This is the second of three speeches outlining ideas on what we need to do to strengthen America at home and abroad. A few weeks ago, I talked about America's role in the world, and next week I'll talk about ways to strengthen education in America.But today I want to focus on our economy. America has the strongest economy on earth, but we all know this is a tough economic time. Widespread uncertainty and lingering overcapacity have held back capital investment. Confidence in our capital markets remains shaky, and the consumer spending that has been buffering our economy has begun to crack. Looking at the long term, our weakening fiscal position has seriously clouded our prospects.
These are serious challenges, but they are challenges we can meet and overcome if we make the right choices.
We need a new economic policy based on three principles that reflect the lessons of the last 20 years — one, fiscal discipline is key to establishing an economic climate in which business can flourish; two, the private sector is the engine that drives economic growth, but we all drive faster with rules for the road; and three, everyone who works hard deserves the opportunity to share in prosperity. I am going to offer a set of proposals guided by those principles to get us back on the path towards long-term economic strength, revitalize our economy in the short-term, and restore mainstream faith in American business.
People in Washington sometimes overstate government's role in the economy. It's the innovation and effort of our people that generates our economic strength.
At the same time, we know that policy choices matter. The right choices can create an environment that encourages innovation and smart risk-taking. They can promote research and investment in people, maintain stability in the face of international economic crisis, and preserve fiscal order in spite of unforeseen challenges. The right choices encourage businesses large and small to create wealth and opportunity for all our people.
We saw the fruits of those kinds of choices in the 90s, when we had broadly shared growth and amazing innovations in information technology that are still helping to boost our nation's productivity.
Unfortunately, good times can also breed bad habits. Today, the White House has an economic policy that is based on past mistakes instead of past successes. Washington has begun a bidding war over who can spend the most. It's deficits and déja-vu all over again.
You know why Americans think many Democrats want to spend too much money? They do. You know why Americans think many Republicans are too close to corporate interests? They are.
We have to do better, and we can. We don't have to look to Wall Street or Washington to find the principles we need. We can find those principles in the way millions of small business owners, factory workers, office workers, salespeople, and secretaries live their lives every day. Even as government has failed in its responsibilities, most Americans have embraced theirs. They are working harder than ever before, even though too often they're earning less. They're volunteering more in their communities, even though economic pressures mean they have less time to give. Our challenge is to get our government and our economy back in line with our values.
It is time for a new ethic of economic responsibility. Government leaders need to stop trying to score political points and start strengthening our economic foundations—fiscal responsibility, stable markets, and skilled workers. Corporate leaders need to get away from battling against any kind of rules and ask how we can achieve the goal we all share—restoring the confidence of ordinary investors that the system isn't rigged. In the short run, this will be difficult for everyone. In the long run, it will be better for everyone.
There are three principles we should embrace.
First, both parties in Washington need to stop spending money we don't have and make a real commitment to fiscal discipline. Our nation is at war against terror, and will be for years to come. The Baby Boomers will start to retire in less than a decade and put an extraordinary strain on Social Security. We cannot meet these challenges unless we get serious about controlling spending — that means spending on pet projects and on pet tax cuts.
Second, we need an economic policy that maintains the confidence of American investors in our free enterprise system. Corporate leaders, ordinary workers, and policymakers must work together to restore faith in capital markets. Nobody wants cures that are worse than the disease, but sensible reforms must continue — not to stop smart risk-taking, but to encourage it again by dispelling the uncertainty and suspicion that are holding back investment and innovation.
Finally, we need an economic policy based on creating opportunity for all Americans, and giving everyone who works for it the chance to share in a strong economy's rewards. I've had some success in my life, and I'm proud of that. But success and security should not be the province of a fortunate few; we have to start growing together again.
Over the last 29 years, average Americans have seen their pay rise by about 10 percent, while the pay of top executives has risen by over 3,000 percent. That kind of disparity is just plain wrong. I am all for incomes rising at the top, but I want incomes rising across the board. We don't want tax rates so high that they slow down growth, but we also don't need an economic theory that helps a handful of people at the top rather than millions in the middle. It is time for an economic policy that protects fiscal discipline but gives all Americans who are willing to work hard a real opportunity to develop their skills, improve their economic position, and save for their children's future.
Before I get into my own plan, let me start by explaining what this administration is doing wrong. There is no question that our economy has taken plenty of hits that aren't the president's fault. We had a stock bubble burst and terrorist attacks and a string of corporate scandals.
But these challenges demanded responses, not excuses, and this administration's economic policy has been a parody of the responsibility ethic. Faced with scandals like Enron, they were dragged to the altar of reform, they accepted a large increase in SEC funding while the cameras were clicking, and then they pulled back that increase once lobbyists came running. They have ignored skyrocketing drug costs and health costs that are choking business's ability to create jobs. In the international arena, where the world looks to us for guidance, they have sent conflicting signals to countries like Brazil that have caused real harm. Finally, they have not just presided over, they have led, the fastest squandering of tax dollars in Washington's storied history of squandering.
Make no mistake: the surplus wasn't killed by accident; this was premeditated. It was a deliberate plan to shortchange most Americans' future so a very few people could get a tax cut. A supposedly conservative administration has done more than anybody else to make fiscal discipline the last priority in Washington. They didn't stop to think about expanding long-term opportunity and improving skills for the middle class. They didn't stop to think about strengthening Social Security for the retirement of the baby boom. They just threw fiscal discipline to the winds.
But fiscal discipline isn't just a nice idea — it is an absolute requirement for long-term growth. Out-of-control deficits means the government competes with you for the capital you need to innovate, expand, and create jobs. Out-of control deficits means interest rates will soar when the economy starts to pick up, dragging it right back down. Out-of-control deficits means future retirees will have to fend for themselves because we've worsened the coming Social Security crisis and spent their money. And out-of-control deficits means that America may not be at full economic strength when we have to deal with some future crisis, like 9/11 and the war on terrorism. It is time to restore fiscal discipline to Washington for good.
Now, it is impossible to talk about fiscal discipline in a serious way without addressing the $2 trillion elephant in the room. The election is over — and I hope that people in both parties will be willing to say what a very few of us have been saying for months but everyone knows is true. We have to address the Bush tax cut.
I believe we should put off the tax cut that President Bush gave to the most fortunate Americans. Whether or not we could afford it when it was originally passed, it is now clear that it is unsustainable. We've had a recession, we've been attacked on our own soil, and we're fighting a war on terrorism. I believe we should make the middle-class tax cuts permanent and offer new tax breaks that will strengthen the economy in the present, because most Americans are hurting now.
To be precise, I believe we should put off additional cuts in the tax rates for families earning more than $200,000 per year. We should not create new deductions for very high-income earners. And we should increase the estate tax exemption to at least $7 million per family, but we should not repeal the estate tax entirely. There are 275 million people in this country, and a full repeal of the estate tax primarily benefits fewer than 3,500 multimillionaires each year. It's just not right.
Together, these measures will save more than $1.5 trillion over the next 20 years. Then, instead of cutting taxes for the most fortunate, we will be able to cut taxes to help middle class working Americans where they need it the most, like education, health care, and retirement, and strengthen Social Security and invest in our people.
Addressing President Bush's tax cut is the first step toward fiscal discipline — but we have to tackle unnecessary spending at the same time. We should start by putting real spending restraints in place for the long haul. That means reinstating real budget caps and permanently restoring pay as you go budget enforcement rules. Six-month extensions just encourage people to wait out the rules; we need to change the whole culture of spending in Washington, and the first step is to establish firm ground rules once and for all.
But streamlining the process isn't enough — we need to streamline the government. Let me tell you three things I would do right away to cut government spending.
First, we must get the size of our government back under control. President Clinton cut the number of civilian employees by over 100,000. President Bush's budget allows an 8 percent increase. Some of it is related to homeland security, and it should remain. But a lot of the increase is in bureaucratic corners that have nothing to do with terrorism. Through smart workforce planning, we can cut the number of government employees and contractors outside defense and homeland security by at least 10 percent over the next 10 years.
Second, we must cut agencies that have outlived their usefulness. Take the Office of Thrift Supervision. This is a regulatory agency for savings and loans, even though their numbers have dwindled. We still need to have strong regulation of the remaining S&Ls, but we have other agencies to do it. The Office of Thrift Supervision is just one very good example of an agency that is outdated, unnecessary, and begging for consolidation.
Third, we must stop the government from acting like a spendthrift when it buys products, especially in a health care system where costs are already spiraling out of control. Right now, Medicare buys medical equipment like oxygen and wheelchairs at prices that are a gift to the people who sell them. The General Accounting Office says we could save $20 million a year just by buying surgical dressings through competitive bidding. The government has a responsibility to get the best price for taxpayers — not guarantee the best price for vendors.
Together, all these measures can save well over $30 billion.
The next thing we need to do is close tax loopholes that are economically pointless at best and downright harmful at worst. No one here can be blamed for taking aggressive advantage of legal holes in our tax law. Doing the most you can under the law to create profit for your shareholders is your job. But Washington can be blamed for failing to fix a tax code that encourages companies to use shelters, shift jobs overseas, and add to the deficit in the process.
I think there are four things we should do.
First, we should eliminate tax shelters that serve little or no purpose but to provide a legal way for companies to hide their income. Too many people benefit from America's public investments and capital markets and then renounce their citizenship to avoid paying their fair share. That is a disgrace, and it certainly shouldn't be legal. Companies shouldn't be allowed to deposit their officers' salaries in offshore accounts, so their officers can avoid taxes. And American companies should not be allowed to set up virtual headquarters in foreign countries that are hardly more than mailboxes so they can hide profits earned in America.
Second, we should put an end to one of the most distasteful practices the tax code allows — the deduction for life insurance that companies take out on their nonexecutive employees. Companies get billions of dollars in tax breaks by buying policies on thousands of secretaries and janitors who never see a dime of those benefits. Even if the company lays these folks off, they can maintain the policy, get a tax break for doing so, actually collect on the policy when the former employee dies, and get another tax break on top of that. The employees and their families often don't get a dime. The government should not be subsidizing companies to get tax breaks when their former secretaries die. It is economically pointless, it is morally perverse, and it should stop.
Third, we need to make sure that businesses and wealthy investors are held to the same standard as ordinary Americans when it comes to following our tax laws. Something is wrong when a poor working family is four times more likely to be audited than a corporation. Something is wrong when the White House is seeking to muzzle an IRS commissioner who has a simple warning: some fortunate but unscrupulous people are breaking our laws with virtual certainty they won't get caught. We can and we should save law-abiding citizens billions of dollars by requiring fair enforcement of our tax laws.
Finally, we need to take on the political obstacle course of corporate subsides. Washington isn't very good at this kind of thing, and that's why I think Senator McCain and Congressman Gephardt's proposal to establish a commission that will present a complete package for an up or down vote — like the Base Closing Commission — is a good idea.
The measures I've just described will make our tax laws more straightforward, but there's more we can do to simplify a tax system that has become way too complex. Tax simplification is a good idea when it encourages investment in our future and makes life easier for ordinary people. At the same time, tax reform cannot become an excuse to blow yet another hole in our budgets, or to shift taxes away from those who need a break the least.
Here's one idea: instead of a host of confusing education deductions, each with their own rules, their own requirements, and their own definitions, we should have a single education credit with a single set of definitions that every family can understand. And we could do that with little or no new cost.
Fiscal discipline is a prerequisite for robust economic growth over the long-term. But we also need a shot-in-the arm to promote growth in the short-term. We've seen enormous resilience from the American consumer over the last year and a half — because so many people benefited from the more evenly balanced income growth of the 90s, American consumers have been able to help keep our economy from falling into a negative cycle. But now we are seeing a dangerous weakening in that confidence, and it has been compounded by global uncertainty, tentativeness in the business community, and concern over the integrity of our markets.
The Federal Reserve has cut interest rates to the lowest level since 1961. It's now clear that monetary policy alone can't fix this economy. It is time for a fiscal policy that will promote demand, spur investment, and bolster confidence. I believe if we create more consumer demand, businesses will feel more confidence, and restart the cycle of investment, hiring, and growth. Let me name five specific measures.
First, I have proposed a one-time refundable energy tax credit of $500 per family. We can't let economic uncertainty and the higher energy prices we're likely to face this winter further dampen consumer spending. This tax cut will put money into the pockets of Americans who will spend it where they need it most: to pay rising heating bills and prevent higher energy prices from squeezing out other vital needs.
This administration's own experts have said that heating bills will rise by 15 to 30 percent this winter. All the price hikes will fall particularly hard on the elderly, who have watched their life savings disappear in the stock market and have no way to make up the lost income. And unlike last year's rebate, which left out over 30 million Americans at the bottom of the economic ladder, this credit would be available to all Americans.
Second, we need to encourage greater business investment. There's increasing evidence that uncertainty and overcapacity have prevented too many companies from restarting investments, and the current depreciation bonus does not do enough to encourage investment right now. I believe we should increase the bonus by 50 percent, but only until June 30, so every business with an investment plan on the shelf has an incentive to roll it out now.
Third, we should provide states with relief to deal with what the Wall Street Journal called a $58 billion budget gap. The last thing we need now is for states to raise taxes, cut education, and contract demand in this soft economy. The quickest way to give relief will be through Medicaid.
Fourth, we also should give a onetime homeland security grant to states for specific priorities like first responder readiness where Senators Hart and Rudman and others have said we are dangerously far behind. And while we are working with states to strengthen our response to terrorism, government has to work with all of you in the private sector as partners as well.
Finally, we should extend unemployment insurance for the people who have suffered most from the economic downturn. We are about to cut off unemployment benefits for nearly a million out-of-work Americans on December 28th. That's a pretty bizarre Christmas present for people who want nothing more than to get back to work. We should help these people because they will pump the money right back into our economy. And we should help them because it's the right thing to do.
Strengthening the economy in the short run and restoring fiscal responsibility in the long run will help restore Americans' faith in government. But, as all of you know, if we are going to get our economy moving again, we have to restore Americans' faith in business as well.
Nothing is more important to our economy than the success of the people in this room — your success in leading companies, in building wealth for your shareholders, in creating jobs for millions of Americans. But as you know, none of you can make it alone. It's time to bury that myth of the 80s and 90s, the cult of the CEO. The best CEOs understand that a CEO alone isn't what makes a company great — it's good products, top services, smart workers, and committed investors.
Today too many Americans are afraid to invest. According to the Wall Street Journal, Americans' confidence in U.S. corporations and the stock markets is at the lowest level since the Great Depression. That has to change so all of you can get back to taking the smart risks that will generate long-term growth again.
The first step to restoring confidence is straight talk from business leaders. Many of you have already done that. I know that you believe $6,000 shower curtains and $15,000 umbrella stands charged to shareholders are wrong. I know that you believe CEOs making tens of millions while their stocks go to zero is wrong. But it isn't enough for you to believe those things are wrong. The investing public needs to believe you share their outrage.
Straight talk is a first step, and strong action is the next. The Washington Post had a headline after last week's election: "Wall Street sees chance to put off reforms." That headline must be proved wrong. Because even if the leadership in Washington gives you the chance to delay reforms, investors across America will not. They need to see change, and they need to see it now. Let me mention three areas where I think action now is most important.
The first is eliminating the conflicts of interest that undermine investors' confidence. Investment banks must clearly separate any division advising investors about what stocks to buy from any division underwriting stocks. And American boards need directors who are truly independent, who are truly committed to protecting shareholder interests, not management jobs. The New York Stock Exchange has taken a big step in the right direction with their proposed new rules. You should stand behind that proposal and encourage NASDAQ to go the same way.
Second, pay packages need to reward those who build shareholder value over the long haul, not those who pump and run. We're seeing positive change already as companies like Citigroup, Bank One, General Mills, and Wells Fargo have required executives to hold a substantial portion of their shares or options for as long as they are with the company. I see no reason why every company shouldn't follow their lead.
The tax code ought to promote true pay for performance, but it doesn't. With the best of intentions, the 1993 law governing executive pay has had some bad consequences. It has encouraged options that can be cashed out for short-term gain, and it has discouraged indexed options that track management performance, not just market performance. We need to work together to overhaul that law, so companies get deductions for high levels of executive pay only when they encourage excellence over the long haul.
Third, investors have a right to know more about the companies where they're putting their money. Companies that reported gains in pension plans as profits last year should not be allowed to hide losses in pension plans this year. Balance sheets should fully disclose how pensions are doing, in good times and bad times.
Businesses should also have to explain the growing gap between the profits they report to the IRS and the profits they report to shareholders. In many instances the gap is innocuous, but in some it is a sign of fast-and-loose accounting. Whichever it is, shareholders ought to know.
By the same token, companies should provide a full accounting of executive pay. Something is wrong when we are learning more about CEO pay from divorce courts than SEC filings. If companies are going to pay perks, shareholders should know what they really cost the company.
I've proposed that companies be required to post a complete and accurate accounting of the pay received by their executives and how that pay stacks up against the ordinary worker, together with an explanation. When a CEO is leading a company to new heights of performance, he or she deserves to be rewarded, and there won't be any problem there ought to be no problem justifying that pay to shareholders and workers.
Let me be clear: I want you to take the leadership in corporate reform. Every law Congress passes is subject to a law of unintended consequences; telling business how to behave should never be a first choice. But at some point, it is the only remaining choice if business ignores its responsibility. After Enron, after WorldCom, last summer's legislation was necessary. I implore you to continue on the path of reform so more rules are not necessary.
All Americans deserve to be rewarded when they take responsibility, and that means government must invest in people who are ready to invest in themselves. Americans who save for the future are better able to provide for themselves, and Americans with greater skills make our economy grow far more in the long term.
We ought to make sure that even the poorest Americans who are working have real incentives to save for challenges ahead. And we ought to invest more in education. When I look at an administration that has effectively flatlined education funding, that has essentially given up on its promise to leave no child behind, and that has left millions of Americans in deep doubt whether their kids can afford college — this isn't just bad education policy. It is terrible economic policy that shortchanges our future.
The challenges we face are real, but we can rise to meet them. You know, I come from a state of extraordinary economic diversity. My wife and I spent most of our lives together in the Research Triangle area of North Carolina — one of the country's high tech centers — but my parents still live 70 miles away in the small mill town where I grew up. Today folks are worried from Raleigh to Robbins. They're worried that their mill will close in two months, that the next round of corporate downsizing will hit them. At the end of the day, these are the folks all of us serve, in business and in government. For their sake, we should put politics aside, take responsibility, and get it right. With your help, we can do it, and I believe we will.