[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
AMERICAN DECLINE OR RENEWAL?
=======================================================================
HEARINGS
BEFORE THE
SUBCOMMITTEE ON INVESTIGATIONS AND
OVERSIGHT
COMMITTEE ON SCIENCE AND TECHNOLOGY
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
----------
MAY 22, 2008
and
JUNE 24, 2008
----------
Serial No. 110-105
and
Serial No. 110-111
----------
Printed for the use of the Committee on Science and Technology
Available via the World Wide Web: http://www.science.house.go
U.S. GOVERNMENT PRINTING OFFICE
42-371 PDF WASHINGTON DC: 2008
---------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866)512-1800
DC area (202)512-1800 Fax: (202) 512-2250 Mail Stop SSOP,
Washington, DC 20402-0001
______
COMMITTEE ON SCIENCE AND TECHNOLOGY
HON. BART GORDON, Tennessee, Chairman
JERRY F. COSTELLO, Illinois RALPH M. HALL, Texas
EDDIE BERNICE JOHNSON, Texas F. JAMES SENSENBRENNER JR.,
LYNN C. WOOLSEY, California Wisconsin
MARK UDALL, Colorado LAMAR S. SMITH, Texas
DAVID WU, Oregon DANA ROHRABACHER, California
BRIAN BAIRD, Washington ROSCOE G. BARTLETT, Maryland
BRAD MILLER, North Carolina VERNON J. EHLERS, Michigan
DANIEL LIPINSKI, Illinois FRANK D. LUCAS, Oklahoma
NICK LAMPSON, Texas JUDY BIGGERT, Illinois
GABRIELLE GIFFORDS, Arizona W. TODD AKIN, Missouri
JERRY MCNERNEY, California JO BONNER, Alabama
LAURA RICHARDSON, California TOM FEENEY, Florida
PAUL KANJORSKI, Pennsylvania RANDY NEUGEBAUER, Texas
DARLENE HOOLEY, Oregon BOB INGLIS, South Carolina
STEVEN R. ROTHMAN, New Jersey DAVID G. REICHERT, Washington
JIM MATHESON, Utah MICHAEL T. MCCAUL, Texas
MIKE ROSS, Arkansas MARIO DIAZ-BALART, Florida
BEN CHANDLER, Kentucky PHIL GINGREY, Georgia
RUSS CARNAHAN, Missouri BRIAN P. BILBRAY, California
CHARLIE MELANCON, Louisiana ADRIAN SMITH, Nebraska
BARON P. HILL, Indiana PAUL C. BROUN, Georgia
HARRY E. MITCHELL, Arizona
CHARLES A. WILSON, Ohio
------
Subcommittee on Investigations and Oversight
HON. BRAD MILLER, North Carolina, Chairman
JERRY F. COSTELLO, Illinois F. JAMES SENSENBRENNER JR.,
EDDIE BERNICE JOHNSON, Texas Wisconsin
DARLENE HOOLEY, Oregon DANA ROHRABACHER, California
STEVEN R. ROTHMAN, New Jersey DAVID G. REICHERT, Washington
BRIAN BAIRD, Washington PAUL C. BROUN, Georgia
BART GORDON, Tennessee RALPH M. HALL, Texas
DAN PEARSON Subcommittee Staff Director
EDITH HOLLEMAN Subcommittee Counsel
JAMES PAUL Democratic Professional Staff Member
DOUGLAS S. PASTERNAK Democratic Professional Staff Member
KEN JACOBSON Democratic Professional Staff Member
BART FORSYTH Republican Counsel
TOM HAMMOND Republican Professional Staff Member
STACEY STEEP Research Assistant
C O N T E N T S
American Decline or Renewal?--Globalizing Jobs and Technology
May 22, 2008
Page
Witness List..................................................... 2
Hearing Charter.................................................. 3
Opening Statements
Statement by Representative Brad Miller, Chairman, Subcommittee
on Investigations and Oversight, Committee on Science and
Technology, U.S. House of Representatives...................... 5
Written Statement............................................ 7
Statement by Representative Ralph M. Hall, Ranking Minority
Member, Committee on Science and Technology, U.S. House of
Representatives................................................ 8
Written Statement............................................ 8
Prepared Statement by Representative Jerry F. Costello, Member,
Subcommittee on Investigations and Oversight, Committee on
Science and Technology, U.S. House of Representatives.......... 9
Prepared Statement by Representative Eddie Bernice Johnson,
Member, Subcommittee on Investigations and Oversight, Committee
on Science and Technology, U.S. House of Representatives....... 9
Panel I:
Dr. Ralph E. Gomory, Research Professor, New York University
Stern School of Business; President Emeritus, The Alfred P.
Sloan Foundation
Oral Statement............................................... 10
Written Statement............................................ 13
Biography.................................................... 25
Dr. Margaret M. Blair, Professor of Law, Vanderbilt University
School of Law
Oral Statement............................................... 25
Written Statement............................................ 27
Biography.................................................... 61
Dr. Bruce R. Scott, Paul Whiton Cherington Professor of Business
Administration, Harvard Business School
Oral Statement............................................... 61
Written Statement............................................ 65
Discussion
A New Metric for Corporate Accountability...................... 100
Corporate Incentives That Encourage Long-term Profit........... 101
Executive Compensation......................................... 102
Corporate Governance........................................... 104
Proposed Rule for New York Stock Exchange...................... 105
Free Trade and Equality........................................ 106
Pension Funds.................................................. 107
Hedge Funds.................................................... 108
Panel II:
Mr. James R. Copland III, Chairman, Copland Industries/Copland
Fabrics, Burlington, NC
Oral Statement............................................... 109
Written Statement............................................ 111
Biography.................................................... 160
Mr. M. Brian O'Shaughnessy, Chairman, Revere Copper Products,
Inc.; Member, Board of Directors, Coalition for a Prosperous
America
Oral Statement............................................... 160
Written Statement............................................ 162
Biography.................................................... 169
Mr. Wes Jurey, President and CEO, The Arlington, Texas Chamber of
Commerce
Oral Statement............................................... 170
Written Statement............................................ 173
Biography.................................................... 178
Discussion
Predatory Pricing.............................................. 181
More on Free Trade............................................. 184
A Comprehensive Solution....................................... 185
Job Training and Competitiveness............................... 186
Appendix 1: Answers to Post-Hearing Questions
Dr. Ralph E. Gomory, Research Professor, New York University
Stern School of Business; President Emeritus, The Alfred P.
Sloan Foundation............................................... 192
Dr. Margaret M. Blair, Professor of Law, Vanderbilt University
School of Law.................................................. 194
Dr. Bruce R. Scott, Paul Whiton Cherington Professor of Business
Administration, Harvard Business School........................ 201
Appendix 2: Additional Material for the Record
The Global Competitive Environment, Drivers of Change, and
Potential Implications for Federal Policy, Congressional
Research Service, May 21, 2008................................. 204
C O N T E N T S
American Decline or Renewal? Part 2--The Past and Future of Skilled
Work
June 24, 2008
Page
Witness List..................................................... 218
Hearing Charter.................................................. 219
Opening Statements
Prepared Statement by Representative Bart Gordon, Chairman,
Committee on Science and Technology, U.S. House of
Representatives................................................ 225
Statement by Representative Brad Miller, Chairman, Subcommittee
on Investigations and Oversight, Committee on Science and
Technology, U.S. House of Representatives...................... 221
Written Statement............................................ 222
Statement by Representative F. James Sensenbrenner Jr., Ranking
Minority Member, Subcommittee on Investigations and Oversight,
Committee on Science and Technology, U.S. House of
Representatives................................................ 223
Written Statement............................................ 224
Prepared Statement by Representative Jerry F. Costello, Member,
Subcommittee on Investigations and Oversight, Committee on
Science and Technology, U.S. House of Representatives.......... 225
Prepared Statement by Representative Eddie Bernice Johnson,
Member, Subcommittee on Investigations and Oversight, Committee
on Science and Technology, U.S. House of Representatives....... 225
Witnesses:
Dr. John B. Russo, Coordinator, Labor Studies Program; Co-
Director, Center for Working-Class Studies, Williamson College
of Business Administration, Youngstown State University, Ohio
Oral Statement............................................... 226
Written Statement............................................ 228
Biography.................................................... 230
Mr. Frank H. Morgan, Attorney, White & Case LLP, Washington, D.C.
Oral Statement............................................... 230
Written Statement............................................ 232
Biography.................................................... 304
Mr. Howard F. Rosen, Visiting Fellow, The Peterson Institute for
International Economics; Executive Director, The Trade
Adjustment Assistance Coalition
Oral Statement............................................... 304
Written Statement............................................ 306
Biography.................................................... 366
Ms. Jeanie Moore, Vice President, Continuing Education Programs,
Rowan-Cabarrus Community College, Salisbury, North Carolina
Oral Statement............................................... 366
Written Statement............................................ 369
Biography.................................................... 385
Dr. Thomas I. Palley, Founder, Economics for Democratic and Open
Societies Project, Washington, D.C.
Oral Statement............................................... 385
Written Statement............................................ 388
Biography.................................................... 401
Ms. Diana Furchtgott-Roth, Director, Center for Employment Policy
and Senior Fellow, The Hudson Institute, Washington, D.C.
Oral Statement............................................... 401
Written Statement............................................ 403
Biography.................................................... 405
Discussion
Job Protection................................................. 407
Wages and Inflation............................................ 410
A New Metric for Corporate Accountability...................... 410
The DOD Model of Community Assistance.......................... 413
Trade Adjustment Assistance.................................... 414
The Service Industry and Trade Adjustment Assistance........... 417
Challenges and Lessons for Community Colleges.................. 419
The Emotional Cost of De-industrialization..................... 421
Part-time Training and TAA..................................... 423
Supporting and Developing a Healthy Workforce.................. 424
Health Care Costs.............................................. 426
Appendix: Additional Material for the Record
The Globalization of R&D and Innovation: Scale, Drivers,
Consequences, and Policy Options, Committee Print, Serial No.
110-A, May 2008................................................ 430
AMERICAN DECLINE OR RENEWAL?--GLOBALIZING JOBS AND TECHNOLOGY
----------
THURSDAY, MAY 22, 2008
House of Representatives,
Subcommittee on Investigations and Oversight,
Committee on Science and Technology,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:05 a.m., in
Room 2318 of the Rayburn House Office Building, Hon. Brad
Miller [Chairman of the Subcommittee] presiding.
hearing charter
SUBCOMMITTEE ON INVESTIGATIONS AND OVERSIGHT
COMMITTEE ON SCIENCE AND TECHNOLOGY
U.S. HOUSE OF REPRESENTATIVES
American Decline or Renewal?--Globalizing Jobs and Technology
thursday, may 22, 2008
10:00 a.m.-1:00 p.m.
2318 rayburn house office building
Purpose:
The purpose of this hearing is to assess the effects of the
globalization of jobs and technology on the American economy, and to
develop an understanding of the incentives and disincentives that
influence United States firms' decisions on whether to locate at home
or abroad the production and research facilities that are critical
sources of value creation and high-paying jobs. Firms' thinking both on
whether to retain or to offshore existing U.S.-based capacity and on
where to locate new investment will be explored.
The Committee on Science and Technology annually authorizes the
expenditure of billions of dollars to support scientific research. It
therefore has a direct interest in the extent to which the benefits of
the innovations spawned by this federal funding are captured by the
U.S. national economy and for the taxpayers with whom the funding
originates. The Committee has a specific interest, through its
connection to the National Institute of Standards and Technology, whose
budget it authorizes, in the health of the Nation's manufacturing
industries. Finally, the vigor of the Nation's scientific research
enterprise, like the health of the economy that supports it, is closely
linked to its ability to sustain value creation--in the form of both
technological innovation and high-value added production--within its
borders.
This hearing has been designed to help the Committee in identifying
measures that might increase the likelihood of high-value-added
activity's remaining, increasing, and succeeding within U.S. borders,
and thereby contributing to the future health of the America's economy
and the future prosperity of its citizens.
Witnesses:
Panel One
Dr. Ralph E. Gomory currently serves both as Research Professor at the
NYU Stern School of Business and as President Emeritus of the Alfred P.
Sloan Foundation. A mathematician who was a longtime Director of
Research at IBM, he is author with the economist William J. Baumol of
the book Global Trade and Conflicting National Interests.
Dr. Margaret M. Blair is a Ph.D. economist who serves as Professor of
Law at Vanderbilt University Law School. She is the author of numerous
scholarly articles on corporate governance and of the book Ownership
and Control: Rethinking Corporate Governance for the Twenty-First
Century.
Dr. Bruce R. Scott is the Paul Whiton Cherington Professor of Business
Administration at Harvard Business School. One of the founders of the
competitiveness debate in the 1980s, he has a new book, Capitalism,
Democracy, and Development, due to be published in October.
Panel Two
Mr. James R. Copland III is the Chairman of Copland Industries, Inc.,
and Copland Fabrics, Inc., located in Burlington, NC; he served as the
companies' President, Treasurer, and CEO from 1986 until 2004. He is
also the founder of two banks and currently serves as Director of four
banks.
Mr. Brian O'Shaughnessy has been Chairman since 1988 of Revere Copper
Products, Inc., in Rome, NY, and until recently served as President and
CEO as well. He also serves on the Board of Directors of the Coalition
for a Prosperous America, three copper industry trade associations, and
three manufacturing associations in New York State.
Mr. Wes Jurey is the President and CEO of the Arlington Chamber of
Commerce in Arlington, TX. He founded the Center for Workforce Training
& Preparation in El Paso, TX, and currently serves as Chair of the U.S.
Chamber's Institute for a Competitive Workforce and as a member of the
Texas Workforce Investment Council.
Chairman Miller. Thank you to all of you, and welcome to
this interesting hearing today, American Decline or Renewal?--
Globalizing Jobs and Technology. The jurisdiction for Oversight
is more indulgent than the jurisdiction the Committee has for
legislation. If this committee tried to claim jurisdiction for
legislation coming out of any of the discussions today, we
probably would be in a death struggle with other committees
that would probably win that struggle, but part of our
jurisdiction is to consider American competitiveness generally.
There are several items in our jurisdiction that give us that
broader authority at least to think about how American business
needs to be more competitive, and much of the Committee's work
in the last two years has been on that subject. And certainly
this hearing today gets at that subject as well.
The former Vice Chairman of the Federal Reserve Board, Alan
Blinder, observed, ``What I've learned is anyone who says
anything that obliquely sounds hostile to free trade is treated
as an apostate.'' Actually, that apostasy is very welcome in
parts of my district that has suffered a great deal of job loss
in the last decade, in the last generation.
The faith that Blinder has recently begun to question
himself has guided both our policy and international economic
policy for more than two decades. Its credo is that lowering
trade barriers while curbing regulation produces the greatest
growth. According to its doctrine, this new order would provide
undiluted benefits to an advanced nation like ours. It would
free Americans trapped in traditional jobs for more
sophisticated, remunerative work, while flooding the world with
goods and services made in the United States. I represent a lot
of folks who do not feel that they were trapped in traditional
jobs but really wish they still had those jobs.
But 15 years after the ratification of NAFTA and 13 years
after the birth of the WTO, the ranks of the doubters seem to
be growing.
Could this reflect America's net loss of 3.5 million
manufacturing jobs since 2001? Many workers have been freed
from being trapped in traditional jobs, but have not found
other jobs that are as well-paid, or as easy to support
themselves and a family on as the jobs that they lost.
Could it reflect the fact that the United States'
merchandise trade deficit has risen every year but one over the
last decade and has hovered around three-quarters of a trillion
dollars for three years running? Our trade surplus in services
is tiny by comparison. In 2007, it was only around one-eighth
the goods deficit's size.
Could this reflect the Nation's assumption since 2001 of
$10 trillion in new debt, $6.5 trillion by households, $3.5
trillion by the Federal Government? Is that an indication that
we have not produced anywhere near the level at which we would
like to consume?
Could it reflect anxiety over the rise of colossal
sovereign wealth funds that are using what they take in from us
to buy up our industrial and financial assets?
In this context, the hardships of working Americans are
proving longer lasting and are deeper. Lawrence Summers, the
Treasury Secretary under President Clinton and before that,
Chief Economist of the World Bank, a strong supporter of
globalization in the past, last month wrote of ``a world where
Americans can legitimately doubt whether the success of the
global economy is good for them.'' He also acknowledged that
``growth in the global economy encourages the development of
stateless elites whose allegiance is to global economic success
and their own prosperity rather than the interests of the
Nation where they are headquartered.''
When even folks like Summers, one of the architects of the
current international trading system, are now feeling and
saying out loud concerns like that, it heralds a significant
change in the public debate on the global economy and the
values of the global economy to American workers. No longer can
we in good conscience avoid the question, what are we to do
about it? If we are to find effective answers, we must be open
to new ideas, even ideas that might have seemed apostasy in the
past. We must be prepared to discover that we know less than we
thought about the consequences of globalization or even that
some of our basic views on the subject may rest on mistaken
assumptions.
The panelists in the first panel today point out that much
of our economic theory is built on a society in which the baker
sells his bread to the candlestick maker who sells his candles
to the miller who sells his flour to the baker. And with the
kind of size, the kind of capital, the kind of labor force
required for the economy today, that may not be the best model.
It may not be one that truly describes the economy of the world
that exists now.
We have two panels, each of which will, in its own way--in
different ways--help us consider these apostate ideas.
The first panel will offer their perspectives on the
beliefs that have, for several generations, shaped the design
and governance of our world trading system, as well as our
expectations of proper behavior by corporations. One of the
members of the panel, Dr. Ralph Gomory, last year testified
before the Science and Technology Committee that the interests
of U.S.-based multinational corporations are no longer
necessarily in step with those of a healthy American economy,
certainly an apostate idea. Today the members of this panel
will question things we think we know, about the role and
responsibilities of corporations, about the relationship of the
state and the market, about the ability of technological
innovation to ensure our country's economic prosperity in the
absence of changes in the trading system. And they will suggest
some measures that might strengthen America for the future.
The second panel is testimony from the trenches. Two heads
of domestic companies will talk about their commitment to
producing at home, what they do out of concern for the well-
being of their employees, the viability of the communities in
which their businesses are located, and the sustainability of
the Nation's economy. They will tell us about the cost of
upholding that commitment under the current trading system and
suggest how the Federal Government might help lighten their
burdens now. Joining them is a regional development expert who
will explain what it takes to attract investment as the lure of
off-shoring becomes more prevalent, and will add some ideas of
his own about how to improve American competitiveness.
I will yield back the balance of my time which expired a
long time ago and recognize now the distinguished Ranking
Member, not Mr. Sensenbrenner, but Mr. Hall for his opening
statement.
[The prepared statement of Chairman Miller follows:]
Prepared Statement of Chairman Brad Miller
``What I've learned,'' former Fed Vice Chairman Alan Blinder has
observed, ``is anyone who says anything even obliquely that sounds
hostile to free trade is treated as an apostate.''
The faith that Blinder has recently begun to question has guided
both U.S. and international economic policy for more than two decades.
Its credo is that lowering trade barriers while curbing regulation
produces optimal growth. According to its doctrine, this new order
would provide undiluted benefit to an advanced nation like ours. It
would free Americans trapped in traditional jobs for more
sophisticated, remunerative work, while flooding the world with goods
and services made in the U.S.A.
But 15 years after the ratification of NAFTA, and 13 years after
the birth of the WTO, the ranks of the doubters seem to be growing.
Could this reflect America's net loss of 3.5 million
manufacturing jobs since 2001?
Could it reflect the fact that the U.S. merchandise
trade deficit has risen every year but one over the past
decade, and has hovered around three-quarters of a trillion
dollars for three years running? By the way, our trade surplus
in services is tiny in comparison. In 2007, it was only around
one-eight the goods deficit's size.
Could this reflect the Nation's assumption since 2001
of $10 trillion in new debt, $6.5 trillion by households, $3.5
trillion by the Federal Government--an indication that we have
not produced anywhere near the level at which we wish to
consume?
Could it reflect anxiety over the rise of colossal
Sovereign Wealth Funds that are using what they take in from us
to buy up our industrial and financial assets?
In this context, the hardships of working Americans are proving
enduring and profound. Lawrence Summers--Treasury Secretary under
President Clinton and, before that, Chief Economist of the World Bank--
last month wrote of ``a world where Americans can legitimately doubt
whether the success of the global economy is good for them.'' He also
acknowledged that ``growth in the global economy encourages the
development of stateless elites whose allegiance is to global economic
success and their own prosperity rather than the interests of the
Nation where they are headquartered.''
That even such a figure as Summers, one of the architects of the
current international trading system, is now expressing such concerns
heralds a significant change in public discourse on the global economy.
No longer can we in good conscience escape the question: What do we do
about it? If we are to find effective answers, we must be open to
hearing new ideas. We must be prepared to discover that we know less
than we thought about the consequences of globalization, or even that
some of our basic views on the subject may rest on mistaken
assumptions.
Today we have two panels, each of which will, in its own way, help
us along this path.
The first panel will offer new perspectives on the beliefs that
have, for several decades, underlain the design and governance of the
world trading system, as well as our expectations of proper behavior by
corporations. One of its members, Dr. Ralph Gomory, last year testified
before the Science and Technology Committee that the interests of U.S.-
based multinational corporations are no longer necessarily in step with
those of a healthy American economy. Today the members of this panel
will question things we think we know--about the role and
responsibilities of corporations, about the relationship of the state
and the market, about the ability of technological innovation to ensure
our country's economic prosperity in the absence of changes in the
trading system. And they will suggest some measures that might
strengthen America for the future.
The second panel will bring us into the trenches. Two heads of
domestic firms will talk about their commitment to producing at home,
which they do out of concern for the well-being of their employees, the
viability of their communities, and the sustainability of the Nation's
economy. They will also tell us about the cost of upholding that
commitment under the current trading system, and suggest how the
Federal Government might help lighten their burdens now. Joining them
is a regional development expert who will explain what it takes to
attract investment as the lure of offshoring becomes more prevalent,
and will add some ideas of his own on how to improve American
competitiveness.
With that I yield back my time--which has, in fact, already
expired--and recognize the distinguished Ranking Member for his opening
statement.
Mr. Hall. Thank you, Chairman Miller, and you very
adequately gave an opening statement that covers I think
everything that ought to be covered, and I am not here to take
Mr. Sensenbrenner's place. I'm just here to carry out the
bylaws that there has to be a Minority here before he can hit
that gavel down and we get started hearing your testimony. But
don't be alarmed that for the lack of Members that are here.
And Mr. Sensenbrenner is not here because he fell yesterday,
and the good news is that he was not badly injured. He is all
right, and he will be back with us shortly.
But all the empty seats, most all of us have about three or
four things to do every hour of the day here; and your
testimony under the Chairman's guidance is taken down. It is
even being televised, and everybody in the Congress will read
it and see it. So you are not talking to the empty chairs. You
have the most important people, staffers back here, that tell
us what you said, you know, when we get back to our offices.
But I won't even be here very long, but I have great admiration
for the Chairman, and I know he is going to handle it well. I
yield back my time. I ask unanimous consent to put my opening
statement in the record.
Chairman Miller. Certainly, without objection.
[The prepared statement of Mr. Hall follows:]
Prepared Statement of Representative Ralph M. Hall
Today's hearing will address a topic that this committee has looked
at several times in the past year--globalization. This new global
marketplace has created many opportunities and challenges that
corporations, governments, and workers must now adapt to. Today's
hearing will touch on a number of broad issues both in and out of this
committee's jurisdiction.
While our thinking should not be limited by such artificial
boundaries, we should, however, be cognizant of what we can actually
affect. STEM education and Federal Research and Development are clearly
topics that this committee should address. From the National Academies
Rising Above the Gathering Storm report, to the President's American
Competitiveness Initiative, to this committee's COMPETES Act, this
committee is actively engaged in maintaining America's preeminence in
Science and Technology. It is in these areas that we can continue to
influence how our nation responds to a globalized economy.
I look forward to the witness' comments on other topics such as
currency manipulation, subsidization, corporate governance, price
fixing, regulatory policy, patent reform, and tort reform. These issues
are certainly an important aspect of globalization, but ultimately may
not be the most appropriate topics for the Science Committee to
address. Nevertheless, much like the intertwined global economy, many
of these issues are also interrelated so I look forward to hearing our
guests' perspectives.
Thank you. I yield back the balance of my time.
Chairman Miller. I hope the Members did not really believe
that every Member of Congress is going to read the transcripts
of today's hearings, but I do still think, even if a relatively
small number of people even learn in the most general terms
what was discussed, it will advance the debate and allow us to
consider these questions in ways we haven't before but need to.
And I ask unanimous consent that all additional opening
statements submitted by any Member be included in the record.
And without objection, it is so ordered.
[The prepared statement of Mr. Costello follows:]
Prepared Statement of Representative Jerry F. Costello
Chairman Miller, thank you for your continued attention to one of
the most important issues facing our nation. The changing nature of the
international economy has had profound effects on the American
workforce. How we confront the long-term effects of this phenomenon is
critically important for our future economic health.
It is a familiar refrain over the last 15 years: more jobs,
particularly manufacturing jobs, have left the U.S. and gone overseas,
where workers are paid substantially less. And this activity has not
been limited to blue collar jobs. As China and India produce more and
more engineers and other high-tech workers--that also work for less
than their American counterparts--white collar jobs are lost abroad.
While our economy slows and rising food and gas prices are
squeezing families, the average American worker's wages have stagnated,
and most manufacturing workers that lose their jobs make less in their
next job.
Our country's success has been underpinned to a great degree by the
fact that a person without a college education could find a good-paying
job, enough to raise a family, afford an occasional vacation, and
generally live a higher standard of living than his parents.
For many Americans, that ideal is in jeopardy. Service sector jobs
do not pay as well as manufacturing jobs, and often come without
benefits. While our economy remains the most innovative in the world,
not everyone will be able to acquire the skills to survive the demands
of the 21st Century workforce. My overarching question to our panelists
is, how do we rebuild the U.S. job base?
Mr. Chairman, thank you for holding this hearing. I look forward to
the insights of our witnesses and appreciate their taking the time to
discuss these issues with us today.
[The prepared statement of Ms. Johnson follows:]
Prepared Statement of Representative Eddie Bernice Johnson
Thank you, Mr. Chairman. I want to commend this subcommittee's work
on today's hearing.
The topic is of great interest: an in-depth analysis of the
incentives and disincentives when it comes to global outsourcing of
high technology jobs.
A simple Internet search for global outsourcing in Texas yields
several large corporate business names.
These businesses advertise themselves as being proficient and
helping other businesses outsource their work, globally.
Mr. Chairman, I believe that as information technology continues to
improve, that global outsourcing will be the way business is done. This
trend will become ever more routine.
My concern is regarding which jobs stay in the United States, and
which jobs go to other nations.
Science, technology, and engineering jobs are among the higher
paying, more rewarding ones. The fruits of this work pay untold
dividends to a society.
There will always be a place, here and abroad, for attorneys,
manufacturers, teachers, bankers, and business people. These can be
high-paying and valuable professions.
I believe that STEM jobs--those involving science, technology,
engineering and mathematics--present critical sources of value creation
and prosperity to individuals and to society.
Let us use Silicon Valley, for an example. Had the Internet boom
occurred initially in India, would that nation now surpass us in
computer science innovation?
Some would argue that, in some sectors, it is already doing so.
I am pleased that our witnesses bring expertise from the academic
standpoint as well as the business perspective.
Hopefully, the information will enable the Subcommittee to get a
sense of decision-making that goes into firms' thinking both on whether
to retain or to offshore existing U.S.-based capacity and on where to
locate new investment.
Thank you, and I yield back.
Chairman Miller. It is now my pleasure to introduce our
witnesses today. The first is Dr. Ralph Gomory who currently
serves as a Research Professor at the NYU Stern School of
Business and is President Emeritus of the Alfred P. Sloan
Foundation. Dr. Margaret Blair is a Ph.D. economist who serves
as Professor of Law at Vanderbilt University School of Law. Dr.
Bruce Scott is Paul Whiton Cherington Professor of Business
Administration at the Harvard Business School. You will each
have five minutes for your oral testimony. Your written
testimony will be included in the record for the hearing. When
you complete your testimony, we will begin with questions. Each
Member will have five minutes to question the panel. As this is
an Investigations and Oversight Subcommittee, it is our
practice to take testimony under oath. The likelihood of a
perjury prosecution coming out of this hearing seems remote,
but we do still take testimony under oath.
Do any of you object to being sworn? All right. And you
also are allowed counsel if you prefer. We ask you these
questions to put you at ease.
Ms. Johnson. Mr. Chairman?
Chairman Miller. Yes, Ms. Johnson?
Ms. Johnson. Pardon me for breaking in but I have a markup
starting at 10:30----
Chairman Miller. Yes, ma'am.
Ms. Johnson.--and I notice on the witness list here there
is someone from my area, the President and CEO of Arlington
Chamber of Commerce, and I simply want to welcome him and then
reiterate Mr. Hall's comment about us getting the information
even if we are not here. But I do have a markup.
Chairman Miller. Ms. Johnson, would you like to introduce--
he is on the second panel, but if you would like to introduce
him now that would be fine.
Ms. Johnson. I don't even know him.
Chairman Miller. Well, thank you. I will be pleased to
welcome him for you and for the rest of the panel, and I wish
you well at your markup.
And none of you have counsel? All right. If you would now
all rise and raise your right hand, do you swear to tell the
truth and nothing but the truth? Thank you. The record will
reflect that all answered that they did so swear.
Dr. Gomory, you may begin. You do need to turn on your
microphone.
Mr. Gomory. I am sorry.
Panel I:
STATEMENT OF DR. RALPH E. GOMORY, RESEARCH PROFESSOR, NEW YORK
UNIVERSITY STERN SCHOOL OF BUSINESS; PRESIDENT EMERITUS, THE
ALFRED P. SLOAN FOUNDATION
Dr. Gomory. I am here just representing myself, not the
Sloan Foundation, not New York University. For myself, let me
say how pleased I am to have this opportunity to discuss these
crucial issues, and I thank you, Mr. Chairman, and Members of
the Committee for having organized this hearing.
I will make only one basic point in my testimony, and that
is that in this era of globalization, the interest of global
corporations and their countries have diverged; and if most
Americans are to benefit from globalization, we must change
this situation and there are ways to do that.
After all, what is it that countries want of their
corporations? I say two things. One, countries have looked to
their corporations to be productive at making what they make,
and second, to enable the people of the country to earn a
living by being a part of these productive organizations.
Now, if we look at the behavior of corporations, it is
clear that profit is something that really matters to
corporations. Globalization has now made it possible for global
corporations to pursue their profits by building capabilities
abroad and instead of investing along side U.S. workers and
using that investment in R&D and all the rest to increase their
productivity, corporations today can produce goods and services
abroad using low-cost labor and import those goods and services
into the United States.
But increasing their profits this way, they are not
fulfilling the social purpose of allowing Americans to
participate in the production of goods. Economists correctly
point out that this often results in the availability of
cheaper goods and that itself is a social good, and that is
certainly true; but it is also true that as we lose our
capabilities in many areas, we have less to trade for those
goods so that eventually, the cheaper goods become expensive in
real terms and you come out behind, not ahead.
The idea that the industrial development of your trading
partner can actually become harmful to your total GDP has
appeared in the economic literature from time to time. With a
detailed understanding that Professor Baumol and I have added
to that viewpoint in our book, there is a good reason to think
that the rapid industrialization of some Asian countries is
harmful to the United States overall, not just in some areas.
Now, let me say that U.S. corporations were not always
purely profit oriented. When Reginald Jones became the CEO of
General Electric in 1972, he announced that his
responsibilities would be equally split among the company and
its shareholders, its employees, the American industry, and the
Nation; and that sense of broad responsibility was at that
time--and I remember it myself--pervasive in American industry.
But in the years since then, that view of corporate
leadership has been largely replaced by the idea that the
business of business is solely to make profit for shareholders
and that in the pursuit of profits or shareholder value, all
other values should be sacrificed. And what has been the result
of that?
During the three decades after 1973, GDP increased steadily
as new technologies were introduced that increased
productivity; but during this period, the gains from this
increase were distributed in a very skewed fashion. Over those
30 years, most Americans have seen little or no growth in real
wages. The gains from this impressive productivity growth have
been going to the wealthy and, even among them, to the very
wealthy primarily.
While many explanations have been brought forward for this
remarkable divergence of the richer and poorer in our country,
one very simple one has received little attention. But let us
note that the shares of corporations are held overwhelmingly by
those who are already wealthy. Ninety percent of shares are
held by the top 20 percent or by those like top executives who
will become wealthy if share values go up. And if corporations
focus on share value to the exclusion of anything else, this is
an automatic mechanism for increasing inequality and the skewed
distribution.
But with the onset of globalization, the capital, know-how,
and technology that once made American workers the most
productive in the world are being transferred overseas to other
workers who will do the same job for a fraction of the wage.
This makes for excellent corporate profits, but it leaves
American workers out and it will leave most Americans as
losers, not winners from globalization.
Can anything be done about this? The answer is yes, but we
will have to do some new things. While the United States has no
national stated strategy aimed at the goal of greater GDP,
there is no lack of individual suggestions about ways to
improve the U.S. economic situation. This often translates into
asking for improved K through 12 education, et cetera, et
cetera, et cetera; and I discuss all these in my written
testimony. However, the main thrust of this testimony today is
on the issue of better aligning corporate and national goals.
We need to consider a U.S. economic strategy that provides
incentives to companies to have high value-added jobs in the
United States. If we want high value-added jobs, let us reward
companies for having such jobs. Let us consider a corporate
income tax that does that, and we don't care how they do it,
whether it is through R&D, advanced technology, or by just
plain American ingenuity exercised at every level. Such a tax
could be revenue neutral, low on producers and high on the non-
producers. Such a tax would encourage corporations to return to
what a country wants of them, high output and jobs in this
country.
Many people would oppose this or any similar move, saying
that our national economic strategy is and should be to leave
markets alone and take whatever free markets produce. But when
you think for one second, you realize there is no one free
market. All markets are affected by all our regulations and our
tax structures. And so the question simply remains, which free
market are you describing and which free market do you want?
However, we cannot do these things that I have described or
anything effective if we do not balance trade. If we do not
balance trade, we cannot be in control of our own destiny. We
will continue to be the victims of merchantless practices and
there is nothing to prevent U.S. corporations from leaving the
country and working from abroad if they prefer that to what it
means to be a U.S. corporation.
But trade can be balanced. There are many approaches to
this, but in this limited time, I would only mention one, a
remarkable approach described by Warren Buffet and based on
what he calls import certificates.
If most Americans are to benefit rather than lose--let me
summarize--if most Americans are to benefit rather than lose
from globalization, we need to re-align the goals of
corporations with those of the Nation, and we must balance
trade to control our own destiny and there are ways to do both
these things. Let us start now.
[The prepared statement of Dr. Gomory follows:]
Prepared Statement of Ralph E. Gomory
Mr. Chairman and Members of the Committee:
Thank you for the opportunity to take part in this hearing. The
subjects that we are to discuss today are the ones to which I have
devoted much of my working life. For almost 20 years I was the head of
the research effort of a major international corporation, (IBM). For
the last 18 years I was the head of a major foundation (Alfred P.
Sloan) deeply interested in science and technology. Today I am a
Research Professor at New York University's Stern School of Business.
In addition, for almost my entire adult life, I have been active as
an individual researcher--first in mathematics and more recently in
economics. I am pleased and honored to be here today and to have this
opportunity to testify.
Some of you may remember that I testified to the full Science and
Technology Committee on June 12 of last year on the subject of the
globalization of R&D. At that time I stated:
The effect on the United States of the internationalization of
the scientific and technical enterprise can only be understood
as one part of the revolutionary process of globalization,
which is fundamentally revising the relation of companies to
the countries from which they have originated. In this new era
of globalization the interests of companies and countries have
diverged. What is good for America's global corporations is no
longer necessarily good for the American economy.
My testimony today will bear on this same question, viewed in the
broader context of the evolving relation of countries and companies. I
will address the impact of these events on the overall ability of this
country to produce a large GDP (value of the total national product),
as well as on the rapidly growing problem of extreme inequality in the
distribution of that national product. Nonetheless, my conclusion will
be exactly the same:
What is good for America's global corporations is no longer necessarily
good for the American economy.
To see why this is so, let us review the fundamental social role
that the corporation fulfills in this country and in other developed
countries.
The Basic Social Function of the Corporation
For a very long time most of the work of the world was done on
farms or in small shops. An individual could learn the printing trade
or shoe making and graduate to his own shop; a family could run a farm.
In both cases an individual or very small groups of people could grow
crops or make shoes that could be sold to others and thus have the
money to supply what was not made at home.
But today the goods we consume cannot be made at home; they are
complex and require large organizations to create them. You cannot
manufacture a car in your garage; it takes a large-scale organization
to do it. The food you eat is not produced by a family on a nearby
farm, but is made by large organizations on highly mechanized farms
with machinery produced by other large organizations. The food itself
then travels on highly organized transportation networks to get to huge
outlets, where nearby you can pick up a refrigerator made by another
large organization or a television set that no individual or small
group could ever build.
The same is true of services: there is no way to build your own
telephone service. And even medicine, one of the last strongholds of
the individual practitioner, is rapidly agglomerating into large-scale
enterprises.
A person must now be part of an organization that makes or
distributes the complex goods and services that people buy today. Being
part of an organization is what people must do to earn a living and
support themselves and their families. The fundamental social role of
corporations and other businesses is to enable people to participate in
the production of the goods and services that are consumed in the
modern world; the corporation enables them to earn a share of the value
produced for themselves and their families.
My testimony bears on the question of how well America's global
corporations are fulfilling that fundamental purpose today. The whole
thrust of my testimony is that in the last few decades the shift in
corporate motivation toward emphasizing profits above everything else
has had a deleterious effect on the way they are fulfilling that role.
That deleterious effect is now being enormously accelerated through
globalization.
The Role of Profits and Competition
Business organizations today do not proclaim the social mission
that I have just described; rather, they make clear that they are there
to make profits for their shareholders.
I understand very well that profit is a creative force. Companies
come into existence to create profits, and to do that they create GDP,
the goods and services that constitute a nation's economic output. And
in constantly striving for more profits, companies tend to become ever
more efficient and create ever more GDP. As Adam Smith pointed out,
``It is not from the benevolence of the butcher, the brewer or the
baker that we expect our dinner, but from their regard to their own
interest.''
Today's butcher and baker are corporations, and their interest is
profits.
But while it is true that profit can be a creative force it is also
true that emphasizing profit above everything else can be bad for the
Nation. Profit under the right circumstances can be an energizing force
that creates GDP. But we should remember that from a national point of
view, profit is a means to the end of creating GDP, not an end in
itself.
The Divergence of the Profit Motive and the Fundamental Role
Globalization has now made it possible for global corporations to
pursue their profits by building capabilities abroad. Instead of
investing alongside U.S. workers and using their investment and R&D to
increase their productivity, corporations today can produce goods and
services abroad using low-cost labor and import those goods and
services into the United States. But in creating their profits this
way, they are building up the GDP of other countries while breaking
their once tight links with America's own GDP.
Economists will sometimes argue that this development of
capabilities abroad is good for the U.S. economy as a whole. For one
thing, we get cheaper goods. That is certainly true, but it is also
true that if we lose our superior capabilities in many areas and are
less competitive, we have less to trade for those goods, so that
eventually the cheaper goods become expensive in real terms. I do not
intend to repeat today the arguments that I have already outlined to
the Full Committee in my earlier testimony and that are spelled out in
the book on global trade and its consequences that I co-authored with
Professor Will Baumol.
I would like to point out, however, that the view that the
industrial development in your trading partner can be harmful to your
total GDP is not new. There is a long history of well known economists
making that observation, most recently Paul Samuelson.\1\ What
Professor Baumol and I have added to that long history in our book
``Global Trade and Conflicting National Interests'' is the realization
that the benefits of your trading partner's economic development occur
in the early stages of its development, and as your partner becomes
more fully industrialized and is no longer confined to low value-added
industries, further development is harmful to your GDP.
---------------------------------------------------------------------------
\1\ See References 1-6.
---------------------------------------------------------------------------
This result, which we derive rigorously from the most standard
economic models, corresponds to the intuitive notion that we do well
when we lose low-wage jobs and not well when we start losing high-wage
or high-tech jobs .And that is what we are seeing today. And as I said
in my previous testimony, in agreeing with my co-panelist Professor
Alan Blinder, there are many reasons to believe that the impact on the
United States will be severe.
In addition to the impact on GDP, the Effect of Globalization on
Inequality
Globalization was not the beginning of the divorce between
corporate profits and the economic welfare of the American people. It
is rather a very large next step down a long road already traveled. To
see how far we have come, let us look back 35 years.
Reginald Jones became CEO of General Electric in 1972, and shortly
thereafter made two remarkable speeches to the Business Roundtable and
the National Press Club.\2\
---------------------------------------------------------------------------
\2\ This is summarized from Reference 7.
---------------------------------------------------------------------------
Mr. Jones said that with his appointment as CEO, he would
henceforth view his responsibilities as being equally split among the
company and its shareholders, employees, American industry, and the
Nation. This sense of broad responsibility became pervasive in American
industry. In fact, urged on by Jones, the Business Roundtable--the
organization of major company CEOs intended to look after the interests
of business in the public policy arena--formally endorsed in 1981 the
policy that shareholder returns had to be balanced against other
considerations.
In the intervening years that view of corporate leadership has
waned, largely replaced by the idea that the business of business is
solely to make profits for shareholders, and that in the pursuit of
profits, or shareholder value, all other values can be sacrificed.
In the decades from 1973 to now, GDP increased steadily as new
technologies were introduced that increased productivity. If the gains
in productivity had been reflected evenly in incomes, a typical worker
would get 35 percent more today than in 1973. In fact, the typical
worker saw a far smaller gain. Median household income grew about 16
percent since 1973, much of that gain being due to the fact that many
households became two-earner households. So, instead of looking at
households, if we look instead at individual workers--for example, men
in the 35-40 age bracket--their inflation-adjusted wages have in fact
decreased in real terms since 1973.
In fact the gains from productivity growth have been going to the
rich--and even among the rich, primarily to the very rich--while most
Americans have seen little or no growth in real wages.\3\ While details
can be disputed, as is the case with much economic data, the general
trend toward a sharply increasing degree of inequality in incomes and
wealth cannot be disputed; and we are seeing today a concentration of
wealth at the very top, unmatched since the days of the so-called
``robber barons'' at the close of the 19th century.
---------------------------------------------------------------------------
\3\ This is discussed in much greater detail in Reference 8 Chapter
1, especially pages 22 and 23 and in Reference 9 Chapter 7. See also
Reference 7.
---------------------------------------------------------------------------
And just to remove any ambiguity about what is going on, in 2004
the Business Roundtable revised its earlier position on CEO
responsibility and publicly asserted that the obligation of business is
only to maximize shareholder wealth.\4\
---------------------------------------------------------------------------
\4\ From Reference 7.
---------------------------------------------------------------------------
While many explanations have been brought forward for this
divergence of the richer and the poorer in our country, one very simple
one has received remarkably little discussion. Companies today are
aimed primarily at maximizing shareholder gains, and their shares are
held overwhelmingly by those who are already wealthy\5\ or by those,
like top executives, who will become wealthy if share values go up.
Corporations today are motivated to cut wages and benefits whenever
they can to increase profits and shareholder value. The money saved
from wages and benefits comes out of the middle and lower income
groups; the gain in profits goes to the wealthy.
---------------------------------------------------------------------------
\5\ Reference 8, page 23.states that almost that 90 percent of
shares are held by the top 20 percent of stock owners and has further
data.
---------------------------------------------------------------------------
As we remarked above, important American corporations have found
that the easiest way to maximize shareholder wealth today is to take
their technology, know-how and capital overseas to wherever labor is
cheapest and subsidies are the greatest. The capital, know how and
technology that once made American workers the most productive in the
world are being transferred overseas to other workers who will do the
same job for a fraction of the wage. This makes for good corporate
profits, but it leaves American workers far behind. Corporate goals, as
they are now being stated, have been diverging for a long time from
what is good for the country. Now, however, that decades-long history
of workers and more generally the middle class losing share in the
productivity gains is being accelerated by globalization. In
globalization, jobs leave the country altogether and only the corporate
profits remain.
We need to realize that the interests of the American global
corporation, whose interest is profit, and the interests of most
Americans, who want a higher standard of living, have been diverging.
Globalization is causing that divergence to occur faster and further
than ever before.
Can Anything Be Done?
This testimony does not pretend to take on in any systematic way
the task of answering the question, ``What is to be done?'' I will be
content if I can contribute to the clarification of some of the issues.
While the United States has no stated national strategy aimed at
the goal of greater GDP, there is no lack of individual suggestions
about ways to improve the U.S. economic situation vis-a-vis the more
rapidly developing nations. This often translates into asking for
improved K-12 education, especially in science and technology. While
improved education can only do good, education improvement is hard to
come by and it is hard to imagine an improvement in education so
profound that it turns out Americans who are so productive that they
are worth hiring in place of the four or five Asians who can be hired
for the same wage.
Another emphasis is the quest for innovation, usually innovation
that is closely linked to R&D. More R&D can only help. But the role of
science and technology in globalization needs to be understood. R&D
does not contribute to a nation's wealth directly by employing large
numbers of people in high value-added or high-wage jobs. It contributes
by supporting a small number of people whose work is intended to give a
competitive edge to the end product, whether that is goods or services.
It is these end products, whether they are cars or computers or medical
services that make up the bulk of a corporation's revenues and support
the wages of its employees.
If in the process of globalization the production (or delivery in
the case of services) of the good moves overseas, so do the wages. Even
if R&D remains behind, the vast bulk of value creation has moved to
another country, and it is there that it supports the wages of
employees.
It is also hard to envision a significant industrial advantage vis-
a-vis other countries derived from more university research, when a
large fraction of graduate students in science are from Asian countries
and who return home after obtaining their advanced degrees. Understand,
too, that the great global companies Intel and Microsoft have research
centers in leading universities and are well positioned to spread the
latest research to their labs and development sites in other countries
around the world.
Proposals of this sort about education and R&D can be helpful. But
they can also be harmful if they create the mistaken belief that these
measures alone can deal with the problem.
Another class of suggestions points to the U.S. infrastructure,
correctly observing the crumbling bridges, crowded airports, and the
inadequate broadband, which restricts the bit traffic of the future.
Again, addressing these domestic needs is worth doing as it does add to
U.S. productivity across the board.
The main thrust of this testimony, however, points to the
divergence of company goals, focused almost exclusively on profit, and
the broader goals of greater GDP and less inequality in the United
States. Therefore, we need to turn our attention not only to the
familiar suggestions I have just listed, but also to the issue of
better aligning corporate and national goals.
Aligning Country and Company
Some Asian countries, for example Singapore and China, have
national strategies aimed at the rapid increase of their GDP. As past
of that strategy they align corporate goals with their national goals.
They have made it profitable for foreign (often U.S.) corporations to
create high value-added jobs in their countries. They do this by
offering tax and other incentives that make it profitable for
corporations to locate high value-added jobs in their countries.
We need to consider a U.S. national economic strategy that includes
incentives for companies to have high value-added jobs in the United
States. If we want high value-added jobs, let us reward our companies
for producing such jobs--whether they do that through R&D and advanced
technology, or by just plain American ingenuity applied in any setting
whatsoever.
The Asian countries have done this usually by individual deals with
individual companies. We have neither the tradition nor the knowledge
nor the inclination in the U.S. Government to do that. An approach that
is better suited to what the United States can do, would be to use the
corporate income tax. We have already used the corporate income tax to
spur R&D, so why not apply it to directly reward what we are aiming
at--high value-added jobs.
For example, the corporate tax rate could be scaled by the value
added per full-time employee, by the workers of corporations operating
in the United States. A company with high value-add per U.S. employee
would get a low rate, a company with low value-add per U.S. employee
would get a high rate. This tax could be made revenue neutral by having
a high tax rate for unproductive companies and a low (or even negative)
tax rate for productive companies. Depending on the rates, it could be
as strong or as weak an incentive as desired. This is quite doable, as
value-add is measurable. It is measured today in Europe as the basis
for the value-added tax.
Critics may say that our national economic strategy is, in fact, to
leave markets alone and take whatever free markets produce. They may
also suggest that this is the best possible economic strategy. But
``free market'' is not a single, simple concept. Do we mean free
markets with or without anti-trust laws, with or without child-labor
laws or with or without the ability for labor to organize? Do we mean
free markets that do or don't have access to government sponsored
research, etc., etc.? The presence or absence or degree of these
restrictions or abilities will produce very different results, all
coming from ``free markets''; as will different tax policies or special
loans for special industries, and so on and so on.
On the subject of government incentives, a present day General
Electric CEO Jeffrey Immelt recently stated:\6\
---------------------------------------------------------------------------
\6\ See Interview in Reference 10.
If the U.S. Government ``wants to fix the trade deficit, it's
got to be pushed,'' he said. ``GE wants to be an exporter. We
want to be a good citizen. Do we want to make a lot of money?
Sure we do. But I think at the end of the day we've got to have
a tax system or a set of incentives that promote what the
---------------------------------------------------------------------------
government wants to do.''
On Inequality
In this part of my testimony I have discussed mainly total GDP. But
we have seen that who benefits from GDP is important too and that
globalization affects the distribution GDP of wealth as well as the
total GDP.
So far I have discussed mainly increasing GDP. But there is also
the question of extreme inequality, the concentration of wealth and
power, and the influence over government that goes with it.
To reduce the natural forces working toward extreme inequality we
should obviously consider what can be done through taxes, individual or
corporate, but also consider charters for corporations that require
consideration of other factors than profit maximization. Today in the
United States, a Delaware-chartered corporation gives nothing in return
for its charter. It is interesting that Theodore Roosevelt saw the role
of corporations quite differently from the current Delaware
perspective. Roosevelt's agenda was to control and regulate
corporations in the public interest. ``Great corporations exist only
because they are created and safeguarded by our institutions,'' he
stated in his 1901 State of the Union Message. ``And it is therefore
our right and our duty to see that they work in harmony with these
institutions.''
We have an interesting mild precedent for broadening the goals of
corporations in the British Corporations Law of 2006. This law is
explicit in allowing directors to consider employees, the community and
many other factors in their decisions. Many U.S. states have in recent
years passed similar statutes, but they have had little impact so far
on the actions of corporations.
Controlling Our Own Destiny
To obtain the benefits of trade in the narrow sense we need free
trade. This means, in particular, that we need to address the major
distortions in the market caused by the systematic mispricing of Asian
currencies and other mercantilist practices. If we do not have a free
market in currencies we cannot claim that the benefits of free trade
are being achieved.
If the imbalance of trade continues there is nothing to stop the
current trend of selling off pieces of the United States to Sovereign
Wealth Funds to balance the import of underpriced foreign goods. There
would also be nothing to prevent U.S. companies from leaving the
country, and, working from abroad, continuing to send in goods and
services thus exacerbating the imbalance and weakening the productive
capabilities of the country. On the other hand, if trade is balanced,
the value of goods imported is matched to the value of goods exported
from the country; and those goods and services are provided by
corporations that comply with the U.S. standard of what a corporation
should be. Balanced trade therefore is necessary if we are to control
our own economic destiny.
Again, there is a litany of approaches to balancing trade ranging
from jawboning to tariffs. One simple approach advanced and advocated
by Warren Buffet, however, could really make a difference. It is well
described in his 2003 article in Fortune.\7\ This approach, in contrast
to import quotas or tariffs aimed at imports from particular countries,
creates a free market in import certificates. It would balance trade
and would give us control over own economic destiny. Since the import
certificate approach is a major departure from the past it should be
introduced gradually. But we should take this approach seriously. In
fact, a bill based on the Buffet approach has been introduced into the
Senate by Senator Dorgan and Senator Feinstein.
---------------------------------------------------------------------------
\7\ Reference 11.
Conclusion
We live in a world of rapid technological change. That change has
made possible a degree of globalism in economic development that was
previously not possible. In so doing it has strongly accelerated the
emerging gap between the goals of global corporations and the
aspirations of the people of individual countries. This is true not
only in the United States but also in less developed countries. Even
when globalization increases a country's wealth, which it does not
always do, most of the gains are going to a thin upper crust, and the
bulk of the people do not participate.
We need to change this and better align the goals of corporations
and the aspirations of the people of our country. This is not an idle
dream, the growth we had in America in the decades after WWII and
before 1970 was both rapid and well distributed. Americans of almost
every stripe benefited.
To do this today we must realign the interests of global
corporations with those of the country. We have given a few examples of
changes that could push in that direction. However, much more thought
is needed in that direction. If we look we will find more and better
ways to do this.
In addition, in a globalizing world where nations pursue their own
interests with mercantilist policies, we must balance trade if we are
to control our own destiny. Fortunately, there is at least one way to
do that, the Buffet proposal.
There are many things we can work on to make the United States a
stronger nation. Let us clear our vision and start now.
References
1. Hicks, J.R. 1953. An Inaugural Lecture. Oxford Economic Papers 5:
117-35.
2. Dornbush, Rudiger W., Stanley Fisher, and Paul A. Samuelson 1977
Comparative advantage, trade and payments in a Ricardo model with a
continuum of goods, American Economic Review 67, pp. 823-829.
3. Krugman, Paul R. 1985. A ``Technology Gap'' Model of International
Trade in K. Jungenfelt and D. Hague eds. ``Structural Adjustment in
Developed Open Economies,'' New York, St. Martin's Press, pp. 39-45.
4. George E. Johnson, Frank P. Stafford ``International Competition
and Real Wages, American Economic Review, Vol. 83, No. 2, Papers and
Proceedings of the Hundred and Fifth Annual Meeting of the American
Economic Association (May, 1993), pp. 127-130.
5. Samuelson, Paul A, 2004, Where Ricardo and Mill Rebut and Confirm
Arguments of Mainstream Economists Supporting Globalization, Journal of
Economic Perspectives Volume 18, Number 3, pp. 135-146.
6. Ralph E. Gomory and William J. Baumol, 2001, Global Trade and
Conflicting National Interests, MIT Press.
7. Barron's On Line Monday, August 13, 2007 ``A Plea for Corporate
Conscience'' by Leo Hindery Jr.
8. Robert Kuttner, 2007, ``The Squandering of America,'' Alfred A.
Knopf Publisher.
9. Paul Krugman, 2007, ``The Conscience of a Liberal,'' W.W. Norton &
Co. Publisher.
10. Jeffrey Immelt, Interview in Manufacturing and Technology News,
November 30, 2007, Volume 14, No. 21.
11. Warren Buffet, Fortune Magazine, October 2003, ``America's Growing
Trade Deficit Is Selling the Nation Out From Under Us. Here's a Way to
Fix the Problem-And We Need to Do It Now.''
Biography for Ralph E. Gomory
Ralph E. Gomory is a Research Professor at the Stern School of
Business of New York University (NYU) and is President Emeritus of the
Alfred P. Sloan Foundation.
Dr. Gomory received his B.A. from Williams College in 1950, studied
at Cambridge University and received his Ph.D. in mathematics from
Princeton University in 1954. He served in the U.S. Navy from 1954 to
1957.
Dr. Gomory was Higgins Lecturer and Assistant Professor at
Princeton University, 1957-59. During this period he invented the first
integer programming algorithm. He joined the Research Division of IBM
in 1959, was named IBM Fellow in 1964, and became Director of the
Mathematical Sciences Department in 1965. In 1970 he became IBM
Director of Research with line responsibility for IBM's Research
Division. Under his leadership the Research division made major
contributions to the computer industry, such as the invention of the
Relational data base, and also won two Nobel Prizes. Dr. Gomory became
an IBM Vice President in 1973 and Senior Vice President in 1985. In
1986 he became IBM Senior Vice President for Science and Technology. In
1989 he retired from IBM and became President of the Alfred P. Sloan
Foundation. Under his leadership the foundation pioneered in on-line
education and supported major scientific efforts such as the Sloan Sky
Survey and the Census of Marine life. In December 2007 he became
President Emeritus.
Dr. Gomory has served in many capacities in academic, industrial
and governmental organizations. He is a member of the National Academy
of Science, the National Academy of Engineering, and the American
Philosophical Society. He was elected to the Councils of all three
societies. He was a Trustee of Hampshire College from 1977-1986 and of
Princeton University from 1985-1989. He served on the President's
Council of Advisors on Science and Technology (PCAST) from 1984 to
1992, and again from 2001 to the present. He served for a number of
terms on the National Academies' Committee on Science, Engineering and
Public Policy (COSEPUP) and is presently a member of the National
Academies Board on Science Technology and Economic Policy (STEP).
He has been awarded eight honorary degrees and many prizes
including the Lanchester Prize in 1963, the John von Neumann Theory
Prize in 1984, the IEEE Engineering Leadership Recognition Award in
1988, the National Medal of Science awarded by the President in 1988,
the Arthur M. Bueche Award of the National Academy of Engineering in
1993, the Heinz Award for Technology, the Economy and Employment in
1998, the Madison Medal Award of Princeton University in 1999, the
Sheffield Fellowship Award of the Yale University Faculty of
Engineering in 2000, the International Federation of Operational
Research Societies' Hall of Fame in 2005, and the Harold Larnder Prize
of the Canadian Operational Research Society in 2006.
Dr. Gomory has been a director of a number of companies including
the Washington Post Company and the Bank of New York (now Bank of New
York-Mellon). He is currently a director of Lexmark International,
Inc., and of two small start-up companies. He was named one of
America's ten best directors by Director's Alert magazine in 2000.
In recent years, while continuing his mathematical research, he has
written on the nature of technology and product development, industrial
competitiveness, technological change, and on economic models of
international trade. He is the author of a 2001 MIT Press book (with
Professor William J. Baumol) on conflicts in international trade.
Chairman Miller. Dr. Blair.
STATMENT OF DR. MARGARET M. BLAIR, PROFESSOR OF LAW, VANDERBILT
UNIVERSITY SCHOOL OF LAW
Dr. Blair. Thank you. I knew to turn his on, I just didn't
know to turn mine on. Thank you, Mr. Chairman, for the
opportunity to speak to your Committee today. I am Dr. Margaret
Mendenhall Blair. I am an economist, and I am also a Professor
of Law at Vanderbilt University Law School; and I specialize in
corporate law, corporate finance, and corporate governance.
What I want to speak to you today about is a question that
has to do with the fiduciary obligations that corporate
directors have, by law, in this country. In particular, I want
to address a claim that is often made in the press, and by
members of what a Delaware Court judge has recently called the
``corporate governance industry.'' This is the claim that
corporate directors have a legal duty to maximize share value
or maximize profits, if you want to think of it in those terms.
What I hope you will take from my testimony today is that
this claim is, at best, a misleading overstatement; and at
worst, this claim is false, but is often asserted as a weapon
to try to persuade corporate managers and directors that they
should take actions that benefit a particular group of
shareholders of a given corporation, regardless of whether
those actions may impose high costs on creditors, employees,
the communities where the corporations operate, or other
stakeholders, or sometimes even on the long-run ability of the
corporation itself to compete effectively for market share, or
to develop the next technology.
Let me begin with an indisputable legal fact: There is no
statutory requirement in the U.S. that corporations must
maximize profits or that directors are responsible for
maximizing share value. The Model Business Corporation Act,
Section 3.01 says simply, ``Every corporation has the purpose
of engaging in any lawful business unless a more limited
purpose is set forth in the articles of incorporation.'' That
is it. That is all it says about what the goal of corporations
is.
Delaware Corporate Law just says that a corporation ``may
be . . . organized under this chapter to conduct or promote any
lawful business or purposes.'' State statutes assign all powers
to act for a corporation to its board of directors, but do not
in any way prescribe how directors are to carry out this task.
Courts recognize that directors and managers must have very
broad discretion to balance competing interests in a business
enterprise because business decisions are often very complex.
Courts further recognize that they should not be making
business decisions for directors, or interfering in the actions
that directors take in good faith. This legal doctrine is
called the ``business judgment rule.'' What this means is that
directors are very rarely found in breach of their duties
unless they engage in blatantly self-dealing behavior.
Now, I by no means intend to suggest today that in today's
world corporate directors and managers are not under
significant pressure to find ways to increase share value,
sometimes even at the expense of the long-run performance of
the company. But let me be clear that this pressure comes from
the media, from shareholder advocates, from financial
institutions in whose direct interest it is for the company to
get its share price to go up, and from self-imposed pressure
created by compensation packages that provide enormous
potential rewards for directors and managers if stock price
goes up. And by the way, those compensation packages also
impose very little downside cost on the managers or directors
if, in their attempt to goose the company to get share price to
go up, it should not work out and the stock price declines.
This means that managers and directors often have huge
incentives to cause their companies to take very big risks in
their effort to achieve higher share prices.
These pressures might be alleviated with certain policy
actions that this body and/or other regulatory bodies could, in
theory, take. In Britain, for example, the British Companies
Act of 2006 explicitly codified what most lawmakers believed
had already been the rule under case law in Britain, and it
provides that directors have duties to multiple stakeholders. A
change in the tax rules, for another example, might reduce the
current tax preference given to compensation packages that are
based on stock options and that makes those stock options so
much more attractive than other forms of compensation.
In sum, decisions by managers and directors of U.S.
corporations to choose investment strategies that may be
profitable in the short run, but that sell our country short by
moving value-creating activities offshore, are decisions that
those managers and directors must take personal responsibility
for. These decisions are not in any way mandated by law.
[The prepared statement of Dr. Blair follows:]
Prepared Statement of Margaret M. Blair
Thank you for the chance to speak to your Committee today.
I am Dr. Margaret Mendenhall Blair. I am an economist, and a
Professor of Law at Vanderbilt University Law School where I specialize
in corporate law, corporate finance, and corporate governance.
I want to speak to you today on a question about the fiduciary
obligations that corporate directors have, by law, in this country. In
particular, I want to address a claim often made in the financial
press, and by members of what a Delaware Court judge has recently
called the ``corporate governance industry.'' \1\ This is the claim
that corporate directors have a legal duty to ``maximize share value.''
\2\
---------------------------------------------------------------------------
\1\ Leo E. Strine, Jr., Toward Common Sense and Common Ground?
Reflections on the Shared Interests of Managers and Labor in a More
Rational System of Corporate Governance, 33 JOURNAL OF CORPORATION LAW
1, 1 (2007) at 5, (describing the ``Corporate Governance Industry'' as
``the strange admixture of public pension fund administrators, proxy
advisory and corporate governance ratings organizations, corporate law
scholars, and business journalists, who profit in monetary and psychic
ways from corporate governance tumult.'' Strine is Vice-Chancellor of
the Delaware Chancery Court. He further adds that ``to say these folks
profit from tumult is not a normative argument; it is a positive
claim.'' Id.
\2\ In a recent article in FOREIGN AFFAIRS, for example, Robert
Reich asserted that we cannot rely on corporations themselves to change
the rules of the game that are driving them to lay off employees, cut
wages, and move production overseas. ``Corporate executives are not
authorized by anyone--least of all by their investors--to balance
profits against the public good,'' he claimed. Robert B. Reich, How
Capitalism is Killing Democracy, FOREIGN POLICY, September/October,
2007. Typical of the share-value maximization rhetoric in the financial
press is this quote from a financial analyst discussing Yahoo's recent
decision to turn down an acquisition offer from Microsoft: `` `While
Yahoo!'s board has a fiduciary duty to maximize shareholder returns,
running the risk of derailing a deal is dangerous to Yahoo!
shareholders,' said Jefferies analyst Youssef Squali.'' Zachery Kouwe
and Peter Lauria, Board Bucks Yang, NEW YORK POST, Feb. 15, 2008,
available at http://www.nypost.com/seven/02152008/business/
board-bucks-yang-97797.htm. Similar
claims are repeatedly made in conversations about Yahoo's recent
rejection of Microsoft's bid on blogs that follow those companies. See,
e.g., Isn't Yahoo! Management Supposed To Work For Its Shareholders?
posting by Timothy Lee to TechDirt Blog http://www.techdirt.com/
articles/20080304/192104440.shtml (Mar. 5, 2008 10:24 a.m.). (``If I
were a Yahoo! shareholder, I'd be pretty unhappy that things are being
framed that way. Yahoo! management has a fiduciary responsibility to
me, the shareholder, to maximize the value of my investment.'')
---------------------------------------------------------------------------
What I hope you will take from my testimony today is that this
claim is, at best, a misleading overstatement. At worst, this claim is
simply false, but is often asserted as a weapon to try to persuade
corporate managers and directors that they should take actions that
benefit particular shareholders of a given corporation, regardless of
whether those actions may impose high costs on creditors, employees,
the communities where corporations have their operations, or other
stakeholders, or sometimes even on the long run ability of the
corporation itself to compete effectively for market share, or to
develop the next technology.
Let me begin with an indisputable legal fact: There is no statutory
requirement in the U.S. that corporations must maximize profits, or
that directors are responsible for maximizing share value. The Model
Business Corporation Act, 3.01 says simply, ``Every corporation . . .
has the purpose of engaging in any lawful business unless a more
limited purpose is set forth in the articles of incorporation.''
Delaware Corporate Law just says that a corporation ``may be . . .
organized under this chapter to conduct or promote any lawful business
or purposes.''\3\ State statutes assign all powers to act for a
corporation to its board of directors, but do not in any way prescribe
how directors are to carry out this task.\4\
---------------------------------------------------------------------------
\3\ DGCL 101(b).
\4\ ``All corporate powers shall be exercised by or under the
authority of the board of directors of the corporation, and the
business and affairs of the corporation shall be managed by or under
the direction . . . of its board of directors.'' MBCA 8.01(b). ``The
business and affairs of every corporation organized under this chapter
shall be managed by or under the direction of a board of directors. . .
.'' DGCL 141(a).
---------------------------------------------------------------------------
Case law, which, in the U.S. is mostly made in the courts of the
State of Delaware, also does not require share value maximization,
except in one very narrow circumstance: When, in the course of buy-out
negotiations, it becomes inevitable that a corporation will be sold,
the Delaware Supreme Court has said that directors' duties then change
``from defenders of the corporate bastion to auctioneers charged with
getting the best price for stockholders at a sale of the company.'' \5\
Note that, implicitly at least, this formulation of the law accepts the
proposition that directors may in all other circumstances act to
preserve the long-run viability of the corporation itself, even if
other actions might be more immediately rewarding to shareholders.
---------------------------------------------------------------------------
\5\ Revlon v. MacAndrews & Forbes Holdings, Inc., Del 506 A.2d 173
(1986).
---------------------------------------------------------------------------
To be sure, courts often note that directors have a duty to act in
the best interest of ``the corporation and its shareholders.'' \6\ In
theory, and sometimes in practice, these interests coincide with one
another.\7\ But not always.\8\ For this reason, courts have always
interpreted the mandate to act in the ``best interest of the
corporation and its shareholders'' very broadly, to give directors wide
discretion.\9\ Moreover, in applying this mandate, courts implicitly or
explicitly recognize that the corporation is a separate entity from its
shareholders, and that directors' duties normally run to the
corporation first. (My colleague Prof. Bruce Scott will say more about
the importance of the corporation being a separate legal entity, and I
have written about the historical importance of this feature of
corporate law.\10\ I would be happy to elaborate on this point if this
committee wants to hear about this.)
---------------------------------------------------------------------------
\6\ ``In carrying out their managerial roles, directors are charged
with an unyielding fiduciary duty to the corporation and its
shareholders.'' Smith v. Van Gorkom, 488 A2d 858 (Del. 1085). Directors
``are charged with an unyielding fiduciary duty to the corporation and
its shareholders.'' Guth v. Loft, Inc., 2 A.2d 225 (Del. Ch. 1938),
aff'd, 5 A.2d 503 (Del. 1939).
\7\ Law and economics scholars have claimed that, since
shareholders are understood to be the ``residual claimants'' in
corporations, maximizing value for shareholders should be equivalent to
maximizing total wealth created by the corporation. See Margaret M.
Blair, OWNERSHIP AND CONTROL: RETHINKING CORPORATE GOVERNANCE FOR THE
TWENTY-FIRST CENTURY, Brookings, 1995, at 227, for a discussion of this
line of economic argument.
\8\ Finance theory makes it clear that shareholders can be made
better off at the expense of other corporate participants by shifting
risk onto them. Because shareholders may not be held liable for
corporate debts (a protection granted to shareholders under the
corporate law doctrine known as ``limited liaiblity''), share value can
be increased if the corporation engages in highly risky ventures, where
shareholders have a chance for substantial gain if the venture works
out, but most of the cost of failure falls on creditors.
\9\ In a classic case establishing the relevant legal doctrine,
shareholders of the Chicago National League Ball Club Inc., which owned
the Chicago Cubs, sued directors on grounds of negligence and
mismanagement because they would not install stadium lights in Wrigley
Field so that the Cubs could play night games. See Shlensky v. Wrigley,
Illinois Appellate Court, 1968, 237 N.E.2d 776. The court dismissed the
complaint for failure to state a claim. See Margaret M. Blair and Lynn
A Stout, A Team Production Theory of Corporate Law, 85 Virginia Law
Review 247 (1999), noting that a series of court decisions in the mid-
to late-20th century have ``allowed directors to sacrifice
shareholders' profits to stakeholders' interests when necessary for the
best interest of the `corporation.' `` Courts, for example, have
sanctioned directors' decisions to expend corporate resources for
charitable purposes, to avoid risky undertakings that would increase
profits at the expense of creditors, and to fend off corporate takeover
bids that threatened to harm employees or the community. Id., at notes
140-148 and surrounding text.
\10\ Separate entity status for the corporation serves a crucially
important economic function: it allows the corporation to hold assets
in the name of the corporation over an indefinite time period, so that,
unlike what would happen under default rules of partnership, the assets
of a corporation will not be broken up and distributed when a
shareholder dies or becomes insolvent or wants to re-deploy her wealth.
The shareholder is instead free to sell her shares, but she cannot
force dissolution of the corporation itself. The ability to keep assets
invested in an enterprise for an indefinite time was critical to the
development of the railroads, and other businesses that required long-
lived specialized capital investment. For an extensive discussion of
how these rules developed under corporate law in the 19th Century U.S.,
see Margaret M. Blair, Locking In Capital: What Corporate Law Achieved
for Business Organizers in the Nineteenth Century, 51 UCLA LAW REVIEW,
2 (2003), 387.
---------------------------------------------------------------------------
Courts recognize that directors and managers must have very broad
discretion to balance competing interests in a business enterprise
because business decisions are often very complex. Courts further
recognize that they should not be making business judgments for
directors, or interfering with actions directors take ``in good
faith.'' \11\ This legal doctrine is called the ``business judgment
rule.'' \12\
---------------------------------------------------------------------------
\11\ A classic statement of this position is the court's opinion in
Shlensky, supra note 7 (``We are not satisfied that the motives
assigned to Philip K. Wrigley, and through him to the other directors,
are contrary to the best interests of the corporation and the
stockholders. For example, it appears to us that the effect on the
surrounding neighborhood might well be considered by a director who was
considering the patrons who would or would not attend the games if the
park were in a poor neighborhood. . . . By these thoughts we do not
mean to say that we have decided that the decision of the directors was
a correct one. That is beyond our jurisdiction and ability. We are
merely saying that the decision is one properly before directors and
the motives alleged in the amended complaint showed no fraud,
illegality of conflict of interest . . . we feel that unless the
conduct of the defendants at least borders on one of the elements, the
courts should not interfere.'' See also In re Caremark International,
Inc. Derivative Litigation 698 A.2d 959 (Del. 1996) (``Whether a judge
or jury considering the matter after the fact, believes a decision
substantively wrong, or degrees of wrong extending through `stupid' to
`egregious' or `irrational,' provides no ground for director liability,
so long as the court determines that the process employed was either
rational or employed in a good faith effort to advance corporate
interests.'' (emphasis in original) )
\12\ See e.g., Aronson v. Lewis, 473 A.2d 805 (Del. 1984), at 812
(``The business judgment rule is an acknowledgement of the managerial
prerogatives of Delaware directors under Section 141(a). It is a
presumption that in making a business decision the directors of a
corporation acted in an informed basis, in good faith and in the honest
belief that the action taken was in the best interests of the company.
Absent an abuse of discretion, that judgment will be respected by the
courts.'')
---------------------------------------------------------------------------
What this means is that directors are very rarely found in breach
of their duties unless they engage in blatantly self-dealing behavior.
I by no means intend to suggest here that, in today's world,
corporate directors and managers are not under significant pressure to
find ways to increase share value, sometimes even at the expense of the
long run performance of the company.\13\ But let me be clear that this
pressure comes from the media, from shareholder advocates and financial
institutions in whose direct interest it is for the company to get its
share price to go up, and from the self-imposed pressure created by
compensation packages that provide enormous potential rewards for
directors and managers if stock prices go up. And by the way, those
compensation packages also impose very little downside cost on managers
or directors if stock prices decline, which means that managers also
often have huge incentives to cause their companies to take very big
risks in their efforts to achieve higher share prices.
---------------------------------------------------------------------------
\13\ Numerous shareholder proposals filed with the SEC, seeking to
urge or compel directors to take certain actions, including selling off
divisions, paying special dividends, or accepting a takeover offer from
another company, justify their proposal on the grounds that the action
would ``maximize share value.'' See, e.g., Schedule 14A filed with the
Securities and Exchange Commission by Wisconsin Central Shareholders
Committee to Maximize Value, SEC File 0-19150, Oct. 23, 2000,
announcing a proxy fight against directors of Wisconsin Central
Transportation Corp. (``Edward A. Burkhardt, former Chairman, President
and Chief Executive Officer of Wisconsin Central Transportation
Corporation (NASDAQ:WCLS), today announced the formation of a committee
to improve company performance and to maximize share value.'').
Available at http://www.secinfo.com/dsvRs.55Wm.htm
---------------------------------------------------------------------------
These pressures might be alleviated with certain policy actions
that this body and/or other regulatory bodies could, in theory, take.
In Britain, for example, the British Companies Act 2006 explicitly
codified what lawmakers believed to be the rule under their case law,
which provides that directors have duties to multiple stakeholders.\14\
A change in the tax rules, for another example, might reduce the
current tax preference that makes compensation packages based on
``stock options'' so attractive relative to other approaches to
executive compensation.\15\
---------------------------------------------------------------------------
\14\ (1) A director of a company must act in the way he considers,
in good faith, would be most likely to promote the success of the
company for the benefit of its members as a whole, and in doing so have
regard (amongst other matters) to-
---------------------------------------------------------------------------
(a) the likely consequences of any decision in the long-term,
(b) the interests of the company's employees,
(c) the need to foster the company's business relationships with
suppliers, customers and others,
(d) the impact of the company's operations on the community and the
environment,
(e) the desirability of the company maintaining a reputation for high
standards of business conduct, and
(f) the need to act fairly as between members of the company.
Companies Act 2006, c. 46, 172, available at http://
www.opsi.gov.uk/acts/acts2006/
ukpga-20060046-en-13#pt10-ch2
---------------------------------------------------------------------------
\15\ For a general discussion of how stock options receive
favorable tax treatment, see Shevlin, Terry J. and Hanlon, Michelle,
Accounting for the Tax Benefits of Employee Stock Options and
Implications for Research (April 2001). University of Washington
Working Paper. Available at SSRN: http://ssrn.com/abstract=271310 or
DOI: 10.2139/ssrn.271310
---------------------------------------------------------------------------
In sum, decisions by managers and directors of U.S. corporations to
choose investment strategies that may be profitable in the short-run,
but that sell our country short by moving value-creating activities
offshore, are decisions that those managers and directors must take
personal responsibility for. These decisions are absolutely not
mandated by law.
(I have some thoughts about how and why the notion that corporate
managers must maximize share value came to be so widely accepted in the
last three decades. But that is a longer story that I will not
undertake to tell here unless the Committee wants to hear it. Instead I
attach to this testimony a copy of Margaret M. Blair, Shareholder
Value, Corporate Governance and Corporate Performance: A Post-Enron
Reassessment of the Conventional Wisdom.'' CORPORATE GOVERNANCE AND
CAPITAL FLOWS IN A GLOBAL ECONOMY, Peter K. Cornelius and Bruce Kogut,
eds., Oxford University Press, January 2003 Available at SSRN: http://
ssrn.com/abstract=334240)
Biography for Margaret M. Blair
Research interests: The legal structure of business organizations,
corporate governance, role of corporations in globalization
About Professor Blair
Margaret Mendenhall Blair is an economist who focuses on business
and management law. She joined the Vanderbilt faculty in 2004 as part
of the team supporting the Law and Business program, which the law
school offers in conjunction with the Owen Graduate School of Business
at Vanderbilt. She moved to Vanderbilt from Georgetown University Law
Center, where she became a visiting professor in 1996 and from January
2000 to June 2004 served as a Sloan Visiting Professor, teaching
Corporations and Corporate Finance, and as Research Director for the
Sloan-GULC Project on Business Institutions. She has also been a Senior
Fellow in the Economic Studies Program at the Brookings Institution,
where she wrote about corporate governance and the role of human
capital in corporations. Her current research focuses on three areas:
the legal structure of business organizations, team production issues
and the theory of the firm, and the role of corporations in
globalization. She served on the Board of Directors of Sonic
Corporation from January 2001 through January, 2006, and current serves
on the Board of WRAP (Worldwide Responsible Apparel Production).
Representative Publications
``The New Role for Assurance Services in Global Commerce,'' with
Cynthia A. Williams and Li-Wen Lin, 33 JOURNAL OF CORPORATION
LAW, 2, 325-360 (Winter 2008).
``Locking in Capital: What Corporate Law Achieved for Business
Organizers in the Nineteenth Century,'' 51 UCLA L. Rev. 2
(December 2003). Republished in Top 10 Corporate Practice
Commentator (2004).
Unseen Wealth: Report of the Brookings Task Force on Intangibles
(author and editor, with Steven M.H. Wallman), Brookings, 2001.
Chinese translation distributed by the Chinese Social Science
Publishing House. Japanese translation distributed by
Chuokeisai-Sha Publishing Company.
Trust, Trustworthiness, and the Behavioral Foundations of Corporate
Law, (with Lynn Stout), 149 UNIVERSITY OF PENNSYLVANIA LAW
REVIEW 1735-1810 (November 2000).
A Team Production Theory of Corporation Law, (with Lynn Stout), 85
VIRGINIA LAW REVIEW (March 1999).
Ownership and Control: Rethinking Corporate Governance for the Twenty-
first Century, Brookings 1995. Chinese translation republished
by the Chinese Social Science Publishing House, Beijing. This
book won an academic book publishers award.
Chairman Miller. Dr. Scott.
STATEMENT OF DR. BRUCE R. SCOTT, PAUL WHITON CHERINGTON
PROFESSOR OF BUSINESS ADMINISTRATION, HARVARD BUSINESS SCHOOL
Dr. Scott. Thank you, Mr. Chairman. I teach at a business
school and started my studies looking at how firms are managed
and doing case writing here and in Europe and switched from
that to looking at those same ideas at the level of countries
and saying countries have strategies as well.
This has been a very lonely thing to be doing for the last
20 years. It really has. It has been completely out of touch
with what is going on in most of organized economics. It is
very strange to see this beginning to be used as a set of terms
and saying, we have to think about it differently.
Having said that, what I would like to say to you is that
if you think about this problem in terms of globalization, you
are never going to get there. Globalization means you are
integrating the markets, that is all. There is another way to
look at it which is how the countries are managed, which has
something to do with what you people on this Committee do all
the time; and the operational way to think about this is in
terms of the government's systems that operate within all the
countries. Capitalism is a system of governance for economic
affairs; democracy is the one that almost everybody uses for
the political affairs. But you have got two governance systems
that are working together that influence each other all through
this, and you need to begin to pick that up I think as a way to
see what you can do. It is very hard to do this, and certainly,
teaching at a business school, most people simply turn off and
say, ``It is too hard to do this. I can't figure out how the
pieces fit together.''
So let me suggest there is a way to think about this that
is simple enough that anybody can catch it very quickly. The
analogy is that organized competition in all the major sports
is organized the same way a capitalist system is in a country.
It is a three-level system that starts with a political
authority. It depends upon which one of those sports you like,
but if it is football, it is the NFL. If it is baseball, it is
Major League Baseball. They operate as a political authority.
They operate--so that they can operate as a state. Now, every
one of these has the power to create the rules. They decide who
gets hired as the regulators and referees. You have a set of
institutions, the rules, the regulations, everything, which is
exactly the same as a capitalist system. I had somebody I was
talking with a couple of weeks ago about this who is a Canadian
banker, and he said, ``Well, I am really uncomfortable about
this notion of regulation.'' I asked, ``Well, do you watch
hockey?'' ``Yeah, of course I watch hockey.'' ``How would it
work if you had no referees?'' ``Unimaginable.'' Well, it is
the same thing. You can't--and if you are on Financial
Services, Mr. Chairman, you must have had at least the chance
to think about what happens when we have the number one
regulator in the financial services sector say, ``I really
think the private sector can do it without government.'' That
is how we got to where we are. Football would work that way,
hockey would work that way, all of them would work that way if
you don't have rules, the referees, and--most of what we focus
on is the games. The games and the sports correspond to the
markets that you see in capitalism.
Well, if I turn from the sports to capitalism, you just
say, look, it is the same three levels. You have a government,
that is you in this, the rules and then the market framework.
And thinking about it this way gives you something that is easy
to work with. If you have ever watched football, you have got
to recognize that--and especially for the men--you end up
saying, I have got to watch until the last two minutes, you
can't tell who is going to win.
Yeah, but that is basically because the National Football
League organized and said, ``We are going to split the
television revenues equally. Green Bay is going to have the
same television revenues as Los Angeles or Boston or anybody
else. We are going to equalize the revenues. Our function is
close games. Close games get people watching until the last of
the game, and that is what sells the advertising revenue.''
If I go to baseball, they have not done that yet. They have
teams that have five, six times the revenue of other teams.
Football decided that entertainment was best when the games
were close. The purpose of the capitalist system is very
different, but the governance process is just exactly--I mean,
this three-level governance system works as a way to understand
it.
Most of our attention, I think, in the description of how
capitalism works, is built around the product markets. That is
the part we see, and that is the fruit stand, the automobile
dealership, whatever else. The really decisive things that
distinguish one country from another are not in the product
markets, they are in the factor markets, meaning: How do you
deal with land, how do you deal with labor, how do you deal
with financial capital, how do you deal with intellectual
property? And unlike the simple-minded models that are used so
much of the time where we assume that we have got voluntary
transactions among people that are consenting adults that have
equal information, there is virtually no way to get equal
relations in the factor markets. You are dealing with unequal
power as well as unequal information.
All you have to do is think about somebody going to apply
for a job. The organization that you are applying to may be 100
people, it may be 1,000 people, it may be 100,000 people. There
just aren't equal relationships in there. You have to have
rules and regulations in how these things work to make it at
all a plausible thing in a democratic society. It can be done,
but that is not the problem. The problem is recognizing the
fact that we are not dealing with equal relationships,
especially not in the factor markets.
Let me take this--I was just thinking just what you were
talking about with the competition and the model of it. This is
a homely little chart, a model of unregulated competition has
existed for a long time. The Brits had it in the Middle Ages.
It is the common pasture, and just imagine that we have got a
bunch of poor people that live in those little brown houses to
the side of it, and we have got one big house. And so the
castle there has got his grounds, the other folks don't have
much, but the other folks share the common. They can take their
goats or their cattle or whatever they are onto the common, and
if it is an unrestricted system, what happens is you keep on
adding cattle until you destroy the common. And people
understood that the way to do this was--and in the British
case, what they did was sell--privatize. And then we are going
to have somebody in control, and we won't have the excessive
usage and in addition we will have people that will invest
money to improve it, to drain it, to change what we do from one
crop to another.
Well, this is a useful thing to think about because there
really are several ways to deal with this, but the easiest one
to think about is, that it is not an insoluble problem at all.
All you've got to do is have a fence around the common, have a
gate, and have somebody at the gate.
If the somebody at the gate is a legitimate gate keeper, he
can just say, ``Look, you are on Mondays and Wednesdays and
your staff is on Tuesdays and Thursdays and this is all you can
have.'' But, you got to have either legitimacy or you got to
have coercive power to manage the gate. Much the same thing is
true when you are thinking about your global economy. That is
exactly what the circumstances are. The biggest of the common
resources is not the land for the grass. It is the savings of a
society, it is the technologies of a society, and in my sense,
above all, it is the legal frameworks that are effectively the
collective capital of the capitalist system. Just take as an
example a country that joins Western Europe at this stage, the
EU. If you ask, what are the terms of joining, the terms of
joining are you must accept the whole framework, and the whole
framework used to mean a few hundred pages, then a few thousand
pages. Now a new member that joins Europe has to sign on for
100,000 pages of regulation, and there is no discussion. You
either sign up for it or you can't belong. But, that is the
accumulated wisdom of somebody building this thing up over a
period of time. That is one of the most precious things that
they have.
If I take this and say what is it applied to the United
States, the United States was set up in an utterly unusual set
of circumstances because the Constitution gave the right to
charter firms to the states. So, they start of with in effect
13 people, 13 organizations that can charter firms to compete
in the market. And then the right to regulate the competition
was held by the Federal Government. Well, it very quickly got
us into a set of circumstances as soon as we got the
continental market, we began to have abuse of the market just
exactly like the folks grazing on the common. And the most
obvious abuse turned out to be companies trying to have holding
companies and quasi-monopolies. And they were prohibited from
doing that by every state until New Jersey changed its law. And
in 1888, New Jersey authorized holding companies, and we have a
rush to incorporate in New Jersey, then New York, and then in
Delaware; and you change the whole structure, both of the firms
and of competition in the United States, not by act of
Congress, but by the vote of a State legislature.
Congress tries to come back and find a way to deal with
this, and Theodore Roosevelt is the first one that I think
really understood what he was doing, saying, ``We are going to
have to create something that has a regulatory framework that
corresponds to the global market.'' So they brought back the
idea of the federal charter. Federal charter was initially
posed by Madison at the Constitutional Convention, and people
decided that if it had been put in the Constitution, the
chances were the Constitution would never have been ratified.
It would have symbolized too much power in the hands of the
Federal Government. So there was no federal charter. You had
initially 13--it is ineffective commons with 13 gates to start
with. As you go along it goes to 30, then 40, then 50. So you
have no regulation of who uses it. You have to have a
regulatory regime that has oversight over the whole thing, and
Roosevelt recognized we didn't have that. And so he and William
Howard Taft both proposed for over a period of about 11 years
that they either create a federal license or a federal charter
which is the same thing. And they can't get it through. The
hitch is when we got the big companies, we ended up with big
companies having enough power to dominate State legislatures.
State legislatures were appointing people who were not going to
allow the regulation of the firms.
How about if I stop there?
[The prepared statement of Dr. Scott follows:]
Prepared Statement of Bruce R. Scott
U.S. Capitalism: a system of governance is challenged
Mr. Chairman and Members of the Committee:
I am a faculty member of the Harvard Business School, and have been
for many years. My initial field of study was in General Management,
meaning the strategies and governance of firms. I migrated from that
field to its analog at the country level in the 1960s while studying
French attempts to formally plan their economic development.
In recent years I have been working on a book entitled Capitalism,
Democracy and Development.\1\ The title of the book is indicative of a
shift in my own thinking from a focus on substantive economic
strategies of countries to a focus on the processes of governance. From
my comparative case studies on countries it has gradually become clear
to me that much of a nation's economic strategy is embedded in the
institutions through which that particular nation is governed, and that
the existence of institutions imply a certain strategy. For instance,
deregulation in the U.S. as practiced since 1980 was a strategy
designed to promote efficiency but it was also designed to favor
capital at the expense of labor. Likewise, tolerance for the omission
of the cost of stock options from profit and loss statements was
nominally a way to promote performance, but also implicitly a strategy
for redistributing wealth in favor of those with the power to secure
grants of such options.
---------------------------------------------------------------------------
\1\ Scheduled for publication later this year by Springer Verlag,
Heidelberg.
---------------------------------------------------------------------------
In this paper I will introduce several ideas from my book and then
append some pages of explanation from two chapters of the text.
Capitalism is a system of governance
If there is one idea that I would urge this committee to consider
in its studies of the offshoring process, it is to go beyond a focus on
markets to consider how capitalism works as a system of governance for
economic affairs. Markets are part of that system of governance, with
the invisible hand acting as an automatic form of governance within the
prescribed frameworks of the markets. But markets are only part of the
system, and a dependent part at that. All formal or organized markets
require laws, regulations and physical and social institutions for
their underpinnings. These laws and institutions are created through
human agency and as a result they are likely to differ in significant
aspects from one nation to another. These institutional variances imply
that there are different variants of capitalism, and this in turn
implies that the so-called Anglo-American style of capitalism is but
one style. We should not assume that other countries are trying to be
more like us unless we have sound empirical research to so indicate. In
the meantime, we should pay close attention to the idea that capitalism
is a system of governance where other countries could have economic
strategies quite different from our own.
Gabriel Almond, a professor of political science at Stanford and
former president of the American Political Science Association, called
attention to this notion of capitalism as a system of governance when
he wrote that the economy and the polity are the two chief problem-
solving systems of a society, interacting with and transforming each
other, as suggested in Slide number one. Almond's idea was expressed in
an article in Political Science and Politics titled ``Capitalism and
Democracy'' and thus I understand ``economy'' and ``polity'' to more
specifically reference ``capitalism'' to ``democracy,'' respectively.
Thus, in his view and mine as well, capitalism refers to something very
different from globalization--and if today you frame your inquiry in
terms of the former, meaning comparative capitalist systems, your
inquiry may take you in quite a different direction.
To explain: Globalization refers to the integration of markets, and
market integration is being driven by very powerful forces such as
declining transport costs and trade barriers, as we all know. Firms
operate within markets and are greatly influenced by the forces of
supply and demand that are manifested within them. Firms must learn to
adjust to those market forces if they are to survive, let alone
prosper. However, the market frameworks themselves are created,
legitimated, monitored and periodically modernized by government and
not by economic actors. To frame your inquiry in terms of how
globalization works will risk ignoring how the markets have been
structured and how these structures determine the actual operations
that take place within the markets.
The market frameworks that facilitate and constrain economic
activity are created through legislatures; as a result, they reflect
the relative power of different interest groups in the political
markets of legislatures at any point in time, as you all know better
than I. It is legislative markets that create the frameworks within
which firms operate, and the frameworks that underpin economic markets
can be tilted to favor capital versus labor or the reverse, producers
versus consumers, lenders versus creditors, and so on. The notion that
the economic markets of capitalism somehow reflect a benign set of
circumstances where parties voluntarily come together to achieve
mutually beneficial transactions may be an adequate description of
commerce at a roadside fruit and vegetable stand or a flea market, but
not for much of the transactional activity of a modern economy. This
notion of a benign, self regulating capitalism where almost all
transactions are voluntary and therefore mutually beneficial is based
upon an unexamined assumption that the legislative markets have done
their job in a flawless way to begin with, which would be quite
remarkable if true. Thus, as a more realistic alternative I suggest
that we see capitalism as a three level system of governance which is
designed to mediate commerce among actors with different purposes,
different access to information, and radically different access to
economic power as well.
Capitalism as a three level system of governance
Capitalism is a concept which has been used to describe processes
of governance that are partly political, partly legal and partly
economic, and which interact in a system or systems that continue to
evolve through time. It is not surprising that such a complex system
has defied any standard definition for more than a century and that
many books that analyze capitalist development do not even attempt to
define it.\2\ Given this situation, I have found it very helpful to
define capitalism relative to some much smaller, simpler and more
tractable governance systems, notably those for organized sports Thus,
as shown in Slide number two, I define capitalism as an indirect, three
level system for the governance of economic activities analogous to
those used to govern team sports such as baseball, basketball, football
and hockey. As in the governance of these sports, the essential
principle is that the economic agents, like their analogs in sports,
are free to use their powers as they wish, whether as individuals or as
members of a firm, so long as they stay within the physical bounds of
the competitive arena, and so long as they obey the rules and
regulations of their particular capitalist system. I spell these ideas
out more fully in three excerpts from Chapter 2 of my book, which are
attached.
---------------------------------------------------------------------------
\2\ Cf. Fernand Braudel, Civilization and Capitalism, 1400-1800,
Volume 2, page 237 for some of the history of definitions.
---------------------------------------------------------------------------
Crudely put, the three levels consist of the economic markets, the
legal and other institutions that underpin those markets, and the
political level through which new institutions are created and older
ones maintained and modified. These three levels permit the harnessing
of human energy that is called forth through competition, whether among
sports teams, firms or individuals. The actions of the competitors are
coordinated in part by their own social organizations (teams or firms)
and in part by the rules, regulations and institutions that govern the
competition, but in any event not by an immediate hierarchical
authority with or without a central plan. Hence capitalism is an
indirect system of governance, in contrast to one that is governed
directly through a hierarchy.
Slide number three shows the three level model in more detail,
distinguishing the factor markets (e.g., those for land, labor, capital
and intellectual property) from those for goods and services. The
distinction is very important for two reasons. First, historically
speaking, it was the establishment of factor markets and not the trade
in product markets that was the hallmark of capitalism. While some
scholars have claimed that the Aztecs had ``capitalism'' before the
Spanish arrived, I disagree. In 1500 the Aztecs, like most of the known
world, did not have free mobility for land or labor; they had feudalism
and even forced labor instead. Trade was compatible with feudalism but
free mobility of land and labor were not. And, as we remember from
Shakespeare's Shylock, returns on financial capital were not seen to be
legitimate in Venice pre-1600.
The second reason for calling attention to the factor markets is
that they are the frameworks for the development and trade of
resources, and thus a prime area where a government can influence its
developmental prospects. Governments can favor saving versus
consumption, for instance, and a number of East Asian nations have had
saving rates at more than twice the American level since World War II.
This has allowed them to finance growth rates superior to ours without
the need to be open to foreign capital, for example in China in recent
decades. Higher saving rates can be achieved through restrictions on
consumer credit, high down payments on consumer durables such as
housing, or mandatory payroll saving plans such as those in Australia,
Chile or Singapore, where money is automatically deducted from
paychecks and deposited in defined saving plans. In addition, countries
can have quite different distributions of incomes between wages and
profits and can use wage reductions as a preferred way to achieve a
result similar to devaluation of the currency.
Capitalist countries that believe in an active role for government
can have active, government led or supported strategies, a concept that
is quite alien to those who think that completely decentralized
decision-making is the sure route to optimal efficiency. For instance,
government supported strategies can embark on attempts to accelerate
the acquisition, adaptation, and production of new, typically higher
technology products instead of remaining specialized in existing
products, (e.g., the Taiwanese government successfully invested in
semiconductor manufactures starting virtually from scratch).
Common property is key resource in most if not all capitalist systems
While capitalism is usually defined as a system based upon private
property and free enterprise, this is a remarkable oversimplification.
As already noted, it is based in part upon regulated enterprise and in
part upon common access to certain resources, such as air, water,
light, and use of land for purposes of transportation. Historically,
capitalism was also associated with the abolition of common land for
grazing purposes in order to improve efficiencies. The choices in how
to deal with common resources can be seen in terms of a hypothetical
common, symbolized in the green area of Slide number 4.
When common land is left unfenced or unregulated, the situation is
ripe for what is known as ``The Tragedy of the Common,'' i.e., the
tragedy that arises when economic actors have unrestricted rights to
the use of a common resource such as a pasture.\3\ If unregulated, the
actors (e.g., the farmers or shepherds) will have a tendency to keep
adding more animals to their herds until they cause the overgrazing of
the field and damage or even destroy it. Still more obviously, it will
be difficult for such a group of actors, if they act as individual
competitors, to maintain the fertility of the field let alone improve
it, and thus it will be very difficult for them to improve its
productivity over time. Thus, the availability of a common resource is
a classic case where unregulated competition produces undesirable
results.
---------------------------------------------------------------------------
\3\ The name comes from a paper by Garrett Hardin, an eminent
biologist.
---------------------------------------------------------------------------
However, it is also a problem which can be readily solved by
putting a fence around the field, adding a gate, and having someone
lock and/or guard the gate. Given an enclosed field, the agent in
control of the gate can regulate the number of users and/or their
frequency of usage, thereby avoiding the over usage that would destroy
the usefulness of the field as a source of food. What this means is
that the so-called ``tragedy of the common'' is only a concern for an
unregulated common. But simple as it might sound to have a fence, a
gate, a guard and some rules and regulations that limit usage by the
various actors, no regulatory framework can be expected to work unless
it has been established by a legitimate political authority that can
back enforce its actions by coercive force if need be, unless it is one
that starts out with coercive force and without legitimacy.
This simple example illustrates some of the critical forces at the
heart of what is needed for effective regulation of any common
resource, such as air, water, sunlight or access to a right of way for
travel. And solutions might seem simple, but in reality they are not.
In Britain, where the idea of enclosing the common has been much
studied, the common areas were privatized over several centuries,
typically by acts of Parliament, and typically by awarding the land in
question to the nearby manor or large landowner. Thus, the Enclosure
Acts that were credited with improving productivity through improved
methods of farming were redistributing land in favor of the rich while
impoverishing most of their neighbors. In addition, these same acts
have been credited with creating the pauper class that helped energize
the workshops that preceded the Industrial Revolution and then the much
larger factories of the latter era.\4\ Enclosing the common in a
legitimate, effective, and socially ``just'' or ``democratic'' way is
therefore quite a difficult task for any political authority to
undertake.
---------------------------------------------------------------------------
\4\ See Karl Polanyi, The Great Transformation, Beacon Press.
---------------------------------------------------------------------------
These developments in Britain illustrate the close connection
between the system of economic governance and its political
counterpart. The small landowners symbolized by the small houses in
Slide number 4 had no representation in Parliament until late in the
19th century, by which time the Enclosure Movement was long since over.
Parliament was dominated by the great landowners even after the Great
Reform Bill of 1832, so the landowners could simply vote to grant
themselves the right to take the land legally.\5\ This illustrates one
of the great risks of capitalism; powerful people can use the system to
appropriate common resources from their neighbors, all in the name of
greater efficiency through privatization. Power passes back and forth
between the economic system and the political, and concentrations of
power in either can subvert normal processes in the other. However,
redistributing the land among the peasantry in the small brown houses
is no sure answer either. When tried in a number of countries, for
example in Mexico when it broke up its ejidos, it was a recipe for
creating farming plots that were too small to be viable, and thus it
led to declining productivity and poverty.
---------------------------------------------------------------------------
\5\ For a fascinating and famous account of these events see Karl
Polanyi, The Great Transformation.
Market frameworks as a key common asset of capitalism
In my view one of the great common assets of capitalism is hidden
right in plain sight. It is the market frameworks that underpin the
various markets for factors of production as well as trade in goods and
services. These market frameworks are expressed in laws, regulations,
and, in many countries, the law books that explain precedents from
previous cases. Since these frameworks originate in legislatures they
are by definition common property. This is also the case for later
supporting regulations and court decisions. And, if a legislature has
truly met Abraham Lincoln's notion of governing the people for the
people and not just by the people, then it has created a form of
commonwealth as surely as if it had voted to authorize new schools or
highways to benefit all, as expressed in Slide number 5.
The state and the firm
Firms have a somewhat different relationship to the state in the
U.S. than in many other industrial countries, and this difference is
very germane to your inquiry into the off-shoring of activities by U.S.
firms. As noted in Slide number 6, in most countries firms are
chartered by a single authority speaking for the Nation. In contrast,
in the U.S. the Constitution did not give the Federal Government this
power to charter firms, for fear that this power might make the central
government appear so powerful that the Constitution itself would be
rejected during the ratification procedure. This meant that there were
initially 13 gates (i.e., the 13 states at the time) to the common of
the U.S. market during the colonial and early federal era. This
governance structure suited the market of the time; transport costs
were so high that, once one was away from navigable water, the U.S.
market amounted to something much closer to 13 distinct State markets
and, indeed, many smaller markets than to a single, national market. In
these circumstances, a state was granting authority to firms to operate
in markets that might in reality be a good deal smaller than a state
and thus able to be managed by the regulatory power of the state in
question. U.S. states typically granted these early charters for public
purposes, such as for universities and canals, and, given their local
monopoly power in chartering, could accordingly ask for something in
return. Since capital was scarce and corporations were rare until the
early 19th century, few, if any, issues over firm power arose. The
corporation existed as a legal entity because of a grant of power from
the state and was at the same time accountable to the state and its
chartering standards.
As time passed and transport improved, trading radiuses grew
larger, and there were more and more requests for charters to establish
a legal vehicle more permanent than a partnership. At much the same
time, the concept of limited liability was developed, increasing the
value of and demand for charters for incorporation even more. In order
to speed up the processing of such requests and reduce the corruption
in the legislatures over who would be favored, the states gradually
shifted to ``general charters'' that notably lacked specific, public
purposes. This movement to the general charter without specific firm
objectives and standards reduced the apparent dependence of the firm on
the state. Accordingly, legal doctrine gradually evolved toward seeing
the firm as the beneficiary of a free contract with the state and,
eventually, as a ``free entity'' altogether, as though firms and indeed
capitalism were born from and existed independent of the state.
What this meant was that by the 1870s, as the railroads linked
regional markets into a nationwide system, the Nation had 30-40 gates
or states admitting firms to the market. States competed for the funds
generated by corporate taxes and thus raced to the bottom in issuing
charters that granted generous terms to firms. It was a case where
unregulated competition was clearly not in the public interest. And the
clearest example came in 1888 when New Jersey decided to break ranks
with the other states and authorized its firms to create holding
companies to buy or merge with other (often rival) firms, no matter
where these firms had been incorporated and no matter whether such
growth would reduce industry competition. As New York and eventually
other states followed New Jersey's lead, the gates to the national
market or common were opened wide to quasi-monopoly capitalism. The
following years were marked by a stampede of mergers and the creation
of much larger firms. Indeed, this change in New Jersey law would
undermine almost all regulation of firm behavior, facilitating a great
change in the structure of U.S. firms and industries, all of it aimed
at larger size with the implication of much greater economic power. And
though this changed the nature of interstate commerce dramatically, the
U.S. Congress had little or no say in the matter as it lacked the
constitutional right to intervene in the chartering process.
President Theodore Roosevelt understood this imbalance of power and
attempted to correct it by supporting proposals to create a federal
right to charter or license firms, as is discussed in the attached
excerpt from Chapter 13. However, neither he nor his successor, William
Howard Taft, was successful. What this meant was that the U.S.
Government had little right to regulate its own market prior to the
passage of the 17th Amendment in 1914, an amendment which switched the
selection of U.S. Senators away from State legislatures in favor of
direct election. This amendment was viewed as essential to establishing
more adequate power in Washington to regulate the national market.
Thanks to their extraordinary influence in State legislatures, the big
firms had been able to ensure the appointment of enough Senators
friendly to their interests to dramatically limit the regulatory powers
of the Federal Government. Thus, the U.S. market had become much like
the unregulated common discussed earlier, except that the agents taking
advantage of the situation were firms advised by lawyers and not poor
shepherds or goat herds, as suggested in Slide number 7.
Today's global economy is much like the U.S. in the later 19th century
In today's economy, nations and states charter firms to compete in
a global common, but no chartering authority exists that wields the
political power to impose rules on these global markets. While there
are rules for trade, the chartering of financial firms in particular
invites a race to the bottom to escape taxes as well as regulations. At
the same time, some countries are imposing conditions on foreign firms
as a condition for doing business in their countries. This issue is
particularly important in the case of a few very large countries,
notably China. These countries, with priorities that favor rapid
growth, are using national power to partner with U.S. firms on the
condition that the latter move some of their activities to China. These
countries are behaving much the way New Jersey did in an earlier era,
taking advantage of an inadequately regulated common.
In light of the inadequate regulation of the global markets for
capital and technology movements, I suggest that you consider reopening
the question of a federal charter or license for U.S. firms as a way to
specify certain requirements for behavior. For instance, a federal
charter might state that any U.S. firms may choose to work for
stakeholder interests if they so choose, a choice that they already
have, in fact, but often seem to not be aware of. This would be a weak
form of guidance. I think it would be better to consider the
establishment of a mandatory standard of stakeholder welfare. In
addition to the fact that it would put U.S. firms more nearly in step
with some of the major European countries in this respect, I believe it
would be a healthy step in its own right, in that it would help limit
the steadily increasing inequalities of income in this country. And, as
another possible standard, there could be a mandate that any incentive
compensation, other than that taking the form of restricted stock that
is held for at least five years, would be subject to a very high rate
of taxation, so as to more nearly align managerial incentives with
those of shareholders.
Incentive compensation systems should have a downside risk as well
as upside potential, and the only way to achieve this will be by
uniform regulation; otherwise, any firms that did so voluntarily would
risk a loss of key employees. The incentives in our market framework
have become very problematic in encouraging CEOs to take risks in
circumstances where they are not subject to comparable down side
consequences if they fail. The costs of failure are borne by
shareholders, lower level employees and, on occasion, by taxpayers. Our
market frameworks, like the pastoral common of old, need regulatory
standards to reduce the likelihood of opportunistic behavior that
inflicts losses on other users of the same common.
Thank you.
Chairman Miller. That would be fine.
Dr. Scott. That is your problem.
Discussion
A New Metric for Corporate Accountability
Chairman Miller. I think all the witnesses spoke for more
than five minutes but less than 50, so I appreciate the
restraint.
Mr. Baird just left. I was going to call upon him. All
right. I now recognize myself for five minutes of questioning.
I won't pause to say I now recognize myself for a second round.
I think you will understand I get to keep asking questions
nonetheless.
Dr. Blair, I was interested in your discussion of the
various constituencies and considerations that boards of
directors should take into account, not just the financial
interest of shareholders. My question is, who shall guard the
guardians? How do we hold directors accountable and on what
basis and how are they chosen? If they are elected by
shareholders, why would shareholders not elect the members of
the board who would do the most to act in their interest, their
financial interest?
Dr. Blair. That is an excellent question. It goes right to
the heart of one of the things that has driven what I regard as
a cultural change in the last 20 to 25 years to bring directors
around to thinking that they have to maximize share value. That
is the argument that if they don't focus on a single metric, we
don't have any way of holding them accountable. And my response
to that is on several levels. First of all, the notion that, if
you maximize shareholder value, it is really clear what you
have to do, is crazy. Nobody knows what you are going to have
to do to maximize share value, and so maximizing share value
doesn't translate into a specific set of actions that directors
are supposed to take, and at any point in time there is
disagreement and contention potentially about whether or not
the actions that the board is trying to take serve to maximize
share value. My own view of this is that the corporation was
formed with the idea in mind that what corporations should do
is maximize the total wealth-creating capacity, and that that
would mean that, you know, in an economic sense, if the
shareholders are made better off, it should not be at the
expense of some of the other stakeholders.
That is a vague mandate, which doesn't translate into
specific instructions as to what they should do on a day-to-day
basis. And I think up until about 25 years ago, the larger
corporations, because they were very visible and because they
had a brand and an image that they had to protect and because
they tended to have loyalties to the communities where they
were incorporated, the executives--maybe not perfectly,
absolutely not perfectly--but at least they tended to think in
terms of, ``what are we doing for the long run health of the
company, what are we doing and how is it going to affect the
communities where we operate and how is it going to affect our
customers?'' I think that the emphasis on share value has
caused many company directors and managers to lose sight of
that bigger picture. Can you make them do it? Can you force
them to do it? Probably not, but my first point is that we
can't force them to maximize share value, either. That is my
point.
But at a second level, when you think about what we can
make corporations do, what I am a strong believer in is
disclosure, and I think increasingly, we have had a tug and
pull in the 1930's after the financial collapse--the Congress
moved to put into place a system that would require publicly
traded companies to disclose a lot, disclose a lot more than
they used to. There is still an enormous amount they don't
disclose, and I think if they are required to disclose what it
is they are doing on a number of different fronts, they are
going to be more responsible about what they do.
Chairman Miller. I would love to pursue that further, but I
will now yield back the balance of my time in the first round
of questioning so that Mr. Baird, who I understand also has a
markup like Ms. Johnson, may ask questions. Mr. Baird for five
minutes.
Corporate Incentives That Encourage Long-term Profit
Mr. Baird. I really am fascinated by the topic of this
hearing and thank the Chairman for holding it. Dr. Blair, I
thought your testimony was quite enlightening because there is
a sense that the fiduciary responsibility obligates the company
to just look at sort of short-term profits. And you are saying
that is not the case at all. You are saying that that is maybe
an urban legend or something.
Dr. Blair. Yes.
Mr. Baird. It is not valid. What other incentives and what
can or should the government do or not do--and this is not just
for Dr. Blair, for all of our panelists--to try to get that
longer-term commitment to the well-being not only of just the
shareholder in the short-term but the communities in which the
businesses operate, the workforce that may have been loyal to a
company for 30 or 40 years or more, what kind of reforms can or
should we do or not do? And that is to any of the panelists.
Dr. Blair. I will start if that is okay. I think the first
and most important thing is that we need to make sure that
there are not incentives in place that cause company executives
and directors to have this preference for risk and preference
for strategies that produce instant profit rather than long-
term profit.
Now, there was an attempt in a sense--it is kind of ironic
because there was a big push in the 1980's when corporate
directors and managers were under a lot of pressure from the
hostile takeover market. Then they began to say, well, if we
have executives who are compensated in stock or in stock
options, they will focus on share value and then they will be
less vulnerable to takeovers. And prior to that, corporate
managers were saying, you know, we have these other
responsibilities and so we don't necessarily think that just
because these outsiders think they can come in and buy the
company for more that we should be required to sell it. And so
we fixed that problem by radically changing the way corporate
executives were compensated, to tie their compensation much
more tightly to not just share value but to the value of the
options which are a one-sided gamble. And stock options have a
huge tax advantage relative to compensation in shares. I think
if directors were paid and managers were paid in restricted
stock that they had to hold for 10 years before they could sell
it, that would cause them to have a very different set of
incentives than what they have with the compensation and stock
options. That is where I would start. It is a big problem, but
I think I would start there.
Mr. Baird. Dr. Gomory.
Dr. Gomory. I agree with what Margaret has just said, but I
have had I don't know whether it is 60 or 70 man years on
corporate boards, and I have concluded that the people on those
boards are humans and they are subject to the normal human
emotions and attachments, all right? And when this whole
business first became visible to me, it was in a world in which
the directors wanted their companies to be successful and they
cared quite a bit about the employees. I was an officer of IBM
during its golden period.
Now, I think that they are still humans, but I think there
are two problems. One is they believe the thing that Margaret
says isn't there and she is right, which is it isn't their
legal duty they believe it is to maximize shareholder value.
The second thing, the compensation being tied to the share
price and the sheer volume of shares given to leading
executives is such that for most people, that amount of wealth
is overwhelming.
I agree with Margaret that restricted stock--which goes up
and down, not just one way--is a much better vehicle, but I
would think that there should be less compensation, honestly,
because these people do care about their companies and their
people as anyone does who associates for a long time with them.
But, they are overwhelmed in my opinion by what they see as the
legal imperatives, some pressure from some of the totally
financially oriented shareholders, and that overwhelms what was
in the past and remains their natural instinct to care about
their people, their community, and the other things because
they are human, too. And I think we have in some sense overcome
that normal tendency which had existed for decades and decades
before the 1980's by a concerted effort to line them up with
very active financial shareholders with these tempting, huge
packages. I think they should not be there.
Mr. Baird. Did you want the time back, Mr. Chairman? I have
got more questions, but I would be happy to give it up.
Chairman Miller. Given that you have a markup and there is
nobody else, why don't you go on?
Executive Compensation
Mr. Baird. Terrific. What are your thoughts about dealing
with golden parachutes and retirement packages for executives?
You know, we see increasingly these takeovers and mergers, et
cetera, or business decisions that basically drive a company
into the dirt, and the employees lose much of their retirement
benefits but the guys at the top walk away with enormous
compensation levels. Any merit to tying the fate of employees'
benefit packages to the fate of the executive or board
packages?
Dr. Blair. I like it in principle. The devil is going to be
in the details, but yeah, I like it in principle.
Dr. Gomory. And I feel exactly the same as Margaret. I
think that is a very good direction. I mean, we don't have to
have and we didn't have in the past corporate executives who
were paid hundreds of times more than everyone else and who had
these enormous retirement packages at a time when the pensions
of everyone else were being cut. But that is what we have now,
and it is a distortion and I think it is one that we do not
need.
Mr. Baird. Do you think that could be remedied statutorily,
possibly?
Dr. Gomory. Yes. I do agree with Margaret. It is not as
simple as it sounds, but as a direction, it is the right way to
go.
Mr. Baird. Are there any other incentives driving--one of
the issues here is the globalization of jobs and the economy.
What are other perverse incentives that you are aware of that
may incline businesses to export jobs, particularly
manufacturing jobs, that they might not want to do but that
inherent structures in our legal code or our tax incentives
don't force them to do but certainly reward them for doing?
Have you identified some of these?
Dr. Blair. I have not focused on that in my work. I don't
actually have a good answer for you.
Mr. Baird. Dr. Scott.
Dr. Scott. Yeah. We are into a transaction-driven system.
Let me back up just one second. Executive compensation in this
country has no parallel anywhere else, okay? It is much higher.
And if you take a look at this over a period of time, just to
go back to the '70s, the CEOs of our big companies are being
paid on the order of 30 times their mean employee, and in
Europe it was about 20. And that is what it was when I went to
start doing research in Europe in the '60s. As we get to the
end of the '70s, we begin to break away; and when we go through
the '80s, we are out of bounds on this. But the reason for
this, I think, is that we created the stock option, and the
stock option cost was not a cost on the P&L statement. And in
1992, 1993, 1994, the Financial Accounting Standards Board said
it ought to be, and there was enough pressure brought by people
down here to say, ``If you really try to put that on the P&L
statement, we are going to so curtail your budget that you are
not going to be able to do anything.'' And Arthur Levitt has
written a very interesting account of what happened, and he
just simply tells the Financial Accounting Standards Board, if
you try to put this on the P&L statement, I will not back you.
And the Accounting Standards Board only recommends, it was the
SEC decision to say, ``We are going to allow this to continue
to go.'' So you have created a transaction-oriented system
where you don't have to pay for it. The cost of the stock
options drops directly to the bottom and doesn't have to go
through the P&L statement until we get to 2004. So you have
given the directors the right to give people free money, and
that is what they did. And you can raise your earnings and
raise your stock price by doing a deal with the Chinese, you
can do it any way you want. It is the transactions that drive
the stock and that drive your compensation. It is really a
pernicious system.
Mr. Baird. What do you think we should do about that?
Dr. Scott. If I were doing it, I would find a way to outlaw
the stock option entirely, and that may sound really weird----
Mr. Baird. You mean as a mechanism of compensation or----
Dr. Scott. Yes.
Mr. Baird. Okay.
Dr. Scott. Margaret mentioned the other alternative. The
other alternative is treat the CEO more like a shareholder and
say, ``We are going to give you stock''; and when you do that,
you have to record a cost. You can't give away stock without--
you can give the option. Now you have to put something on it.
But you have to give the stock, and if you are getting
restricted stock you can't sell it for a good deal of time.
Therefore, if the company has a down on this thing, you take it
down along with the shareholders. It is a tremendous change. We
have created a set of--this is a big part of your problem over
in Financial Services, and if you go back to Martin Wolf
writing about this in the Financial Times back in January, he
said unless this is changed and unless it is changed by
legislation, you are never going to correct this problem. The
runaway is creating financial incentives--Margaret mentioned
this just briefly--that have an upside that encourages people
to take risk and no downside. The downside is paid by the
shareholder and the taxpayer but not by the person taking the
risk.
Dr. Gomory. Let me add something to that. So far we have
talked mostly about, you know, let us not have stock options,
let us not do this, let us not do that. But I think we ought to
decide what we want a corporation to do, we as a nation; and
that might have something to do with where the jobs are and
whether they are productive and things like that. And then we
ought to make sure that our tax structure rewards that, not
just pure profit because they won't get to keep it if they
don't meet certain other criteria. If they are not productive,
if they don't treat people right, if their skew of compensation
is crazy. Why don't we try and incent the corporations to
behave in the way we want them to? I think that is worth
thinking about.
Mr. Baird. Thank you. Thank you for your indulgence, Mr.
Chairman.
Corporate Governance
Chairman Miller. Thank you, Mr. Baird. I want to pursue the
corporate governance issues that I had begun with Dr. Blair.
This has also been debated as Dr. Scott suggested in the
Financial Services Committee and corporate governance issues,
specifically in executive compensation. And there are other
critics of corporate governance who say that if actually
corporations were acting to benefit 20 percent of the
population, the 20 percent that Dr. Gomory says owns most of
the stock, that would be more revolutionary than anything the
Bolsheviks did or what happened in 1789 in France. That would
be a remarkable change. The corporations are not actually even
being governed to benefit the shareholders, that corporate
boards are made up of CEOs of other corporations; and they all
think that they are underpaid and they know that the salary or
the total compensation for the CEO of a company on whose board
they sit will be looked at by their own board as what their
compensation should be. And the single best predictor of what
exactly compensation will be is how many CEOs sit on the board,
and particularly on the compensation committee.
There are critics. Dr. Blair spoke less than admiringly of
shareholder advocates, but there are shareholder advocates who
argue that if boards were required to act on behalf of the
shareholders, it would be a vast improvement in corporate
governance, that actually executive compensations now have
become a fairly significant part of overall profitability. And
in fact, even these massive pension funds can't get to 50
percent because 70 or 80 percent of stock is now legally held
by someone who is not the beneficial owner. In other words,
brokerage houses that hold the stock of shareholders who never
see the piece of paper, never actually claim the legal title to
the stock, but are the beneficial owner. And they vote for the
incumbent or for the slate of corporate boards proposed by the
incumbent directors and California, North Carolina, UAW, any
combination of pension funds can't outvote them.
Dr. Blair, do you disagree with that critique and why?
Dr. Blair. I think----
Chairman Miller. I think you turned it off.
Dr. Blair. I think the critique has been taken way too far.
I think it started out as a well-intentioned effort to try to
make sure that corporate officers and corporate directors and
managers were more accountable, but it has become an obsession
and it has become an industry. The Delaware judge I quoted was
Vice Chancellor Leo Strine, that over time we now have
shareholder advisory firms, we have a substantial number of
academics who are keenly interested in pushing a position in
which we can create more and more control rights for
shareholders. I think it is a very dangerous direction. I
personally don't think that Carl Icahn knows better about what
Yahoo should do than Yahoo's executives do.
Chairman Miller. Dr. Gomory.
Dr. Gomory. I think that you may have already made the
point that I want to make, but I would like to--my actual
experience with boards and worrying about takeovers and things
like that is that a board of any significant corporation today
knows there is a short list of people who control the shares.
In this company that I have dealt with, it is about fourteen.
Almost all are as you suggested I think earlier--they are
financial houses of one sort or another. So when we are talking
about having shareholder control, people's minds go to people,
individuals. Not so, folks. It is really the financial houses.
Now, putting more control in their hands is not at all
necessarily a good idea because you have to look----
Chairman Miller. Are you talking about the brokerage houses
that are buying shares for which they are not the beneficiary--
--
Dr. Gomory. Yes, that is----
Chairman Miller. Are you talking about----
Dr. Gomory. Yes, exactly. Exactly that. Because you have to
look at how those individuals are compensated in their
financial firms. And if they are very sensitive--in hedge funds
it is terrible, of course--through the share price, all you are
doing is making the company more directly a financial object to
be manipulated. You are not going to the people, you are going
to the financial people and a small group of them.
Proposed Rule for New York Stock Exchange
Chairman Miller. There is a proposed rule for the New York
Stock Exchange--I think I am getting this right--that has been
at the SEC for one and one-half years, not acted upon. Are you
familiar with that proposed rule? It would limit what the legal
owner of stock could vote on, even if it deprived the board or
the shareholder meeting of a quorum for some issues, unless
they had specific directions from the beneficial owners, which
would essentially mean the brokerage houses couldn't vote for
board members, et cetera.
Dr. Gomory. To answer your question, I am not aware of
that, but I think it is an excellent direction.
Chairman Miller. Dr. Scott.
Dr. Scott. I would have to disagree. If you go back to
roughly 1960, the average share was held for somewhere between
six and eight years, and so it was reasonable to speak of
somebody as having a long-term interest. It doesn't mean they
know anything about the company, but at least with a six- or
eight-year holding, you are talking about somebody that has a
long-term connection with the company. The average shareholding
now is about one year. So when you are talking about a
shareholder and saying does the shareholder have some kind of a
long-term interest in the company, you have no way to have any
bet on that at all. The change is we have, quote,
``democratized ownership,'' but we have also reduced the cost
of trading. People are trading much more. I mean, just go and
pick up the statement of any mutual fund and look and see what
is the average turnover on their funds. The average turnover on
a lot of them is two times a year. Their real interest--and by
the way, I think you are missing a term when you say it is
brokerage houses. It is not brokerage houses, it is mutual
funds and pension funds and insurance companies. And if you ask
what is their big business, their big business is trying to
attract additional assets that they manage. They don't want to
antagonize any firm at the risk of losing its pension funds
business. So they don't even want to have to vote their shares,
they don't want to have to vote anything that would be
considered hostile to management. They are trying to grow
assets under management at the mutual fund, the pension fund,
or whatever else, not really worrying about how the company is
managed.
Chairman Miller. I want to pursue that at another time, I
think. Stocks held in street name, which are 70 to 80 percent
of stocks are actually not stocks held by pension funds.
Dr. Scott. No, but your big holders are mutual funds.
Free Trade and Equality
Chairman Miller. Dr. Gomory, obviously international trade
affects not only American workers but workers all over the
world, and when I was considering the CAFTA vote, I was lobbied
vigorously by advocates for human rights in the CAFTA countries
who said it would actually be bad for the workers in those
countries, too, which is perhaps contrary to the common
impressions of what the effect of trade is.
What is the effect of free trade, international trade,
unrestricted international trade on workers in other countries,
and what is the effect then on the distribution of wealth in
those countries?
Dr. Gomory. Well, first of all, I would like to say this is
not a subject on which I have deep knowledge. I have had an
awful lot of experience in the United States, but very limited
in other countries, and I will simply report the impression
that I have from those who know more, and the impression that I
have received is that the globalization has reinforced whatever
the economic structure was in these countries. If you had a
ruling elite as you did in many--I am not talking about China
of course, but take South American countries or others--that
this has simply--they have been the principal gainers from
globalization. So as I see that, in the United States, the
wealthy have been also. That pattern I am told is repeated in
other countries, but I am really relaying to you the opinions
of others, not my own direct experience.
Chairman Miller. Dr. Gomory, is there an economic benefit
besides simply having a more fair society, of having a more
even distribution of wealth, income, and what is that benefit?
Dr. Gomory. Well, let us just stick to the United States.
In the United States, we have had a productivity increase for
30 years, but people are, from the middle class on down,
struggling to pay their bills. And it is not that the
productivity increase wasn't there, it is just that they didn't
get it. That is the downside.
Chairman Miller. Dr. Scott.
Dr. Scott. Yeah, I would answer that very differently, not
in any way contradictory. It has a huge impact in the United
States. We are almost alone in operating our educational system
at the first 12 grades on a market, and the market is local
real estate taxes. You want to get a good school system, you
now look and you say, ``Who has the good school systems?'' It
is the people that have the big tax base. The big tax base is
then wealthy people, and they are attracting more and more; and
now we are getting segregated schooling all over the country
out of this. Other countries pay their school teachers
typically either by a province or by a Federal Government. We
are paying them by local real estate taxes. So as you are
building this, you are building a self-reinforcing thing. We no
longer have mobility of the labor force that is greater than
Europe. It is the other way around. So you are creating
something where a whole lot of people are being deprived of the
chance for a good education because they are in a school
district that doesn't have the money to do it, and that is
particularly what is going on around our big, urban areas. So
yes, it does. We are going to deprive all sorts of people of a
good education as the wealth concentrates and people learn to
buy their way into a place where they can get a good school.
Chairman Miller. Mr. Baird, do you wish to ask another
round of questions?
Mr. Baird. I would, if I might.
Chairman Miller. All right. Mr. Baird.
Pension Funds
Mr. Baird. Given that incredible amounts of money are
available in State and federal pension funds, can you talk a
little bit about constructive or counter-productive roles
pension funds can play and some of the kind of reforms you
talked about?
Dr. Blair. Let me take that on. It is true that State and
local pension funds have been among the most activist in the
shareholder rights movement if you want to call it that. And it
does seem to me that some of them have played very constructive
roles in the almost behind-the-scenes conversations that they
have had with companies than the rhetoric that you see in the
newspaper would tend to suggest--when General Motors was really
in serious trouble in the 1980's, CalPERS, the California State
Public Employees Retirement System, did some behind-the-scenes
maneuvering along with a number of other institutional
shareholders to pressure the board to change management and to
make changes that needed to be made. And I certainly think that
they have the potential to play a role in insisting on the
overall performance of the company because they have a
constituency that is in the state where they are operating in
the community. So they ought to be paying attention to other
beneficiaries as well--and what is good for the beneficiaries--
both in the financial terms and in the larger picture.
Ironically, corporate pension funds are actually precluded from
doing that because of a Department of Labor ruling that said
that pension funds that are regulated under ERISA are required
to pay attention to the financial interest only and not to pay
attention to other interests that might affect the
beneficiaries of those pensions. It was kind of a perverse
rule, but it was put in place in the 1980s, and it is not--as I
understand it, it is a Department of Labor regulation, rather
than a statute.
The thing about pension funds is that they tend to have the
most long-run interests because there is money flowing into
pension funds that is to be held there for 10, 20, 30 years for
the beneficiaries. So they intend to have a more long-run
focus. I don't think the problem is coming from pension funds,
and I think they have a potential role that could actually be
productive.
Hedge Funds
Mr. Baird. Let us look at a different--and you may have
mentioned this already so forgive me--the role of hedge funds
in this issue in either making the problem worse or possible
ways they could improve it.
Dr. Blair. I am not an expert on hedge funds. One of the
things that really troubles me about hedge funds is that they
don't disclose anything. They are not required to disclose
anything. So we don't know how their executives are being
compensated. There are stories that the hedge funds management
gathers two percent of the gross amount of money under
management plus 20 percent of the profits annually. That
produces some outrageous results in which they can, by taking
very high risk strategies, they get their two percent every
year and then they can take off 20 percent when their strategy
wins but they don't have to give any back when their strategy
loses. And so they are in a heads-I-win, tails-you-lose
situation. Now, what is puzzling to me is that the market
hasn't regulated it, and I think the reason why the market
hasn't regulated that so far is partly because they had a
string of good years, and so it caused a lot of money managers,
and even like private endowments, to say, ``Well, let us put
some of our money with these hedge funds.'' I would hope that
in the wake of the financial crisis that has resulted from the
mortgage lending and the securities that were based on mortgage
lending, you will see some of these institutions saying,
``Oops, maybe that wasn't such a good idea. Maybe we should not
invest so much of our money with hedge funds.'' But I am a
strong believer in disclosure. I think if hedge funds had to
disclose more of what they were doing that they would then be
subject to embarrassment, and I believe in embarrassment as a
regulatory device.
Mr. Baird. May I ask one other question, Mr. Chairman?
Chairman Miller. I am sorry. I thank all the witnesses in
the first panel for their testimony. If we could now have the
testimony of the second panel, I think we will be called to
votes before too much longer. I would like to see if we can get
in the second panel's testimony. But, I thank all of you.
Panel II:
Thank you. I would now like to introduce our second panel.
The first witness is Mr. James R. Copland, III. Mr. Copland is
the Chairman of Copland Industries and Copland Fabrics located
in Burlington, North Carolina. It is not in my long-term
interest for all Americans to realize that some Southerners
when they act unsophisticated and guileless actually have a
pretty good idea of exactly what they are doing. They may just
be playing you, and I pointed out to Mr. Copland that I did
know in the past that he was a Morehead scholar at the
University of North Carolina at Chapel Hill and son, Jason, who
now works in the family business, has a Master's degree from
the Amos Tuck School of Business at Dartmouth. So welcome, Mr.
Copland, and I hope you don't give our secret away. Second is
Mr. Brian O'Shaughnessy, who is the Chairman of Revere Copper
Products located in Rome, New York, and third, Mr. Wes Jurey,
the President and CEO of the Arlington Chamber of Commerce in
Arlington, Texas. Mr. Jurey, I am sorry you did not get to meet
your charming and capable Member of Congress, Eddie Bernice
Johnson, but you are lucky to have her.
And now, all of you know that your oral testimony is
limited to five minutes, and after that the Members of the
Committee will have the opportunity to ask rounds of questions.
Again, to put you at ease, we would like to put you under oath
under penalties of perjury. Do any of you have an objection to
being sworn in? And do any of you--are any of you represented
by counsel? No? All right. If you would all now stand and raise
your right hand? I understand Jason may also be testifying, so
if you would stand as well? Do you swear to tell the truth and
nothing but the truth? All right.
Mr. Copland, you may begin.
STATEMENT OF MR. JAMES R. COPLAND III, CHAIRMAN, COPLAND
INDUSTRIES/COPLAND FABRICS, BURLINGTON, NC
Mr. James Copland. First, thanks for the opportunity to
speak before this esteemed committee.
America needs a new manufacturing policy. I don't believe
that anyone in America is opposed to free trade as long as it
is fair trade, but when foreign governments subsidize,
manipulate their currency, flout legal requirements and
tactically condone worker and environmental abuses, it is
impossible for Copland or any domestic manufacturer to compete.
Under such circumstances, Copland isn't competing against
foreign companies but they are competing against foreign
governments. This is bad manufacturer policy.
Let us look at the People's Republic of China. They are the
800-pound gorilla in international trade. As a communist
country, most of China's industry is government owned or quasi-
government owned. The Chinese government buys their capital
equipment, or in the case of quasi-government-owned companies,
it guarantees the purchase. Chinese companies often end up
paying zero capital costs, a tremendous advantage that no U.S.
competitor can overcome.
In many cases, the Chinese government subsidizes utility
and transportation costs but that is not all. China also
provides a 17 percent export subsidy on goods shipped to the
United States when it fully rebates value-added taxes. China's
currency is pegged to the dollar and it is undervalued by
approximately 40 percent. If our dollar goes down, the Chinese
currency goes down. The yuan is not allowed to float on the
world market like other currencies. This subsidy makes China's
goods 40 percent cheaper in the market.
Finally, China has no EPA, no OSHA, no workmen's
compensation, no unemployment insurance. Their whole system is
different from ours, a communist system, yet U.S. manufacturers
must compete against them, an impossible task.
People often talk about wage rights. Sure, China's wages
are a mere fraction of ours with no child labor laws, no
overtime, few benefits, but let me be perfectly clear. Wages
are not the only issue. U.S. workers are much more efficient.
In many cases, if a Chinese company's labor costs were free,
they still could not compete without subsidies from their
government. U.S. manufacturers would win hands down,
absolutely. No company can compete when your competition is a
foreign government determined to spend whatever it takes to
force you out of the market and the U.S. Government does
nothing about it. The U.S. Government recognized problems with
the communist Soviet Union but for some reason it fails to see
it with China. This is one of the things I mean when I say in
my written testimony that the United States has an
uncompetitive manufacturing policy.
I also want to talk about one aspect of trade agreements
that has not been given proper emphasis, the human factor.
Millions of Americans are losing their jobs. Their jobs are
being moved overseas and they can't get other jobs. Don't think
there are high-tech jobs available for those folks, because
there aren't. They are being shipped to China and India too.
Moreover, many of the factory workers being laid off in the
United States aren't trained for those jobs, even if they did
exist. If those that were laid off are lucky, they have landed
jobs flipping hamburgers or as a greeter at some retail store.
Every American deserves the right to provide for his family, to
own a home and to educate his kids, but our flawed
manufacturing and trade policies are taking this away. Our
Constitutional preamble says a government of the people, by the
people and for the people. We have forgotten about the words
``for the people.''
Go to the small towns in North and South Carolina. Mills
are closed. Stores are closed with weeds growing up around
them. But you know it is really bad when you see the churches
closing. Someone needs to think about the hardworking people
and what is happening to them. They are left out of the thought
process when flawed manufacturing and trade policy is made. Let
me say that the big multinational companies, the importers and
big retailers have exactly what they want. They couldn't have
written a book and had it more perfect for their world. Buy at
the China price, sell at the U.S. price and don't worry about
whether the average American has a job or he can make ends,
meet but their world is not what is good for America.
You hear a lot of political candidates talking about the
economy, our financial crisis and health care. They talk about
the result but they don't talk about the cause. Subprime
mortgages have been around for decades, car loans as long as
there have been cars, credit cards for decades. The primary
reason people can't make their payments now is because they
don't have any money. In most cases, the reason they don't have
any money is because they have lost their jobs or they now have
jobs making a fraction of what their pay was before their jobs
were exported. If these people had their manufacturing jobs,
they wouldn't have the economic problems and financial problems
we now have. People often got their health insurance from their
jobs. Now many of those jobs have moved offshore because of our
flawed trade agreements. No wonder we have a health care
crisis. Americans just want their manufacturing jobs back. The
U.S. Government's policy is creating millions of jobs, all
right, but they are creating them in the People's Republic of
China and Vietnam at the expense of hardworking Americans here
at home.
Our country should be ashamed, totally ashamed of what our
government has done to working people in America. People are
angry now, and when they connect the dots, and they are going
to connect them, they are going to know where to focus their
anger.
[The prepared statement of Mr. Copland follows:]
Prepared Statement of James R. Copland III
Introduction
My name is Jim Copland and I am the Chairman of Copland Industries/
Copland Fabrics, a company located in Burlington, North Carolina.
Copland Industries/Copland Fabrics is a textile company whose main
business historically serviced the home furnishings industry in the
United States. We manufactured fabrics for curtains, draperies and
blinds among other home furnishing products. Due to the U.S. home
furnishing market being overrun by imports, especially by those of the
subsidized variety from China, employment at Copland Industries/Copland
Fabrics has fallen from more than 1,000 in recent years to less than
300 and we have been forced to exit many of our traditional business
markets.
To give you an example of the one of the competitive challenges
faced by Copland Industries/Copland Fabrics, in the man-made fiber
curtain and blinds tariff lines not included in the U.S.-China textile
bilateral agreement due to expire at the end of this year, U.S. imports
from China exploded by 6,912 percent, jumping from 845,000 kilograms in
2001 to 59.265 million kilograms in 2007.\1\ China accounted for almost
107 percent of the total U.S. growth in imports for those products
during the time period, meaning the rest of the world actually lost
U.S. import market share. In 2007, China held a 90.2 percent U.S.
import market share for man-made curtains and blinds not under quota
compared to a 7.7 percent market share in 2001. A flood of imports from
China in products like the ones for which we used to make fabric is one
of the main reasons why my home town of Burlington has lost nearly 40
percent of its manufacturing jobs since 2001, making it the hardest hit
metro area for manufacturing job loss in North Carolina.\2\
---------------------------------------------------------------------------
\1\ Source: U.S. Office of Textiles and Apparel.
\2\ Source: U.S. Bureau of Labor Statistics.
---------------------------------------------------------------------------
Copland Industries/Copland Fabrics also is a member of the American
Manufacturing Trade Action Coalition (AMTAC), a lobbying organization
dedicated to preserving and promoting domestic manufacturing. On May 1,
2008, my son Jason Copland, CEO of Copland Industries/Copland Fabrics,
participated in a conference call press event where AMTAC released a
comprehensive report on North Carolina jobs and manufacturing that
provides the basis for much of the following testimony.
The two main points I want to drive home are these: (1) the U.S.
Government's uncompetitive manufacturing policy is responsible for much
of the steep decline in manufacturing employment and investment that
significantly is hindering economic growth in the United States and in
my home State of North Carolina and hurting working people; and (2)
U.S. manufacturing will continue to suffer unless Congress and the Bush
Administration intervene with policies that encourage rather than
discourage manufacturing investment in the United States--and the first
policy step in this direction is countering the predatory trade
practices of China and other countries.
If the United States comprehensively were to address its
manufacturing competitiveness policy problems, domestic manufacturers
likely would rebound strongly. This is because only the most efficient,
productive, nimble, and innovative companies have been able to survive
the severe manufacturing economic downturn since 2001.
But let me be clear. As long as the current status quo on the U.S.
Government's manufacturing policy continues, the United States will
have much more difficulty ameliorating the pain an economic recession
will inflict on its citizenry in a timely manner. To wit, the 2006 U.S.
Department of Labor study of the 1.085 million U.S. manufacturing
workers who were displaced between 2003 and 2005 from jobs that they
had held for three or more years showed that only 64.5 percent of those
workers gained reemployment and that just 20 percent of them found a
job that paid better than the one they lost.\3\
---------------------------------------------------------------------------
\3\ Source: U.S. Department of Labor. See: http://www.bls.gov/
news.release/disp.t07.htm
Record Debt Stimulus Should Have Created Booming Domestic Manufacturing
Sector
U.S. manufacturing is mired in the midst of a crisis unprecedented
since the Great Depression. Deeply flawed U.S. trade policy toward
domestic manufacturing is the single most important root cause of the
illness, undermining U.S. manufacturing competitiveness on a global
basis.
Absent a rational U.S. trade policy, U.S. manufacturing should be
experiencing the best of times. Consider the following. Since 1950,
U.S. Gross Domestic Production (GDP) has grown 550 percent in
inflation-adjusted terms\4\ while the U.S. population has doubled from
150 million to 303 million. Since 1990, U.S. GDP has grown by a little
more than 50 percent in inflation-adjusted terms while the U.S.
population has increased by 54 million.\5\
---------------------------------------------------------------------------
\4\ Source: U.S. Bureau of Economic Analysis.
\5\ Sources: U.S. Bureau of Economic Analysis and U.S. Census
Bureau.
---------------------------------------------------------------------------
Moreover, the percentage of U.S. GDP used for consumer consumption
has been above 70 percent in each of the previous six years.\6\ Noting
this figure, it should not be surprising that U.S. household and
Federal Government debt has skyrocketed to unprecedented levels.
Together, household and federal debt almost have doubled over the past
seven years, soaring by $10.4 trillion to reach $23.1 trillion, an
amount 64 percent larger than the entire Gross Domestic Product
(GDP).\7\ In comparison, total U.S. household and federal debt was 27
percent larger than GDP at the end of 2000. While the current record
debt level is the basis for the debt crisis that now has plunged the
United States into a new and possibly severe recession, in recent years
it should have served as the greatest stimulus to U.S. manufacturing
since the need for production to fight and win World War II.
---------------------------------------------------------------------------
\6\ Sources: U.S. Department of Commerce, U.S. Bureau of Economic
Analysis, and MBG Information Services.
\7\ Sources: U.S. Department of the Treasury, U.S. Department of
Commerce and MBG Information Services.
---------------------------------------------------------------------------
Instead, the United States by far suffered its slowest seven-year
job growth since the demobilization following World War II. Although
the U.S. Census Bureau estimates that the U.S. population grew by 6.9
percent, expanding by 19,622,932 people from 283,946,833 on January 1,
2001 to 303,569,765 on January 1, 2008, the United States added only
5,587,000 jobs for a seven-year employment increase of 4.2 percent,
growth far short of the 9,140,000 job creation figure necessary to
maintain employment participation rates at January 2001 levels. The
U.S. manufacturing sector suffered even worse, losing 3,361,000 jobs.
Additionally, annual inflation-adjusted U.S. GDP growth has been
weak, averaging just 2.55 percent per year for the seven-year period
ending in 2007.
Indicators of the National Manufacturing Crisis
Rather than showing strong gains in employment, capacity, output,
and investment that normally would be expected in an economy
experiencing the level of consumer stimulus that the United States has
seen in recent years, the evidence instead demonstrates that U.S.
manufacturing has slumped severely.
Last year, the United States ran a trade deficit of $708.5 billion,
including a $498.9 billion deficit in manufacturing goods. The
cumulative numbers even are more troubling. Since 1980, the cumulative
U.S. trade deficit is $6.365 trillion, with manufacturing goods
accounting for $5.249 trillion of that figure. Of even greater concern,
almost 59 percent of that trade deficit in manufactured goods, $3.08
trillion, has been accumulated since 2001. Even the U.S. dollar's 24.2
percent fall against the U.S. Federal Reserve Board's price-adjusted
``Broad'' Index of world currency values since January 2002\8\ has
failed to increase U.S. exports enough materially to stanch the trade
red ink.
---------------------------------------------------------------------------
\8\ Source: Federal Reserve Board's price-adjusted ``Broad'' Index
of currency values.
---------------------------------------------------------------------------
The United States cannot continue to withstand the problems
associated with a runaway trade deficit indefinitely. But don't just
take my word for it; others agree:
``The present level of the current account deficit is
enormous, it is unprecedented and I believe it is
unsustainable.''
-- Martin Feldstein, Professor of Economics at Harvard
University, former Chairman, Reagan Council of Economic
Advisors
``[T]he United States must now attract almost $7
billion of capital from the rest of the world every working day
to finance its current account deficit and its own foreign
investment outflows.''
-- C. Fred Bergsten, Director, Institute for
International Economics
``[O]ur trade deficit has greatly worsened, to the
point that our country's ``net worth,'' so to speak, is now
being transferred abroad at an alarming rate. A perpetuation of
this transfer will lead to major trouble.''
-- Warren Buffet, Chairman, Berkshire Hathaway
So, how can it be that the United States, a country that possesses
the most sophisticated industrial complex in the world, spends billions
on research and development and product innovation, and has one the
world's most advanced transportation, communication, and higher
educational infrastructures, cannot run a trade surplus in virtually
any manufacturing sector?
The reason why the United States runs massive trade deficits in
products where free-trade theory posits America should have a
comparative advantage is because foreign government intervention
negates comparative advantage with value-added tax schemes, manipulated
currencies, State sponsored subsidies, lack of protections for
intellectual property rights, below market interest rates, and non
performing loans that create an absolute advantage for their
manufacturers.
These foreign predatory practices often are compounded by other
factors such as pennies-per-hour labor, blatant disregard for
environmental protection, lack of reasonable labor rights and workplace
safety standards, and lack of basic benefits such as health care.
Consequently, it should surprise no one that other key economic
health indicators for U.S. manufacturing show either an industry in
distress or the weakest growth on record in the last six decades.
The U.S. manufacturing sector's inflation-adjusted capital
expenditures for plant and equipment have plunged dramatically. The
2006 expenditure amount of $116.6 billion was smaller than each of the
amounts for 1978 ($120.7 billion), 1979 ($124.2 billion), and 1980
($129.7 billion), the last three years of President Jimmy Carter's
Administration. Furthermore, it was considerably lower than the $158.8
billion expenditure peak in 1997.
U.S. manufacturing capacity also has grown at a slower rate in the
2000s than in any of the past six decades. Growth was 50 percent for
the 1950s, 63 percent for the 1960s, 38 percent for the 1970s, 25
percent for the 1980s, and 57 for the 1990s. Projected growth for the
2000s has fallen to a mere 16 percent or 1.6 percent per year.\9\
---------------------------------------------------------------------------
\9\ Source: Federal Reserve Board, Industrial Capacity,
Manufacturing (SIC), Not Seasonally Adjusted.
---------------------------------------------------------------------------
U.S. manufacturing output numbers tell a similar tale as output in
the 2000s has grown at a slower rate than in any decade since the
1950s. Output growth was 69 percent for the 1950s, 54 percent for the
1960s, 40 percent for the 1970s, 23 percent for the 1980s, and 56
percent for the 1990s. Projected output growth for the 2000s is an
anemic 13 percent or 1.3 percent per year.\10\ For the category that
covers much of the Copland Industries production, U.S. Textile Mills,
output is down 50.4 percent from its peak in December 1997.
---------------------------------------------------------------------------
\10\ Source: Federal Reserve Board, Industrial Output,
Manufacturing (SIC), Not Seasonally Adjusted.
---------------------------------------------------------------------------
Finally, U.S. manufacturing employment collapsed between 2000 and
2003 and has yet to recover from the downturn. It now has plummeted to
13.6 million, its lowest level since May 1950 one month prior to the
eruption of the Korean War. Employment in the U.S. textile and apparel
sectors has been even harder hit, falling from 1,048,300 in January
2001 to 506,200 in April 2008--a loss of 542,100 jobs and a decline of
51.7 percent.
Pollyannas arguing that little is wrong with U.S. manufacturing
cite U.S. manufacturing productivity increases as the main reason for
employment decline. Although U.S. manufacturing productivity indeed has
doubled in recent years, U.S. demand for manufactured goods has
tripled. Because U.S. growth in demand for manufactured goods exceeds
growth in productivity, the United States should be adding
manufacturing jobs instead of losing them if it were maintaining its
market.
The real culprit in the loss of U.S. manufacturing jobs is the loss
of markets and the loss of domestic markets to offshore producers in
particular. Since 1980, U.S. demand for durable manufactured goods has
soared nearly 400 percent. U.S. production of durable manufactured
goods, however, only has grown by 40 percent of that total.\11\ To
further illustrate this point, U.S. Business and Industry Council
Research Fellow Alan Tonelson conducted a study on import penetration
rates for 114 high tech and other capital-intensive industries in the
U.S. manufacturing sector. His research showed that import penetration
rates for those industries jumped by 58.6 percent from a penetration
rate of 21.4 percent in 1997 to 33.9 percent in 2006.\12\
---------------------------------------------------------------------------
\11\ Source: U.S. Commerce Department, U.S. Federal Reserve and MBG
Information Services.
\12\ See USBIC Research Alert, New Data Show Import Growth
Depressing U.S. Industrial Output; Advanced U.S. Manufacturers Keep
Losing Ground in Home Market, by Alan Tonelson and Sarah Linden,
January 8, 2008.
New Competitive Trade Policy Needed to Restore Health of U.S.
Manufacturing
Considering the undeniable plight of U.S. manufacturing, a
comprehensive new U.S. trade policy to boost competitiveness
desperately is needed.
Require Reciprocity--U.S. trade policy must be redirected to its
original roots in reciprocity, a concept clearly not present in the
global economy's chief trade regime, the World Trade Organization
(WTO). In the Uruguay Round, the United States agreed to lower or
eliminate most barriers to its market for manufactured products without
receiving commensurate market access from the rest of the world in
return. Today, the average U.S. bound tariff for industrial products is
three percent, while the average worldwide bound tariff is 30
percent.\13\ Moreover, the average trade weighted U.S. industrial
tariff stands at less than 1.7 percent.
---------------------------------------------------------------------------
\13\ Statement of Senator Charles Grassley at Senate Finance
Hearing on WTO negotiations 10/27/2005.
---------------------------------------------------------------------------
In this regard, one significant problem is the ability of WTO
members to self-designate themselves as ``developing countries,'' a
status granting them more favorable trading privileges than self-
designated ``developed'' countries such as the United States. The
ability of WTO members to self-designate their country status must be
eliminated and replaced with objective criteria that accurately measure
a country's ability to compete in the global trading arena.
Take China for example. While it may be a developing country in
many respects, it is an international superpower in terms of global
trade. In both 2006 and 2007 China exported more manufacturing goods to
the world than did the United States.\14\ Yet under the current WTO
regime, China is allowed to maintain high tariff walls and other
substantial non-tariff barriers to market access as a self-designated
``developing country.''
---------------------------------------------------------------------------
\14\ Sources: U.S. Department of Commerce, China Customs, and MBG
Information Services.
---------------------------------------------------------------------------
The ongoing Doha Round negotiations only further would exacerbate
the lack of reciprocity afforded to U.S. producers. The Doha Round's
Non-Agricultural Market Access (NAMA) text grants numerous exemptions
to developing countries such as that contained in the Hong Kong
Declaration's paragraph 14, ``Take fully into account the special needs
and interests of developing countries including through less than full
reciprocity in reduction commitments.'' The NAMA Chairman's July 2007
text states, ``There is almost unanimous support that a simple Swiss
formula with two coefficients should be adopted.'' Finally, for
developed countries such as the United States, the maximum industrial
tariff allowed proposed in the current NAMA negotiations is to be
between eight and nine percent. In contrast, developing countries such
as China will be allowed a tariff ceiling that would fall between 19
and 23 percent.
Offset the VAT Border Tax Disadvantage--Currently, 149 countries,
accounting for approximately 95 percent of all U.S. trade, utilize a
border-adjusted, value-added (VAT) tax system implemented at average
rate of 15.4 percent. This tax often is among a country's most
significant revenue sources to pay for such expenditures as
nationalized health care and other vital government services.
Countries utilizing value-added tax systems impose those taxes on
the cost of an import plus all shipping, handling, insurance and tariff
expenses. They also rebate any VAT paid on a domestically produced good
that is exported. Meanwhile, the United States neither rebates the
taxes paid by a producer upon the export of a good nor imposes a
significant tax burden on imports.
Consequently, goods produced in VAT countries have a built-in price
advantage over their U.S. counterparts. Producers in VAT countries
often are able to export goods at a price that deducts the U.S.
equivalent of payroll and other taxes that are used to pay for social
security, unemployment insurance, and health care costs. U.S. producers
not only pay those U.S. taxes in the process of manufacturing
domestically produced goods, they also are forced to pay them in other
countries the moment a U.S. export is slapped with a VAT. AMTAC
estimates that border-adjusted VAT schemes disadvantaged U.S. producers
and service providers by a staggering $428 billion in 2006.
Ordinarily, a VAT would be viewed as an impermissible export
subsidy under current trade rules. Unfortunately, in the years
following World War II, the United States agreed to a loophole under
the old General Agreement on Tariffs and Trade (GATT) the exempted VAT
subsidies. Since allowing that loophole, use of the VAT grew from just
France to almost the rest of the world, 149 countries. And as one would
expect, VAT rates often have risen as tariff rates have fallen,
creating a constant, but less visible barrier to U.S. exports. For the
European Union (EU), the average barrier to U.S. exports has remained
nearly constant at 23.8 percent since 1968.\15\ Although the average EU
tariff has dropped from 10.4 percent in 1968 to 4.4 percent in 2006,
the average EU VAT has risen from 13.4 percent to 19.4 percent.
---------------------------------------------------------------------------
\15\ Sources: Simple averages of MFN tariff rates on industrial
products applied by EU countries are from the OECD and UNCTAD. For
2006, the latest available tariff rate from UNCTAD, for 2003, is
assumed to remain constant. Simple averages of standard VAT rates of EU
members with a VAT in effect are from the European Commission.
Aggregate trade barrier is the sum of the average tariff rate and the
average VAT rate for each year examined.
---------------------------------------------------------------------------
Last year, Congressmen Bill Pascrell (D-NJ), Duncan Hunter (R-CA),
Mike Michaud (D-ME), and Walter Jones (R-NC) introduced H.R. 2600, the
Border Tax Equity Act, to offset the VAT disadvantage to U.S. producers
and service providers. Congressman Steven Rothman (D-NJ) of the Science
and Technology Committee's Subcommittee on Oversight and Investigations
also is among the 15 total (seven Democrats and eight Republicans)
House Members currently sponsoring the bill. H.R. 2600's swift
enactment is a key to restoring U.S. manufacturing health.
Make Currency Manipulation an Actionable Subsidy--U.S. congressional
and executive inaction against blatant currency manipulation by China
is inexcusable. For years that country has pegged the value of its
currency, the yuan, to the U.S. dollar at an artificially low rate.
Factoring inflation, the value of the yuan has risen in value by less
than five percent against the U.S. dollar since its peg was
``loosened'' to a basket of currencies in 2005. This policy has enabled
China to simultaneously lower the cost of its exports and raise
substantial barriers to imports.
Since 2001, the year China joined the WTO, the U.S. merchandise
trade deficit with that country has exploded from around $80 billion to
a staggering $256 billion in 2007.\16\ The cumulative U.S. trade
deficit with China during that same time period for manufactured goods
was a staggering $1.2 trillion!
---------------------------------------------------------------------------
\16\ Sources: U.S. Department of Commerce, U.S. Bureau of Economic
Analysis, and MBG Information Services.
---------------------------------------------------------------------------
The United States imported $313.6 billion in manufactured goods
from China in 2007. If, for example, China were undervaluing its
currency by 35 percent, a figure not unreasonable to many experts, it
would amount to a subsidy of nearly $110 billion to Chinese
manufacturing exporters. With subsidies like this, its should surprise
no one that less productive and efficient Chinese manufacturers can
ship their products halfway around the world to the United States and
still undercut the prices of their U.S. competitors.
Congressmen Tim Ryan (D-OH) and Duncan Hunter (R-CA) have
introduced H.R. 2942, the Currency Reform for Fair Trade Act of 2007,
to discourage currency manipulation by China, Japan, and other
countries. A total of 44 Democrats and 31 Republicans (75 House Members
total) are sponsoring the bill, including U.S. Representatives Eddie
Bernice Johnson (D-TX), Dana Rohrabacher (R-CA), and James
Sensenbrenner (R-WI) of the Science and Technology Committee's
Subcommittee on Oversight and Investigations.
H.R. 2942's strongest deterrent is a provision that would make
currency manipulation an actionable subsidy under U.S. countervailing
duty (CVD) law. Enactment of this legislation is imperative if the
United States is to reduce its manufacturing and trade policy
competitiveness gap with China, Japan and others.
Separate Trade Enforcement from the Office of the U.S. Trade
Representative--It is unreasonable to expect that an office who on one
hand is charged with negotiating trade agreements with other countries
to then be able to turn around and impartially punish them when they
run afoul of U.S. trade law. The conflicts of interest inherently are
too great. As such, all enforcement of U.S. trade law should be
separated from the Office of the U.S. Trade Representative (USTR).
A separate U.S. governmental entity should be set up as an
independent agency or in another cabinet-level department, such as the
U.S. Department of Commerce, to enforce U.S. trade law. This body would
be charged with aggressively pursuing dumping, subsidy and intellectual
property rights violation cases within the U.S. judicial and regulatory
system and at the WTO. The anti-competitive dumping and illegal subsidy
practices revealed in recent cases against China (the case on coated
free sheet paper is a good example) should provide enough work to keep
any enforcement agency busy for years.
Also as part of this reform, the U.S. Government should reduce the
cost and barriers to U.S. manufacturers attempting to bring trade
enforcement cases. Presently, anti-dumping and CVD cases often cost
millions for U.S. manufacturers to prosecute effectively. Even after
making such a financial commitment, a favorable outcome is not
guaranteed. In addition, U.S. manufacturers in a product's supply chain
often have almost no access to trade law remedies due to a lack of
standing. Only the assemblers of the final product and/or its workers,
i.e. a union, usually effectively have standing to file a case. These
costs and barriers deter the filing of many legitimate trade cases. The
United States should consider adopting reforms to mimic the European
Union where manufacturers would submit data indicating a likelihood of
dumping or CVD infraction and the government then would investigate
them and render a decision.
Stop Negotiating FTAs With Countries That Cannot Buy Finished U.S.
Goods--Finally, the United States should stop negotiating free trade
agreements with countries or economic regions that either are unwilling
or unable to buy finished U.S. goods at the same rate they export to
the United States.
Flawed U.S. free trade agreements demonstrably have fueled the U.S.
trade deficit. Measuring U.S. Government data for domestic exports\17\
minus imports for consumption,\18\ the U.S. trade deficit with our free
trade partners has skyrocketed since 1989 from $13.55 billion to a
whopping $187.84 billion in 2007.\19\ With just Canada and Mexico
between 1994 and 2007, the United States ran a cumulative trade deficit
in manufacturing goods of $397.6 billion, a merchandise trade deficit
of $1.071 trillion, and a current account deficit in goods and services
of $942.2 billion.
---------------------------------------------------------------------------
\17\ Domestic Exports are defined as exports of domestic
merchandise include commodities which are grown, produced or
manufactured in the United States, and commodities of foreign origin
which have been changed in the United States, including U.S. Foreign
Trade Zones, or which have been enhanced in value by further
manufacture in the United States.
\18\ Imports for Consumption measure the merchandise that has
physically cleared Customs either entering consumption channels
immediately or entering after withdrawal from bonded warehouses under
Customs custody or from Foreign Trade Zones.
\19\ Source: U.S. Department of Commerce.
Instead of seeking out negotiating partners in small or developing
countries, the United States should be targeting agreements or economic
alliances with countries that have lucrative consumption markets and a
settled rule of law. Japan or the European Union would be examples of
two good candidates. These trade partners both have sufficient large
populations and high standards of living to buy sizable quantities of
U.S. exports if a good free trade agreement were negotiated and
---------------------------------------------------------------------------
properly enforced.
Conclusion
Despite the hardships it has faced, the health of U.S.
manufacturing quickly can be restored if the United States addresses
its manufacturing policy competitiveness issues by fixing its broken
trade policy. Weak and inefficient U.S. manufacturers closed their
doors years ago. Only the strongest and most efficient U.S.
manufacturers have been able to survive in such a hostile competitive
atmosphere. These companies will be well placed to ramp up new
investment, reclaim lost market share, and add employment if the U.S.
Government boosts competitiveness by removing trade policy obstacles
impeding their success.
Biography for James R. Copland, III
Education
Elementary and High School--public schools Burlington, NC
College--1962 graduate UNC-Chapel Hill
Morehead Scholar, Phi Beta Kappa
Degree--B.S. Business Administration
Work Experience
1962-Present--Copland Industries, Inc./Copland Fabrics, Inc.
1986-2004--President, Treasurer & CEO, Copland Industries, Inc. &
Copland Fabrics, Inc.
2004-Present--Chairman of the Board, Copland Industries, Inc. & Copland
Fabrics, Inc.
1970-Present--Director, Copland Industries, Inc. & Copland Fabrics,
Inc.
1963-1986--Director, Northwestern Bank, Burlington, NC
1977-1986--Director, Northwestern Bank, North Wilkesboro (Corporate
Board)
1986-1987--Director, First Union National Bank, NC Board
1988-1996--Director, Executive Committee, FirstSouth Bank, Burlington,
NC
1997-Present--Director, Chairman, MidCarolina Bank
1982-Present--Director, Vice President, Executive Committee, Lutheran
Retirement Ministries, Burlington, NC
1986-Present--Capital Treasurer, Macedonia Lutheran Church, Burlington,
NC
1994--Alamance County Man of the Year
2006--Business Leadership Award, Elon University
1992-1996--UNC Board of Visitors
Worked with various charities and foundations including--United Way,
Boy Scouts of America, Alamance Citizens for Education,
Alamance Community College, Salvation Army, UNC Honors Program
Married--Harriett E. Copland (40 years)
3 Sons--James R. Copland, IV; Dr. Spencer T. Copland, Jason C. Copland
Chairman Miller. Mr. O'Shaughnessy.
STATEMENTOF MR. M. BRIAN O'SHAUGHNESSY, CHAIRMAN, REVERE COPPER
PRODUCTS, INC.; MEMBER, BOARD OF DIRECTORS, COALITION FOR A
PROSPEROUS AMERICA
Mr. O'Shaughnessy. Thank you, Mr. Chairman.
My company is Revere Copper Products and was founded by
Paul Revere in 1801. We believe we are the oldest manufacturing
company in the U.S.A. Our factory is in Rome, New York, and
produces copper and brass sheet, strip, coil, bar and extruded
products for shipment to other manufacturing companies. Revere
is a domestic manufacturing company and outsources nothing. My
unwillingness to outsource or sell out is based on loyalty and
patriotism.
Please note that I also represent and serve on the Board of
Directors of the Coalition for a Prosperous America, or CPA.
This coalition includes domestic manufacturing, organized
labor, farming and ranching. You should visit CPA at
www.ProsperousAmerica.org. My testimony includes positions on
issues that have not yet been considered by CPA but are ever
present in Revere's besieged financial results.
Mr. Chairman, the United States is alone among major
trading nations in the world without a national trade policy.
China and the rest of the world are waging a mercantilist war
on the United States and the United States is sleeping as its
factories, farms and ranches are being systematically
destroyed. We desperately need a national trade policy instead
of a patchwork of trade agreements that deepen the current
problems and enable foreign protectionism. Our nation's focus
on general trade agreements and FTAs is misguided, inadequate
and lacks strategic thinking.
While I am a proponent of free trade, the agreements to
date compound the problem while deceiving many who think free
trade is being promoted. This is one problem that has real
solutions.
First, the United States cannot continue to negotiate
global or bilateral trade agreements as long as the other
country is free to manipulate its currency and use VATs to
offset any tariff reduction. Also, labor, environment,
antitrust, quality and intellectual and other property
standards and trade agreements must be equivalent to the burden
placed on manufacturing, farming and ranching in the United
States or we just cannot compete and provide jobs in the United
States. Can you imagine competing in a global market that gives
your competition an eight-year head start? Yet that is exactly
what is being proposed to kill jobs with House legislation for
only domestic manufacturing companies to cap and trade and die.
If the environmental burden is unfair for our foreign
competition, it is unfair for us. In the global trade war, who
do you represent?
Second, the manipulation of its currency by China or any
nation is unacceptable. The first step should be to pass the
Ryan-Hunter bill, H.R. 2942, that would define currency
manipulation as an illegal subsidy and allow the application of
countervailing duties, CVDs, to offset the injurious impact of
currency manipulation. The Ryan-Hunter bill is designed to
sanction the use of CVDs to offset currency manipulation. We
must assume that the system that governs world trade is broken
and must be fixed immediately. If the use of CVDs to offset
currency manipulation does not lead China to stop manipulating
its currency, then the United States must take stronger
measures, even if it means stepping outside WTO rules.
Third, the United States must reform its tax and health
care systems and institute VATs on a scale that gives
production of goods and services in the United States a
competitive advantage. Currently, the United States is the only
country without such a policy. The United States must
significantly reduce or eliminate all national taxes, both
corporate and personal, including income, dividend, capital
gain, estate, FICA and unemployment taxes and replace them with
a consumption tax like a VAT. Under current international trade
rules, consumption taxes can be rebated on exports and imposed
on imports. The United States refuses to reciprocate,
disadvantaging all American-made goods that compete with
imports or are offered for export. No wonder we have such a
massive trade deficit. In my opinion, those taxes must also
include the tax of health care costs. My concern is simply that
health care cannot be paid for by job providers in the United
States competing with job providers abroad who pay little, if
any, health costs. Either the U.S. Government solves this
problem or outsourcing will resolve it.
Fourth, the United States needs to ensure that its citizens
and businesses have access to substantial additional low-cost
clean energy so that they are able to compete on the world
stage and keep the environment clean. Our government needs to
focus on the big picture of global trade and the competitive
position of the U.S. economy, which is deteriorating. Please
address these problems with a national trade policy
immediately.
When Paul Revere tried to rouse the countryside with his
wakeup call, what did the people do? They certainly didn't go
back to sleep. We all need to wake up and listen but we must be
careful who we listen to. Visit RevereCopper.com and learn
more. Wake up, America.
Thank you, Mr. Chairman.
[The prepared statement of Mr. O'Shaughnessy follows:]
Prepared Statement of M. Brian O'Shaughnessy
Who Do You Represent?
Three and a half million manufacturing jobs have been lost in the
USA since the year 2000. Some attribute it to increased productivity--
but previous recoveries typically resulted in a loss of about one
million jobs in spite of productivity increases. Some think it is our
country's responsibility to support fledgling economies because we are
the strongest, most powerful Nation in the world. Some say we need to
set a good example and others will follow. Make no mistake about it,
protectionism should not be the end game but it seems to be an
acceptable practice when used by everyone but the USA.
No matter how we try to rationalize it, millions of manufacturing
jobs are going overseas.
I'm sure this committee is well aware of the significant connect
between manufacturing and research and development. Manufacturing and
Technology News just ran an article on May 16, 2008 that puts the
foreign flight of technology in perspective. The article is titled,
``China Displaces United States In Georgia Tech's Technology Index.''
The article states, ``China has surpassed the United States in a
key measure of high tech competitiveness. The Georgia Institute of
Technology's biannual High-Tech Indicators finds that China improved
its technological standing by nine points over the period of 2005 to
2007, with the United States and Japan suffering declines of 6.8 and
7.1 respectively. In Georgia Tech's scale of one to 100, China's
technological standing now rests at 82.8, compared to the U.S. at 76.1.
The United States peaked at 95.4 in 1999. China has increased from 22.5
in 1996 to 82.8 in 2007.''
``The message speaks out pretty loudly,'' says Alan Porter, Co-
Director of Georgia Tech's Technology Policy and Assessment Center,
which produces the benchmark.
``I think the prospects are pretty scary.''
My company is Revere Copper Products. We were founded in 1801 by
Paul Revere and believe we are the oldest manufacturing company in the
USA. Our factory is in Rome, New York and produces copper and brass
sheet, strip, coil and extruded products for shipment to other
manufacturing companies. Revere is a domestic manufacturing company and
outsources nothing.
My unwillingness to outsource or sell out is based solely on
loyalty and patriotism.
Please note that I also represent and serve on the Board of
Directors of the Coalition for a Prosperous America (CPA). This
coalition includes domestic manufacturing, organized labor, farming and
ranching. You should visit CPA at www.prosperousamerica.org. My
testimony includes positions on issues that have not yet been
considered by CPA but are ever present in Revere's besieged financial
results.
So Revere is part of the copper and brass industry of the USA. In
December, 2006, China's State Assets Supervisory and Administration
Commission (SASAC) which is second only to its politburo directed that
this industry in China be designated a ``heavyweight'' and a ``vital
artery of the national economy and essential to national security.''
Revere's founding was considered vital to U.S. national security in
1800.
The U.S. Government loaned Paul Revere $10,000 to construct the
first copper rolling mill in North America. The War Department was
concerned about another war with the British and worried about the
domestic content of its naval vessels to wage such a war. The USS
Constitution needed copper sheathing to prevent barnacles from growing
on its sides underwater. Barnacles would slow the ship and cause extra
time in dock to remove them. Such copper was previously rolled in
Britain.
That's how Revere started and how the USS Constitution came to be
sheathed with Revere Copper.
Today, many of Revere's customers are manufacturing companies
located throughout the USA. Since 2000, about 30 percent of these
customers have shut down, moved offshore or outsourced their
production. Revere's customer mix is quite broad ranging from building
and construction, transportation, electrical and electronics including
weapon systems. Revere's engineers work on research and development
projects regarding national defense applications including the Nation's
new aircraft carrier under construction, the Gerald Ford. But in the
context of Revere's history, let's just describe what happened recently
to the production of a simple silver bowl.
Of course, this silver bowl was designed by Paul Revere.
In the year 2000, Revere shipped copper coils about 20 miles to
Oneida Ltd. Oneida cut and formed that copper into a bowl and plated it
with silver to produce a Paul Revere silver bowl. Now, that product is
as American as apple pie, right? Wrong. Today, that bowl is
manufactured in China and shipped to Oneida and sold as a Paul Revere
replica. You probably believe that the people of Revere just can't
compete anymore with the people of China.
Let me explain why our people can compete but our government does
not.
Let's assume the production cost of that silver bowl made in China
is 100 yuan. China manipulates its currency so that the exchange is now
about seven yuan to $1. So the production cost in China is $14.28. But
if the free market were to determine the rate of exchange, it would be
about four yuan to $1 and the production cost in China would be $25.00.
In other words, China manipulates its currency so that it
subsidizes the cost of manufacturing in China.
The current and the former U.S. administration have refused to take
any concrete action against such manipulation by China and have chosen
instead to jawbone. The problem with this strategy is that currency
manipulation by China is serving its best interests.
The manipulation of its currency reduces the competitiveness of
every other product, good and service in the world when compared to its
production in China.
This form of protectionism by China is reaping huge rewards as its
export-based economy is growing three or four times faster than the
rest of the world with factories being built at a pace beyond the
imagination of anyone just a few years ago. Meanwhile, factory jobs are
disappearing in the USA and the world. Even manufacturing plants in
Mexico are moving to China.
But this is more than an economic battle.
Did you catch the statement by Congressman Tim Ryan of Ohio
concerning the paper (``Unrestricted Warfare'') written by two Chinese
military strategists? They suggested that military supremacy be
achieved by undermining the manufacturing base of the United States by
maintaining China's currency at artificially low levels to gain an
economic advantage for Chinese manufacturing and destroying the
manufacturing base of the United States. Seems to be working, doesn't
it?
Personally, I admire the Chinese culture and believe that China
does not need such a disruptive currency policy to compete in the world
given its many other advantages. The Chinese economic policy is export
driven by taxing its citizens through currency manipulation which
drives inflation and takes away their disposable income. A market
driven currency exchange rate policy would drive China's economy toward
domestic consumption and a better life for its citizens.
But make no mistake about it, China is waging a mercantile war on
the world and the world is sleeping.
Why is the world sleeping? First, we must look at the role of the
multinationals. Remember in the 1980s when Japan was such a fierce
competitor in so many U.S. markets. The reaction by our largest
corporations was loud and largely one voice calling for tariffs and
restraints. Contrast that with today as most of the largest U.S.
corporations are so much more international and especially with their
investments in China. Many that do not have direct investments in China
buy substantial numbers of components from China's factories. Many have
set their strategic plans to produce components or products in China.
It may surprise you to learn that I don't have a problem with any
company that sets up a plant offshore or imports components or
products. But if manufacturing in America must compete with the
protectionist policies of any foreign government, that is not fair. And
if meaningful corrective action by the U.S. Government is thwarted by
U.S. manufacturing and financial service companies who gain from such
protectionism, that is wrong. CEOs of multinational companies are put
in a very difficult position by national trade policies.
They have to choose between their company and their country.
Let me explain. Earlier I mentioned that China practices a policy
of managing its currency at artificially low levels to gain a
competitive advantage for any export products or services produced in
China . . . by as much as 40 percent! Now, you must realize a simple
truth, a multinational that manufactures in China and benefits
significantly from this advantage doesn't want this to change.
It is not my intention to vilify multinationals or the capable CEOs
who run them. These executives are charged with representing the best
interests of their shareholders. Also, many of these CEOs of
``American'' companies are not U.S. citizens nor are many of their
shareholders. For example, the Chairman of Coca-Cola is Irish and its
President is Turkish!
It is important to appreciate that it is in our nation's best
interest to have the corporate headquarters of a multinational located
in the USA even if it has no remaining production facilities here. That
is not so that they can be taxed and regulated and driven away but so
that the high skilled, corporate level jobs are here not there . . ..
So when issues such as patriotism are raised in this paper, it is
really an appeal to U.S. political leadership not that of multinational
corporations.
Companies that manufacture in the USA and must compete with either
multinationals or companies that outsource components from abroad
believe currency manipulation is unfair and must be stopped. They see
other U.S.-based manufacturing plants shutting down and are concerned
that will be their fate. These domestic manufacturing companies want
the U.S. Government to take effective action to right this wrong and
the sooner, the better.
At a 2006 meeting I attended of an international economic policy
committee of an association of manufacturing companies, one
manufacturing company said that it buys components from China and does
not want the current situation to change. Now there's a breath of
honesty. Maybe not patriotic but at least he's honest.
Patriotic . . . why bring that word into the mix?
Well, you see the strength of manufacturing is an inherent strength
of our country. Some economists believe our country is in a transition
from a manufacturing economy to a service economy just as it
transitioned from an agricultural economy to a manufacturing economy
years ago. But maybe the manufacturing economy was simply layered on
top of our agricultural economy just as the service economy is layered
on the manufacturing economy. And it is certainly hard to argue against
the proposition that a weak manufacturing sector threatens our national
security.
Even so, some economists cite data that the manufacturing sector is
doing just fine as it is producing more than ever before. Such data is
misleading and you should consider the source. For example, statistics
on U.S. produced products include Dell computers which are merely
assembled in the USA from components produced abroad. We could argue
endlessly about this but the facts are the facts and the fact is we
have become a nation with a colossal trade deficit. In 2005, for the
first time in over a hundred years, our nation imported more food
products than it exported and our trade deficit in manufactured goods
continues to soar. Indeed, our nation's trade deficit is growing by $2
billion a day! (More about this later . . .)
Sounds like our nation needs some help.
Or at least some good advice . . . and that leads me to integrity.
You see when a CEO attempts to push an agenda that supports Chinese
protectionism rather than an agenda that goes against that
protectionism, maybe that CEO should declare that he or she is
conflicted on this issue and should be recused from any forum that
determines U.S. trade policy. Many of these CEOs have plants in the USA
which would benefit from freer trade but they support their growing
investments in plants in China and outsource components from China by
choosing their company's best short-term interests over that of their
own domestic plants and their country.
That's because they have to but you don't!
Supposedly, one issue before us today is how to stop China from
managing its currency so as to give its production of goods and
services an unfair competitive advantage. Or, is it? If you recall,
earlier I mentioned the multinational delegate, the honest one . . . he
said he was against a proposal that would raise his prices on the
components he buys from China. I believe the real issue is, ``Should
the USA support measures that will not work so multinationals can
support them or should the USA support measures that will work to cause
China to change its policy of managing its currency?''
The multinationals have endless arguments for stretching out the
process like . . .. ``We don't want to start a trade war now, do we?''
But we are already in a trade war, aren't we? Of course we are and we
are losing. We are pacifists in this war. How about this one by the
multinationals . . .. ``Your policies are protectionist!'' Yes, they
actually say that, can you imagine? Often the accuser benefits from
China's export subsidies which are clearly prohibited by the WTO as
protectionist.
The irony is that domestic producers are the victims of
protectionism not the beneficiaries.
Another argument we hear is, ``What about their fragile banking
system?'' This one has been around for years and of course, it is
impossible to amend an economic strategy let alone a banking system
that depends on subsidization to such an extent without removing the
subsidy, isn't it? Besides, their banks are owned by the same
government that is holding more than 1.7 trillion U.S. dollars worth of
official reserves. Maybe their banks are not quite as insolvent as you
have been lead to believe . . ..
China set up a system to manage the movement of its currency toward
market levels and then used it to move its currency at rates about four
percent per year compared to estimates of an underlying rate of
appreciation of five percent of its currency, thereby exacerbating the
problem.
Even if China were immediately to stop manipulating its currency,
there is nothing to deter China from returning to the policy at a time
of its choosing. Equally, other countries would be free to continue or
adopt similar mercantilist policies with impunity. In fact, the author
of a paper published by the UN Conference on Trade and Development in
``China in a Globalizing World'' (2005) has advised developing
countries that ``China's experience in the past decade can be seen as a
model of a successful development strategy.''
The author continued, ``As in other Asian countries in the past,
fixing the real exchange rate at a favorable level and promoting
exports offers the possibility of penetrating world markets rapidly and
experiencing strong growth and capital accumulation. The penetration of
foreign markets brings about the rise in income needed to finance
increased investment without recourse to net foreign capital inflows.''
The experience so far is that China is going to delay as long as it
can and make corrections in as small increments as it can get away with
given its support.
Part of that support comes from U.S. trade objectives which please
the multinationals that are aligned with the trade policies of China.
Never give in on trade issues, but, if ever, give slowly . . ..
There is no easy solution to this Chinese puzzle. Even I have
supported the verbal approach . . . for years. Our nation could simply
slap a tariff on all imports from Chinese and other nations that manage
their currency but I think we must take measured concrete steps that
increase in severity before such a step.
China is not the only country that manipulates its currency to gain
a competitive advantage. Other Asian nations also manipulate their
currency partly as a defensive mechanism so their producers of goods
and services can compete with goods and services originating from
China.
It is important to understand that the end of currency manipulation
will not end the depreciation of the U.S. dollar against other
currencies including China's yuan.
For this reason, it is difficult and perhaps impossible to develop
a coherent trade policy to deal with China without considering the tax
policies of our own country. China uses a Value Added Tax (VAT) to
protect its domestic production of goods and services and uses its
revenues to fund government programs such as national health care. VATs
are a tax but they are also a form of tariffs which are largely exempt
from World Trade Organization (WTO) rules. The WTO was established to
advance world trade. It has developed ground rules for international
commerce and mediates trade disputes. Of course, China also employs a
VAT tax but unlike everyone else, the VAT is applied in a
discriminatory manner which is in direct violation of WTO rules.
Market determined exchange rates simply put all nations back at the
starting gate for the race to determine who will win the battle to
produce competitive goods and services assuming all other things are
equal. Of course, all other things are not equal and because of this
our nation's inability to compete with China and the rest of the world
means that our currency will continue to depreciate and the standard of
living of all Americans will decline and our nation will grow weaker.
This is because other trading nations use revenues generated by
Value Added Taxes (VATs) to reduce the tax and health care burden on
their production of goods and services and the most ambitious nations
are developing energy policies which give them a competitive edge.
Here is a real world example of how VATs are used by other
governments to protect their industry. Revere had an industrial plate
mill in New Bedford, Massachusetts for 145 years. The plate was used in
heat exchangers and in unique applications for U.S. national defense.
It was considered the best quality plate in the world. Its major
competitors were located in Germany but could be located in China and
the principles and the result would be the same. These competitors were
able to undercut Revere's prices thanks to a VAT that the German
government applies to all goods and services sold in Germany, domestic
or imported.
When New Bedford shipped its plate to Germany for its consumption,
that plate paid the 19 percent German VAT tax. If the German mills ship
plate to the USA, the 19 percent VAT tax is rebated. VAT revenues allow
the German Government to help fund national health care costs and
reduce corporate taxes. So German competitors pay far less in taxes and
medical costs. Medical costs alone amount to about $10,000 per employee
for Revere. Ironically and tragically, the New Bedford workers had to
bear the burden of helping to pay for the health care of the German
workers they competed with through the payment of German VATs on any
Revere products shipped to Germany.
Naturally, Revere hardly shipped any product to Germany while its
German competitors just loved the U.S. market.
Meanwhile, the American worker is expected to respond to these
pressures by increasing productivity and reducing waste. The people at
Revere's New Bedford plant did that at an astonishing pace, averaging
productivity improvement at the rate of 10 percent a year for the last
six years. During this period the workers and management of this mill
did everything that was asked.
Yet, even that wasn't enough--on March 5, 2007, Revere announced
the closure of its New Bedford mill and the loss of 87 good paying
jobs.
In recent years, the USA has been negotiating Free Trade Agreements
(FTAs) in an effort to get other countries to lower tariffs. This has
led to the North American Free Agreement (NAFTA) in which the U.S.,
Canada and Mexico reduced outright tariffs. Around the time of the
negotiations, however, Canada instituted VAT taxes while Mexico
increased its VAT rates. VATs are excluded.
How can the USA continue to negotiate trade agreements allowing
other nations to offset tariff reductions with VATs and other forms of
border adjustable taxes and manipulate their currency?
These VATs are applied on our products by over 140 foreign
countries. The chart above shows how the European Union countries have
managed to increase VATs while lowering other types of tariffs--keeping
the effective tariff the same despite trade agreements. Mexico and
Canada have made similar adjustments despite FTAs. Countries that sign
FTAs are free to replace the tariffs they give up with VATs charged on
our goods sold to them.
The revenues collected by the foreign countries help pay for the
health care cost of their manufacturing workers that U.S. workers must
compete against. Foreign countries also have to collect VATs on their
domestic production to comply with World Trade Organization (WTO) rules
on trade but then use them to lower corporate and payroll taxes on
domestic production of goods and services. Foreign producers gain even
further as their nations refund their VATs on exports.
VATs protect the domestic production of goods and services in any
country that has them. The lack of a VAT in the USA allows European
nations to gain market share from the USA partially offsetting the
impact of China's manipulation of its currency on the production of
goods and services in Europe. That's one reason why Europe is less
vocal about China's mercantile war. The lack of VATs in the USA also
largely explains why the USA has a trading deficit with virtually every
other trading nation in every class of goods.
VATs have been adopted by all of the world's major trading nations,
excluding the USA and some oil producing Middle Eastern nations.
Another nail in the coffin of U.S. manufacturing would be if the
USA were to sign the Kyoto Treaty. The Kyoto Treaty exempts China,
India, Brazil and other developing nations from its standards. But the
carbon emissions per $1,000 of GNP in China are seven times that of the
USA while India emits three times as much. The Kyoto Treaty and other
measures such as Regional & National Greenhouse Gas Initiatives and
carbon cap and trade schemes drive manufacturing from developed
countries with more strict standards to countries with much worse
practices.
These treaties and regulations have the unintended consequence of
increasing carbon emissions and global warming as factories are
shutdown in the USA and Europe and production increases in China.
During the days of substantial aid programs by the USA to
developing nations, the primary consideration was to build an
infrastructure. That included large scale projects to supply low cost,
economic energy. Of course, what is true for developing nations is also
true for developed nations that must compete in a global economy . . .
the provision of low cost, competitive power is essential to success.
The gigantic footprint of windmills, solar energy, bio-fuels, and
hydropower is so vast and the costs so uneconomic that no nation that
is serious about engaging in the global competition for skilled jobs is
embarking on these power programs to the extent of the USA. Any energy
source that must be mandated, subsidized and surcharged to such an
extent cannot be economic, can it?
In my opinion, the best large scale, low cost source of clean
energy is nuclear. China is planning 40 new nuclear power plants; Japan
is building 10 more while France relies on nuclear for 80 percent of
its electricity. Why? Nuclear power is clean and low cost if sitting
and environmental concerns are managed. Nuclear waste is dangerous but
can be contained in areas much smaller than most people realize. Thirty
years of nuclear waste from a 1,000 MW plant would fit in an area the
size of a high school gym. If other countries can do it, why can't the
USA?
The loss of manufacturing jobs to date in the USA is only the tip
of the iceberg. The impact of currency manipulation, VATs and
environmental/energy costs are not limited to manufactured goods. Any
goods and services that compete in global markets, either directly or
as part of a supply chain, are exposed to these protectionist forces.
Future losses will go far beyond the continued loss of manufacturing
jobs and extend to the agriculture, food processing and service
industries. Indeed, Alan Blinder, former Federal Reserve Vice Chairman,
was quoted in the Wall Street Journal on March 28th saying that, ``. .
. as many as 40 million American jobs (are) at risk of being shipped
out of the country in the next decade or two.''
Policy-makers and citizens must realize the urgency of the matter.
The USA must see itself as a competing nation . . . competing in a
global market for good paying jobs. But it's not only about jobs. It is
also about national security and our entire economy. Factories
producing goods and services necessary for U.S. national defense are
moving offshore. The U.S. trade deficit is growing $2 billion a day.
China and Japan have each accumulated more than U.S. $1 trillion. The
accumulation of U.S. currency by China and other Asian nations is a
growing bubble.
So, the looming question is, ``What should be done to counter this
offensive and protective behavior by other nations?''
First, the USA cannot continue to negotiate global or bilateral
trade agreements as long as the other country is free to manipulate its
currency and use VATs to offset any tariff reduction. Also labor,
environmental, antitrust, quality and intellectual and other property
standards in free trade agreements must be equivalent to the burden
placed on manufacturing, farming and ranching in the USA or we just
cannot compete and provide jobs in the USA.
Can you imagine competing in a global market that gives your
competition an eight year head start? Yet, that is exactly what is
being proposed to kill jobs in current House legislation for domestic
manufacturing to cap and trade and die. If the environmental burden is
unfair for foreign competitors, it's unfair for us.
In the global trade war, who do you represent?
Second, the manipulation of its currency by China or any nation is
unacceptable. The first step should be to pass the Ryan Hunter bill
(H.R. 2942) that would define currency manipulation as an illegal
subsidy and allow the application of Countervailing Duties (CVDs) to
offset the injurious impact of the currency manipulation. The Ryan
Hunter bill is designed to be compliant with the rules of the WTO. That
being said, if the WTO refuses for any reason to sanction the use of
CVDs to offset currency manipulation, we must assume that the system
that governs world trade is broken and must be fixed. Immediately!
If the use of CVDs to offset currency manipulation does not lead
China to stop manipulating its currency, then the USA must take
stronger measures, even if it means stepping outside WTO rules.
Third, the USA must reform its tax and health care systems and
institute VATs on a scale that gives production of goods and services
in the USA a competitive advantage.
A smart competitor never looks at where a competitor is and tries
to match that position. A smart competitor might try to match where a
competitor is going to be at a certain time. But the most intelligent
competitor attempts to gain a competitive advantage by providing a
product beyond where the competition is going to line up in the race.
In order to achieve this objective, the USA must significantly
reduce or eliminate all national taxes, both corporate and personal,
including income, dividend, capital gain, estate, FICA and unemployment
taxes and replace them with a consumption tax like a VAT. Under current
international trade rules, consumption taxes can be rebated on exports
and imposed on imports. The U.S. refuses to reciprocate, disadvantaging
all American-made goods that compete with imports or are offered for
export. No wonder, we have such a massive trade deficit!
The regressive nature of a VAT or consumption tax should also be
offset by the provision of a national health care system to offset the
unique American health care ``tax on jobs.''
A national health care system could utilize private insurance to
provide the best choice to U.S. consumers or we could adopt a system
similar to that employed by Great Britain. It provides universal health
care for all but allows any citizen to opt out to private care as long
as they are willing to pay the cost. I am not aware of any nation that
is considering dropping its health care system to adopt the system used
in the USA which eats up twice as much GNP per capita and burdens the
domestic production of goods and services. My concern is simply that
health care cannot be paid for by job providers in the USA competing
with job providers abroad who pay little if any health costs.
Either the U.S. Government solves this problem or outsourcing will
resolve it.
Also, adverse impacts on charitable and lending institutions need
to be offset by matching charitable grants and providing housing
subsidies which could further offset the regressive VAT system and make
it fair. The new system should be designed to be revenue neutral for
all classes.
Fourth, the USA needs to ensure that its citizens and businesses
have access to substantial, additional low cost, clean energy so that
they are able to compete on the world stage and keep the environment
clean. The USA should use a system similar to the one used by the Base
Realignment and Closure (BRAC) Commission to determine the location of
surviving military bases to site nuclear power stations throughout the
USA. Competing nations all over the world are building terminals and
pipelines to receive natural gas to supply their manufacturing and
economic base. So must the USA. We simply must not allow the events of
9/11 to destroy our nation's ability to compete by stifling the
expansion of natural gas terminals and pipelines.
The U.S. is alone among major trading nations in the world without
a national trade policy.
The result is that the U.S. is being defeated in international
trade. American manufacturers are extremely efficient. Indeed, I would
argue those still remaining are the most efficient in the world because
they are surviving despite unfair foreign protectionist practices that
general trade agreements like GATT and Free Trade Agreements (FTAs)
allow to continue.
The demand in the U.S. for durable manufactured goods has soared
about 400 percent since 1980 as our economy has grown. But U.S.
production of these goods grew only 40 percent. Without foreign
government trade cheating, U.S. production would have been far greater.
Revere Copper's exports and domestic sales would have grown very large
indeed.
Our nation's focus on general trade agreements and FTAs is
misguided, inadequate and lacks strategic thinking. Although I am a
proponent of free trade, the agreements to date compound the problem,
while deceiving many who think free trade is being promoted.
China and the rest of the world are waging a mercantilist war on
the U.S. and the U.S. is sleeping as its factories, farms and ranches
are being systematically destroyed. We desperately need a national
trade policy instead of a patchwork of trade agreements that deepen the
current problems and enable foreign protectionism. That is what we
should be hearing about from our Congress and the remaining
Presidential candidates. We are running out of time. What a mess we are
leaving our children. This is one problem that has real solutions.
Our government needs to focus on the big picture of global trade
and address these problems with a national trade policy immediately.
When Paul Revere tried to rouse the countryside with his wake up
call, what did the people do? They certainly didn't go back to sleep.
We all need to wake up and listen. But we must be careful who we listen
to . . ..
Wake up, America!
Biography for M. Brian O'Shaughnessy
Brian O'Shaughnessy is the Chairman of Revere Copper Products and
served as President & CEO for almost twenty years until the end of
2007. His company was founded in 1801 by Paul Revere and may be the
oldest manufacturing company in America. Revere does not make pots and
pans anymore but makes copper and brass sheet, strip and coil as well
as extruded products for shipment to other manufacturing companies.
Brian did a leveraged buy out of Revere in 1989.
Brian is recognized as an expert on international trade & taxes as
well as energy and environmental issues. He championed and chaired the
world class, worldwide copper industry's environmental program. In
February of 2006, the Copper Club named Brian as its Copper Man of the
Year--an international award considered the most prestigious in the
copper industry.
Brian has chaired two industrial energy advocacy committees and
serves on the board of directors of a third group. He also serves on
the board of directors of a public utility with transmission and
distribution operations for gas and electricity in New Hampshire, Maine
and Massachusetts.
In 2005, Brian testified before the U.S. Senate Committee on Energy
and Resources and testified in 2006 before the U.S. House of
Representatives Committee on Government Reform regarding energy, trade
and tax policy. In May, 2007, he testified before a tripartite hearing
on China Currency Issues before subcommittees of the House Ways and
Means, Energy and Financial Services Committees. In July, 2007, he
testified before a U.S. Senate subcommittee hearing on the impact of
China Trade on U.S. manufacturing. Brian has appeared on BBC World News
and been interviewed on Bloomberg on the Economy as well as PBS. Brian
has written op-ed pieces for various newspapers including the Boston
Globe.
Brian also serves on the boards of directors of the Manufacturers
Alliance of New York and the Manufacturers Association of Central New
York (MACNY) and served on the BOD of the National Association of
Manufacturers (NAM). At NAM, Brian is on its International Economic
Policy Committee and its China Policy Subcommittee. Brian is a past
Chairman of the U.S. Copper & Brass Fabricators Council and currently a
member of its BOD. He testified on its behalf before the International
Trade Commission. Brian is currently Chairman of the Copper Development
Association (CDA) and serves on the BOD of the Coalition for a
Prosperous America (CPA).
Brian is a national leader of domestic manufacturing companies
attempting to change U.S. international trade and tax policy to help
level the playing field for domestic manufacturing.
Prior to joining Revere, Brian spent twenty-one years in the
international copper mining industry with seven years each in
operations, marketing and corporate administration.
Brian graduated with a BS in Industrial Management from the
University of Nevada and studied International Business in Graduate
School at the University of Southern California. USC course work
included ``Advanced Problems of International Finance'' and ``Case
Studies in International Business.''
Brian is celebrating 40 years of marriage with three sons and four
grandchildren. In 2002, Mr. O'Shaughnessy rode his Harley Davidson on
two-lane scenic roads from Moody Beach, Maine to Seattle, Washington
stopping off in Sturgis, South Dakota. Mr. O'Shaughnessy is an avid
snow-boarder and golfer but spends most of his time working!
Chairman Miller. Thank you.
Mr. Jurey.
STATEMENT OF MR. WES JUREY, PRESIDENT AND CEO, THE ARLINGTON,
TEXAS CHAMBER OF COMMERCE
Mr. Jurey. Mr. Chairman, thank you for the opportunity to
appear before the panel. I may bring a slightly different
perspective than those who have testified before.
As President of the El Paso Texas Chamber of Commerce
during the 1990s, I was leading that chamber during a period
when we lost 23,000 jobs in the garment industry so I am
acutely aware of those issues and yet many of the experiences
there have led me to the things I will share with you today,
and at the end of that decade we actually had more net
employment in the county despite the fact that we lost that
many jobs. I then went to Arlington, Texas, in 2001 and have
led that chamber in the past nearly seven years, took that
community from a time of economic stalemate to a time of robust
growth in its tax base and jobs as well, and so I will offer
some thoughts from those perspectives.
I would say at the outset that there are two factors that
happened in the 1980s that we sometimes overlook, and that was
that the Cold War ended. We asked Premier Gorbachev to tear
down the wall, and the unintended consequences, we put three
billion people into competition with us in the world's
marketplace and we are not going to turn that clock back. Then
we invented the Internet in the federal labs and we gave people
the ability with the click of a mouse to move CAD drawings and
X-rays worldwide and we are not going to close that door again
either.
And so the reality is, we are in a truly globally driven,
innovation-driven economy and the critical issue, how do we
maintain U.S. competitiveness, and from my experience, these
companies have two critical factors they have to think about:
do they have access to a highly trained, skilled, competitive
workforce, and what is the true cost of doing business in the
area they are at, often derived from various factors including
things like whether we tax consumption, production or wealth,
as well as what kind of regulatory climate and processes are
they competing with in that climate, and so I will offer five
brief suggestions.
Number 1: If you look at the publicly funded workforce
system, it is not that you need more dollars, it is that we
need to think very carefully about how we both allocate and
deploy the dollars that you do spend. And I would say that at
the outset, if you look at the Workforce Investment Act (WIA),
it is written from a job seeker perspective, not an employer or
job creator perspective, and therein lies your challenge. We
are currently managing a grant for the Texas Workforce
Commission. It is a modest grant of $1 million, and the goal is
to create replicable, sustainable, scalable models of how we
engage the systems to work together to provide workers for
advanced manufacturers. I will give you simple examples.
National Semiconductor spent $50 million retooling a plant to
go from a six- to an eight-inch wafer to remain competitive in
the United States, finding no curriculum to retrain their staff
with. We are putting modest sums of money into National
Semiconductor. Our community college and our university, they
are cataloging training National Semi is having to develop. The
outcome will be curriculum that can be employed in the future
at a fraction of the cost to National Semi. A second quick
example is Progressive, a company building a part for Lockheed
Martin for the Joint Strike Fighter, can't find the seven
machinists it needs today, let alone the 400 it will need in
the future. There are hundreds of unemployed machinists in
Michigan but the Texas Workforce Commission can't spend $1
letting them know these jobs exist, and there is little
training capacity in Texas, and so we are putting dollars into
the Dallas and Tarrant County college systems to create that
capacity.
The commonality of many examples I could cite for you is
that under current DOL [Department of Labor]/WIA regulations,
the ways we are deploying and allocating these dollars would be
exceedingly difficult to do under those regulations, and my
bottom-line recommendation, and there are many in my written
testimony, is a really thoughtful look at both the process and
the measures would help those dollars be spent far more
effectively to address many of the workforce needs and the
challenges that these employers face.
Secondly, to recognize that if we need highly skilled
workers to drive a highly innovative economy, that if you look
at the graduate and postgraduate programs in the United States,
50 percent of those students are either immigrants or they are
foreign students. Forty percent of all Ph.D.s granted in 2006
went to those foreign students or immigrants and 75 percent of
those Ph.D.s will go to foreign students or immigrants in 2010.
We have an incubator in Arlington. We started it with the
University in 2002. In the past six years, more than 75 percent
of all the intellectual discoveries and innovative ideas coming
to us came from foreign students and immigrants, and the bottom
line is, they can either go home and take that innovation with
them or we can find ways to both protect our borders and
welcome legal immigrants and keep the innovation in the United
States.
Third, federal R&D funding. In talks with Dr. Zerhouni at
the National Institutes of Health, I commend him because under
translational awards, called road maps sometimes, he has
recognized that if you take some of the $27 billion NIH uses to
fund health research and put it into the hands of universities
that partner with the private sector in a genuine collaborative
environment, that the commercialization activity resulting then
takes place in the United States, not foreign countries. And if
you look at what they are doing in Homeland in the Science and
Technology Directorate, they have funded six major research
projects to date, all through major universities all required
collaboration with 20 to 30 other partners, both private sector
and nonprofit and other universities. And I would commend you
to those models because they take Federal R&D dollars, they
leverage private sector and university dollars and they ensure
the commercialization takes place in the United States, and if
you look carefully at Northern California from the 1940s and
1950s on, it is frankly how they became Silicon Valley.
Fourth, promote global cooperation in the international tax
arena. As was cited, foreign countries do many things with
their currency and their taxation, but the reality is, we have
got to go back to looking at the factors that drive U.S.
competitiveness, and a part of it is taxation. Are we taxing
production, wealth or consumption? What does that do in the
regulatory environment and how does that impact cost structure?
I remember Reynolds aluminum plant in Arkansas in the
1980s. They paid high wages, $25 to $45 an hour in 1984, but
their cost was the cost of electricity. They paid $100 million
a year to Arkansas Power and Light for electricity, and the
rumor started that they were going to move and go to another
city in another state and everybody scoffed at the idea because
they just built the $42 million plant. The plant manager put it
in perspective. He said, ``Wes, if you pass second grade math,
you will understand that if a city offers me that utility
kilowatt hourage at $60 million a year, in three years I will
net $80 million to the bottom line in a highly competitive
industry while abandoning that plant to your industrial
development corporation and building a new plant in the other
city.'' And so although we can say we kept those jobs in
America, that was little consolation for the people in Hot
Springs and Malvern, Arkansas, who lost their jobs, the city
and county who lost the tax base, and $100 million hole left in
the rate base of Arkansas Power and Light. And so it really is
critical to think about the cost factors of those companies and
how we think globally and talk about the international tax
arena. That could be an area where the United States leadership
could be impactful.
And fifth, focus on the prevention of harmful regulatory
competition internationally. Use our economic international
diplomacy in those arenas. Imagine if the General Motors plant
in Arlington, Texas, that brings in components from over 600
suppliers throughout the United States imposed tariffs on all
of those supplies. Well, the truth is, the United States
economy is strong because interstate commerce is regulated in a
way that allows that trade to flow among and between the 50
states. In the global competition, we are going to have to find
ways for that trade to flow fairly throughout the countries of
the world because again, we are not going to be able to turn
the clock back.
I would say in summation that the number one most vital
recommendation I have is that our economic policy promote
globalization. For 60 years we told foreign companies to open
their markets and for the last 20 years they finally did, and
that coincides with the time of economic prosperity in the
United States. We have got to recognize too that 96 percent of
the world's consumers live in another country. We have grown
because we were a land of immigrants and we fed on their hunger
and their energy and their innovation and we have become one of
the most open competitive societies in the world, and I close
by leaving you with this thought. Dr. George Kozmetsky,
considered one of the pioneers and founders of Silicon Valley,
published an extensive demographic analysis in 2000 going back
to 1950 and forward to 2050. He said on giving me a copy, ``We
are living in a time when 88 percent of the wealth is
controlled by 12 percent of the people in countries all
demographically projected to decline through 2050, meaning 12
percent of the world's wealth is what 88 percent of the world's
people try to survive on, all in countries demographically
projected to grow for the next 50 years. What do you think that
means?'' he said. And my comment was, I would much rather
understand what he thought, and he said, ``I think it is
simple; Global competitiveness will cause us to finally go to
war over resources or learn to integrate the global economy so
that every nation has a stake in a strong global economy in
which the United States can remain competitive.
I appreciate the time given to me to speak to the panel.
[The prepared statement of Mr. Jurey follows:]
Prepared Statement of Wes Jurey
The United States today finds itself in unprecedented and
unchartered waters. For the past several decades, our super power
status has largely gone unchallenged, something seldom seen in history
other than perhaps the Pax Romana nearly 2000 years ago. It has been an
unprecedented time of global economic growth and expansion, fueled, I
would argue, by two seemingly unrelated events in the 1980s.
The first was the end of the Cold War, symbolized by President
Reagan's pronouncement to Premier Gorbachev to ``Tear down this wall.''
What should be noted is that the end of the Cold War allowed under
developed nations to shift their focus from defense to develop
educational systems and economic and transportation infrastructure
necessary to compete.
The second was the discovery of the Internet in a U.S. federal lab,
enabling everything from x-rays to engineering design to be transferred
world-wide with the simple click of a mouse. Viewed from an historical
perspective, those two seemingly unrelated events in the 1980s have
enabled global economic development during the past 20 years.
In his book, The Post-American World,\1\ Fareed Zakaria argues that
we are living through the third great power shift in modern history.
The first, the rise of the western world, around the 15th century,
produced the world as we know it now--science and technology, commerce
and capitalism, and the industrial and agricultural revolutions. It
also led to the prolonged political dominance of the nations of the
western world.
---------------------------------------------------------------------------
\1\ The Post-American World, Fareed Zakaria, W.W. Norton & Company,
Inc., 2008.
---------------------------------------------------------------------------
The second, in the closing years of the 19th century, was the rise
of the United States. Once industrialized, becoming the most powerful
nation in the world, stronger than any likely combination of other
nations.
The third, the one we are experiencing now, is the rise of the rest
of the world, largely driven by a global economy that has dramatically
accelerated. Zakaria further argues that this post-American world,
although an unsettling prospect for Americans, is not a decline of
America, but rather the rise of everyone else, fueled by the Innovation
Economy.
From my perspective, the Innovation Economy really isn't new; it
simply is a relatively new way of describing what has always the driver
of wealth creation. Historically, research resulting in technology
innovation has been the primary driver of economic growth and
development.
For the most part, technology led economic development has
clustered around and been driven by universities who understood that
commercializable research is the basic cornerstone in the creation of
technology start-ups. The most successful innovation economies have
been the result of effective partnerships between universities and the
private sector, focused on technology transfer from the lab to the
marketplace. Clear examples include the role Stanford University and
the University of California played in the evolution of Silicon Valley;
MIT and Harvard in the development of the Boston Biotech Corridor; and
Duke and the University of North Carolina in the growth of the Research
Triangle.
In these regions, applied research is the basic cornerstone for the
creation of technology start-ups, new applications for existing
technology, as well as new technologies. The resultant products form
the basis for thousands of companies.
What is new, however, is the unprecedented challenge we face in our
communities, regions, states and as a nation in terms of global
competition. As examples, the emergence and evolution of India, China
and Brazil during the last two decades from an economic perspective is
truly staggering. If we clearly look back to the early 1900s,
technology discoveries resulted in the creation of the assembly lines
that sparked the industrial revolution. In a similar manner, the
discoveries that led to the Internet essentially sparked the Innovation
Economy we find ourselves competing in today.
George Kozmetsky, one of the founders of Silicon Valley, stated
``All human affairs--political, social, economic, cultural, and
business--are conducted by human beings; people's motivations,
ingenuity, and creativity ultimately determine success or failure in
all these human affairs.'' \2\
---------------------------------------------------------------------------
\2\ Embracing the Global Demographics Transformation 1950-2050
Sharing Peace and Prosperity in the Global Marketplace, George
Kozmetsky and Piyu Yue, IC2 Institute, University of Texas at Austin.
---------------------------------------------------------------------------
His statement supports the U.S. Chamber's premise that ``the
toughest, most important competition in the 21st century worldwide
economy will be the global race for talent and workers.\3\ From my
perspective, the outcomes will largely determine U.S. competitiveness
in the future.
---------------------------------------------------------------------------
\3\ The State of American Business, 2008, Thomas J. Donahue, U.S.
Chamber of Commerce.
---------------------------------------------------------------------------
We are competing in an era in which the U.S. represents only four
percent of the world's population, while consuming approximately 26
percent of our planet's available resources with the U.S. population
projected to decline for the next 50 years. At the same time, most of
the planet's natural resources, people, capital, and markets reside
some place else, generally in countries where the populations are
projected to grow for the next 50 years.
In recent columns, dated April 26 and May 4, 2008 in the Financial
Times, Laurence Summers, Harvard University professor, argues that
America's economic policy has supported an integrated global economy,
stimulating the development in poor countries, particularly in Asia, at
unprecedented rates. Yet American commitment to internationalist
economic policy is ever more in doubt. He further argues that this has
been the right economic policy, and that withdrawing from the global
economy is untenable, ultimately reducing U.S. competitiveness.\4\
---------------------------------------------------------------------------
\4\ The Financial Times Ltd., Lawrence Summers, 2008.
---------------------------------------------------------------------------
And from the Federal Reserve Bank's March newsletter comes this
opening line; ``Innovation is key to global growth in rising living
standards.'' \5\ My response is that our ability to remain highly
innovative depends largely upon our ability to continue to train,
educate, and retain a highly skilled workforce.
---------------------------------------------------------------------------
\5\ Economic Letter, Federal Reserve Bank of Dallas, March 2008.
---------------------------------------------------------------------------
In responding to the Committee's request to explore the issues of
U.S. competitiveness, and in particular those factors that drive and
influence U.S. firms' decisions to retain existing production and
research capacity at home or take it abroad, I offer the following
observations and suggestions.
I'll begin with an observation. Since 1990, corporate location
decisions have increasingly been driven by two key factors; the
availability and competitiveness of the workforce in areas in which the
company locates, and the competitiveness of the regulatory environment.
Both determine the ability of the company to remain competitive. Much
has been said and written about incentives. In practice, I have found
that they are not the primary determinant, since the ability of a
company to remain profitable month after month, quarter after quarter,
and year after year is highly dependent upon the competency of the
workforce and the cost of doing business in a particular location. In a
free market economy, it generally comes down to that. From that
perspective, I offer five suggestions to the Committee.
First, the manner in which we allocate and deploy funding for
workforce development should enable and empower our publicly funded
workforce development system to become talent developers rather than
funders of training. Allow me to explain. Since 1990, I have been
highly involved with the U.S. Department of Labor, the Texas Workforce
Commission, and two local workforce development boards. I have done so
because in the communities I have served, I have found that the most
critical need is to ensure that the companies we are attempting to both
attract and retain have access to a highly skilled, highly competitive,
highly innovative workforce.
Through my participation in a variety of national pilot projects,
and service on various Texas Workforce System and U.S. Department of
Labor advisory boards, committees, and commissions, I have found that
it is not necessarily the amount of funding we allocate but rather the
means by which we deploy it, and the restrictions we place upon it. As
a recent example, the Arlington Chamber of Commerce is currently
administering a grant from the Texas Workforce Commission; the primary
purpose being to develop replicable, sustainable, scalable model
pipelines that develop the talent and supply chain for advanced
manufacturers, rather than simply funding job training assistance.
The focus of our work is fairly simplistic. The Chamber works to
identify specific workforce challenges employers face. In doing so, we
engage the local workforce development board, our local community
college system, and our local university. Collectively, as partners, we
identify the challenge, design the solution, and do what is necessary
to resolve the employer defined challenge.
National Semiconductor, for example, recently spent $50 million
retooling 26 machines to convert production from a six- to eight-inch
wafer. Their challenge: to retrain their workforce, with no curriculum
available to do so. In response, the Chamber engaged the university and
community college to collectively catalogue training conducted by
National Semiconductor, in order to develop curriculum. Grant funding
provided approximately 20 percent of National Semiconductor's training
cost. The outcome--retrained workers and curriculum for future training
needs, meeting the critical need for the employer.
As another example, we began working with Progressive last fall, a
local company that is one of Lockheed Martin's many subcontractors for
the Joint Strike Fighter. Progressive indicated they will need to hire
400 CNC machinists over the 20-year life of the contract, and cannot
find the seven they currently need. This, despite the fact that their
starting salary is $86,000 annually. As we continued this work, we
discovered that Progressive is not alone; that there are a significant
number of companies in need of machinists; and that the critical factor
in North Texas is the lack of capacity to train machinists. As a
result, we are allocating some of the funds directly to the Dallas
County and Tarrant County Community College Systems to enable their
collaboration to develop the training capacity necessary to train
skilled machinists in North Texas.
It should be noted that in our discussions with employers, they
indicated that they can pay machinists $86,000 to $106,000 because of
the increased productivity of the United States' worker; however, they
also indicated that as wages continue to escalate due to the lack of
skilled machinists, there would come a point where cost versus
productivity would meet, and they would be forced to move these jobs
offshore.
As a third example, the General Motors Assembly Plant in Arlington
is working with us to develop internships for high school students,
apprenticeships for promising interns, entry level certification, and
incumbent worker training. All defined as critical to their
competitiveness. This example prompts me to point out that although
participants in DOL apprenticeship programs are paid during their
apprenticeship, there are essentially no DOL funds allocated to
directly support this effort, other than direct staff technical
assistance. This despite the fact that every federal dollar spent for
apprenticeship leverages significant private sector dollars.
What is important to understand about all three models is that they
would be difficult to fund under current DOL/WIA guidelines. First, the
law itself is crafted, and the services and centers funded under WIA
are based upon the job seekers perspective--the supply side--rather
than the demand side. That translates into the need for State and local
workforce systems to be highly creative in structuring grants or
contracts in order to fund the types of activities I have cited.
Second, if it is truly our intent to create an employer driven
system, then we must take into account that employers are faced with
two primary factors critical to their competitiveness; speed to market,
and rapid response to market conditions. That same criterion, however,
seldom applies to public funding. Therefore, we must minimize both the
time it takes an employer to secure funding, and the process employers'
view as unnecessarily cumbersome.
Third, we should assess the performance measures that State and
local workforce investment boards have to meet, because they don't
reflect the factors determining industry competitiveness. Again, the
focus of performance measures is on the supply side, relative to job
seekers, rather than the demand side, relative to jobs being created.
These measures also place more focus on entry level, rather than
incumbent workers who need enhanced skills to advance. By focusing on
incumbent workers who gain the skills to move up the ladder, we also
create the entry level positions job seekers require.
Fourth, the system should allow greater flexibility. I understand
that a call for flexibility is often perceived as a request to not be
held accountable for achieving results. In response, I firmly believe
that recipients of these funds should be held accountable for
measurable outcomes. I also believe you must allow recipients the
flexibility to be innovative in the manner in which they work to
achieve the measurable outcomes.
The simple truth is that employers don't use the publicly funded
workforce development system. Whether real or perceived, they view it
as difficult to work with and unnecessarily cumbersome.
My overall recommendation is that a detailed analysis of the
processes employers are subject to in order to utilize these funds
should lead to opportunities to effectively streamline the process
required, and re-think the measurements. I might add that a recent
study by the U.S. Small Business Administration indicated that the
average small business spends $7,647 annually as the cost of regulatory
compliance per employee.\6\ When you add to that the slow, cumbersome,
regulatory process to access the publicly funded system, it may lead to
a greater awareness as to why these funds are not more effective in
achieving the outcomes we expect from their use.
---------------------------------------------------------------------------
\6\ The Impact of Regulatory Costs on Small Firms, W. Mark Crain,
U.S. Small Business Administration, September 2005.
---------------------------------------------------------------------------
I would also suggest that it would be helpful if the U.S.
Departments of Labor and Education work together with major U.S.
business organizations, such as the U.S. Chamber of Commerce, the
National Association of Manufacturers, and other such national employer
organizations, to clearly define workforce readiness precluding the
fifty states from each separately trying to do so. Given our extremely
mobile workforce, we frequently find that workers are trained and
certified for jobs they can't find in the regions they are in,
requiring them to move to other regions in order to secure meaningful
employment. When they do so, their certification frequently doesn't
reflect the work readiness credentials and certifications established
in other regions. An industry led and developed work readiness
definition, universally accepted throughout the United States, would
enable certification to be universally understood, increasing the
likelihood of matching the supply of job seekers with the demand of
jobs we've created, regardless of the geography.
Second, if we recognize that highly skilled innovative people are
necessary to drive our economy, then we need to recognize that nearly
50 percent of the students in our graduate and post-graduate programs
at our nation's universities are foreign students and immigrants. In
2006, they received 40 percent of all Ph.D.s and by 2010, 75 percent of
all science Ph.D.s in this country will be awarded to foreign students.
If our immigration policies allow these students to stay upon
graduation, then innovation will happen here. If our policies force
them to leave, they take their innovative talents with them.
In other words, the potential for American productivity may depend
far more on a rational immigration policy that both secures our borders
and welcomes legal immigrants to our shore, rather than on the quality
of our actual education systems or amount we spend for research and
development. Let me share a local example.
In 2002, the Arlington Chamber established the Arlington Technology
Incubator in partnership with the University of Texas at Arlington. Our
focus was very basic--we intended to support the commercialization of
intellectual discoveries emanating from the labs of our university. At
the time, UT Arlington had one of the first nano-fabrication labs in
the southwest; and one of the few in the United States. This
essentially meant that UT-Arlington scientists could fabricate working
mechanical devices at the molecular level. By contrast, the National
Institute of Standards and Technology launched its nano-fabrication lab
in 2007.
Our focus was on ensuring that research resulting in patentable,
licensable discoveries would be nurtured through proof of concept,
proof of product, and proof of market; providing access to venture
funding to bridge the gap until the technology was ready for
introduction to the marketplace. During the past six years, the vast
majority of intellectual discoveries brought to the incubator are from
scientists who are foreign students or immigrants.
Third, we should allocate federal R&D funding, to the greatest
extent possible, to support industry academic research partnerships;
thereby leveraging federal dollars with both private sector and
university dollars while ensuring that commercialization activity
resulting from such research takes place in the United States. Allow me
to explain. During a meeting with Dr. Elias Zerhouni, Executive
Director of the National Institutes of Health, he indicated that of the
approximate $27 billion annually spent by NIH on health care and
related research, most of the resultant commercialization takes place
offshore, in countries we compete against economically. Under new
programs developed by NIH, college and university systems are
designated ``translational centers'' based on their ability to
demonstrate significant collaboration among and between universities,
while partnering with the private sector. Under the terms of the Bayh-
Dole Act, granting the funds to universities who partner with the
private sector ensures that the patentable discoveries are
commercialized in the United States. This simple act--that of linking
industry and academia while funding academia ensures that the
commercialization of research financed by federal R&D dollars would
inure to the benefit of our local, regional, State and national
economies, and support the development of top tier research
universities as regional economic drivers.
Fourth, we should take the lead to promote global cooperation in
the international tax arena. Just as U.S. corporations frequently
locate in states where the corporate tax structure favors their
business model, firms that do business internationally increasingly
headquarter in countries whose tax structure favors their business
model. As we assess the issue of taxation, it should be noted that we
fundamentally tax one of three things; productivity, consumption, or
wealth. In turn, it is important to understand the factors that drive a
particular business, in terms of assessing the impact of a country's
tax structure on that particular business. If, for example, a
particular business is capital intensive, meaning their business model
requires significant outlays for taxable property and equipment, then
taxing wealth would be seen as a disincentive to that business. On the
other hand, a company with little capital expense, but significant
production cost would find a tax system built on taxing production as a
disincentive. What we often fail to take into account is the impact of
the allocation of tax in terms of production, wealth and consumption on
the key industry clusters that drive our economy.
Allow me to provide a simple analogy. During my tenure in Hot
Springs, Arkansas in the 1980s, a rumor surfaced that the Reynolds
Aluminum plant might relocate. At the time, the regional director of
Arkansas Power & Light assured me it wasn't so, citing the expenditure
by Reynolds of $42 million to build the plant. However, my conversation
with the plant manager put it in proper perspective. My cost isn't
people, he explained, although he paid his production workers $25 to
$45 dollars an hour in the mid 1980s. My cost, he stated, is a $100
million dollar a year electric bill to Arkansas Power & Light. In
recent months we have been offered the same kilowatt hours for $60
million annually by other cities. The cost of this factory including
equipment, was only $42 million. I could actually abandon the factory
and move to one of the new communities offering reduced electrical
rates, build a new production plant, and still net $80 million over
three years in a highly competitive global business. When the plant
closed, it left hundreds of people unemployed and Arkansas Power &
Light with a $100 million hole in its annual rate base. Simplistic,
perhaps, but it is one more way to point out that the factors that
drive U.S. companies to make decisions about where to locate are based
on their ability to compete; and that a key factor is their cost of
doing business, whether based on the tax structure or other key
factors.
Fifth, we should focus our international economic diplomacy on the
prevention of harmful regulatory competition. As an example, imagine
the challenge of the United States maintaining economic prosperity if
every state in the union had differing regulations that impacted
interstate trade.
For example, imagine Texas imposing tariffs on the parts and
components used by General Motors in Arlington received from more than
600 suppliers located throughout the U.S. The reality is the United
States' economy is vibrant largely because interstate commerce is
supported by an overlay of federal regulatory guidelines rather than
competitive State guidelines. In a similar manner, the United States
must acknowledge that the global marketplace increasingly needs to
think about global regulatory competition. Just as companies in
countries we compete against are integrating their production lines
with developing countries, we must integrate our country's regulatory
structure with the structure of the world's marketplace.
In closing, I would encourage the Committee to recognize that the
single most important thing the Federal Government can do is support
economic policies that promote healthy globalization, strengthening
efforts to reduce inequality and insecurity throughout the world.
For the past 60 years, the United States has encouraged foreign
countries to open up their markets and increasingly in the last 20
years they have done so. During those two decades, the U.S. has also
enjoyed unusually robust growth, low unemployment, and increased
productivity, with most of the job gains coming from small and medium
size businesses during a time of rapid globalization. I would argue
that the opening of these international trade markets has been a
critical driver of our economic growth, and as the world continues to
globalize, we must continue to globalize with it; particularly in a
time when 96 percent of the world's consumers live in foreign lands.
At the same time, we should remember we are a land developed by the
hunger and energy of immigrants. In the process we have become the most
open, flexible society in the world. We have absorbed people--their
cultures, their ideas, their goods and services. That very openness has
inspired and encouraged innovation. And we are still dominant in the
technologies that will drive future growth, such as nanotechnology, and
our universities are still among the best in the world. In recent
rankings, U.S. universities received eight of the top 10 rankings, 37
of the top 50. Faced with continued international competition, we have
adapted and adjusted; primarily through our ability to innovate.
I leave you with this closing thought. I was privileged to know
George Kozmetsky, both as a mentor and a friend. Acknowledged as one of
Silicon Valley's founders, he published a demographic analysis in 2000.
He gave me one of the first copies with this comment; ``Today 88
percent of the world's wealth is controlled by 12 percent of the
world's population, all living in countries demographically projected
to decline in the next 50 years. That means 88 percent of the world's
population struggles to live on 12 percent of the world's wealth, all
in countries demographically projected to grow over the next 50 years.
What do you think that means?'' I responded by stating I was far more
interested in what he thought. His reply has stayed with me ever since.
``It means one of two things, he said. We will ultimately go to war
over the resources nations need for people to survive, or we will learn
to become an international marketplace where trade and commerce link
and integrate the countries of the world, one to the other, providing
the very motivation needed to stabilize our global economy.''
The Arlington Chamber of Commerce
The Chamber's mission is to serve as the primary catalyst for
Arlington's economic development, fostering a positive business
environment through the enhancement and diversification of our economic
base, representing the business community on public policy and
community issues that impact the ability of Arlington citizens and
businesses to reach their full economic potential.
The Arlington Chamber of Commerce is one of North Texas' largest
business federations, representing more than 1,400 businesses and
organizations of every size, sector, and region.
More than 96 percent of the Chamber's members are small businesses
with 100 or fewer employees, 70 percent of which have 10 or fewer
employees. Yet, virtually all of Arlington's largest companies are also
active members. We are particularly cognizant of the problems of
smaller businesses, as well as issues facing the business community at
large.
Besides representing a cross-section of the Arlington business
community in terms of number of employees, the Chamber represents a
wide management spectrum by type of business and location. Each major
classification of American business--manufacturing, retailing,
services, construction, wholesaling, and finance--is represented. Also,
the Chamber has substantial membership throughout North Texas.
The Chamber's State and national engagement is substantial as well.
The Chamber has been and continues to be a participant in a number of
State and national pilot projects and innovation grants, focused on the
Innovation Economy and developing and maintaining a competitive
workforce.
Our positions on State and national issues are developed by a
cross-section of Chamber members serving on committees, subcommittees,
and task forces. More than 300 business people participate in this
process.
Biography for Wes Jurey
President & CEO of the Arlington Chamber of Commerce since 2001,
Jurey also serves as Chair of the U.S. Chamber's Institute for a
Competitive Workforce; was appointed in 2007 to a six-year term on the
Texas Workforce Investment Council; and appointed in 2008 to a two year
term on the U.S. Department of Labor's Advisory Committee on
Apprenticeship. He was one of nine individuals appointed to the U.S.
Department of Labor committee charged with developing DOL's five year
research plan for 2002-2007.
He founded the Center for Workforce Training & Preparation in El
Paso, Texas; was a partner in the establishment of the Center for
Continuing Education & Workforce Development in Arlington, Texas, and
is the founder of the Arlington Technology Incubator.
Discussion
Chairman Miller. I want to thank all the panelists. We were
just called for a vote.
We have now had proposals that are out of the usual
mainstream political debate to the left and out of the
mainstream political debate to the right, so we wanted an open
discussion of ideas that aren't part of the usual debate and we
certainly have had that.
I will waive my first round and recognize Mr. Baird. Do you
have questions? Oh, one second, please. For now, Mr. Baird.
Mr. Baird. I thank the panelists. I thought all of the
comments were very insightful and I appreciate the struggles,
particularly Mr. Copland and Mr. O'Shaughnessy as you try to
meet the challenges of keeping domestic workforce and industry
viable. One could say that Mr. Jurey's comments were
contradictory to Mr. Copland and Mr. O'Shaughnessy. I don't
necessarily see it so as I listened. It sounded to me like Mr.
Jurey was saying, ``Look, if we blame it all on trade, we are
missing a whole lot of other things we could be doing to make
ourselves more competitive.'' As the three of you listened to
each other, what are the areas of common ground that you heard
in one another's testimony?
Mr. Jurey. I will start. One of the things that I will
acknowledge quickly is, they both face intense competitive
pressures, and many of the regulatory policies of the United
States don't necessarily help them, and then there is reality.
We have a company that I didn't talk about, Progressive, to an
extent, the one trying to find the machinists. They are paying
$86,000 a year to a starting machinist. They will quickly get
them to $106,000, and when they get them trained at that level,
their competition comes in, gives them a signing bonus, a
higher salary and takes them away, and their comment was, ``We
want as good corporate citizens to keep this job and this work
in the United States, but if you continue to not be capable of
producing the machinists we need and the wages continue to
escalate, there will come a time when even that enhanced U.S.
productivity per worker will meet a certain mark and I am going
to have to be forced to do something different to remain
competitive.'' And so again, if you look at the way we spend
dollars, you have got an apprentice program at the Department
of Labor that has almost no money to spend, and yet the minute
you put people in an apprenticeship program, they start getting
industry wages. There is a great return on the dollar spent to
assist industry with the cost of getting highly trained,
competitive people who can create that level of productivity.
Mr. Baird. Mr. Jurey, what you are saying is music to my
ears. I founded the Career and Technical Education Caucus in
the Congress. I just would ask you to not repeat this in front
of our staff lest we lose a number of fine young people to
career and technical fields like machinists because they will
make more money doing what they do there than they do here.
Mr. Jurey. Well, every time I have announced that salary,
people come up and give me cards and ask me where to apply, and
the reality is, that is where the job market is going, and we
do need to think differently about how the United States
supports industries like the two on the panel with me. I simply
think you also have to take into account the fact that we are
forced to compete in a global economy, and pretending otherwise
won't make a difference, won't change that.
Mr. Baird. Thank you.
Mr. O'Shaughnessy or Mr. Copland, any comments?
Mr. O'Shaughnessy. I think job training is an important
factor, but I think it comes after some of the basics, and the
basics start with your costs and the costs of your competitor,
and if currency manipulation has an impact of 40 percent on
your costs and value-added taxes has an impact, an average
worldwide of about 20 percent, put them all together, that is
60 percent, those two. If health care costs, they are 10
percent of Revere's costs, now you are up to 70 percent.
Mr. Baird. It is a tough margin to beat.
Mr. O'Shaughnessy. It doesn't really matter whether there
is anyone trained or not; we are out of business and now we are
going to increase the energy costs by probably 30 percent in
this country but not in others.
Mr. Baird. Is it your feeling, Mr. O'Shaughnessy, that the
things the other panelists, the issues you have just addressed
are not adequately dealt with in our trade negotiations?
Mr. O'Shaughnessy. Sir, they are not dealt with, period, in
our trade negotiations.
Mr. Baird. Any dispute of that?
Mr. Jurey. I would concur with that. I made two points. It
is a competitive workforce and it is the total cost of doing
business environment they have to compete in, and that is a
legitimate part of that total cost of doing business. So if you
go back to one of his comments about consumption tax, look at
the taxation factors that really are a part of the cost of
doing business. If you are taking a company that has high
capital costs and your tax environment primarily taxes wealth
or capital investment, then that is a disincentive to that
company. On the other hand, if a company's costs are primarily
in production and you have levied a high production cost, you
have handicapped their competitiveness. And so if you don't
think about tax policy as it impacts their cost of doing
business and if you don't think about the tax policy
internationally that either helps or hinders the global
competition, then we aren't going to be able to enable the kind
of true competition we need for the U.S. companies to remain
competitive.
Mr. Baird. I actually concur with both points, and one of
the frustrations I have about our trade policy, and I spoke
with Susan Schwab about this a few days ago and spoke with
members from the machinists' union just yesterday, is we tend
to battle it out over yes or no Colombia, yes or no Peru, yes
or no Panama, but we neglect all these other structural factors
of our own society, and the focus so becomes on the trade
agreement yes or no that we neglect our tax policy, our
education policy, our currency policies, et cetera, and I think
ultimately to solve this--and whoever the next President is,
Democrat or Republican, we are not going to solve this
country's financial situation unless we take a comprehensive,
integrated approach. And by the way, the President doesn't
write the laws, this body does, so we can look to that
President, but the fact is, it is the next Congress that needs
to address a comprehensive approach, not just a trade policy
but an economic policy writ large, and I very much value the
insights of the gentleman and yield back to him.
Chairman Miller. Thank you. The buzzers that you heard
earlier were Mr. Baird and me being called to a vote, and we
now need to go vote. It will probably take us 20 minutes,
perhaps a half an hour. And so if you all could be at ease for
a little bit, we will go vote and come back and reconvene.
Thank you.
Mr. Baird. I may not be able to return, but I am very
grateful to both panels for their insightful testimony. Thank
you very much.
[Recess.]
Predatory Pricing
Chairman Miller. I think we are probably close to the end
of the hearing. I apologize for making all of you wait for so
long so close to the end of the hearing. I do have a couple
questions for various members of the two panels. Most antitrust
laws are designed to keep prices low. An exception to that that
I remember from law school and from the early years of my
practice when I actually did a little of that was predatory
pricing, where a large company set prices that were below their
cost, certain in the knowledge that they could outlast their
smaller competitors, and when the smaller competitors went out
of business, they would be able to set their prices at whatever
level they wanted to, whatever the monopoly price would be
rather than the competitive price. A lot of the economists
point out, those who are strong advocates for free trade, not
apostates, that a lot of the benefits that Mr. Copland
described and Mr. O'Shaughnessy described and others of you as
well that the Chinese have in particular--the currency
manipulation, the free capital, getting free land, free
building, free machinery--all that is free capital, is actually
a cost and they are selling to us below cost, below what it
costs their society at least. And that if a country wants to
sell us goods at below cost, we ought to let them. That is a
bargain for as long as it lasts, but eventually they will have
to raise their prices.
Mr. Copland, when the day comes and the Chinese correct or
let their currency float and stop giving free capital to
Chinese textile manufacturers, are you going to be in business?
Mr. James Copland. First off, are you going to guarantee
that they are going to change their currency policy and they
are going to change the stuff you are talking about?
Chairman Miller. Well, if they do.
Mr. James Copland. Oh, if they do.
Chairman Miller. Are you sure that you are going to be----
Mr. James Copland. Are we going to be in business? Well,
let me tell you, it has been extremely difficult. It has been
like a nightmare what we have had to face. Our business was the
curtain business. We were the big player in the United States
for it and actually we had extremely high market share because
we were the best. That is why we had that market. And they came
at this market starting in 2001. China had about seven percent
of the import market, and the total import market on our goods
was only about five percent. What has happened in that seven-
year period is that China's imports went up 6,900 percent on
the type of goods that we make. China has got 90-plus percent
market share. Let me tell you something, the total market is
offshore goods. The total market today is 98 percent offshore
goods. So what do we have to do? I mean, what we are doing,
that market is gone. They are selling this stuff not below
cost, they are selling it below our raw material cost to be
able to do it. This is the subsidies that you are talking
about. This is the predatory pricing that you are talking
about. How do we survive? It is a sad way to have to survive.
We are picking up the pieces when somebody else goes out of
business. We have competition go out of business, we pick up a
piece and believe you me, just as soon as you get into it, here
come the Chinese again. We look constantly for something that
the Chinese are not doing, that they haven't focused on yet or
we are looking constantly for something that may have some
natural barrier to them coming over here, a time thing or so
on. But remember, everybody in our industry is doing the same
thing, everybody. There have been 550,000 jobs lost in my
industry since 2001 alone. Manufacturing in my state, North
Carolina, has lost 28 percent of the manufacturing jobs. We
have lost 19 percent nationwide, folks.
You ask, are we going to be able to do it? With every ounce
of energy I have got, with every ounce of energy that my son
has got and our wonderful workforce, loyal workforce we got, we
intend to do it. We intend to be here. But I am going to tell
you, that if this thing doesn't stop, there are going to be no
survivors that have manufacturing in the United States, and I
will not put my manufacturing in the People's Republic of
China. I will not put it in any foreign country. I have a loyal
workforce. They are part of my family. I speak of them as
though they are part of my family and I will tell you under no
circumstances will I export their jobs, will I put them out of
work for my own personal gain. But I intend to, if the Lord
gives us the strength and we get any decent break at all, we
will make it.
Chairman Miller. Anyone else? Dr. Gomory.
Dr. Gomory. Yes, I want to talk to the notion that when
they have wiped out the competition and then they raise their
prices that you can get back in. I mean, that may be some form
of economics but it is not the real world. In any business,
either low tech or high tech, there is an immense amount of
know-how, and when you lose the know-how, you are out of it.
You are also not an isolated thing. You depend on a chain of
people who get parts for you and they are not there anymore,
and the idea that when the other guy is finished killing you,
you can rise from the dead, just--that is a piece of--that is
on paper, but in the real world, it is complicated. You are
very dependent on things that have gone away. You can't do it.
Chairman Miller. Dr. Scott.
Dr. Scott. Well, listening to Mr. Copland, it really
strikes me that there is a certain measure of discretion that
people have when they are running a company. He could have
changed his mind and said, ``Guys, I am in the nickel and dime
business, shut the business.'' There aren't very many people
like Mr. Copland any longer. One of the reasons is what is
taught in business education across the entire country has
changed and that also changes beginning at the end of the 1970s
or the beginning of the 1980s. Just pick one, the one that I
happen to know, but our school was founded, the dean said the
mission of the school is to teach people to earn a decent
profit in a decent way. That is a question, it is not an
answer, but business schools don't do that anymore, and the
change, teaching a decent profit in a decent way, you could
pass for saying we are going to teach officers that have some
loyalty to a broad range of things. We start doing the other
and what we are doing is teaching mercenaries. We are teaching
mercenaries. No mercenary is going to pay attention to his
concerns at all and they are going all through the
establishment with a new calculus that says, ``Hey, in order to
be effective, you have got to be able to reduce it to one
dimension or you can tell that three is bigger than two.'' The
sense of responsibility that ought to be there isn't there, and
we are generating them. I am sure that this is an exception
where they don't do that but aside from Vanderbilt, it is all
over the country.
Mr. James Copland. Let me make another statement about this
in regard to what was said just a minute ago. Mr. Chairman, you
said whenever they get enough and they are going to raise their
prices, this business is not going to come back to America. Let
me tell you about the textile business. When these plants are
closed down, they are closed. The equipment--if you don't run
the equipment, keep it up, it deteriorates to nothing anyway,
but the equipment is being sold. Pakistan is buying the
equipment. People are selling it for five cents on the dollar.
Nobody wants it. And let me tell you what is happening to the
buildings themselves. I was just down in Joanna, South
Carolina, a huge mill down there has been closed five years.
They are tearing it down. They are doing it all over the South,
tearing the mills down that are closed. Why? They are going to
sell the bricks, guys. They are going to sell the beams. They
will sell the bricks and sell the beams. So don't think that
you are going to be able to say, ``Oh, boy, as soon as this
thing is over, here we come back,'' it is going to be
regeneration. All we are trying to do is to hold onto what we
have got, and if we don't wake up and start paying attention to
these trade agreements that we are making and pay attention to
the fine points of these trade agreements, we are going to give
it all away.
Let me give you one example. We just talked about CAFTA,
and that is not too long ago, CAFTA. It sounded like a good
idea, all right, going to make it in the United States, going
to make it in Central America, everybody is going to be okay.
They left a loophole. The loopholes are what get us and so many
times our negotiators don't even know that the loopholes are
there because they are some political appointee that hasn't
done it but about six months or three months or they have been
out of college for about a year. They don't even know the
loopholes are there. They do know when they do it, woe be to
them. Let me tell you something. They had a deal in there to
where they could take pocketing, so that doesn't sound like
much. That is not sounding like much. Let me tell you
something. Pocketing is a 180-million-yard business in the
United States, pockets for trousers. It is a United States
business, and they had it in there and said, ``Well, you know,
we are going to make an exception on pocketing and we are going
to let these Central American countries make this stuff out of
Chinese cloth.'' Dominican Republic wanted that. They gave it
to them. We pointed it out and said, ``Look, you are going to
destroy the industry.'' ``Oh, no, oh, don't worry, we are going
to fix it, we are going to fix it, we are going to fix it,
trust it, we are going to fix it.'' That was three-plus years
ago, folks. It hasn't been fixed. There has been nothing done.
Let me tell you the end result of that thing. Eighty percent of
that market is gone, and it is gone, folks. Eighty percent of
it is gone. Haines Finishing Company in Winston-Salem closed
down 75 percent of their business, closed it down. They have
been there longer than we have. Allis Manufacturing Company
closed down four plants down in South Carolina. You have got
Mount Vernon, they lost 70 million yards worth of business,
closed plants in Rome, Georgia, closed plants down in Texas.
We have got to start paying attention to what we are doing
with these trade agreements. We have to get some people that
know what they are doing with these trade agreements. We are
being out-negotiated. We better start paying attention to what
we are doing because let me tell you something, we are
exporting the wealth of this country as fast as we can export
it today. It is going offshore. We are going to pay one
tremendous price in this country.
Chairman Miller. Dr. Gomory.
Mr. Gomory. I really want to comment on that because first
of all, I am in wholehearted agreement, but I think it is very
difficult to work out a set of agreements which are that
detailed. It is also very difficult to counter the next
mercantilist policy which may be loophole 47, all right? The
reason why I think we should seriously consider the Buffet
certificate program is because it measures results, not how you
got them. The Buffet proposal, if you can't export, they can't
import, however tricky they are and whatever the deals are. It
is not trying to match, you know, their currency manipulation
with our currency manipulation or their loophole with our
loophole or their subsidy with our subsidy. It says, ``Okay,
kids, if you want to ship stuff in, we have got to be shipping
stuff out and it is not nation by nation.'' This I think is an
approach which needs to be taken very, very seriously.
Chairman Miller. Mr. O'Shaughnessy.
More on Free Trade
Mr. O'Shaughnessy. I have two problems with the trade
agreements in general that we have negotiated. The first is,
trade agreements are designed to lower tariffs. That is what
they are about. But the problem is, because of our tax system
where we are the only major country in the world that does not
have VAT taxes, VAT taxes are like a tariff but they are exempt
from trade agreements. They are exempt by WTO rules. And so
what happens is that you can look at a chart in my written
testimony, about how European countries have lowered tariffs,
normal tariffs, and they have increased VAT taxes and their
total tariffs are the same. So they don't even work on that
side.
The second problem I have with the free trade agreements is
that the focus is wrong. And you see, to put together a
patchwork of trade agreements to solve our trade policy, to
solve the loss of the manufacturing jobs, and the loss that we
are going to see in the service sector--we are going to lose
way more jobs in the service sector than we have lost in the
manufacturing sector--we have to design a national trade
strategy or policy from the top so that when we consider things
like environmental standards, we think about the impact on our
own ability to produce goods and services. When we consider
energy policy, we will think about that. When we consider tax
policy, we will think about that. And when you layer all of
these things together, that is very critical and that is what
is wrong. Our focus is wrong by looking at trade agreements
without having the framework to negotiate them from.
Mr. James Copland. Let me just say this about the tariffs,
you brought up about the tariffs. You know, we make these trade
agreements and today the average tariff in the United States,
this is the average of United States tariffs: 1.7 percent. That
is not much, guys. You turn right around and you look at the
tariffs that the other countries have that we have these
agreements with and they average 30 percent. Is that fair? Is
that a good deal when you negotiate something like that? No,
you can't tell me it is. Let me tell you something. China
today, they have--under the rules, they have the right to
designate themselves as an underdeveloped country, China.
They've got the biggest international trade in the world but
when you are designated as an underdeveloped country, you can
charge anything you want as far as tariffs on stuff coming in
there in addition to these value-added taxes like has been
brought up. Is that fair? Is that good negotiations? Are those
good trade deals? Is that good for America? Absolutely not.
Chairman Miller. Mr. Jurey.
A Comprehensive Solution
Mr. Jurey. I guess a point I would make, a lot of good
comments have been made, but I would encourage the panel, the
Committee to think this way: there is going to have to be a
comprehensive solution. It is not as simplistic as taking any
one of these suggestions. At one point I remember a key member
of your staff said, ``Well, could you cite in your testimony
what specific clause we could change to deal with your point?''
And I said I wish it were that simple. I wish I could say that
if you simply change article 3, section 2, paragraph 9 under
WIA, all these things would go away, but the reality is, the
entire law is structured in such a way that you are going to
have to rethink all of the processes and all of the
measurements and how they impact the competitiveness of all
these companies. And in a similar way, you are going to have to
think about the broader aspects of these free trade agreements
because there are components that challenge the men at this
podium but you can't simply take one component and change it
and think you have solved the problem.
The broader issue really is, we don't have a comprehensive
economic policy to deal with global competitiveness. It has got
to be multifaceted and there are some aspects of global
competition we are not going to be able to change and there are
others we can. And if out of this you can begin to think about
the things that you can impact--and as one of your colleagues
said--you are the group that writes the laws, if you can pull
out the parts that you can have an impact on and look at it in
a more comprehensive way, I believe you could make significant
progress in enabling these companies to remain and be very
globally competitive.
Chairman Miller. Dr. Scott.
Dr. Scott. The main ideas are the same as the one for the
domestic, and by the way, the increasing inequality in the
United States comes after 1980--from 1945 to 1980 the fraction
of the income being earned by the top 10 percent in the United
States does not change for 35 years. The change is since 1980,
1982. By the same token, this is not coming from globalization.
Europeans are not experiencing the same problem at all that we
are. It is here, it is since 1980, and we are very close to
being back to the income distribution that we had at the end of
the 1920s. The common denominator is, we have deregulated
domestically at the same time that we are trying to deregulate
internationally and the universal principal has been to
deregulate. And it is like my little green box, it is exactly
the same thing: ``Hey fellows, we really don't need to
regulate, we can use the common resources without really having
to figure out what we are going to do, it will solve itself
automatically.'' Well, it isn't and it won't as you do this,
but that is a very big job because you'll find that being
taught, not in the business schools, but at the economics
departments in this country everywhere. It is very, very
different when you get to Europe. My big personal luck was
somebody that is a publisher in Germany happened to call and
ask, ``Are you publishing a book? Tell me about it and hey, we
will publish it.'' Because they really teach economics that is
grounded in history in Europe, in Germany, in France and in
Scandinavia. We don't.
Chairman Miller. The other Mr. Copland, Jason Copland.
Mr. Jason Copland. I wanted to expand upon and agree with
Mr. Jurey's comments, just about the whole need for a
comprehensive trade policy. Just something that is going on
real and right now that I thought would be interesting to hear
about, Chairman Miller, is the recent Farm Bill, and I want to
give a very concrete example. We have had kind of a disjointed
trade policy where sometimes we sign free trade agreements with
countries for political reasons or sometimes reasons I can't
even figure out other than the fact that maybe we just want to
sign as many free trade agreements as possible. But then
sometimes we also try to create these regional trading blocks,
and that was really the intent behind NAFTA and CAFTA, that we
would be able to use our technology and our productivity and
then utilize other countries' less expensive labor and then you
would have that rising economic tide that would both help the
United States and Mexico and our Central American partners.
Well, in the most recent Farm Bill, Charlie Rangel put out
a Haiti add-on to that Farm Bill where it kind of destroys that
entire concept. In North America we are going to have a trade
bill with Haiti that is part of the Farm Bill that just
specifically with textiles will have absolutely no rules or
regulations whatsoever and will allow fabrics to come in not
just from the regional trading block but from China. And it is
so sad that the economic condition that Haiti is in, but this
just shows the lack of any type of a comprehensive trade policy
and no one has thought that through. Well, if Haiti has that,
what is that going to do to the Dominican Republic and what is
that going to do to Guatemala and Nicaragua? No one thinks
about that at all. And who it really is going to help is the
Chinese, and it is really--you know, too many people want to
blame China, and this is just an overall criticism of
Washington, D.C. People like to point the finger at China, and
I think that that is wrong. I think we should be pointing the
finger at ourselves. It is not China's fault, it is our fault
because we have let it happen.
Job Training and Competitiveness
Chairman Miller. The answers to my only question so far
have taken 20 minutes, and I am not sure how important my
questions are in the discussion now. We are close to the end,
obviously not to solving all the problems of the world or this
problem but of the hearing at least and we will have further
hearings on this topic.
I know that some of the first panel in the discussion of
corporate governance talked about the model of corporate
governance in which the corporation was not driven entirely by
profitability but by other considerations and that a corporate
board of directors could decide to locate manufacturing
operations in the United States even if they would be cheaper
somewhere else because of the effect on the community and out
of loyalty to their employees and that the law should allow and
even encourage that, but I wonder how well that generous
impulse is going to work in guiding corporate behavior for the
longer term, although perhaps you are right, there have been
more generous impulses in the past than there have been
recently.
I would like to hear a little bit about some of the other
things we could do besides having more generous impulses guide
boards of directors, and one that I have worked on a fair
amount or talked about a fair amount is the need for training
for workers to learn new skills very quickly, that we should
have an advantage on the rest of the world in the ability to
learn new skills quickly as manufacturing operations change
fairly quickly. I visited Mr. Copland's plant. If you have seen
the movie Norma Rae, it doesn't look much like that. We are
developing new technologies quickly. I think one of the first
panel's discussions of R&D being an advantage is if it is just
R&D--if that is the only thing happening in the United States--
it is not all that helpful. What we hope happens is R&D is
applied in the United States at least first. At least for a
while we will have a head start and then our workforce needs to
be able to learn the skills quickly to use new technologies.
I attended a panel discussion earlier this week organized
by the Business Roundtable. They did't invite me to talk about
executive compensation but they did invite me to talk about
community colleges. Mr. Copland knows the role that--both Mr.
Coplands know the role that community colleges play in North
Carolina and perhaps how much more of an advantage it is to
North Carolina business than in other parts of the country. In
other parts of the country, community colleges began as
academic institutions, as essentially a junior college, and in
North Carolina they have always been technical job skills-
driven and there is a close relationship between the business
community, business leadership, and the community colleges to
develop curricula for specific job skills. The leading employer
in Alamance County is no longer Mr. Copland's company or Glen
Raven Mills or Burlington. It is LabCorp, the Nation's second
largest medical testing firm, and Alamance Community College
has a curriculum in medical testing developed in consultation
with LabCorp and LabCorp hires every one of the graduates of
that program, at least the ones that don't take another job
with somebody else and actually get a better deal out of it.
Mr. Jurey, what is the role of community colleges or job
training in our ability to compete and keep jobs in this
country?
Mr. Jurey. I think it is critical, and I will give you one
clear anecdote that speaks to what you have said about
community colleges. In the mid-1990s, I was in El Paso. The
Texas Workforce Commission committed considerable dollars,
every hospital committed considerable dollars, to that
community college to expand the only nursing program within 200
miles. We had 12 percent unemployment. We had hospital CEOs
going to India and China to recruit nurses and finally
persuaded the board to go along with the need to expand the
program with 200 on its waiting list. Along came a new college
president who called me and said, ``I decided we are going to
open a beauty college and put a hold on the nursing
expansion,'' and when I got up off the floor, I said, ``Could
you tell me why? There are six for-profit beauty colleges in
our community, none have a waiting list. They pay below median
wage. Nursing pays a very high above-median wage. It is a huge
demand and you are taxpayer supported and we thought you were
going to meet the demand needs of industry. And he still was
unwilling to bend and so I said, ``Fine,'' went back and talked
to my board and they said, ``You are going to organize a tax
rollback election,'' since he announced something like a 30
percent tax increase. The next day the College Board of
Trustees Chair called me and said, ``I thought we were
partners.'' I said, ``So did I, but all we ever asked you to do
was listen to the actual needs of the employers and you have
quit doing that.'' He quickly called the board together in
closed session, asked me to recite my discussion with the
college president. At the end of it, he looked at the board and
they nodded and he said, ``Can we have 24 hours to reason with
our new president?'' I said ``Well, yes, sir.'' He called me
the next day after reasoning with him, ``He has resigned, can
you get that money back on the table?'' And to me, that is a
very responsive community college system because the board of
trustees took seriously their need to think about the role they
played in providing the kind of training necessary to keep key
sectors competitive.
Then if you back up into the regulatory process side, as I
discussed, and you start really digging deeply into how quickly
can local workforce boards and community colleges deploy WIA
and DOL dollars to meet those needs, when employers are faced
with having to get speed to market and rapid response to
changing market conditions, it is extremely cumbersome. It is
very difficult to do outside of the box. It is hard to help
employers retrain incumbent workers to get higher skills to
quickly meet those changed needs because the slant in the law
is toward entry-level job seekers, and yet if you don't move
incumbent workers up the ladder, there are no entry-level jobs
for the job seekers to seek. And so again, I keep trying to
stress, you are going to have to think a little more
comprehensively if you really want to help all these companies
remain competitive and think about the impact not just of one
change but to how systemically we can provide the type of
incentives and assistance and help, particularly in having a
highly competitive trained workforce that these employers need.
And one last comment. If they need apprenticeships, there are
no dollars to pay them in the program.
Chairman Miller. Mr. O'Shaughnessy.
Mr. O'Shaughnessy. Yes, thank you, Mr. Chairman. I have to
catch a flight so I would like to comment. Thank you. I think
the issue of education and training is a very important one.
However, I think it is necessary to put it in perspective. I
often read articles about we need to encourage more of our
young people to study engineering. The way we are going, it
really isn't going to matter because there is not going to be
anywhere for them to work that needs that kind of work. The
factories are going to be shut down. The service jobs are going
overseas. Because of factors like 40 percent of our costs are
due to currency manipulation, 20 percent taxes, 10 percent
health care. That is 70 percent. If you don't deal with those
issues, and then we add on energy costs, another 10,
environmental costs, another 10, we have got a 90 percent cost
problem. I want to solve those problems so that we have jobs
for well-trained people, and to train people when they lose
jobs, to focus on that, well, I don't know where they are going
to go. I think we are in a much more serious problem than any
of us realize and we won't realize it until the service jobs
start flowing overseas. Allen Binder, the former Vice Chairman
you quoted, also said that he expected to see 30 million
service jobs go overseas in the next few years.
Chairman Miller. Dr. Gomory.
Dr. Gomory. I would like to go back to your point about
what we were saying about corporate governance. By the way, I
am very supportive--we have done a great deal of work on
community colleges. I think they are vital, great training
grounds. Sometimes they are confused about whether their place
is to train people for higher education or for jobs. I think in
corporate governance, we certainly mentioned liberating
directors to consider more than profit, but I also think we
should seriously entertain the notion of rewarding companies
that create and keep high-value jobs in the United States so
that when they have this generous impulse to locate the jobs
here, they are doing a service to the country. They are adding
to our GDP. Let us give them something for doing that. That is
what all the other countries do. They say, ``Come here, add to
our GDP, we will give you profit in return.'' Why can't we say
that too? And that is why I suggested just one example, a
corporate income tax graded by the value add of the people in
the company. But there are other ways. I think we have to
realize that when companies create jobs here and especially
those that are productive, they are already doing a service for
the country before they pay their tax, and we need to take that
into account.
Chairman Miller. Mr. Jurey.
Mr. Jurey. I would support that in this way. The market
responds to incentives, and if you think about how to
incentivize those kinds of behaviors in ways that also enable
companies to be highly cost competitive, that can be very
effective as part of a strategy.
Mr. James Copland. As far as----
Chairman Miller. I almost said that I wanted the record to
reflect that I asked a question and no one named Copland had
raised their hand to respond. Mr. Copland.
Mr. James Copland. Thank you, Mr. Chairman. First off, let
me say that as far as job retraining and education, I am
totally in favor of it. It is a wonderful thing and we do in
the State of North Carolina have a tremendously successful
community college system. But it can only go so far. It can
only go so far. You talked about my county of Alamance County
and LabCorp and what the Chairman said is true. We have had 40
percent of the people in my county--40 percent of the
manufacturing jobs have been lost. LabCorp can't hire all these
people. LabCorp hires them but they can't hire all those people
at all. Only a fraction are they able to hire. And if you look
right down the road to Cabarrus County, North Carolina, down at
Cannon Mills, Pillowtex, what was it, four years ago they went
out. Five thousand people lost their job all at one time. Today
only 60 percent of those people have found any job at all and
they have got a wonderful community college system. So there
has got to be a blend. You have got to have both. You have to
take into consideration everything, and job retraining and
education is part of the answer, but it needs to be a
comprehensive program, as has been brought out here today.
Chairman Miller. I have been called for another vote and I
think we are probably then going to end the hearing. I
encourage all of you to keep talking among yourselves. When you
get it all worked out, I will introduce the bill that solves
all the problems.
Mr. James Copland. Do you promise?
Dr. Gomory. I really want to thank all of you for
organizing this. It has been very worthwhile, and we are
talking about some things you don't get to talk about
everywhere. I appreciate it.
Chairman Miller. Well, it obviously--these are topics that
we need to talk about more.
I want to thank all of the panelists for appearing
including Mr. O'Shaughnessy, who had to leave now to go get on
a plane, but thank all of you and I appreciate all of the
perspectives that are not typically part of this debate. But
perhaps given the consequences of this debate, we need to step
back and think about what are some of the assumptions that have
gone unchallenged but should be challenged.
So again, thank you for appearing, and we are now
adjourned.
[Whereupon, at 1:12 p.m., the Subcommittee was adjourned.]
Appendix 1:
----------
Answers to Post-Hearing Questions
Answers to Post-Hearing Questions
Responses by Ralph E. Gomory, Research Professor, New York University
Stern School of Business; President Emeritus, The Alfred P.
Sloan Foundation
Questions submitted by Chairman Brad Miller
Q1. You say in your written testimony: ``If in the process of
globalization the production (or delivery in the case of services) of
the good moves overseas, so do the wages. Even if R&D remains behind,
the vast bulk of value creation has moved to another country, and it is
there that it supports the wages of employees.'' But if production
moves offshore, how long can R&D remain behind? Particularly in high-
value-added industries, has there been any evidence that R&D activity
is drawn toward the geographic location of manufacturing capacity?
Conversely, are there circumstances in which R&D activity has drawn
manufacturing capacity to its geographic location?
A1. In the case of established products R&D is very likely to follow
production. In disc drives and semiconductors or similar advanced and
difficult products you need the R&D people to be intimately involved in
the details of production in order to know what is actually possible
and what is needed.
If you are talking about a totally new product, and this is the
picture that is too often in peoples'' minds, there is no production to
follow and initial production could be set up anywhere depending on a
great variety of circumstances. However if the new product becomes
established and large scale, production location will often be dictated
by costs and thereafter R&D will eventually follow production.
However, at any given time, most production is in established
products.
Q2. In your written testimony, you say that ``the emerging gap between
the goals of global corporations and the aspirations of people of
individual countries''--a gap arising from ``rapid technological
change'' and its consequently increased ``degree of globalism in
economic development''--has accelerated ``not only in the United States
but also in less developed countries.'' You add: ``Even when
globalization increases a country's wealth, which it does not always
do, most of the gains are going to a thin upper crust, and the bulk of
the people do not participate.'' What does this augur for the future of
a world economy that, in recent memory, has depended for its sustenance
on the production and sale of goods of mass consumption?
A2. This is really a quantitative question whose answer is not obvious.
In the U.S. the growth of wealth in the upper crust has been extremely
rapid, the growth for most others zero, i.e., some negative some
slightly positive, all greatly below the rate of growth of GDP. It is
difficult therefore to extrapolate into a rather far off future when
the number of people is growing.
Q3. During a discussion of whether executives' severance and
retirement packages drain lower-ranked employees' retirement and other
benefits, Dr. Blair was asked about the ``merit [of] tying the fate of
employees' benefit packages to the fate of the executive or board
packages.'' You agreed with her endorsement of the idea ``in
principle.'' Can you envision some ways in which this might be put into
practice, and what hindrances or limits might exist?
A3. I do think this is a good general direction, not only for benefit
packages but also for the general use of profit. Profit represents the
available surplus after standard expenses are met. How should this be
allocated, all to shareholders, all to workers as a bonus, split
between the two, used to improve pensions? The possibilities are
endless. We need to decide what we want of our corporations. This may
be left to the boards of directors after first limiting the shareholder
share. This is more a direction thing than an explicit rule and
different companies might act differently and a tax structure is needed
in the end to incent this sort of behavior. If this level of response
is not helpful I have nothing further to respond to this question.
Q4. You said that ``we as a nation . . . ought to decide what we want
a corporation to do'' and ``make sure that our tax structure awards
that.'' You also talked about not allowing firms to keep the profits
they earn ``if they are not productive, if they don't treat people
right, if their skew of compensation is crazy.'' In addition to the tax
regime you proposed that would reward firms for keeping high-value-
added jobs in the country and punish firms for moving them offshore,
can you offer specific measures for incentivizing desirable corporate
behavior?
A4. Taxes are the most obvious method. In addition corporate charters
that require corporations to consider the Nation, the employees and the
community as well as the shareholders. Incentive pay should reflect all
these factors. At present the use of huge stock option grants has
skewed the attention of management, which was once focused on other
factors as well as share price to focus on share price only as the
reward, is tens and hundreds of millions of dollars. This skewed
motivation should be changed and the executives should be rewarded for
performing in many factors. Share price became especially attractive
when the stock market was rising as every company went up whether well
managed or not. It was rewarding the executives for being in charge
during good weather. I suggest that it would be better for even the
component of compensation that is tied to share price should be tied to
a peer group comparison. This would motivate executives to build
companies that could survive bad times as well as rise with the rising
tide.
Answers to Post-Hearing Questions
Responses by Margaret M. Blair, Professor of Law, Vanderbilt University
School of Law
Questions submitted by Chairman Brad Miller
Q1. You offered while testifying to expand upon ``how and why the
notion that corporate managers must maximize share value came to be so
widely accepted in the past three decades.'' Please do so here.
A1. Societal norms, conventions, or expectations rarely change
overnight, and that is certainly true with respect to the question of
the purpose of corporations, and what corporate managers and directors
are expected to do. Throughout the history of the use of the corporate
form as a way to organize business activities, there have been societal
debates about whether corporations should be regarded as creatures of
the state, required to serve some public purpose, or whether they are
purely the product of contracts among private parties, whose only
purpose is to serve the interest of those parties, presumably by
earning profits for investors.
For most of the 20th Century, until at least until the late 1980s,
the question was thought by most corporate law scholars, as well as
most business leaders, to be settled in favor of the view that
corporations are supposed to serve a broad social purpose (while also,
of course, earning profits for investors).\1\ This ``social entity
conception,'' as this view has been called, came to be widely-accepted
in the 1930s, partly as a reaction to widespread concerns about the
role that corporate abuses had played in the financial excesses of the
``Roaring 20s,'' and in the collapse of financial markets in 1929 and
the ensuing Depression of the 1930s. The social entity view was
accepted by most economists and legal scholars partly as a result of
the scholarship of Adolph Berle and Gardiner Means, who, in 1932, found
that most large corporations did not have a ``controlling'' shareholder
(an individual or other firm who held 50 percent or more of the voting
shares) who could be held accountable for the actions of the
corporation.\2\ Instead, shares had come to be very widely-held by
individual investors, so that in many firms, managers and boards of
directors were not constrained to act only in shareholders' interest.
If shareholders could not be held accountable for the actions of
corporations, Berle and Means argued, it made no sense as a matter of
public policy to hold directors and managers responsible for serving
the interests of shareholders.\3\ Instead, they argued, directors and
managers should be required to manage corporations in the public
interest.\4\
---------------------------------------------------------------------------
\1\ For a discussion of the economic function served by the
corporate form that made it attractive to business organizers in the
19th Century, as compared with the partnership form, see Margaret M.
Blair, Locking in Capital: What Corporate Law Achieved for Business
Organizers in the Nineteenth Century,'' 51 UCLA Law Review, 2, 387
(2003). For a general discussion of the history of legal thinking about
the role of corporations, see Margaret M. Blair, Ownership and Control:
Rethinking Corporate Governance for the Twenty-first Century, Brookings
(1995), Chapter 6, Whose Interests Should Corporations Serve? pp. 202-
234.
\2\ See Adolf A. Berle, Jr., and Gardiner C. Means, The Modern
Corporation and Private Property, 1932.
\3\ ``The owners of passive property [dispersed shareholders], by
surrendering control and responsibility over active property, have
surrendered the right that the corporation should be operated in their
sole interest,'' Berle and Means asserted. Berle and Means, 1932, pp.
355.
\4\ ``Eliminating the sole interest of the passive owner, however
does not necessarily lay a basis for the alternative claim that the new
powers should be used in the interest of the controlling groups
[corporate managers and directors] . . .. The control groups have,
rather, cleared the way for the claims of a group far wider than either
the owners or the control. They have placed the community in a position
to demand that the modern corporation serve not alone the owners or the
control but all of society.'' Berle and Means, 1932, pp. 355-356.
William Allen, former Chancellor of the Delaware Court, described the
``social entity'' view in a law review article as follows:
``Contributors of capital (stockholders and bond holders) must be
assured a rate of return sufficient to induce them to contribute their
capital to the enterprise. But the corporation has other purposes of
perhaps equal dignity: the satisfaction of consumer wants, the
provision of meaningful employment opportunities and the making of a
contribution to the public life of its communities. Resolving the often
conflicting claims of these various corporate constituencies calls for
judgment, indeed calls for wisdom, by the board of directors of the
corporation. But in this view, no single constituency's interest may
significantly exclude others from fair consideration by the board.''
See William T. Allen, Our Schizophrenic Conception of the Business
Corporation, 14 Cardozo Law Review, 2 (1992).
---------------------------------------------------------------------------
During the years of World War II, and the post-War expansion, the
interests of the corporate sector seemed to be very much aligned with
the interests of the country.\5\ Thus business leaders could credibly
proclaim that ``what is good for the country is good for General
Motors,'' \6\ and courts did not worry much about whether corporate
officers and directors who took into account the public good in their
corporate decision-making would thereby breach their fiduciary duties
to shareholders.\7\
---------------------------------------------------------------------------
\5\ Historian Dow Votaw, writing in 1965, observed that ``the
corporation performed brilliantly during World War II,'' and ``the
performance of the corporate system since the war has also been very
good, as a whole, [producing] rising prosperity and standards of
living.'' Dow Votaw, Modern Corporations, 1965, p. 102.
\6\ Attributed to Charles E. Wilson, who was president of General
Motors Corporation in the early post-War years, and later became
Secretary of Defense. See The New Dictionary of Cultural Literacy,
Third Edition. Edited by E.D. Hirsch, Jr., Joseph F. Kett, and James
Trefil. Copyright 2002 by Houghton Mifflin Company. Published by
Houghton Mifflin Company, at http://www.bartleby.com/59/18/
whatsgoodfo2.html
\7\ In 1946, Frank Abrams, then chairman of Standard Oil Company of
New Jersey, described the role of modern managers as maintaining ``an
equitable and working balance among the claims of the various directly
interested groups--stockholders, employees, customers, and the public
at large.'' See Eugene V. Rostow, To Whom and for What ends is
Corporate Management Responsible? in The Corporation and Modern
Society, edited by Edward S. Mason, 47-71, 1960. In the 1970s, General
Electric C.E.O. Reginald Jones similarly argued that corporate leaders
must balance shareholder concerns against the interests of employees,
American industry, and the Nation. The Business Roundtable formally
adopted a similar position in 1981. And as late as 1990, the Business
Roundtable position was that ``Corporations are chartered to serve both
their shareholders and society as a whole.'' See Corporate Governance
and American Competitiveness, Business Roundtable, March, 1990, p. 4.
The Business Roundtable reversed its position in 2004, however,
asserting that the only obligation of business leaders is to maximize
shareholder wealth.
---------------------------------------------------------------------------
This view of the duties of officers and directors of corporations
changed during the late 1980s and 1990s. The change was the product of
a new set of theories in economics and finance, in combination with
dramatic changes in how financial markets work.
On the theory side, three developments were important:
First, economists began developing alternative theories about
whether corporations would, in practice, always maximize profits (as
basic economic theory generally assumes). If managers were not
themselves substantial shareholders, theorists speculated, and if there
were no controlling or dominant shareholders, then managers might tend
to act in their own personal interests rather than in the best interest
of the corporation or its shareholders, economists argued. This was
seen as a policy problem as well as a problem with economic theory. To
address this problem, economists developed ``agency theory.'' Agency
theory recognizes that a gap often exists between what shareholders
would want and what managers might want, and it argues that corporate
participants will develop a variety of contracting strategies that
could be deployed to give managers incentives to act in shareholders'
interest. Agency theory analyzes the effectiveness of various contract
terms at resolving the ``agency problem'' or at least trying to
minimize its costs.\8\
---------------------------------------------------------------------------
\8\ See, e.g., Michael C. Jensen and William H. Meckling, Theory of
the Firm: Managerial Behavior, Agency Costs and Ownership Structure,''
3 Journal of Financial Economics (October) 1976.
---------------------------------------------------------------------------
One of the most important theories to come out of the focus on
agency problems is the idea that, if managers of a corporation do not
choose actions that maximize share value, other investors will be able
to acquire the shares of the company at a price that is discounted
relative to the corporation's potential value, and in this way, get
control of the corporation and fire those ineffective managers. Thus
theorists believed that a market mechanism, the so-called ``market for
corporate control,'' would limit the ability of managers to diverge
from share value maximization.\9\
---------------------------------------------------------------------------
\9\ See, e.g., Henry G. Manne, Mergers and the Market for Corporate
Control, 73 Journal of Political Economy, 1965, and Michael C. Jensen,
Agency costs of Free Cash Flow, Corporate Finance, and Takeovers, 76
American Economic Review, May, 1986.
---------------------------------------------------------------------------
Second, finance scholars came to believe in the ``Efficient Capital
Markets Hypothesis,'' which states that security prices in widely-
traded markets, such as stock markets in the U.S., will quickly reflect
all available information that might be relevant to the future
performance of the company that issued the security. Prices determined
in such markets will be an unbiased estimate of the true value of the
security, according to the theory.\10\ The beauty of this theory, from
the point of view of academic economists and finance scholars, is that
it implies that the financial performance of any company with publicly-
traded shares can be measured quite easily and without systematic error
simply by looking at what happens to the share price of the company's
stock.
---------------------------------------------------------------------------
\10\ E.F. Fama, Efficient Capital Markets: A Review of Theory and
Empirical Work, 25 Journal of Finance, May, 1970.
---------------------------------------------------------------------------
Furthermore, with a few ``modest'' assumptions (and this was the
dangerous part), changes in stock prices could be interpreted as
measuring the entire economic performance of corporations. The
assumptions required are that all participants in the enterprise of a
corporation except shareholders (lenders, suppliers, employees, etc.)
are compensated at their (risk-adjusted) opportunity cost by complete
contracts, so that all of the surplus economic value created by the
corporation is captured by shareholders. Under efficient capital
markets theory, and with these assumptions, stock prices came to be
viewed as the single most important measure of total corporate
performance--in fact, some scholars came to treat stock prices as
essentially the only meaningful measure of corporate value.
The third theoretical innovation that helped lay the intellectual
foundation for shareholder primacy is the development of mathematical
models for estimating the value of stock ``options.'' \11\ The role of
option pricing models is more subtle and complex, however, so I save
the discussion of why it was important for later, when I explain why
stock options became important.
---------------------------------------------------------------------------
\11\ See F. Black and M. Scholes, The Pricing of Options and
Corporate Liabilities, 81 Journal of Political Economy, May-June, 1973.
---------------------------------------------------------------------------
On the financial markets' side, several developments helped change
the general public perception and belief about the responsibilities of
corporate officers and directors:
First, securities markets went through an extended period of time
in the 1970s and early 1980s when returns on capital were abysmally
low. As an indicator of this, from a peak of 1051.7 in 1973, the Dow
Jones Industrial Average collapsed to 577.60 at the end of 1974, and
did not rise above 1000 (to stay above that level) until early 1983.
Bond markets also performed poorly during this period as inflation ate
away at the real return to bond holders, and drove nominal interest
rates to record highs by the early 1980s. By the 1980s, financial
investors were willing and eager to try new things in order to improve
the return on capital.
Second, several financial market innovations emerged in the 1980s
that made it easier for outside investors to get control of publicly-
traded corporations, to force changes in the management of these firms
in order to improve returns on investments. The innovations were junk
bonds, hostile takeovers, and leveraged buyouts. Investment banking
firm Drexel Burnham Lambert demonstrated how investors could make
outsized profits (seemingly without corresponding risks) by investing
in portfolios of bonds that were rated below investment grade (Such
bonds are called ``junk bonds.''). This created a substantial market
for junk bonds, and made it possible for Drexel to underwrite the
issuance of junk bonds by a new breed of market players who were
willing make ``tender offers'' for corporations, even if existing
management and boards of directors at those corporations believed that
a takeover would not be in the best interests of the corporation and
its various stakeholders. Tender offers made in the face of opposition
by target company management are called ``hostile takeovers.'' The
outside investors who were making these junk-bond financed offers,
pejoratively called ``corporate raiders,'' were then able to buy up a
sufficient quantity of shares in a number of companies to get control
and oust directors and managers who did not want to go along with the
plans of the takeover investor. These transactions (called ``leveraged
buyouts'' because they were financed with large amounts of debt and
relatively small amounts of equity) seemingly confirmed the new
economic theories that predicted that if corporate managers did not
maximize share value, other investors would come along and take over
the firm to force the firm to maximize share value.
Thus the ``market for corporate control'' theory provided
legitimacy to the ``raiders'' to the extent that what they were doing
appeared to be consistent with what theorists had predicted, and the
theory seemed to provide an explanation for why so many takeovers and
leveraged buyouts were happening in the 1980s. Although most corporate
directors and managers strongly resisted takeovers during the 1980s,
over the course of that decade, the argument was repeatedly made that
takeovers were the market's way of eliminating poorly performing
managers and compelling corporations to restructure and redeploy assets
to improve the return for shareholders. And because of the rarely-
acknowledged or examined assumption behind the market for corporate
control theory--that other corporate participants were fully protected
by their contracts with the corporations--defenders of hostile
takeovers argued that actions such as factory closings, layoffs, and
asset sales that accompanied LBOs and led to higher share prices must
be value-creating, and should be encouraged rather than inhibited by
the law.\12\
---------------------------------------------------------------------------
\12\ The full reality was more complicated. As mentioned before,
the return on capital in the aggregate economy was dismal during the
1970s, so that investors had become restless and prepared to pursue new
strategies to try to improve returns. Then in the early 1980s, the
``cost'' of capital (as measured by market rates of interest for bonds
issued during that period) shot up to unprecedented levels, as Federal
Reserve Board Chairman Paul Volcker promulgated policies to try to
squeeze inflation out of the economy. During the period from about 1983
to about 1987, the aggregate cost of capital in the U.S. economy
exceeded the aggregate return on capital, creating an environment in
which it did not make economic sense for most firms in many industries
to make further investments in new capital. Leveraged buyouts, of
course, did not represent new investment by the buyout firms, since
buyers were simply buying out the position of the previous
shareholders, who could then redeploy their cash to other investments,
such as government bonds, which were paying extraordinarily high rates
at the time. Leveraged buyouts, thus, had the effect of preventing net
new investment in the buyout firms, because after the buyout, all cash
flows had to be used to pay down the debt, rather than to make new
investments. The financial markets rewarded firms that restructured in
this way because it freed up cash from corporate investment that could
then be available to support the huge and growing federal budget
deficits accumulated during the 1980s . Thus leveraged buyouts can be
understood as a mechanism by which the financial markets forced the
corporate sector in the U.S. to disinvest in the 1980s and 1990s. See
Margaret M. Blair, ``Financial Restructuring and the Debate about
Corporate Governance,'' in Margaret M. Blair, ed., The Deal Decade:
What Takeovers and Leveraged Buyouts Mean for Corporate Governance,
Brookings, 1993.
---------------------------------------------------------------------------
Raiders and their fellow investors who were financing hostile
takeovers in the early 1980s made very high returns on their
investments. By the late 1980s, however, it became clear that too many
deals were being done, and that some firms could not handle the high
levels of debt they were taking on. A number of prominent firms that
had been taken over in leveraged buyouts had to be reorganized or
liquidated in bankruptcy proceedings.\13\ Meanwhile, the return on
capital climbed steadily during the 1980s, and by the late 1980s and
early 1990s, and the cost of capital began falling again, suggesting
that the underlying macroeconomic rationale that had fueled the
takeover frenzy had largely worked itself out. Moreover, a number of
states passed statutes in the late 1980s that made it easier for
corporate managers to resist hostile takeovers. So by the early 1990s,
we saw that the wave of takeover and leveraged buyout activity
declined.
---------------------------------------------------------------------------
\13\ See e.g., Blair, The Deal Decade, at 41 for the story of
Campeau Corp.'s leveraged buyout of Federated Department Stores in
1988,and subsequent bankruptcy filing by Campeau in early 1990.
---------------------------------------------------------------------------
This did not seem to undermine the success of the new theory,
however. Excesses of the old regime, in which corporate executives (who
were more likely to see it as their role to grow the corporation rather
than enhance share value) often engaged in wasteful empire building and
indulged their desire to enjoy fancy offices and corporate jets in the
absence of restraint by shareholders, had been exposed as epic takeover
battles were fought.\14\ And the seeds of the idea had been planted
that corporate executives could provide substantially higher returns to
shareholders if they were willing to abandon commitments their firms
had made to employees, communities, and to long-term investments in
basic research.
---------------------------------------------------------------------------
\14\ See, e.g., Bryan Burrough and John Helyar, Barbarians at the
Gate, 1990, for a description of the excesses at R. J. Reynolds prior
to its leveraged buyout by Kohlberg, Kravis, and Roberts, in 1988.
---------------------------------------------------------------------------
Thus, by the early 1990s, the culture inside the boardrooms had
begun to change. Economists and finance scholars who bought in to the
shareholder primacy perspective were telling directors that they should
not believe that managers had intrinsic motives to do what was best for
the companies, let alone to maximize share value. Rather, directors
should monitor managers closely, and compensate them in ways that would
give them large financial incentives to focus on share value. The most
common way to do this was to grant large blocks of stock options to the
executives.\15\
---------------------------------------------------------------------------
\15\ One might imagine that, in a well-functioning market for
executive services, cash compensation would be reduced by a substantial
amount to offset the value of the grant of stock options to executives.
But one would be wrong about that. Studies have repeatedly shown that
stock option compensation awards seem to come on top of salary and
bonus payments in cash.
---------------------------------------------------------------------------
The rise to prominence in recent decades of stock option-based
compensation, then, can be seen as the third development in financial
markets that has encouraged widespread acceptance of the idea that it
is the job of corporate directors to focus on improving share price.
Stock option compensation is attractive to both the managers and the
directors of corporations, relative to compensation in cash or even
stock itself, because it provides substantial tax benefits to the
corporation and to the executives receiving the options. If the strike
price of a stock option is the same as the trading price of the stock
on the day the option is granted to an executive, the company treats
the grant as if it has zero cost to the company for accounting
purposes. This means the company can record higher net profit than it
actually earned because some true costs are not accounted for.
Moreover, if an executive receives stock options as compensation,
the executive does not have to declare the option grant as income for
personal income tax purposes at the time of the grant. As far as the
IRS is concerned, the executive does not get the compensation until he
exercises the options. At that point, the executive is credited with
receiving income equal to the difference between the stock price in the
market, and the exercise price which the executive pays to buy the
stock. And the company then takes a charge against earnings (and
corresponding tax deduction) for the cost equivalent to what the
executive records as income.
During the 1980s, corporate directors and managers came to
appreciate the fact that they could get extremely rich very quickly if
their compensation packages included substantial blocks of stock
options. And at the same time, the development of sophisticated models
that could be used to estimate the value of options made the options
seem less exotic and easier to understand. By the early 1990s, most
corporate executives received more value in stock options each year
than they did in cash compensation. This trend was given even more
impetus by the boom in tech companies and dot.com companies of the
1990s, because such firms were typically low on cash, and high on
promise, and thus often paid their executives very little in actual
cash, but huge numbers of stock options.
Stock option compensation gives corporate executives exaggerated
incentives to focus on stock prices, often over a relatively short
period of time, rather than on other measures of corporate performance.
This is because stock options are a ``heads I win--tails you lose''
proposition for corporate executives who receive them. If the market
price of the underlying stock goes up, holders of stock options can get
huge rewards, while if the price of the underlying stock goes down,
option holders do not suffer corresponding losses. Thus stock options
give corporate executives incentives to cause the company to choose
highly risky strategies that may lose value on average, but that have a
small chance at winning big. The executive will share in the winnings
but not in the losses.
The net effect of these developments--low returns to capital in the
'70s, the introduction of junk bond financing, hostile takeovers, and
leveraged buyouts as mechanisms for squeezing higher returns for
shareholders out of corporations in the 1980s, and the acceptance of
stock option-based compensation packages for corporate executives--have
made ``shareholder primacy'' attractive for corporate executives as
well as for shareholders. Meanwhile, agency theory, the Efficient
Capital Markets Hypthesis and options pricing models, have provided a
gloss of intellectual respectability to shareholder primacy. Although
corporate law in the U.S. has never required managers and directors to
maximize share value, the restructuring of compensation schemes and the
revision of corporate norms that has taken place over the last two
decades means that it is now in the interest of most managers,
executives, and directors, as well as of shareholders, to do so.
Q2. Can the holder of shares in a corporation be regarded legally as
an owner of that corporation? If not, what differentiates a shareholder
from an ``owner'' in the normal legal sense of the term?
A2. Although it is common practice in the media and even in occasional
scholarly article or court cases to refer the shareholders as the
``owners'' of corporations, the structure and rules of the relationship
between shareholders and the corporations whose shares they hold make
it clear that, while shareholders own their ``shares,'' they do not
``own'' the corporation itself.
Property, according to Barron's Law Dictionary, ``describes one's
exclusive right to possess, use, and dispose of a thing, . . . as well
as the object, benefit, or prerogative which constitutes the subject
matter of that right.'' \16\ William Blackstone, in his 1765 treatise,
stated that property ``consists in the free use, enjoyment and disposal
of all . . . acquisitions, without any control or diminution, save only
by the laws of the land.'' \17\ Property is also widely understood to
convey responsibilities as well as rights with respect to the owned
asset. Property owners can be held personally liable for damage to
others caused by the misuse or neglect of their property.
---------------------------------------------------------------------------
\16\ See Steven H. Gifis, Barron's Law Dictionary, Third Ed., 1991,
p. 380.
\17\ 1 Blackstone, Commentaries on the Laws of England 134 (1765).
---------------------------------------------------------------------------
Clearly, none of these characteristics apply to shareholders' role
in corporations. Shareholders may not take possession of the assets of
a corporation, or manipulate its machinery for their own personal
benefit, especially if there are other shareholders. And by virtue of
the doctrine of ``limited liability,'' shareholders are generally not
held personally liable for corporate debts, or for actions of the
corporation that cause harm to others. Instead, the law creates a
separate legal person when a corporation is formed, and that legal
person is the owner of all corporate assets as well as the party that
is held legally responsible for corporate liabilities and for harm
caused by the improper use of corporate assets. Corporate officers and
directors are charged with making decisions for the corporation, but
since they are fiduciaries, they may not treat the assets of the
corporation as their own personal assets.
Even where there is a sole proprietor who creates a corporation for
carrying out his business activities, the corporate form is generally
employed precisely because it protects the proprietor from personal
responsibility for the debts and liabilities of the business. Just as
in a corporation with multiple shareholders, the sole shareholder in a
private corporation may not appropriate the assets of the corporation
for his personal use, or intermingle the corporate assets with his
personal assets, or he may lose the protective benefit of limited
liability.
Ironically, some of the strongest shareholder primacy advocates
concede this point. In their classic book, The Economic Structure of
Corporate Law, authors Frank Easterbrook and Daniel Fischel argue that
a corporation is a ``nexus of contracts,'' not a thing that can be
owned.\18\ It is a legal mechanism that facilitates contracting among
the suppliers of capital and the managers and directors. Easterbrook
and Fischel nonetheless argue that the corporation should be run for
the benefit of shareholders because, they argue, shareholders are the
``residual claimants'' to proceeds of the enterprise.
---------------------------------------------------------------------------
\18\ See Frank H. Easterbrook and Daniel R. Fischel, The Economic
Structure of Corporate Law, Harvard University Press, 1991, pp.------.
---------------------------------------------------------------------------
Shareholders are legal owners of the equity shares that they hold.
They are entitled to the full set of rights and benefits that go along
with ownership of the shares--they can receive dividends if paid, they
can sell their stock, or borrow against it, or pass it to heirs. But it
is a great distortion of the words ``property'' and ``ownership'' to
argue that shareholders are the ``owners'' of the corporations
themselves.
Q3. If corporate officers and directors are not required by law to
maximize share value, what are their duties, and what should they try
to do? And what constraints or incentives are available to make sure
they do these things?
A3. Corporate law statutes provide that ``all corporate powers shall be
exercised by or under the authority of the board of directors of the
corporation, and the business and affairs of the corporation shall be
managed by or under the direction, and subject to the oversight, of its
board of directors.'' \19\ Beyond this, neither the statutes nor case
law prescribe how directors and managers should go about their duties,
except to make it clear that the they are in a fiduciary role with
respect to the corporation, and must not appropriate its assets for
their own personal benefit to the detriment of the corporation.
---------------------------------------------------------------------------
\19\ Model Business Corporation Act, 8.01(b). State statutes
generally follow this language or other language to the same effect.
---------------------------------------------------------------------------
I have argued elsewhere that, in an ideal world, directors and
managers ``should understand their jobs to be maximizing the total
wealth-creating potential of the enterprises they direct. In doing
this, they must consider the effect of important corporate decisions on
all of the company's stakeholders. For this purpose, stakeholders
should be defined as all parties who have contributed inputs to the
enterprise and who, as a result, have at risk investments that are
highly specialized to the enterprise. Those parties inevitably share in
the residual risk of the firm. The law and culture of the boardroom
should support this broader view of the role of management and
directors.'' \20\
---------------------------------------------------------------------------
\20\ See Margaret M. Blair, Ownership and Control: Rethinking
Corporate Governance for the Twenty-first Century, Brookings, 1995, p.
239.
---------------------------------------------------------------------------
This is, of course, much easier said than done. In practice, there
are many reasons why corporate officers and directors might nonetheless
try to manage the firm in a way that maximizes total wealth creation,
even though it is difficult and often requires balancing competing
interests. These range from financial benefit to themselves, to
personal satisfaction, concern about their reputations, and social
pressures. In the past two decades, however, the financial,
reputational, and social pressures have all shifted so that they now
generally encourage managers and directors to focus on share value to
the exclusion of, and sometimes at the expense of, total value
creation.
Can these sources of pressure be shifted back so that they push
corporate officers and directors to try to maximize the total value
created by corporations, instead of just the value that can be
extracted by shareholders? That, it seems to me, is the major policy
question at stake in this debate, and I don't know the answer. But it
seems possible that a combination of changes in tax incentives, and
changes in certain social and reputational factors might help. The
following are a few suggestions along these lines:
The tax system should not make it more attractive to
use stock options in compensation packages rather than direct
stock ownership.
Tax benefits might instead be used to encourage
corporate managers and directors to be compensated in
restricted stock, with holding periods of at least five to ten
years. If officers and directors are rewarded for share price
performance over long periods of time, rather than over a few
months or quarters, this should encourage them to pay attention
to the long run implications of their actions and decisions on
all of the parties whose investments and effort contribute to
the long run viability and profitability of the corporation.
Shareholder primacy rhetoric should be continuously
challenged, on the grounds that the law does not, in fact,
require shareholder primacy, and that what is best for
shareholders at any point in time is not necessarily what is
best for the U.S. economy or for society at large.
Changes in corporate or securities laws that would
enhance shareholders' ability to pressure or compel
corporations to accept takeover offers, or pay dividends, or
take other actions that would benefit shareholders at the
expense of the long run health of the corporation, should be
avoided and even repudiated.\21\
---------------------------------------------------------------------------
\21\ Lucian Bebchuk has argued, for example, that shareholders
should have the power to initiate and approve distributions to
shareholders in cash or in other corporate assets, and to distribute
new debt securities to shareholders (to compel managers to pay out cash
flow rather than reinvest it), to initiate mergers and/or
consolidations with other companies, to initiate a sale of all of the
assets of the company to a particular buyer, or to initiate dissolution
of the company. See Lucian Arye Bebchuk, The Case for Increasing
Shareholders Power, 118 Harvard Law Review, 3, 2005. These are all
matters that under current corporate law are reserved to corporate
directors. In prior work I have argued that any or all of the above
changes in the law would be misguided. See Margaret M. Blair, Reforming
Corporate Governance: What History Can Teach Us, 1 Berkeley Business
Law Review, 1, 1 (2004).
The above changes might alter the cultural and financial pressures
on officers and directors to some degree, but even if all were to
happen, they would be unlikely to alter the massive economic pressures
that are driving U.S. corporations to move their important investment
and job-creating activities overseas. Addressing these pressures will
require changes in tax and trade policy that are beyond the scope of
this testimony.
Answers to Post-Hearing Questions
Responses by Bruce R. Scott, Paul Whiton Cherington Professor of
Business Administration, Harvard Business School
Questions submitted by Chairman Brad Miller
Q1. In your written testimony, you call ``one of the great risks of
capitalism'' the fact that ``powerful people can use the system to
appropriate common resources from their neighbors, all in the name of
greater efficiency through privatization.'' Is it easier for the
powerful to ``use the system to appropriate common resources from their
neighbors'' under capitalism than under other economic systems, or more
likely for any other reason that they will do so? As a corollary, is
such behavior easier or more likely under certain forms of capitalism
than under others?
A1. We think of our economy as one based on private property, and
private enterprise in particular. While true, our economy relies on
public resources as well, both natural resources and public goods such
as an educational system, public health and the entire regulatory
system that protects our resources. Often we fail to recognize that
these public resources are exposed to capture and or abuse by economic
actors, as for example when private actors pollute the water, the air,
or the appearance of an area, a situation called creating negative
externalities, meaning that the polluter can get away without being
charged for the transgressions. Some degree of negative externalities
is almost inevitable, but it is the job of the regulators to hold this
type of behavior in check, for example through monitoring by the EPA or
the Department of the Interior, etc.
However, a version of capitalism premised on extreme deregulation,
or still worse self regulation, creates a culture not only of contempt
for the protection of public resources it invites business interests to
corrupt the regulators and the extreme to try to privatize government
through taking it over piece meal. Whole services such as logistics
support for the military in Iraq have been privatized, as have others
in the U.S. If this much is obvious it may not be so obvious that much
the same can be done for the market frameworks more broadly. Lobbying
can transfer revenues from the IRS and thus the taxpayers to the firms
through the creation of subsidies or less visible loopholes. Similar
transfers can be effected from consumers or employees to business
interests, all in the spirit of enjoying a free for all at public
expense. Our news papers carry such stories day by day and week by
week.
Rising inequalities of income are a sign that the market frameworks
are being tilted in favor of the rich, as they have been in this
country since 1981. The U.S. now has the most unequal incomes among
industrial countries as a result of just such tilting of its market
frameworks. One of the most egregious examples was the business
lobbying that prevented the FASB and the SEC from requiring the
expensing of stock options as a business expense. About 75 percent of
CEO pay in large firms has been in the form of payments such as options
that did not have to be reported or recorded as expenses. This created
a totally phony market of extraordinary CEO pay that was ``free'' for
the company so far as its profit and loss accounts were concerned.
Q2. Recalling that U.S. states were once able to ``ask for something
in return'' for granting a corporate charter, in your written testimony
you advocate establishing ``a mandatory standard of stakeholder
welfare,'' which you say ``would put U.S. firms more nearly in step
with some of the major European countries.'' What is a ``mandatory
standard of stakeholder welfare''? How does it work in countries where
it is in existence, and what form might it take in the United States?
A2. The U.S. is in a small minority of countries where firms may view
their primary mission of the firm as the maximization of shareholder
value. Since in practice this translates into maximizing the likelihood
of regular stock price increases this tends to induce corporate
cultures of management by the numbers, where the importance of
relationships with customers, employees and communities is devalued. It
also produces a tendency to continuously take risks to boost share
price, even to the point of ``overvaluing the stock'' to achieve
numerical targets. Over-valuation in turn increases the temptation to
fudge the accounts in subsequent periods to maintain performance, as
was obvious in the Enron situation among others.
Q3. You testified that the growth of economic inequality that began in
the United States during the decade of the 1980s has not been in
evidence in at least some European countries. Can you comment on the
implications of the degree of economic equality or inequality for the
health of a national economy, its prospects for growth, and the general
health of the society?
A3. Most countries have a single authority that charters firms, and
historically these authorities have demanded that the firm be managed
for the long-term health of the firm, with due care for its employees,
customers, suppliers and affected communities. With that commitment
built into the charter a firm can be held to much higher standards of
sensitivity for its actions, and by government as well as shareholders.
Since most firms in the U.S. have been chartered by the individual
states, there has long been a race to the bottom to compete for
chartering fees and other revenues by having minimal requirements for a
charter. As Theodore Roosevelt pointed out a century ago, the U.S.
needs a chartering authority whose reach is as extensive as the market,
and whose power exceeds that of even a very large firm. We are an
exception in allowing out continental market to be exploited as an
under-regulated common resource of incredible value. A federal charter
or license could change this, by mandating a broader sense of corporate
purpose.
Appendix 2:
----------
Additional Material for the Record
AMERICAN DECLINE OR RENEWAL? PART 2--THE PAST AND FUTURE OF SKILLED
WORK
----------
TUESDAY, JUNE 24, 2008
House of Representatives,
Subcommittee on Investigations and Oversight,
Committee on Science and Technology,
Washington, DC.
The Subcommittee met, pursuant to call, at 1:07 p.m., in
Room 2318 of the Rayburn House Office Building, Hon. Brad
Miller [Chairman of the Subcommittee] presiding.
hearing charter
SUBCOMMITTEE ON INVESTIGATIONS AND OVERSIGHT
COMMITTEE ON SCIENCE AND TECHNOLOGY
U.S. HOUSE OF REPRESENTATIVES
American Decline or Renewal? Part 2--The Past and Future of Skilled
Work
tuesday, june 24, 2008
1:00 p.m.-4:00 p.m.
2318 rayburn house office building
Purpose
This hearing will focus on how the United States can maintain and
expand high-skilled, high-paying jobs here at home. To examine this
question, which is central to the Nation's competitiveness in a
globalized economy, the hearing will survey the efficacy of past and
current efforts to aid dislocated workers and communities.
Manufacturing, the traditional engine of value-added production in our
economy, has been deeply affected by globalization, and service
industries--even those relying on highly trained personnel--are coming
under increasing pressure from foreign competitors.
The hearing will also assess the structure of international trade
in order to predict how well domestic efforts at retraining and
reinvestment can be expected to succeed in the future. For the health
of the national economy, and the scientific and technological
enterprises dependent on it, we must learn what our workers and
communities need. The goal must be, as the former Chair of the Council
of Economic Advisers, Laura D'Andrea Tyson, put it, ``to produce goods
and services that meet the test of international competition while our
citizens enjoy a standard of living that is both rising and
sustainable.''
The Committee on Science and Technology has jurisdiction that
directly relates to the competitiveness of the United States through
our authorization of programs that directly contribute to innovation.
The Committee has a specific interest in the health of the Nation's
manufacturing industries through its connection to the National
Institute of Standards and Technology, whose budget it authorizes. In
addition, the Committee annually authorizes the expenditure of billions
of dollars to support scientific research and the training of the next
generation of scientists and engineers, and has taken steps to support
retraining of workers for high tech employment opportunities.
This hearing has been designed to help the Committee in identifying
measures that might increase the likelihood of high-value-added
activities remaining, increasing, and succeeding within U.S. borders.
By so doing, it will contribute to the future health of America's
economy and the future prosperity of its citizens.
The hearing will take testimony on the impact on workers and
communities when jobs move abroad; problems with the current program of
Trade Adjustment Assistance in supporting workers whose jobs have been
sent off-shore; successes of using community colleges, working with
local businesses, to retrain displaced workers; the need for rethinking
the supports and our approach to global trade if high-paying employment
and a good standard of living are key economic policy goals for the
country.
Witnesses:
Dr. John Russo is the coordinator of the Labor Studies Program at the
Warren G. Williamson School of Business Administration of Youngstown
State University in Ohio, and the founder and Co-Director of Youngstown
State's Center for Working-Class Studies. He is co-author with Sherry
Linkon of Steeltown, USA: Work and Memory in Youngstown.
Mr. Frank H. Morgan is an attorney at the Washington, DC, firm of White
& Case LLP. He has pled before the International Court of Trade in New
York City on behalf of workers whose petitions for Trade Adjustment
Assistance have been denied by the U.S. Department of Labor.
Mr. Howard F. Rosen is the founder and Executive Director of the Trade
Adjustment Assistance Coalition and a visiting fellow at the Peterson
Institute for International Economics in Washington, DC. He is a
leading expert on and advocate for programs designed to aid dislocated
workers.
Ms. Jeanie Moore is Vice President for Continuing Education Programs at
Rowan-Cabarrus Community College in Salisbury, NC. Her work on the
effort to revive Kannapolis, NC, has been recognized by the U.S.
Department of Labor, which in 2005 presented her with its Workforce
Innovations Award for ``Serving Special Populations in the Workplace.''
Dr. Thomas I. Palley is the founder of the Economics for Democratic &
Open Societies Project in Washington, DC. He earlier served as the
chief economist of the U.S.-China Economic and Security Review
Commission and as Director of the Open Society Institute's
Globalization Reform Project.
Ms. Diana Furchtgott-Roth is a senior fellow at the Hudson Institute in
Washington, DC. She earlier served at chief economist of the U.S.
Department of Labor and as Chief of Staff of the President's Council of
Economic Advisers. She writes a weekly column for the New York Sun.
Chairman Miller. Good afternoon. This hearing will now come
to order.
A casual examination of the usual measures of economic
confidence among working families, the unemployment and
inflation rates shows that everything is just fine. The current
unemployment rate of 5.5 percent and the inflation rate of 4.2
percent are a far cry from the June, 1980, 7.6 percent
unemployment and 14.4 percent inflation. But a closer look
presents a very different picture for working Americans.
Consumer confidence last month came in at its lowest levels
since June of 1980. Only 13 percent of Americans rate the
national economy positively, and 74 percent say it is getting
worse according to a national poll released just a week ago.
Over the last generation economic conditions have
fundamentally changed for American families, and simple
comparisons of unemployment and inflation rates fail to capture
those changes. Today American households carry debt that is
equal to 132 percent of their disposable annual income, nearly
twice the average debt load of 68 percent in 1980. For the past
four years Americans have spent the equivalent of every penny
they have earned, including what they have earned for
retirement. In 1980, they were saving at a rate of 10 percent;
the employment rate may be lower now, but the consequences of
joblessness are likely to be dire for most Americans.
Still, an illusion of well-being persists in the minds of
those who cling to the usual or traditional ways of looking at
things. This mirage really obscures the profound changes in the
American economy and keeps us from taking a hard look at the
realities that so many of our families and communities face.
Now, here is another statistic that would provide comfort
from a traditional economic viewpoint. American manufacturing
productivity rose 3.6 percent in the first quarter of 2008. If
that is true, why are Americans so worried? Here is why.
Manufacturing output actually dropped during the same period.
American workers' hours dropped even more. Productivity is
manufacturing output divided by the number of hours worked.
That apparent positive for the economy is, therefore, only
statistical. In reality both output and workers' hours are
down. When output and employment are rising, a productivity
gain shows a robust economy, but in today's economy it masks
the fact that we are producing less of what we need and taking
home less for doing it.
It is obvious that we must go beyond the traditional
analysis if we are to form an accurate picture of what is
happening to Americans. We need to ask what changes in the last
30 years have skewed the results of familiar economic formulas.
We need to ask what is behind those changes. Finally, we need
to understand what we do know, whether it is scientific,
technological, or educational, can be applied effectively to
assure that our citizens and our communities can look forward
to a secure and prosperous future in this globalized economy.
This hearing presents a second step along that path. On May
22 this subcommittee heard suggestions offered from a variety
of perspectives on how to structure incentives so that American
firms will maintain and expand at home in America. Today we
will hear about what has happened when we failed at this in the
past and about the effectiveness of our efforts to aid the
recovery of those individuals and communities who have directly
paid the price.
We are fortunate to have with us witnesses who speak from a
wide variety of experiences. Dr. John Russo is an academic who
has lived through and studied one of the leading episodes of
de-industrialization in America, that affecting Youngstown,
Ohio.
Frank Morgan is an attorney who has represented displaced
workers whose applications for Trade Adjustment Assistance, or
TAA, have been denied by the Labor Department.
Howard Rosen is one of the leading advocates for the TAA,
who will report on the program's shortcomings and put forward a
national strategy for dealing with economic dislocation.
Jeanie Moore, a community college official, has played a
leading role in one of the most striking community turnarounds
in the country, that of Kannapolis, North Carolina.
Thomas Palley is not with us yet, but we assume he will be
here in a short while. He is an economist who has long studied
globalization and will assess our options for shaping its
influence and addressing its effect.
And, finally, Ms. Diana Furchtgott-Roth, a senior fellow at
the Hudson Institute in Washington. She earlier served as chief
economist to the U.S. Department of Labor and as Chief of Staff
of the President's Council of Economic Advisors.
This is obviously a complex topic. At our last hearing we
heard completely contradictory viewpoints. Coming to grips with
what it will involve is a challenging proposition, but long-
held assumptions have to be examined and replaced sometimes
with original thinking and novel ideas. But the difficulty of
the task is no excuse for shrinking from it.
And I now recognize the distinguished Ranking Member from
Wisconsin, Mr. Sensenbrenner.
[The prepared statement of Chairman Miller follows:]
Prepared Statement of Chairman Brad Miller
A casual examination of the time-honored measures of economic
confidence among working families, the unemployment and inflation
rates, shows that everything is just fine. The current unemployment
rate of 5.5 percent and inflation rate 4.2 percent, are a very far cry
from June 1980's 7.6 percent unemployment and 14.4 percent inflation.
But a closer look presents a very different picture for working
Americans. Consumer confidence last month came in at its lowest level
since June 1980. Only 13 percent of Americans rate the national economy
positively, and 74 percent say it's getting worse, according to a
national poll released just one week ago.
Over the last generation, economic conditions have fundamentally
changed for American families and simple comparisons of unemployment
and inflation rates fail to capture these changes. Today, U.S.
households carry debt that is equal to 132 percent of their disposable
annual income, nearly twice the average debt load of 68 percent in
1980. For the past four years, Americans have spent the equivalent of
every penny they've earned--including what they've earned for
retirement. In 1980, they were saving at a rate of 10 percent. The
unemployment rate may be lower now, but the consequences of joblessness
are more likely to be dire.
Still, an illusion of well-being persists in the minds of those who
cling to the traditional ways of looking at things. This mirage
obscures the profound changes in the American economy and keeps us from
taking a hard look at the realities that so many of our families and
communities face.
Here's another statistic that would provide comfort to traditional
thinkers: U. S. manufacturing productivity rose 3.6 percent in the
first quarter of 2008. If this is true, why are Americans so worried?
Here's why: Manufacturing output actually dropped during this same
period and, American workers' hours dropped even more. Productivity is
manufacturing output divided by the number of hours worked. This
apparent positive for the economy is only statistical; in reality both
output and workers hours are down. When output and employment were
rising, a productivity gain signified a robust economy. In today's
climate, it masks the fact that we are producing less of what we need,
and taking home less for doing it.
It is obvious that we must go beyond conventional analysis if we
are to form an accurate picture of what is happening to our people and
our nation today. We need to ask what changes in the past 30 years have
skewed the results of familiar economic formulas. We need to ask what
is behind those changes. Finally we need to understand how what we do
know--whether its scientific, technological, or educational--can be
applied effectively to ensure that our citizens and our communities can
look forward to a secure and prosperous future in this globalized
economy.
This hearing represents a second step along that path. On May 22,
this Subcommittee heard suggestions offered from a variety of
perspectives on how to structure incentives so that U.S. firms will
maintain and expand, at home in America. Today, we will hear about what
has happened when we have failed at this in the past, and about the
efficacy of our efforts to aid the recovery of those individuals and
communities who have directly paid the price.
We are fortunate to have with us witnesses who speak from widely
varied experience:
John Russo--an academic who has lived through, and
studied, one of the leading episodes of de-industrialization in
America, that affecting Youngstown, Ohio;
Frank Morgan--an attorney who has represented
displaced workers whose applications for Trade Adjustment
Assistance, or TAA, have been denied by the Labor Department;
Howard Rosen--one of the leading advocates of TAA,
who will report on the program's shortcomings and put forward a
national strategy for dealing with economic dislocation;
Jeannie Moore--a community college official who has
played a leading role in one of the most striking community
turnarounds in the country, that of Kannapolis, North Carolina;
Thomas Palley--an economist who has long studied
globalization and will assess our options for shaping its
influence and its addressing its effects; and
Ms. Diana Furchtgott-Roth--a senior fellow at the
Hudson Institute in Washington, DC. She earlier served at chief
economist of the U.S. Department of Labor and as chief of staff
of the President's Council of Economic Advisers.
This is a complex topic. Coming to grips with it will involve
challenging received wisdom and long-held assumptions and replacing
them with original thinking and novel ideas. But the difficulty of the
task is no excuse for shrinking from it.
Now I recognize the distinguished Ranking Member from Wisconsin,
Mr. Sensenbrenner.
Mr. Sensenbrenner. Thank you very much, Mr. Chairman.
Today's hearing is the Subcommittee's second hearing on
globalization in a month. These hearings closely follow a
series of four hearings on the same topic in the Science and
Technology Committee. In addition to these hearings and over
the vocal objections from the Minority, the Committee also
hired an outside consultant and paid $20,000 for, ``studies and
advice,'' on issues of globalization.
In March, 2007, Chairman Gordon wrote Members of the
Committee and asked that they support the consulting agreement.
In his letter he argued that the consultant, Dr. Ron Hira, had
unique knowledge and experience in this field that could not
easily be duplicated by the Committee staff.
Without doubting Dr. Hira's qualifications, the Minority
questioned the need to hire him as a consultant. With numerous
hearings planned, why not invite Dr. Hira to testify? And why
did the Committee have to enter into a costly consulting
agreement when experts routinely testify before Congress for
free?
Those questions are renewed now that we have seen the
Majority's report. That report was due to the Committee by
December 31, 2007. It was presumably delivered on time, but the
Minority was not given a copy until a few weeks ago when it was
made publicly available as a Committee print. This print has an
official look to it just like our hearing records and lists all
of the Committee Members names on it, even though half of us
never saw it before it was released.
The report itself was 12 pages long and included five full
pages of background. This report which reportedly could not
have been accomplished by the Committee staff itself, is little
more than a summary of the Committee's hearings on this topic.
I would like to enter this report into the record for
taxpayers to decide if their $20,000 is well spent. I look
forward to hearing from today's witnesses, who like most
Congressional witnesses, have generously agreed to appear today
without charge. I must say that I have a meeting in my office
with a constituent at 1:30 which I can't break, but my staff
will inform me of what each of the witnesses say, and if I can
make it back, I will be happy to do so.
And I ask unanimous consent that this Committee print,
which represents a waste of $20,000, be included in the record.
[The prepared statement of Mr. Sensenbrenner follows:]
Prepared Statement of Representative F. James Sensenbrenner Jr.
Today's hearing is the Subcommittee's second hearing on
globalization in a month. These hearings closely follow a series of
four hearings on the same topic in the Science and Technology
Committee. In addition to these hearings, and over vocal objections
from the Minority, the Committee also hired an outside consultant and
paid $20,000 for ``studies and advice'' on issues of globalization.
Last March, Chairman Gordon wrote to Members of the Committee and
asked that they support the consulting agreement. In his letter, he
argued that, the consultant, Dr. Ron Hira, had ``unique knowledge and
experience in this field'' that could not ``easily be duplicated by
Committee staff.''
Without doubting Dr. Hira's qualifications, the Minority questioned
the need to hire him as a consultant. With numerous hearings planned,
why not invite Dr. Hira to testify? Why did the Committee have to enter
into a costly consulting agreement when experts routinely testify
before Congress for free?
Those questions are renewed now that we have seen the Majority's
report. The report was due to the Committee by December 31, 2007. It
was presumably delivered on time, but the Minority was not given a copy
until a few weeks ago, when it was made publicly available as a
``Committee Print.'' The Print has an official look and lists all the
Committee's Members--even though nearly half of us never saw it before
it was released.
The report itself is 12 pages long and includes five full pages of
background. This report, which reportedly could not have been
accomplished by Committee staff, is little more than a summary of the
Committee's hearings on this topic.
I would like to enter the report into the record for taxpayers to
decide if their $20,000 were well spent. I look forward to hearing from
today's witnesses, who like most Congressional witnesses, have
generously agreed to testify without charge.
Chairman Miller. Without objection the Committee print will
be entered into the record, not necessarily as a waste but as
Mr. Sensenbrenner's evidence. And I don't know anything about
it. This all has to do with something done at the Committee
level and not the Subcommittee, but we will enter that print in
the record.
[The information appears in Appendix: Additional Material
for the Record.]
Chairman Miller. All additional opening statements by any
Member on any topic, germane or not germane, to this
subcommittee's work will be included in the record.
[The prepared statement of Chairman Gordon follows:]
Prepared Statement of Chairman Bart Gordon
I would like to thank Chairman Miller for holding this hearing on
the very important topic of globalization. This hearing complements the
work begun in the last session by the Technology and Innovation
Subcommittee. Mr. Sensenbrenner referred to a small portion of that
work, and I would like to take a moment to discuss the Committee
consultant we hired in the first session.
Dr. Ron Hira was contracted to advise the Committee on the issue of
outsourcing and offshoring of high skilled jobs and research and
development. His work resulted in the Committee's holding four hearings
on the issue over a period of six months: The Globalization of R&D and
Innovation, Part I; The Globalization of R&D and Innovation, Part II:
The University Response; The Globalization of R&D and Innovation, Part
III: How Do Companies Choose Where to Build R&D Facilities?; and, The
Globalization of R&D and Innovation, Part IV: Implications for the
Science and Engineering Workforce. Those hearings were printed together
in a hearing print entitled, ``The Globalization of R&D and
Innovation.'' This print is 359 pages long.
After the series of hearings was completed, Dr. Hira worked with
Committee staff to compile a brief report containing policy
recommendations based on the testimony we received at the four
hearings. This summary document is the 12 page report my colleague from
Wisconsin refers to.
Dr. Hira's work with us over those many months, along with the work
of our talented staff, produced excellent hearings on a very important
topic to Americans everywhere.
I would again like to thank my friend from North Carolina for
maintaining the Committee's focus on the issue of globalization. This
is an issue that isn't going away, and the Committee will continue its
work in this area.
[The prepared statement of Mr. Costello follows:]
Prepared Statement of Representative Jerry F. Costello
Mr. Chairman, I would like to thank you for overseeing this hearing
today and for your leadership of this subcommittee. The Science
Committee's jurisdiction over the competitiveness of America's
workforce is an especially important one as our economy has suffered as
U.S. jobs have been moved overseas and unemployment rates continue to
rise.
While the American economy remains relatively strong, the average
American worker's wagers have stagnated, and most manufacturing workers
that lose their jobs make less in their next job.
This committee must ensure that Trade Adjustment Assistance, our
primary program to combat the effects of fewer manufacturing jobs, is
administered efficiently and fairly in order to achieve its objectives.
We must focus our intentions towards the goal of rebuilding the
American job base. I believe part of the solution to the problem of
declining competitiveness lies in successfully training the American
workforce to provide the skills needed to survive the demands of the
21st century economy.
I look forward to our testimony today, Mr. Chairman, and I would
like to thank our witnesses for taking to time to discus these
important issues with the Subcommittee today.
[The prepared statement of Ms. Johnson follows:]
Prepared Statement of Representative Eddie Bernice Johnson
Thank you, Mr. Chairman. Globalization has in some ways been good
for our nation, but for our manufacturing sector, it has been
detrimental.
Today's hearing is designed to assess the impact on workers and
communities when jobs move abroad.
Should the Federal Government provide Trade Adjustment Assistance
to support workers whose jobs have been sent offshore?
Globalization is changing the way Americans view the future of
business in our nation. Educational institutions question the jobs of
the future, and how to go about adequately preparing tomorrow's worker
to compete in a global workforce market.
We will determine the impact that community colleges have in
working with local businesses to retrain displaced workers, and how
trends in retraining are changing with time.
Mr. Chairman, I have always asserted that a good education is the
root of future success.
It is my desire for the students of today to obtain high-paying
jobs that are fulfilling and that offer long-term financial security.
This forward-thinking committee is in a position to steer our
research and education efforts in directions to keep us globally
competitive.
I want to welcome our panel of distinguished witnesses.
Chairman Miller. It is now my pleasure to introduce our
witnesses.
First Dr. John Russo is Co-Director of the Center for
Working-Class Studies and Coordinator of the Labor Studies
Program at the Warren G. Williamson School of Business
Administration at Youngstown State University in Youngstown,
Ohio.
Mr. Frank H. Morgan is an Attorney with the Washington
Office of the Law Firm White & Case.
Mr. Howard F. Rosen is the Executive Director of the Trade
Adjustment Assistance Coalition and a visiting fellow at the
Peterson Institute for International Economics in Washington.
Ms. Jeanie Moore, who may be called upon to translate the
Chairman's remarks to the rest of those here in the Committee
room, is the Vice President of Continuing Education Programs at
Rowan-Cabarrus Community College in Salisbury, North Carolina.
Dr. Palley, thank you for joining us. Dr. Thomas I. Palley
is the Founder of Economics for Democratic and Open Societies
Project in Washington.
And Ms. Diana Furchtgott-Roth is the Director of the Center
for Employment Policy and senior fellow at the Hudson Institute
in Washington.
Each of you will have five minutes for your oral testimony.
Your written testimony will be included in the record of the
hearing. When you complete your testimony, we will have
questions. Each Member will have five minutes to question the
panel.
It is the practice of the Subcommittee to take testimony
under oath, although with this kind of hearing prosecutions for
perjury seem unlikely. Do any of you have an objection to being
sworn in, to taking an oath?
All right. The Committee also provides that you may be
represented by counsel, although, again, this hearing makes
that somewhat less pertinent than some of our other hearings.
Are any of you represented by counsel today?
If you would now all please stand and raise your right
hand. Do you swear to tell the truth and nothing but the truth?
Okay. The witnesses the witnesses all took the oath, and Dr.
Russo, would you now begin?
STATEMENT OF DR. JOHN B. RUSSO, COORDINATOR, LABOR STUDIES
PROGRAM; CO-DIRECTOR, CENTER FOR WORKING-CLASS STUDIES,
WILLIAMSON COLLEGE OF BUSINESS ADMINISTRATION, YOUNGSTOWN STATE
UNIVERSITY, OHIO
Dr. Russo. My name is John Russo, and I am a Professor of
Labor Studies at the Warren P. Williamson Jr. College of
Business Administration and Co-Director of the Center for
Working-Class Studies at Youngstown State University. I am also
the co-author with Sherry Linkon of the book, Steeltown USA:
Work and Memory in Youngstown. I want to thank the House
Committee on Science and Technology for giving me this
opportunity discuss my research on de-industrialization and its
impact on local communities such as Youngstown, Ohio.
This spring I was interviewed by more than 20 journalists
from around the world on working-class voting patterns and on
local and State economic issues. The attention is not new.
Every four years reporters and candidates return to Youngstown
to test conventional wisdom about economic renewal and the
political responses in the face of de-industrialization. Since
the 1980s, Youngstown has become the poster child for de-
industrialization, losing 50,000 jobs in steel and steel-
related industries. This decade the Youngstown area has
continued to hemorrhage jobs, most recently because of the
downsizing of the automobile industry with Delphi and General
Motors. Since 2000, in fact, the State of Ohio has experienced
the worst job losses, reduced standards of living, and social
disruptions associated with unemployment since the Great
Depression. But what seems different this time is the reports
seem to understand what Sherry Linkon and I wrote in our book,
Steeltown USA: the Youngstown story of the 1980s has become
Ohio's and the America's stories today.
De-industrialization undermines the social fabric of
communities and nation-states. The social costs of de-
industrialization include the loss of jobs, homes, and health
care; reductions in tax base, which lead in turn to reductions
in necessary public services such as police and fire; declines
in non-profits and cultural resources, decaying local
landscapes; and increases in crime, both immediately and long-
term; increase in suicide, drug and alcohol abuse, family
violence, and depression; and the loss of faith in institutions
such as government, business, unions, churches, and traditional
political organizations.
So job losses do not affect individuals only, although, it
touches many who having dedicated their lives and sometimes
their health to employers now feel betrayed and economically
expendable. As one steelworker suggested to me, ``We are too
old to work and too young to die.''
Rather, de-industrialization is a systemic problem that
affects the identity of whole families and communities and the
Nation. De-industrialization brings with it a great deal of
cynicism and underlying discontent that may not be apparent to
outsiders. Economic cheerleading and bootstrap journalism that
labels large-scale job loss as ``creative destruction'' just
reinforces a community's identity loss. When you lose your
identity, other people define who you are, and you get blamed
for your own situation.
Nor can simple government interventions ameliorate the
dramatic social costs of de-industrialization and offshoring.
Attempts to revitalize our area have largely failed. Many
represent what we might call the economics of desperation. Many
displaced steelworkers in Youngstown in the 1980s got trained
or retrained in refrigeration. There are no refrigeration jobs
in Youngstown, Ohio. Between 1992 and 2000, nine percent of the
economic growth in the area was the result of building prisons.
Youngstowners have begun to understand that the current
economic thinking and political decision-making have often
exacerbated these problems. For example, technologies developed
with public research dollars are being used to offshore jobs.
Tax incentives to multi-nationals are being used to export
jobs. In both cases, public policy is contributing to putting
hard-working Americans out of work.
When challenged, many politicians and corporate leaders
tender platitudes about long-range economic adjustments and
suggest that displaced workers train for jobs that either don't
exist or will be moved offshore in the next wave of economic
change. Increasingly, Americans understand that they are being
sacrificed at the altar of economic theory. They reject the
argument that de-industrialization and offshoring are part of
the natural economic order and that job losses and declining
wages are an inevitable part of globalization.
Instead, they see themselves as victims of conscious
decisions by corporate leaders and government officials, and
they are resentful. No longer will they accept the short-term
solutions and amelioration efforts. While important, such
approaches are ultimately ineffectual. Americans are beginning
to recognize that we are in a new period of global capitalism
and that the resulting problems and issues are systemic and
will require systemic solutions.
If we are to reach solutions, we must raise the following
questions: What is the purpose of the corporation? What is the
relationship between markets, corporations, and nation-states?
How is international trade structured? How can trade and tax
policies better reflect changes in the global economy? Anything
less than serious answers to these difficult questions will be
window dressing. Without serious answers, cities like
Youngstown will continue to lose faith in the American dream.
In summary, while we need programs that more widely share
benefits and risks from globalization and offshoring, I would
argue that the global economy demands new forms of corporate
and international regulation that will prevent some nation-
states and some corporations from engaging in economic
blackmail by playing one country or one workforce against
another. We can no longer afford to tinker with economic and
trade policy or enact reforms that are simply window dressing.
Without systemic reform, growing discontent and the incipient
rebellion in American politics over globalization and de-
industrialization will only grow and breed a new politics of
resentment.
[The prepared statement of Dr. Russo follows:]
Prepared Statement of John B. Russo
My name is John Russo and I am a Professor of Labor Studies at the
Warren P. Williamson Jr. College of Business Administration and Co-
Director of the Center for Working-Class Studies at Youngstown State
University. I am also the co-author with Sherry Linkon of the book,
Steeltown USA: Work and Memory in Youngstown. I want to thank the House
Committee on Science and Technology for giving me this opportunity to
discuss my research on de-industrialization and its impact on local
communities such as Youngstown, Ohio.
This spring I was interviewed by more than 20 journalists from
around the world on working-class voting patterns and on local and
State economic issues. This attention was not new. Every four years,
reporters and candidates return to Youngstown to test conventional
wisdom about economic renewal and political responses in the face of
de-industrialization. Since the 1980s, Youngstown has been the poster
child for de-industrialization, losing 50,000 jobs in steel and steel-
related industries. This decade the Youngstown area has continued to
hemorrhage jobs, most recently through the downsizing of Delphi
Automotive and GM (Lordstown). Since 2000, the State of Ohio has
experienced the worst job losses, reduced standards of living, and
social disruptions associated with unemployment since the Great
Depression.\1\ But what seems different this time is that reporters
understand what Sherry Linkon and I wrote in Steeltown USA:
Youngstown's story has become both Ohio's and America's story today.\2\
---------------------------------------------------------------------------
\1\ Charles W. McMillion, ``Ohio's Job Losses: 2000-2007 Worst
since the Great Depression,'' MBG Information Services, Washington,
D.C., February 2008.
\2\ Forester Research, a consulting firm, estimates that 3.4
million white-collar jobs will be sent offshore between 2003 and 2015.
The estimate of the exodus includes 542,000 computer jobs, 259,000
management jobs, 191,000 architectural jobs, 79,000 legal jobs, and 1.6
million back-office jobs. Outsourcing can also have a negative effect
on the workers who remain in the U.S. A study by three Harvard
economists estimates that for every one percent that employment falls
in a manufacturing industry because of moving overseas, wages fall by
five-tenths of one percent for workers who remain. As the recent,
concessionary bargaining at American Axle, suggests those numbers may
be an underestimate.
---------------------------------------------------------------------------
De-industrialization undermines the social fabric of communities
and nation-states. The social costs of de-industrialization include the
loss of jobs, homes, and health care; reductions in tax base, which in
turn lead to reductions in necessary public services like police and
fire protection; declines in non-profits and cultural resources;
decaying local landscapes; increases in crime both, immediately and
long-term;\3\ increases in suicide, drug and alcohol abuse, family
violence, and depression; and loss of faith in institutions such as
government, business, unions, churches, and traditional political
organizations.
---------------------------------------------------------------------------
\3\ In the early 1990s, the per capita murder rate in Youngstown
was among the highest in the Nation. Interestingly, criminal justice
experts determined that the murders were being committed by young
adults that were born between 1977 and 1984, the most intense period of
the de-industrialization. But for the mill closings, Youngstowners of
this age might have found well-paying work in the steel industry.
---------------------------------------------------------------------------
So job loss does not affect individuals only, although it touches
many who, having dedicated their lives and sometimes their health to
employers, now feel betrayed and economically expendable. As one
steelworker suggested to me, ``We are too old to work and too young to
die.''
Rather, it is a systemic problem that affects the identity of whole
families, their communities, and the Nation. De-industrialization
brings with it a great deal of cynicism and an underlying discontent
that may not be apparent to outsiders. Economic cheerleading or
``bootstrap journalism'' that labels large-scale job loss as ``creative
destruction'' just reinforces the community's identity loss: When you
lose your identity, other people define who you are, and you get blamed
for your own situation.
Nor can simple governmental interventions ameliorate the dramatic
social costs of offshoring and de-industrialization. Attempts to
revitalize our area have largely failed: many represent what we might
call the economics of desperation. Many displaced steelworkers in
Youngstown got trained in refrigeration, but there were no jobs in
refrigeration. Between 1992 and 2000, about nine percent of the
economic growth in the area was a result of building prisons.
Youngstowners have begun to understand that the current economic
thinking and political decision-making have often exacerbated the
problem. For example, technologies developed with public research
dollars are being used to offshore jobs. Tax incentives to
multinationals are being used to export jobs. In both cases, public
policy is contributing to putting hard-working Americans out of work.
When challenged, many politicians and corporate leaders tender
platitudes about long-range economic adjustments and suggest that
displaced workers train for jobs that either don't exist or that will
be moved offshore in the next wave of economic change.\4\ Increasingly,
Americans understand they are being sacrificed at the altar of
traditional economic theory. They reject the argument that de-
industrialization and offshoring are part of the ``natural economic
order'' and that job losses and declining wages are an inevitable part
of globalization. Instead, they see themselves as victims of conscious
decisions by corporate leaders and government officials, and they are
resentful. No longer will they accept short-term solutions or
amelioration efforts. While important, such approaches are ultimately
ineffectual. Americans recognize that we are in a new period of global
capitalism and that the resulting problems and issues are systemic and
will require systemic solutions.
---------------------------------------------------------------------------
\4\ Training and education have been the hope for many. But I in
good faith cannot tell my students that just because they get a BA or
an MBA now, or a degree in engineering, they are going to do better
than their parents. A sense prevails that there is a decline in
America, and that only by accepting a lowered standard of living will
we be able to compete.
---------------------------------------------------------------------------
If we are to reach solutions, we must raise the following
questions: What is the purpose of the corporation? What is the
relationship between markets, corporations, and nation-states? How is
international trade structured? How can trade and tax policies better
reflect changes in the global economy? Anything less than serious
answers to these difficult questions will be window dressing. Without
serious answers, cities like Youngstown will continue to lose faith in
the American Dream.
Let's just take the first few questions. What is the purpose of the
corporation? Is it merely a legal entity whose purpose is to maximize
profits for shareholders by moving inputs and assets around like pieces
on a chess board? Or do corporations have reciprocal responsibilities
with shareholders, managers, employees, and nation-states in the
creation of value? As earlier speakers before this Committee have
suggested, current practice appears to be in line with the former.
How we answer the first question informs how we approach our second
question, on the relationship between corporations, nation-states, and
markets. If we believe that corporations have little social
responsibility other than creating wealth, then government should
support free markets globally and pay scant attention to forms of
government or working conditions in and between countries. In such a
world, corporations can become as powerful as nation-states and
override democratic values. If, however, we believe that government
needs to balance reciprocal relationships and provide a social safety
net for capitalism, then economic and trade policies must be systemic
and proactive. Governments should make decisions that benefit all
citizens and hold corporations accountable to all stakeholders, not
just a few. For example, government leaders need to take seriously
labor, environmental, and political conditions in all countries that
can lead to unfair trade.
In summary, while we need programs that more widely share the
benefits and the risks arising from globalization and offshoring, I
would argue that the global economy demands new forms of corporate and
international regulation that will prevent some nation-states and
corporations from engaging in economic blackmail by playing one country
or one workforce against another. We can no longer afford to tinker
with economic and trade policy or enact reforms that are simply window
dressing. Without systemic reform, the growing discontent and incipient
rebellion in American politics over globalization and de-
industrialization will only grow and breed a new politics of
resentment.
Biography for John B. Russo
John Russo is the Coordinator of the Labor Studies Program in the
Williamson College of Business Administration at Youngstown State
University. He received his doctorate from University of Massachusetts,
Amherst, where he also served as a postdoctoral research fellow at the
Labor Relations and Research Center. Dr. Russo has written widely of
labor and social issues and is recognized as a national expert on labor
unions and working-class issues. His current research interests involve
two book length projects, Who Will Protect Worker Rights?: Unions and
the Use of Codes/CSR, Capital Strategies, Framework Agreements and
Strategic Campaigns and an historical study of the famous GM
(Lordstown) Assembly plant. His most recent publications are a book co-
authored with Sherry Linkon, Steeltown, USA: Work and Memory in
Youngstown (2002). Also with Sherry Linkon, an edited book entitled New
Working-Class Studies was published in 2005 by Cornell University
Press. For his many activities, Dr. Russo is one of the few professors
at YSU to have ever received Distinguished Professorship Awards in each
of three areas: research and scholarship, teaching and public service.
Dr. Russo is also a founder and the Co-Director of the Center for
Working-Class Studies at Youngstown State University. The Center is an
interdisciplinary center for research, teaching, and community activity
on working-class life, work, culture, and thought. Since its inception,
the CWCS has provided a regional and national forum for scholarly
activities; supported YSU faculty research; fostered collaborations
within the academic institution and between the university and
community; developed an annual lecture series; and become a national
and international clearinghouse for information on working-class
culture and pedagogy. For its work, the Center has been the recent
recipient of two major Ford Foundation grants.
Chairman Miller. Thank you, Dr. Russo.
Mr. Morgan.
STATEMENT OF MR. FRANK H. MORGAN, ATTORNEY, WHITE & CASE LLP,
WASHINGTON, D.C.
Mr. Morgan. Good afternoon, Chairman Miller and Members of
the Committee. My primary practice area is in the international
trade disputes, and I must say that my remarks today are my own
and do not reflect those of my firm or its clients. And I thank
Michael O'Connor and Sara Sargeantson whose assistance made my
testimony possible.
Thank you, Mr. Chairman, for inviting me to offer my
experience and to convey the concerns of countless frustrated
workers who have unsuccessfully petitioned the Employment and
Training Administration [ETA] of the Department of Labor for
Trade Adjustment Assistance, TAA.
I know this committee is considering broader and more
fundamental issues surrounding globalization. Regardless of
one's views on the merits of free trade, it is a no-brainer to
make sure that the Department of Labor investigates each TAA
claim and that workers who are entitled get prompt assistance.
Congress has directed the ETA to investigate each petition
and to do so with the utmost regard for the workers. In
preparing this testimony I came across a startling statistic.
From 2002 to 2005, approximately 45 cases were litigated at the
Court of International Trade, and in all but four there were
reversals of Labor's decision not to certify. Since 2005, there
have been a further 15 cases litigated, resulting in reversals
of Labor's decision not to certify. Such a large number of
reversals in the face of further scrutiny shows that Labor is
not conducting the investigation that Congress directed it to
do in the first instance. And while this litigation has dragged
on, Labor has denied workers the relief to which they are
entitled and need.
The Court of International Trade has written much about
this topic, and I commend anyone who is concerned with the
problem to read Judge Ridgway's decision in BMC Software, which
I have attached to my written materials.
My written testimony elaborates fully on the problems that
exist in Labor's investigation of TAA petitions, and I
summarize those here today. In cases that I have litigated and
those I have analyzed, the failure of Labor to investigate
starts at the Agency level and consists of a complete failure
to conduct a basic investigation beyond the four corners of the
information provided in the petition. Often the record consists
of a few e-mail messages and a few summaries of telephone
calls. There is no excuse for this, and I have practiced before
many other agencies, and none of them would call this an
administrative record.
This is even more disturbing when you consider the fact
that Labor is conducting an investigation that is not supposed
to be adversarial in nature. Labor is supposed to be looking
out for the interests of the workers. For TAA to serve its
intended purpose, the system has to function properly at the
agency level, and it will not do so until Labor conducts a
thorough investigation of each petition.
An unsuccessful TAA petitioner at Labor faces three
options: appeal immediately to the Court of International Trade
(CIT), seek administrative reconsideration, or give up. Labor
sends a denial letter that informs the petitioner of their
right to administrative consideration but not of their right to
seek a Court appeal. There is no excuse for Labor's failure to
inform workers of the right to appeal, and I fear that many
give up unaware of that right.
For the few cases that do eventually make it to the Court
of International Trade, the TAA petitioner faces a whole new
round of challenges, frustration, and delay. The average case
at the CIT took approximately 354 days to resolve. Contrast
that with the fact that Congress contemplated that these
decisions would be made within 40 days of the filing of the
petition by the Department.
In almost every case Labor will ask the CIT's permission to
conduct what is known as a ``voluntary remand proceeding.'' In
essence, Labor will go back and revisit the facts and
reconsider its decision.
Aside from being a concession that the agency's decision
isn't supported by the investigation that it conducted, it adds
further delay to the process of up to 60 days or more. More
disturbing, Labor often uses these proceedings as a means of
bullet-proofing its initial decision not to certify. This means
multiple Court-directed remands are necessary to get Labor to
do what a reasonable decision-maker would have done from the
outset. Labor engages in several other litigation tactics that
cause delay, including implausible interpretations of the law
and the facts. Each day of delay makes an eventual Court
victory less meaningful for the workers.
The problems with Labor's investigations and subsequent
litigation tactics are widespread. My written testimony
contains excerpts from several CIT judges criticizing Labor on
this score. The Judiciary has done its level best, but the
problem persists and has persisted irrespective of which party
occupies the Executive Branch. So in my view, the solution
requires legislative pressure and changes to the law.
To conclude, the biggest problem is ETA's conduct and
approach to investigations, and fixing this does not require
any changes to the law. Congress simply must hold the agency
accountable. Several changes to the law could help, including
establishing swift and strict timeframes, allowing for more
meaningful participation by the workers and their counsel in
remand proceedings, and clarifying that the CIT has the
authority to order Labor to certify workers.
Thank you, Mr. Chairman and Members of the Committee, for
affording me the honor of representing the interests of
hardworking men and women of America who have been failed by
the very agency that Congress designated to protect their
interests.
[The prepared statement of Mr. Morgan follows:]
Prepared Statement of Frank H. Morgan
Good afternoon Mr. Chairman and Members of the Committee. My name
is Frank Morgan and I am an attorney at the law firm of White & Case
LLP where I practice primarily in the area of international trade
disputes. My remarks today are necessarily my own and do not reflect
the views of my firm or our clients. I thank Michael O'Connor and Sara
Sargeantson, two summer associates at my firm whose assistance made
this testimony possible.
Thank you for inviting me to offer my experience and to convey the
concerns of the many frustrated workers who have unsuccessfully
petitioned the Employment and Training Administration (``ETA'') of the
Department of Labor for trade adjustment assistance (``TAA'').\1\ The
primary mission of the Department of Labor is to protect and promote
the American worker's interests. It should go without saying that in
administering TAA, the ETA must act with the utmost regard for the
American workers who seek assistance. But, all too often, the ETA fails
to do so. And regardless of one's views about international trade,
ensuring that workers who are adversely affected by trade get prompt
retraining and transitional assistance is a no brainer. In preparing
this testimony I came across a startling statistic: from 2002-2005,
approximately 45 TAA cases were litigated, and in all but four, Labor
ultimately certified the workers. That is shocking and it shows that
Labor is not fulfilling the responsibilities that Congress entrusted to
it.
---------------------------------------------------------------------------
\1\ Throughout my testimony, I refer interchangeably to the agency
as ``the ETA'' or Labor.
---------------------------------------------------------------------------
Before I joined White & Case, I served as a law clerk to the
Honorable Judith M. Barzilay at the U.S. Court of International Trade
(``CIT''). It was during my clerkship that I first encountered the
difficulties unsuccessful TAA petitioners face. In addition to working
for an outstanding jurist, I had the privilege of knowing many other
judges on the court. A review of their decisions reflects just how
frustrated and disturbed most (if not all) of the CIT judges are with
ETA's handling of TAA cases. Among a frustrated bench, Judge Delissa A.
Ridgway stands out for her efforts to call attention to the problem and
to catalogue the breadth and enduring nature of it. Attachment 1 of my
written testimony contains Judge Ridgway's decision in Former Employees
of BMC Software, Inc. v. U.S. Sec'y of Labor, 454 F. Supp.2d 1306 (Ct.
Int'l Trade 2006) which is a must read for anyone that is concerned
about this problem. My remarks today are mere footnotes to the expert
treatment Judge Ridgway already has given to the topic.
I. DIFFICULTIES FACED BY THE UNSUCCESSFUL TAA PETITIONER
My testimony focuses on the unsuccessful TAA applicant both at the
agency level and in the subsequent battles to use the judicial process
to overturn an incorrect agency decision. Without question (as I am
sure Labor would be quick to note), many workers are successful in
petitioning for TAA. But--even if Labor reaches the correct result much
of the time--the workers who succeed at the agency level are the easy
cases, where little or no independent inquiry by the agency is
necessary: the cases where it would be patently obvious to anyone that
the workers satisfy the criteria for TAA certification; the cases where
the workers have themselves compiled and neatly served up for Labor's
convenience all the evidence required to support certification; and
(perhaps) the cases where certification of the workers is the
politically expedient thing to do.
The problem arises in all the other cases: the cases where it is
not immediately obvious whether the workers are entitled to TAA, where
all the evidence is not served up to the agency on a silver platter--
the cases where a true investigation is required. These are the cases
where the agency fails the workers. Labor often reaches the wrong
result because it has conducted an inadequate investigation. It is one
thing to deal with the easy cases, and an entirely different one to
resolve those that require a deeper investigation. But Congress did not
intend for Labor to shirk the difficult investigations.
Of course, the statute does not entitle every petitioning worker to
be certified for TAA. But, as the Court's opinion in BMC emphasized,
``every worker is entitled to a thorough agency investigation of his or
her claim--without being forced to resort to the courts. The law
mandates no less.'' \2\ It is for these reasons that I believe my focus
on the unsuccessful TAA applicant is appropriate.
---------------------------------------------------------------------------
\2\ Former Employees of BMC Software, Inc. v. U.S. Sec'y of Labor,
454 F. Supp.2d 1306, 1357 (Ct. Int'l Trade 2006) (quoting 29 C.F.R.
90.12).
---------------------------------------------------------------------------
In order to understand the difficulties unsuccessful TAA applicants
face, it is necessary to understand how a case starts, proceeds through
the ETA, and how it may, eventually, end up in the judicial system. TAA
initially is sought at the agency level, specifically, at the ETA. A
petition for TAA generally is filed by three or more workers who have
been laid off by a firm, a union representing workers that have been
laid off, or the firm that has laid off workers. Eligibility for TAA is
governed by statute. To grossly summarize the law, Labor is supposed to
certify workers for TAA if one of the following three conditions is
met: 1) there has been an increase in imports that caused job losses,
or 2) the workers' firm shifted production to a country that has a free
trade or other preferential trade agreement with the United States, or
3) the workers' firm shifted production to a foreign country and there
have been subsequent imports of that product into the U.S. market.\3\
If Labor does not certify, the workers have the right to appeal that
decision to the CIT. I know that this committee has been examining the
effects of globalization, and I thought the Members might be interested
to know that appeals involving a shift in production to a foreign
country have accounted for approximately 22 of 40 appeals filed with
the CIT since 2005.
---------------------------------------------------------------------------
\3\ Workers who are employed by a firm that supplies components to
a firm that has been certified for TAA also may be eligible. See 19
U.S.C. 2272(b). Please see Attachment 2 for the full text of the
statutory provision governing eligibility for TAA.
A. Difficulties for TAA Petitioners at the Agency Level
At the agency level, TAA petitioners almost never have counsel
representing them. As a consequence, individuals who often have little
or no experience with federal law and agency regulations are largely
relying on the ETA to perform its functions with the utmost regard for
protecting their interests. Indeed, as the BMC opinion pointedly
observes, that is precisely the situation that Congress contemplated:
Congress designed TAA as a remedial program, recognizing that
petitioning workers would be (by definition) traumatized by the
loss of their livelihood; that some might not be highly-
educated; that virtually all would be pro se; that none would
have any mastery of the complex statutory and regulatory
scheme; and that the agency's process would be largely ex
parte. Congress did not intend the TAA petition process to be
adversarial. Nor did Congress intend to cast the Labor
Department as a `defender of the fund,' passively sitting in
judgment, ruling `thumbs up' or `thumbs down' on whatever
evidence petitioning workers might manage to present.
Quite to the contrary, the Labor Department is charged with an
affirmative obligation to proactively and thoroughly
investigate all TAA claims filed with the agency--and, in the
words of its own regulations, to `marshal all relevant facts'
to make its determinations.\4\
---------------------------------------------------------------------------
\4\ Former Employees of BMC Software, Inc. v. U.S. Sec'y of Labor,
454 F. Supp.2d 1306, 1357 (Ct. Int'l Trade 2006) (quoting 29 C.F.R.
90.12).
Because counsel does not become involved until much later in the
process we typically only see the shortcomings in Labor's initial
investigations after the case has been appealed to the CIT--and the
shortcomings can be tremendous. For example, in the first TAA case that
I litigated, the ETA determined based on inconclusive and inaccurate
information that the workers were service providers, and denied TAA on
those grounds. It took almost four years and several court orders to
get the ETA to correct that decision. Unfortunately, by that point, TAA
was meaningless for my clients. For TAA to serve its intended purpose,
the system has to function properly at the agency level. As I will
discuss later, this will not occur until the ETA fully accepts the
mandate that Congress has given it to conduct a full and thorough
investigation--in every case.
Congress has not set forth specific instructions on how Labor is to
conduct its proceedings, but Congress has clearly expressed its intent
that Labor is to conduct an investigation.\5\ By providing Labor with
the power to subpoena witnesses and documents, Congress evinced a clear
intent that the investigation should not be cursory.\6\ Labor's
investigations, however, are often pro forma at best, and fall far
short of what Congress intended.
---------------------------------------------------------------------------
\5\ See 19 U.S.C. 2271(a)(3) (requiring Labor to publish notice
of the initiation of an investigation).
\6\ See 19 U.S.C. 2321(a).
---------------------------------------------------------------------------
In addition to mandating that Labor conduct an investigation,
Congress has recognized that the ETA must conduct its investigation
swiftly, providing Labor with 40 days to determine whether the
petitioners are eligible for TAA.\7\ In fact, Congress shortened the
period to 40 days from 60 days in 2002. Yet Labor, by regulation, has
granted itself the authority to conduct reconsideration proceedings
that can greatly extend the time for making its ``final'' determination
beyond 40 days.\8\ If a worker chooses to pursue this process, it can
add up to 90 additional days to the process at the agency level.\9\
---------------------------------------------------------------------------
\7\ See 19 U.S.C. 2273(a).
\8\ See 29 C.F.R. 90.18. While Labor claims that the authority to
conduct an administrative reconsideration is provided for by the Trade
Act of 1974, as amended, my colleagues and I have been unable to locate
the relevant provision in the statute.
\9\ See 29 C.F.R. 90.18(c)&(g) (providing Labor with 15 days to
decide whether reconsideration is warranted and, if so, 45 additional
days to make the determination). In my view, the investigation that
Labor performs on reconsideration is equally inadequate, so the
additional time provides a TAA applicant with little benefit, and
merely delays the time before an appeal is made.
---------------------------------------------------------------------------
It is deeply disturbing--and, likely, telling--that the standard
form letter that Labor uses to inform workers that their TAA petition
has been denied advises the workers only of the ability to seek
administrative reconsideration before the agency, and conveniently
fails to inform them of their right to seek immediate judicial review
instead.\10\ The vast majority of unsuccessful TAA petitioners simply
end the process at this point, unaware of their right to appeal or too
exhausted and frustrated to continue.
---------------------------------------------------------------------------
\10\ My understanding is that Labor used to inform petitioners of
that right and its omission from current notifications can only be
taken as an attempt to limit petitioners' right to avail themselves of
the judicial system.
---------------------------------------------------------------------------
For the unsuccessful TAA petitioners with any fight left in them,
there is one last hurdle, the 60 day deadline for filing an appeal at
the CIT.\11\ This deadline is extremely short especially when
considering that most aggrieved persons are not represented by an
attorney. Congress should consider extending the time for filing an
appeal to reflect this reality.
---------------------------------------------------------------------------
\11\ See 19 U.S.C. 2395(a).
B. Difficulties Faced After the Administrative Process Has Concluded
and Litigation Begins
Once a TAA case gets to the CIT, it takes too long to litigate,
and--even then--the ETA generally fails to carry out its
responsibilities with the utmost regard for the workers. Fully
litigated TAA cases from 2005 to present took an average of 354 days to
resolve, with one case lasting 954 days, or a little over two and one-
half years. As I mentioned earlier in my testimony, the first case I
litigated took four years to resolve. In my case and in at least 15 of
the cases litigated since 2005, there was a change in Labor's decision.
Instead of receiving TAA within 40 days, as Congress intended, these
workers were unjustly denied TAA for far too long, and all because
Labor's investigation was inadequate. During this time, those
unsuccessful TAA petitioners suffered the full brunt of the adverse
effects attendant to being laid off, and even though the court action
was successful, it can never remedy the harm that workers suffer due to
delay in receiving the TAA benefits to which they were entitled.
As the CIT observed in the Chevron case, the consequences of agency
delays in certification can be profound--sometimes, quite literally,
life-or-death:
There is a very human face on [TAA cases]. Workers who are
entitled to trade adjustment assistance benefits but fail to
receive them may lose months, or even years, of their lives.
And the devastating personal toll of unemployment is well-
documented. Anxiety and depression may set in, with the loss of
self-esteem, and the stress and strain of financial pressures.
Some may seek refuge in drugs or alcohol; and domestic violence
is, unfortunately, all too common. The health of family members
is compromised with the cancellation of health insurance;
prescriptions go unfilled, and medical and dental tests and
treatment must be deferred (sometimes with life-altering
consequences). And college funds are drained, then homes are
lost, as mortgages go unpaid. Often, marriages founder.\12\
---------------------------------------------------------------------------
\12\ Former Employees of Chevron Prods. Co. v. U.S. Sec'y of Labor,
298 F. Supp. 2d 1338, 1349 (2003).
The bottom line is this: Where displaced American workers seeking TAA
benefits are concerned, litigation will never be an adequate substitute
for Labor doing its job. For this reason, it is imperative for Labor to
conduct a proper investigation in the first instance.
In large measure, Labor creates the delays in the litigation
process by: 1) seeking a voluntary remand in virtually every case that
is appealed, 2) making excessive requests for extensions, 3) failing to
conduct the type of investigation (in the first instance and in
response to court ordered remands) that Congress contemplated, 4)
failing to interpret the statute in a good faith manner, consistent
with the remedial nature of the TAA statute, 5) failing to concede that
cases with similar facts should be resolved in a similar manner, and 6)
failing to respect the CIT's authority. These failings suggest to me,
and I am not alone in this view, that Labor is defaulting on its
obligations to fulfill the responsibilities that Congress entrusted to
it.
1. Labor Often Uses Voluntary Remand Proceedings to Support its
Original Determination
In the cases I have litigated, the ETA has sought consent to
conduct what is referred to as a voluntary remand proceeding. This
means that Labor is asking the court for permission to conduct
additional fact finding, clarify areas of confusion, and reconsider its
decision. In other words, Labor is admitting that it did not do a
proper investigation in the first instance. Moreover, in other cases
that I have reviewed, it appears that Labor seeks a voluntary remand in
almost every case. In contrast, other agencies that appear before the
CIT rarely ask for voluntary remands. In short, the ETA's own actions
at the CIT demonstrate that it is not conducting a proper investigation
in the first instance.
Adding to this frustration is the fact that Labor often does not
conduct a better investigation after asking for the remand. Often the
ETA conducts the remand investigation with an aim towards ``bullet
proofing'' its original decision.\13\ For example, in the Former
Employees of Merrill Corporation Labor asked for 90 days to reconsider
its original determination, the plaintiffs consented and the CIT
granted the request.\14\ A fundamental issue was whether the workers
produced an article. Labor had originally contended that the workers
provided a service; and thus, were not eligible for TAA. Yet in the
voluntary remand proceeding, and despite requests that it do so, Labor
did not even examine whether the workers' firm produced printed
materials which would have qualified as articles. As the CIT noted,
``Labor failed to undertake even a minimal investigation of Merrill's
production of printed matter. The record is devoid of any information
concerning the percentage of [printed documents].'' \15\
---------------------------------------------------------------------------
\13\ As I discuss below, even when the remand proceeding is ordered
by the CIT, Labor sets out to justify its original determination.
\14\ See Former Employees of Merrill Corp. v. U.S. Sec'y of Labor,
Slip Op. 04-2, 2004 WL 34548 (Ct. Int'l Trade Jan. 4, 2004).
\15\ Former Employees of Merrill Corp. v. U.S. Sec'y of Labor, 387
F. Supp. 2d 1336, 1346 (Ct. Int'l Trade 2005).
---------------------------------------------------------------------------
2. Labor's Requests for Extensions Are Excessive
As I have explained earlier in my testimony, the TAA statute
reflects Congress' considered judgment that 40 days is ample time for
Labor to complete a thorough investigation of even the most complex TAA
petition. But not only is the agency failing to fulfill that mandate,
it is routinely seeking periods far in excess of 40 days to conduct its
remand investigation--precious time on top of the time the ETA already
had to conduct the initial investigation. In short, the agency's
dilatory conduct in the course of litigation greatly compounds and
exacerbates the effects of its failures and omissions in the conduct of
its initial investigation. For the unsuccessful TAA petitioner, the
feeling of frustration and anger builds each time Labor seeks an
extension.
I have been involved in litigation (either in private practice or
as a law clerk) with almost every agency over which the CIT has
jurisdiction. Parties (both private and government) often seek
extensions of time to perform certain acts. But Labor stands out both
in terms of the number of extensions requested and the apparent lack of
need for them. In the Former Employees of Merrill Corporation
litigation, Labor sought two extensions of time to file various remand
results.\16\ Like Charlie Brown hoping to finally kick the football, we
consented in the belief that Labor needed the time and was acting in
good faith. Yet this proved not to be the case, as Labor reached the
same result over and over.
---------------------------------------------------------------------------
\16\ Labor's counsel also sought extensions for various reasons.
While the reasons given were understandable, the combined effect was to
significantly delay the resolution of the case.
---------------------------------------------------------------------------
In the TAA case I am currently litigating, Labor sought a voluntary
remand (which it originally had 60 days to complete) and then asked for
two extensions of time to file the remand results. We consented to the
first because a legitimate reason was provided. We objected to the
second because it was requested in the afternoon on the very day the
remand determination was supposed to be filed with the CIT, and Labor
did not even offer a reason for making the request. Labor eventually
filed its remand determination with the CIT, again denying eligibility.
We were disappointed with the result but not surprised given Labor's
track record. What outraged us was what Labor did in those 70 days:
seven e-mail messages (four of which were non-substantive), a few voice
mail messages, and a visit to a website. This did not require seven
days, much less 70.
Again, these are not isolated incidents. Labor typically has
requested at least one extension in each fully litigated case since
2005, and has requested as many as six extensions in a single case. The
requests averaged approximately 20 days each but some were as long as
90 days. This is troubling because the extension follows on what are
almost always 60 or 90 day periods that already had been given to
Labor. In my experience, other agencies do not request so many
extensions for such lengths of time, and when they do, it is usually
because the private parties also need additional time.
3. Labor Does Not Conduct Investigations in the Manner Congress
Contemplated
As I discussed earlier, Labor does not conduct an adequate
investigation in the first instance. In my experience, this does not
change even after the case reaches the CIT. The ETA's failure to
conduct an adequate investigation causes significant delays in the
resolution of a CIT proceeding.
First, the amount of information that Labor obtains is
insignificant and insufficient to resolve the issues that are presented
in most cases. In the cases I have litigated, the investigation mainly
consisted of a few e-mail messages and a few phone conversations. The
agency record, even after several remand investigations, often consists
of fewer than fifty pages after accounting for duplicative material.
Moreover, when information supports a negative determination, Labor
accepts it without question.
In contrast, other agencies with which I am intimately familiar
(such as the International Trade Commission (``ITC'') and Department of
Commerce (``DOC'') ) obtain far more information in similar time
frames, and critically assess it. I am convinced that Labor does not
seek more information, and does not conduct the kind of investigation
that Congress intended for fear that it will undercut the decision not
to certify.
Second, Labor does not conduct its investigations in a manner that
gives counsel for the workers a meaningful opportunity to participate.
Labor does not provide information to counsel for the workers as it is
obtained, but only after Labor has made and submitted its remand
determination to the CIT. In contrast, the ITC and DOC release
information that is submitted to the agency (or obtained by it) to
parties on the same day or shortly thereafter. The ex parte nature of
Labor's investigation, even within the context of an appeal, means that
the workers' first opportunity to challenge the relevance, accuracy,
and completeness of the information is after the case re-commences at
the CIT. Not only does this cause further delay, but it suggests that
Labor is not interested in arriving at the correct result. Counsel for
employees of IBM referred to the manner in which Labor conducts its
remand investigations as a ``sham which lacked transparency and was
conducted to reach a predetermined negative result.'' \17\ Again, this
suggests that Labor is not acting in accordance with the utmost regard
for the workers, which is the mission that Congress entrusted to it.
Indeed, when workers succeed in achieving TAA certification through
litigation, it is only because the workers and their counsel have
provided evidence to the ETA, which the ETA appears to be wholly
unwilling to obtain on its own. Accordingly, Labor's standard practice
of excluding the workers and counsel from playing an active role in the
remand investigation in effect postpones an accurate determination on
the workers' entitlement to TAA benefits, and is indefensible.
---------------------------------------------------------------------------
\17\ Former Employees of IBM Corp. v. U.S. Sec'y of Labor, 483 F.
Supp. 2d 1284, 1287 (Ct. Int'l Trade 2007 (quoting Plaintiffs' brief).
---------------------------------------------------------------------------
Third, Labor arbitrarily relies on information that supports its
decision to deny TAA certification, and disregards that which does not.
For example, the CIT has criticized Labor for over-reliance on employer
provided information that supported no certification for TAA when there
was contradictory information submitted by the workers that
contradicted it and supported certification.\18\ If Labor uniformly
relied on employer information at least there would be consistency, but
even this is not the case. In the cases I have litigated, the employer
generally was supportive of the workers' request for TAA, and in one
instance, the employer even filed the TAA petition and continued to
press for Labor to find that the employees were eligible. Labor chose
to ignore the employers' statements and information favorable to TAA
certification. Yet had the employers submitted information unfavorable
to certification, I suspect Labor would have relied on the information.
Again, Labor's pattern of seizing on any evidence that supports its
decision to deny benefits--and its utter disregard for that evidence
which supports certification--demonstrates a lack of good faith in
resolving the dispute and adds to the delay in the resolution of the
case.
---------------------------------------------------------------------------
\18\ See Former Employees of BMC Software, Inc. v. U.S. Sec'y of
Labor, 454 F. Supp. 2d 1306, 1328-36 (Ct. Int'l Trade 2006).
4. Labor Arrives at Interpretations of the Statute that Do Not Reflect
---------------------------------------------------------------------------
a Good Faith Effort to Resolve the Problem
The agencies that I primarily appear before (the ITC and DOC)
almost always offer well-reasoned views in their interpretations of the
statute. Even when I have occasion to challenge the reasonableness of
an ITC or DOC interpretation, I have never faced one as absurd and
unreasonable as the one Labor offered in Former Employees of Merrill
Corporation.
My clients in that case produced financial documents (SEC filings,
annual reports, etc.) for many different customers. The firm shifted
certain functions (typesetting, proof reading, formatting) to India,
and the finished financial document was imported into the United
States. After the firm shifted that aspect of production offshore, it
laid off the workers who had performed those functions. Following
several court ordered remands, and years into the case, Labor found a
new and previously unarticulated reason for denying TAA to my clients.
Labor reasoned that the articles my clients produced were not like or
directly competitive with the imported articles.\19\
---------------------------------------------------------------------------
\19\ It took several CIT orders just to get Labor to grudgingly
accept that my clients produced an article.
---------------------------------------------------------------------------
The ETA took the position that each financial document was unique.
For example, an annual report for Microsoft was not like or directly
competitive with an annual report for Apple, and even quarterly
financial reports were not like or directly competitive with one
another because they contained different financial data from different
reporting periods. On the basis of this tortured reasoning, Labor
argued that the workers who lost their jobs after the shift to India
were not eligible because each and every article they produced was
unique, and thus did not fall within the meaning of ``like or directly
competitive'' as Labor interpreted the term. Nonsense, as the CIT
astutely noted. Nowhere did Congress (or even Labor) restrict TAA
eligibility ``to workers engaged in mass-production to the exclusion of
workers whose output may require skills, training, and expertise
necessary to produce custom-made articles.'' \20\ I believe that
Labor's reliance on tortured interpretation of the statute to defend a
negative decision shows how deep the problems are in the ETA's
administration of the statute. Again, this is not a unique instance of
Labor engaging in an absurd interpretation of the statute in order to
reach Labor's desired result. The CIT chastised Labor in another case
as follows: ``To put it bluntly, the Labor Department's pinched,
formalistic analysis verges on intellectual dishonesty.'' \21\
---------------------------------------------------------------------------
\20\ Former Employees of Merrill Corp. v. U.S. Sec'y of Labor, 483
F. Supp. 2d 1256, 1268 (Ct. Int'l Trade 2007).
\21\ See Former Employees of IBM v. U.S. Sec'y of Labor, 483 F.
Supp. 2d 1284, 1326 (Ct. Int'l Trade 2007).
5. Labor Does Not Concede that Cases with Similar Facts Should Have
---------------------------------------------------------------------------
Similar Outcomes
Another disturbing trend that adds to the unsuccessful TAA
petitioners' plight is the unwillingness of the ETA to acknowledge that
similarly situated applicants should receive the same treatment. Labor
ignored this basic tenet of law in Former Employees of Merrill
Corporation. During the course of that multi-year litigation, but in a
different case, Labor announced a change in policy that recognized
certain products could be considered articles even if the goods were
intangible, and workers manufacturing them would thereby qualify for
TAA. Labor, however, did not notify the CIT of this change--that burden
fell on the workers. Upon learning of this policy change, the CIT
ordered Labor to reconsider its decision.\22\ Incredibly, Labor again
denied certification (as noted above, on the grounds that the articles
were unique). But this time, Labor ignored its practice in still a
different case in which it had certified workers who produced custom
logos, which--by definition--were unique.\23\ In other words, Labor
twice in the same proceeding failed to accord a similar outcome to
similarly situated individuals. Labor's failure in this regard is not
unique, as the CIT has expressed a similar concern in three recent
cases.
---------------------------------------------------------------------------
\22\ See Former Employees of Merrill Corp. v. U.S. Sec'y of Labor,
Slip Op. 06-72, 2006 WL 1491616 (Ct. Int'l Trade May 17, 2006).
\23\ Former Employees of Merrill Corp. v. U.S. Sec'y of Labor, 483
F. Supp. 2d 1256, 1268-69 (Ct. Int'l Trade 2007).
---------------------------------------------------------------------------
6. Labor Appears to Lack Respect for the CIT's Authority
In the cases in which I have been involved, and in analyzing many
CIT decisions, it is evident to me that Labor has little respect for
the CIT's authority. Short of holding Labor officials in contempt,
there is little the CIT can do to remedy this situation. In my view,
this is partly responsible for the untenable situation that exists
today, where Labor strives to maintain its original determination
without regard to the duty prescribed by Congress to conduct TAA cases
with the utmost regard for the workers.
Labor, itself, has argued that the CIT has no authority to order
the certification of workers, and that Labor, alone, can do so. For
support, Labor cites two statutory provisions. The first states that
Labor's factual findings are conclusive if they are supported by
substantial evidence.\24\ The second states that the CIT may not grant
an injunction or issue a writ of mandamus in an appeal of Labor's
denial of TAA.\25\ Taken together, Labor reads these provisions to mean
that there can only be an endless back and forth between the agency and
the court until one side surrenders. At no point, in Labor's view, does
the CIT have authority to order certification. The consequence of this
battle of wills is delay in the final resolution of the case and issues
that already had been settled during a prior segment of the same
proceeding often are reargued.\26\
---------------------------------------------------------------------------
\24\ See 19 U.S.C. 2395(b).
\25\ See 28 U.S.C. 2643(c)(2).
\26\ See Former Employees of Merrill Corp. v. U.S. Sec'y of Labor,
483 F. Supp. 2d at 1266 n.7 (stating ``This Court does not appreciate
Labor's attempt to reargue this point in the third remand results.'').
---------------------------------------------------------------------------
Common sense dictates that Labor's view is incorrect. Congress must
have intended for meaningful judicial review and for the courts to have
the authority to ensure that their rulings were implemented. This is
evident from the fact that Congress created three levels of judicial
review of Labor decisions including the CIT, the Court of Appeals for
the Federal Circuit, and, ultimately, the Supreme Court.\27\ Yet
Labor's position is that if Labor decides not to change its decision,
not one of the three reviewing courts can do anything about it.
---------------------------------------------------------------------------
\27\ See 19 U.S.C. 2395(c).
III. THE PROBLEMS WITH LABOR ARE WIDESPREAD
My testimony thus far has focused primarily on my own experience.
The following quotes are intended to show the Committee the breadth of
the problem. In my experience, some CIT judges direct occasional harsh
words towards the government agencies that appear before it. But I am
unaware of an agency that has received more uniform criticism from so
many different judges. To me, this is further evidence of the severity
of the problem with the ETA's investigations.
The following quotations are taken from two opinions by Judge
Ridgway in which she catalogued the court's various criticisms of
Labor's investigations.
A. Former Employees of BMC Software, Inc. v. U.S. Sec'y of Labor, 454
F. Supp. 2d 1306, 1313 N.10 (Ct. Int'l Trade 2006).
agency's investigation was ``merely perfunctory,''
and petition was denied based on only ``scant evidence;''
action remanded to agency with instructions to supplement
``shockingly thin'' record of investigation\28\ (Judge
Barzilay)
---------------------------------------------------------------------------
\28\ Former Employees of IBM Corp., Global Servs. Div. v. U.S.
Sec'y of Labor, 387 F. Supp. 2d 1346, 1350-51, 1353 (Ct. Int'l Trade
2005).
agency's determination both ``betrays . . . [any]
understanding of the industry it is investigating and the
requirements of the [TAA statute]'' and ``failed to make
reference to relevant law . . ., including Labor's own
regulations on the matter;'' and, although agency was granted
three extensions of time to file results of second remand,
remand results nevertheless still failed to comply with court's
remand instructions\29\ (Judge Pogue)
---------------------------------------------------------------------------
\29\ Former Employees of Murray Engineering, Inc. v. Chao, 358 F.
Supp. 2d 1269, 1274, 1275 n. 10 (Ct. Int'l Trade 2004).
``Labor repeatedly disregarded evidence of critical
facts,'' ``refused to accept information submitted by [the
petitioning workers], which allegedly contradicted statements
made by [company] officials,'' ``rel[ied] on incomplete and
allegedly contradictory information to support its position,''
and ultimately ``failed to provide any analysis regarding the
change in its position to certify [the workers] as eligible''
\30\ (Judge Carman)
---------------------------------------------------------------------------
\30\ Former Employees of Tyco Electronics v. U.S. Dep't of Labor,
350 F. Supp. 2d 1075, 1089 (Ct. Int'l Trade 2004).
agency's finding ``is not only unsupported by
substantial evidence, but is contradicted by the scant
evidence'' that exists\31\ (Judge Eaton)
---------------------------------------------------------------------------
\31\ Former Employees of Ericsson, Inc. v. U.S. Sec'y of Labor,
Slip Op. 04-130, 2004 WL 2491651 at *5 (Ct. Int'l Trade Oct. 13, 2004).
because ``Labor never acknowledged its receipt of
[the workers'] petition and wholly failed to initiate an
investigation thereof,'' ``the displaced workers' claims were
ignored for over three months;''' once initiated, ``[t]he
entire investigation consisted of two communications with only
one individual, [the company's] HR manager;'' and even ``the
investigation upon [the workers' request for] reconsideration
was perfunctory at best'' \32\ (Chief Judge Restani)
---------------------------------------------------------------------------
\32\ Former Employees of Sun Apparel of Texas v. U.S. Sec'y of
Labor, Slip Op. 04-106, 2004 WL 1875062 at *6-7 (Ct. Int'l Trade Aug.
20, 2004).
``the entirety of the Labor Department's initial
investigation consisted of forwarding the standard [form
questionnaire]'' to company official, with no follow-up by the
agency, ``even though the company's responses . . . were, in a
number of instances, ambiguous or inconsistent, and called for
clarification;'' ``Moreover, the agency's investigation
conducted in response to the Workers' request for
reconsideration was little more than a rubber stamp of its
initial Negative Determination,'' ``consist[ing]--in toto--of
two phone conversations with company officials on a single day,
which were in turn documented in two memoranda that, together,
constituted a mere three sentences'' \33\ (Judge Ridgway)
---------------------------------------------------------------------------
\33\ Former Employees of Ameriphone, Inc. v. U.S., 288 F. Supp. 2d
1353, 1358-59 (Ct. Int'l Trade 2003).
B. Former Employees of Ameriphone, Inc. v. U.S., 288 F. Supp. 2d 1353,
---------------------------------------------------------------------------
1355 N.3 (Ct. Int'l Trade 2003).
castigating agency for ``a sloppy and inadequate
investigation'' which was ``the product of laziness,'' and
holding that a fourth remand would be ``futile'' \34\ (Judge
Tsoucalas)
---------------------------------------------------------------------------
\34\ Former Employees of Hawkins Oil and Gas, Inc. v. U.S. Sec'y of
Labor, 814 F. Supp. 1111, 1115 (Ct. Int'l Trade 1993).
characterizing agency's actions as ``unreasonable''
and its investigation as ``misguided and inadequate at best''
where agency, inter alia, failed to clarify important aspects
of information provided by company, relied on company's
unsubstantiated statements on critical point, and ignored other
relevant information\35\ (Judge Goldberg)
---------------------------------------------------------------------------
\35\ Former Employees of Swiss Indus. Abrasives v. U.S., 830 F.
Supp. 637, 641-42 (Ct. Int'l Trade 1993).
``conclud[ing] that Labor . . . conducted an
inadequate investigation and analysis of the plaintiffs as
`production' workers'' and, similarly, that ``Labor's service
worker [analysis was] inadequate''\36\ (Judge Musgrave)
---------------------------------------------------------------------------
\36\ Former Employees of Pittsburgh Logistics Sys., Inc. v. U.S.
Sec'y of Labor, SLIP OP. 03-111, 2003 WL 22020510 at *11 (Ct. Int'l
Trade 2003).
With so many well-respected jurists of the same mind on this issue,
there is no question in my mind that my clients' painful experiences
---------------------------------------------------------------------------
are not unique--they are suffered by all unsuccessful TAA applicants.
IV. COMMON MISUNDERSTANDINGS ABOUT PROBLEMS WITH LABOR'S
ADMINISTRATION OF TAA
In discussions that I have had with my colleagues over the years,
it occurs to me that there are a number of misunderstandings that
attempt to explain (or even justify) the inadequacy of Labor's
investigations (both at the agency level and in subsequent litigation).
Generally, the misconceptions fall into one of the following three
categories: 1) Labor receives inadequate funding for the TAA program,
2) Labor follows the wishes of the company that has laid off the
workers, and 3) Labor has the same track record as the other agencies
that appear before the CIT. My reason for addressing these
misconceptions is that I believe each, in its own way, suggests that
some factor, other than sheer unwillingness explains the ETA's action.
In my view, there is no valid excuse for the appallingly low quality of
Labor's investigations.
A. Inadequate Funding or Lack of Resources Cannot Explain Labor's
Stance
There is little question that Labor has limited resources in terms
of staff, funds, and even the time it is given to conduct its
investigations. At first glance, these would appear as a reasonable
basis for excusing Labor's shortcomings. On closer inspection, the
above factors cannot explain or justify Labor's failure to investigate
TAA cases in the manner Congress intended.
First, Congress has directed Labor to evaluate a worker's
eligibility for TAA through an investigation that should consist of
gathering all relevant evidence and applying the law to the facts
found. Labor, surely, does not have the time or resources to compile
the same extensive records as do other agencies such as the ITC and
DOC. If Labor needs more than just the handful of investigators that it
has, it should ask for them. To my knowledge, Labor has not done so.
But even with the resources Labor does have, surely the agency could do
far more than sending a few e-mail messages and making a few phone
calls, especially in the context of a remand proceeding. Not allowing
parties to meaningfully participate in the remand investigation, which
would greatly improve the information gathering, also is not a question
of resources. As I have previously discussed, Labor's failure to
conduct the kind of investigation Congress intended is because the
agency has lost sight of the need to hold the interests of the workers
in the utmost regard.
Second, Congress did not intend for funding concerns to drive
Labor's determinations on TAA eligibility. Instead, Congress spelled
out the conditions for eligibility and specified that if those
conditions were satisfied, Labor was to certify the workers for TAA. To
the extent Labor is making determinations on eligibility based on
funding concerns, it is at complete odds with Congressional will.
Third, my view is that Labor's overall approach to the unsuccessful
TAA applicant demonstrates a lack of concern for the workers--not a
lack of resources. Last minute requests for extensions of time, absurd
interpretations of the statute, and a general unwillingness to accept
the CIT's authority cannot be explained by resource constraints. In
fact, by not following the statute and the CIT's instructions in good
faith, Labor creates more work for itself--not less.
B. Labor Follows the Will of the Company that Laid Off the Workers
The CIT has expressed concern that Labor unquestioningly relies on
employer-provided information to the exclusion of that provided by
employees or other sources.\37\ In particular, the CIT was concerned
that some companies might want to avoid the negative publicity that
might be associated with laying off workers for trade-related
reasons.\38\ As a result, such companies might have an incentive to see
the petition fail, and would provide information to influence the
decision in that direction. Consequently, if those circumstances were
present and Labor accepted the information provided by company
officials in the face of contradictory information provided by the
employees, Labor clearly would not be fulfilling its responsibilities.
---------------------------------------------------------------------------
\37\ See Former Employees of BMC Software, Inc. v. Sec'y of Labor,
454 F. Supp. 2d 1306, 1328-37 (Ct. Int'l Trade 2006).
\38\ See Former Employees of BMC Software, Inc. v. Sec'y of Labor,
454 F. Supp. 2d 1333 (Ct. Int'l Trade 2006).
---------------------------------------------------------------------------
While I do not doubt that the court's concerns were justified in
the case before it and are present in others, my concern is that Labor
seizes on whatever information supports its decision not to certify--
irrespective of the source. In the cases I have litigated, Labor
ignored information provided by company officials, which if taken at
face value, should have resulted in a certification of the workers for
TAA. In one case, the company's human resources department was even
responsible for filing the petition with Labor. A review of the cases
filed at the CIT since 2005 shows that the company filed the TAA
petition with Labor in at least six instances. So I do not believe that
Labor tends to take the position favored by the firm laying off the
workers. Rather, Labor relies on information that supports its decision
not to certify.
C. Labor Has the Same Track Record as Other Agencies that Appear
Before the CIT
A number of agencies who enforce and administer the U.S. customs
and trade laws are frequent litigants at the CIT. While I have not
performed an objective assessment to compare the agencies' track
records, I am able to offer my views based on the cases in which I have
participated. In most trade and customs cases, the dispute between the
private parties and the government agencies focuses on several discrete
issues. Rarely (in my own experience, never) are challenges made to the
overall adequacy of the investigation, and rarely does an agency ask
for a voluntary remand, thereby conceding a flawed investigation. Even
when Labor does not seek a voluntary remand, the record is so poorly
developed that there is little to do but ask the CIT to remand to the
agency.
The large number of remands in TAA cases also makes Labor stand out
from the other agencies administering the customs and trade laws. In my
experience, and in all but the most unusual cases, if an ITC or DOC
determination is not upheld by the CIT without remand proceedings it
often is upheld after the remand proceedings. But in a TAA case, one
must expect that multiple remands are going to be necessary just to
settle the basic facts, which the CIT has described as the ``ping pong
phenomenon.''
Finally, there is no question that the CIT has expressed concern
with agencies besides Labor. But if one looks earlier in my testimony
at the excerpts from the opinions of a wide range of judges that
contain scathing criticisms of the ETA, it is clear that Labor is in a
class by itself.
V. SOLVING THE PROBLEMS FACED BY UNSUCCESSFUL TAA PETITIONERS
In my view, fixing the existing system will require one significant
non-statutory change and several statutory ones. Sadly, the biggest
obstacle to unsuccessful TAA petitioners is the Employment and Training
Administration of the Department of Labor. Possibly no other change
could have as beneficial an effect as holding the ETA responsible for
conducting a meaningful investigation. The CIT has been trying to do
this, yet the problem persists. As I mentioned earlier in my testimony,
for TAA to be effective, Labor has to get it right the first time. Once
the court steps in to force Labor to do a proper investigation it
already is too late. By that time, most workers will have suffered the
brunt of the adverse economic consequences associated with the job
loss. While I can diagnose the problem, I cannot prescribe an exact
cure for a problem that is deeply entrenched and long standing. I do
think it will require active involvement by the legislature because in
my view, the problem has persisted irrespective of which political
party occupies the White House. In other words, I do not believe that a
new occupant in the White House, irrespective of party, is going to
solve the problem without active pressure from the legislative branch.
In terms of legislative changes, I believe the following statutory
amendments would improve unsuccessful TAA petitioners' chances of
obtaining meaningful relief: 1) mandatory and swift time frames for
judicial resolution of TAA cases, 2) mandatory changes to the manner in
which the ETA conducts its investigations, and 3) clarifying that the
CIT has the authority to order Labor to certify workers for TAA.
Although it is not common for Congress to impose mandatory time
frames on Article III courts, it is not without precedent. Congress has
established express and speedy time frames under which the courts must
act in laws ranging from the Crime Victims' Rights Act and the
Antiterrorism and Effective Death Penalty Act to procedures dealing
with the disclosure of classified information.\39\ I do not mean to
convey the impression that TAA cases rise to the level of severity
present in these other situations, but Congress created the program
because it felt these individuals needed help, and if lengthy judicial
proceedings are preventing that intent from being realized, Congress
can impose time limits if it so chooses.
---------------------------------------------------------------------------
\39\ See 18 U.S.C. 3771(d)(3); 18 U.S.C. 2339B(f)(5)(B); 28 U.S.C.
2261 et seq.
---------------------------------------------------------------------------
Another improvement for unsuccessful TAA petitioners would be to
require Labor to change the manner in which it conducts its
investigations. As I have indicated throughout my testimony, I do not
believe that the manner in which the ETA currently conducts
investigations is consistent with what Congress intended. Two
modifications would go a long way towards improving the quality of the
investigation the ETA conducts. First, counsel for the workers should
have the right to participate and ask questions in any fact-finding
missions by Labor, whether conducted telephonically or otherwise.
Second, Labor must provide counsel for the workers with the information
it obtains on the day it receives the information, or shortly
thereafter. These two changes are needed to ensure that the workers,
through counsel, have a meaningful opportunity to participate in the
remand proceedings.
Finally, Congress needs to clarify the statute to protect the CIT's
authority. As I noted earlier, Labor construes 19 U.S.C. 2395(b) and
28 U.S.C. 2643(c)(2) to preclude the CIT from having the authority to
order Labor to certify workers for TAA. As a consequence, litigations
drags on endlessly, and getting to a final resolution becomes a war of
wills. This cannot be what Congress intended when it enacted these
provisions, and a clear statement to that effect is needed to end this
absurd impasse.
Thank you, Mr. Chairman and Members of the Committee, for affording
me the honor of voicing these concerns on behalf of the countless
hardworking men and women of America who have been failed by the very
agency that Congress designated to protect their interests.
Attachment 2
19 U.S.C. 2272
(a) In general
A group of workers (including workers in any agricultural firm or
subdivision of an agricultural firm) shall be certified by the
Secretary as eligible to apply for adjustment assistance under this
part pursuant to a petition filed under section 2271 of this title if
the Secretary determines that--
(1) a significant number or proportion of the workers in such
workers' firm, or an appropriate subdivision of the firm, have
become totally or partially separated, or are threatened to
become totally or partially separated; and
(2)(A)(i) the sales or production, or both, of such firm or
subdivision have decreased absolutely;
(ii) imports of articles like or directly competitive with
articles produced by such firm or subdivision have increased;
and
(iii) the increase in imports described in clause (ii)
contributed importantly to such workers' separation or threat
of separation and to the decline in the sales or production of
such firm or subdivision; or
(B)(i) there has been a shift in production by such workers'
firm or subdivision to a foreign country of articles like or
directly competitive with articles which are produced by such
firm or subdivision; and
(ii)(I) the country to which the workers' firm has shifted
production of the articles is a party to a free trade agreement
with the United States;
(II) the country to which the workers' firm has shifted
production of the articles is a beneficiary country under the
Andean Trade Preference Act [19 U.S.C. 3201 et seq.], African
Growth and Opportunity Act [19 U.S.C. 3701 et seq.], or the
Caribbean Basin Economic Recovery Act [19 U.S.C. 2701 et seq.];
or
(III) there has been or is likely to be an increase in imports
of articles that are like or directly competitive with articles
which are or were produced by such firm or subdivision.
(b) Adversely affected secondary workers
A group of workers (including workers in any agricultural firm or
subdivision of an agricultural firm) shall be certified by the
Secretary as eligible to apply for trade adjustment assistance benefits
under this part if the Secretary determines that--
(1) a significant number or proportion of the workers in the
workers' firm or an appropriate subdivision of the firm have
become totally or partially separated, or are threatened to
become totally or partially separated;
(2) the workers' firm (or subdivision) is a supplier or
downstream producer to a firm (or subdivision) that employed a
group of workers who received a certification of eligibility
under subsection (a) of this section, and such supply or
production is related to the article that was the basis for
such certification (as defined in subsection (c)(3) and (4) of
this section);
and
(3) either--
(A) the workers' firm is a supplier and the component
parts it supplied to the firm (or subdivision)
described in paragraph (2) accounted for at least 20
percent of the production or sales of the workers'
firm; or
(B) a loss of business by the workers' firm with the
firm (or subdivision) described in paragraph (2)
contributed importantly to the workers' separation or
threat of separation determined under paragraph (1).
(c) Definitions
For purposes of this section--
(1) The term ``contributed importantly'' means a cause which
is important but not necessarily more important than any other
cause.
(2)(A) Any firm, or appropriate subdivision of a firm, that
engages in exploration or drilling for oil or natural gas shall
be considered to be a firm producing oil or natural gas.
(B) Any firm, or appropriate subdivision of a firm, that
engages in exploration or drilling for oil or natural gas, or
otherwise produces oil or natural gas, shall be considered to
be producing articles directly competitive with imports of oil
and with imports of natural gas.
(3) Downstream producer.--The term ``downstream producer''
means a firm that performs additional, value-added production
processes for a firm or subdivision, including a firm that
performs final assembly or finishing, directly for another firm
(or subdivision), for articles that were the basis for a
certification of eligibility under subsection (a) of this
section of a group of workers employed by such other firm, if
the certification of eligibility under subsection (a) of this
section is based on an increase in imports from, or a shift in
production to, Canada or Mexico.
(4) Supplier.--The term ``supplier'' means a firm that
produces and supplies directly to another firm (or subdivision)
component parts for articles that were the basis for a
certification of eligibility under subsection (a) of this
section of a group of workers employed by such other firm.\40\
---------------------------------------------------------------------------
\40\ 19 U.S.C. 2272.
Biography for Frank H. Morgan
Frank H. Morgan is an associate with White & Case LLP's
International Trade Group with an active practice in injury
investigations before the U.S. International Trade Commission (ITC),
anti-dumping and countervailing duty investigations before the U.S.
Department of Commerce and in related trade litigation and appeals
before the U.S. Court of International Trade and the U.S. Court of
Appeals for the Federal Circuit.
Mr. Morgan has represented manufacturers from numerous countries in
a wide and diverse array of industries, including paper, lumber, steel,
fertilizers, and agricultural goods. Mr. Morgan has served as a member
of the Court of International Trade's planning committee for the 13th
and 14th Judicial Conferences and has spoken on trade law issues to
industry groups and professional organizations.
Prior to joining White & Case LLP, Mr. Morgan served as a law clerk
to the Honorable Judith M. Barzilay, Judge, U.S. Court of International
Trade from 1998-2000. From 1997-1998, Mr. Morgan worked in the Office
of the General Counsel of the ITC.
Publications
``Tips for the New Practitioner at the U.S. Court of International
Trade,'' Georgetown University Law Center Continuing Legal Education
Seminar Materials, Trade and Customs Law Refresher, January 2007
Bars and Courts
District of Columbia Bar, 2000
Virginia State Bar, 1998
U.S. Court of Appeals for the Federal Circuit
U.S. Court of Appeals for the Fourth Circuit
U.S. Court of International Trade
Education
B.A., Villanova University, 1995
J.D., Columbus School of Law, Catholic University of America, cum
laude, 1998
Chairman Miller. Thank you, Mr. Morgan.
Mr. Rosen.
STATEMENT OF MR. HOWARD F. ROSEN, VISITING FELLOW, THE PETERSON
INSTITUTE FOR INTERNATIONAL ECONOMICS; EXECUTIVE DIRECTOR, THE
TRADE ADJUSTMENT ASSISTANCE COALITION
Mr. Rosen. Thank you very much, Mr. Chairman, for the
invitation this morning to discuss this very important issue.
The U.S. economy faces intense competition from at home and
abroad, and although this competition has its benefits, it
places significant costs on American workers and their
families, firms, and communities.
Approximately 16 million jobs are terminated each year of
which four million result in serious unemployment. Although the
probability that a worker will become unemployed has declined,
the duration of unemployment has actually increased.
Approximately 700,000 firms go out of business each year,
affecting six million workers. An additional 1.7 million firms
contract each year, affecting another 11.8 million jobs. About
40 percent of dislocated workers do not find a job within a
year or two after their layoff. Another 40 percent who find
jobs actually experience long-term earning losses. Forty-five
counties representing a half a million workers have
unemployment rates twice the national average currently, and 20
metropolitan areas currently have unemployment rates 50 percent
higher than the national average. Of these, 13 are in
California, two are in Michigan, and one in each New Jersey,
Washington, Florida, North Carolina, and Arizona.
And finally, federal spending on training and employment
and community development, as a share of GDP, has fallen
sharply over the last 20 years. The country does not have a
national, coherent, comprehensive strategy to deal with these
economic dislocations. Instead, we have a collection of
disparate, ad hoc, and inadequate programs that tend to provide
assistance too little, too late.
As a result, efforts to expand economic liberalization and
introduce new technologies are facing significant political
backlash. Over the long run reluctance to embrace economic
flexibility will cost U.S. economic growth and seriously affect
U.S. living standards.
If I could, let me just give you some examples of some of
the problems that we have with our existing programs.
Currently, only one-third of unemployed workers actually
receive unemployment insurance. If you are lucky enough to
receive that unemployment insurance, it replaces only one-third
of your previous wage, and one-third of unemployed people who
receive unemployment insurance exhaust their assistance before
they find a new job.
As you have heard, there are targeted programs like the
Trade Adjustment Assistance Program, and I commend Mr. Morgan
for his statements that are really right on. The program,
though, for those people who receive it, is quite effective.
The problem is only a minority of workers receive that
assistance.
Programs designed to assist firms respond to competitive
pressures such as the Manufacturing Extension Partnership and
the Trade Adjustment Assistance Program for Firms, are also
effective, but their funding is minuscule. The Department of
Defense provides comprehensive assistance to communities that
are hurt by military base closings, but there is no equivalent
program for civilian dislocations.
I am, therefore, this afternoon calling for a national
economic adjustment rapid response as part of the country's
broader competitiveness strategy. This national economy
adjustment rapid response would be based on the following
elements: comprehensive assistance to workers, firms, and
communities; assisting everyone in need regardless of cause of
dislocation; flexible, not one-size-fits-all; based on early
intervention; and coordinating public and private assistance.
Let me give you some examples. Instead of providing workers
a one-size-fits-all list of assistance so that they must take
it or leave it, we would provide a menu of assistance to
workers which would include, in addition to income maintenance
and training, possibly wage insurance and a tax credit to
maintain their health insurance during their period of
unemployment. We could expand and build on the Manufacturing
Extension Partnership and the Trade Adjustment Assistance
Program for Firms and apply the base-closing model to civilian
economic dislocations.
In conclusion, I just want to state some very basic facts.
Number one, we do not live in a textbook. Markets are not
perfect. The labor markets are also not completely flexible.
There are transition costs. Unfortunately, many economists tend
to ignore those transition costs. By contrast, I think that
much of public policy is actually made to address transition
costs.
The debate is not over should we act or not. That debate
was settled decades ago. The question is what kind of
assistance do we provide and who should we assist. The
challenge is designing government assisted programs that are
cost effective and appropriate.
Mr. Chairman, the Bear Stearns Adjustment Program could
potentially cost the American taxpayers $30 billion, many
multiples of the amount that the government currently spends to
help workers, firms, and communities. If we can devote this
many resources to save one financial institution, certainly we
can find the resources to assist workers, firms, and
communities throughout the country facing severe economic
dislocation.
I look forward to the discussion. Thank you.
[The prepared statement of Mr. Rosen follows:]
Prepared Statement of Howard F. Rosen
Designing a National Strategy for Responding to Economic Dislocation
The U.S. economy faces intense competition from home and abroad.
Although increased competition may benefit the economy through access
to more, better and less expensive products and services, it places
significant costs on American workers and their families, firms and
communities. These costs are exacerbated by the lack of a national
comprehensive strategy to deal with these economic disruptions. In
place of a national strategy, there is a collection of ad hoc, out-of-
date and inadequate programs that provide too little assistance too
late to those in need. As a result, efforts to expand economic
liberalization and introduce new technologies in the economy are facing
significant political backlash. Over the long run, reluctance to
embrace economic flexibility may result in lower economic growth and
risk long-term improvements in U.S. living standards.
American workers, their families, firms and communities experience
significant dislocations every day:
Between 1995 and 2004, approximately 16 million jobs
were terminated each year. (See Figure 1.) Four million
terminations resulted in serious unemployment.
Although the national unemployment rate has been
failing over the last several, years, the duration of
unemployment has been rising. (Figure 2.)
No region is exempt from the recent changes in the
labor market. There has been a convergence of unemployment
rates across all 50 states and the District of Columbia.
Between 1995 and 2004; approximately 690,000 firms
closed each year, affecting 6.1 million workers. An additional
1.7 million firms contracted each year, affecting 11.8 million
workers. (See. Figure 3.)
Between 1996 and 2007 there were on average 16,400
mass layoff plant closings each year, affecting 1.8 million
workers.\1\ (See Figure 4.)
---------------------------------------------------------------------------
\1\ Layoffs affecting 50 or more workers is considered a mass
layoff.
Forty-five counties, representing one-half million
workers, currently have unemployment rates twice the national
---------------------------------------------------------------------------
average.
Of the 20 metropolitan areas currently 50 percent
above the national average unemployment rates, 13 are in
California, two are in Michigan and one each in New Jersey,
Washington, Florida, North Carolina and Arizona. (See Table 1.)
Workers are the first to feel the negative consequences of economic
restructuring due to increased domestic and international competition.
They may be asked to cut back their hours, accept lower wages and/or
benefits, or ultimately lose their jobs. Lori Kletzer finds that almost
40 percent of displaced workers do not find new jobs within a year or
two after their initial job loss.\2\ (See Figure 5.) Although 40
percent of workers find new jobs, their new jobs pay less than their
previous ones. Only a little more than 20 percent of displaced workers
find new jobs that pay as much or more than their previous jobs.
---------------------------------------------------------------------------
\2\ Kletzer, Lori, Job Loss from Imports: Measuring the Costs,
Washington, D.C.: Institute for International Economics, 2001.
---------------------------------------------------------------------------
Job loss can place enormous strain on household finances. The
Congressional Budget Office reports that Unemployment Insurance (UI)
played a significant role in maintaining family incomes of recipients
who experienced long-term spells of unemployment, particularly for
those families that had only one wage earner. Before becoming
unemployed, recipients' average family income was about $4,800 per
month. UI helped offset the reduction in average family income by 20
percent points.\3\
---------------------------------------------------------------------------
\3\ Long-term recipients are defined in this report as unemployed
workers who received UI benefits for a spell of at least four
consecutive months, in 2001 or early 2002.
These pressures are not restricted to those workers employed in
industries that directly face increased domestic and international
competition. Workers employed in up-stream and down-stream industries
may also experience economic dislocation as a result of the effect of
increased competition on final goods-producing and service-providing
industries. For example, in addition to its production workers, an
apparel plant closing might affect textile workers, as well as
maintenance and food service workers, designers, cutters, sales
representatives and accountants associated with the production of
apparel. Depending on the number of workers laid off from the apparel
plant, there may also be a third ripple effect on the broader
community. Communities with a high concentration of industry may
experience further cutbacks and job losses, as workers and their
families spend less money on consumer goods and services.
Job loss is not restricted to production workers. Firm closures can
also affect white-collar management workers. Although these workers
tend to be more highly educated and earn higher incomes than production
workers, their adjustment to economic dislocation can also be costly.
Limited job opportunities in the local community may require these
workers to move, causing significantly disruptions to their families.
Mass layoffs and plant closings, and the associated drops in
household disposable income, can also hurt a community's tax base,
having implications for the provision of government services, including
schools, transportation and health care. In summary, what starts as a
``limited'' lay off or plant closing affecting a select group of
workers can very easily result in successive ripple effects with
consequences on an entire community.
Current Policy Responses to Economic Dislocation
Existing government programs designed to cushion the effects of
economic dislocation are, for the most part, out-of-date, ad hoc and
inadequate. These programs are often targeted to assist select groups
of workers or communities that have some political importance. Overall,
these programs are not part of any comprehensive or coherent strategy.
This ``segmentation ``of assistance is not a new phenomenon. Early
examples include assistance programs for workers employed by
Studebaker, the railroad industry and the meat packing industry in the
1960s.\4\
---------------------------------------------------------------------------
\4\ Frank Jr., Charles, Foreign Trade and Domestic Aid, Washington:
The Brookings Institution. 1974.
---------------------------------------------------------------------------
Many targeted programs are designed to ``compensate'' workers
deemed to be adversely affected by changes in discrete policies, in
order to reduce opposition to those changes. The largest example is
Trade Adjustment Assistance (TAA), which was established in 1962 and
subsequently expanded as part of Congressional approval of negotiations
to liberalize trade. Other examples include targeted programs to assist
workers affected by the Clean Air Act and legislation to protect
Spotted Owls. Congress in currently considering establishing a program
to assist workers potentially adversely-affected by policies aimed at
reducing greenhouse gas emissions.
Although there may be a political motivation for these targeted
programs, the economic justification for them may not be as compelling.
There is not much evidence that the adjustment burden placed on workers
covered by these targeted programs is significantly different from that
experienced by other dislocated workers. In addition to discriminating
between groups of workers, these programs create a bureaucratic maze,
making it harder for worker to get the assistance they desperately
need.
For example, the Catalogue of Federal Domestic Assistance lists 52
programs under the category of ``Economic Development,'' 44 programs
under ``Community Development'' and 60 programs under ``Job Training
and Employment.'' \5\ Although the information included in the
catalogue is extremely useful, the catalogue is difficult to navigate
and the material is written at a highly technical level. A more brief
and use-friendly version of this catalogue could provide invaluable
assistance to workers, their families, firms and communities facing
economic dislocations.
---------------------------------------------------------------------------
\5\ Executive Office of the President, Office of Management and
Budget, Catalog of Federal Domestic Assistance, Washington: Government
Printing Office, 2008.
---------------------------------------------------------------------------
The following are examples of some of the more well known programs
designed to assist workers, firms and communities adjust to economic
dislocation.
Worker assistance
Unemployment Insurance
Despite significant changes in U.S. labor market conditions there
have been no major changes in the basic structure of UI since it was
established 70 years ago. As a result, UI does not currently meet its
initial goals, leaving millions of workers without the assistance they
desperately need.\6\
---------------------------------------------------------------------------
\6\ Kletzer, Lori G. and Howard F. Rosen, ``Reforming Unemployment
Insurance for the Twenty-First Century,'' The Hamilton Project,
Discussion Paper 2006-06, Washington: The Brookings Institution,
September 2006.
---------------------------------------------------------------------------
UI's original goals were to smooth a worker's income stream by
providing income support during periods of unemployment, to provide
insurance against the risk of job loss, and to serve as counter-
cyclical stimulus during periods of economic down-turns.
Although a federal entitlement, UI is administered by the states,
allowing each state to set its own program parameters. On average,
workers can receive up to 26 weeks of benefits. The national average
weekly benefit in 2007 was $281.17.
The following program indicators suggest that the current UI
program falls short in meeting its initial goals:
The average recipiency rate, i.e., the percent of
unemployed receiving UI, over the past 27 years is
approximately 37 percent.
The average replacement rate between 1975 and 2004;
i.e., the amount of assistance relative to a worker's previous
wage, was 36 percent, far short of the initial goal of 50
percent.\7\
---------------------------------------------------------------------------
\7\ Author's calculations based on Department of Labor data.
The exhaustion rate, i.e., the percent of workers who
exhaust their benefits before finding new jobs, averaged
---------------------------------------------------------------------------
approximately 30 percent between 1974 and 2007.
Restrictive eligibility criteria constitute a large hole in the
existing UI program. The current look back and job tenure provisions,
as well as the exclusion of contingent workers, i.e., temporary and
part-time workers, particularly affect low-income workers.\8\ Thirty-
seven states do not provide dependent payment supplements.
---------------------------------------------------------------------------
\8\ Some workers associated with temporary placement agencies may
receive UI. Twenty states currently do not cover part-time or temporary
workers.
---------------------------------------------------------------------------
After taking inflation into account, the real value of the national
average weekly benefit has not changed much over the last 30 years. Nor
has it changed much relative to the poverty threshold or average weekly
earnings. It has improved relative to the minimum wage only because
that was not increased for a decade.
Figure 6 presents the real annualized value of the national average
UI weekly benefit relative to the real annualized value of the hourly
minimum wage, the poverty threshold for a family of four adjusted by
inflation, and the annualized value of the real average weekly wage for
all workers. On average over the last 35 years, the real value of the
weekly UI benefit has been about 40 percent below the poverty rate for
a family of four adjusted by inflation, and approximately 44 percent of
real average weekly earnings.
In 1970, Congress enacted the Extended Benefit (EB) program with
automatic triggers to provide assistance in an orderly fashion during
periods of high unemployment. Under the current program, UI benefits
can be extended for an additional 13 weeks when the unemployment rate
reaches a certain level.
Changes in the labor market, combined with the static nature of the
triggers, have produced an extended benefit system that is no longer
automatic. As a result, Congress has occasionally found it necessary to
extend UI through legislation. Although helpful to millions of workers,
these temporary stopgap measures politicize UI, thereby undermining one
of the initial goals of the program. These temporary programs have
proven to be clumsy, typically being enacted after hundreds of
thousands of workers have already exhausted their. UI. In.addition, the
sunset provisions are arbitrarily set and usually fall before
employment has recovered. Overall, the Nation's UI program has become
less automatic and more dependent on Congressional action in response
to prolonged periods of economic slowdown.
UI is financed by a combination of federal and State payroll taxes.
Revenue from the federal payroll tax is used to finance the costs
incurred by Federal and State governments in administering the UI
program and to cover loans to states that exhaust their regular UI
funds. States are required to raise the necessary revenue to finance
regular UI benefits paid to their unemployed workers. Currently,
federal taxes finance 17 percent of the UI program. The remaining 83
percent is financed by State taxes.
The federal tax established by the Federal Unemployment Tax Act
(FUTA) is currently 0.8 percent on the first $7,000 of annual salary by
covered employers on behalf of covered employees. A maximum of $56 is
collected annually for each worker who is covered under the program.
There have been few adjustments in the FUTA taxable wage base since
it was first established in 1939. The last adjustment was in 1983. Had
the taxable wage base been automatically adjusted for inflation over
the past 65 years, it would currently be about $45,000.
The following are some proposals to improve UI:\9\
---------------------------------------------------------------------------
\9\ Kletzer, Lori and Howard Rosen, ``Reforming Unemployment
Insurance for the Twenty-First Century,'' The Hamilton Project,
Discussion Paper 2006, Washington: The Brookings Institution, September
2006.
Shift the determination of eligibility to hours
---------------------------------------------------------------------------
rather than earnings.
Amend the work test to allow job search for part-time
employment.
Standardize benefit levels to at least half of lost
earnings.
Increase the federal taxable wage base, in steps,
from $7,000 to $45,000.
Set a maximum weekly benefit equal to two-thirds of
State average weekly earnings.
Fix the extended benefit triggers so that they are
more automatic and workers can receive assistance during
economic down-turns without disruption.
Standard allowances for dependents across all states.
Provide a Health Coverage Tax Credit (HCTC) similar
to the one currently included in the TAA program.
Changes necessary to move UI into the twenty-first century require
significant federal leadership. The very basic structure of UI must be
reformed, broadening it from the single-employer, full-time worker,
temporary layoff model to an approach that accommodates permanent job
loss, part-time or contingent work, self-employment, and the incidence
of job loss and national, rather than local or regional, unemployment.
American workers are currently facing considerable pressure due to
corporate restructuring, technological change and increased competition
from home and abroad. These pressures are likely to intensify as the
economy faces new challenges.
Reforming UI is an important step toward providing workers with the
assistance they need to adjust to these challenges.
Training
The Workforce Investment Act (WIA), passed in 1998, provides job
training and related employment services to unemployed and
underemployed individuals. The Act establishes training programs for a
wide array of individuals, including, youth, adult, dislocated workers,
Veterans, Native Americans. Although all of these programs fall under
the responsibility of the federal Department of Labor, they are
administered by State and local One-Stop Career Centers. Federal
spending on all of these programs was $3.7 billion in FY 2007, of which
$1.4 billion was dedicated to dislocated worker training. Of the
approximately 260,000 workers who participated in the program in PY
2007, approximately 182,000 workers received core and intensive
employment services and only 77,000 enrolled in training.\10\
---------------------------------------------------------------------------
\10\ Budget data are presented according to fiscal year (October to
September) and participate data are collected according program year
(April to March).
---------------------------------------------------------------------------
Although designed to assist all dislocated workers regardless of
cause of job loss, the number of participants in WIA programs account
for only 6.6 percent of the annual estimate of dislocated workers. In
addition, since the program is not an entitlement, there is no
guarantee that workers in need will receive training assistance.
Training funds are distributed on a ``first come, first served'' basis,
with little regard for a worker's needs.
Trade Adjustment Assistance (TAA)
TAA provides Workers 78 weeks of income maintenance payments, in
addition to the traditional 26 weeks of UI, for as long as they
participate in training. In addition, the program includes a 65 percent
HCTC, a limited wage insurance program, job search and relocation
assistance. Under wage insurance, otherwise known as Alternative Trade
Adjustment Assistance (ATAA), workers above the age of 50, earning less
than $50,000, can receive half of the difference between their old and
new wages, for up to two years, subject to a maximum of $10,000. This
program is designed to assist the large number of workers who
experience earnings losses after re-employment.
In order to be eligible for TAA, workers must have been laid off
from a plant for which at least one of the following three criteria
``contributed importantly'' to its decline in employment and sales:
An increase in imports
Laid off from an upstream or downstream producer
A shift in production to another country
ATAA and HCTC are two examples of how assistance under the TAA for
workers program has shifted from traditional income transfers to more
targeted, cost effective assistance. Despite the benefits associated
with these new forms of assistance, enrollment in ATAA and the HCTC are
disappointingly low. A 2006 GAO study of five large plant closings
found that less than half of those TAA eligible workers who visited
one-stop career centers were even informed of the HCTC during their
visits to one-stop career centers. A little over half of eligible
workers were aware of the ATAA program.
One of the gapping holes in the existing program is that it does
not cover all service workers. As recent press stories suggest,
American service workers are experiencing dislocations due to
international outsourcing. Although some service workers, like computer
programmers and accountants, have the necessary tools to ease their
adjustment from job to job, other workers, like call center operators
and data entry clerks may not, making their adjustment more costly.
Congress is currently considering proposals to expand TAA eligibility
to cover all service workers.
Other reform proposals currently under consideration include:
Raising the cap on training funds
Increasing the HCTC from 65 percent to 85 percent
Expanding ATAA to cover workers over the age of 40
making less than $60,000
Technical changes to make the program more user-
friendly
Although the TAA for workers program has been the subject of some
criticism over the years, it has and continues to provide critical
assistance to millions of workers and their families as they face
probably the most severe financial burden of their lifetime. More than
25 million workers have received assistance under the program since it
was established in 1962.
The TAA for workers program works; the problem is that it helps
only a minority of potentially affected workers. Only 10 percent of
estimated group of potentially eligible workers receive assistance.
(See Figure 7.)
Assistance to Firms
Manufacturing Extension Partnership (MEP)
MEP provides a wide spectrum of services, including business
support, technical assistance and training, to manufacturing companies
throughout the United States. Presently, the MEP program includes 59
centers with approximately 440 locations serving manufacturing
establishments across the country. The Centers are financed through a
partnership between Federal and State governments with additional
project funding from private industry. The program fosters partnerships
with public institutions, including the Small Business Development
Centers (SBDC), community colleges, technical colleges and
universities, trade associations, local Chambers of Commerce and
organizations focused on economic development. The purpose of the
program is to improve the productivity and enhance competitiveness of
U.S. manufacturers. Despite numerous reports of effectiveness, the
program's funding has been low and relatively flat over the last few
years. (See Figure 8.)
TAA for Firms
Congress established the TAA for Firms program in 1962 to help U.S.
firms respond to the pressures resulting from increased import-
competition in order to avoid possible cutbacks and layoffs. Initially
the program provided technical assistance, loans and loan guarantees.
Congress eliminated the loans and loan guarantees in 1986. Technical
assistance is currently provided to firms by 11 Trade Adjustment
Assistance Centers (TAAC) located around the country. Eligibility
criteria mirror, although are not exactly the same as those for the TAA
for Workers program.
The TAA for Firms program has historically been quite small.
Between 2001 and 2006, the program assisted approximately 150 firms a
year that employed some 16,000 workers. Average spending over the last
nine years has been approximately $11 million per year.
Assistance to Communities
Similar to worker assistance programs, community assistance has
tended to be targeted to politically sensitive regions and not widely
available to all communities. The best example is a program designed to
assist communities adversely affected by military base closings.
Department of Defense (DOD) Office of Adjustment Assistance
The DOD Economic Adjustment program has been successful in helping
communities in the aftermath of a military base closing. Under the
program, the DOD provides intensive technical assistance and funds to
help communities prepare strategic plans for economic development.
Economic development specialists are assigned to regions to help local
public and private leaders design and implement its strategic plan. The
specialists also help local communities identify and, apply for federal
and State assistance.
In 1998, in response to the Levi Strauss plant closing in Roswell,
New Mexico, Senator Bingaman initiated a series of steps aimed at
assisting the workers and the community modeled after DOD's base
closing program.\11\ The Levi Strauss plant was Roswell's largest
single employer and as a result, the economic impact of the plant
closing was felt throughout Roswell and the surrounding communities.
---------------------------------------------------------------------------
\11\ Rosen, Howard. 2001. A New Approach to Assist Trade-Affected
Workers and Their Communities: The Roswell Experiment. Journal of Law
and Border Studies 1:1.
---------------------------------------------------------------------------
Senator Bingaman's plan included the following elements:
A committee was established including representatives
from State and local government, private industry, unions and
other non-profit organizations.
An economic development specialist from the DOD
Office of Adjustment Assistance was assigned to provide
technical assistance to the committee in developing and
implementing a strategic plan to revitalize the region's
economy.
Senator Bingaman invited representatives from
numerous Federal and State government agencies to meet with
public and private sector officials in Roswell. The purpose of
the meeting was to describe the various government programs
designed to assist workers, their families and communities
facing economic dislocation.
The Clinton administration established an interagency
working group to provide assistance to the economic
redevelopment committee in Roswell, as well as to State and
local government officials.
It is difficult to evaluate the impact of these measures, since the
effort was disbanded prematurely due to political factors. Individual
elements of this initiative have subsequently been tried in response to
other plant closings. Congress is currently considering a TAA for
Communities program, modeled on Senator Bingaman's efforts in response
to the Levi Strauss plan closing in Roswell.
Summary
This survey suggests that the United States has a series of ad hoc
and under-funded programs that serve only a limited number of workers,
firms and communities. Most of the programs are motivated by political
considerations, with little economic justification. As a result, these
programs discriminate between workers and communities. Although these
programs may be effective in winning support for discrete policy
changes, they certainly do not constitute a national strategy for
responding to economic dislocation, regardless of its cause.
Ironically, funding for most of these programs has declined,
despite increased pressures on the U.S. economy, resulting is greater
demand for these programs' services. At 0.05 percent of GDP, federal
spending on employment and training programs is at its lowest rate in
almost 45 years.\12\ Federal spending on community development programs
was also 0.05 percent of GDP in 2006, down considerably from its peak
of 0.18 percent of GDP in 1980. (See Figure 9.)
---------------------------------------------------------------------------
\12\ Federal spending on employment and training peaked at 0.46
percent of GDP in 1978 and 1979.
The National Economic Adjustment Rapid Response (NEARR)
Developing a comprehensive national strategy to respond to economic
dislocation would require four steps: