C. Peter McColough Roundtable Series on International Economics: A Conversation with John Snow

Speaker:
John Snow Secretary of the Treasury, U.S. Department of the Treasury
Presider:
Peter G. Peterson Senior Chairman and Co-Founder, The Blackstone Group L.P.
Description

The C. Peter McColough Roundtable Series on International Economics is presented by the Corporate Program and the Maurice R. Greenberg Center for Geoeconomic Studies.

Audio
Transcript

Council on Foreign Relations
New York, N.Y.


PETER PETERSON: Good evening all. First, I have a couple of announcements. This meeting is organized by the Council's Corporate Program and the Maurice Greenberg Center for Geoeconomic Studies. Council members around the nation and around the world are participating in this meeting via secure, password-protected teleconference. This meeting is also on the record. Is that right, John? Good.

Having once been a cabinet officer, I fully appreciate the need from time to time to do a bit of a snow job [laughter], if you will forgive the awful pun. For example, on even the most modest initiatives, at least in the Nixon administration, one was expected to attribute it to the president credit for all initiatives, including in some cases, initiatives that the president may never have heard of or had anything to do with, so one tried to do as much—do this without too much of an assault on their own integrity.

I do not know, John, if you will sprinkle a bit of snow on us today, but if you do, I will understand perfectly. I would like to tell you about a few personal experiences with my good friend John Snow; things that I recall and John Snow did in the public sphere prior to his latest move into public service. John, you will recall, I think, in the '90s that I got a call from [former Treasury Secretary] Bob Rubin urging that we get the top business community organized around a push for a balanced budget and a few other things. John was then head of Business Roundtable. He responded immediately, and together with several hundred CEOs [chief executive officers] and a number of Democrats, we were able to launch a national advertising effort, including two-page ads, and I know from personal experience that the president was very impressed with the depth of this effort.

More recently, following the spate of corporate scandals, John and I were asked to co-chair the Conference Board Commission on Public Trust and Private Enterprise. And a great group—including not only John, but [former Federal Reserve Board Chairman] Paul Volcker, [former Securities and Exchange Commission Chairman] Art Levitt, [former Representative] Warren Rudman [R-N.H.], Ralph Larsen of J&J [Johnson & Johnson], Andy Grove of Intel, and on and on—took this one on. And I found John Snow perfectly prepared to confront the obvious elephants in the boudoir that so many were trying to ignore.

I refer, John, to stock options that were being issued in huge amounts, not expensed, but for which tax deductions were given. I refer to executive compensation unrelated to operating performance and very short-term oriented, with huge sums often going to CEOs with mediocre performance, or in some cases, even in failing or failed companies. I refer, John, to boards of directors that were not led by anyone, and the obvious need for a lead director or presiding director, a non-CEO chairman. I refer to auditors and lawyers with serious potential conflicts of interest. And I am here to tell you that John Snow joined in directly confronting all of these issues and more, so again, John, with this personal experience I've had, I am particularly proud and privileged to introduce my friend and the secretary of Treasury, the Honorable John Snow. [Applause]

JOHN SNOW: Thanks, Pete, very much. You know, that was going so well I could have just listened and listened for a lot longer. Thanks for the opportunity to be here. It's great to see so many old friends and colleagues from prior life and some who served with me in the government.

The G-8 [Group of Eight] leaders are getting ready for the Gleneagles conference and I thought I might share some thoughts with you and maybe provoke some questions and comments from you as we prepare for that important and historic event made more historic by the fact that just two weeks ago, when I was in London with [British Chancellor of the Exchequer] Gordon Brown and the other members of the G-7 [Group of Seven] following up on an agreement between President Bush and [British] Prime Minister [Tony] Blair, we signed an agreement to cancel the debt of the poorest countries in the world. This was a real milestone agreement. It means for 18 of the poorest countries, immediately their debt will be cancelled; $40 billion of debt which was pressing in on them and constraining their future has been eliminated, and it means that for another 20 or so countries, when they qualify, and they will in time, their debt will be eliminated. This is a concept that President Bush and the Bush administration, we at Treasury, have been pushing for a long, long time.

It's a real breakthrough idea; the idea that you just cancel the stock of debt, relieve the countries of the annual service payments which are a drain on their capacity to do more productive things, and then substitute grants for loans. That's something that [former U.S. Executive Director to the World Bank Carole Brookins is nodding here in agreement with me here. She served ably and well as our representative to the World Bank—an idea we've taken to the World Bank, an idea that really makes sense. Very simple: Cancel the debt. Relieve poor countries of the obligation to make those service payments, and then avoid saddling them with heavy debt burdens in the future by making grants rather than loans. That was our framework. We were always prepared to put more money on the table to accomplish the full funding that was required, and I can't tell you how delighted we were two weeks ago when that agreement finally came to pass.

The issue of growth in the global economy I think will be the central issue before the leaders in Gleneagles [Scotland]. This issue of growth is one that we've focused on an awful lot, and sometimes it's easy to forget the seminal importance of growth. Growth is the foundation for the success of individual economies and it's the foundation for the success of the global economy. It's the foundation, really, to lift poor people out of poverty. It's the foundation for creating enriched and better lives for the citizens of the globe. And today, both in the large, industrialized countries of the world and in the developing countries of the world, while some progress is being made, a big gap exists between where we are with growth and where we could be; where we could be if we applied good policies, where we could be if we removed the impediments to growth, where we could be if we really promoted trade on a broader basis and went at the things that stand in the way of growth.

One thing I've learned here in the last couple of years—two and a half years—is that growth isn't an accident. Growth is the result of well-conceived, well-articulated, and well-implemented national and global economic policies. Today, the United States is enjoying strong growth. We're leading the industrialized world. You know the numbers, I don't need to go through them, but we've been through an awful lot. We've come out on the right side of it. The American economy had serious body blows: the recession, 9/11, the corporate scandals that caused me to put together that blue-ribbon panel [the Commission on Public Trust and Private Enterprise] and, I think, do some good work. That was a real threat to corporate capitalism. That challenged the most fundamental ingredient of corporate capitalism: trust. And once you lose trust, it's hard to rebuild it. And we did jeopardize trust, and I think in a way, corporate capitalism was hanging in the balance there, back in those days that those scandals one after another, after another unfolded.

And the American people were saying to themselves, "What's going on? Who can we trust?" And, while Sarbanes-Oxley [Act of 2002] has actually gotten a lot of criticism, it seems to me Sarbanes-Oxley was an absolutely essential response by Congress and by the government to the needs of that time. It was an imperative. So, growth is the result of good policies.

We've been through a lot, I think. We're patting ourselves on our backs a little bit. The Bush administration has put in place the right policy. We've embraced open, competitive markets, trade—trying to get CAFTA [Central American Free Trade Agreement] done right now. We've embraced good fiscal policy. Pete, let me say that again: We've embraced good fiscal policy. [Laughter] At the time when the economy needed some oxygen, we lowered tax rates to put it in, but we didn't lower tax rates simply for the sake of lowering tax rates and getting a short-term stimulus. The tax plan that was put in place was one that was well crafted for long-term growth. It lowered the marginal tax rate on capital formation—first time in years. Dividend taxes came down significantly. Taxes on capital gains came down significantly and taxes on work and risk-taking, marginal rates on labor came down significantly. The result? Well, the result is about three and a half million new jobs since that legislation took effect. The highest growth rates we've seen in the United States in a long time—in decades—and all with high productivity and low inflation.

When I was in Europe traveling around last week to try and continue something called the Euro-U.S. financial market dialogue—as something that's important to Europe and important to us as they try and create one open, integrated competitive, efficient capital market—the question I got asked everywhere from national leaders, from regulators, from business people is, "How do you do it? How do you get the American economy performing so well? What's the secret? What do we need to do?" Because the contrast—the contrast is really marked. Euro-zone growth rates are a third of most of growth rates in the United States. Germany, the engine of Europe, is sputtering. France, anemic growth rates. Italy, negative growth rates. Japan, weak growth rates—promise of doing better but for a decade very, very weak growth rates.

Now, the world can't function well—the global economy can't function well with only one major engine of growth in the industrialized world. And that's what we've had for too long. So when we meet with the leaders of [inaudible] the G-7, when the president meets next week with the leaders of the G-8, growth will be on the agenda. And our message is: We want to see the rest of the world grow faster; we want to see Europe do better. We want to see Europe achieve more of its full potential for growing its economy and raising living standards. It's good for Europe, but it's good for us. Just as our growth is essential to propel Europe forward—and of course, our European allies and our allies in Asia are delighted to see the United States growing at the rates we're growing—they're growth is important to us.

That was the major message I was trying to take to Brussels, to Paris, to London, all across the capitals of Europe last week. We support your efforts, the Lisbon agenda [to increase Europe's economic competitiveness]. We support national efforts: Germany's effort to make labor markets more flexible; France's efforts to deal with pensions; Italy's efforts to lower tax rates; on and on, Japan's efforts to deal with the banking sector. All of those efforts are important, but it takes political will to get them done.

What I've learned in the last couple of years—two and a half years—is that we don't suffer from a scarcity of good ideas on economics. Most first-year students of economics, if confronted with the problems of most economies of the world, could figure out what to do. There isn't that dearth of understanding of good economic policy. What we need is more real political leadership to make things happen. That's what Europe is suffering from right now. France, Germany, Italy—all those countries aren't advancing the agenda they say they know they need to advance growth. So one thing the leaders will certainly talk about is growth in the global economy and how to create more growth.

One reason more growth is important is the connection between growth and the imbalances in the global economy we see. The current-account deficit, it seems to me, is in large part a result of these growth imbalances. If the United States is growing at a rate which is a great multiple of our trading partners', it just stands to reason we're going to be creating more disposable income than they are. The United States has a high propensity to consume. We also have a high propensity to consume imports, higher than the rest of the world. So here is our higher disposable income rising at a good clip, fast clip. The rest of the world, our trading partners, [are] not so fast. Our higher propensity to consume and high propensity to consume imports, that's a formula for a continuing current-account imbalance.

And then the other side of that, of course, is we're creating lots of investment opportunities in the United States. Our trading partners are not, but they are generating savings. So it's natural their savings would find their way into the investment opportunities that we're generating. That really is the definition of the term account imbalance used that I just gave you. So growth is an important part of finding the answer and that will be on the agenda at Gleneagles.

But we recognize that dealing with the current-account imbalances is a shared responsibility. We have a lot to do, too. We've got to face up to our deficit. We've got to reign in the deficit. Only two ways to do that, really. You know them: One, government receipts have to rise. Government receipts rise when the economy is doing well, when businesses are profitable, when more people are working. And it's no surprise then that as we got this economy rolling again, it's three and a half million people who are working, who weren't working two and a half years ago. As companies have become much more profitable, the sales are up and the profits are up, that government receipts are rising. But even we are a little bit surprised by just how much government receipts are rising. They are now about 15 percent higher than the beginning year forecast. They're particularly higher in this category of non-withheld [receipts], and non-withheld is important because that deflects the profitability of enterprises; that's a dividend, that's interest, that's capital gains. And we're also at that sort of tipping point in the cycle wherein the recovery returns to capital have been particularly high for the first several years of this recovery, but now we're beginning to see signs with returns to labor becoming higher, firms compete away some of the returns. They hire, the hiring process leads to competition for labor, which takes up labor rates, which is happening, which is all good news for the deficit, because wage income is one of the highest taxed forms of income we have.

And we can see continuing strengths in labor markets, continuing wage increases, which means continuing strong receipts. All that's playing out. Those of you who follow the Treasury market realize we're not putting out as much paper. We've reduced our demands for borrowed funds and it's all translating into good news on the deficit. Pete, I want you to listen to me on this. He rags me on this all the time. He rags me. We are bringing the deficit down. We are bringing it down. It's clear now from the private sector estimates that it will be well below the going-in numbers. [Inaudible] you're shaking your head in agreement because you've run these analyses, I'm sure. The private-sector estimates are well below the coming-in number. The Treasury and the CEA [Council of Economic Advisers] and OMB [Office of Management and Budget] will be putting out our numbers here in several weeks. I don't want to foreshadow what those numbers will be, except I will say they are going to be a lot lower and they will show that we are well in advance of the president's target of cutting the deficit in half by the end of this term. His target was a halving of the deficit; bring it down to about 2 percent of GDP [gross domestic product]. I think I will be fairly safe in saying that we are well ahead of that target.

So we're trying to do our part to reduce the dis-savings in the U.S. budget. We also need to find a way to encourage more savings in households. We're one of the lowest savings rates in the world, and there are some proposals—I won't go through them—that we have in the Congress now that would help on that score. And if we could get Social Security down, I think, long term, that would lead to additional savings as well.

The other piece of this puzzle, it seems to us—that is, the puzzle of the current-account imbalances is what to do with the Asia rim countries that operate with inflexible exchange rates. Now you might say, "What's that got to do with anything?" Well, it's got a lot to do with it. It's got a lot to do with it, because flexible exchange rates will better order the global economy. The global economy really works well with free capital flow, with open, competitive capital markets, with trade—open trade markets, and with flexible exchange rates, because flexible exchange rates are the signals to the system to how to deploy resources. And if we don't have flexible exchange rates, it's very hard to get the pricing signals of the global economy right. If you don't have the pricing signals right, you don't know, well, how to deploy resources. Resources get put into wrong uses, and if resources get put into the wrong, the signals aren't followed; they are wasted, and wasting resources is a terrible thing to do.

But in the case of China, it goes beyond that. In the case of China, without reference to flexible exchange rates, the evidence is pretty clear that they are over-investing in their tradable sector at the expense of their non-tradable sector. And that introduces an imbalance in their economy and the global economy. Exchange rate flexibility would help that. It would also [help] China deal with discontinuities and imbalances in their own economy, because think about it: What does it mean to have a fixed exchange rate? It basically means somebody else is setting a monetary policy, because your monetary authority is focused on sustaining the peg or the exchange rate of your currency with whatever's pegged. So if your currency starts to go up, your monetary authority is required to go buy the other currency to sustain the desired pegged relationship. But if the monetary authority is focusing its efforts on sustaining the pegged relationship, who is thinking of inflation and who is thinking about deflation and how can the monetary authority possibly deal with those sorts of imbalances? Well, it can't.

This is the discussion which is going on in China to date. China has said that it wants to go to a floating rate or flexible rate. I think they will. I think they will, because it's in their own interest. It's in the interest of managing their own economy better. Recently, Treasury released its semiannual study saying that China is ready to move to flexibility—ready in the sense that, after two years of really focusing a lot of effort on improving the financial infrastructure, they have reached a point in their financial market maturation that it looks to us that they're in a position to put in place flexibility. Good for them; good for us. Good for the global economy. I think they are going to do it, but it's not the United States telling them they should do it for our sake. That's how it's often reported. We're not saying that. We're saying China should to flexibility for their sake and for the sake of the global economy. That's a view that's shared widely among financial institutions of the world. It's the view of the G-7. It's the view of the IMF [International Monetary Fund]. It's the view of the World Bank. It's the view of the Bank for International Settlements. It's the view of many, many finance ministers and central bank governors, including Jean-Claude Trichet of the ECB [European Central Bank] and [Chairman] Alan Greenspan of the U.S. Fed [U.S. Federal Reserve].

The framework I've laid out here for dealing with these imbalances has become the standard and accepted framework to deal with these problems. It won't occur immediately. It won't occur overnight. But by going down the path we've suggested, I'm confident we'll put the global economy to a much sounder and a much more stable basis.

Now, the other part of that discussion that the world leaders are going to have is Africa—sub-Saharan Africa, in particular. The debt arrangement that I talked to you about is a foundation for further progress, but it is a milestone, and I'm confident that we'll see the leaders celebrate that and build on it. A lot of the talk will be about funding, about additionality, about money. Money is important here. It's a necessary, but not a sufficient condition to deal with the underlying problems. The United States has taken a clear view on this: We're prepared to do more on financing, but it needs to be productively used, traditional financing. Money alone doesn't get this problem of poverty and development dealt with very effectively. We've too long relied on money alone. The view was, make money available and the good things will follow. Well, money alone doesn't make good things happen. Money coupled with good policy. Money tied to measurable results. Money tied to investment in people. Money tied to investment in health care, education. Money tied to developing political institutions that really work. Money helped to foster private-sector development so the SMEs [small and medium-sized enterprises] can take a lead role. That's the sort of money that gets results. I'm conscious that the money that we make available for development is the taxpayers' money. It's money—hard-earned money of U.S. citizens, and we have a fiduciary duty to the citizens to see that that money is used well.

So the president will talk about additionality, but he'll talk about putting in place, as well, the framework that produces real results. It's because of our sense that development has not been done as well as it could that the administration several years ago move to Congress this new idea for development called the Millennium Challenge Account. Many of you are familiar with it. In fact, many of you chatted with me about it before. The central idea of the Millennium Challenge Account is, reward good actors. Reward people who are doing the right thing. Reward people who really have programs to deal with corruption. Reward people who believe in democratic institutions. Reward people who are investing in their people. Reward people who—nations that are getting the results in healthcare. Reward people that are actually achieving results in raising literacy.

All too often in the past we talked about goals—raise literacy, deal with disease—and we haven't measured results. And the money goes out and we come back two or three years later and we say, "What have we got?" All too often, nothing. All too often, nothing. That does a disservice to our taxpayers. It does a disservice to the good people of the developing country who had high expectations. I hope what comes out of Gleneagles will be a consensus that, while money is important, money has to be harnessed to good policy and to measurable results. If we accomplished that, if those ideas that are implicit in the Millennium Challenge Account are the ideas that shape the broader framework for development, Gleneagles will be an historic achievement. Pete, I thank you very much for the chance to be here and look forward to trying to respond to comments and questions.

PETERSON: Thank you. [Applause] John, I know you will be profoundly disappointed and depressed if I didn't ask you a question or two about Social Security and Medicare. [Laughter] The president deserves credit in my view for at least getting the issue on the table. The Democrats, I'm sad to say, have a plan that [former Senator] Bob Kerry [D-Neb.] refers to as the "Do nothing" plan. It seems a bit stalled at the moment. I'd be interested in what your prognosis is, but I think in many ways—you and I have discussed this before—the Medicare problem and the healthcare problem generally is an infinitely larger problem not only fiscally, but infinitely more difficult to solve because of the values questions, the ethical questions, the psychological questions, et cetera. And as you know, it's beginning to seriously affect the competitiveness of some of our countries. So I'd be interested in bringing us up to date on Social Security, and how do you see this country attacking its healthcare explosion?

SNOW: Pete, thanks. This is another subject that the secretary and I have had a chance to talk about over the years. Social Security is far and away the easier, the clearer, the simpler of these two sets of issues. We've studied Social Security over and over and over. And it's all based on demographics, and of all the things people are asked to forecast, the easiest is demographics. It's hard to get future interest rates right. It's hard to get GDP rates right. It's hard to get exchange rates figured out. It's hard to get inflation rates figured out for the future. It's not hard to figure out who's going to retire in 2008. They're on the rolls already. We know it, right?

This is almost to a certainty that we can talk about the inflows and outflows to Social Security. We know there's a gap. We've quantified the gap. The gap on an ongoing basis is $10 trillion. It rose last year $600 billion. If we don't fix it, it'll arrive another $600 billion. People say, "The bigger issue is Medicare, why don't you deal with it first?" Well, we don't know enough about Medicare at this point. We do know enough about Social Security. It's all about demographics. The options are on the table. I think we are making some progress.

Pete, I am disappointed we aren't getting more response from the other side. The president laid out a number of ideas. He said that these are some ideas. These aren't the only ideas. What other ideas might you have? And so far, we haven't heard much. But we're plowing ahead anyway. Chairman [Bill] Thomas, the very able, talented chairman of—and creative, innovative chairman of the House Ways and Means Committee, is now moving some interesting legislation through the House Ways and Means Committee. And his counterpart, somebody for whom I have great admiration, [Senator] Chuck Grassley [R-Iowa], the chairman of the [Senate] Finance Committee, is trying to do the same thing. But they are doing it without much support outside their own party. That's a shame. That really is a shame. This is issue is too important to be dealt with the way it's being dealt with as partisan politics, but I think we will prevail. I guess maybe that's because I'm an optimist and the glass is half full, but obviously this is a matter of getting votes. And if you've got to get 60 votes in the Senate, as we may have to get if this goes that route, it is heavy, heavy lifting. At the same time, the president is committed to it. He's hasn't lost any of his ardor for the fight for moving it forward. He thinks that it if you're given a privilege of leading the country, you ought to take on the tough issues, not kick them down the road, and he's committed to it. He is going to invest every bit of effort he has in it.

I view this, Pete, as the prelude to Medicare and I'm disappointed we aren't making more progress because this ought to be the easy one. This is pretty straightforward; Medicare isn't. Medicare involves all the things you mentioned—values, ethics. It also involves how to deal with a healthcare delivery system that cries out for major restructuring in a lot of ways because our healthcare system simply doesn't deliver the goods efficiently. We have healthcare outcomes in the United States that look like lots of other countries', but we spent twice as much to get it. It looks like we are wasting a lot of resources in the way we organize the healthcare delivery system, and we need to get at the problem of how you organize an efficient, competitive, well structured healthcare delivery system. That is a big subject, one for which we don't have all the answers now.

PETERSON: OK, now time for your questions. Please identify who you are. Yes, sir in the center.

QUESTIONER: I'm [former Representative] John Brademas [D-Ind.], New York University, third congressional district of Indiana. Mr. Secretary, I've enjoyed listening to you. You asked a question, "How do you do it?" "How do you do it," people say to you. And I made these notes, I could have a longer list: enormous deficits after having inherited surpluses; Social Security privatization going nowhere; foreign aid minimal; and 45 years ago, I drafted a letter and got 45—and got 50 Democratic congressmen to sign a letter to President [Dwight] Eisenhower saying, "You're Republican, we're Democrat. We support your foreign aid proposal." Almost no action on [the humanitarian crisis in the] Darfur [region of Sudan]. The Pew poll says our country is in very bad order all over the world. The public opinion polls are down on the president, down on Congress. Republicans are in charge of the House, the Senate, the White House, the Supreme Court. How do you do it? [Laughter]

PETERSON: Well, John. Could I say something about it, John? From the tone of that question, John, I [inaudible] the rumor that you might have been a Democrat at some time is true, is that right? [Laughter]

QUESTIONER: That is true, but I will also say this, that I remember 40 years ago, as chairman of an education subcommittee wanting to hold hearings on legislation that produced the Education for all Handicapped Children Act, I turned to the senior Republican of the committee, Al Quie of Minnesota, for whom I had immense respect. I said, "Al, what witnesses do you want to hear?" I didn't have to do that. We got up to the mark-up session; I said, "Al, what do you need here?" Result? We produced a unanimous bill, went to the floor of the House of Representatives, I said, "Mr. Speaker, managing the bill, I want to pay my respects to the gentleman of Minnesota and those on his side of the aisle for their contributions to this measure." He threw flowers at me, and this was a signal to then-President [Gerald] Ford, "Don't even think about vetoing this bill."

Now, I was in Washington all day last week and talked to some of my former Republican colleagues and heard voices of great despair about the lack of civility; the lack of comity; the poisonous, bitter hostility between one party and the other. And as somebody who worked very closely—and I speak as the former majority whip of the House of Representatives—with my Republican colleagues to write a lot of legislation, I am deeply distressed about these developments and I hope that somebody of the stature of our distinguished speaker tonight will take some steps to reach across the aisle instead of treating Democrats as traitors of our country. I yield back the balance of my time. [Laughter] [Applause]

SNOW: Well, I hope—I don't take that as a partisan set of comments at all. [Laughter]

QUESTIONER: [Inaudible]

SNOW: Well, I'm trying not—well, let me answer you there, Congressman. Look, there's—we are disappointed on Social Security that there hasn't been more of a response, but there is a quiet behind-the-scenes dialogue going on with members from both sides trying to find a way through this political thicket which is Social Security. And I've had any number of conversations in both the House and the Senate with Democrats, and maybe I shouldn't mention them for fear that I would taint them, but [Senator] Joe Lieberman [D-Conn.] is somebody we're talking to a lot. He's a good fellow. He's got an open mind on this. He recently said, "We need to come up with something on our side as well." Having good conversations with [Democratic Senator] Kent Conrad of North Dakota; with [Democratic Senator] Ben Nelson of Nebraska. There's a lot of reaching out. We haven't yet found the reaching out that results in the agreement, but we are not stopping the reaching out by any means. And I do think the political leadership of this country still works. I think we'll get CAFTA done, for instance. Some of the consensus on trade isn't there, but trade is always tough. Go back to NAFTA: It was tough. CAFTA will be tough, but I think in the end, there will be enough votes to get it done.

Now, the Energy Bill apparently came through today—a long, hard-fought battle, but it came through with—after a lot of effort to create a comprehensive energy bill. The malpractice reform I won't go through, but these are bills that have had—that showed that our institutions—that our institutions work.

On the issue of the deficit, look, we take it real seriously. We know that deficits matter. They count. If we don't manage the [inaudible] of the United States well, we'll pay a huge price and I think we're on a path to bring the deficit—to bring the deficit down, as I said, to levels that'll be low by historical—by historical standards. So I still have a lot of confidence in our political institutions that they'll work. And sometimes things get strained there in Washington, maybe more strained than they were 30 years ago, but I'll bet back then they got strained from time to time as well and we'll see our through—ourselves through the stresses and continue, I think, to see Congress and the executive branch work well together.

PETERSON: Thank you. In the back, please—way back.

QUESTIONER: Ramon Martinez. Mr. Secretary, I want to go back to the question of forgiveness of debt, which is a laudable objective, but I'm very concerned about the—how you deal with corruption in these countries. Making grants I can see attaching strings to them. The poorest countries in the world—not by coincidence—are the most corrupt. When you forgive the debt, you create debt capacity for further borrowings, so how do you plan to deal with that problem?

SNOW: Well, the—remember, the countries who qualify have gone through a process. They have to go through this completion process and that completion process includes conditionality on a lot of things, so you don't get to the position to where the debt is forgiven unless you have performed well on a number of measures. And going forward, the grants as well under this IDA [International Development Association] process—IDA 14—has a substantial amount of conditionality associated with it; conditionality in the sense that the grants are tied to good behaviors and good performance so, no, no. We will keep that very much in mind. That's central, actually, to the whole conceptual framework we're using for development.

PETERSON: OK. Over here on the left.

QUESTIONER: Mr. Secretary, Bob Sinche from Bank of America. There's been discussion—certainly when we have discussion with our corporate clients that the issue of China—a much greater issue for them are things like patent protection, intellectual property rights, et cetera, and they're much less concerned, perhaps, than the political establishment with changes in the exchange rate. Do you see any progress in sort of moving that dialog in Washington away from this simple focus on the exchange rate and moving it toward some of these broader issues?

SNOW: Well, the—I think we've got to take China as a piece. We've got to deal with a lot of issues and they're all interrelated; interrelated in the sense that failure to act on them is creating a negative reaction in the body politic in the United States. I testified, oh, a month or so ago before the Appropriations Committee on the Treasury appropriation, which you wouldn't think would be a long or involved or controversial hearing, but it ended up being a three-hour hearing of which two hours and 45 minutes was on China, because every member on the committee wanted to tell me horror stories of their constituents who had been cheated by—or gone to China and had their product knocked off—who'd found they couldn't get through some bureaucracy. And the feelings in the Congress of the United States are running pretty strong right now on China and we're trying to lean against some of those feelings—we're trying to lean against this legislation—it's really punitive; some of it far-reaching and punitive that would move America really down the wrong path. I testified on that before the Senate Finance Committee here a couple of days ago.

But I think we also have to recognize the intensity of the feelings that are all across America as businesspeople go to China and find that the product they're producing gets ripped off, knocked off, counterfeited. As intellectual property rights aren't honored, it's creating a backlash—a really far-reaching backlash. And currency has become the focal point of it now because of the Schumer-Graham bill on trade with China]. But it's the whole kit-and-caboodle. It's everything. It's the feeling that China's not playing by the rules. You hear that over and over again: "They're not playing by the rules." And, of course, they need to play by the rules. They are subject to the rules. They're part of the WTO [World Trade Organization] process, now, and we're urging them to accelerate their compliance with those rules.

I think for their own sake and the sake of trade generally, it's important they do. One of the things that we're running into in CAFTA is the backlash because of China—a backlash generally on trade; that we're not tough enough, "Bush administration, you aren't tough enough." You're not enforcing the laws enough. You're not leaning hard enough against these practices. And the currency has just become the focal point for a lot of these sentiments. Our view is clear: China needs to live by the rules. China needs to get much more vigorous in enforcing intellectual property rights and stopping this knock-off stuff.

Trade's got to be a two-way street. It's got to be rules-based. It's got to be fair in that sense, and that's the message that we're taking to China. We want open trade with China, but we want it based on rules and we want it to be fair. And Ambassador [Rob] Portman, the new head of the USTR [U.S. Trade Representative], who just came in several weeks ago, is doing a top-to-bottom review of what actions we have available to us to address some of these concerns that American businesspeople all across this country have and have been registered so effectively and forcefully with the Congress.

When I was testifying last week, Ron Wyden, the senator from Oregon who's a Democrat and a free-trader and a good guy, said to me, "Mr. Secretary, why don't we do something about this? Here's an idea for you. Why don't we catalog every proven case of intellectual property theft or copying of—that's involved in any product that comes to the United States and then let the buyers know that this product is using copyrighted material—this product is using the results of thievery?" Well, I don't know whether that's a workable idea or not, but here's a free-trader who's saying that we've got to find a way to enforce the rules, because if we don't get the rules enforced, the general broad-based support for trade which is so important—it's right at the heart of why this economy of ours works so well and is so resilient—will be lost. And if we lose the commitment to trade, we've lost something mighty important to keep America on the right path and the global economy on the right path. So it is focused on the currency, but it's a whole lot of other issues.

PETERSON: Just down here, please. Yes, sir?

QUESTIONER: Secretary Snow, before we began, we talked briefly about the Millennium Challenge Corporation and you've done such a great job here tonight in articulating the administration's belief behind that. Why is it that President Bush isn't going to come to the Millennial Summit [inaudible] this September and Secretary [of State Condoleezza] Rice and others at [the] State [Department] weren't, and can you be there to eloquently defend our new approaches here in the administration for foreign assistance?

SNOW: Well, look, we really believe in this program. The president does; Condi Rice, who serves as the chairman of the Millennium Challenge Corporation, the Treasury secretary is the vice chairman—we really believe in this. This is, as we think about it, the most important new set of ideas on development in a half century or so, and it's critical that it succeed. We need to put more energy into that whole process. We know that. We need to get more grants out. We need to get more compacts written. And we're heightening our focus on how to get that done.

You're going to see this administration continue to push hard for support in the Congress for the Millennium Challenge Account, for full funding of the Millennium Challenge Account, and I'm confident that as we continue down this course, we're going to set the—we're going to be path-setters for development done the right way.

PETERSON: John, we want to be courteous to our out-of-town guests and they've submitted the following question that you've touched upon and maybe you want to amplify. It says Europeans appear to value leisure, long vacations, job security, and early retirement more than Americans. Given these values, what should the Europeans do—be doing to stimulate economic growth? [Laughter]

SNOW: Well, I think they're reevaluating some of those things. Apparently, the 35-hour work week is no longer going to be the norm, and I think this vote that occurred in Holland and France --I was over there right after, so I had a chance to talk to a lot of leaders on it—was a wake-up call to the leaders, because in large part, that vote was saying to the national leaders, "Think about us. You know we've got unemployment rates of 10 [percent], 11 [percent], 12 percent. What are you doing for us as you think about further accessions? Did you think about this constitution for—what about the work force here? What about job opportunities for us?" I think that the vote clearly has gotten the attention of leaders in Europe and they're going to become more focused on what needs to be done to deal with the concerns of their voters, which is, how do you raise living standards and create jobs? That always ends up being a fundamental issue facing elected leaders, how to create good jobs.

PETERSON: All right. Yes, sir?

QUESTIONER: Thank you. Secretary Snow, enjoyed your remarks. [Inaudible] I would be curious to hear your views when it comes to the question of job creation and outsourcing, and you look around the economy of India, the economy of China, what you're noticing is the types of jobs that now in a flattened environment is getting outsourced, [inaudible] looking at really very, very high-end jobs. I'd be interested in your views on what this means for high-end job creation within the United States. Thank you.

SNOW: Well, the answer to these—to this question is really the same answer that I would give you to how do we deal with any new form of competition? How do we deal with new technologies? New competition of any kind is disruptive. New technologies of any kind are disruptive. Over the course of American economic history, we've had any number of competitive innovations, haven't we? A hundred years ago, 40 percent of the workforce was farming land. Today it's under 3 [percent], yet we're still eating pretty well and we've got a 5 percent unemployment rate.

We've faced any number of technological changes that have disrupted existing ways of organizing labor and capital, and despite that, decade in and decade out, the United States has continued to create more good jobs and higher standards of living and higher wages and higher full compensation for our workforce. No reason to think that won't continue, whatever the changing nature of competition in technology, as long as we keep the system open, responsive, resilient, capable of adapting.

We're clearly moving the more value-added nature of production. We're turning more to brain-power type activity. I was out today at CNBC—had a tour of their facility—brand-new facility employing lots and lots of people doing highly complicated things, using technologies the CNBC people told me weren't available two years ago. Well, average Americans learn how to use that technology and how to interconnect CNBC with the world through these production centers. I was out the day before at the NASDAQ—went through their technology center. Again, whole new sets of technologies to organize the electronic trading market; technologies that weren't known just a few years ago. There are people sitting running those technologies getting very, very well paid.

The key here is just keeping the capacity for enterprise and innovation strong and alive, keeping this fundamental flexibility that's the hallmark of our economy—a centerpiece of the economy, and letting the spirit of enterprise—the spirit of innovation continue to thrive in the country. As long as we're hospitable to capital, hospitable to risk-taking, hospitable to wealth creation, and hospitable to people with good ideas and make sure our capital markets work so they can get access to capital, we're going to do just fine.

PETERSON: Yes, please?

QUESTIONER: I'm Nancy [inaudible], Dover Financial Research Analysis. Mr. Secretary, thank you for your work on corporate governance. I have a question with regard to China, going back in that direction. How likely do you think China will be able to leapfrog in the area of corporate governance as it has in other areas such as technology, and if it is unable to leapfrog in that area, how likely would it be able to bounce back from a potential corporate governance crisis?

SNOW: That's a great question—great, great question. China, of course, doesn't have the sort of highly developed capital markets that we have in the United States. It doesn't have the wide variety of opportunities for investors to go into fixed income, go into derivatives, go into equities and other outlets for capital spending, which is one reason housing is attracting so much of the savings of the country and some China followers tell us it's creating a potential bubble in that market.

We think of China often as this great competitor—emerging competitor of the United States. The fact is, China is still a developing country with a lot of work to do on the fundamental—fundamentals of a well-functioning market economy. They don't really have interest rates to allocate capital. They don't have well-functioning stock exchanges. They don't have a deep and liquid capital market for fixed-income instruments, and they don't have a lot of experience with corporate governance or with accounting standards or with the oversight of banking institutions, but they're coming along and they're learning from us. And this engagement of the United States and Europe with China is a great learning experience for China and I—the people I know and deal with in China clearly want to draw on the best practices of the best U.S. companies and the best European companies and the best regulators and they're great students of what we're doing and what Europe is doing.

But you can't have a well-functioning system of corporate capitalism without good rules of the road. You've got to be able to trust the books. If you can't trust the books, you don't get investors. If you don't have confidence in the people running the enterprise that they're looking out for your interests rather than their own interests, it makes you reluctant to want to invest, so getting corporate governance right will be important.

PETERSON: All right. That's the last question, please. Yes, the young lady right there.

QUESTIONER: [Inaudible] I'm a lawyer in New York. I wanted to get your comments on the relationship between fiscal policy and our foreign policy, as well as your thoughts on growth rates versus the sense of—you know, and how they compare to different systems of government; i.e., the Chinas and Singapores of the world versus democracies that are puttering along.

SNOW: Well, fiscal policy and foreign policy, and the last one was growth rates in the U.S. and other places?

QUESTIONER: Growth rates in the democratic countries versus non-democratic.

SNOW: Oh, OK. Well, our fiscal policy is to bring the deficit down to levels that are low by historical standards, which is consistent with sustaining low interest rates, which is consistent with making the United States an attractive place to invest. That is, in short, our fiscal policy. We will use fiscal policy to help get the economy out of a hole if it falls into one, but always with the long-term objective in mind of minimal deficits, of keeping fiscal responsibility at the forefront of what we're doing.

Now, on growth rates in different parts of the world, democracy versus less democratic places, I suppose the evidence would be quite varied depending on who you're looking at. The highest growth rates are found in developing countries, not developed countries. Developed countries of the West tend to be democracies, but they have low GDP growth rates. I think they're going to do better. I think we're going to see Germany and France making some good improvements and Japan as well. India has got a pretty good growth rate and it's a democracy, and China is not a democracy and it's got pretty good growth rates, too, so I don't know what the larger message is, but—from that, but I think I know what the better set of policies is: The better set of policies is to encourage democratic institutions. And that, of course, is at the center of our foreign policy. And I would much prefer the brief that says democracy advances the world and advances long-term engagement of people in the right behaviors and good economic performance than the other side of that, and I would take that side of the brief every day. Thank you very much. [Applause]

PETERSON: John, thank you. You're in great form today. [Laughter]

SNOW: Yeah, you inspire me. Did I give them their money's worth?

PETERSON: Absolutely. Great job.

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