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Department of thefREASlIRY WASHINGTON, D.C. 20220 TELEPHONE 566-2041 FOR RELEASE AT NOON, EDT REMARKS BY THE HONORABLE G. WILLIAM MILLER SECRETARY OF THE TREASURY BEFORE THE NATIONAL ASSOCIATION OF BANK WOMEN WASHINGTON, D.C. OCTOBER 7, 1980 It is a pleasure to have the opportunity to address this distinguished group. As bankers, you represent an important segment of the financial community, and as citizens you represent the country as a whole. In both capacities you have a profound stake in the future of this Nation's economy. I would like to discuss with you the challenges that face us now, our programs for meeting those challenges, and the enormous opportunities which await us if we are successful in that endeavor. Because you are bankers, you have a particular interest in what lies in store for a particular industry. I want to discuss your industry, but I cannot to do so in a vacuum. Our economic problems are complex and inter related. It is imperative that we discuss and address them on a comprehensive basis. We appear in recent weeks to be emerging from the sharp economic decline of the second quarter. Moreover, the overall decline seems to have been neither as severe nor as prolonged as many had anticipated. In consequence, M-697 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2 we are now in a position to focus our primary attention on the long term — to tackle the problems of the decade ahead. That means we must not only reinforce the process of recovery, but also address fundamental problems of inflation, energy, declining productivity growth and unemployment. First and foremost, we must continue and intensify the fight against inflation. This requires constant control of Federal expenditures. And it also requires bold efforts to encourage innovation and investment. Putting Americans to work in the most modern facilities is the best way to achieve the improvements in productivity that are essential for higher real incomes, improved standards of living and ultimate success in our struggle against inflation. At the same time, we must adhere to and build upon our national energy policy, which is designed to reduce consumption, develop domestic energy resources and thereby decrease our still excessive dependence of foreign oil. We must continue to reduce and simplify federal regulation so market forces can work more freely, and so necessary regulations are no more cumbersome than they must be. And we must accomplish these things in a way that cushions human costs, aids regions in transition and leaves intact our commitments to encourage and support small business and minority business. We must, in short, revitalize our economy. To do this, we need a well thought out, long-term program, that requires the participation and involvement of all sectors of the economy: business, labor, and the public. On August 28, the President proposed key elements of such a program. In conjunction with prior efforts in the fiscal, energy and international areas, those steps will set us on the road toward the revitalization of America. The President*s Revitalization Program I would like briefly to highlight the major aspects of the President's program, and then to look in somewhat greater detail at the role of the financial community in what lies ahead. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 3 First, the program contains tax incentives that will bring about a major increase in private capital investment, and with it productivity. The central proposal is for a new depreciation system which will increase allowable rates by 40 percent and significantly simplify the filing and accounting processes. Making the ten percent investment tax credit partially refundable will also aid capital formation. Together, these measures will increase the share of Gross National Product devoted to capital investment by 10 percent. In addition to reducing capital costs, the program will reduce labor costs and encourage employment through a tax credit which would offset the employer's share of the January 1, 1981, increase in social security taxes as well as the employee's share. Second, the program will reinforce cooperation between government and the private sector through the establishment of an Economic Revitalization Board. The Board will advise the President on the broad range of issues involved in the on-going process of revitalization. It will consist of members from industry, labor and the public, and will be co-chaired by Irving Shapiro, Chairman of E.I. DuPont, and Lane Kirkland, President of the AFL/CIO. Third, the program will ease the adjustment and dislocation that are likely to accompany revitalization by providing increased economic development funding, an additional ten percent investment tax credit for eligible investments in areas with high unemployment, expanded job training and additional relief for the unemployed. And fourth, the program will provide selective individual tax relief by offsetting the social security tax increase, liberalizing the earned income tax credit for low income wage earners, and reducing the "marriage penalty" tax. The investment incentives and social security tax credit will be especially helpful to small businesses, which are a vital source of innovation and job creation in our economy as well as providers of some of the best opportunities for women and minority entrepreneurs. Current depreciation allowances tend to be too complex to be of value to many smaller businesses, and the proposed new constant rate depreciation system would alleviate this problem. Moreover, many small businesses rely https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4 heavily on labor rather than equipment, and thus will benefit significantly from the social security tax credit. In addition, the President has proposed changes in the tax code which will allow new ventures to write off most startup costs and give them easier access to capital. A number of other measures complement the four aspects I have discussed. They include public investment in energy creation and conservation and in transportation infrastructure; increased research and development funding; efforts to promote exports; and, of course, determined efforts to build upon past gains in the energy and inflation areas. Regulatory Reform A critically important feature of this program is continuing regulatory reform. This Administration already has recorded major achievements in reducing and simplifying unnecessary and counterproductive government regulation. Regulatory burdens on the trucking, airline and railroad industries, and on our financial institutions, are being reduced. As that happens, markets can work more freely to promote efficiency and competition, and businesses are spared the costs of complying with unnecessary regulations. The result is more efficiency and better prices for consumers. Your own industry already has been greatly affected by the Administration's deregulation efforts. One of the most significant pieces of financial reform legislation in our history became law last spring when the President signed the Depository Institutions Deregulation and Monetary Control Act of 1980. As a result of that Act reserve requirements at all depository institutions have been simplified and made more equitable. Since reserve requirements are in essence a "franchise tax", it is only fair that all depository institutions pay that "tax" — that all institutions play by the same rules. The Act also allows all institutions holding reserves to use the Fed as a lender of last resort, a significant privilege which will help maintain confidence in and provide further liquidity to our already strong banking system. In addition, the Act provides for equal access by all institutions to Federal Reserve services at realistic prices. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 5 One of the most important aspects of the recent legislation — and one that the Administration strongly recommended — is a phaseout of deposit rate ceilings at depository institutions. The Depository Institutions Deregulation Committee, which was established by the Act, has the responsibility for managing the phaseout. That process must be accomplished in a manner that is fair to all concerned — a difficult task. But the final result will be a better break for small savers. Removing the ceilings will help promote a "national savings habit" and encourage new deposits in financial institutions. It will "level the playing field" by allowing depository institutions to compete fairly against nondepository institutions that have not been subject to ceilings — such as money market funds, securities firms, retail firms, and the U.S. Treasury. In retrospect, we can see that the ceilings did not work — instead of reducing the cost of funds to institutions, they caused disintermediation. It is time to recognize that the most efficient, socially useful financial system is one in which deposit and loan rates are set by the marketplace, not by Washington. Provisions of the recent Act also overrode some unrealistically low state usury ceilings. Usury ceilings which keep loan rates below the market rate distort credit flows and reduce credit availability to higher risk borrowers, including small businesses and individuals in need of small loans. The Treasury participated in preparing the Report of the Interagency Task Force on Thrift Institutions — submitted to the Congress at the direction of the Depository Institutions Deregulation and Monetary Control Act. In that Report, the Task Force recommended that Congress give serious consideration to an override of state usury ceilings on consumer credit while making sure that consumers were adequately protected from abusive or usurious practices. The banking industry itself must be given a good deal of the credit for achieving deregulation. You have done a commendable job implementing new technology to serve customer needs more effectively. ’Xour efforts in developing new services such as ATS accounts have prompted legislators and regulators to eliminate restrictions. You have been willing to make innovative loans; and you have been creative in developing methods to pay market rates of interest within the bounds of existing regulations. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 6 You have, in short, proved willing and able to meet competition, not only among yourselves, but from nonbank and foreign sources. There is, however, still much to be done. The Administration hopes to continue to work with you to explore further areas for deregulation. We are, for example, likely to see change in the ability of financial institutions to compete across geographic boundaries. In my opinion, such change will come slowly, through an evolutionary rather than a revolutionary process. Similarly, we may see a gradual easing of restrictions on the type of financial instruments that may be offered by banks in competition with nondepository institutions. Banks1 Role in the Revitalization Process In the coming years, you will need the added flexibility that comes with deregulation because bankers will play an important role in revitalizing our economy. You are, after all, a major source of the funds that will be needed — — to increase investment in plant and equipment, — to encourage new business development, growth of small business, and — to help redevelop our cities, — to increase exports. I might add, in this regard, that the Administration supports legislation that would allow banks to own export trading companies and thus increase our Nation’s ability to promote exports. To play a role in the process of revitalization you will have to meet new challenges in your own industry. Technologies are evolving rapidly. Customers have more complex needs. And the demands of a global economic system are growing. I have outlined a series of policy initiatives designed to spur a process of revitalization. But that process depends in the last analysis upon the private sector, upon you and people like you. Accordingly, your continued innovation and your dedication to greater efficiency and productivity are urgently needed. I am confident that they will be forthcoming, and that working together we will meet the economic challenges of the 1980s. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 0O0 4 Department of theTREASURY WASHINGTON, D.C. 20220 TELEPHONE 566-2041 FOR RELEASE AT NOON, EDT REMARKS BY THE HONORABLE G. WILLIAM MILLER SECRETARY OF THE TREASURY BEFORE THE NATIONAL ASSOCIATION OF BANK WOMEN WASHINGTON, D.C. OCTOBER 7, 1980 It is a pleasure to have the opportunity to address this distinguished group. As bankers, you represent an important segment of the financial community, and as citizens you represent the country as a whole. In both capacities you have a profound stake in the future of this Nation's economy. I would like to discuss with you the challenges that face us now, our programs for meeting those challenges, and the enormous opportunities which await us if we are successful in that endeavor. Because you are bankers, you have a particular interest in what lies in store for a particular industry. I want to discuss your industry, but I cannot to do so in a vacuum. Our economic problems are complex and inter related. It is imperative that we discuss and address them on a comprehensive basis. We appear in recent weeks to be emerging from the sharp economic decline of the second quarter. Moreover, the overall decline seems to have been neither as severe nor as prolonged as many had anticipated. In consequence, M-697 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2 we are now in a position to focus our primary attention on the long term — to tackle the problems of the decade ahead. That means we must not only reinforce the process of recovery, but also address fundamental problems of inflation, energy, declining productivity growth and unemployment. First and foremost, we must continue and intensify the fight against inflation. This requires constant control of Federal expenditures. And it also requires bold efforts to encourage innovation and investment. Putting Americans to work in the most modern facilities is the best way to achieve the improvements in productivity that are essential for higher real incomes, improved standards of living and ultimate success in our struggle against inflation. At the same time, we must adhere to and build upon our national energy policy, which is designed to reduce consumption, develop domestic energy resources and thereby decrease our still excessive dependence of foreign oil. We must continue to reduce and simplify federal regulation so market forces can work more freely, and so necessary regulations are no more cumbersome than they must be. And we must accomplish these things in a way that cushions human costs, aids regions in transition and leaves intact our commitments to encourage and support small business and minority business. We must, in short, revitalize our economy. To do this, we need a well thought out, long-term program, that requires the participation and involvement of all sectors of the economy: business, labor, and the public. On August 28, the President proposed key elements of such a program. In conjunction with prior efforts in the fiscal, energy and international areas, those steps will set us on the road toward the revitalization of America. The President's Revitalization Pregram I would like briefly to highlight the major aspects of the President's program, and then to look in somewhat greater detail at the role of the financial community in what lies ahead. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 3 First, the program contains tax incentives that will bring about a major increase in private capital investment, and with it productivity. The central proposal is for a new depreciation system which will increase allowable rates by 40 percent and significantly simplify the filing and accounting processes. Making the ten percent investment tax credit partially refundable will also aid capital formation. Together, these measures will increase the share of Gross National Product devoted to capital investment by 10 percent. In addition to reducing capital costs, the program will reduce labor costs and encourage employment through a tax credit which would offset the employer*s share of the January 1, 1981, increase in social security taxes as well as the employee's share. Second, the program will reinforce cooperation between government and the private sector through the establishment of an Economic Revitalization Board. The Board will advise the President on the broad range of issues involved in the on-going process of revitalization. It will consist of members from industry, labor and the public, and will be co-chaired by Irving Shapiro, Chairman of E.I. DuPont, and Lane Kirkland, President of the AFL/CIO. Third, the program will ease the adjustment and dislocation that are likely to accompany revitalization by providing increased economic development funding, an additional ten percent investment tax credit for eligible investments in areas with high unemployment, expanded job training and additional relief for the unemployed. And fourth, the program will provide selective individual tax relief by offsetting the social security tax increase, liberalizing the earned income tax credit for low income wage earners, and reducing the "marriage penalty" tax. The investment incentives and social security tax credit will be especially helpful to small businesses, which are a vital source of innovation and job creation in our economy as well as providers of some of the best opportunities for women and minority entrepreneurs. Current depreciation allowances tend to be too complex to be of value to many smaller businesses, and the proposed new constant rate depreciation system would alleviate this problem. Moreover, many small businesses rely https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4 heavily on labor rather than equipment, and thus will benefit significantly from the social security tax credit. In addition, the President has proposed changes in the tax code which will allow new ventures to write off most startup costs and give them easier access to capital. A number of other measures complement the four aspects I have discussed. They include public investment in energy creation and conservation and in transportation infrastructure; increased research and development funding; efforts to promote exports; and, of course, determined efforts to build upon past gains in the energy and inflation areas. Regulatory Reform A critically important feature of this program is continuing regulatory reform. This Administration already has recorded major achievements in reducing and simplifying unnecessary and counterproductive government regulation. Regulatory burdens on the trucking, airline and railroad industries, and on our financial institutions, are being reduced. As that happens, markets can work more freely to promote efficiency and competition, and businesses are spared the costs of complying with unnecessary regulations. The result is more efficiency and better prices for consumers. Your own industry already has been greatly affected by the Administration's deregulation efforts. One of the most significant pieces of financial reform legislation in our history became law last spring when the President signed the Depository Institutions Deregulation and Monetary Control Act of 1980. As a result of that Act reserve requirements at all depository institutions have been simplified and made more equitable. Since reserve requirements are in essence a "franchise tax", it is only fair that all depository institutions pay that "tax" — that all institutions play by the same rules. The Act also allows all institutions holding reserves to use the Fed as a lender of last resort, a significant privilege which will help maintain confidence in and provide further liquidity to our already strong banking system. In addition, the Act provides for equal access by all institutions to Federal Reserve services at realistic prices. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 5 One of the most important aspects of the recent legislation — and one that the Administration strongly recommended — is a phaseout of deposit rate ceilings at depository institutions. The Depository Institutions Deregulation Committee, which was established by the Act, has the responsibility for managing the phaseout. That process must be accomplished in a manner that is fair to all concerned — a difficult task. But the final result will be a better break for small savers. Removing the ceilings will help promote a "national savings habit" and encourage new deposits in financial institutions. It will "level the playing field" by allowing depository institutions to compete fairly against nondepository institutions that have not been subject to ceilings — such as money market funds, securities firms, retail firms, and the U.S. Treasury. In retrospect, we can see that the ceilings did not work — instead of reducing the cost of funds to institutions, they caused disintermediation. It is time to recognize that the most efficient, socially useful financial system is one in which deposit and loan rates are set by the marketplace, not by Washington. Provisions of the recent Act also overrode some unrealistically low state usury ceilings. Usury ceilings which keep loan rates below the market rate distort credit flows and reduce credit availability to higher risk borrowers, including small businesses and individuals in need of small loans. The Treasury participated in preparing the Report of the Interagency Task Force on Thrift Institutions — submitted to the Congress at the direction of the Depository Institutions Deregulation and Monetary Control Act. In that Report, the Task Force recommended that Congress give serious consideration to an override of state usury ceilings on consumer credit while making sure that consumers were adequately protected from abusive or usurious practices. The banking industry itself must be given a good deal of the credit for achieving deregulation. You have done a commendable job implementing new technology to serve customer needs more effectively. your efforts in developing new services such as ATS accounts have prompted legislators and regulators to eliminate restrictions. You have been willing to make innovative loans; and you have been creative in developing methods to pay market rates of interest within the bounds of existing regulations. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 6 You have, in short, proved willing and able to meet competition, not only among yourselves, but from nonbank and foreign sources. ’ » i There is, however, still much to be done. The Administration hopes to continue to work with you to explore further areas for deregulation. We are, for example, likely to see change in the ability of financial institutions to compete across geographic boundaries. In my opinion, such change will come slowly, through an evolutionary rather than a revolutionary process. Similarly, we may see a gradual easing of restrictions on the type of financial instruments that may be offered by banks in competition with nondepository institutions. Banks' Role in the Revitalization Process In the coming years, you will need the added flexibility that comes with deregulation because bankers will play an important role in revitalizing our economy. You are, after all, a major source of the funds that will be needed — — to increase investment in plant and equipment, — to encourage new business development, growth of small business, and — to help redevelop our cities, — to increase exports. I might add, in this regard, that the Administration supports legislation that would allow banks to own export trading companies and thus increase our Nation's ability to promote exports. To play a role in the process of revitalization you will have to meet new challenges in your own industry. Technologies are evolving rapidly. Customers have more complex needs. And the demands of a global economic system are growing. I havs outlined a series of policy initiatives designed to spur a process of revitalization. But that process depends in the last analysis upon the private sector, upon you and people like you. Accordingly, your continued innovation and your dedication to greater efficiency and productivity are urgently needed. I am confident that they will be forthcoming, and that working together we will meet the economic challenges of the 1980s. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 0O0
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