to allow the visionaries, the entrepreneurs, to keep pushing ahead, falling down, and getting up – creating jobs and prosperity.  At the same time, it needs to attend to those who suffer from the disruption, with education, training and other assistance to help them onto their feet.

Raising standards of living and creating jobs doesn’t happen by accident – good policies that preserve flexibility -- such as low marginal tax rates, low taxes on capital, low barriers to trade and labor movement – these kinds of bottom-up policies encourage growth.  Investment in education and training is also important, because it allows people to find opportunities and adapt to change more quickly. 

But policies that direct growth, that smack of central planning, tend to jam the signals from the market.  And even if they push the economy forward in the short term, they eventually lead to collapse.  They often push it in the wrong direction.  They don’t heed the call of the market, or of competition, they heed only political expedience.

We strive to encourage entrepreneurship, capital formation, and education, and we’re starting to see the results.  This year’s tax program was the first in decades to focus on reducing taxes on capital formation, such as taxes on dividends and capital gains.  At the same time, the President’s “No Child Left Behind” Act invests more in education, and it introduced key concepts of innovation and competition into the market for education.  In education, as in business, there should be rewards for success.

We’ve also focused on enhancing the mobility of labor.  Our mobile society is a key factor in our prosperity and economic resilience.  We’ve introduced proposals to strengthen the functionality and security of national credit standards to make ease mobility in our economy.

Labor mobility facilitates another kind of mobility, which also lies at the heart of America’s success – that is the mobility within income categories.  Mobility within income categories has helped avoid the dangers of class consciousness.  Immigrants are inherently optimistic and feel they and their families have the chance to enjoy greater prosperity.

Efficient financial markets also play a role.  In the financial markets, we’ve been rebuilding investor trust with strong but fair oversight and disclosure measures.  Investors need to know what kind of risks they’re taking with their capital – they should expect reasonable risks to partake in new market opportunities.  That’s the fair part.  But they should not ever have to take a risk on the character and honesty of those managing their capital.  That’s the strong part.

Financial market regulations, like tax policy, should encourage the right kind of risk taking, but they should leave no doubt about the integrity of the system.  Innovations in finance have been as essential to the success of the American economy as innovations in technology.  The prominence of venture capital may be the most obvious, truly American financial innovation. 

A marketplace where innovative ideas and innovative capital work together has created some of our greatest economic success stories in places like Silicon Valley and Boston’s Route 28.   Our university system also has played a big part by allowing faculty and students to test their ideas in the marketplace, even as they pursue academic careers.  It is no accident that venture-funded tech start-ups tend to cluster around our top research universities.

Other innovations in finance such as stock options have allowed managers and employees to participate more fully in the success of their businesses.  While there have been cases of abuse involving stock options, their appropriate use can allow small companies with great ideas to compete with large companies with great wealth. 

Innovations in mortgage financing have allowed American homeownership to reach all time highs, near 70% of households, and new kinds of mortgages, as well as innovations in credit markets, have put homeownership in reach of millions who could never before achieve it. 

Innovations in derivatives have spread financial risks more broadly in markets, and allowed the American economy to bounce back from the body blows of recent years.

That economic bounce back has been much in the financial news of late.  7.2% growth last quarter, after 3.3% the previous quarter.  And it looks like the balance in the labor markets is beginning to favor the forces of job creation – but it’s still early in the process, and we have no intention of resting on our laurels.  Not in the U.S., and not in the global economy, where higher growth and productivity is more needed than ever.

As we look at the global economy today it is hard to escape the conclusion that growth has been far too uneven – particularly in the largest industrial nations.  The U.S., now starting to experience the benefits of the fiscal policy, and the Federal Reserve’s monetary policies, is now growing at a healthy pace.  The Britain has demonstrated consistent growth, but the other major world economies – particularly Japan, Germany and France, are performing well below their potential.
 
This is an issue for all of us.  With the dramatic expansion of trade in recent decades, the world economy is more connected than ever before.  For the United States, this means that our success in creating jobs and sustained economic growth depends in no small measure on other economies.  When other economies are growing and expanding, their demand for the things we produce is greater. 

By the same token, as the United States grows, we generate more domestic income and buy more from the rest of the world.  Successfully managing our economy is as important to the rest of the world as their success is to us.   For the UK, integrated into the single European market, this is doubly true

We must all take steps to accelerate growth, especially in those economies that are lagging.   At the recent G-7 finance ministers meeting in Dubai, my colleagues and I agreed on an Agenda for Growth, as each nation committed to increase growth at home.  This acknowledgement, in my view, was a milestone.  The barriers to growth in each of our countries are different, but we have all agreed to tackle those we face, and to monitor and discuss each other’s progress. 

Enhancing the outlook for global growth will be the focus for the G-7 next year when the U.S. hosts the leaders Summit at Sea Island.  The following year, when Prime Minster Blair will chair the leaders Summit, I hope we will be in a position to point to real progress across all of our economies.  Chancellor Brown and I share a deep commitment to seeing that happen and have had several conversations on the question how can we combine our efforts to press forward on the global growth agenda.  The United States chairs the G7 finance minister meetings next year and the Britain the following year, so Chancellor Brown and I will make the most of this back-to-back opportunity.

Though we all face challenges to faster growth, the issue is most pressing for the major economies in Europe where growth is stagnant.  Chancellor Brown knows this.  A few weeks ago in the Wall Street Journal, he pointed to some of the key areas where Europe could do better and offered sound counsel for the EU.   If I may quote my esteemed colleague, he observed that “the right response to global competitive pressure is to liberalize, deregulate, remove the old state aid subsidies, agree an open competition policy, and remove barriers that hamper companies crossing borders.” 

The Chancellor knows whereof he speaks.  In a recent OECD study of industrial economies, the UK was found to have the least overall restrictive regulatory regime.   The study looked at things like barriers to trade, administrative regulation and economic regulation.  It’s no coincidence that the UK was able to avoid the major slowdown seen in other large European economies or that, along with the US, it ranks at the forefront among industrial countries in information technology investment as a share of GDP, a key to productivity growth.

The Chancellor also said “Europe must embrace labor-market flexibility as the only modern route to full employment, put current and new regulations to that flexibility test, and devise new incentives to help people move from welfare to work.” 

Finally he said that “Europe must be outward-looking and internationalist… and that a strong transatlantic economic partnership – and a pro-European, pro-Atlantic consensus – is critical to long-term prosperity.”  I couldn’t agree more.  This was the essence of our discussions in Dubai, where we renewed our commitment to tackling our domestic challenges to benefit our own economies and lay a basis for balanced global growth.  
In the United States, President Bush’s reforms emanate from the same broad policy outlook: create an environment that encourages flexibility, capital formation and innovation, and in turn leads to job creation, productivity, and higher living standards.

The UK has its own important agenda – improving skills and labor productivity, expanding research and development tax credits, supporting entrepreneurs and job seekers, and reforming the financial sector.
 
I look forward to working with our UK friends on our common economic challenges.  Together, we plan to expand the flows of trade and investment across the Atlantic and enhance cooperation between our universities in areas such as entrepreneurship and technology transfer.  I also look forward to hosting a business-government forum next year with Chancellor Brown to discuss common opportunities to promote innovation, raise productivity and increase research and development, while encouraging closer ties between academic centers and enterprise
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I think this is an historic moment.   

The world’s leading economies are all committed to ending the period of stagnation, and moving forward to renewing growth and creating jobs in all of our countries.  We have begun to make progress – passing President Bush’s jobs and growth package in the United States, and moving forward with his six-point plan for the economy.  The UK, too, has made great strides in providing an environment for enterprise, innovation, growth and prosperity.  I have confidence in Great Britain’s leadership and industry, and I believe that you, and our other European and international partners, are up to the challenge.

Thank you.