Online Extra: "We're Going To Come Through This Fine" (extended)

Treasury Secretary John Snow sees a very strong underlying U.S. economy

Since February, 2003, Treasury Secretary John W. Snow has been the Administration's No. 1 economic spokesman. And as an advocate of President Bush's election-year vision of an "Ownership Society," the former CEO of CSX (CSX ) brings an executive's straightforward approach to questions of taxes, the budget, and economic policy. On Aug. 23, the Secretary talked with Deputy Washington Bureau Chief Mike McNamee, Senior Writer Rich Miller, and Senior Correspondent Howard Gleckman. Here's an extended version of edited excerpts from a Q&A that will appear in the Sept. 6 issue of BusinessWeek:

Q: Why is the time right for the sorts of reforms President Bush seeks to promote with his Ownership Society idea?


Twenty-five years ago, only a few people owned stock. Today 50% have some equity ownership. That's a healthy thing -- to have people get the benefit of returns to capital as well as returns to labor. The President's core idea is, give people more control over their own lives, empower them to take greater responsibility for their own retirements, health care, and economic security.

Q: In 2001, a Presidential commission offered three methods to replace part of Social Security with private retirement accounts. Does the President favor one?


The commission showed that personal accounts have a critically important role to play [in making Social Security solvent]. We didn't choose among the three, nor do we endorse any one as the answer. The President wants to get a broad national dialogue going on securing the future of Social Security. Stay tuned: Social Security will continue to be a major issue on the President's mind.

Q: John Kerry has said he would keep today's Social Security system and that the President's approach is risky.


We'd give people choices. People are intelligent in the U.S.; they can make intelligent trade-offs. Personal accounts are consistent with the President's Ownership Society, where people take more responsibility for their own lives, for their health care, for their savings. And they'd have something. They get a stake in America.

Q: Are you worried about the $1 trillion or more needed to pay for the transition to private accounts?


It's got to be managed, it's got to be dealt with. Transition costs are about making explicit the costs [of unfunded future benefits] that are now implicit. Most economists will tell you that you do better when you make costs explicit rather than hidden and implicit, because that invites better behavior.

You would have a somewhat higher explicit deficit. But markets look at the reality of things, not the appearances. It shouldn't have any significant effect on the borrowing costs of the U.S. It lowers future obligations so the future debt and future deficit levels come down as we finance our way to this more attractive and more solvent long-term [system].

Q: The President recently said that a national sales tax was an interesting idea. Is the Treasury studying that?


No, not especially.

Q: Are the President's initiatives -- retirement savings accounts and lifetime savings accounts -- moving us away from taxing income toward taxing consumption?


They're very much part of the Administration's tax agenda. I see them as important initiatives advancing better tax policy rather than some grand plan. We need to encourage more savings in the U.S. That plays into long-term growth rates because, if you invest more for the future, you have higher real wages, higher per capita income, higher prosperity.

Q: Is the correct tax rate for capital income zero, as some conservatives argue?


I'm going to leave that to the tax theorists. The current [tax] rate on capital has come down as a result of the President's initiatives. I've long felt that lower taxation on capital would help the performance of the American economy. We'd like to make those permanent. As long as the market looks at those rates as not being permanent, they don't credit the full tax reduction going forward. By making them permanent you would lower the cost of capital. That would be beneficial.

Q: The International Monetary Fund wants the U.S. to move faster to cut the budget deficit, which stands at 3.8% of gross domestic product. Your response?


We're in the process of doing it. At the pace we're at right now, we'll have it cut in a few years to a level that is well below our historic average. Our historic average is something like 2.2% [of gross domestic product]. We're going to have it down to 1.5%, 1.6% in four years' time. We're making very good progress.

Q: But your budget estimates don't include the Iraq war or the $500 billion cost of fixing the alternative minimum tax (AMT).


What we've said is the President's commitment is absolute. Whatever we do has to be done in the framework of the President's commitment to cut the deficit in half. Any fix on the AMT -- with everything else that's happening on the expenditures and revenue side -- will have to fit within the President's commitment.

Q: The President has been talking about tax simplification. Does that mean getting rid of the Internal Revenue Service?


I travel around the country, and there's a common sentiment -- the tax code is too doggone complicated. Einstein observed it is the only thing impenetrable to the human mind. What we mean is making it less burdensome on people to do their taxes.

We have made some progress. More and more people are using the EZ form. Far more people are filing electronically. We want to move well beyond that. Whatever you do, there is going to be some tax collector. You are never going to go to a self-enforcing tax system.

Q: How worrisome is the economy's recent softness?


We're going to come through this fine. Economies don't move month to month in a constant direction up or down. But the underlying economy remains very strong. Inflation is very low. Productivity is very high. Profitability is high. Cash flow in businesses is high.

Monetary policy and fiscal policy continue to work together to accommodate growth. Even if second-quarter [gross domestic product growth] comes in at 3%, with 4.5% for the first, that is well above the historic norm.

The jobs numbers for July are a little curious. You've got everything surrounding the payroll number -- hours worked and compensation going up, initial claims going down, and the household survey producing 629,000-or-so new jobs. Then there's this curious lower number coming out of the payroll survey.

My own hunch here is that the real number is somewhere in the middle. We are seeing a lot of jobs -- 11 straight months of job creation.

Q: Will high oil prices hold the economy back?


Right now, energy prices are an added burden on the economy -- headwinds on an otherwise very strong economy. They're too high. I don't think they're sustainable, because they've gotten out of line with fundamentals. Gasoline prices have moderated. I think they'll stay moderate because we're now getting out of the driving season. But even in the face of these unwelcome and unsustainably high energy prices, we're continuing to make real good progress.

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