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C. Peter McColough Series on International Economics: A Conversation with Allan Hubbard [Transcript; Federal News Service, Inc.]

Speaker: Allan Hubbard, Assistant to the President for Economic Policy and Director, National Economic Council
Presider: Paul Gigot, Editorial Page Editor, Wall Street Journal
April 18, 2006
Council on Foreign Relations New York, NY

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PAUL GIGOT:  Good morning, ladies and gentlemen, my name is Paul Gigot.  And today’s meeting is part of the C. Peter McColough Series on International Economics.  The topic is "The President’s American Competitiveness Agenda."  And the session has been co-sponsored by the council’s corporate program and the Maurice R. Greenberg Center for Geoeconomic Studies.   

Today’s meeting is on the record.  And just a reminder to please take a moment to double-check and turn off your cell phones, BlackBerries, and other potential noise-makers.  The plan is for me to engage in a conversation with today’s speaker for 20, 25 minutes or so, and then open the floor to your questions.  And as usual, we end promptly at 9:00. 

It’s now my pleasure to introduce our featured speaker this morning.  He is Allan Hubbard, the assistant to the president for economic policy in the White House, director of the National Economic Council.  This makes him the coordinator of all economic policy within the Bush administration and a key advisor to the president on everything from taxes to monetary policy, health care and trade.   

Al Hubbard was raised in Tennessee; has degrees from Vanderbilt and from Harvard Business and Law Schools.  He’s also an entrepreneur, having founded a couple of successful private companies in Indianapolis, where he lived before he went in exile in Washington.   

In the first Bush administration he was executive director of the White House Council on Competitiveness, so he comes full circle back to that issue today.  And he returned to Washington assume his current duties at the beginning of 2005. 

Welcome, Al. 

Paul Gigot and Allan Hubbard discussing U.S. competitiveness.

ALLAN HUBBARD:  Delighted to be here.  Thanks for the kind invitation. 

GIGOT:  Your first job in government also involved the notion of U.S. competitiveness.  And I want to start by asking you to reflect a little bit over the—from the perspective of 13 or 14 years later, how have the problems and challenges of American competitiveness changed?  Are there new—are the issues entirely different or are they essentially the same?   

HUBBARD:  Well, I think fundamentally they are the same.  You know, the—although we have this big elephant that is getting bigger in bigger, and in two years is just going to get gigantic, and that is entitlements, which we all know, Medicare, Medicaid and Social Security are huge unfunded liabilities that are growing faster than any other part of the budget.  But starting in ‘08, when we baby boomers start to retire, it’s going to dramatically have a huge impact. 

But in terms of, you know, the economy as a whole, we still have the big challenges of government intrusion unnecessarily, unnecessary regulations, and basically tax policy that discourages investments and basically economic growth. 

The great news is, one of the fun things about my job is I got to spend an enormous amount of time with Chairman Greenspan.  And in talking—I learned, obviously, an enormous amount from him.  And when we talk about our economy, which has done so remarkably well, especially over the last five years with all the challenges, especially the high oil prices, Katrina, et cetera, and why have we continued to do so well, why have we created 5 million new jobs, obviously we in the Bush administration point to the big tax cuts of ‘01 and ‘03.  But in addition, what’s great about the U.S. economy—it could be greater—is how flexible we are, and that makes us resilient.  And the deregulations that have occurred over the last 25 or 30 years in financial services, transportation, et cetera, have had a very, very positive impact on our economy.  And that’s why it’s important that we never forget that that flexibility is what makes us so strong as an economy and that we’ve got to protect that, because there’s no question that there are those in our country who don’t believe in that flexibility, and the result would adversely impact our economic growth.  So I guess I would—

GIGOT:  Well, it sounds like what you’re saying is that the entitlement problem’s gotten worse, partly by inattention or some of us might—

HUBBARD:  All of us getting old! 

GIGOT:  Well—or some of us might say political malice aforethought in some of the Medicare policies.  But that’s a policy note. 

But has anything gotten better?  Has there been improvement in certain areas?  I remember in the late 1980s and ‘90s you were working on biotechnology as part—was one of the themes of the Council on Competitiveness. 

HUBBARD:  That’s right. 

GIGOT:  Yet that is now a thriving part of the American economy—

HUBBARD:  Right. 

GIGOT: —creating new jobs and—all the time. 

Paul Gigot, Allan Hubbard, and Council Chairman Peter G. Peterson.

HUBBARD:  Well, I think—I mean, one of our big concerns there was to keep the government from becoming over-intrusive in biotechnology.  And you know—I’m not saying we were the ones that were responsible, but the government has kept its hands off, for the most part, and allowed the biotechnology companies to be innovative, and they’ve been remarkably successful.   

You know, in the telecommunications area—you all know—I mean, you all watch it very carefully like Paul and I do.  The give and take in Washington seems like sometimes we’re not making much progress.  But, you know, telecommunications—you have an editorial in today’s paper about—in the Wall Street Journal today about this—has evolved over time and has become less regulated.  And that’s so important because the innovations are truly, truly remarkable.  And it’s important that we continue to deregulate to allow that industry to evolve, and to allow people like you all to invest your money and lead great companies that will have a huge impact on the economic well-being of the world. 

GIGOT:  Okay.  Anything else?  Telecom’s gotten better. Anything else?  Tax regime better? 

HUBBARD:  Well, I mean, obviously, we—President Reagan made, in ‘86—so what?—20 years ago—made a dramatic improvement in the tax system, cutting the marginal tax rate on income to 28 percent.  Unfortunately, we went backwards in the ‘90s.  But this president has made some, you know, dramatic changes in the tax system, not only cutting marginal rates for income, but dramatically cutting it on capital.  I think that’s had a very, very positive impact on economic growth.  And this president, by the way, is committed to not allowing those tax rates to go back up, and making those tax cuts permanent. 

GIGOT:  Okay.  Let me talk about a subject that I know you’ve spent a lot of time thinking about.  And I want to quote Rick Wagoner, the CEO of General Motors, who recently wrote—he wrote the following in my favorite newspaper.  Quote, "So what are the fundamental challenges facing American manufacturing?  One is the spiraling cost of health care in the United States.  Last year GM spent $5.2 billion on health care for its U.S. employees, retirees and dependents, a staggering $1,525 for every car and truck we produced. Foreign car markers have just a fraction of these costs."  End quote. 

What obligation does the government have to ease this cost burden on health care, and what can it do about it? 

HUBBARD:  There’s no question health care is a major problem in America.  The interesting thing is when you look at polling and open-ended questions, you know, what’s the biggest problem facing the country, one and two will be Iraq or terrorism, and then three generally is health care.  And the reason it—I’m sort of diverting, and I apologize.  But the reason the American public says health care is their biggest—is the biggest domestic problem it’s because of the costs of health care for the average American.  And there’s no question—because employers generally pay for health insurance, employers feel the burden.  But economists will tell you the ultimate person who pays the cost of health care is the employee.  And what’s been happening is employees’ compensation has continued to go up, but their wages have been suppressed because of the escalating costs of health care and the escalating costs that employers have to pay for health care.   

There’s no—you know, the problem with health care—and this is probably longer than you wanted to hear, but I can’t resist this. Pete Peterson and I were talking about it.  If you think about health care, most of us get our health care from a third party, through insurance paid for either by our employer or by the government.  And then when we consume health care, we never pay attention to price. Now, how do we know we don’t pay attention to price?  Because—number one is we never even ask what the price is.  And number two, the industry is not even prepared to provide us with price.  So we have been, over the last 40 years, consuming a product—a service, I should say, and never asking the price.  So guess what’s happened? And we’ve perceived it to be free.  So guess what’s happened?  We over-consume and the prices have gone up dramatically.  And that’s what I think any economist, or anyone thinking about it with common sense, would conclude what happened in any industry.  If you have people consuming something and they don’t care about—and they think someone else is paying for it, then they don’t pay attention to price and they over-consume.  And this is what’s happened to health care. 

The solution?  There are two solutions—and I’ll go back to General Motors real quickly.  But there are two solutions, I think, and we’re at a tipping point, and I think it’s important that the American people grapple with this.  Many Democrats feel like the solution is to go to a single-payer system.  And the only other—and that’s the way to get costs under control.    

And then y’all know what happens when you have a single-payer system.  You have price fixing.  And it’s not what traditionally is the American way. 

And the other approach is, we have got to incentivize the consumer to pay attention to price and quality.  And we’ve got to provide information, so that the consumer can be a good consumer and a wise consumer and can drive down price and drive up quality. 

Now, with respect to General Motors, you know, we believe in companies making their own decisions about what they pay people who work for them and then taking responsibility for that.  It’s true in the pension area, where we are committed to making sure that promises that were made with respect to pensions are kept by corporations. 

And when it comes to health care, you know, it’s up to General Motors to decide how to deal with their commitments.  And if they believe they should be renegotiated, that’s certainly up to them, or if they believe that—you know, however they want to deal with them. But it’s General Motors’ decision about how to deal with its problems. 

And we certainly are supportive of General Motors.  They’ve been a great company for a hundred years.  They produce terrific products. There’s no question they’re going through some difficult times right now.  We’re confident that they will overcome these big problems and that they will continue to be a major employer in this country and a major supplier of automobiles. 

GIGOT:  I think in other places Chairman Wagoner has said what we have here, what we’ve done at General Motors and indeed in the auto industry and much of the legacy manufacturing part of the American economy is there was an implicit social contract, where we provided these wages and benefits, and the government and the political system looked kindly upon that and even gave incentives for it.  And now we’re being punished—that is, GM is being punished—for having fulfilled their part of that social contract.  And therefore, there is a role for government in helping it compete against Japanese and other manufacturers who don’t have those similar burdens.   

No role for government? 

HUBBARD:  It was General Motors’ decision—you know, General Motors decided itself what its contracts should provide for  when it comes to its labor contracts.  There’s no question that the—you touched on something I think it’s important to understand.  We’ve had a system—you know, our tax system is biased towards employer- purchased health care.  And that’s why we have employer-purchased health care, because if the employer purchases the health care, it’s paid for on a pre-tax basis.  If the individual purchases it, it’s paid on an after-tax basis.  That isn’t fair. 

But the result is that for the—you know, most Americans get their health insurance through employer-based health care, and it makes economic sense.  That’s one reason why the—one of the president’s proposals on Capitol Hill right now is to level the playing field and make it possible for individuals, when they purchase HSAs, to get the same tax advantages they do when the employer purchases an HSA. 

But with respect to General Motors, you know, they made—you know, they—it was their decision, and they must take responsibility for it.  And if they think it was a mistake, then they need to renegotiate those contracts. 

GIGOT:  Okay.   

Let’s change the subject a little, talk about China.  This week, with President Hu’s visit, we all know the U.S. trade deficit with China and the accumulation of their—going towards a trillion dollars of foreign currency reserves—on the other hand, China’s also the home of enormous amount of American investment and a huge market and growing market for U.S. goods.  Why don’t you describe how you see the competitive challenge from China? 

HUBBARD:  Well, China’s obviously a very important trading partner.  As you alluded to, we had a—about a $200 billion bilateral trade deficit with them last year.  China globally had a $150 billion current account surplus last year.  The—you know, the result of trade with China is that the costs of many goods in America are much less than they would be otherwise.   

What’s important to Americans and what’s important to this administration is that we have a level playing field with China.  This president believes very strongly that the American worker can outcompete any worker in America—I mean, in the world, as long as there’s a level playing field.   

Right now there’s not a level playing field with China.  There’s certain—China has certain trade policies that are inconsistent with open and fair and free trade.  And we’ve been addressing those problems. 

One of the biggest is in intellectual property rights.  As y’all know, they don’t—they do not respect intellectual property rights the way we believe they need to be.  And we’ve been negotiating with them very aggressively on that.  We just had a meeting last week—Secretary of Commerce Gutierrez and Trade Representative Portman—with Madame Wu Yi from China, who’s their chief economic minister.   

And we have made some significant progress.  Just to give you an example, PCs—you know, obviously China makes millions and millions of PCs every year.  And in the past, these PCs have been made without software.  And then, to be perfectly frank, the software is stolen and put on the PCs.  Well, they’ve now committed to only making PCs that have honestly purchased software that’s embedded in those PCs. 

They’re opening their markets to our beef.  They’ve just announced that.  The government is—the government, by the way, has been buying stolen software, and they’ve agreed that in the future they will not buy stolen software.  So we are making progress on—and they’ve also committed to opening up their markets more.   

We also have a concern about their currency.  Again, we believe—as I mentioned, Chairman Greenspan is a big believer in flexible markets.  And unfortunately, their currency has been a controlled currency and been pegged to the U.S. dollar.  And we have been encouraging them openly and we think it’s in their best interest to move towards a more market-based currency regime.  They’ve made some very small steps in that direction, but we will continue to encourage them to move towards a more market-based currency regime.   

And again, our goal is to have a level playing field with China, where it’s free and—but fair trade.  And we’re confident, if that in fact happens, that it—the American economy will very much benefit from our trading relationship with them.  And we believe China’s moving in that direction.   

GIGOT:  Do you think it’s—China is manipulating its currency?  The Treasury’s got a report that’s coming up here that they have to make a determination.  Is, in your view, that the case? 

HUBBARD:  Well, there’s no question that—you know, that’s up to Treasury to put that report out.  But there’s question that it’s not a—their currency is not allowed to reflect market forces completely.  And we’re encouraging them to allow it to—

GIGOT:  Are you sure that if the currency floated, that it would actually rise in value?   

HUBBARD:  Depreciate— 

GIGOT:  Or could it be that the yuan would go the other direction, as the capital—if they liberalized the capital account and capital float out of the country, how do you know it would go in the direction you want it to go? 

HUBBARD:  Well, to be perfectly honest, we don’t—you know, there’s one thing that—all these fancy economists will tell you that they are not—they are—it’s not possible for them to predict  which way a currency’s going to go.  And by the way, there are some notable examples of others who have not been successful at predicting the direction of currency, but other examples where they have been.   

So I’m—you know, we’re not in the business of predicting where the currency’s going to go.  We just think it’s important that—you know, again, when you talk about what’s made not only the American economy but the world economy so strong, it’s the—it gets back to this whole flexibility, where you don’t have any artificial barriers that prevent the markets from working freely.   

One major artificial barrier is the peg of the Chinese currency to the American dollar.  And that’s why we think it’s important to begin the process of moving away from that. 

GIGOT:  Hasn’t this whole relationship with China actually been something of a success?  I mean, they’ve linked to us.  They haven’t had the financial crisis.  They avoided the currency crisis of the late 1990s in Asia, by the peg.  Yes, there’s a big trade deficit, but China’s growing smartly, we’re growing smartly.  Why mess with a good thing?  I mean, there are a lot of other places in the world which are a problem, like slow growth in Europe.  What is wrong with the Chinese-American relationship right now, economically? 

HUBBARD:  Well, the—again, I don’t—I’ll repeat myself. The only problem is that it’s not a fair trade relationship.  Their markets are not nearly as open as our markets, not nearly as open to our products as we are to their products.  Again, they do peg their currency. 

But the relationship, you know, overall has been very positive, and we believe very strongly that they’re moving in the right direction.  We just encourage them to move more quickly than they are. 

GIGOT:  On this issue of imbalances, global imbalances and the trade deficit, what do you see as the main sources of these imbalances?  Is it slow growth in Europe?  The problem of the U.S. savings rate?  Or is it that world investors—we’re financing our deficit with an 800—(Aside)—Is that what it is, Bill?—$800 billion a year in capital inflows.  Is it just they see this U.S. market as such a great place to invest?  See if you can break that down for us. 

HUBBARD:  Well, it’s all of the above.  The—you know, the bottom line is we invest about 6 percent more than we save.  And so as a given—you take 6 percent of our GDP and that equals about $800 billion—or maybe it’s 6.5 percent.  So as long as we are investing more than we’re saving, we’re going to have a current account deficit equal to that delta.   

Now, why do we?  America has never been a great saving country. You know, our savings rate is quite low.  You know, there’s no question we have a budget deficit that’s much higher than it should be and than the president would like for it to be, and he’s committed to reducing it.  But then there are some other reasons why we have a saving rate significantly lower than our investment rate.   

The reason our investment rate is so high is because we’re such an attractive economy.  Without question, we’re the most successful developed economy in the world.  So when you have people overseas who are big savers and, you know, as the population ages all over the world in developed countries, in Europe and Japan, there’s this accumulation of savings, so the question is where do they put that savings.  And if they’re looking for a safe investment, there’s no better place in the world than America.  So that investment comes here, and that’s why our investment is as high as it is.  And that’s again, another reason why we have our big current account deficit.  

And then finally—and you mentioned this—you know, the other developed countries in the world—in Europe and Japan—have not, over the last several years, been growing very rapidly.  The result of which is they have not been purchasing our goods at the same rate that we’ve been purchasing theirs.  We’re hopeful that that is changing. Japan seems to be finally coming out of their long, long recession. We see some positive signs in Europe.   

But if you put all these things together, that’s why we have our very large current account deficit. 

GIGOT:  Robert Rubin would say that one way—quickest way to increase national savings is to reduce the budget deficit.  If you need to raise taxes to do it, combined with a spending cut deal or an entitlement deal, if you need that as your leverage to do it on Capitol Hill, go ahead and do it; that will increase national savings rather rapidly. 

Why isn’t that a good idea? 

HUBBARD:  You know, raising taxes is never a good idea.  I’m going to have to teach you that, Paul!  (Laughs.) 

GIGOT:  (Laughs.) 

HUBBARD:  You know, the problem with our budget deficit isn’t the fact that Americans are under-taxed, it’s that government overspends.  And I must admit, one of the most—and I know this sounds naive, but one of the biggest surprises over the last 14 months since I’ve been in Washington is to realize the propensity of elected members of Congress on both sides of the aisle, their propensity to want to spend money.  And it is a significant, significant problem. And, you know, we—you know, the worst thing we could do would be to tax ourselves more, give them more money down there, and then, you know, they will just spend more money.  I mean, the only thing holding them back is the fact that, you know, we have this big budget deficit and we’ve got to be committed to reducing it.  So, we cannot tax our way out of it, we’ve got to find the discipline to control our spending.   

And by the way, the other sort of eye-opener to me is the best way to get Congress under control is for the American people all around the country to keep telling them to cut spending.  But, of course, everyone wants the spending cut except in their own backyard, and that’s a problem we run into. 

GIGOT:  How about a presidential veto of a spending bill? 

HUBBARD:  The president will tell you that if they send him a spending bill that’s inconsistent with our budget, you know, he will do that.  So far—you know, if you take the highway bill, the original proposal from Congress, from, I think, the House, was $380 billion.  And to be perfectly frank, the president’s original proposal was $250 billion.  And again—not again—but the final bill came in at $286 billion or $284 billion, I can't remember which—

GIGOT:  Something like that. 

HUBBARD:  Something like that.  And that’s because the president put enormous pressure on Capitol Hill to be more responsible with the highway bill.  And the result was that, you know, he cut a hundred billion dollars off what they originally wanted to spend. There’s no question is his spending was up $30 billion, but the deal—you know, he agreed to the deal, and compromise is a part of the process in Washington.   

But I can tell you, every day, if you look at our spending, you know, we’ve got entitlements which are given, that are—you know, every year you have—they’re baked into the law.  So if you look at discretionary spending and you look at non-defense, non-security discretionary spending, the growth rate has dropped dramatically since the president’s been in office, and actually declined last year.  And in the ‘06 budget, actually declined in nominal dollars.  And a proposal for ‘07 is to decline again in nominal dollars. 

GIGOT:  Okay.  Before questions, I just want to ask you about the—if you’re worried at all about the trend in Congress drifting towards protectionism on the trade account or the—and particularly the investment account.  The Dubai Ports episode certainly did not look like anything but a debacle, from my point of view.  And now Senator Shelby, who’s the head of the Banking Committee, has a bill in Congress that would give Congress a larger role in vetting foreign investment.  Specifically, what do you think of the Shelby bill?  And are you worried about the trend on Capitol Hill towards greater protectionism? 

HUBBARD:  Well, let me just say trade—and I think all of you here recognize this—that trade is so important to the standard of living of the American people and to the world.  But I was just looking at some statistics last night, and most economists—I mean the sort of consensus number is that because of our trading regime and the liberalization of our trading regime since World War II, adds every year approximately $5,000 to the income of the average American.  

Investments in America, foreign investment in America is also incredibly important.  Over 5 million jobs are a result of foreign investment.  The average income of the employee of companies owned by foreign—American companies owned by foreigners is about 15 percent higher than the average American wage.  The investments are in dynamic industries.  And, you know, the last thing in the world we need to do is to discourage foreign investment in this country. 

At the same time, we’ve got to be committed to national security. And there’s no question national security is—comes ahead of everything else.  And, obviously, the president very much believes in that.   

You know, the Dubai Ports situation was unfortunate.  I think—a little "mea culpa" in that we did not do a good job of informing Congress in advance about this proposed acquisition.  And that’s something that’s going to be changed in the future.  We also are working with Senator Shelby and with House members in terms of reforming the CFIUS law—CFIUS is the acronym—do you know what it stands for? 

GIGOT:  I sure don’t.  (Laughter.)  Committee on Foreign Investment in the United States. 

HUBBARD:  Yeah.  Very good!  

We’re working with Congress to reform that law and, you know, to make certain that every—you know, that members on Capitol Hill are comfortable with the executive branch’s review process for foreign acquisitions to make sure that national security is not being compromised, and also to set up a system to ensure that the appropriate people, appropriate members are kept informed about foreign investment.   

But we are committed to making certain that—number one, that national security continues to be the number one objective.  But secondly, that we do not do anything beyond looking after our national security needs to discourage foreign investment in this country, because foreign investment’s been very, very positive to the American economy. 

GIGOT:  But as for now, not formally against what Shelby is proposing? 

HUBBARD:  Well, we will be working with Senator Shelby and, again, with House members. 

And you know, we have certain concerns about the Shelby bill, but you know, we’re confident we can work with him.  He’s always been a great ally of the president and other members of the Senate as well as the House to eventually end up with a bill that’s appropriate. 

GIGOT:  Okay.  Open it up to questions from the floor. 

Yes, sir? 

QUESTIONER:  John Brademas, New York University, 3rd Congressional District, Indiana. 

HUBBARD:  Yes, sir.  That’s what I was just going to say. You’re from South Bend, aren’t you? 

QUESTIONER:  That’s right.  (Laughter.)  I enjoyed hearing my fellow Hoosier and his campaign speech. 

I was surprised, however, that in discussing the state of the American economy I didn’t hear the phrase "the war in Iraq" once; and second, related perhaps, if everything is going as swimmingly as your remarks indicate, why do the polls show that the president is so unpopular and that the Congress is so unpopular? 

I yield back the balance of my time.  (Laughter.) 

HUBBARD:  Obviously, the—you know, the Iraqi situation is a big challenge.  At the same time, you know, this president told the American people right after 9/11 that we were in—going to be involved in a war against the terrorists, that it was going to be a different kind of war, it was going to last a very long time, and that he was committed to doing whatever is necessary to win that war.  And I think if you look at what’s happened since September of ‘01, he’s done exactly what he said he was going to do, and unfortunately, he was—his prediction about it being a long war was correct.  But he will not back down. 

And you know, we’re fighting al Qaeda in Iraq and in Afghanistan, and the Taliban’s in Afghanistan and other places around the world. And you know, I think the, you know, the—obviously, the—a major accomplishment is that we’ve not had another incident since 9/11, and that has taken an incredible commitment on the part of this president and this government and working with other governments around the world to make that happen.  But Iraq is, you know, a very, very  difficult situation right now, but this president is—you know, we’re making progress, and this president’s committed to winning that war.  And we will win that war. 

In terms of the, you know, our—you know, this economy, this economy is remarkably, remarkably strong, and I think those of you, all of you here are—we’re all getting the benefit of that.  And if you look at the statistics, it’s truly remarkable.  You know, the president inherited a recession.  He immediately passed his tax cut of ‘01, followed by the tax cut of ‘03.  The result has been we’ve created over 5 million jobs since May of ‘03, over 2 million last year.  The unemployment rate is now at 4.7 percent.  And the most remarkable statistic that people don’t talk about is productivity growth, and productivity growth is what leads directly to a higher standard of living. 

To give you a sense, in between 73 and 95, productivity growth was 1.4 percent in America, and so that means that it takes 50 years for the standard of living of the American people to double.  Since the president’s been in office, the productivity growth has been 3.4 percent.  We don’t think that’s sustainable, but we do think the high two’s are sustainable.  And if we can have productivity growth at 2.8 percent, that means our standard of living will be doubling every 25 years.  Again, this is a important statistic in looking at how this economy is doing. 

So the economy is remarkably strong.  There’s no question we have very big challenges overseas.  The president is addressing those challenges.  He wishes he could fix them quicker, but—and he’s committed to doing it as quickly as possible, but doing it in a responsible way to protect the American people from our overseas enemies. 

GIGOT:  Al, in retrospect, do you think that the troubles in Iraq are one of the—a big part of the explanation that you weren’t able to make any progress on Social Security last year, the low approval ratings and the difficulties there? 

HUBBARD:  You know, actually, I’m sure it contributed, but I don’t think that was the major reason.  I think the major reason we were unable to be successful is Harry Reid decided early on that this was going to be a—this was a political opportunity for the Democratic Party to beat the president.  He decided that the issue, even though if he were sitting here, I think he would—I’m confident he would agree because it’s just arithmetic—you know, Social Security is a huge problem.  It’s—these, by the way, are not our numbers.  These are the independent numbers of the Social Security Administration—an $11 trillion unfunded liability.  It’s growing at $600 billion a year.  The sooner we deal with it, the easier it’ll be to deal with. 

But Harry Reid decided and his Democratic colleagues that this was some—this was a political opportunity to beat the president,  even though it’s going to cost the country, and he was able to get the AFL-CIO and the AARP to spend a million and a half bucks a week telling the American people that the president wanted to destroy Social Security.  And unfortunately, their megaphone was bigger than our megaphone, and they frightened the American people with respect to Social Security reform.  And that’s why we were unable to make progress. 

But I can tell you this—the president hasn’t given up on it. I mean, just, I think, it was yesterday he was talking about Social Security, and how—you know, that he’s not going to give up on it. And now, he’s expanded talk about entitlements. 

GIGOT:  Okay. 

Yes, sir?  You were—and the rule is to identify yourself as well. 

QUESTIONER:  Thank you.  (Name and affiliation inaudible.)  I’d like to touch—get your comments on two things you touched on: competitiveness and national security.  It would seem to that in the medium term to continue to remain competitive in an economy which is innovation and service-driven, the ability to attract intellectual capital in addition to heavy investment in education would be critical.  Now the United States has been fairly successful in its ability to attract intellectual capital worldwide, but balancing out national security concern and the kind of chilling effect certain of the measures is having the ability to attract intellectual capital in the medium term, one fears, will have fairly significant consequences in addition to, of course, the low levels of investment in education. Interested in your—(inaudible). 

Thank you. 

HUBBARD:  By the way, we agree completely with what you just said.  You know, our ability to attract intellectual capital from overseas is incredibly important and has been an enormous benefit to our economy, and there’s no question that after 9/11, you know, visa requirements changed; you know, the immigration process became more burdensome; it became more burdensome to study in the U.S.  And this has been a very big concern to the Bush administration.  It’s been a very big concern to Condi Rice, our secretary of State, who was formerly a provost at Stanford, who very much recognizes the importance of bringing in students to American universities.  It’s very important that when those students get their PhDs or degrees, that they’re allowed to stay in America.  And we are working very aggressively to reduce the unnecessary burdens that we have created. 

I was just in India with the president whenever it was, a month or so ago, and meeting with some CEOs, and they talked about the difficulty of bringing their people to America.  And again, we—we’re very much committed to doing that. 

But intellectual capital is so important.  And you know, I talked to the Bill Gates’ of the world and others who lead the big technology companies, and they make the point if they can’t bring the intellectual capital to America, then they will put their facilities overseas where the intellectual capital is, because we are not growing enough internally to satisfy the needs of our innovative companies. And so we truly confront the choice of either, you know—if we don’t allow them to come here, then our companies are going to move their investments overseas because they’ve got to have the intellectual capitalists to continue to remain competitive on the world economic stage. 

Anyway, I guess that answers your question.  Thank you. 

GIGOT:  Yes, Steve? 

QUESTIONER:  I’m Steve Schwartzman from Blackstone Group. 

I’ve read that—and I believe it’s true—that nine of the 10 largest IPOs in the last year were not done in the United States. This is a huge change from what’s happened historically.  I happened to be in Europe visiting with the finance minister from one of the largest countries there, and they said they’ve been contacted by a number of their large companies who are having trouble delisting from the New York Stock Exchange to get the government’s help to facilitate that. 

Just anecdotally, I was talking with somebody from India who is trying to do a financing, and said, "No, we didn’t even consider the United States as a place to list."   

I have no particular horse in this race.  We’re a private company.  But for the good of the United States, it seems to me that when the world votes with their feet and avoids our markets, nothing good will happen from that.  And the question is, why is that occurring?  And what these people say is mostly Sarbanes-Oxley.  And when I talk to people in Washington, they sort of say, "Yeah, yeah, but I just can’t do anything about that," and that’s sort of on the don’t touch list. 

But if you’re looking for the health of America in the service economy—and the strength of our financial markets is certainly a major, major asset, and we take certain of these things for granted. And when you see the tide going out on them and people really avoiding us, this isn’t a national security issue, where we can hang our hats on other things.  It seems logical that this needs to be addressed. And to just say, "I’m sorry; it’s a little difficult," is going to really hurt us for the competitiveness in not just the long term; it’s going to come in on us a lot faster. 

So it’s just an observational issue.  I’m not a Sarbanes expert, but in terms of having the opportunity to pass on to you something that’s actually going on in the world—you know, I think we got to sort of grab this and do something with it before, you know, it becomes much more widespread. 

Ninety percent of the share losses—that’s high enough to be noted.  But, you know, that kind of thing is a problem, I think. 

HUBBARD:  I’m actually going to make a note of that.  I didn’t realize—I knew it was a big problem, but I didn’t realize nine of 10—nine out of the 10 largest were offshore, overseas. 

The—I mean, Steve, you’re absolutely right that, you know, when we get our regulations too burdensome—I mean, we’re a world economy.  People will move—and there’s plenty of capital offshore—they will move offshore.  I’m sure our leading investment banking firms—I mean, they’re already obviously huge in London and other places around the world—they will move over—they will do their underwriting overseas. 

We all know the history of Sarbanes-Oxley and the problems that occurred in the late ‘90s, the misrepresentations that occurred in public American corporations, and Sarbanes-Oxley was a natural response to that, to ensure that the investors in our American companies were being properly informed of the financial condition of the companies in which they were invested.   

The question of whether Sarbanes-Oxley went overboard is a very legitimate question, and at the same time I’m not sure Congress is ready to deal with that right now.  I think they need to be informed of this kind of information that you just shared with me.  We do need to make certain that our regulations are not overly burdensome, so we’re running capital out of the country.  It will have a very, very deleterious effect on our economy.  So I very much appreciate you raising it, and I think it is something that needs to be looked at. 

GIGOT:  Yes, sir? 

QUESTIONER:  Thank you.  Sergio Galvis, Sullivan & Cromwell. 

Sarbanes-Oxley is one legacy of the Enron-WorldCom situation. 

Parenthetically, the other issue is that U.S. money still gets invested, but without the benefit of the more rigorous protections of the SEC registration process, so that’s a secondary consequence of this stuff being done offshore. 

The second legacy was the change in the behavior of regulators and the criminalization of otherwise—what was otherwise traditionally regulatory-type enforcement activity and competition between federal enforcement authorities and regulators as well as at the state level. 

That has had a significant impact, too, and has been a significant distraction in the boardrooms.  How do you see that second legacy of Enron-WorldCom situation playing out? 

HUBBARD:  You know, obviously I have concerns, just like you implied you have.  You know, the sad thing is that the Enron and the WorldCom situations occurred, and obviously human beings are never going to be totally honest, but it had such an adverse impact on the perception of capitalism and free markets.  And, you know, the public was and continues to be legitimately outraged by, you know, the total misrepresentations and the result of which was that people, average folks lost a lot of money because of these misrepresentations, and the effort is to prevent that in the future.   

But we’ve got to do it in a way that is—has minimal harm to the economy, and regulatory burdens and obviously potential, you know, criminal liability has a chilling effect on entrepreneurial activities, and so, you know, there’s a balancing act that must go on. And sometimes we overcorrect, and when we overcorrect, we need to fix it.  So I appreciate you all raising these concerns. 

QUESTIONER:  Do you think the Justice Department should revisit the Thompson memo, which some of us think undermined the attorney-client privilege and stopped companies from providing the—from paying the legal defenses of some of their employees? 

HUBBARD:  Fortunately, this is out of my area, and I will stay out of that area.  (Laughter.) 

GIGOT:  Yes, sir? 

QUESTIONER:  I tried.  I mean, you can’t—(laughter)—

QUESTIONER:  Henry Hirschberg from McGraw-Hill Companies. 

Attracting talent from abroad is obviously very important.  I think what’s even more important, though, is educating our own population.  And the fact that we basically have such a low percentage of graduates, even from high school, in this country—and each year, this percentage is basically getting worse—I think it’s a much more, from a competitive point of view, a much greater danger for the United States than we really perceive and believe. 

About a year ago, Mr. Greenspan spoke in Congress about the competitiveness of the United States and its population was so great that I see it as he was thinking about our European competitors over the last hundred years, not the—India and the Chinese population, which—where education comes up foremost.  The most important thing for every family is to educate their child, and the competitiveness of two and a half billion people, I think, will just overwhelm the United States population and its competitiveness. 

Would you like to comment on that? 

HUBBARD:  Yeah, I would, and I appreciate—I was going to mention that to this gentleman over here, and I forgot to point. 

You know, as I mentioned earlier, the demand for highly skilled workers, well-trained Ph.D.s, et cetera, exceeds the supply in America, and that’s why it’s so important that our—we allow the high-skilled immigrants to come to America to work. 

But the other thing we need to do, which this president is committed to, is we need to improve our education system, not only overall but also particularly in science and math.  And that’s one of his major initiatives this year under his competitiveness agenda is to put special emphasis on science and math so we can produce more of these intellectually talented people for, you know, our very competitive technology companies in America, and again, to—where they won’t have the need to go offshore as much to employ the talented overseas. 

So there’s no question we’ve got a big, big challenge when it comes to our education system.  Obviously the president ran on that in 2000.  His No Child Left Behind is a very, very big step in putting accountability into our education system.  But he also wants to add to that by putting a special emphasis on science and math. 

QUESTIONER:  Can I just—(off mike)? 

HUBBARD:  Yes, sir. 

QUESTIONER:  The cost of going to university/college is almost impossible—(off mike). 

HUBBARD:  Yeah.  The gentleman said the cost of going to college has become—I mean, it’s—I must admit I find it indefensible, why it costs $40,000 a year to send your kid to college or even 44,000 (dollars).  I have a kid at Vanderbilt and two going next year.  So I’m right in the middle of it.   

And it’s remarkable to me that the price is where it is.  I don’t disagree with you. 

GIGOT:  The gentleman right here.  You had your hand—you, in the—exactly.  Sir, yes. 

QUESTIONER:  Thank you. Scott Johnson, SJ Partners.  I wanted to shift the buck maybe to Europe for a minute— 

HUBBARD:  Yes, sir. 

QUESTIONER: —and was interested in your perception and thoughts on some of the issues they’ve had in terms of liberalization of their labor markets, what you think their efforts—or some of the lack thereof—what the impact will be on the U.S. economy, and to maybe ask the interesting question:  If you were advising the president of France, what would you be telling him?  (Laughter.) 

HUBBARD:  Oh, I got to tell y’all a—yesterday the—you know, before the president goes to India or takes a big overseas trip or meets with one of our—the major leaders of another country, we brief him on the economic situation in that country.   

And so yesterday we were briefing on China.  And Eddie Lazear—he’s chairman of the Council of Economic Advisers—led the briefing.  And he shared with the president this little poll, this one question. And the question was posed to the—it was a—you know, a scientifically done poll—in China, the U.S. and in France.  And the question was, "Do you think the free market is the best system for your economy?"   

And in China, it was 74 percent said yes.  In America, it was 71 percent said yes.  And in France, 36 percent said yes.   

And it was—it was just like—(chuckles)—I mean, and that’s the problem.  They just don’t believe in—you know, the great thing about—you know, we have a very—you know, probably the—one of the best things about our economy is our flexible labor system. And you know, we create a million jobs a week, 50 million jobs a year. And it’s—we—and then we lose 48 million jobs a year, so we have a net gain of 2 million.  But there’s this constant churn.  So people, you know, if they’re not happy with their jobs, then they leave their jobs and find better jobs.  And that’s what makes this economy work. 

But in France, they want to have a job and keep it for life.  And you know, that’s just not—doesn’t have a positive impact on the economy.  

But you know, if I were advising President Chirac, I would encourage—you know, I think the—I've talked to Paul about this—I—you know, their system of—the parliamentary system allows you to get a bill passed—(snaps fingers)—just like that, without a lot of debate.  And so this new bill was passed, and then we know what happened, on employment regulations for people under 26. 

Where in our country, it’s very frustrating, because it’s so difficult to get something passed in Congress, even though—even if you—your party controls Congress—you can see how much trouble we have getting things passed—but you know, there’s a positive to that, because the American people get educated about the issue.  I mean, immigration is a great example.  You know, we’ve spent the last three years in debate about immigration, and hopefully that’s going to get passed along the lines that we—of what the president has proposed.  But the American people will be prepared for it and will be educated about it.  And I think that’s very positive about our system of government. 

But they’ve got to—you know, if—they’ve got to continue to talk about and debate the virtues of a flexible economy and how flexible economies, where people can leave their jobs and can be terminated, lead to lower unemployment.  It’s counterintuitive.  And that’s why our employment (sic) rate is half what it is France. 

GIGOT:  Pete? 

QUESTIONER:  Allan, you haven’t had a chance to talk about energy.  The president referred to our "addiction."  As you look at the numbers on how much more oil and gasoline we consume than the rest of the world, you’d have to say we’re probably gluttonous addicts.   

Most of the people I know who understand energy, while they’re very much for alternative energy sources, tell me it’ll be some time before they have much effect on the demand for oil.  And therefore, a major part of any energy policy should be conservation. 

Unfortunately, every proposal that I hear that really reduces demand, whether it’s gasoline taxes or strict mileage limits, are politically very difficult. 

Have you ever been—assuming you agree that we ought to reduce demand—have you thought about any proposals that have got a political chance of being passed? 

HUBBARD:  Obviously, we think about all kinds of proposals, and you know, as the president has pointed out, it took us a long time to get into this situation.  I mean, this—I think we discovered in the early ‘70s how vulnerable we were to disruption, and we committed, literally 30 years, if you’ll recall, this was probably before—I forget.  Did you serve under Ford? 

QUESTIONER:  Nixon. 

HUBBARD:  Nixon.  So you would have been there.  Are you responsible for this?  (Laughter, laughs.)  Why didn’t you get it solved back then?  (Light laughter.) 

QUESTIONER:  (Off mike.) 

HUBBARD:  (Laughs.)  But anyway, we’ve—we—it took us a long time to get into this.  It’s going to take us a long time to get out.  The president believes very strongly.  I mean, "addiction to oil" is a great phrase, and by the way, as you know, he doesn’t write his own speeches, but that is his phrase.  He’s the one that suggested that to the speech writers. 

And the remarkable thing is that we are very close to new technology.  We’re very close to a lithium ion battery that will, we think, in the next two or three years replace the current battery technology and lead to plug-in batteries, which will allow you to drive up to 40 miles purely on electricity, which is about what is—most people don’t drive more than that in a day.  So for most people, that would be actually not using imported oil for their driving. 

Cellulosic ethanol.  We are within five years of being able to make that on a competitive basis, which would—could provide up to 40 percent of our fuel needs for our vehicles.  But again, this is going to take time. 

Solar energy.  We’re very—we think by 2015 we’ll have—we’ll be able to produce solar energy at a competitive non-subsidized price. 

But we’ve got to—you know, as you pointed out, it’s not going to happen tomorrow, and that’s why it’s important, you know, during this transition that we continue to make it possible for our oil companies to explore and produce more oil to get us through this period until we move to new technologies—more oil and gas.  But there’s no short-term solution, unfortunately. 

GIGOT:  All right.  I’m afraid that takes us to 9:00. 

I thank you all for coming and listening, and thanks to our speaker, Al Hubbard.  (Applause.) 

HUBBARD:  Thank you.

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