The White House, President George W. Bush Click to print this document

For Immediate Release
Office of the Vice President
December 15, 2004

Vice President's Remarks in a Panel Discussion at Economic Conference
Ronald Reagan Building
Washington, D.C.

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9:35 A.M. EST

MR. FRIEDMAN: Mr. Vice President, thank you so much for those remarks. Welcome again to this audience, and we're so delighted to have this distinguished group of panelists, academic and business economists, entrepreneurs, and people running extremely successful businesses. And this is a great opportunity to get their perspectives on the economy, what we have to do to keep America's economy growing, and the challenges that we face.

What I'd like to do is introduce this very distinguished group, and I'll start with Dr. Feldstein. Marty Feldstein is a professor of economics at Harvard. He's the chief executive of the National Bureau of Economic Research, President of the American Economic Association, and has served in government. He was -- Marty was Chairman of the Council of Economic Advisors under President Reagan.

Next we have Mary Farrell, who is the chief investment strategist for UBS Wealth Management, New York. Mary is a member of the firm's investment policy committee, and has spent the last number of years analyzing and getting deeply into understanding how our markets work.

On Mary's right is Brian Wesbury, who is the chief economist of Griffin, Kubik, Stephens & Thompson in Chicago. Brian is a member of the Academic Advisory Council, the Federal Reserve Bank of Chicago, has been ranked as one of the nation's top economic forecasters, and previously served as Chief Economist for the Joint Economic Committee of Congress. So Marty -- Brian has also had substantial government experience.

Going around the table, at the far end from me is Kevin Rollins, who is the president and chief executive officer of Dell Computers. Dell, as many of you know, is an extremely successful company, has currently over 50,000 employees worldwide and annual revenues in excess of $45 billion.

To Kevin's right is Jack Stack, who is the CEO of SRC Holding Corp, a Missouri-based company, which has over 20 broadly diversified businesses -- manufacturing engines, engine components, products for a range of industries, and Jack and his fellow employees purchased the company over 20 years ago, and since then, it has consistently grown sales and profitability.

And right next to Jack, on his right, is Catherine Giordano, who is the CEO of Knowledge Information Solutions of Virginia Beach, Virginia. Catherine purchased that company in 2002, and has -- its business is providing information technology services and products to a wide range of companies, and she has been very successful in substantially increasing its revenues and its number of employees since the acquisition.

With that, I'd like to turn to you, sir, and ask if you'd like to kick this off with a question.

THE VICE PRESIDENT: All right. Well, let me begin by calling on my old friend, Marty Feldstein, and asking him maybe to give us his sense, or his overall assessment of where we are today with respect to the economy.

MR. FELDSTEIN: Well, Mr. Vice President, I'm pleased to say the economy is now in very good shape. National income is growing, growing at an above-trend pace. Employment is rising, inflation is low. So by all of the key measures, we're in good shape.

The growth rate of nearly 4 percent in the last year is more than twice that in Europe and Japan. And our 5.4 percent unemployment rate is much lower than the 9 percent rate that we see in Europe. I think these favorable conditions reflect good policies and also sound economic structure.

The weakness of the economy that we worried about a few years ago is now essentially all gone, thanks to supportive stimulative Federal Reserve policy, and the combination of the personal tax cuts and the tax incentives for business that you spoke about a couple of minutes ago.

Our flexible labor markets, our flexible product markets, allow the U.S. to create more jobs and to grow more rapidly than other industrial countries. When I look at the European economies, I see them burdened by high taxes and by a large government share in the economy, with government spending often taking nearly half of all of their national incomes.

In the most recent data that we had, the data for the third quarter, real consumer spending after inflation rose at an annual rate of more than 5 percent, and real business investment and equipment and structures jumped at more than 17 percent. So we really are seeing very strong economic performance.

What about the future? Well, there are always pluses and minuses when we look at the future, but I think the preponderance of the evidence now is that we're going to continue to have above-trend growth for the coming year, with resulting gains in employment. The evidence for that kind of strong growth is seen in the rising household incomes and higher capacity utilization in business, greater number of housing starts, and the favorable expectations reported by businesses.

Making the tax cuts permanent, as you emphasized, I think will help to keep the economy on track. If those personal tax cuts were reversed, after-tax incomes would be hurt and consumers would cut back on their spending.

Moreover, looking at the longer run, the low tax rates also strengthen long-term incentives for productivity and for increases in the real standard of living.

At this point, inflation is well controlled, although there is evidence of upward pressure on prices, some of it coming from the higher oil costs earlier this year, some from the increased costs of imports, some from rising unit labor costs, but the core inflation rate, excluding food and energy, the core inflation rate is still about 2 percent, and appropriate Federal Reserve policy can continue to deliver low inflation in the future.

That kind of low inflation really is key to the healthy long-term performance of the economy, and it's also critical to maintaining the confidence of foreign investors in U.S. financial markets.

So what are the biggest challenges facing the American economy? One major challenge is to increase the very low national saving rate. More saving will allow us to increase business investment, leading to higher real incomes and better jobs. And higher saving is also the key to reducing our dependence on foreign capital, and therefore, to cutting our trade deficit with the rest of the world.

So what could we do to increase the saving in the United States? Well, lower taxes on interest and dividends and capital gains, a process that's already begun in the last four years, as you indicated, lower taxes on that kind of investment income can stimulate household saving.

Shrinking the government budget deficit in order to increase national income -- national saving -- I mean shrinking the government budget deficit will increase national saving and will strengthen confidence of foreign investors in U.S. financial markets. That's why it's so important to see spending controlled in a way over the coming years that does achieve the President's goal of cutting the deficit in half. The recently passed budget for next year I think shows the kind of spending restraint that can make that happen.

But the most important long-run challenge for the economy, I believe, is dealing with the fiscal implications of the aging population. If Social Security is not reformed, the payroll tax required to finance future benefits would have to increase from the current 12 percent to about 20 percent. That would be a major burden on all working households, and it would be a substantial drag on the economy. That tax increase can be avoided if we adopt the President's idea of adding some form of investment-based personal retirement accounts to supplement traditional Social Security benefits. I think it's very important that that Social Security reform begin as soon as possible, before the changing demographics make it too difficult and leave us -- leave the future legislatures with no choice but to cut benefits or raise taxes.

So let me summarize what I've been saying. The American economy is in very good shape now. It can continue to be in good shape, in the near term and the more distant future, if there is appropriate tax and budget and monetary policy, and if the President succeeds in achieving his goal for Social Security reform.

Thank you.

MR. FRIEDMAN: Thank you very much, Marty. Brian, let's turn to you and just get your overview, areas in which you may agree or disagree with Marty, and just your general view of the economy.

MR. WESBURY: Thanks, Steve. Mr. Vice President, good morning, and your comments about the economy and Dr. Feldstein's comments about the economy really laid out the strength of it, but let me add some numbers to that.

Real GDP in the past year is up 4 percent. Personal spending or retail sales are up 7.5 percent. Our exports in the past year are up 11.3 percent, which means the United States is competitive, relative to the world. The Institute for Supply Management publishes an index of manufacturing and non-manufacturing activity, both of which suggest real GDP in the range of 5 percent to 6 percent, although the economy hasn't performed as rapidly as that. We have created 2 million jobs in the past year, and then just to add to your tax revenue figures, in the past six months, individual tax receipts are up 9.4 percent over the same period of a year ago.

So no matter how I look at the economy, I see a very strong economy today. However, there does seem to a flavor, an uncertainty, a kind of an underlying pessimism that many people have about our economy. And trying to understand that is one of the things that I've attempted to do in recent years. And I like to kind of relay a story, and that is that I teach a class -- I teach 39 students at Wheaton College in Wheaton, Illinois. And I asked them the other night how many of them owned a digital music player, an Apple IPod, or a Digital Juke Box from Dell. (Laughter.) And virtually every single one of them, I'm saying 38 out of 39 raised their hand. Now, I have tell a lot of you that this is a function of age because I ask this to audiences of people over 30, and two out of a hundred say they do. But what is interesting about this is that these students buy the preponderance -- most of their music online. They don't go to a record store -- a C.D. store. I'm dating myself. But they don't go to a C.D. store to buy music, they buy it online. So if you work for a record story, or a C.D. store, of if you own a C.D. distribution outlet or system, you are wondering and worrying about your future. The technological change that we are living through today is creating an upheaval in our economy that we have not seen since the industrial revolution. And I believe that this is causing people to have uncertainty about the future in many, many industries.

Now, having said that the total picture shows that the new, the creation of new technologies is outweighing the destruction of the old. So this transformation is net-net a positive in our economy. The question becomes how do we make certain that we stay on the cutting edge of this technology, that we continue to see the creation of the new outweigh the changes and the transformation and the transition costs of moving from the past. And my belief is that the only way to do that is to keep growth strong in our economy, which it is right now, to keep investment growing rapidly.

And let me make one point about investment -- from the first quarter of 2001 through the first quarter of 2003, business investment fell for nine consecutive quarters. Not since the Great Depression has that happened. And you explained why. We were in a recession, we had 9/11, uncertainties about military conflict.

But since the tax cuts, May of 2003, business investment has expanded for six consecutive quarters. We're now in the fourth quarter; it will expand again. That's seven consecutive quarters. That is a dramatic turnaround. It's also a sign that businesses have more confidence in the future, that this investment is funding the technological change that we -- our economy is based on, and we must keep that business investment, we must keep that savings and investment and good attitude about the future in place. And I think the way to do that is to make certain that we increase the breadth and depth of our capital pool, and the way, in my opinion, to do that, is to follow policies which encourage entrepreneurial effort, savings and investment. That is, we keep taxes low. We continue to encourage an ownership society -- because with ownership, there can be leverage in our economy, there can be people who start businesses with the assets they have accumulated over time. And so I am a huge supporter of the direction of policy that we have followed so far.

Let me add one additional comment to the tax code that you made, and that is that the compliance costs are heavy, but in addition, our tax code as it exists today reduces the incentives to save while not necessarily increasing the incentives to consume, but it alters that mix, and if we can lower taxes on investment and savings, I believe we will see more savings and less consumption as a share of income, which would be a very positive thing. We need to have the depth and breadth of our savings pool and asset pool be as deep as possible to continue this transformation that we're living through.

We are being very successful in this transformation. The United States is the leading economy in the world, in terms of technological development and advancement, and I think we will continue to be that as long as we follow policies that support entrepreneurial activities, savings, and investment.

MR. FRIEDMAN: Thanks a lot, Brian.

Mary is a long-time observer of the markets. Perhaps you'd like to put your own overlay on the economy, and why don't we just ask you get right into that?

MS. FARRELL: Thanks, Steve, Mr. Vice President. Yes, I don't need to be repetitive. I absolutely agree with my colleagues that this is a very strong economy, has a long way to go, and things do look very positive, from a fundamental basis.

So what I would like to do is address what the markets are telling us from the standpoint of the expanded investor class, which includes the 50 percent of Americans that own stocks, the over 60 percent of America households that have 401k plans. And I think one of the most exciting developments for this investor class is the results of the dividend tax cut of 2003. Not only do investors get to keep more of those dividends, but corporate America has responded astoundingly. After 3 percent annual growth in the '90s and dividends for the S&PENTAGON, we expect them to be up about 12 percent this year, an additional 18 percent next year. So it's a wonderful example of how enlightened tax policy can achieve great results.

Also moving on to what the financial markets are concerned about, clearly, the U.S. budget deficit, particularly with the dollar weakening and half of Treasury debt owned by foreigners, is a concern, which is why the commitment to reduce that deficit in half is certainly welcomed by the market, and will have, I think, a very positive impact on the economy long-term, markets short-term.

And I'd put in with that the concerns about Social Security. That's a huge unfunded liability. I think the current estimates are $10 trillion to $11 trillion, which certainly would result in structural deficits that would have a very dire implication for the future health of the economy.

Talking about privatizing could add another $1 trillion to $2 trillion over the next 20 years to this deficit, but in fact, I think the markets would welcome it. Privatizing Social Security would be a very positive development, from two significant standpoints. The first is, it would be accompanied by the kind of reform that would result in a much healthier system and reduced long-term deficits. And secondly, deficits for Social Security reform are not the negative that spending deficits are. While they would lower government saving, it would increase household saving, leaving total savings unchanged, so not having those negative implications. If we combined that with other incentives for saving, the national savings rate could actually increase.

And we did not compare notes about what we were talking about, but obviously, the three of us on this side of the table are huge proponents of increasing savings. I think that is one of the most important aspects going forward to solve a multiple set of problems in the U.S. economy. We really need measures to improve the culture of saving in the United States. We are now a consumption and debt society, and that is very negative going forward. And we need also to shift the culture of responsibility for retirement security back to the individual. Not only is our national savings rate less than 1 percent, but Americans have the highest debt on record, a combination that will leave far too many poorly prepared for retirement, whatever happens with Social Security. And Social Security was always intended to provide only a safety net, and the shift away from pensions with their guaranteed monthly checks to 401k plans with far less security really suggests that Americans need to take control of their own retirement security.

We heavily favor expansion of the tax-preferred retirement savings vehicles. There were some -- the catch-up provisions in the 2003 Tax Act for people 50 and over were certainly a very good example of this can be done, but given the national savings shortfall, we would really like to see them extended to more age groups and enlarged.

I would note that research shows when IRAs were instituted, the individual retirement accounts, it didn't really increase savings. People merely shifted from other forms of savings into the tax-advantaged IRA, so we would like to see these enhanced savings vehicles really structured to have a much bigger impact on saving.

And finally, another challenge is certainly the area of taxes. Any initiatives to rationalize or simplify the current tax system would provide a huge productivity boost to the economy, reduce the incredibly non-productive, non-economic decisions fostered by the current tax system. And also, I think very, very importantly for markets to trade efficiently requires knowledge. So we would like to see the tax cuts made permanent, not with sunset provisions that really distort investors' ability to make those long-term decisions.

So just summarizing, the outlook remains highly favorable for growth continuing, and we are moving into a much more normal or stable U.S. economy and markets. We had a huge bubble, a painful bear market. We are now looking at much greater stability; more people are working, all of the very positive things we heard of.

But let also note a few things that I think are less well known. That's the rise in merger and acquisition activity indicates much stronger confidence on the part of corporate managements. The Manpower survey about projected hiring also indicates the very high degree of confidence, and several of the bellwether companies have been out there with optimistic forecasts for double-digit growth going forward. Corporate earnings are very strong, coming in at about 19 percent this year, on an operating basis. All of these are very, very positive, and precisely because of that positive outlook and the stability that we're seeing, it provides a very unusual opportunity for us to focus on long-term structural problems such as Social Security and tax reform, to ensure that growth continues and the promise of retirement security is assured.

MR. FRIEDMAN: Thanks a lot, Mary. We've heard from the economist side of the table, and now let's turn to the practitioners. And Kevin, you're already gotten a plug for one of your products from this side. (Laughter.) But let's turn to you and how do thinks look from your perspective?

MR. ROLLINS: Well, Steve, thank you very much for allowing us to be here, and Mr. Vice President, we thank you as well and the President for convening this summit.

We are actually very hopeful and positive on the economy, as measured by technology spending, since technology has become a large portion of overall capital expenditures and correlates very nicely with GDP. Simply put, we believe technology spending equals productivity which equals growth. And we recognize the administration's commitment to pro-growth, to investment, and to a pro-business environment where we can all benefit.

Our success at Dell is based on the same principles, principles of productivity and of improvement. In the last five years, we have had a 240 percent increase in the number of computers built per employee at Dell. We've given those employees access to technology, and we've placed the burden of responsibility, of accountability and integrity, on our employees, as well as our management team.

That's occurred because of our fairly different business model, which encourages close proximity to the customer, very efficient operations, and great value to all of our customers. The result has been a growth in our business of about 20 percent, predominantly in the corporate procurement and purchasing arena, and this past year is evidence of the successes of this approach and of the economy. We've launched new operations in Oklahoma City, a large call center. We've launched a new distribution center in Ohio, and most recently announced the largest manufacturing complex we'll have in the world in North Carolina.

We manufacture at Dell all of our computers, none is outsourced, none is made in other countries and shipped in. It's manufactured here by Americans in the U.S. and by Europeans in Europe and by Asians for Asia. And so we believe all of those signals suggest that the economy is strong, corporate spending has increased and continues to rise on technology, and is a very positive trend.

Second thing we would say is that for the consuming public for technology, access is very critical, access to technology, access to information and broad band capability -- 60 percent of households own computers, versus 23 percent in 1994, so that has clearly grown. Our new computers are 20 times faster, have 50 percent more storage, or 50 times more storage, excuse me, and cost half of what they did seven years ago. This access to technology for all of our citizens means an excellent economy where information flows and where capability and education can also flourish.

The last area we believe will stimulate and continue to help the growth is the whole notion of integrity within our business community. And we believe strongly, as stated in our Soul of Dell corporate charter that the responsibility for integrity in corporations lies not only with business leaders, but also with every employee taking responsibility, taking ownership for their own behavior; in such transparency can occur, integrity can flourish within corporations and the trust that our population has in our business community can increase and improve.

So just in closing, we believe that our business leaders, our people, our employees, really must take responsibility for not only the performance of our companies, but also for the integrity with which we operate, and we believe that we can effect change. And we've seen that change occur in corporate confidence in buying technology, as reflected in GDP growth rates, driven to a great extent by technology spending and productivity, and we will be able to help the U.S. economy thrive and inspire new trust and confidence in our nation and in our companies, as we move this way.

MR. FRIEDMAN: Thanks a lot, Kevin. Jack, why don't we turn to you and just hear about how things look from the perspective of someone who's in basic manufacturing businesses.

MR. STACK: Vice President Cheney, Director Friedman. You've heard it from the top. Now you're going to hear it from the bottom up. By this, I mean, I work for a privately held, employee-owned open-book company, and twice a year, we, our sales marketing team, goes to every associate inside of the company and presents macroeconomics to each and every hourly salary and managerial personnel.

From that, they then set their material forecasts, their labor forecasts, and I thought what I would do is share with you just a few of the bullets in the marketplaces from the data that's brought in from the major original equipment manufacturers that we sell to, and most of our customers represent about -- over 20 percent of the market share that they're in. So, in short, we go to them, we get the information, we then present it in such a way that our entire organization can understand it, and then our organization votes on the confidence of the forecast by which we set forth. And here's some of the bullets, and I'll just give you a couple of them from the presentation.

In the truck market, in 2004, we will mark a year-over-year growth of 17.9 percent in just truck retail sales. Tonnage hauled by Class 5 trucks grew 3.5 percent in '04, freight hauled 4.8 percent. This was staggering to us. And the forecast for Class 7A production -- in '03, they produced 290,000 large trucks in the United States; '04, 330,000. They are projecting 400,000 trucks to be manufactured next year. We're forecasting our growth in the truck market to be over 4.2 percent.

In our agricultural sector, and again, this is coming directly from the marketplace, net income from the farm sector hit $5.2 billion, up 59 percent from the previous year. The farmers have a lot of money. We expect tractor sales to increase 10 percent. Our forecast to the commodities that we sell into that marketplace, we're forecasting a 22 percent growth in agreement '05 versus '04.

Construction, we sell against the construction industrial market, OEMs. They're in the second year of recovery. The cycle normally runs six to seven years. We are forecasting an average gain of 10 percent annually, 4 percent bridge and tunnel; up 11 percent in commercial; up 27 percent in manufacturing; and shipments of construction equipment , we expect to see a 9 percent rise. Now remember, this is a presentation going to hourly to salary to managerial people.

We sell to the automotive markets. We remanufacture engines and we make race car engines and we also sell them to the re-market. That market is expected to grow at a rate of 4.5 percent, even though light vehicle sales, which were projected at 6.6 million in '04, is going to have a slight increase of 16.8. We're expecting a 5.2 percent rise in '04.

Overall, we look in our business for year '05 to see a 10 percent growth in the top line and a 20 percent growth on the bottom line. This went to the employees for a vote of -- and we asked them for a vote of confidence. Their confidence on that forecast was 87 percent. The bottom line, in summary, is that we have elevated from cautiously optimistic to optimistic.

MR. FRIEDMAN: Thanks a lot, Jack

Catherine, we all know that small businesses create the lion's share of the jobs in the U.S. economy, and that's your customer base. What are you seeing? How is business? Why don't you just tell us a little bit about what you're doing?

MS. GIORDANO: I'm very fortunate to be the beneficiary of the major changes that have taken place, both by the administration in a business-friendly environment for small business, but also with the corporations that are now investing in their systems refresh. We are an information technology company that provides products and services to both federal, state and local and commercial customers. We're blessed that our commercial customers are the folks like Lockheed Martin, SAIC, and Northrop Grumman, so we have a good basis in the marketplace.

We are seeing and experiencing, since acquisition of the company in 2002, we have been sustaining a 30 percent growth on average. We are projecting that growth for the next three years, based on the marketplace, and the incentives for corporations to make those investments in their equipment to facilitate processes and organic capabilities within their corporations.

That has allowed us to bring in a new business model, if you will. That business model has included some high-end state-of-the-art manufacturing, which for a small company is a little bit unusual. We are also an 8A SBA-certified company, and so when government has specific requirements, such as modeling and simulation platforms for the United States Joint Forces Command Center in Suffolk, we have been building those specific required machines, and it's American hands that are building those. So we are very proud to support the effort for security.

We also produce a forensics acquisition computer terminal that's, again, an American commercial off-the-shelf product; however, it's doing an unusual thing in the marketplace. We're projecting that that particular machine is more than likely going to do 100 percent growth, and we just began the process 18 months ago.

It's a state-of-the-art forensics computer terminal that allows you to do data recovery and -- I'm not Dell, but it's -- we work a lot with Dell, by the way. It has some good components for law enforcement and intelligence.

That growth allows us to invest in ourselves again. Last year, we invested through the benefits of the administration and their forward-thinking for pro-growth processes for small business. We invested $165,000 in our own personal infrastructure, which was very good for our business process. In this year, we will be investing in our R&D capabilities in this new forensics acquisition and modeling and simulation side for manufacturing.

Overall, I can tell you that small businesses in my community, and I believe nationwide, have tremendously benefited from the administration's programs. It's allowed us to think beyond the current. And hopefully, all of those benefits such as the tax incentives that have been put in place and the pro-business growth administrative process that we look at from how we keep our budgets and how we manage to them remain in place so we can continue to reinvest in the company. Sustaining that tax incentive program to small business is going to be critical. Sustaining the ability to grow and project that growth over -- we do a five-year plan. Even though we're small, we try to manage to that five-year plan. Our benchmark was 20 percent, and we've exceeded our own expectations. I believe it's a direct result of the economy that was put in place by the administration. And, sir, this small business would like to thank you for all that has been done.

MR. FRIEDMAN: Thank you, Catherine.

Catherine, how -- at the low end, in terms of size, what are the smallest customers that you do business with?

MS. GIORDANO: We manage everything from a five-seat environment to over 3,000 seats, and that would be an entire network system.

MR. FRIEDMAN: Now you mentioned putting an infrastructure in your own business.


MR. FRIEDMAN: It would be interesting for the audience to understand how you thought of the return on that. Kevin, earlier, talked about technology investment leads to productivity leads to growth. How did you think about it? How do your customers think about that equation?

MS. GIORDANO: Well, it's a sense of security -- if you were a company selling a security system or a new network for their total refresh, that you have technology capabilities that you practice what you preach. And it was very imperative for us because we are now moving into government contracts that have allowed us to grow at this rate, that we put in place a very sophisticated software package for our accounting. And the bulk of the cost of doing that required a new server, new systems, technology upgrades.

When our customers look at us, they know that we've invested, that we have what I would consider to be the state of the art in the marketplace today. When we refresh, we refresh because it's a better system so that our folks that are managing their systems have hands-on capability of understanding every platform that is being utilized in the marketplace because we work it on a daily basis internal to our business. So it's important for us to have the credibility, if you will, and the integrity in the marketplace of saying, we know how this works. And that's how it -- it produces a larger opportunity for us, as well.

MR. FRIEDMAN: Let me turn to Jack with a similar question. In this tough competitive marketplace, what are the -- you obviously work very closely with your employees. How much of the suggestions you get for productivity enhancement comes from employees? What are the kinds of things you do every week and every month that make yourself more competitive, improve productivity?

MR. STACK: Well, part of this process that we go through in order to get them information, and that's what's critical, they really have to know what kind of game they're in and they've got to know the competition. And they've got to believe that they have the opportunity to succeed and to grow.

And so we spend a lot of time giving them financial literacy, and teaching them economics, and teaching numbers, regardless of their education. Even if they have a 5th grade education, we'll teach them compounded fractions because you can't understand income statements or balance sheets unless you understand compounded fractions. So we have a tremendous economic literacy program where we teach people how to be able to look at the business from the end zone. We've spent a lot of time trying to move the ball between the 20 to 20 yard line and never show employees how to get into the end zone. So we give them the end zone and teach them how to score.

So as a result of that, we appeals to a higher level of thinking and consequently get higher levels of productivity. In the old days, when I worked in the industrial society before Dell came along -- (laughter) -- you get too many -- he had too many favorable comments.

MR. FRIEDMAN: Kevin could not possibly pay for this publicity.

MR. STACK: Right, I know. He got too many -- we have to bring him back down to Earth. (Laughter.)

But most of the associates believe that we time studied -- we put an industrial engineer in a 55-gallon drum. We would roll him out on the factory floor, see how quick they work, then go back and change the standards. I mean, it's the mind set, and they don't realize that it's the marketplace that affects wages; it's the marketplace that affects their quality of life.

And so one of the tricks that we do -- and it is a trick because you have to trick them into learning -- to teach them business is to bring the marketplace to the people, show them that somebody is doing it better. And once they begin to understand that somebody else is it doing better, their first reaction is, then if somebody, I can do it -- then if they can do it, I can do it. And that's pretty much been our success over the last 22 years.

MR. FRIEDMAN: The President has talked about the importance of having our workers trained for 21st century job skills. American workers can compete with anyone in the world if we give them a level playing field. I just -- Kevin, from your standpoint, you want to comment a little bit about the educational levels that you need from your workers and how different they are from what they might have been 20 years ago?

MR. ROLLINS: Certainly. First, let me thank Brian and Catherine. Now, Jack, your holiday gift baskets are in the mail. (Laughter.)

The work force, as I alluded to, in the U.S., is second to none. And so we've found it fitting, from a sheer economic standpoint, to continue to locate factories and call centers in the U.S. Now we do that globally, too, because we're growing globally. But for the U.S., we build those facilities here in the U.S. And education is very critical. We do compete globally, the U.S. We have many nations that are now growing with a very well-educated work force, and good programs there. And so we, as a nation, need to continue to focus on core skills and capabilities, particularly in the areas of higher education. We haven't talked a lot about that, and I know this is not a focus for our panel today or in the coming day or two, but education will be critical to maintain our competitive edge. Both the engineering front -- we need more engineers. Some of our competitive nations are flooding the market with engineering talent. And so we will need to continue to stay at the forefront. The technology sector is a gem for the United States. We essentially lead in almost every technology sector. And so we need to make sure we continue to ensure that we have the education and the capabilities to do that.

But our workers today are moving to a higher level of capability. We have to now train our tech support folks with a greater education. Most of them now are at least college trained, if not advanced degree trained as they perform technical assistance to our customers. Our factory workers now have to be trained in state-of-the-art supply chain management techniques. We now, in our factories, have full cell build capability rather than the old assembly line with a screwdriver and everyone touching a widget. They know how to build entire systems. They know how to assess, diagnose those systems.

And so it's raising the awareness and the capability of those folks, and we've realized that our responsibility to train them, as well as to recruit from the best education facilities in our country is now paramount. And so we believe that is a core element to our economic stability in the U.S., continuing the educational investments to make sure we stay ahead.

MR. FRIEDMAN: Thank you, Kevin

One of the panels tomorrow will be focusing just on this issue -- educating and training our workers, the President's initiative to use community colleges even more aggressively there, Leave No Child Behind. While we're with you, I'd like to -- just to go to -- back to productivity and technology. What are the trends that you see? We've had such remarkable innovation over the last 20 years. What -- can you give us just some sense of what you're anticipating over the next decade or two?

MR. ROLLINS: Sure. There's a couple that I'd mention. One that really spans last number of years is kind of an execrable march from very proprietary and expensive technologies to open systems and to standards-based technologies. What that has done is dramatically reduced the cost as scale has been brought into the market, additional capability, market competitiveness forces. As I mentioned, you can buy computers today for a fraction of what you used to, and the compute power is multiple times greater than it used to be. That has come about through standards formation. That march will continue and moves into the corporate arena where data centers now take advantage of server clusters. Many of you have heard of blade technologies, very dense technology built on very standard building blocks and components that are simple and would reflect what you might buy in your home computer. That has had a huge impact on costs and productivity.

The second one, which has been going for a while and will continue in the future is the whole advent of wireless and the ability to be connected everywhere, all the time. What that has done, in our parlance, is it allows us to substitute inventory for information, or information for inventory, or information for asset intensity, or information for maybe higher cost investments. And in so doing, you increase productivity, you increase growth. So the wireless era is not done yet. We're going to see more and more with access to our information really anywhere, anytime. And that's going to have a continual transformation on our productivity. And so anyone who believes that the technology era is over or that we've seen all we're going to see is really not paying attention; it's going to continue on for years and years and years, far beyond my lifetime.

MR. FRIEDMAN: Thank you very much, Kevin, for that.

Let's just switch back to the economist side of the table. And, Marty, there has been -- there's been discussion this morning about taxes and the impact they have on growth. Maybe you could just explain to those of us who are not at the cutting edge of economic thinking how a lower tax burden actually stimulates growth. What's the dynamic there?

MR. FELDSTEIN: Well, a lower tax burden cuts in marginal tax rates, in particular, changes incentive. It changes incentives for individuals who are thinking about what kind of work they're going to do, how much education they're going to get, are they going to take on an entrepreneurial activity where, if things go well, they're going to make a lot of money, but pay a lot of taxes, or are they going to take a lower productivity career line where the tax burden would be less.

So taxes affect incentives and they affect incentives for quite middle-income individuals. You don't have to have a lot of income to be paying a marginal federal tax rate of 28 percent -- and you add on top of that your payroll tax and the employer part of your payroll tax and your state taxes, it's easy to see a marginal tax rate for a young man or woman making 40-plus percent, and that means that out of an extra $100 of earnings, they're going to get to keep only $60. So that affects their choice of career; it affects their choice of how hard they work; whether they take compensation in the form of cash or other things. And all of those things hurt the economy; all of those things create bad incentives which slow down the rate of growth of the economy and hurt the standard of living.

And then, of course, there are the savings impacts that we've talked about separately from that, and the incentives on businesses faced with high marginal corporate tax rates to invest abroad, rather than in the United States. So bringing down marginal tax rates, it has to be a key part of what we want to do if we want to provide the right kinds of incentives.

MR. FRIEDMAN: What I hear you saying is that yes, we need taxes because we have to pay the bills, but bear in mind that there is a cost attendant there, too, in terms of growth.

MR. FELDSTEIN: That's certainly right, and that there are taxes and taxes, and how you structure those taxes is very important. So bringing down marginal tax rates, high marginal tax rates is key in that process.

MR. FRIEDMAN: Brian, let's turn to you. I think you touched earlier on business confidence, that intangible that sometimes is called "animal spirits." Go a little deeper into some of the things that have in recent years tamped it down and what we should be focusing on to try to keep it vibrant.

MR. WESBURY: Thanks, Steve. And I'll build on what Marty said -- and this is all -- it fits in one box, so to speak. My belief is that it's entrepreneurial effort that creates wealth in societies. Wherever you look around the world, the more a society supports its entrepreneurial effort, the more wealth it creates, the higher its standards of living, the better that economy.

And when you look at what people face when they make these choices about whether to take a risk, it's all a risk/reward balance. In other words, what risk am I willing to take for what reward? And in recent years, we've seen risks go up dramatically. Not only did we have a recession and some deflationary pressures in 1999, 2000, 2001, into early 2002 -- we had 9/11; we've had corporate malfeasance and some dramatic events in that environment; we've had war. And all of these things have raised the level of risk. By the way, when you have a recession, that also reduces the rewards.

And so in order to bring this back to balance and increase entrepreneurial effort, we have to reduce risk and raise rewards. My belief is that the administration in its policies in the last three years has done just that. By fighting terrorism we have reduced the risks. And we have not had another terrorist attack and, God willing, we will never have another one, but I'm certainly not in a position to know that. But we have reduced risk. At the same time, by cutting taxes -- especially the tax cuts of mid 2003, where we reduced capital gains, reduced dividend tax rates, reduced marginal tax rates, as Marty was talking about -- we raised the after-tax rewards for taking risk.

So the bottom line is that we have brought risk and reward back more in balance and that is what I mean by business confidence. And by doing that -- by lowering the risks in the economy and raising the after-tax rewards, we have increased investment dramatically. And that's, as we move into the future what we have to think about, that entrepreneurs are constantly assessing the risk of any investment versus the reward of that investment. And anything that we can do to tilt that scale in the right direction will help our economy grow.

MR. FRIEDMAN: Brian, on this general topic, we've been hearing a lot in recent years about the litigious nature of our society and how that impacts it. Do you want to give an economist's perspective on that? Then I'm going to ask the business people.

MR. WESBURY: Certainly. I mean, it's very simple. The litigiousness of our society raises risks and lowers rewards. And the bottom line is that the more we can reduce those costs and bring that scale back into some kind of normal balance, the more growth we're going to have.

And to follow up on Kevin's point, a perfect point, and that is the better balance we have there, the more entrepreneurial the effort, the more development of technology, the more productivity and then the more growth we will have. And that's the key to providing higher standards of living for all Americans.

MR. FRIEDMAN: Kevin, you're the person on the panel who runs a public company -- are you spending more time on legal-related things now than you would have a number of years ago? How does this impact your -- the focus of the company and your direction?

MR. ROLLINS: Well, certainly as our company has grown, obviously, we've become a bit more prominent, so that adds some interest of some of the legal types for what, for lawsuits.

What we do think is there needs to be clearly a pathway for wrongs to be redressed for people, and that's important to maintain in our society -- but we do believe it has gone too far and there's too many frivolous, class action lawsuits that don't have a lot of merit and that do impede progress and suck life bloods out of organizations and their energy, not just their resources, but their energy and their time toward defending against those -- worrying about them to the point of not focusing on jobs and productivity. So anything we can do to remove that frivolity portion of a lawsuit, particularly class action -- which I know the administration has firmly set sights on -- would be very, very beneficial to us and, as Brian said, reduce the risk.

MR. FRIEDMAN: Jack, did you have something you wanted to add on that?

MR. STACK: Well, I remember the time when legal and health care were very, very small general ledger lines of overhead in our income statements. And I remember specifically several years ago talking to the doctor saying, you're going to hate it when manufacturers have to learn medicine -- and then telling the lawyers that they're going to hate it when manufacturers are going to learn law.

Last year we spent probably $400 per person on legal, and it had just risen dramatically. And we then decided as a corporation to enter into arbitration agreements, which have a tendency to take all the contingencies out of the business, which is what we all fear. So what happens now is that if there is some problem in our organization, if we're not doing things that are kosher with everybody inside the organization, we then have agreements to go to arbitration first, we've reduced the cost from $400 per employee down to $90 per employee. And that's turned out to be really a big benefit for us.

MR. FRIEDMAN: Great story.

Catherine, as someone who's had just the drive to get a small business really going, just I think it might be interesting for the audience to understand how you dealt with the tax preparation and the regulatory and those other issues. What is it like for a small business person?

MS. GIORDANO: To coin the phrase that my partner used was "cha-ching" I think it was. And the "cha-ching" happened with the legal and the CPA requirements that we have fallen under. Our CPA has standardized their format. Jack and I were talking about that earlier. Regardless of whether you're a privately held corporation, or a publicly held corporation, everybody is moving in the environment towards the compliance piece. So last year, we paid $25,000 for our audit, and that was an amazing amount of money for a small business to pay. But compliance is very expensive.

On the legal side, like everyone else, there are issues either with employment or issues of the frivolous lawsuits, which we also are receiving, amazingly, at our level. And that cost last year was close to $40,000 just to manage at that level. So there is a cost associated with compliance, if you will. Where we are trying to get smart is we're educating our work force. It increases their productivity. They make fewer mistakes. Where we're also trying to get smart is by coming into new software programs that we've established and purchased that there is a real track of everything that's being done on a daily basis. So the awareness internal and external is there. But the cost doesn't seem to be diminishing. So anything that can be done I'm pleading for some kind of relief.

MR. FRIEDMAN: That's a terrific explanation. There will be a panel tomorrow talking about this litigious burden, which is clearly an administration focus.

We have a very strong economy, as you have been hearing, but there are always head winds. These are some of them. Let's turn to another one, Mary. I'd just like to ask you oil and petroleum prices. And just they're clearly better that they were some months ago, but also much too high for the American consumer and business. Why don't you talk a little bit about how the economy has adapted to these, and what your group is foreseeing?

MS. FARRELL: First, obviously, oil has a big impact on the economy two ways. Businesses have already seen their costs go up because of oil, and to the extent that consumers pay more at the pump and to heat their homes, it impacts consumption. So looking at very high oil prices in the future would be a negative. Fortunately, our outlook is for oil prices to continue to come down.

There's a break point of about $42 a barrel. Up to that point, it seems to reflect a growing economy, a healthy economy. Above that, it starts being a negative. We're actually projecting oil prices down in the $30s for next year. So I think we have coped.

And let me also note, if you go back to -- and factor in inflation, oil prices, even at that $56 peak, were well below where they were in the early '80s. So we have dealt with it, but oil is, unfortunately, a wild card. It does not operate with the same forces of supply and demand that tend to result in the pricing elsewhere. You can have a lot of political -- global political issues impacting. So I think that's out there right now. It looks to be under control, looks to be declining, not a negative for the economy, but always subject to change.

MR. FRIEDMAN: Brian, you look like you might have something to add to that.

MR. WESBURY: Our economy is much more efficient than it was in the late '70s, early '80s. I've seen different numbers, but roughly we use 40 percent less energy today to produce every dollar of GDP. That also means that today's price of oil has less of an impact. But having said that, it's still very high. And I would suggest that we do everything we can to increase the supply of energy produced in the United States relative to elsewhere in the world. And I think that the President has made some, I think, very good proposals. And I would hope that we revisit those, and work toward passing that legislation.

MR. FRIEDMAN: Let me come back to Marty, and something you touched on earlier. As part of dealing with our trade deficit, you talked about increasing savings in the United States. But everyone in the world economy has some work to do, and our foreign trading partners -- it would be very helpful if they had more pro-growth policies. Perhaps you would touch on some of the things that would be good for our economy if they did more of.

MR. FELDSTEIN: Well, certainly it would be good for our economy if, particularly the Europeans and the Japanese were growing more rapidly, then they would want to import more. But to free up the resources for us to be able to meet that demand, to export more to them, or to be less dependent on imports from them, we have to have a higher saving rate. And that's why I emphasize that the key to improving our trade balance is to increase our saving rate here.

The Europeans have to get the message, though, that if we're going to have a smaller trade deficit, they're going to have less exports, and therefore they're going to have to do more to stimulate their economies. So the clear message to them, to the Europeans is, for their own sake, as well as for ours, they have to be doing more to get their economy out of the doldrums.

MR. FRIEDMAN: I'm just wondering if any of the other economists would have anything on that point, Brian or Mary?

MS. FARRELL: I would say, everything keeps tying back to that same risk/reward type of thing. One of the problems with the European economies is that they don't have -- they have very high social safety nets, the rewards for entrepreneurial activity are much less than they are here today, and not surprisingly, they have less of it.

Ireland, for example, lowered their marginal tax rates a few years ago and had a dramatic increase in growth, dramatic foreign investment in that country, and really was quite on top of virtually any European nation. So it's going to be quite a trick to get them to buy more U.S. goods. We have seen very strong exports. I think they're up about 9 percent, is it?

MR. FELDSTEIN: A little over 11 percent.

MS. FARRELL: Over 11 percent. And 35 percent to 40 percent of the earnings for the S&P 500 come from outside the U.S. So those earnings are benefiting from the weakened dollar. But, again, we're going to need a lot stronger demand from Asia and Europe to get that balance better.

MR. FRIEDMAN: Thank you, thank you.

Jack, let's go back to your business. American business people, entrepreneurs and manufacturers, are endlessly adaptive. And I've heard a little bit from you about trends that you see coming on, like remanufacturing, recycling. Maybe you'd like to educate our audience about that.

MR. STACK: Well, I've been in the manufacturing world for 35 years. And it has only been in probably the last two years that I really see this as a growth industry. In typical organizations that make things -- the predominant unit is, obviously, the whole good -- the truck, or the car. The second business then is to support the cars, the parts and the aftermarket. And that becomes, like, the orphan of the whole goods. And then there's remanufacturing, which is like the step-child of the orphan. (Laughter.) And what's happening today environmentally, lack of raw materials, the increasing cost of raw materials, we're seeing more recycling; we're seeing more remanufacturing. And we see remanufacturing now positioned greater today then we have seen it in the last 22 years. And it's good, because it's a labor-intensive type business. It provides a lower cost of goods in terms of the marketplace. It definitely creates jobs.

But probably more importantly, what we see is we see the large OEMs dumping a lot of money into remanufacturing. We're seeing investments where people are seeing that eventually what will happen is that if you make something, you will have the responsibility to dispose of it. And I think we're beginning to see American companies aligning their engineering, I think they're aligning their distribution. I've sat in some very high-level meetings where I begin to see now people looking at putting core deposits on cars or core deposits on vehicles, knowing full well 11 years from now or 25 years from now they're going to be responsible for those that they can't recycle, or they can't remanufacturing. So it's really sizing itself up to be a -- really an exciting industry. And we're seeing money -- and that's, again, the key to critical component of whether the industry is going to take a switch. But we're now seeing money being invested in that market. And I think it's a good market for us, because it takes a lot to take a car engine overseas or across the border. It's a localized type of a business. One of our employees best described it as, you tear it down and you build it up. That's the whole industry. And, again, I really think we're seeing really strong indications that this is an emerging industry.

MR. FRIEDMAN: Jack, how much of your business is export?

MR. STACK: Probably not 2 percent.

MR. FRIEDMAN: And what would it take for you to increase that percentage? It that something you are looking at?

MR. STACK: Primarily our business is one that if we were going to go to Europe, we would put a company in Europe and we would build there, because of the freight costs back and forth. We're just in an uncompetitive position. Ideally, we'd like to sell a product into the marketplace at about no greater than 27 percent less than new, as high as 50 percent less than new, with the same warranty as new, with the same -- as close to the original specifications that we possibly can. So we're in a very, very unique niche, and we stay predominantly in the U.S.

MR. FRIEDMAN: Let me come back to the economist side of the table. And we've had a pattern in this country of holiday shopping in the last few years where maybe there's a dip in early December and then it picks up later. And maybe Mary -- maybe you'd like to -- I don't know if UBS and your group have any forecasts, but what do you see happening with retail?

MS. FARRELL: We're forecasting a pretty good Christmas. Things look very strong. I think that delay into the Christmas has a lot to do with working mothers; too disorganized to get that shopping done, they wait until the last minute. But I think net-net, we'll see a reasonably strong Christmas.

MR. FRIEDMAN: Does it also have to do with gift certificates that don't get cashed in until the end, and that type of thing?

MS. FARRELL: That's a huge -- I would also -- I would say that -- one thing that I think, not this year, but looking forward -- we were talking earlier about the low savings, but also high level of debt -- the consumer really does have a very high level of debt. Unfortunately, business investment has picked up. The consumer spent us out of the recession, and it was a very mild recession, by any measure, and as the consumer has slowed, we've seen business investment picking up quite dramatically. But with the level of consumer debt, I would be, down the road, concerned about growth in spending.

MR. FRIEDMAN: And now that the political season is behind us, do you see -- which had its share of negativity, do you see that having an impact on consumer confidence?

MS. FARRELL: I think -- and thank God the election is over. I have never seen so much economic misinformation and illiteracy out in the marketplace. We have a wonderful economy. Look at virtually every single measure. Look at business confidence. Look what businesses are doing. There is no better measure of business confidence and the kind of commitments that we've heard today and that we see in the overall statistics. So I think this administration has been incredibly pro-growth, pro-business. And now with a second term, an ability to take it to the next level. So I think it's very optimistic.

MR. FRIEDMAN: Well, I wonder -- we've had a -- this has been a terrific panel, and we've covered an awful lot of ground. I don't know, Mr. Vice President, or if any of the panelists have anything they'd like to add.

MR. FELDSTEIN: I would just say one thing, Steve. Until this last, little discussion, we've had a discussion that is focused on the long-term. And that's very different from a couple of years ago in Waco, where there was a lot more concern about the short-term and what could be done to make sure the economy got back on track. And I think what we're all saying, some explicitly said, and just because we're not even talking about it, is the economy is on track; the economy is doing very well. Personal incomes are up, job growth is up, and so we can really shift the focus to these longer-term issues about getting incentives right, dealing with problems like Social Security reform, getting our savings rate up. And I think that's a wonderful situation for us to be in now, and for the administration to be in as it starts its second term.

THE VICE PRESIDENT: And just let me say, too, Steve, that I want to second what Mary said. I'm glad the campaign is over with, as well. (Laughter.)

MR. FRIEDMAN: Well, look, I think that's a wonderful, broad-ranging perspective to bring this panel to a close with. And I just want to thank this audience for your attentiveness. And I mostly want to thank the Vice President and the panelists for their very, very informative remarks. It's been terrific. Thank you all. (Applause.)

END 10:43 A.M. EST

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