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The Consumer Price Index, a key measure of inflation in the United States, rose again Wednesday. Treasury Secretary John Snow discusses inflation, rising energy costs, Social Security and the state of the U.S. economy.
Mr. Secretary, welcome.
Thank you very much. Good to be on, Jim.
The Consumer Price Index, a major measurement of inflation in this country, was up today more than it has been since October. Have we got a serious inflation problem now?
No, I don't think so. Inflation is still pretty well in check. We do have energy prices that are unwelcome, too high. I hope Congress can take some action on that.
But overall, the inflation picture is still fairly benign, although clearly, as the Fed indicated yesterday in their FOMC statement, it's beginning to show some signs of resurgence.
And the Fed raised its major rate yesterday. Was that the right thing to do, in your opinion?
Well, I never comment on the Fed's actions in that regard. I have many private conversations with Chairman Greenspan and we never reveal what we talk about. So I don't want to break my rule.
But clearly an economy that's growing and expanding like this one — and it certainly is doing that with high GDP output, employment numbers strong, capacity utilization strong — that's an environment in which the Fed needs to continually be alert to early signs of inflation.
Are you concerned, though, that if interest rates continue to go up, obviously that begins to put a damper on economic growth, does it not?
Well, Jim, interest rates rising during a recovery — and we're in the good recovery, as I indicated —
— are exactly what you expect — so rising interest rates of the sort we're seeing are consistent with and confirm actually the fact that the economy is recovering. So rather than slowing the recovery it really should be seen as part and parcel of the recovery.
Now you mentioned energy prices. Gasoline prices are up, obviously, oil prices are up. That's a bad thing for the U.S. economy?
Well, it's bad in a number of regards. Higher energy prices act like a tax. They reduce the disposable income people have available for other things after they've paid their energy bills. Many of our industries are very energy intensive. Those industries get particularly hard hit by rising energy prices.
Fortunately, this economy is very resilient and vibrant, and while the higher energy prices are creating some head winds, they're not of the sort that's going to knock us out of the strong recovery we're in now, but they are certainly unwelcome.
Is there anything special that you or others in the administration are doing trying to control energy prices?
Well, I think the best thing we can do for the short term is move good energy legislation through to the Congress; I'm encouraged that there's some prospect for that now.
And we have abundant natural energy resources in the country. We haven't been taking adequate advantage of them, and we can burn coal in a clean way; we could improve the grid.
We can get more energy out of the north slope of Alaska; we have available the ability to make ourselves less dependent on those uncertain sources of supply from the Middle East. And it's important we do that.
But those are long-term solutions, are they not, rather than short term?
Well, they absolutely are, but to the extent that the markets see us taking positive actions, I think we would get a good response, because the markets are anticipating the future as well as the present, of course.
What would you say, Mr. Secretary, to those who say that higher energy prices are actually a blessing in disguise for the United States, because it tamps down our use of gasoline and oil, and that's a good thing?
Well, there's no doubt about the fact that, that higher energy prices lead to greater conservation, greater energy efficiency, and they also, of course, play a useful role on the supply side. They encourage more exploration, and they make non-conventional fuels more attractive in the marketplace.
So it's not entirely without a silver lining, but overall I think the facts are pretty clear, that high energy prices, if they are sustained, will take its toll on the economy, will reduce GDP growth rates and will hurt employment, so it's clearly a negative for the economy as a whole.
Are you concerned that they are going to stay up like this, that this is a sustained rise in energy cost?
Jim, I think these current prices are not sustainable. I think they go beyond what would be dictated by pure demand and supply considerations, long-term demand/supply considerations.
Markets tend to adjust to long-term demand/supply conditions. And I very much am of the view that high energy prices lead to lower energy prices because of the supply and demand side behavioral changes that they induce.
So not a crisis?
No, and far from a crisis.
OK, the price of the dollar has fallen 30 percent in the last three years. Is that a crisis? Is that a subject of concern? Is that bad for America?
Well, I make a practice of not commenting on the role of the relative exchange value of our currency.
We continue to have a strong dollar policy; we continue to support the strong dollar policy. It's been our policy and will continue to be our policy.
We're focused on doing the things that make the economy perform well, and as you do that, reduce deficits, for one, very important; secondly, keep growth rates high, very important. We have the deepest and most liquid capital markets in the world.
We have the most flexible and adaptive economy. Making sure we sustain the ability of the American economy to perform well is really the priority of economic policy.
But you say we have a strong dollar policy, and yet, the dollar is sinking in value, so what's the problem?
Well, the U.S. is running a current account deficit; we are creating lots of investment opportunities in the United States that exceed our own domestic savings rates, so the issue here is to encourage higher savings rates in the United States.
Of course, in part, you do that by eliminating or reducing the dis-savings through government deficits. We promote domestic savings by also things like the personal accounts associated with the president's Social Security initiative, which over time would generate more savings.
But the other part of this problem is the slow growth rates, the slow GDP growth rates that so many of our trading partners are experiencing. And one of our points of continuing conversation with our trading partners is the urgency of their taking steps to remove barriers to their improved growth performance.
And, in fact, there's a consensus that that needs to be done; it's a consensus reflected in the G-7 finance minister's statement entered into about a year ago at this time.
Well, for those of us who are not experts on why that helps the United States, is that makes it possible for them to buy more of our products, is that what you're saying?
Precisely, Jim. Our GDP growth rates are creating — our high GDP growth rates, the success of our economy means we're creating lots of disposable income.
A considerable part of that additional disposable income ends up, ends up buying goods and services from our trading partners abroad. Their slower growth rate means they aren't generating the increases in disposable income.
So they're not in a position to buy more from us, and those differential growth rates really lie at the very center of this import/export imbalance that we're seeing.
You mentioned deficits several times. Federal Reserve Chairman Greenspan said recently, and he said it many, many times before, recently, that that is the single most critical problem facing our economy is the rising federal deficit.
And he suggests that nobody, nobody in the administration, nobody in Congress is doing enough about that problem. What would you say in return to him?
Well, that's a subject that the chairman for whom I have the highest admiration, it's a subject that he and I talk about with some regularity; I couldn't agree with him more.
We have a serious structural deficit problem. And it needs to be addressed. The president is trying to address it through reforms of Social Security, but the problem is there with other entitlement programs like Medicare and Medicaid.
And what we foresee in the future is clearly a non-sustainable situation that imperils — imperils, and I use the word advisedly, the very success of this great economy of ours because of the crushing burden it will visit on the economy either in the form of much higher tax rates or much higher borrowing rates, either of which is very damaging to the performance of the economy.
So Chairman Greenspan is absolutely right; this is the number one domestic economic policy issue we face.
And why isn't more being done about it, sir?
Well, as I say, the president is trying to address it with Social Security reforms. Social Security represents an $11 trillion unfunded obligation. And when I say unfunded obligation, I mean we have to come up with $11 trillion at some point to make the system whole.
Now, that's either tax increases or borrowing or reductions in other programs. It's an unsustainable burden; the president's taking it to the American people. Something is being done with it, and I am bold enough to suggest to you, Jim, and your viewers and listeners, that something will be done about it.
I think we'll build a consensus for action on Social Security reform which will reduce that long-term unfunded obligation and put the system on a sustainable basis.
As I'm sure you know, Mr. Secretary, the public opinion polls show that there has been a kind of rather slow reaction of the American public to the president's calls not only in general for Social Security reform but to some of the specific things he's suggested. What's the problem?
Well, we're in the early innings here; we're just beginning really to get the story told, get the message out. You don't fix the problem until you define it. We're in the problem definition phase of this, of this undertaking.
And I'm encouraged. I'm spending a lot of time out across America as part of a 60-day, 60-site tour; I will be in Delaware tomorrow, in Pennsylvania; I've been in eight or nine states already.
The president is leading the effort. The vice president's engaged other members of the cabinet, and as I go out and talk to people, I'm getting a pretty clear sense that the problem is being defined and we're a nation of fixers.
Once we know we've got a problem we want to get it fixed. I think there will be a lot of pressure on Congress to find answers to this problem over the course of the remaining months of this session of Congress.
You say pressures on Congress. Congress comes back, at least the Democratic leadership says, "Hey, wait a minute, if the president wants to fix Social Security, why doesn't he lay out a specific plan and let's, let's go"?
Well, the president's laid out a lot of ideas. He's touched that so-called third rail of American politics. He touched it in the campaign in 2000, and 2004. And now he's really embraced it as no other American leader has in modern times.
And I think the American people look to the leaders to lead. They look to the leaders to take on the big problems. And the president deserves a lot of credit for doing that.
He's trying to create a climate of ideas where in a bipartisan basis in both Houses, members of Congress will reach across the aisles and try and come up with good ideas. It's happening right now. We've seen proposals from Senator Bennett, from Senator Hagel, from Sen. Lindsay Graham of South Carolina.
There's a lot of discussion and dialogue going on. And I don't despair; I'm still optimistic we're going to get good strong legislation this year to strengthen and preserve Social Security.
Mr. Secretary, thank you very much.
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