Face to Face: A Conversation with John Snow

The Secretary of the Treasury gives his outlook on the nation's economy.

Q. What is your assessment of the U.S. economy? What are the strengths and weaknesses?

A. The overall economy is in a much, much better posture now than it was a year ago. And we've seen these numbers for the last year or so where [gross domestic product] growth has been much, much higher since the president's jobs and growth bill got put in place. We've had the highest GDP growth in some 20 years or so and with it jobs have been coming back with a good pace for the last year, 11 straight months of job pickup. Underlying fundamentals are awful good. We have the low inflation, low interest rates, high productivity, manufacturing coming back, confidence is good but we're running into some head winds from energy prices. Energy prices act like a tax on businesses, raising their costsand it's affecting consumers leaving less disposable income available for other things And since we depend too much on foreign supplies of energy, an awful lot of that higher price, which is income to somebody, is leaving the country. So, I'd say, for the short-term that's a head wind. I think the economy is strong enough to push through it, but it's creating choppier seas than we would have otherwise had.

Q. The economy seemed to have momentum, the recent job numbers had expectations of 200,000 jobs, but the number came out lower, only 32,000. Why was the number so low?

A. At the same time that the payroll survey came out with the 32,000 number, which was, I agree with you, lower than we expected, the unemployment rate went down, from 5.6 percent to 5.5 percent, the hours worked went up and hourly compensation went up and workforce participation rates went up. And most importantly, the household survey had jobs up by a very sizeable 629,000. Now, probably, when the next revisions come out we're going to find that the real number is somewhere in between the low number, the payroll survey, and the higher number from the household survey

Q. Why do you think they came in where they did?

A. We're going to have to await these revisions to the estimates to get a better sense of that. I think they'll probably come out somewhere in between. The household survey picks up temporary work, and if you add the temporary work, which are real jobs, that come out of the household survey to the 32,000 that came out of the payroll survey you're up over 200,000 jobs, which is also the number suggested by looking at the number of new positions lost and new positions created I'm going to leave it to the later revisions and the statisticians that work those to give you a more complete answer there. But I think it's going to be somewhere in between, and labor markets remain strong. One of the problems we've got is firms looking for people and not being able to find them [with] the requisite skills. We need to make sure people have the skills to fill the jobs.

Q. Two of the big drivers behind the economy last year were the tax cuts and mortgage refinances. Where are we going to get that push now?

A. You get the push from a couple of things. One is more people working. We have 1.5 million people working now that weren't working a year ago. That helps create strength in the economy. Another thing we have going for us is this very high productivity [rate] which is translating into very high corporate profits which in turn always translates into more capital spending and capital spending creates demand for labor. That is working. We see corporate spending picking up, reflecting higher corporate profitability and higher corporate cash flows. We're at that point where the underlying strengths of the economy give the economy a self-generating force going forward.

But of course those tax cuts don't stop working. It's the gift that keeps giving because as new people come into the workforce they are paying lower taxes. As new businesses are formed they get the benefits of the larger expensing, and it keeps giving. So as I look at the economy I'm pretty optimistic. I'm pretty confident. I think we're on the right path even in the face of this very unwelcome development on energy Iraq's oil production is now fallen down below a million barrels a day and it ought to be at 2.5 million. That gap, along with concerns about Venezuela and Middle East stability, is creating an `uncertainty premium' in energy prices

Q. Vice President Dick Cheney made a statement that the Reagan administration proved deficits don't matter. Do you disagree, and if so, what is the plan for reducing the deficits?

A. The president has said that we're going to cut this deficit in half over the course of the next five years. We view the deficits as too large and unwelcome and something requiring immediate and direct attention. There are only two ways to get a deficit down. One is to get the economy growing, more people working, businesses expanding, paying more taxes, better jobs and then the government's receipts go up. We're already seeing that. Government receipts are coming in much higher than they had been foreseen because the economy is stronger than foreseen, more people are working than foreseen, businesses are more profitable than foreseen, and that leads to more taxes.

But, secondly, you have to watch spending. Spending has been a problem. We're going to have to rein in the growth rate of spending. The budget that the president sent up to the Congress this year is very tight on non-defense, non-payroll discretionary spending. We've got to defend the country and deal with the terrorists. So those categories are going to continue to be well-funded because that's a national priority. But outside of those areas we're going to have to tighten our belts. The president sent up a belt-tightening budget that is growing about one-half of 1 percent -- smallest in a long, long, long time. By staying on that path, growing and expanding the economy we'll get the revenues. Revenues are trending back up over the course of the next four years to their historic level of about 18 percent to 18.5 percent of GDP At that level, if we control spending, we have a very small deficit so I think we're on the right path here.

Q. When the Baby Boomers will start to retire in large numbers, won't that have a counterbalance effect?

A. Yeah, it will, but we've got some period of time before Social Security, for instance, becomes a negative on an annual basis for the deficit. And we're going to have to deal with that problem. I agree with you 100 percent. It's simply arithmetic. We started out with Social Security and we had 16 workers to 1, and we now have 3 or so and we're headed off to having 2. And it's a pay-as-you-go system and in any pay-as-you-go system, the math gets pretty bad as the number of contributors declines relative to the number of recipients. So we have a real problem here

The president has put forth some ideas on that that really showed leadership four years ago in the campaign. Your congressman down here [Clay Shaw] has put forth some important ideas as well. Both the president and Congressman Shaw have talked about these personal accounts, some way to augment, supplement the Social Security benefits system with independent accounts, giving people an opportunity to control their own destiny by making investments that would have an equity premium to it, the opportunity to earn an equity premium. [President Bush's commission on Social Security] found that by deploying personal accounts appropriately you could keep the system financially viable.

Q. With the Medicare drug plan and other needs, is it realistic to think we'll be able to meet all the commitments and still keep the tax cuts permanent?

A. Yes, in fact, we need to keep the tax cuts permanent. The one thing we know is that high taxes hurt creativity, productivity and growth. So we've got to find a way to make those tax cuts permanent because they do so much to keep the economy on the right path.

Then we've got to restrain the spending. The biggest bill in there, of course, is health care. It's rising health care costs and the prescription drug bill is an effort to deal with that. But we've got a larger issue in health care. We need to think about how to change the system so people are more empowered to act like consumers. In the health care arena I'm struck by the fact that we Americans don't approach the subject the way we approach buying a car, or buying a computer or picking an Internet provider.

We shop. We're a nation of shoppers. We do comparisons. We talk to our neighbors. We go on the Internet. We look at the newspapers. We make informed, intelligent decisions involving trade-offs We do that all the time, except in health care. Our health care system is set up in a way that we aren't empowered as citizens to be good consumers, and changing that equation is important So this sort of idea of empowering people to deal with their own health care in ways that they become better consumers has a lot of promise to lower health care costs. So does dealing with the malpractice problems and the problems of the frivolous lawsuits.

Q. What kind of feedback are you getting about the new Cuba regulations?

A. I haven't gotten that sort of feedback. There's an office inside Treasury, Office of Foreign Asset Controls, that deals with these regulations. The regulations were tightened up some to make sure we aren't inadvertently funding [Fidel] Castro. An awful lot of money that tourists take down there, or people going down there on educational missions, a lot of that money ends up in the pockets of the dictator. The administration, the president, feels strongly that we're going to hasten democracy and self-rule and end the oppression of Castro's regime by reducing the flow of these monies he gets his hands on.

Q. But given that a lot of money that leaves South Florida to Cuba goes to family and friends, does it make sense to cut back on that money and make folks in Cuba more dependent on the Cuban government?

A. Well, talk to the Cuban community here that hates Castro and you'll get a very clear answer on that.

Q. So in terms of negative feedback

A. I think the Cuban community is divided. Some feel strongly for the new regulations, some have reservations. But the actions being taken are being taken to weaken the Castro regime. An awful lot of the money that ends up flowing down there is used to sustain and strengthen the regime. We want to make sure that doesn't happen

Q. Sen. Charles Grassley was critical of OFAC this past spring, saying OFAC had many more people cracking down on Cuba embargo violators than chasing terrorist money. Have any changes been made?

A. We responded to him, and pointed out that there was something of an apples-to-oranges comparison in the way he was explaining the issue. The department is part of a much larger anti-terrorism program. And OFAC is part of a much larger anti-terrorism program that is dependent on, that draws on resources from, the whole government Treasury's role is a much broader effort to wage the war on terrorism finance. The president's assigned Treasury to lead in that critical activity because without the blood monies you can't carry on the terrorism activities. And we have to be just as relentless and aggressive as they are. We need to take all appropriate legal measures to interdict these flows, break up their networks and stop the flow of funds. We've made a lot of progress. We've made it a lot tougher for the donor network to use our financial system; that's where the Patriot Act becomes so important [But it] goes beyond banking. It's anybody touching money. It's jewelry stores, it's broker/dealers and so on, insurance companies, are all part of this now. The Know Your Customer modality [has] helped us make the private sector a real ally in stopping the money laundering and in identifying terrorists or terrorist suspects and working with law enforcement as part of a huge effort to make the flow of monies more difficult. It's the flow of terrorist monies that enable their wicked and wretched activities. So it's a very important mission and OFAC is just a part of that mission.

Interview by members of the Editorial Board and Business staff writers

JOHN SNOW BACKGROUND President Bush picked John Snow to serve as treasury secretary in December 2002. At the time, Snow served as chairman of the railroad company CSX Corp. As one of the president's most high-profile Cabinet officers, Snow's top job is to help craft the administration's economic policies. But as Treasury chief, he also plays a pivotal role in the financial side of the war on terrorism, as well as enforcing the new restrictions on travel and remittances to Cuba.