May 9, 2006
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The Honorable John W. Snow
Prepared Remarks
To The National Association of Home Builders
Executive Meeting

Good afternoon, and thanks for having me here today. I'm really pleased to have the chance to visit with this group because you represent such a key piece of the American economy– both practically and symbolically. You are literally building the American Dream, while also creating lots of good jobs.

In fact, a good portion of economic activity can be attributed to your industry. And a strong, thriving economy is an important foundation for your industry. So the relationship between the American economy and the housing industry is an indispensable one.

That relationship is illustrated by three issues that I want to discuss with all of you today, with the health and direction of the housing market being the first. Next I want to make a couple of points about taxes and the effect they have on individuals, investment and the overall economy. Finally, housing markets are interested in the path of the federal deficit, which of course depends greatly on federal revenue streams. In sum, there are three good stories to tell.

The Housing Market

The President has shown a strong commitment to housing – because there is no other place in the world where homeownership means so much as it does in America – and housing has been booming. Let's review the record. The US homeownership rate reached a record 69.2 percent in 2005. The number of homeowners in the United States reached 73.4 million, the most ever. And for the first time, the majority of minority Americans own their own homes.

But I watch the current housing market closely, and although it is cooling off from record highs, it's still a good strong market. Sales of new single-family homes jumped 13.8 percent in March, and that was welcome news.

At this stage of a strong economic recovery, it is natural and expected to see rising market interest rates at the long end of the curve. So there has been some concern expressed about mortgage resets, that is, the effect of higher rates on adjustable and non-traditional mortgages. It is first important to note that millions of Americans have been able to move into homeownership because of these products. To put this further into perspective, only about five percent of mortgage debt is subject to reset over the next year, and total annual payments on these reset mortgages should go up by about $10 billion, which is roughly 0.1 percent of annual private consumption. Overall, rates remain relatively low, and it is our view that the effect of resets on the macroeconomy will be relatively small in the foreseeable future.

While Treasury does not directly oversee the bank and housing regulators, I make it a point to meet with them regularly. Treasury has followed closely the work on revising lending guidelines, and we will continue to monitor the new guidance.

Tax Relief: Helping Families and Spurring Investment

In 2004, I visited a homebuilder in a subdivision construction a site in Charleston WV. He recalled the story of driving out to that same site on September 12, 2001. He had just put his livelihood on the line to start the project, and in the wake of the vicious attacks, said to himself: "Will I ever be able to sell any of these houses?" Do you know what he said to me next? "Thank God the President acted. To restore confidence. To get the country moving again."

The President led and Congress responded in '01 and again in '02, by cutting taxes on paychecks and tax returns as an essential first step toward economic recovery. It provided stimulus and oxygen.

During the President's first term, Congress enacted three tax acts containing tax relief for America's families, and the tax burden was reduced on all families who pay taxes, including the working poor and middle class.  Low and middle-income families have especially benefited from the creation of a new 10-percent-rate bracket and the expansion of the child tax credit to $1,000. These tax cuts reduce the amount of taxes paid both throughout the year through withholding and at the end of the year when taxpayers file returns.

Over five million taxpayers, including four million taxpayers with children, will have their income tax liability completely eliminated in 2006 due to the tax acts enacted during the President's first term. Most of these taxpayers have income under $50,000

Also, it is important to note that our current tax system is already quite progressive with those with more income paying a higher fraction of individual income taxes. In fact, the bottom half of Americans ranked by income pay four percent of individual income taxes, while the top 50 percent pay the remaining 96 percent. The top five percent pay over 50 percent of the individual income taxes.

Some truths are as old as taxation itself: Anything you tax, you get less of. And anything you tax less, you get more of. Lower tax rates on individual income – with everyone who pays income taxes getting relief from the President's program– mean more money in the pockets of every American taxpayer. That importantly included small-business owners, who tend to file their business income on individual forms. This is important to note because of their critical role in economic growth and job creation.

But it wasn't enough. The recovery was still anemic. It needed more life. And it needed to be made sustainable.

The second step then was lowering tax rates on savings and investment, and that has proven to be a powerful catalyst indeed. The Jobs and Growth Act of 2003 lowered taxes on capital, and that has helped the economy pivot from nine consecutive quarters of declining real annual business investment to 12 straight quarters of rising business investment. It was as if a light switch has been thrown on.

Rarely has a piece of public policy been so effective, with the effects so evident and immediate.

Tax Relief: Creating Jobs and Growing the Economy

Relieved of some of their economic burden, the behavior of businesses, individuals and investors acted like yeast; our economy has risen quite naturally and steadily for three years.

All the major economic data are now positive – it's difficult to find an indicator that isn't good news-- and the trend lines can clearly be traced to the enactment of pro-growth tax relief.

In the past three years the US economy has grown at a 3.9 percent annual rate. GDP growth for the first quarter of this year, we learned recently, was a very strong 4.8 percent, making up for the fourth quarter's hurricane-related slowdown.

Construction spending reached an all-time high in March.

Business investment is growing at a rate last seen at the peak of the high-tech boom in 2000, but fortunately without the market excesses we saw then. No one is talking about `irrational exuberance' today. This is a well-grounded, durable expansion.

With 5.2 million new jobs created in the past three years and unemployment at a very low rate of 4.7 percent– that's lower than the average for the 1960s, 1970s, 1980s or 1990s – there is much for you and your customers to be proud of and optimistic about. And it's broad-based across society, with unemployment dropping sharply for youths, African Americans, and for the last quarter, to an all time low for Hispanic Americans.

We really are firing on all cylinders when you look at homeownership, real disposable income, durable goods, consumer confidence and a host of other indicators. Propelled by the economy, the Dow is approaching its all-time high closing.

It has been a long time since I've been asked about a "double dip" or a "jobless recovery." A more recent criticism has been that income and wealth gains are uneven, and that average Americans are somehow not better off.

Yet again, we are able to prove the critics wrong. Federal Reserve data shows that median family income is picking up. We can see, when we compare wages at this point in the business cycle with the same point in the last business cycle, that we're doing better during this recovery. We are at a point in this recovery where it is reasonable to expect real labor earnings to rise.

We learned from last Friday's jobs report that average hourly earnings have risen 3.8 percent over the past 12 months – their largest increase in nearly five years.

In the past, I have said we were at the tipping point on returns to labor. Let me be clear: we are there now. This is the point when incomes rise for workers and business combined, but workers once again increase their incomes faster than businesses. Once businesses have been doing well for a while – which I'm sure you can confirm first hand--they ultimately compete those increases in income away by competing harder for labor. The result is higher wages and higher standards of living for workers.

Fortunately, productivity remains strong, so we are able to maintain both higher wages, higher standards of living and low per-unit labor costs.

Now, I know one thing that has to be true--a strong economy is good for housing. And it is important that we keep the economy strong.

Of course there are some headwinds to the economy. Gasoline prices are one area that is a real concern. They are making things tougher for hard-working families all over America. The President has presented a four-part plan that includes making sure consumers and taxpayers are treated fairly at the pump, promoting greater fuel efficiency, boosting our oil and gasoline supplies, and investing aggressively in alternatives to gasoline, so we can eliminate the root cause of high gas prices by diversifying away from oil in the longer term.

As part of this, we need to take advantage of our own abundant natural resources, like clean coal, the resources of ANWR and windpower.

Everyone appreciates that high gas prices act like a tax on families and businesses, and we need to ease the pain to the extent it is possible. But the good news is that our strong economy has proven so resilient in handling these headwinds to this point.

Looking back, there can be no question today that well-timed tax relief, combined with responsible leadership from the Federal Reserve Board, created an environment in which small businesses, investors, entrepreneurs, and workers could bring our economy to this point of strength.

Clearly, tax relief encouraged business investment and created jobs. The resulting economic growth – with more people working, more profits and strong markets – leads to higher tax revenue.

Tax Relief: Raising Federal Revenues and Lowering the Deficit

Those who were skeptical of the President's economic policies didn't anticipate the depth and breadth of good economic news I've just shared with you. They said that it wouldn't help at all, that it was counter-productive and "reckless." But of course they were wrong.

Some said--and continue to say – that the tax relief would blow a hole in the federal budget. According to their view of economics, tax cuts would shrivel up revenue streams.

But they're wrong yet again. Lower tax rates and rising federal revenues are entirely consistent, because economic growth leads to increased tax receipts.

Every new job creates new tax revenue. And we've had 5.2 million reasons why this is true. Every investment that grows a company or builds wealth for an individual or family… creates tax revenue. Rising equity markets also help.

And this is why tax revenues are at an all-time high today--with lower tax rates.

Do we have a perfect financial picture? No, of course not. We've had unwelcome budget deficits, but tax cuts were not the culprit. The deficits are actually understandable considering challenges our nation has faced in recent years – from a previous downturn in the economy to fighting a ruthless enemy, a global terrorist threat unlike any threat we have faced before. We also have a responsibility to help the victims of hurricanes to recover. According to data from the nonpartisan CBO, over three-quarters of the deficits over the last 5 years are attributable to higher government spending, and the effects of the earlier recession.

There are two sides to the federal budget: one is spending, and one is revenues. First, let's talk about revenues. In 2004, tax revenues grew about 5.5 percent. Last year those revenues increased by almost 15 percent, or 274 billion dollars, and they continue to grow by double digits again this year.

With this increasing stream of revenues, the deficit is shrinking. In fact, it is on track to be cut in half by 2009 in spite of those fiscal demands I mentioned earlier. Last week a Congressional Budget Office report said that the 2006 deficit is expected to be significantly less than originally anticipated due to a surge in federal tax receipts, which would put the deficit around 2.5 percent of GDP.

We've seen that tax cuts are an effective way to grow the economy. And a growing economy reduces the budget deficit.

Taxes and Spending: Higher or Lower?

There's a fault line now coming into full view in public discourse. Some now boldly advocate raising taxes. They have waited over a decade for their opportunity and they feel the time has come.

But I wonder: how would raising taxes increase the chances of people realizing the American dream through homeownership? How would raising taxes help you hire more people to build those houses?

The call for tax increases comes under the pretense of deficit reduction and the mistaken belief that the only way to close the deficit gap is to raise taxes. I've also heard skeptics point, for example, to last week's Social Security and Medicare Trustees' report as a reason to raise taxes. This attempt at criticizing the President's highly successful economic policies is perhaps the most misguided of all. Social Security and Medicare are financially unsustainable the way they are currently structured. To suggest that the American people pay additional taxes today in order to shore up these programs for the future is irresponsible and advances nothing but denial of the real structural problems of the programs rooted in the changing demographics of our nation. Reform of these programs is incredibly important – but the underlying drivers of their growth must be dealt with.

There is one truth which all sides of economic and tax debates should be able to agree on at this point, so I'd like to close on that one: controlling spending is critical to deficit reduction. The President and I believe that it is part two of a two-pronged strategy: grow the economy and control spending. That is why the President is holding the line on the emergency supplemental spending bill now pending in Congress, and that is why he is pushing so hard for the Line Item Veto. Just imagine what those who now seek to raise taxes would do to federal spending if they had their way.

Conclusion

I want to commend this group for its continued hard work and service to its customers--the homeowners of America.  The value of homeownership extends well beyond bricks and mortar, to what it means to the very hopes and aspirations of the people of this country. We cannot underestimate its importance in our national identity.

It is inextricably tied to the course of the economy. The President's strong leadership to help revive the economy is now paying dividends to all sectors of the economy. I'm sure you'll agree that it only makes sense to continue those good policies, and that the markets would not view kindly a retreat from them. Now is simply not the time for a tax increase.

Thanks so much for having me here today – I'd be happy to take your questions now.