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Debt-Driven Doldrums or the Promise of Prosperity: America at a Crossroads

Speaker: Rob Portman, U.S. Senator, Member, Joint Select Committee on Deficit Reduction
Presider: Stephen Friedman, Chairman, Stone Point Capital
January 11, 2012, New York
Council on Foreign Relations

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STEPHEN FRIEDMAN: Good afternoon. We're at the appointed hour, so let me call this meeting to order. I'm Steve Friedman, and it's going to be my great pleasure to introduce Senator Rob Portman.

First let me remind you of a few of the ground rules. Everyone really should turn off their cell phones and BlackBerrys, not just put them in vibrate, because of the systems here. Secondly, I'd like to remind you that this meeting is on the record.

Now, Rob Portman is -- many of us in the room are great Rob Portman fans. He is -- after a distinguished career in the House, he's -- as you all know from the resume, won by a wide margin the senatorial seat. Rob when he was in Congress distinguished himself for being highly substantive and had that increasingly rare ability to work extraordinarily effectively across party lines. He's a man who is capable of getting deeply into the substance and the meat of issues, and as a result, he was made the special trade representative and subsequently headed the Office of Management and Budget, two of the most complex and really deeply substantive areas in Washington.

He's off to a very distinguished career in government, and I'm looking forward, as you are, to hearing from Rob talk about debt-driven doldrums in this area -- era. Rob Portman.

SENATOR ROB PORTMAN (R-OH): (Applause.) Steve, thank you very much.

What Steve didn't mention is that I was one of those members of Congress that always came up to the White House when Steve was the director of the National Economic Council to give him advice and counsel, which he acted like he actually listened to sometimes. And it was great having Steve there. He was a breath of fresh air, both because he brought that private-sector experience and because of his style. You know, he woke up every morning, when he was in that job -- which is a tough job -- trying to figure out what was best to grow our economy, and never considering partisan advantage and never considering extraneous issues. So he served President Bush well during that first term.

And I'm also joined today by another good friend, who's actually one of my top advisers and my 21-year-old son, Jed Portman -- where are you, Jed -- in the back -- who is here in New York City in school, so I told him he could get a free lunch if he came.

And a lot of other great friends in the room. I'm going to miss saying hello to somebody, and I apologize, but I have to say that the last time I was here, which I think was 2006, Pete Peterson sat in the front row. And here he is again. And in the interim time we've had a lot of great opportunities to meet and talk about important issues, including this little issue of entitlement reform and deficit reduction that he is still taking a leadership role on in Washington.

I want to thank Richard, too. I know Richard Haass couldn't be here today, he's out on the West Coast, but he invited me to come, found out that I could come, and he immediately left for California. But I appreciate him being persistent, and it's great to be here again, great to visit with a lot of friends. And I look forward to getting your input.

I wanted to come today because this is a group that understands the economy and our challenges but also looks at it from a global perspective. And I think that's something that's often missing in Washington. I'm going to talk a little about that today. The title is "Debt-Driven Doldrums or the Promise of Prosperity: America at a Crossroads." And what I'm going to talk about is how we need, in my view, to reboot our economy. And it's in part because of the global economy in which we find ourselves, increasingly competitive, and I'm going to focus on just two issues today and try to dig a little deeper into those two, but again, look forward to your comments and questions on a much broader array of issues.

I read the headlines again today about what's going on across the Atlantic. Many of you are involved in that, some of you very directly, and know a lot more about it than I do. But I think it's inescapable, when you read those headlines, that our economic woes are shared. More importantly, we are intertwined and interconnected, in ways that, frankly, we weren't a couple decades ago.

And finally I would say that it's clear to me we are increasingly competing on a global stage, where the movement of goods and capital, services and people is more easily and more rapidly than ever crossing national boundaries. And so we are very much, you know, part of this global economy and we have to take it into account in terms of how we deal with our problems here in America.

Overseas we see our European brethren facing a sovereign debt crisis that is devastating to them, the fundamental cause of which, by the way, is decades of unsustainable public-sector spending, excessive borrowing, leverage, and at the same time, of course, a recession that's making it much more difficult for these countries -- particularly Greece, but all these countries -- to close that gap between the revenues and their expenses.

And I hope when we look at that we realize that we're not far behind. We've got a looming fiscal crisis right here on our own doorstep, and we've got a crisis of confidence which is resulting in an historically weak recovery that's not producing enough jobs, leaving millions of Americans deeply worried about their future, the security of their families. It's placed us in an uncertain and precarious position, and it's cast doubt on our ability to compete and prosper long-term in the global economy.

For those who believe that Europe's woes are far worse than ours, let me give you a couple interesting statistics. One, our gross debt, as you know, now equals 100 percent of our economy. The top story in USA Today yesterday was about that, that this year we have achieved this distinction of having our gross debt equal the entire size of our economy. Spain's debt-to-GDP ratio is not 100 percent, it's 67 percent. In fact, the average in the EU is 80 percent. So those who think this is America, we'll be fine, we've got a stronger fiscal foundation -- we need to think again. Yes, there are some countries, like Greece, that have a debt-to-GDP ratio worse than ours, but on average the EU's doing better than us.

We do see some signs of life here in our economy. Last Friday we had some job numbers come out that were highly touted, and I'm delighted to see some jobs coming back after four years from the recession, and a recovery that is felt -- at least in Ohio, where I've been the last couple days, talking to a lot of businesses and workers -- feels in Ohio like a continuation of the recession because it's been so weak.

But let's look behind those job numbers for a second and better understand the enduring and historic weakness of this recovery. First, a lot of that improvement in the jobs numbers comes from the fact that people have stopped looking for work, hardly something to celebrate. So we've gone from 8.9 percent to 8.5 percent in the past two months in terms of our unemployment rate. Again, good news. During that time period, more than 350,000 Americans have stopped looking for work.

So if that had not happened, if those Americans had not, through frustration, said, we're not even going to be part of the statistics anymore, our unemployment rate would have gone from 8.9 to 8.7, not to 8.5. So half of the improvement we're seeing is due to something bad, which is the fact that people are leaving the workplace, frustrated.

Another interesting statistic is that based on the most recent figures we have, labor-force participation rate -- those looking for work or working as a percent of the population -- is at historic lows. It's at about 64 percent right now. That's lower than at any time in the past four recessions. In other words, at this point in a recovery, four years out it's never been this low. If the labor rate were at 66 percent, which is what it was in the late 1990s, our unemployment rate today would be 11.3 percent.

So again, as you look at these statistics and you look at how the stock market responded, which was kind of tepid, there may be a reason of that, because some of these underlying issues when you look at the broader context here indicate that we're not out of the woods.

Another point that I heard a lot about in the last couple days from employers in Ohio is they have people coming to work, looking for work, who have a huge resume gap and a skills gap. And I talked to some manufacturers who were saying, Rob, it's just tough to hire somebody who's been out of work for, you know, six, nine months, and part of it's just, you know, getting back into work. He said their accident rates are higher among those workers. Safety's not as keen. They're not as focused on the job and they've lost some of their skills.

The average number of weeks on unemployment today is at historic levels, far higher than it has been in any of the last four recessions; 40 weeks is the average.

So again, I -- great to see these new numbers; I hope we continue to see better numbers. But this notion that somehow we're back on track and out of the woods I think is naive.

In terms of job growth, let's also look at this recession versus other recessions. We -- right now, four years after the recession, total nonfarm jobs in the United States of America are still 6.1 million below the level they were before the downturn began. So we're still 6 million jobs down.

Let's compare this to other recessions. Four years from the start of the 2001 recession -- which, you should know, was called the jobless recovery -- we had recovered all of the jobs lost during the recession, in fact had added jobs, about 350,000 jobs at this point in the recovery.

So if you look back to other recessions, four years from the recession that began in June 1990, jobs had grown by about 4 million, and four years after the '81 recession, which was the deepest recession, the U.S. economy had added about 6 million jobs from the pre-recession peak.

So this is a true jobless recovery in that sense, and we've got a lot of work to do. We have 21 million Americans who are either unemployed or underemployed. And the chairman of the New York Fed I think said it well last week when these new numbers came out; he said, these new levels are a decrease, but still unacceptable. That was his word. And it is unacceptable.

Now, I say all this not just to spread doom and gloom and to make us all feel more depressed about the economy, but to say that I think when you look at what's really going on in our economy -- and again, coming from Ohio, maybe I feel it more sharply because we still have not been able to get manufacturing back on its feet the way we'd like to; our employment numbers are slightly -- have been slightly worse than the national average -- they're actually equal to it right now -- but I say it because I believe we need to understand what's going on and have the right diagnosis of the problem to come up with the right prescriptions.

And I think the predominant view in Washington, and certainly at the White House, is that this is a temporary cyclical business downturn largely due to the financial crisis -- a lot of fingers get pointed here to New York, Wall Street -- and that as in any other business cycle downturn, there are things that Washington can do in terms of spending -- therefore, stimulus -- in terms of temporary sweeteners -- therefore, the temporary tax cuts -- and that like any other business cycle, you know, over the past 50 years in this country, those Washington prescriptions would be the right thing to do.

I think the diagnosis is wrong. I don't think this is a temporary business cycle downturn. Unfortunately, I think it's far deeper than that. I think it's a matter of our economy having deeper structural issues that cannot be addressed by the kinds of policies coming out of Washington.

And I think that if we don't look at these more fundamental structural challenges that are holding back risk-taking, investment, and therefore, job creation, we're not going to be able to get out of the woods.

We've got to make fundamental changes that add certainty to the economy, or else we'd risk long-term decline relative to our major competitors, many of whom have already tackled many of the challenges that we need to tackle.

I think the evidence supports my view. We tried stimulus; it didn't work. The president's own economic advisers, as you know, confidently predicted that because of the stimulus package alone, unemployment would be under 6 percent today as we sit here. Washington, both under the Bush administration and the Obama administration, has tried short-term tax breaks. They haven't worked. And again, I don't think short-term sweeteners work because it's not a short-term problem.

The right diagnosis, again, is that our economy has lost its competitive edge in the global economy due to a set of serious structural problems, most of which are of our making. And if we don't address these obstacles, I think we risk long-term decline relative to our major competitors, and a lack of economic growth in this country. And it's especially true because so many of our competitors have tackled these challenges and are tackling them.

During the so-called supercommittee process, I decided to put up on the website a solicitation for ideas and received about 17,000 ideas for deficit reduction. I think half came from Pete Peterson. (Laughter.) But one of the ideas I liked the most was, the first couple of weeks, somebody sent a suggestion saying, merge with Canada. (Laughter.) And, you know, it was sort of funny until I started looking into it more, and Canada's done a lot of the right things to keep their economy on track during tough times, including some things I'll talk about in a second in the area of taxes and trade that make more sense.

To alter the trajectory we're on -- we are currently on, obviously, we have to deal with our budget deficit. This is simply unsustainable. Fifteen trillion dollars -- we talked about earlier -- as our debt is bad enough; what's even worse is the trajectory for the future. You know, the supercommittee was asked to cut 1.2 (trillion dollars) or 1.5 trillion (dollars) in the face of an increase in debt during that same time period, the next 10 years, of anywhere from 5 (trillion dollars) to $10 trillion. As a former OMB director who looks at these numbers, you know, I try to look out five and 10 years more than what's happening now, and the trends and the trajectories are what are really concerning. That has to be addressed, because I don't think that the economy will recover the way we'd like to see it until we deal with restraining spending and reforming our major entitlement programs.

Some say increase taxes. You can't catch up with the spending. It -- I mean, this is not a philosophical point of view, although you may take it as that; it's a question of math. You simply cannot raise taxes high enough to catch up with the spending. And, you know, I'm all for tax reform. I think there's much better ways to collect taxes and to increase revenue through pro-growth policies. But raising taxes alone will not catch up with soaring spending. And raising taxes, of course, in the wrong way damages an already fragile economy.

But in addition to tackling the debt, writing the trajectory of our country requires a thoughtful pro-growth strategy to regain our competitive edge in the global economy. Unless we're growing at 6 (percent) or 7 (percent) or 8 percent, we're not going to be able to grow our way out of this. And that is not something that anybody predicts. But we can grow and grow at rates that are far higher than our current growth rate, and that will play a major role in getting us out of the deep fiscal hole that we're in.

In my first months in the Senate, I laid out a seven-point plan to address what I consider the structural problems in our economy. It includes rebooting the economy by fiscal discipline -- again, I think that's kind of the wet blanket over the economy, a lot of uncertainty caused by that -- but also some very specific proposals: tax reform, much more bold tax reform than some have talked about; regulatory relief; education and worker retraining; a new commitment to domestic energy production -- energy efficiency needs to be part of that, by the way; health care cost containment; much more aggressive trade policy. So these are all issues that I think can and should and must be addressed that are more structural issues.

Today I'm not going to walk through all of them, although again, in our Q-and-A period, if you -- if you have interest, I'd love to talk more about some of them. But if I could, I'd like to touch on just a couple that directly affect our international competitiveness.

The first obstacle we need to overcome on the international side is the fact that we are underachieving in terms of exports. And, you know, America's had a great market here for many businesses, some of whom are represented in this room today. And frankly, we haven't been looking beyond our shores as we should.

Exports equals jobs. The president talks about that a lot. He would like to double our exports over a five, 10-year period. We need to do much more and we can and should. Instead of being content to sell in our own market, we've got to look overseas much more. It's a key to jump-starting the economy.

Let me give you a common measure which is used globally to look at exports, and that's as a percent of GDP. Where do you think America stands in terms of our exports as a percent of our GDP? Out of 170 countries that were rated, we're near the bottom. We're tied with Tonga at 163, which puts us just ahead of Ethiopia -- 163rd out of 170. Interesting, isn't it?

There's also a new reality that's got to shake us from our complacency. That's that 95 percent of the world's consumers who live beyond our border now hold 75 percent of global purchasing power. In other words, we've always been 5 percent of the world's population, but now the other 95 percent is buying a lot more. And our global competitors, you know, whether it's Germany or Japan or China, are accessing those markets in ways much more aggressively than we are.

We shouldn't be sheepish about selling our goods, our products, our services. I believe we have the best workforce in the world. I believe we have the best products in the world. We certainly know how to sell them domestically. We sometimes lose sight of the fact that trade is about opening as many markets as possible, but also leveling a playing field so that our partners in trade receive reciprocal treatment here, which benefits our consumers from greater choices, lower prices. Simply put, increased trade flows result in growing the economic pie, and it's something we should be doing much more aggressively.

Let's take the services sector as an example where the United States has a great opportunity. We're a powerhouse there. You often hear about our ballooning trade deficits. Incidentally, our trade deficit is driven by two things: energy and China.

When you add it up, our trade deficit with China, which, by the way, grew last month while China's trade deficit went down with others -- it grew with us partly because we don't have all the raw materials that some of these other countries do that they're sending to China. But. when you add up our trade deficit with China, at about $200 billion, and our trade deficit with regard to foreign imports of oil, that accounts for about 95 percent of our trade deficit. But we do have some great opportunities, as I've said.

We have a trade surplus in banking and insurance for instance. In fact, in 2010, our services trade surplus exceeded $162 billion. So we can do it, and we should be working around the clock to increase our surpluses in other areas: services and goods.

Part of the obstacle has to do with Washington. A perfect example is the length of time it took to get Washington to act on the free trade agreements with Korea and Colombia and Panama. The last time I was here before this group was almost six years ago. And for those of you who were here at the time, I'm sorry to be repeating myself, talking about Colombia, Panama -- (chuckles) -- and Korea, because that's what I've talked about then. And at that time we were very close to completing Colombia. I was able to sign that agreement when I was trade representative, and we were very close to completing the agreements also with Panama and Korea, which were signed after my tenure, but launched when I was in the trade rep's office. That was six years ago almost.

After those trade agreements were signed, and people assumed we were going to move forward with these commercially beneficial agreements that also had enormous foreign policy benefits for the United States, they simply languished in Washington.

President Bush, of course, proposed that Congress take them up. You know, he had negotiated them and thought they were good agreements. Democrats in the House at the time, as you recall, objected to allowing them to have a vote on the floor. The president has to send them forward in order to be ratified, but of course, Congress also has to ratify them. In this case, it was under trade promotion authority or fast-track authority. But getting them to the floor for a vote was impossible, and Speaker Pelosi effectively blocked them.

President Obama was elected and, according to his advisers and even his comments, he understood that these trade agreements would create jobs. In fact, by his own metrics, he said they would create 250,000 jobs. But it took nine months after the president was elected, even to get him to send the agreements to Congress.

For those of you who follow this closely -- and some of you are here, some of my Democrat friends who are here, who helped me when I was in the trade rep's office, and helped me in the last nine months to get these agreements to Congress -- and I did help create a path forward by supporting trade adjustment assistance, which is a -- or for a retraining program that the administration insisted upon, an expansion of the existing program. But it was like pulling teeth, I can -- I can tell you. And if you've followed this in the press, you saw that. Crazy.

While we allowed these agreements to languish for five years, what happened in the rest of the world? Well, no one else slowed down or waited. Other countries negotiated and completed trade agreements right and left.

I mentioned Canada earlier. You know, we negotiated an agreement with Colombia, completed it; President Uribe and I personally negotiated it. It was done. It was very tough for Colombia, but they agreed to lower their tariffs and open up to services and make fundamental reforms to their economy that are more free market-oriented. Canada started negotiating after us, finished before us, ratified it and took market share -- (chuckles) -- away from us. So our wheat sales to Colombia are less today than they would have been, but for the fact that Canada got in ahead of us.

But this has happened all over the globe. There are over 100 bilateral trade agreements being negotiated right now -- over 100. The United States is party to zero, none.

So, maybe in the old days, we could afford this, just as we could have afforded to access our own market and not worry about the 95 percent of consumers outside of our market as much, but things are moving fast. Other countries are moving quickly, and they're grabbing market share from us.

You've heard a lot of statistics, but the European Union started negotiating with Korea before -- after we completed our agreement with Korea, they negotiated their agreement; got it ratified; and in the first couple of months over this past summer, before we could finish with Korea, they were grabbing market share from us. And that market share is tough to get back, as some of you know who are involved in international trade.

So, instead of working around the clock to negotiate additional agreements and to move forward, the United States is sitting on the sidelines. And therefore, our workers, our farmers, our service providers are suffering because we're not getting the benefit of these lower tariffs and other nontariff barriers and creating more jobs here in this country.

It works. If you add up all of the free trade agreements that we have, all around the world, including Canada, Mexico, the CAFTA (ph) countries now -- Chile, Peru, Singapore and so on, Australia -- all of those countries add up to less than 10 percent of global GDP.

Think about it. We don't have a trade agreement with Europe or trade agreement(s) with China or Japan. So it's less than 10 percent of global GDP; latest number I have is 8.2 percent of global GDP. Yet, we send 41 percent of our exports to 8.2 percent of the world because of these trade agreements.

So the next time you hear someone say exports equals jobs, they're right, and they're also saying something that's not happening. In other words, we're not creating the jobs we should be creating through trade.

This president is the first president since FDR not to request the ability to negotiate trade agreements. Pretty interesting, isn't it? Two presidents actually didn't have to request it because they already had TPA or trade promotion authority, negotiating authority, before they were elected. So they came into office with the ability. Both happen to have been Republicans who were free traders. But President Obama has not asked for nor does he want trade promotion authority -- unbelievable! Because without trade promotion authority, other countries won't sit down with you to negotiate an agreement for a very good reason: because under our system, if they do that, then it goes to Congress, and Congress can amend it to death, and nickel and dime it, and they're not going to put their last, best offer on the table. It won't happen.

The only negotiation we're doing right now is with the Trans-Pacific Partnership, which is a regional trade agreement. I'm supportive of it; I hope it works. Trade agreements tend to, you know, work on the basis of the least common denominator, meaning that some of those countries in the so-called TPP are unlikely to want to reduce their barriers as much as we could get in a bilateral agreement. Therefore, the whole agreement probably won't make a huge difference, at least initially, in terms of tariff reductions and nontariff barrier reductions, but it's the right thing to do. But we have no trade negotiating authority nor has the president asked for it, even to negotiate the trade promotion authority in the TPP, the Trans-Pacific Partnership. So this is an area where, again, Washington is shooting itself in the foot and therefore our country and our workers.

The White House has been very effective in using extraordinary measures to pass other legislation. I would say the health care bill would be an example of that. I would say the recent activity in terms of NLRB and the Consumer Financial Protection Bureau would be examples of that, where they're willing to be quite aggressive with Congress in getting things done. We simply haven't seen it with regard to export opening agreements.

I have legislation that I've offered with Senator Joe Lieberman to give the president trade promotion authority, no strings attached. I've also offered to work with them on putting together whatever they want in terms of trade promotion authority. I think it's incredibly important we give this president the ability to negotiate on behalf of our country. And I'll continue to work with them on other issues, like Russia's accession to the WTO and the Trans-Pacific Partnership, with the hopes that we can get something done, but honestly it's frustrating and it doesn't have to be this way.

While we have made some progress -- and I think it was the most bipartisan progress that was made on anything -- as these free trade agreements in the last year -- we need to do a lot more. And we need to do a lot more also of reducing obstacles of our own making here in this country.

I'm going to mention one other important reform topic, and this is one that also, I believe, can and should be bipartisan, and we could move forward on even during this year, as political as this year will be. And that's tax reform and specifically corporate tax reform.

If you look at our challenges globally, I think our outdated corporate tax code has to be at the top of the list. It effectively forces U.S. employers and workers to compete with one hand tied behind their backs.

And there's been a lot of discussion about tax reform, how you do it. I think there's a very simple solution that involves a lot of complexity, because it's the tax code, after all, but it is simply to lower the rate, broaden the base on the corporate side. Our corporate tax code is build on a closed-economy assumption that basically, our corporations are going to be insulated from international competition.

And the world has changed a lot, and that assumption is way out of step with today's integrated global economy. Our trading partners are competing hard for capital, investment and jobs. One measure of this is the increasing mobility of investment across borders. In 1980, not too long ago, cross-border foreign investment comprised 6 percent of global GDP. Today it exceeds 33 percent. Think about that.

And like trade, I don't think we can afford to sit this one out. And as we do, as we have our businesses competing with one hand tied behind their backs, we are sitting it out. We need a tax system that helps U.S. businesses and workers compete on the global economic playing field.

In the context of the supercommittee, which was spectacularly unsuccessful in reaching its hopeful result, we did get some things done. And one was sitting down as Republicans and Democrats together and talking about tax reform. (In fact ?), we spent hundreds of hours on this with staff from the committees of jurisdiction and with members. And one of the things that we were able to do is to craft a framework for an overhaul of the corporate tax code. Although the broader deal never came together, we did find more common ground on this than any other tax issue, and I think some sense, any other spending issue.

So my goal now is to take that framework that we've developed and propose legislation soon in the new year and to do so on a bipartisan basis. I can't tell you how it'll be bipartisan yet because that'll depend on one of my Senate colleagues on the other side of the aisle stepping forward, but I think -- I think some are interested, from discussions.

And our plan addresses what I think are the two major competitive disadvantages built into the corporate code. One is the high rate, which is globally, as you know, way out of line with other corporate tax rates, and then our outdated approach to international operations.

On the first point, there is a wide consensus now among policymakers, economists, business leaders and so on that the 35 percent corporate tax rate has become a drag on our economy. It makes us noncompetitive. It's the second-highest corporate tax rate among the OECD countries. Only Japan has a higher rate. They have plans to lower theirs, by the way. Thirty-nine point two percent is the average combined federal and state burden, compared to a 25 percent average now among OECD countries. So when you combine our state and federal, we're 39.2 (percent). The average is 25 percent. When Japan's new rate cut takes effect on April 1st, ours will be the highest, actually.

We talked about Canada earlier. It's interesting. Canada is going from 16 1/2 percent to 15 percent right now. And as you know, we have lots of companies that operate in both Canada and the United States. And it's interesting in Ohio talking to those companies. The U.S. companies are looking to Canada for their investments and maybe for their headquarters. Canadian companies are very interested in not just remaining Canadian companies, but doing a maximum amount of their business there so their revenues are there and they're taxed there. So it's a -- you know, it's a way to compete, and the United States has been left out of that competition.

It's a fairly recent development. In 1986 under the Reagan administration, the corporate rate was cut from 46 (percent) to 34 percent. And that 34 percent was actually a rate below our global trading partners. So as recently as the mid-80s we were competitive. And you know, we were moving. We were -- we were -- we were acting on this issue to make ourselves competitive.

In the interim period what has happened is that the OECD rate, which at that time was about where ours is now, about 39 percent, has come down to this 25 percent level. Every single one of the OECD countries in the last two decades have reformed their corporate tax code -- all of them -- to make it more competitive, all of them except us. (Chuckles.) We're the only ones. And again, while we have languished and had, you know, partisan discussions about taxing big corporations, this global trend has been fiercely competitive, and it has driven investment and jobs away from America.

So it's true our effective tax rate is not 35 percent. It's probably closer to 28 percent. And the reason that's true is that we have hundreds of special preferences and exemptions in the code. But even at 28 percent, that's a full 5 percent above the OECD average. And much more important to me, our tax break-riddled code means resources are not being allocated to productive purposes. So even if the effective rate is lower, there are so many economic inefficiencies in the way we're doing it that we're still globally uncompetitive.

Who's paying the price? The American workers. Just like trade, who pays the price? American workers. The office of the congressional -- the Congressional Budget Office, which, you know, is a nonpartisan group that gives Congress advice, has done some analysis of this. And their analysis would be that 70 percent or more of the burden of corporate taxes is borne by workers in the form of lower wages.

Now, you know, again, this is a controversial issue, I suppose, among some. And certainly there are folks who say we shouldn't be helping big corporations; we should be making life tougher for them; they have too much cash on the sidelines. My view is if we're going to help workers and help make America competitive, we've got to have a tax system that makes sense globally.

The chairmen of the Finance Committee and Ways and Means Committee have said this. The Simpson-Bowles commission said it. President Obama has said it. So this is not something that can't be done on a bipartisan basis.

The proposal we're developing actually does it. It brings the top rate down from 35 (percent) to 25 percent. It does so in a revenue-neutral manner. The Joint Committee on Taxation has scored it. It's the only proposal of its kind. Some have said it can't be done. It can be done. You got to get rid of a lot of loopholes and tax breaks, but it certainly can be done.

The tax rate cut is paid for primarily by reducing inefficiencies, preferences and exemptions in the code, so again, base broadening, lowering the rate. It will ensure that businesses succeed more based on the quality and value of their goods and services and not based on the sophistication of their tax planning. As a recovering lawyer myself, I will say it'll mean fewer corporate lawyers in house and fewer need for lawyers on the outside.

And by the way, it also ensures that all corporations pay taxes. There's been a lot of publicity about some that don't or pay very little, and this'll be a 25 percent rate.

We know from economic studies and international experience that the lower corporate rate will spark substantial economic growth and job creation. There's a study out by the Journal of Public Economics saying that reducing the rate by 10 percent would increase economic growth rates by between 1 (percent) and 2 percent, about a million jobs a year, not bad by something that, again, can be bipartisan, revenue-neutral.

We know from the European experience that the growth effects can increase taxable income and revenue, an important consideration in our current fiscal climate. According to Ernst & Young, in Europe, for every 1 percentage point cut in the corporate rate, total corporate taxable income expanded by nearly half a percent. So again, raising revenue not by raising taxes, actually by lowering the rate, broadening the base, making the code more efficient. So we have strong evidence this will mean more jobs, more growth and more revenue.

The second competitive disadvantage is the way we approach international taxation. With 95 percent of the consumers living outside the U.S., we can't afford a tax system that continues to impede U.S. businesses and workers from succeeding in foreign markets. That's what we do now. We compete, again, not just with a high rate, but with a worldwide taxation system rather than a territorial taxation system that penalizes U.S. businesses for reinvesting profits they earn overseas back here at home.

The tax code basically gives firms a choice between keeping their earnings abroad tax-free or paying a steep tax bill if and when they choose to bring their money home. Some have noted that tax on repatriation of foreign earnings creates this lockout effect. They say we have trapped an estimated $1.4 trillion overseas. And that's foreign earnings overseas that could otherwise come to this country with a lower rate. So again, this is an obvious opportunity for us to increase investment here, increase jobs here and to get the economy moving.

Bill Simon, former Treasury secretary, once said something interesting. He said we need a tax system that looks like it was actually designed on purpose. And that would be the idea of this corporate tax reform. So at a time with 21 million Americans underemployed or unemployed, it seems like that makes a lot of sense to go to a territorial regime and also to be sure that we have repatriation to bring some of those profits back.

Some have asked, why should we care about helping U.S. companies compete overseas in Asia and Europe and elsewhere? I'll give you a quick example, which is Procter & Gamble in my hometown of Cincinnati, Ohio. They employ about 13,000 people in Cincinnati, our largest private sector employer. And Procter & Gamble does a lot of business overseas. Like most of the Fortune 200, they make most of their money in foreign sales.

And people say, well, you know, why should we help them with their operations overseas? They're not going to export soap; they're going to make soap overseas and sell it overseas. But then, being headquartered in the United States, that money comes back to the United States, because that's where they do their research and development and back-office work and legal work and accounting work, and that's where their headquarters is. So of the 13,000 people who work in Cincinnati, 5,000 of them have their jobs because of the international sales. Expand the international sales, you expand the number of jobs in Cincinnati, Ohio. That's the concept.

And again, I think we can take a lesson from other countries that have done this. It works. It means more jobs in the U.S. It means a territorial regime that will give businesses much more confidence to compete abroad and to invest more at home.

I've laid out two what I think are big and important ways to strengthen the American economy. I think they're achievable reforms, too, and they'll help America regain its competitive edge: export expansion, corporate tax reform. There are so many others. We mentioned earlier a list of them. It includes domestic energy production; it includes worker retraining; it includes reforming our health care system to actually reduce costs of health care; it certainly includes dealing with the debt and deficit. And by doing these things -- restraining spending, surmounting these structural obstacles in our economy -- we can grow our economy. We can get out of the debt-driven doldrums and we can achieve the promise of prosperity. And we can do it for our kids and our grandkids, which is ultimately the American dream. When you think about it, it's being sure that our children and our grandchildren have more opportunities than we had. It's what my dad did for me and his grandparents did for him.

But it's also about America's place in the world. And to be that beacon of hope and opportunity, to have America continue to lead in the world, we've got to sharpen our competitive edge. Some of you worked with me when I was U.S. Trade Rep and have this experience in common with me. But you go around the world, as many of you do with your businesses, and you talk to people from other countries -- in my case, foreign leaders -- and even if in public sometimes they were critical of the United States -- in my case, on trade issues and sometimes foreign policy issues -- in private, you generally get the same reaction, which is, you know: How did you do it? How did you create the greatest middle class on the face of the Earth? What is the trick of, you know, free-market economics? How does -- how does it work?

And America continues to be the envy of the world in some respects, but frankly, we're falling behind. That question isn't asked as frequently. The question now being asked often is: Gosh, is there another model? Maybe state capitalism, practiced by China. They seem to be doing better.

If the United States is not out there promoting trade liberalization, promoting human rights, promoting free markets and freedom, don't expect anybody else to. (Chuckles.) So you know this well -- again, so many of you here have tremendous experience globally. America's role in the world is in question. And what I've outlined today are just two of many things that we need to do to right the ship, and do it soon so that America (can ?) continue to be that beacon of hope and opportunity for the rest of the world.

Thank you all very much. (Applause.)

FRIEDMAN: (Off mic) -- questions, and let me just, as a reminder: Wait for the microphone, if you would, and speak directly into it, and state your name and your affiliation when you ask a question; and would, as always, remind you to keep it concise. I'm just going to kick this off, though, while you're gearing up.

Rob, you mentioned, as part of your list of seven areas for work, regulatory reform. Do you want to comment on your general thoughts about that?

PORTMAN: Steve, I think it fits perfectly in what we were talking about in making our economy more competitive, including more globally competitive.

One quick story: This week, I had a business roundtable in Findlay, Ohio. A Danish company is investing there and they're very interested in our regulatory system, because they have found dealing with OSHA and EPA is a lot more difficult in the United States of America than dealing with any of their regulators in Denmark -- so, you know, changing kind of the conventional wisdom, which is that it must be so tough to do business in Europe. These folks are seeing firsthand that it's harder to do business here, in some respects.

So this notion that our regulations are fine, we don't need to worry about it, we need to have strong regulations to protect safety and soundness and the health of our citizenry and so on -- we've got to do it in a smarter way. And we can and should, and regulators should work with business. Regulations are important, no question about it; but there's a much smarter way to do it.

There is legislation that's bipartisan, I've introduced with Senator Pryor. Senator Pryor is a member of the Governmental Affairs Committee with me, which is a committee of jurisdiction. We've also got some other Democrat support for it. Senator Bill Nelson from Florida is a cosponsor, as is Susan Collins.

It has almost identical legislation in the House that passed in November; it's called the Regulatory Accountability Act. I hope you'll check it out if you're interested. But it reforms the Administrative Procedure Act for the first time in about five decades -- hasn't been touched; again, we've fallen behind. And it simply says to the regulators: You've got to use a cost-benefit analysis that includes the impact on jobs; you also have to choose the least-burdensome alternative, so if there's a policy objective that's been laid out, fine. But right now, of course, there's no requirement to use the least-burdensome alternative, which is one reason the cost of some of these regulations is so high.

The recent EPA regulation that would have affected Ohio quite negatively, power plants, was deemed, even by the EPA, to result in over a million jobs being lost. And that wasn't considered as part of their analysis as to how to come up with, again, a policy objective being met through the promulgation of regulations. So it's really commonsense stuff.

It also requires more transparency in the process. It requires independent agencies be brought into this cost-benefit analysis. That is done for most executive branch agencies, but not for most independent ones. The president himself has said that's a good idea. But he can't do anything about it because they're independent agencies, so it has to be done by statute.

It also requires judicial review -- not for every regulation, but for larger regulations -- so that agencies are actually held to the standards that are established by Congress. So I think this is good, commonsense, bipartisan legislation. I think it can get done this year. There's a lot of talk about regulations; this is something that could actually happen.

I also support a number of other, more aggressive measures on regulations -- honestly, that I don't think is going to have bipartisan support. So my big push this year, just as it is with corporate tax reform and some of these trade measures, is to get some regulatory relief going that actually gives companies some sense of predictability and certainty. You would never have some of the regulations that have come out in the last year -- some of which have been postponed until after the election now -- if you'd had this sort of regulatory framework in place.

So I think there's great opportunity here, Steve, and it definitely affects our global competitiveness.

FRIEDMAN: Great. Thanks, Rob.

Now we'll open it up. Sir.

QUESTIONER: My name is Khalid Azim, Senator. My question to you, sir, is, I think you rightfully said that raising taxes can't keep pace with our expenditures, but wouldn't some part of the solution for the structural imbalances we have in our fiscal policy include raising taxes?

PORTMAN: You sound like Peterson -- no -- (laughs, laughter).

It's a -- it's a complicated question, in the sense that, as I said earlier, I believe strongly in tax reform, on the individual side and the corporate side. You will raise more revenue through that, and that's a much better way to go. So to me, it would actually be broadening the base, reducing the statutory rate and generating more income.

Whether it's tax -- in a tax increase or not is sort of in the eye of the beholder. And, you know, there's this issue about, you know, Americans for Tax Reform and the so-called pledge and how it all works. The pledge does not mean that there can't and shouldn't be tax reform. In fact, I'm, again, a strong advocate of it, as are -- as are many Republicans who signed the pledge. So my view would be tax reform, generating more revenue.

In the supercommittee process, I also supported a proposal that would have tax reform: lowering the rate; broadening the base; permanency with regard to the '01 and '03 rates; and also generating some additional income (for ?) the two top brackets -- $250 billion, to be precise -- of static-scored new revenue.

But honestly, when you look at our spending issues and you look at spending as a percent of GDP -- which is probably the right way to look at it -- the historic average: 20 percent over the last 50 years. We're now at 24 1/2 percent, heading to 25 -- soon 27, soon 28, soon 30, soon 40. You simply can't tax enough to get there.

Should we have a revenue base that is greater than the current revenue to GDP? Yes. You know, it's 14 1/2 to 15 percent right now. It's getting a little stronger as we're coming out of the recession. And as the recovery begins, this -- Congressional Budget Office thinks it'll get back to the historic levels, which is about 18 percent. If the $4 trillion tax increase happens a year from now, which is scheduled, it would be more like 21 percent -- (chuckles) -- which is way above the historic average.

So I don't mean to give you such a complicated answer, but I think just raising taxes on the current base and in the current code would be a huge mistake. I think tax reform makes sense. I think you will generate more tax revenue from it. I think there are ways in which you could do that and even have some static score revenue, but it would have to be in the context of tax reform and predictability and certainty in the tax code.

I mentioned being in Ohio. We did three factory tours and a lot of business roundtables, three different groups. And you know, this -- you hear a lot about certainty and predictability, and when you're out there -- as many of you are and many of you are invested in some of these companies, some of you run some of them -- you know, in Ohio there's a lot of uncertainty about the tax code. And most of these companies are pass-through entities. They're looking at a rate that's going to go from 35 to 39.7 (percent) at the end of the year, and you add the president's health care bill surcharge on top of that, they're looking at, you know, 42, 43 percent tax rates. And that means they take less money -- put less money into their businesses, so they take more out to pay their taxes.

And most of these guys, what they do is -- they're Sub S owners. Some of them are partnerships. They take money out to pay their taxes. And they're going to invest less in their company. And that's one reason cash is on the sidelines, they tell me. They're getting a little more business, but they're not willing to take that risk.

So part of the answer is certainty, predictability, not that anything's ever permanent in Washington. But there's total impermanence right now. Nobody knows what's going to happen. I would, you know, challenge anybody in this room to tell me what's going to happen a year from now on taxes. I don't know. And if you're an entrepreneur or investor, as many of you are in this room, you don't know either. And that is part of the reason, in my view, that we're not seeing the strong recovery that we need.

FRIEDMAN: Sir.

QUESTIONER: Thank you. I'm Dan Altman with North Yard Economics and NYU, and it's a pleasure to hear someone talk about things like corporate income tax reform and trade promotion authority that would seem to be noncontroversial on either side of the aisle.

One thing that you didn't mention, though, in terms of America catching up to other countries is the public goods that we might need, like our infrastructure, which is probably decades behind in investment, potentially basic research as well, our educational system. Can you talk a little bit about what public goods you think we need and how we could pay for them?

PORTMAN: Good question, Dan. And you know, I'm here, again, with the master, Peterson, on this, these budget issues, but if you imagine our budget as a pie, 60 percent of it is now on autopilot. So that would be Social Security, Medicare, Medicaid, some other entitlements, and then interest on debt, and probably just under 40 percent would represent the rest. More than half of that is defense and the rest is what you're talking about.

So in terms of public goods, whether it's transportation funding or research funding, that's done under the -- you know, the part of the annually appropriated budget that represents a smaller and smaller share of the budget because that 60 percent is the fastest-growing part of the budget, the so-called entitlement programs -- very important programs. But if they're not reformed, they will bankrupt the country, and they will continue to put more and more pressure and squeeze more and more on what you would term as "public goods" or domestic discretionary spending, outside of defense.

So I mean, that's the -- that's the reality of what's happening. If you are a liberal Democrat or if you are a conservative Republican, I think you should find common cause in this -- in this endeavor, because many of those public goods are things that traditionally the Democratic Party has held dear, and what's going to happen, by protecting the entitlement programs, refusing to consider any sensible reforms, is you will squeeze that more and more. Again, the numbers just don't work. It's not philosophy. It's math.

So yes, we need to invest in our infrastructure. There is a huge problem right now because our gas tax receipts are down, and that's how we fund the trust fund. And the question is, do you put more general revenues in -- we've already started down that track -- and you put more general revenues in, you're borrowing 42 cents of it, including a lot more from foreign investors, at a time when interest rates are historically low. What's going to happen there? So we've got to figure out, in my view, one, how to keep that section of the pie from shrinking by taking some pressure off from the rest of the pie and also, specifically with regard to infrastructure, a better way to fund infrastructure.

But these are -- you know, these are the fundamental issues, I think, where we have a structural problem. I think we have a structural problem on the economy, we have a structural problem in terms of our fiscal condition. If we don't reform these major entitlement programs, there simply will not be funds available for those.

You think about it. Even today, I mean, all of our revenue coming in pays for that 60 percent. That's it. I mean, to the extent we are borrowing 40 to 42 cents on the dollar, that 60 percent is all we're paying for today. We're not actually paying for any of the rest of government, including defense, including all those public goods. We're borrowing money to do that.

One percent increase in interest rates, by the way, is another $130 billion a year, 1.3 trillion (dollars) over 10 years, of deficit.

So the European situation is a drag on our economy, in my view, but it also has had an interesting impact, which is that we -- and some of -- some of you, again, know a lot more about this than I do, in terms of the bond market, but it has encouraged people to continue to invest in America as in some respects the least dirty shirt in the closet. And that has kept our interest rates relatively low, along with aggressive action by the Fed.

That doesn't go on forever. And you know, this is the -- I think the window of opportunity -- right now we have to act, and act without having a tremendous dislocation by huge benefit cuts or huge tax increases.

FRIEDMAN: David Malpass.

PORTMAN: Hey, David.

QUESTIONER: Hello, Senator. David Malpass with Encima Global. I wonder if you could comment on the debt limit. The increase went badly in August. Another one will come up a year from now, and it looks like it'll go just as badly. I think it should be replaced, so that we don't threaten default or government shutdown but instead can actually use it to cut spending. Is there any plan to change the debt limit or avoid that disaster that we had in August?

PORTMAN: You're right, David. I think that was harmful to the economy. It was certainly one of the reasons Congress is at -- now at a 9 percent approval rating, which I think is family members like Jed and staff -- is 9 percent. So I don't know. Nobody else out there that approves, probably.

FRIEDMAN: Can you count on Jed?

PORTMAN: I'm not sure I can count on Jed anymore after that.

You know, I thought it was a huge mistake for us to go into a post-debt limit period, because it's not even like shutting down the government when you come to the end of a continuing resolution. You know, this has been one of the big issues in Washington. You come to the end of a CR, and are you going to shut down government or not? We just did it, actually, for a day recently and -- that's hard, but shutting down government means you continue essential services, and you still have revenue coming in.

When you're borrowing -- let's choose a number -- 40 cents on the dollar, to be conservative, and one day you're bringing in 40 cents of all your revenues from borrowing and the next day you cannot borrow, because you have exceeded your debt limit and your borrowing authority is gone, and your cash flowing -- in other words, on any given day, your expenses are going to be different, just as they are in your businesses -- you are tempting fate.

And many of my colleagues on my side of the aisle, as you know, were willing to do that. I was not, because I felt as though there was a possibility of a truly deep cut in Social Security, because on any given day, you have a big Social Security payment, and you don't have the money for it, the government's going to have to make a decision.

And by the way, Treasury had exhausted all of their tools, so other than selling gold, David, we'd done about everything, hadn't Treasury, I mean. So there was really no flexibility there. And so it's not a good way to run a railroad. (Chuckles.)

And what I did like about it is that there was -- there was a theory that, OK, we'll raise the debt limit, but we will cut spending dollar for dollar -- over a 10-year period, admittedly, but over a 10-year period -- at the same level we increase the debt limit -- so increase it by a trillion dollars, a trillion dollars of deficit reduction over 10 years, which is what you're talking about.

So I think that's the better way to go, but you've got to find common ground to do that. So I don't think we should tempt fate again. I think it's a mistake. I think it would be, you know, enormously harmful to what I described earlier as an increasingly tenuous situation internationally and a -- and a still very weak economy. I think the economic growth we're seeing is fragile and tenuous, and I think it would be a mistake to get back into that game of chicken.

FRIEDMAN: We have tough strictures on time, so it's time for one more. And we'll take the gentleman in the back.

QUESTIONER: Badinski (ph), Voice of America.

PORTMAN: Yeah, good to see you.

QUESTIONER: Senator, you said at the tail end of your remarks that you can't expect other countries to do things like promote human rights. So with that in mind, how do you see the sentiment in the Congress, the House and the Senate, regarding American foreign expenditures for things like foreign aid, embassies, military posts and public diplomacy?

PORTMAN: Good question. I hope I didn't say that countries won't promote human rights, but I did say America tends to take the leadership role. And by the way, we take the leadership role on, you know, a lot of issues that relate to our national security as well and to global security. You know, the fight against terrorism, we tend to take the lead.

But in terms of promoting human rights and promoting free elections and promoting free markets and promoting trade liberalization, often our allies who might benefit from some of those same structures are nowhere to be found, and we're out there in the lead. And so my point was that America's role in the world is outsized. We sort of box above our weight even. We're not just the remaining superpower -- a waning one, albeit -- but we're the one who is willing to step up and do some things that are hard but that are necessary. And sometimes in international fora I've found, at the World Trade Organization or other places, you know, that's our role.

So the whole issue of this part of the budget we talked about that's not defense but is annually appropriated includes foreign assistance, foreign aid, includes the way in which, you know, America helps our allies and helps promote democracy and helps promote freedom. And there's a big debate about it right now. Republicans are split. When I go to speak to -- at town halls or have teletown hall meetings, often I get the -- you know, the response that, gee, if you want to reduce spending, just cut foreign aid.

Well, it turns out, depending on how you describe foreign aid, if you include foreign military sales or not, it's 1 (percent) or 2 percent of the budget. And frankly, it's not going to balance the budget, and it does play an important role to the extent you believe it keeps us out of much more significant expenditures like wars in Iraq and Afghanistan that -- for a long period of time they were costing us over $150 billion a year.

So I think there is a lot of support in Congress for continuing -- and you saw in the -- in the appropriations bills that made their way through the Congress this year, there was support for continuing foreign aid programs. But there is also a lot of pressure, as there will be on the entire budget, to make sure we're getting the most bang for the buck. So I think you're going to see a continued effort to be sure that we're seeing some results from our foreign aid.

And as you know, over the -- really, the past decade there's been a movement toward U.S. foreign aid being more directed toward countries that are willing to encourage, you know, the fight against corruption and transparency and human rights and free elections and so on -- I think that's appropriate -- rather than just sending money to folks without having any longer-term progress to show for it. So I think there'll be more pressure on it, but I do think there's still support for keeping what I view as, in the latest continuing resolution and the budget, adequate support for foreign assistance.

FRIEDMAN: Well, Rob, thank you. This is -- you've given us the realities, but also the path forward, if we can take it. So we thank you very much. It's been terrific. (Applause.)

PORTMAN: Thank you all.

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