FROM THE OFFICE OF PUBLIC AFFAIRS

I am very happy to be here, in my hometown, with so many good friends and former colleagues, and with all of you who are participating in the amazing growth and development of this state and of Metro Atlanta in particular.

I want to commend the Chamber of Commerce for helping to stimulate, and to manage, the economic growth which has added 600,000 jobs in ten years-truly a remarkable record for any city.

Also the Department of Industry and Trade. As I have traveled in other countries-whether it is Brussels or Tokyo-I see that the Department is right there, helping our exporters, running Georgia pavilions at trade shows, talking up the advantages of this State as a place to live and work. And I was delighted to learn that the Department has joined with the Board of Regents and the Research Alliance to sponsor the very exciting new Yamacraw Mission. Its goal is to raise Georgia to world class status in key high-tech industries, with the field of high bandwidth technology as a starter. In this way, Georgia can participate fully in a field which has been responsible for one-third the economic growth in our country, and whose jobs pay 80 percent more than the average wage in our economy.

I want to talk today about the implications of this technology, and especially about what has been called the "new economy." The volatility of equity markets does not obscure the fundamental fact that internet technology is spreading very rapidly across the country, expanding into all parts of our traditional economy. At the very least, computers and the Internet represent a major new technology, whose impact will equal that of the automobile or television. At most, they could eventually change the entire world, as the Industrial Revolution did in the 19^th century.

In 1870, America's steam engines delivered 1.2 million horsepower to America's manufacturing firms. By 1939, sixty years later, the electric motors that replaced them gave factories 45 million horsepower-an increase in "muscle power" of forty times, or five per cent a year. In the forty years since electronic computers replaced electromechanical calculators, the number of computers has increased from 2,000 to 200 million worldwide, and there has been an increase in information processing power of one million times. This comes to 35 per cent a year.

The products and processes based on this computer power are changing the way we buy, the way we sell, how we communicate with one another, how we entertain ourselves and how we educate our children. They are making businesses far more efficient in the way they design, manufacture and market products. They are even changing the nature of what constitutes a product. We are moving from an economy in which the symbolic product was an ingot of iron, a barrel of oil or a bushel of grain to one in which the symbolic product is gene sequence, a line of computer code, or a logo. As Chairman Greenspan has often said, in such a world goods are increasingly valued for the knowledge that went into them rather than for their physical weight.

In this economy, information technology has been the largest single factor in the remarkable increase in productivity, which has given us a high rate of GDP growth with very low unemployment and low inflation. It has helped make the United States a high performance economy, powered by technology, driven by ideas, rewarding the value of innovation, flexibility and enterprise and attaining ever better living standards for its people.

Let me give you just one example. Between the end of World War II and the start of the 1990s, our economy went through eight recessions. In almost every case, when economists looked back with their analytic tools, they concluded these were what they called inventory recessions. Business firms had overstocked. When they discovered this, they cut back on orders. This cut in spending rippled through the economy, reducing consumer spending, reducing investment, and forcing layoffs. The economy declined until firms decided to stock up on inventory again.

With information technology, companies can fine-tune their inventories through "just in time" purchasing and other techniques. Inventory recessions may become a thing of the past. This does not mean the business cycle has been repealed. There are other factors, including new ones, which could cause our economy to run aground. But it shows how technology has been instrumental, not just in creating new ways of living and new economic opportunities, but in solving some of the most persistent problems of our economy.

The traits of the new economy will have important implications for public policy. For example, the "weightless" goods it produces usually have very high initial fixed costs and low, even zero marginal costs. It can be compared to publishing a book, cutting a record or marketing a new pharmaceutical product. In the new industries, 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. Moreover, networks become increasingly important. The first fax machine could do very little. With one hundred fax machines, ten thousand connections are possible, and with ten million machines the possibilities are limitless.

We therefore need to enlarge our markets-at home and internationally- as much as possible. Their development should not be slowed or distorted by unnecessary regulation. That is why we worked to pass the Telecommunications Act, and the right kind of Financial Modernization Act last year. That is why we are working so hard to persuade the Congress to grant China Permanent Normal Trade Relations status in our trade laws and supporting its entry into the World Trade Organization. We will not be able to sustain the new economy unless we have access to what is going to be the largest market in the world in the 21^st century.

The agreement we signed with China last November, which China must live up to if it wishes to be part of the WTO, is especially favorable to high-tech companies. Some of the most important concessions China made are in this sector.

• The Chinese market for a wide range of computer, internet and software services will be opened to American companies, either through Joint Ventures or direct service.

• China will participate fully in the Information Technology Agreement, which eliminates all tariffs by 2005 on computers, semi-conductors and other high-tech products-markets in which the U.S. is highly competitive.

• In telecommunications, China has agreed for the first time to allow direct foreign investment. It will also participate in the Basic Telecommunications Agreement, accepting pro-competition principles such as an independent regulatory authority and interconnection rights.

The opening of these sectors comes at the same time as the Internet revolution is just beginning in China. There is an enormous potential for both increased American exports and the freer flow of information. Our high-tech exports to Chin grew 500 percent between 1990 and 1998. China's telecommunications market is the world's fastest growing. By the end of this year, some analysts predict that China will become the world's second largest market in both telecommunications and personal computers. Last year, the number of Chinese Internet users quadrupled, from 2 million to 9 million. This year it should double again. No amount of censorship or monitoring can completely control this explosion of information. President Clinton has compared it to trying to nail Jello.

The agreement we signed with China will also result in direct and substantial benefits to Georgia's industry and agriculture. China is the third largest importer of wood, the second largest importer of poultry, and the largest consumer of pork in the world. In this agreement, China will cut its tariffs on these products by upwards of 50 percent, and in the case of meat, accept all products certified as "wholesome" by the Department of Agriculture. Tariffs on peanut oil will be eliminated altogether, allowing potential exports of $2.85 million a year in that product alone. The bars to investment will come down, allowing your banks, insurance companies, your law firms, accountants, engineers and high tech companies to operate in the Chinese market, free of most of the impediments that limited business in the past.

The movement of information technology to the center of the American economy came about in part because of the dynamism of the American financial system. In the 1980s, tough-minded economics, driven by investors who looked hard at the bottom line, forced our companies to restructure and reengineer years before those of other countries. This allowed them to emerge faster and stronger in their fields and, in the 1990s, to more readily adapt new technology as an integral part of their businesses. An open, flexible and extremely entrepreneurial venture capital sector has channeled needed funds to new industries. It was also the result of an outpouring of traditional American ingenuity . The number of patents granted to our inventors has increased over l40 per cent over the last decade, and now stands at over 150,000 a year. And it came about because an increasing number of workers have been willing to invest longer hours, acquire new skills and accept pay increases more in line with the success of their companies than ever before.

While constant change and innovation are hallmarks of the new economy, its national economic policies need still be grounded on the old virtues of fiscal discipline and sound monetary policy. Our ability to exploit the new opportunities has depended critically on President Clinton and Vice President Gore's determination to stop a generation of public borrowing and forge a new national consensus around sound budget policy. We know that structural deficits give rise to vicious circles. They tend to lead to rising interest rates, and so to falling investment and slower growth, which reduce revenues further, increase deficits and start the cycle again. This is what we saw in the 1980s and the early 1990s.

Surpluses generate a kind of virtuous circle of declining debt, increasing national savings, lower interest rates and rising growth and investment. 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. That is more than $2 trillion dollars available for new private investment in America's future.

Debt reduction effectively functions as a tax cut, by permitting lower interest rates on everything from college and auto loans to home mortgages. Under our policies, we estimate a typical family with a mortgage of $100,000 would save around $2,000 a year on mortgage payments.

We need to continue to exercise fiscal discipline, and retire debt, to keep the longest economic expansion in our history going strong. That is why the budget the President submitted to Congress for fiscal 2001 devoted $2.5 trillion to debt reduction.

It is also imperative that we not leave millions of Americans behind in the new economy we embrace. Half a century ago, this meant ensuring that every home had electricity and running water and a telephone. Today it means ensuring that all Americans have access to technology and the skills necessary to use it.

There is a digital divide in America today. 69 percent of households where someone has a bachelor's degree or higher have computers, compared with only 16 percent that have not completed high school. 80 percent of households with an income of $75,000 or more have them, compared again with 16 percent of those earning $10-15,000.

We are making bridging this divide a major priority. Last year, the Administration provided over $2.25 billion to connect schools and libraries to the Internet. This year's budget proposal contains $2 billion in tax incentives over a ten year period to encourage the private sector to donate computers, sponsor technology training for workers and help create technology centers in their communities.

And the needs of the new economy surely make the case for public support for scientific innovation. It was the National Science Foundation and DARPA, just as much as the Bell Labs and Xerox PARC, that kept the infant Internet alive. We have increased our national science and technology budget for seven successive years. The President's 2001 budget commits an unprecedented $43 billion to science and technology research.

We cannot know what this new economy will look like a decade from now. What we can know is that we are enjoying a very special moment, a moment that confers a special responsibility on public policy to broaden the base of our prosperity, expand opportunity, and minimize future risks.

I would now like to discuss two aspects of the new economy that are particularly within the purview of the Treasury Department: electronic payments and Internet taxation. Despite the expansion of the Internet into so many areas, there is no legitimate option at this time for businesses to pay each other over the Internet. Most e-commerce shoppers use credit cards, which involve a 2-6% expense to the seller. For shoppers, credit cards only work on line for certain classes of payments. A college student who successfully bids on this weekend's basketball tickets on eBay has to spend additional money to FedEx his check to the seller. According to one study, in 1999, consumers spent $19 billion on-line. But the amount they ordered off-line after doing their browsing on-line came to $103 billion.

In the physical world, parties can pay each other directly using cash and checks in a peer-to-per fashion. In the electronic world, existing payment mechanisms must be processed through central bank hubs and mainframes before payments or payment obligations can be delivered to a payee. One of the greatest attractions of the Internet is the way it makes possible person-to-person communication and commerce even where the people have no prior relationships and the geographic distance between them is great. Our current systems simply were not designed to support this type of dynamic commerce.

To narrow this gap, payments need to be accompanied by the kinds of documents that allow one to purchase, collect and store data electronically. We need an efficient, standards-based mechanism for exchanging information across different automated processes. Buyers, sellers and financial institutions also need to know with certainty that their orders were received and payments logged. Even E-mail still lacks much of the certainties traditional mail offers - guaranteed delivery, return receipts, guaranteed time-stamping, change of address information.

Because the Treasury Department handles 85% of the government's payments, we have focused our efforts on improving electronic payments. We have been quietly working on some revolutionary pilot programs to use the new technologies for this purpose. We have introduced smart cards that function as cash. At military training sites and at US bases in Bosnia, for example, soldiers now receive their pay on smart cards. Merchants on these sites are equipped with the tools to accept payments from the cards. As a result, Treasury's Financial Management Service is now the largest producer of financial smart cards in the country.

We are using electronic checks to pay some of our vendors. The Treasury creates an e-check on a PC, digitally signs it and securely emails it to a payee along with remittance information. The payee verifies the digital signature and strips off the remittance information. It then digitally endorses the check and e-mails it to its bank for deposit. The bank validates the endorsement digital signature and presents the items for payment to the bank on which it is drawn. Our partners in this test include banks, technology companies, DOD and major Defense vendors.

We are exploring the use of electronic cash. It allows transactions to be consummated instantly with no clearing or settlement and no involvement by a financial intermediary. The first use will be in buying computers on-line.

Introducing changes to the payments system is a long-term proposition and raises complex policy issues, but these pilots can teach us a great deal. The Treasury will continue to build on our pilots through an "electronic per-to-peer payments" effort. We shall also launch additional initiatives to help develop the tools and find the models that will bridge the internet payments gap.

The Clinton-Gore Administration has worked to create an environment in which the Internet has flourished adding efficiencies and dynamism to our economy. We have allowed the private sector to lead on Internet policy, avoided unnecessary regulation, and drafted policies that recognize that the Internet has no borders. The challenge now is to balance Internet growth with the interests of Main Street retailers, and with the need of State and local governments to raise the revenues needed to fund essential civic services. That is where the tax issue arises.

The Administration supports a permanent ban on taxes on Internet access and an extension of the moratorium on discriminatory and multiple taxes that was contained in the Internet Tax Freedom Act. We also support a permanent ban on customs duties on international electronic transmissions.

The current debate over taxation of goods and services sold over the Internet stems from a Supreme Court ruling that States cannot require out-of-state sellers to collect sales taxes unless the sellers have a physical presence within the state, such as a store. As a result, under current law, taxes on out-of-state purchases, including those made on the Internet, go untaxed. Although e-commerce is still a small percentage of total retail sales-accounting for 0.64 percent during the fourth quarter of 1999, according to the Commerce Department-it is estimated that e-commerce will increase dramatically over the coming years. State and local governments are concerned that their revenue base will be undermined. Traditional retailers are concerned that unequal tax treatment would put them at a competitive disadvantage vis-a-vis e-commerce.

This debate raises issues, which go to the core of our system of government. In our federal system, States and localities have the responsibility to provide education, police, fire and other important civic services. They have come to rely heavily on sales taxes, which now account for approximately one-third of all State and local tax revenues, to pay for these services. Were they to abandon the sales tax, they would have the difficult job of finding an alternative revenue source.

Because the current debate is important to the national economy, the Administration has been working actively as an honest broker to try to achieve consensus between industry and State and local government officials on Internet tax issues. Over a year ago, Congress created an Advisory Commission on Electronic Commerce to make recommendations on these issues. The Commission succeeded in achieving consensus on the need for simplification of the widely differing rates and definitions of the sales taxes employed by the over 6,000 taxing jurisdictions in this country. A group of Governors under the leadership of Utah's Mike Leavitt has pledged to begin work on this through the National Conference of Commissioners of Uniform State Laws.

The Commission did not, however, achieve a sufficient majority needed to make a recommendation on the more pressing sales tax collection issues. In fact, one coalition of Commissioners proposed further limits on the states' ability to collect sales taxes owed. The debate now moves to the Congress. There are a number of proposals to extend the existing moratorium and the Administration will work with Congress on them. However, until we see the results of the States' simplification efforts, we believe we should not change the existing rules regarding sales tax collection which have allowed E-commerce to flourish. It is essential that we move with care and consideration in changing those laws, because they go to the core of our system of government as well as the continued vitality of the Internet.

In conclusion, the new economy is sure to create even more public policy issues, as well as new opportunities for the economy and for our people. I am sure that, with the energy and commitment that is in this room, and the strong base you have already built, the State of Georgia will participate fully. Thank you.