March 3, 2006
JS-4090

Prepared Remarks
Stanford Institute for Economic Policy Research (SIEPR)
Economic Summit
Stanford, CA

Good morning. It's great to be here at Stanford; thank you so much for having me. It's an honor to visit the intellectual `home' of Secretaries Rice and Schultz, my good friend and former colleague John Taylor, and so many others who I've had the pleasure to know and work with, like Anne Krueger and Eddie Lazear.

Stanford has produced some of the most influential economic minds of our times, and certainly of the Bush Administration. John Taylor alone dramatically changed the direction of conversation among the finance ministers of the G7. He gave international economic policy direction that was both inspired and sound at a time when the international financial community was really in need of it that kind of intellectual leadership.

John's influence over Bush Administration policy began much earlier, of course, when he served as an economic advisor to the 2000 Presidential campaign. The economic policies that he was involved in developing – namely tax relief – have led to a terrific period of economic expansion for this country.

With GDP growth over four percent in 2004, at 3.5 percent last year and this year promising to be perhaps better yet, there can be little question that smart, steady economic stewardship deserves some credit.

Well-timed tax relief, combined with sound monetary policy from the Federal Reserve Board, helped boost 4.7 million Americans onto the payrolls over the past three years. Our unemployment rate is very low, and with the exception of the peak of the high-tech bubble in 1999-2000, initial jobless claims have not been this low in more than 30 years.

Many of you are economists, so I know that I don't have to tell you this, but simple truths can be worth repeating: You always get less of something you tax.

So by lowering the taxes on capital, the Jobs and Growth Act of 2003 encouraged increased long-term investment. Increased long-term investment in turn improved the long-turn outlook of the economy. It made the economy more productive. With additional capital, labor output rose. And with rising labor output the demand for labor increased and living standards are now higher.

And while many factors contributed to the improved performance of the economy, the tax reductions on capital, I think, have been at the heart of the progress we have seen. By lowering the cost of capital the President's proposals improved the inherent efficiency of the economy, and this will prove effective for both the short and long term.

The proof is in the numbers: After nine consecutive declining quarters of real annual business investment, we have had ten straight quarters of rising business investment.

Making those tax cuts permanent will help keep our economy on this good path of growth. And an important part of my job is reminding Congress of that fact. I can't say it strongly enough: a tax increase would be very bad for this economy, for every American who still seeks work, and it would be foolish to turn away from this course that is benefiting so many. Congress must resist the urge to raise taxes.

Tax relief permanency really is the tax business of the day in Washington. The next significant step on taxes, of course, being tax reform. Eddie Lazear, who I mentioned earlier – a proud Stanford alum – was part of a terrific effort on the President's Panel on Tax Reform. The work of that panel is the beginning of what is sure to be one of the most significant policy debates of this decade.

We only get a chance to enact meaningful, broad tax reform once about every twenty years, so it's important that we do it right. John Kennedy led that accomplishment in the 1960s, Reagan in the 1980s and it's time to do it again. But with a tax code that impacts nearly every aspect of all of our lives, reform is a task that must be thought through and deliberated in a painstaking manner. The panel got this process started, and I'm thankful for their work. The discussion you will have later this morning will be part of the ongoing tax reform dialogue, and I look forward to hearing of your debate and conclusions.

You'll have a panel discussing the United States' economic relationship with China as well, and I want to touch on that issue, while I'm here.

There is a lot of concern these days about China's growth and challenges it creates for U.S. economy. I find it interesting that there is far less talk about how a prosperous China is in the interest of the U.S. For example, while largest U.S. bilateral deficit is with China, China is also our fastest growing export market.

Keep in mind that United States and China accounted for half of global growth since 2001. We're at the head of the global growth class, together, so we need to work in partnership for the benefit of all our citizens.

China's impact on world markets now very significant and with this increased role, comes increased responsibility. In particular, divergent growth rates and saving and investment patterns among major economies are widening global current account imbalances. Adjustment of global imbalances is a shared responsibility that must be undertaken in a way that maximizes sustained global growth.

Appropriate response involves increasing savings in the United States, raising domestic demand led growth of our largest trading partners and greater exchange rate flexibility in China and other large economies in emerging Asia to allow for gradual, market-based adjustments.

The United States is doing its part. But we cannot address this issue alone; U.S. fiscal consolidation absent offsetting measures to boost domestic demand abroad will reduce global imbalances but at much lower growth rates.

Through fiscal and regulatory changes, China also needs to continue its efforts to achieve more balanced growth to reduce heavy reliance on credit-fueled investment and exports.

This will take time. Savings are high because China is aging and doesn't have financial and insurance products, and a social safety net, to handle retirement or health care needs.

Also, China stands to benefit from expertise and capital that U.S. financial services firms can provide – a win-win for both countries.

Finally, China must make progress to open up and reform its financial sector to address highly inefficient financial intermediation. This will also lead to more consumption-led growth.

All of this is playing out against backdrop of rising protectionist pressures, which pose significant risks to U.S. economic growth, global economic growth and financial market stability.

The Administration is committed to open trade and investment policy.  We believe that the international trading system works best with free trade, the free flow of capital and with market-based exchange rates.

But we need China's help to make this work. China has pledged to be flexible on the rate of the Yuan, and they've made progress. We need more progress, more flexibility.

The last topic I want to discuss today – and then I'll let you get started with this terrific meeting! – is the impact of energy prices on our economy, and what we can do about that going forward.

Clearly, the price of oil is a drag on the economy. According to standard models of the U.S. economy, oil price increases have detracted from real GDP growth and raised the level of inflation. Put in the simplest of terms, high energy prices act like a tax on businesses, families and individuals.

Energy markets have always been complex, and in recent years have been further complicated for the U.S. by our tension with oil-producing countries.

The President has said that the best way to break America's dependence on foreign sources of energy is through new technology. I agree that American innovation and technology will lead us to a new day of reduced reliance on foreign sources of energy as well as energy efficiency that is good for American pocketbooks.

Clean, efficient alternative sources of energy for our vehicles, homes and businesses are of vital importance to America's ability to remain competitive and safe, and those energy sources will be developed and produced by American scientists and entrepreneurs – just as so many solutions have come from American innovation in our past.

In government, we have a responsibility to encourage and support the research and development that will lead to these technological breakthroughs. That's why, since 2001, the Administration has spent nearly $10 billion to develop cleaner, cheaper, and more reliable alternative energy sources. As a result, America is on the verge of breakthroughs in advanced energy technologies that could transform the way we produce and use energy. To build on this progress, the President's Advanced Energy Initiative provides for a 22% increase in funding for clean-energy technology research at the Department of Energy in two vital areas:

1.  Changing the way we fuel our vehicles. We can improve our energy security through greater use of technologies that reduce oil use by improving efficiency, expansion of alternative fuels from homegrown biomass, and development of fuel cells that use hydrogen from domestic feedstocks; and

2.  Changing the way we power our homes and businesses. We can address high costs of natural gas and electricity by generating more electricity from clean coal, advanced nuclear power, and renewable resources such as solar and wind.

I'm sure that some of these strategies, and others, will be explored in the panel discussion this morning on energy, and I'm reassured knowing that conversations like this are taking place in academic and other intellectual establishments all of this country. Because of great institutions of learning and idea development like Stanford, because of the great skills of the American workforce, and because of this country's passionate embrace of entrepreneurship I will never bet against Americans when it comes to problem-solving and innovation. We'll get it right on energy, but we'll have to work hard for it.

I know you must be anxious to begin panel discussions, but I'd be happy to take a few of your questions in the time we have left.

Thanks so much, again, for having me here today.