August 1, 2006
HP-41
Remarks Prepared for Delivery
by Treasury Secretary Henry M. Paulson
At Columbia University
New York, NY – It's good to be back at CBS – a great school with a storied history that includes Benjamin Graham and David Dodd as faculty members, and Warren Buffett as a student. And while the business school didn't exist in the 18th century, the rigorous education Alexander Hamilton received as a Columbia undergraduate – inside and outside the classroom – no doubt paved the way for his groundbreaking work as America's first Treasury Secretary.
Today, CBS graduates are excelling in multiple fields, and what's more, you have a great sense of humor. I watched your Glenn Hubbard-Ben Bernanke video and I would guess that Ben would find it at least as funny as Glenn and I did. I don't usually get a lot of laughs in my speeches – at least not on purpose – so I was tempted to begin or end with the video!
I chose New York for my first public remarks because this city is unquestionably the world's financial capital. New York is home to financial institutions that are leaders in the U.S. and in every major market around the globe – and that is saying something! I also chose to come to New York because I know from experience that the solutions to our nation's challenges are not always found in Washington.
Today I will address the state of the U.S. economy, with a particular emphasis on our long-term challenges. These are problems that do not lend themselves to quick fixes – but they must be solved.
My approach as Treasury Secretary will be bipartisan. And in my early meetings in Congress, with Democrats and Republicans, I have communicated my sincere desire to work with both political parties to meet our long-term challenges.
We are fortunate to be able to address these challenges from a position of economic strength here at home. I spent 32 years working in a business, which gave me hands-on experience with markets and economies around the world. And over the past year, the global economy has been more robust than at any point I can recall during this period.
In Asia, not only are China and India growing, but so are South Korea and Japan. In Latin America, Mexico, Brazil and others are experiencing strong growth and improved fiscal performance. In Europe there are signs of moderate recovery in countries like Germany and France. And here at home the economic growth has been strong.
Last week the Commerce Department announced its advance estimate of GDP growth for the second quarter, which was 2.5 percent -- or half a percentage point below what most economists were expecting. We have to be careful not to put too much emphasis on any one quarter, and remember that this was an advance estimate that will be revised. However, for the past few years -- and for the first quarter of 2006 in particular -- the economy had been growing at a rate that was simply not sustainable over the long run. It would appear that what we are seeing is the economy transitioning to a more sustainable rate of growth, similar to the pattern we saw in the mid-1990s.
The economic strength here in our country would have been difficult to foresee even a few years ago, when the U.S. economy was reeling from the impact of the 9/11 terrorist attacks, the bursting of the stock-market bubble, and the recession. This is worth remembering because when things look the bleakest, they almost never are as bad as they seem. Similarly, when they look too good to be true – as they did during the dotcom and telecom bubble of the late 1990s – they almost always are.
The U.S. economy is on a more solid footing, and is stronger than most of us would have predicted. The unemployment rate has held below 5 percent for seven straight months, and we have seen 5.4 million new jobs created since August 2003. I witnessed this recovery on a first-hand basis -- one day at a time -- through the lens of our resilient, broad, deep capital markets, and through the dozens of institutional investors and American corporations who were the clients with whom I worked.
This remarkable recovery is a true testament to the strength and resilience of our nation's extraordinary economic system and entrepreneurial spirit. I can assure you that the President's tax cuts and economic policies played a major role in this recovery, by helping to restore market confidence, investor confidence, business confidence and consumer confidence. I watched the tax cuts and economic policies change behavior in very real and tangible ways.
There have been plenty of challenges over the last five years, not the least of which were the corporate scandals involving such companies as Enron and WorldCom. Corrective measures to address corporate scandals and increase investor confidence also played a role in the recovery. I take pride in the fact that when there is a problem in the United States – like no other nation in the world – we shine a light on it and move quickly to clean it up.
Often the pendulum swings too far and we need to go through a period of readjustment. But there is no doubt that certain legal and regulatory actions were critical to restoring confidence. The challenge before us now is how to achieve the right regulatory balance to allow us to be competitive in today's world while guarding against the recurrence of past abuses.
The overall dynamism and strength of the U.S. economy remains the model for the rest of the world. The indicators of this strength are many, but income mobility has always been a particular hallmark of the U.S. economy. This mobility is facilitated by our open and flexible economic environment, where there are relatively few obstacles to education, work, or innovation. Workers often change jobs in pursuit of better pay or to broaden their skills.
Indeed, the average American between the ages of 18 and 38 has held slightly more than 10 jobs. The bulk of these job changes are voluntary and increase the wages of the job changers. When we read about the American workers or American families earning the median income, let's remember that many of them are on their way up the income ladder.
Millions of Americans, and generations of immigrants, have been able to ascend this ladder because of the opportunities derived from our economy's growth. And while income mobility can be downward as well as upward, what is significant is the volume of mobility. Among families with the lowest 20 percent of incomes, about half move to a higher income classification within ten years. Similarly, about half of the families with the highest 20 percent of incomes had not been there ten years before. Behind these numbers are countless stories of individual achievement that reflect our dynamic economy and our dynamic workforce.
That in my judgment is the hallmark of our economic system, and we need to work to ensure that all Americans continue to have the opportunities to realize their full potential. From the position of strength we enjoy today, we can address the longer-term challenges that will face our economy in the years to come. These include:
- Reforming entitlement programs.
- Advancing energy security.
- Maintaining and strengthening trade and investment policies that benefit American workers.
- And addressing issues of wage growth and uneven income distribution.
Before I begin, I know there is always interest in the Treasury Secretary's views on the dollar. I believe that a strong dollar is in our nation's interest and that currency values should be determined in open and competitive markets in response to underlying economic fundamentals.
So you will see me continue to focus on policies that maintain and strengthen confidence in the U.S. economy and increase productivity. These policies must deal with our long-term challenges.
The biggest economic issue facing our country is the growth in spending on the major entitlement programs: Medicare, Medicaid, and Social Security. The cost to the federal government of these three programs, without fundamental reform, is projected to more than double, from the current level, 8 percent of GDP, to nearly 17 percent by 2060. If left unchecked these programs would significantly impair our economic flexibility and erode our competitiveness.
Demographics don't lie and demographics aren't partisan. Social Security was created in 1935. Today, people are living longer than they did in 1935, yet Social Security's basic structure has barely changed. Just 3.3 workers are paying into the system to support each beneficiary, while 16 workers did so in 1950. The President put forward a plan last year to strengthen and modernize Social Security. The longer we wait to fix this problem the more limited will be the options available to us, the greater the cost and the more severe the economic impact on our nation.
The financial burdens associated with Medicare and Medicaid are larger and even more complex. Like Social Security, they are linked to the aging of America, and the good news of our increased life expectancy. But they are complicated further by the rapidly rising cost of health care and the structure of our health-care system, which is riddled with inefficiencies and poorly-aligned incentives.
I've only been Treasury Secretary for a short time. In my first days in office, many in Washington have told me that reform of entitlement programs is just too difficult to achieve. They tell me that politicians will demagogue this issue and use it as a political weapon.
I have always tried to live by the philosophy that when there is a big problem that needs fixing, you should run toward it, rather than away from it. That is one of the reasons I decided to come to Washington, and that is the reason I admire the President's political courage and willingness to address entitlement reform. The entitlement challenge is difficult, but it is fixable. And given our expanding economy we can approach the issue from a position of strength.
So the President has instructed me to work with Congress on a bipartisan basis to find workable solutions – solutions that will help to keep our economy competitive in the years, and decades to come – and solutions that should not place an unfair burden on future generations. These solutions should be built on what we can agree on, not what divides us.
Another serious long-term structural challenge is energy security. Today this is top of mind for many Americans because they are paying about three dollars per gallon at the gas pump – a cost that generates real hardship for all those who are trying to make ends meet. These prices are largely attributable to a strong global economy that brings with it an increasing demand for oil, particularly in rapidly growing and developing emerging markets such as China and India.
The fact that our economy has remained strong in the face of these high oil prices is a testament to its remarkable resilience. The global demand for oil is outstripping supply and we as a nation have a long-term structural problem:
- We consume much more oil than we produce.
- We are too dependent on foreign sources of oil.
- And too much of it comes from troubled parts of the world.
And this will still be true if gas prices decline.
The President and this Administration are focused on this problem, and have made important proposals and progress in a number of areas. But everyone I have talked with, from the President, to Sam Bodman, our Secretary of Energy, to Senators and Congressman on both sides of the aisle, agree that much more has to be done. It is a major long-term challenge and one we need to fix through a comprehensive approach. We need to do more on the supply side, and we need to do more to conserve energy. In addition, we need to do much more in terms of investing in new technologies and further developing alternative sources of energy, including nuclear power and ethanol. In doing so, we need to encourage market-based solutions. Moreover, an energy policy that takes us toward greater energy security should also lead to cleaner air and cleaner water.
We also need to expand opportunities for American workers and businesses to compete in the global economy. The goods we export – from corn to computers – create high-paying jobs for millions of Americans. And foreign investments in our country are responsible for more than five million U.S. jobs. Simply put, we need to continue working to open markets abroad, and to keep our own markets open.
As Treasury Secretary I will be a strong advocate for free trade and will encourage other countries to open their markets to American goods, services, and capital. When I travel to Asia early this fall trade will be a top agenda item. The world is a competitive place. And if we are to retain our competitive advantage, we need to welcome competition, and not run away from it.
But I must tell you, in all candor, that I am very concerned about the anti-trade rhetoric I hear coming from some quarters here and around the world. I have spent my career advising clients on international matters, working in U.S. and foreign capital markets, and investing in countries around the globe -- ranging from developing countries like China, to highly-developed economies, such as those in Japan and Germany.
If this experience has taught me anything it is that nations that reform their economies, and open themselves to trade and competition, benefit their own citizens greatly. They see more jobs and higher living standards. And those nations that don't take these steps are left behind. But in many countries – even those that have seen the greatest gains from open markets – there is a disturbing wave of protectionism. A number of countries are increasingly viewing market access as something that should apply to someone else's home market and not their own.
Sadly, I have seen this mindset paralyze the Doha round of global trade negotiations. I know the President and U.S. trade negotiators led by U.S. Trade Representative Susan Schwab have worked doggedly to achieve a balanced, multilateral agreement, and we will continue to try to find a way to move forward with the global negotiations. At the same time, we will continue to press for liberalization through important regional and bilateral agreements.
I firmly believe that this country benefits as much from trade as any country in the world. The challenge is how best to convey the benefits of trade to the American people. Unfortunately the clear benefits of trade – such as stronger economic growth, more jobs, and a higher standard of living for Americans – are broader, sometimes take longer to manifest themselves and are less visible than some of the immediate dislocations which are linked to trade.
These dislocations are very real and painful, such as when an individual factory closes and hard-working men and women lose their jobs. The answer, however, is not new trade restraints, which hurt all Americans, but rather thinking more creatively about how we can be more competitive and how we can assist those who face hardships.
The final challenge I will touch on today is wage growth and income distribution. There is no question that the strong economic growth of recent years has made people better off than they would have been in a low-growth or no-growth environment.
But we still have challenges, and amid this country's strong economic expansion, many Americans simply aren't feeling the benefits. Many aren't seeing significant increases in their take-home pay. Their increases in wages are being eaten up by high energy prices and rising health-care costs, among others.
But we must also recognize that, as our economy grows, market forces work to provide the greatest rewards to those with the needed skills in the growth areas. This means that those workers with less education and fewer skills will realize fewer rewards and have fewer opportunities to advance. In 2004, workers with a bachelor's degree earned almost $23,000 more per year, on average, than workers with a high school degree only. This gap has grown more than 60 percent since 1975.
This trend dates back many years, and was evident in the recovery of the 1990s. It is simply an economic reality, and it is neither fair nor useful to blame any political party. It stems from a number of factors, including technology and U.S. integration with the global economy. Rather than playing the blame game, we must focus on helping workers move up the economic ladder.
The first priority must be to keep our economy strong, which helps create new and better opportunities for all Americans. But, we also need to continue our focus on helping people of all ages pursue first-rate education and retraining opportunities, so they can acquire the skills needed to advance in a competitive worldwide environment. As you know, this has been one of the President's major priorities. Moreover, if we can keep our economy growing, and maintain the gains in productivity, this should drive increases in living standards. That was certainly the experience in the 1990s, when income growth eventually followed increases in employment and productivity.
And while that was a period of high productivity growth – 2.5 percent per year – today it is even higher, averaging more than 3 percent since 2001. In many ways, productivity is fundamental to the long-term strength and competitiveness of the U.S. economy and the financial well-being of all Americans.
As we focus on how to translate our economic growth to greater take-home pay, let's not confuse the facts. As I said earlier, the President's tax cuts energized the economy, and federal taxes take a smaller bite out of people's paychecks. And while part of the benefit of these tax cuts is being masked by higher energy prices and rising health-care costs, among others, Americans still have more money in their pockets because of the President's tax cuts.
Now, I can't give a speech on the economy without talking about the federal deficit, given how much discussion there is of the issue. The recent surge in tax revenues has driven the deficit down to just 2.3 percent of our gross domestic product – about the same as the average over the past 40 years and putting the Administration well ahead of the President's goal to cut the deficit in half by 2009. This is even more noteworthy given that it has occurred while we have been financing a war and bearing the costs of devastating hurricanes on the Gulf coast.
We've made progress, but the deficit is still too large. I wish it were less and I am working with my colleague and friend Rob Portman, the Director of the Office of Management and Budget, to restrain federal spending. But let's be honest with each other. The big budget issue is the longer-term structural entitlements challenge staring us in the face.
And the decision we make on this issue will not only be vitally important to the future of our country, but of great interest and importance to people around the world, particularly business school students like you who live in developing countries. This was driven home to me six or seven years ago when I spoke at a Chinese business school, before a standing-room only audience in a large auditorium.
As I recall, I was feeling somewhat guilty because on the advice of my Beijing colleagues I was reading – and not particularly well, I might add – a very long prepared text, which seemed, at least to me, to be rather boring. If I had done something like this at CBS, Wharton, or Harvard Business School, the students would have been streaming out of the room 10 minutes into the speech. But these students listened in total silence; you could have heard a pin drop.
After the speech, I was flooded with questions. And, as I was leaving, I was mobbed for autographs. I was beginning to think I was a rock star or at least a dynamic public speaker! But then it dawned on me . . . I was just a window on U.S. capitalism. These students were in awe of our economic system and wanted to learn. For them, America is the beacon of capitalism and a model to be emulated. I don't expect you to be in awe of what you have always taken for granted. And I encourage you to be grateful for all that you have inherited and all that you can accomplish. Don't ever take it for granted. Because I can assure you that keeping a positive attitude and a sense of gratitude will go a long way in determining your future success, and ours as a nation.