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92-479 PDF 2004

THE CHANGING NATURE OF 

THE ECONOMY: THE CRITICAL 

ROLES OF EDUCATION AND 

INNOVATION IN CREATING 

JOBS & OPPORTUNITY IN A 

KNOWLEDGE ECONOMY

HEARING

BEFORE THE

COMMITTEE ON EDUCATION 

AND THE WORKFORCE 

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

March 11, 2004

Serial No. 108-47

Printed for the use of the Committee on Education and the Workforce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house 

or 

Committee address: http://edworkforce.house.gov 

(II)

COMMITTEE ON EDUCATION AND THE WORKFORCE 

JOHN A. BOEHNER, Ohio, Chairman

Thomas E. Petri, Wisconsin, Vice Chairman 

Cass Ballenger, North Carolina 

Peter Hoekstra, Michigan 

Howard P. ‘‘Buck’’ McKeon, California 

Michael N. Castle, Delaware 

Sam Johnson, Texas 

James C. Greenwood, Pennsylvania 

Charlie Norwood, Georgia 

Fred Upton, Michigan 

Vernon J. Ehlers, Michigan 

Jim DeMint, South Carolina 

Johnny Isakson, Georgia 

Judy Biggert, Illinois 

Todd Russell Platts, Pennsylvania 

Patrick J. Tiberi, Ohio 

Ric Keller, Florida 

Tom Osborne, Nebraska 

Joe Wilson, South Carolina 

Tom Cole, Oklahoma 

Jon C. Porter, Nevada 

John Kline, Minnesota 

John R. Carter, Texas 

Marilyn N. Musgrave, Colorado 

Marsha Blackburn, Tennessee 

Phil Gingrey, Georgia 

Max Burns, Georgia 

George Miller, California 

Dale E. Kildee, Michigan 

Major R. Owens, New York 

Donald M. Payne, New Jersey 

Robert E. Andrews, New Jersey 

Lynn C. Woolsey, California 

Rube ́n Hinojosa, Texas 

Carolyn McCarthy, New York 

John F. Tierney, Massachusetts 

Ron Kind, Wisconsin 

Dennis J. Kucinich, Ohio 

David Wu, Oregon 

Rush D. Holt, New Jersey 

Susan A. Davis, California 

Betty McCollum, Minnesota 

Danny K. Davis, Illinois 

Ed Case, Hawaii 

Rau ́l M. Grijalva, Arizona 

Denise L. Majette, Georgia 

Chris Van Hollen, Maryland 

Tim Ryan, Ohio 

Timothy H. Bishop, New York

Paula Nowakowski, Staff Director 

John Lawrence, Minority Staff Director 

(III)

C O N T E N T S 

Page

Hearing held on March 11, 2004 ............................................................................ 1

Statement of Members: 

Boehner, Hon. John A., Chairman, Committee on Education and the 

Workforce ....................................................................................................... 2

Prepared statement of ............................................................................... 3

Miller, Hon. George, Ranking Member, Committee on Education and 

the Workforce ................................................................................................ 4

Statement of Witnesses: 

Bernstein, Dr. Jared, Senior Economist, Economic Policy Institute, Washington, DC ..................................................................................................... 43

Prepared statement of ............................................................................... 46

Castellani, John J., President, Business Roundtable, Washington, DC ...... 38

Prepared statement of ............................................................................... 40

Grady, Robert E., Managing Director, The Carlyle Group, on behalf of 

the National Venture Capital Association, San Francisco, CA ................. 55

Prepared statement of ............................................................................... 58

Greenspan, Hon. Alan, Chairman, Board of Governors of the Federal 

Reserve System ............................................................................................. 7

Prepared statement of ............................................................................... 10

Response to questions submitted for the record ..................................... 69

(1)

THE CHANGING NATURE OF THE ECONOMY: 

THE CRITICAL ROLES OF EDUCATION AND 

INNOVATION IN CREATING JOBS & 

OPPORTUNITY IN A KNOWLEDGE ECONOMY 

Thursday, March 11, 2004

U.S. House of Representatives 

Committee on Education and the Workforce 

Washington, DC 

The Committee met, pursuant to notice, at 10:01 a.m., in room 

2175, Rayburn House Office Building, Hon. John Boehner (Chairman of the Committee) presiding. 

Present: Representatives Boehner, Petri, McKeon, Castle, Ehlers, 

DeMint, Isakson, Biggert, Platts, Tiberi, Keller, Osborne, Wilson, 

Cole, Kline, Musgrave, Blackburn, Gingrey, Burns, Miller, Kildee, 

Owens, Payne, Andrews, Woolsey, McCarthy, Tierney, Kind, 

Kucinich, Wu, Holt, S. Davis, McCollum, Grijalva, Majette, Van 

Hollen, Ryan, and Bishop. 

Staff present: George Canty, Counselor to the Chairman; Kevin 

Frank, Professional Staff Member; Ed Gilroy, Director of Workforce 

Policy; Donald McIntosh, Staff Assistant; Greg Maurer, Coalitions 

Director for Workforce Policy; Stephanie Milburn, Professional 

Staff Member; Jim Paretti, Professional Staff Member; Alanna Porter, Executive Assistant; Molly Salmi, Deputy Director of Workforce Policy; Deborah L. Samantar, Committee Clerk/Intern Coordinator; Dave Schnittger, Communications Director; Kevin Smith, 

Senior Communications Counselor; Jo-Marie St. Martin, General 

Counsel; Linda Stevens, Chief Clerk/Assistant to the General 

Counsel; Loren Sweatt, Professional Staff Member; Ellynne 

Bannon, Minority Legislative Associate/Education; Jody Calemine, 

Minority Counsel, Employer-Employee Relations; Tylease Fitzgerald, Minority Staff Assistant; Margo Hennigan, Minority Legislative Assistant/Labor, Cheryl Johnson, Minority Counsel; Tom 

Kiley, Minority Press Secretary; John Lawrence, Minority Staff Director; Alex Nock, Minority Legislative Associate/Education; Peter 

Rutledge, Minority Senior Legislative Associate/Labor; Lynda 

Theil, Minority Legislative Associate/Education; Michele 

Varnhagen, Minority Labor Counsel/Coordinator; and Mark 

Zuckerman, Minority General Counsel. 

Chairman BOEHNER. The Full Committee for Education and the 

Workforce will come to order. 

2

We are meeting today to hear testimony on ‘‘The Changing Nature of Our Economy: The Critical Roles of Education and Innovation in Creating Jobs and Opportunity in a Knowledge Economy.’’ 

Under the Committee rules, opening statements are limited to the 

Chairman and Ranking Member. And so with that, I’d ask unanimous consent for the Members who have written statements and 

other extraneous material referenced during the hearing today to 

be submitted for the official record. Without objection, so ordered. 

STATEMENT OF HON. JOHN A. BOEHNER, CHAIRMAN, 

COMMITTEE ON EDUCATION AND THE WORKFORCE 

I want to thank all of you for coming today, and a special thanks 

to our distinguished witnesses for being here. As we look back, 

1999 was a good year for our economy. It grew that year at a 

healthy 4.5 percent clip. Unemployment was relatively low, and the 

major stock market indices were fairly close to where they are now. 

In comparison, we think of 2002 as being a tough year for our 

economy, driven in part by the terrorist attacks on New York and 

the Pentagon. Economic growth slipped. The stock market was 

lower, and unemployment was higher. We were in a recession. And 

yet in 1999, according to the nonpartisan Bureau of Labor Statistics, almost 33 million jobs in America were lost. 

In 2002, about 32 million jobs were lost. That’s right. In the good 

year of 1999, we lost almost a million jobs more than the bad year 

of 2002. The difference lies in the engine of real economic growth 

and worker prosperity: Job creation. What made 1999 a good year 

for workers and 2002 a challenging year wasn’t the number of jobs 

lost; it was the number of other jobs that were created. 

In 1999, our economy created approximately 35.6 million new 

jobs, about 2.7 million more than were lost, and about 5 million 

jobs more than were created in 2002. The difference between the 

good year of 1999 and the challenging year of 2002 wasn’t the number of jobs lost; it was the number and quality of the new jobs the 

economy created. 

The lesson from that, I think, is pretty clear. We have a dynamic 

economy. Job loss is not a new phenomenon, and we can’t rest until 

every American has the chance for a good quality job. Any time a 

worker loses his or her job, there’s real pain and loss. But Americans are resilient, and when we get knocked down, we dust ourselves off, get back up and look for new opportunities better than 

the old ones. I believe that’s where our emphasis needs to be—figuring out how to help the economy create new and better jobs and 

opportunities for American workers. 

To do that, we need to understand what drives growth in today’s 

economy. As many of you know, before I came to Congress, I built 

my own business. That wasn’t so long ago, but I believe that the 

economy has changed substantially since then. The Internet’s impact has been enormous and undeniable. Knowledge, education, 

and innovation play a far greater role in today’s dynamic and 

changing economy than in previous generations. And I believe they 

are key factors in America’s ability to generate sustained job 

growth and create promising new job opportunities that provide 

higher wages and raised standards of living for workers. The individual skills, imagination and commitment of workers are increasVerDate 0ct 09 2002 12:12 Oct 14, 2004 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 H:\DOCS\92479.TXT EDUWK PsN: NNIXON
3

ingly critical not just to their individual employers, but to our entire economy. 

All of this underscores one vital growth engine: Education. With 

an increasingly mobile workforce, it’s absolutely critical for workers 

to have the education and skills necessary to adapt to new opportunities and move into new, higher wage jobs. And only with educational excellence at all levels, from K-12 all the way through to 

retirement, will we be able to continue generating the ideas that 

create high wage, high opportunity products and industries in the 

future. 

In fact, we have a chart that highlights some important numbers 

from last week’s Labor Department jobs report. The chart highlights the fact that the more education that workers receive, the 

lower their rates of unemployment and the better chance they’ll 

have of getting a good job. As you can see, those who have had the 

least—have a college degree, have unemployment rates of lower 

than 3 percent. 

We’re here today to learn more about what drives job growth and 

opportunity in today’s economy so that we can best give our constituents what they expect and deserve, solutions that will allow 

our economy to continue creating better opportunities for American 

workers and their families. 

I support what the President and the Congress have thus far 

achieved, and I’m confident that because of those policies, we’ve 

turned the corner on the recession that began in 2000. But we need 

to think long term as well, and I believe that we need to ask ourselves this question: Given what we know and what we will learn 

about what drives job growth and opportunity in today’s economy, 

what can we do to put our economy on the strongest possible footing? 

This is an election year. We all know in election years there’s a 

temptation on both sides to point fingers instead of solving problems. And with due respect to all of my colleagues, I know my constituents are tired of a lot of finger-pointing. What they want is 

sound policy that will help them improve their lives and their families’ lives. And it might take some doing on both sides, but I hope 

we can keep them in mind despite our election year pressures. 

And with that, I look forward to hearing from our distinguished 

guests today. I now yield to my colleague and friend from California, Mr. Miller. 

[The prepared statement of Chairman Boehner follows:]

Statement of Hon. John A. Boehner, Chairman, Committee on Education 

and the Workforce 

Thank you all for coming and a special thanks to our distinguished witnesses for 

being here. As we look back, 1999 was a good year for our economy. It grew that 

year at a healthy 4.5 percent clip, unemployment was relatively low, and the major 

stock market indices were fairly close to where they are now. 

In comparison, we think of 2002 as being a tough year for our economy. Driven 

in part by the terrorist attacks on New York and the Pentagon, economic growth 

slipped, the stock market was lower, and unemployment was higher. We were in 

a recession. 

And yet in 1999, according to the bipartisan Bureau of Labor Statistics, almost 

33 million jobs were lost. In 2002, about 32 million jobs were lost. That’s right–in 

the good year of 1999 we lost almost a million jobs more than in the bad year of 

2002. The difference lies in the engine of real economic growth and worker prosperity, job creation. 

4

What made 1999 a good year for workers and 2002 a challenging year wasn’t the 

number of jobs lost–it was the number of other jobs that were created. In 1999 our 

economy created approximately 35.6 million new jobs, about 2.7 million more than 

were lost and 5 million jobs more than were created in 2002. The difference between 

the good year of 1999 and the challenging year of 2002 wasn’t the number of jobs 

lost–it was the number and quality of the new jobs the economy created. 

The lesson from that is clear. We have a dynamic economy. Job loss is not a new 

phenomenon. And we cannot rest until every American has a good job. Any time 

a worker loses his or her job, there is real pain and loss. 

But Americans are resilient; when we get knocked down, we dust ourselves off, 

get back up, and look for new opportunities better than the old ones. I believe that’s 

where our emphasis needs to be: figuring out how to help the economy create new 

and better jobs and opportunities for America’s workers. 

To do that, we need to understand what drives growth in today’s economy. As 

many of you know, before I came to Congress I built my own business. That wasn’t 

so long ago, but I believe that the economy has changed substantially since then. 

The Internet’s impact has been enormous and undeniable. Knowledge, education, 

and innovation play a far greater role in today’s dynamic and changing economy 

than in previous generations, and I believe they are key factors in America’s ability 

to generate sustained job growth and create promising new job opportunities that 

provide higher wages and raise standards of living for workers. The individual 

skills, imagination, and commitment of workers are increasingly critical not just to 

their individual employers, but to our entire economy. 

All of this underscores one vital growth engine—education. With an increasingly 

mobile workforce, it is absolutely critical for workers to have the education and 

skills necessary to adapt to new opportunities and move into higher-wage jobs. And 

only with educational excellence at all levels, from K–12 up to retirement, will we 

able to continue generating the ideas that create high-wage, high-opportunity products and industries in the future. 

In fact, we have a chart that highlights some important numbers from last week’s 

Labor Department’s jobs report. The chart highlights the fact that the more education that workers receive, the lower their rates of unemployment and the better 

chance they’ll have a good job. As you can see, those who have at least a college 

degree have unemployment rates of lower than three percent. 

We’re here today to learn more about what drives job growth and opportunity in 

today’s economy, so that we can best give our constituents what they expect and 

deserve–solutions that will allow our economy to continue creating better opportunities for American workers and their families. I support what the President and the 

Congress have thus far achieved, and I’m confident that because of those policies 

we’ve turned the corner on the recession that began in 2000. But we need to think 

long-term as well. I believe we need to ask ourselves this question: given what we 

know and will learn about what drives job growth and opportunity in today’s economy, what can we do to put our economy on the strongest possible footing? 

This is an election year, and we all know in election years there’s a temptation 

on both sides to point fingers instead of solving problems. With due respect to all 

my colleagues, I know my constituents are tired of finger-pointing. They want sound 

policy that will help them improve their lives and their families’ lives. It might take 

some doing on both sides, but I hope we can keep them in mind despite election 

year pressures. With that, I look forward to our hearing from our distinguished 

guests today. 

STATEMENT OF HON. GEORGE MILLER, RANKING MEMBER, 

COMMITTEE ON EDUCATION AND THE WORKFORCE 

Mr. MILLER. Thank you, Mr. Chairman, and thank you for convening this hearing. Chairman Greenspan, thank you for being 

here. I’ve waited a long time to hear this testimony on the importance of education and innovation in our economy. We have heard 

this from many for many years. Just recently I was reading a long 

interview by John Chambers of CISCO about the importance he 

felt that education would be to future job growth. Carli Forino from 

Hewlett-Packard was back testifying in the Senate a couple of 

weeks ago with the same message. Bill Hambreck was making this 

call a number of years ago in the previous administration. 

5

And I think we all understand that as we look in the globalized 

world, the need to have a better educated, a better trained workforce is absolutely paramount to our competitive position. But I 

also think that we have to clearly express concern about what is 

happening immediately today in our economy with 8 million Americans out of work, with 2 million of those workers unemployed almost 6 months or longer, with the exhaustion of the unemployment 

benefits, and with no help from Washington on the way. If the 

question of my colleague, Mr. Boehner, is whether or not people 

would prefer to live in 1999 as today, I think the question is a resounding yes. They would rather be in 1999, whether they were in 

the tech industry or they were working in America, because we 

were in fact creating a significant number of new jobs in the late 

’90’s. 

And yet at this point we see that some 2.3 million jobs have disappeared on this administration’s watch. If you take out the public 

sector job creation, you’re talking about 3 million jobs that have 

been lost, and we all know the devastating loss to manufacturing. 

And I think it’s important that we understand, if we want to 

back to 1999, as that was vibrant, we can go back some 70 years 

to find an administration that was unable to create jobs during its 

tenure in the White House. As the chart to the right show, Eisenhower created jobs, Roosevelt created jobs, Kennedy and Johnson, 

Nixon and Ford and Carter created jobs, Reagan and Bush Sr. created jobs, but this administration has been unable to do so. Maybe 

it’s more complicated than we all think, because the Secretary of 

Treasury says he’s absolutely mystified by the lack of the jobs. 

Maybe we need a new Treasury secretary. 

But the fact of the matter is, the fact of the matter is that America’s working people and families today are hurting. And the fact 

of the matter is, what we have seen is the decline in wages during 

this economic recovery. We’ve seen a jobless recovery now for some 

31, 32 months. There was speculation this morning on the financial 

stations of whether or not this economic recovery has run its 

course. I hope it hasn’t, because we need the jobs to show up in 

the future. 

But what stuns me most of all is the lack of urgency about this 

problem in this administration, and I would say in the Republican 

Congress. The fact of the matter is, when you see hundreds of 

thousands of people exhausting their benefits, and we don’t think 

about helping those families who are crashing to the ground, who 

are losing their homes, who are losing their families, actually, because of the economic stress in that situation. And yet we vote in 

the Congress, in the House and the Senate, to extend those benefits, but we can’t get a real bill to the floor to extend those benefits. 

The President says he will sign it if it comes to his desk, but he 

doesn’t demand that it comes to his desk. 

Where is his sense of urgency about these families that are in 

so much trouble? Where is his sense of urgency when he fails to 

fully fund vocational education? I know he’s creating a new fund 

to help the community colleges. We haven’t seen the program. We 

haven’t seen the money. We just know it was cut out of vocational 

education to create that program. 

6

We see the Manufacturing Extension Partnership, a program 

that has provided thousands of small firms and medium-sized firms 

with critical technical assistance and business support systems. 

That’s going to be slashed by 65 percent. These are the means by 

which we help small businesses generate the new jobs. These are 

the means by which we help families stabilize themselves until 

they can find that new job. And the fact of the matter is, many of 

them are so discouraged that they have left the workforce. 

That’s America today. That’s America today where 6 months 

after the President tells us that he’s going to appoint a manufacturing czar on Labor Day. He was going to create a new job, a manufacturing czar. It now turns out that that potential manufacturing 

czar is creating new jobs in China, not in the United States. He’s 

creating a new factory and 165 new jobs in China. I don’t think 

that that’s the response that the American people deserve. The 

American people are quite rightly concerned about this effort. 

I would also say that if we are going to make this investment in 

education, and I look forward to your remarks, that investment 

must be sustained, it must be real, and it must be comprehensive. 

Because when you read the economic journals on Asia, you will see 

that what is different now than when we started this process of 

some job transfers, when Motorola went early in the ’80’s, is what 

you now see is the building of institutions in China and India, 

seeking standards of excellence in their universities. The degrees 

are better now than they were before. The talents of those young 

people getting those degrees and technical training in engineering, 

in biotech, are vastly superior to what they were just a few years 

ago. 

That parallel infrastructure ought to suggest to America that 

simply resting on our laurels on education in this country will not 

be good enough. It’s very similar to when we all have said now see 

essentially a parallel manufacturing structure that technically is 

very good, major investment, state-of-the-art facilities that we 

thought we had the corner on for so long. And I think we’ve got 

to pay attention to that effort that is going on and understand 

what that signal is to those of us in Congress, to the American people of the kind of investment in applied research, the kind of investment in basic research, the kind of investment in education, 

whether it’s K through 16 or it’s lifelong learning, the continuous 

training and investment that must be made on behalf of these individuals. 

But what I don’t see is I don’t see any of that reflected in the 

budgets of this administration, and I don’t see any of that reflected 

in a sense of urgency that if we are going to leap to the new technologies, if we are going to go to the next generation of manufacturing, that we’re preparing an educated workforce to take part in 

that activity. 

And my concern is, is the remark made by one of the leaders in 

Silicon Valley, which said ‘‘today Silicon Valley is where you start 

a company. You grow it in China.’’ That’s a very, very serious problem if in fact that’s more than just an offhand remark. 

But we do see that, in fact, taking place in so many of our industries where people were led to believe they would have the good 

jobs; the bad jobs would be outsourced. The dirty, the heavy, the 

7

dangerous jobs would go to Third World economies. That has 

changed rather dramatically, and I suspect that we’re only at the 

beginning of that process, because so many of the technological 

changes that facilitate that have yet to be—have had their run yet 

in terms of the kinds of benefits that they can provide to companies 

in terms of managing worldwide manufacturing, worldwide sales 

and marketing and the financial transactions. 

So there’s a lot on our plate, Mr. Chairman, and I hope that your 

remarks will address the idea that this must be a sustained national commitment for a long time into the future if in fact we are 

going to be able to participate in that globalized economy on behalf 

of America’s workers and their families. 

Thank you. 

Chairman BOEHNER. It’s now my pleasure to introduce the 

Chairman of the Board of Governors of the Federal Reserve System, the Honorable Alan Greenspan. 

Dr. Greenspan is the Chairman of the Board of Governors of the 

Federal Reserve System. He’s held the Chairmanship since 1987, 

and most recently resumed the office in June 2000 for his fourth 

4-year term. He’s been nominated as Chairman by President 

Reagan, President Bush, President Clinton, and has been confirmed by overwhelmingly broad bipartisan majorities. 

Chairman Greenspan has served as a member of President Reagan’s Economic Policy Advisory Board, a member of Time Magazine’s Board of Economists, Senior Adviser to the Brookings Panel 

on Economic Activity, a consultant to the Congressional Budget Office, a Chairman of the Conference of Business Economists, President and Fellow of the National Association of Business Economists, a director of the National Economics Club, and Chairman of 

the Federal Open Market Committee. 

And on a personal note, we worked very closely together on the 

movement and the first House passage of financial services modernization in the summer of 1998. Without his help, we’d still be 

debating financial services modernization. 

So with that, Mr. Chairman, we’d love to hear your testimony. 

STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN, BOARD 

OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. GREENSPAN. Thank you very much, Mr. Chairman, Mr. Miller, and Members of the Committee. The United States economy 

has long been characterized by a strong tradition of entrepreneurial spirit among our businesspeople, a high level of skill among 

our workers, and an openness by firms and workers alike to intense competition within and beyond our borders. 

Those attributes have given us a standard of living unparalleled 

for so large a population, and one that has risen steadily over the 

history of our nation. But with that bounty has also come the inevitable stresses and anxieties that accompany economic advance. One 

concern that has persisted for some time is the fear that we are 

irreversibly losing manufacturing jobs because of businesses’ efforts 

to extract rapid gains and production efficiencies and to cut labor 

costs by tapping the lower wage economies of Asia and Latin America. 

8

More recently, similar concerns have arisen about the possibility 

that an increasing number of our better paying white collar jobs 

will be lost to outsourcing, especially to India and China. Many of 

these jobs are in the service sector, and they were previously perceived as secure and largely free from the international competition 

long faced in the manufacturing sector. There is a palpable unease 

that businesses and jobs are being drained from the United States 

with potential adverse long-run implications for employment and 

the standard of living of the average American. 

Job insecurity is understandably significant when nearly 2 million members of our workforce have been unemployed for more 

than 6 months. The issue is both important and sensitive, dealing 

as it does with the longer term wealth of our nation and with the 

immediate welfare of so many individuals and communities. 

In the debate that has ensued, a large gulf is often perceived between the arguments of economists who almost always point to the 

considerable benefits offered over the long term by exposure to free 

and open trade, and the obvious stress felt by those caught on the 

downside of turbulence created by that exposure. It is crucial that 

this gulf be bridged. 

As history clearly shows, our economy is best served by full and 

vigorous engagement in the global economy. Consequently, we need 

to increase our efforts to ensure that as many of our citizens as 

possible have the opportunity to capture the benefits that flow from 

that engagement. For reasons that I shall elucidate shortly, one 

critical element in creating that opportunity is it provide rigorous 

education and ongoing training to all members of our society. 

This proposal is not novel. It is in fact the strategy that we have 

followed successfully for most of the past century, and a strategy 

that we now should embrace with renewed commitment. 

Over the long sweep of American generations and waves of economic change, we simply have not experienced a net drain of jobs 

to advancing technology or to other nations. Since the end of World 

War II, for example, the unemployment rate in the United States 

has averaged less than 6 percent with no apparent trend. And as 

recently as 2000, it dipped below 4 percent. Moreover, incomes 

trended higher whether we had a trade deficit or a trade surplus, 

and whether international outsourcing was large or small. 

Clearly, fundamental economic forces have apparently been at 

work. Research on wealth creation in both emerging and developing nations strongly suggests that it is the knowledge and the 

skill of our population, interacting under our rule of law, that determine our real incomes, irrespective of the specific jobs in which 

these incomes are earned, and irrespective of the proportion of domestic consumption met by imports. 

These upward trends in the standard of living, however, mask 

the stress that significant parts of our workforce endure. Joseph 

Schumpeter, the renowned Harvard professor, called the process of 

progress ‘‘creative destruction,’’ the continuous scrapping of old 

technologies to make way for the new. Standards of living rise because the cashflows of industries employing older, increasingly obsolescent technologies are marshaled along with new savings to finance the production of capital assets that almost always embody 

cutting edge technologies. Workers migrate with the capital. This 

9

is the process by which wealth is created incremental step by incremental step. 

The process of creative destruction has been accompanied by an 

ever growing conceptualization of economic output. Ideas rather 

than materials or physical brawn have been by far the greatest 

contributors during the past half century to our average annual increase of 3.25 percent in real gross domestic product. Technological 

advance is continually altering the shape, nature and complexity of 

our economic processes. 

To effectively manage this ever increasing complexity, our labor 

force has had to become more and more technically oriented. Years 

of schooling, a rough proxy for skills, averaged 9.25 years in 1950. 

A half century later, schooling averaged more than 12 years. At the 

risk of some oversimplification, if the skill composition of a workforce meshed fully with the needs of our increasingly complex capital stock, wage-skill differentials would be stable and percentage 

changes in wage rates would be the same for all job grades. 

This was largely the case through the first quarter century after 

World War II. But for the past 20 years, the real incomes of skilled, 

especially highly skilled workers, have risen more than the average 

of all workers, whereas real wage increases for lesser skilled workers have been below average, indeed virtually nonexistent. 

This difference in wage trends suggests that at least in relative 

terms, we have developed a shortage of highly skilled workers and 

a surplus of lesser skilled workers. Although in recent years the 

proportion of our labor force made up of those with at least some 

college education has continued to grow. We appear nonetheless to 

be graduating too few skilled workers to address the apparent imbalance between the supply of such workers and the burgeoning demand for them. 

More broadly, in considering the issue of expanding our skilled 

workforce, some have a gnawing sense that our problems may be 

more than temporary, and that the roots of the problem may extend back through our education system. Many of our students languish at too low a level of skill, and the result is an apparent excess of supply relative to a declining demand. 

Our population today is also adjusting to an ever faster turnover 

of jobs. We are growing more aware that in the current intensely 

competitive economy, the pace of job creation and destruction implies the average worklife will span many jobs and even more than 

one profession. I do not doubt that the vast majority of us would 

prefer to work in a less stressful, less competitive environment. Yet 

in our roles as consumers, we seem to relentlessly seek the low 

product prices and high quality that are prominent features of our 

current frenetically competitive economic structure. Retailers who 

do not choose their suppliers, foreign or domestic, with price and 

quality uppermost in mind, risk losing their customers to retailers 

who do. 

In response to these strains and the dislocations they cause, a 

new round of protectionist steps is being proposed. These alleged 

cures would make matters worse rather than better. They would do 

little to create jobs, and if foreigners were to retaliate, we would 

surely lose jobs. Besides enhancing education, we need to further 

10

open markets here and abroad to allow our workers to compete effectively in the global marketplace. 

We do have a choice. We can erect walls to foreign trade and 

even discourage job displacing innovation. The pace of competition 

would surely slow, and tensions might appear to ease, but only for 

a short while. Our standard of living would soon begin to stagnate 

and perhaps even decline as a consequence. Time and again 

through our history, we have discovered that attempting merely to 

preserve the comfortable features of the present, rather than reaching for new levels of prosperity, is a sure path to stagnation. 

In closing, Mr. Chairman, I have emphasized the importance of 

redressing the apparent imbalances between the supply and demand for labor across the spectrum of skills. Those imbalances 

have the potential to hamper the adjustment flexibility of our economy overall. But these growing imbalances are also aggravating 

the inequality of incomes in this country. Historically, we have 

placed much greater emphasis on the need to provide equality of 

opportunity than on equality of outcomes. But equal opportunity 

requires equal access to knowledge. We cannot expect everyone to 

be equally skilled. But we need to pursue equal access to knowledge to ensure that our economic system works at maximum efficiency and is perceived as just in its distribution rewards. 

Thank you very much. I should very much like that my full remarks be included for the record, Mr. Chairman. 

[The prepared statement of Mr. Greenspan follows:]

Statement of Hon. Alan Greenspan, Chairman, Board of Governors of the 

Federal Reserve System, Washington, DC 

The United States economy has long been characterized by a strong tradition of 

entrepreneurial spirit among our business people, a high level of skill among our 

workers, and an openness by firms and workers alike to intense competition within 

and beyond our borders. Those attributes have given us a standard of living unparalleled for so large a population—and one that has risen steadily over the history 

of our nation. 

But with that bounty have also come the inevitable stresses and anxieties that 

accompany economic advance. One concern that has persisted for some time is the 

fear that we are irreversibly losing manufacturing jobs because of businesses’ efforts 

to extract rapid gains in production efficiencies and to cut labor costs by tapping 

the lower-wage economies of Asia and Latin America. 

More recently, similar concerns have arisen about the possibility that an increasing number of our better-paying white-collar jobs will be lost to outsourcing, especially to India and China. Many of these jobs are in the service sector, and they 

were previously perceived as secure and largely free from the international competition long faced in the manufacturing sector. There is a palpable unease that businesses and jobs are being drained from the United States, with potentially adverse 

long-run implications for employment and the standard of living of the average 

American. Job insecurity is understandably significant when nearly two million 

members of our workforce have been unemployed for more than six months. 

The issue is both important and sensitive, dealing as it does with the longer-term 

wealth of our nation and with the immediate welfare of so many individuals and 

communities. In the debate that has ensued, a large gulf is often perceived between 

the arguments of economists, who almost always point to the considerable benefits 

offered over the long term by exposure to free and open trade, and the obvious 

stress felt by those caught on the downside of turbulence created by that exposure. 

It is crucial that this gulf be bridged. 

As history clearly shows, our economy is best served by full and vigorous engagement in the global economy. Consequently, we need to increase our efforts to ensure 

that as many of our citizens as possible have the opportunity to capture the benefits 

that flow from that engagement. For reasons that I shall elucidate shortly, one critical element in creating that opportunity is the provision of rigorous education and 

ongoing training to all members of our society. This proposal is not novel; it is, in 

11

fact, the strategy that we have followed successfully for most of the past century 

and a strategy that we now should embrace with renewed commitment. 

Over the long sweep of American generations and waves of economic change, we 

simply have not experienced a net drain of jobs to advancing technology or to other 

nations. Since the end of World War II, for example, the unemployment rate in the 

United States has averaged less than 6 percent with no apparent trend; and as recently as 2000, it dipped below 4 percent. 

Moreover, real earnings of the average worker have continued to rise. Over the 

past century, per capita real income has risen at an average rate of more than 2 

percent per year, declining notably only during the Great Depression of the 1930s 

and immediately following World War II. Incomes trended higher whether we had 

a trade deficit or a trade surplus and whether international outsourcing was large 

or small. More fundamental economic forces have apparently been at work. Research on wealth creation in both emerging and developed nations strongly suggests 

that it is the knowledge and the skill of our population interacting under our rule 

of law that determine our real incomes, irrespective of the specific jobs in which 

these incomes are earned and irrespective of the proportion of domestic consumption 

met by imports. 

These upward trends in the standard of living, however, mask the stress that significant parts of our workforce endure. Joseph Schumpeter, the renowned Harvard 

professor, called the process of progress ‘‘creative destruction,’’ the continuous scrapping of old technologies to make way for the new. Standards of living rise because 

the cash flows of industries employing older, increasingly obsolescent, technologies 

are marshaled, along with new savings, to finance the production of capital assets 

that almost always embody cutting-edge technologies. Workers migrate with the 

capital. This is the process by which wealth is created, incremental step by incremental step. 

The process of creative destruction has been accompanied by an ever-growing 

conceptualization of economic output. Ideas rather than materials or physical brawn 

have been by far the greatest contributors during the past half-century to our average annual increase of 3–1/4 percent in real gross domestic product. 

Technological advance is continually altering the shape, nature, and complexity 

of our economic processes. To effectively manage this ever-increasing complexity, our 

labor force has had to become more and more technically oriented. Years of schooling, a rough proxy for skills, averaged nine and one-quarter years in 1950. A halfcentury later, schooling averaged more than twelve years. 

At the risk of some oversimplification, if the skill composition of our workforce 

meshed fully with the needs of our increasingly complex capital stock, wage-skill differentials would be stable, and percentage changes in wage rates would be the same 

for all job grades. This was largely the case through the 1960s when the addition 

of skilled college graduates to the labor force, in part the result of schooling financed 

by the GI Bill, was sufficient to hold wage increases among the highly skilled to 

average gains. Real wages of the lesser skilled also rose significantly, in part as a 

result of effective high-school educations and the many skills learned during the 

war. In the 1970s, the supply of skilled workers received another boost from the 

rapid expansion of our nation’s community colleges. In short, technical proficiencies 

across all job grade levels appeared to rise about in line with the needs of our, even 

then, complex stock of capital. 

But for the past twenty years the real incomes of skilled, especially highly skilled, 

workers have risen more than the average of all workers, whereas real wage rate 

increases for lesser-skilled workers have been below average, indeed virtually nonexistent. This difference in wage trends suggests that, at least in relative terms, we 

have developed a shortage of highly skilled workers and a surplus of lesser-skilled 

workers. 

Although in recent years the proportion of our labor force made up of those with 

at least some college education has continued to grow, we appear, nonetheless, to 

be graduating too few skilled workers to address the apparent imbalance between 

the supply of such workers and the burgeoning demand for them. Perhaps the accelerated pace of high-tech equipment installations associated with the large increases 

in productivity growth in recent years is generating unachievable demands for 

skilled graduates over the short run. If the apparent acceleration in the demand for 

skilled workers to staff our high-tech capital stock is temporary, as many presume, 

the pressure on our schools would ease as would the upward pressure on highskilled wages. 

More broadly, in considering the issue of expanding our skilled workforce, some 

have a gnawing sense that our problems may be more than temporary and that the 

roots of the problem may extend back through our education system. Many of our 

students languish at too low a level of skill, and the result is an apparent excess 

12

1The Third International Math and Science Study is a project of the International Study Center, Lynch School of Education, Boston College. A complete set of TIMSS publications is available on the center’s web site, http://timss.bc.edu/timss1995i/TIMSSPublications.html. 

of supply relative to a declining demand. These changing balances are most evident 

in the failure of real wages at the lower end of our income distribution to rise during 

the past quarter-century. 

The hypothesis that we should be able to improve upon the knowledge that our 

students acquire as they move from kindergarten to twelfth grade gains some support from international comparisons. A study conducted in 1995 revealed that, although our fourth-grade students were above average in both math and science, by 

the time they reached their last year of high school they had fallen well below the 

international average.1 Accordingly, we apparently have quite a distance to go before we catch up. 

Early last century, technological advance required workers with a higher level of 

cognitive skills—for instance the ability to read manuals, to interpret blueprints, or 

to understand formulas. Youth were pulled from rural areas, where opportunities 

were limited, into more-productive occupations in business and an advancing manufacturing sector. Our educational system responded: In the 1920s and 1930s, highschool enrollment in this country expanded rapidly. It became the job of these institutions to prepare students for work life. In the context of the demands of the economy at that time, a high-school diploma represented the training needed to be successful in most aspects of American enterprise. The economic returns for having a 

high-school diploma rose and, as a result, high-school enrollment rates climbed. 

By the time that the United States entered World War II, the median level of education for a seventeen-year-old was a high-school diploma—an accomplishment that 

set us apart from other countries. I cannot dismiss the notion that we can learn 

something from that period and perhaps from other countries. Still, I realize that 

the world was different from today in many ways. Societal changes have been numerous and profound, and our schools are being asked to do a great deal more than 

they have in the past. We need to be forward-looking in order to adapt our educational system to the evolving needs of the economy and the realities of our changing society. 

One area in which educational investments appear to have paid off is our community colleges. These two-year institutions are playing a similar role in preparing our 

students for work life as did our early twentieth-century high schools in that less 

technically oriented era. But to an even greater extent, our population today is adjusting to an ever-faster turnover of jobs. We are also growing more aware that in 

the current intensely competitive economy, the pace of job creation and destruction 

implies that the average work life will span many jobs and even more than one profession. 

The desire of workers to learn skills that build on their previous work experiences 

or to acquire new skills is apparent. Currently almost one in three of the enrollees 

in community colleges and almost one of two part-time enrollees at four-year undergraduate schools are aged thirty or older, statistics that suggest that these individuals have had previous job experience. The increase in these enrollments over the 

past thirty years attests to the success of these institutions in imparting both general and practical job-related training. A rising proportion of the population is also 

taking advantage of work-related instruction. 

More broadly, our system of higher education bears an important responsibility 

for ensuring that our workforce is prepared for the demands of economic change. 

America’s reputation as the world’s leader in higher education is grounded in the 

ability of these versatile institutions to serve the practical needs of the economy by 

teaching and training and, more significantly, by unleashing the creative thinking 

that moves our economy forward. 

* * *

I do not doubt that the vast majority of us would prefer to work in a less stressful, 

less competitive environment. Yet, in our roles as consumers, we seem to relentlessly seek the low product prices and high quality that are prominent features of 

our current frenetically competitive economic structure. Retailers who do not choose 

their suppliers, foreign or domestic, with price and quality uppermost in mind, risk 

losing their customers to retailers who do. Retailers are afforded little leeway in 

product sourcing. If consumers are stern taskmasters of their marketplace, business 

purchasers of capital equipment and production materials inputs have taken the 

competitive paradigm a step further and applied it on a global scale. 

13

Those who have lost jobs as a consequence of this process, I know, are not readily 

consoled by the fact that job insecurity concerns are not new. But keeping the current period in context is instructive. Jobs in the United States were perceived as 

migrating to low-wage Japan in the 1950s and 1960s, to low-wage Mexico in the 

1990s, and most recently to low-wage China. Japan, of course, is no longer characterized by a low-wage workforce, and many in Mexico are now complaining of job 

losses to low-wage China. 

In response to these strains and the dislocations they cause, a new round of protectionist steps is being proposed. These alleged cures would make matters worse 

rather than better. They would do little to create jobs; and if foreigners were to retaliate, we would surely lose jobs. Besides enhancing education, we need to further 

open markets here and abroad to allow our workers to compete effectively in the 

global marketplace. 

* * *

As our economy exhibits increasing signals of recovery, job loss continues to diminish. But new job creation is lagging badly—the ironic consequence of accelerated 

gains in productivity. In all likelihood, employment will begin to increase more 

quickly before long as output continues to expand. We have reason to be confident 

that new jobs will displace old ones as they always have, but America’s job-turnover 

process will never be without pain for those caught on the downside of creative destruction. 

We do have a choice. We can erect walls to foreign trade and even discourage jobdisplacing innovation. The pace of competition would surely slow, and tensions 

might appear to ease. But only for a short while. Our standard of living would soon 

begin to stagnate and perhaps even decline as a consequence. Time and again 

through our history, we have discovered that attempting merely to preserve the 

comfortable features of the present, rather than reaching for new levels of prosperity, is a sure path to stagnation. 

In closing, I have emphasized the importance of redressing the apparent imbalances between the supply and demand for labor across the spectrum of skills. Those 

imbalances have the potential to hamper the adjustment flexibility of our economy 

overall. But these growing imbalances are also aggravating the inequality of incomes in this country. 

Historically, we have placed much greater emphasis on the need to provide equality of opportunity than on equality of outcomes. But equal opportunity requires 

equal access to knowledge. We cannot expect everyone to be equally skilled. But we 

need to pursue equal access to knowledge to ensure that our economic system works 

at maximum efficiency and is perceived as just in its distribution of rewards. 

Chairman BOEHNER. We will include all of your remarks, and, 

Chairman Greenspan, we appreciate your coming before our Committee today. 

You clearly believe that we need to strengthen the educational 

system in this country to ensure that workers can capitalize on today’s and tomorrow’s opportunities, whether it’s K-12 education to 

higher education, worker training, lifelong learning. And worker 

training and retraining programs offer short-term solutions for 

some of our fellow citizens, but could you talk specifically about the 

importance of kindergarten through 12th grade education, our expectations as a nation for our students and the need for high standards? 

Mr. GREENSPAN. Mr. Chairman, I think that we find in the various different studies, as I’m sure you are aware, that our forth 

grade students are above average internationally in both math and 

science. And somewhere beyond that, something happens which 

brings them by 12th grade apparently to fairly significantly below 

the average. 

Fortunately, we have world class colleges and universities generally, and the students which do manage to work their way 

through the primary and secondary education system into college 

14

tend to do reasonably well in this country and indeed are a major 

force in the staffing of our very complex technological capital stock 

and economic structure. 

But we clearly are not doing enough in the way of moving students through at a faster level of skill accretion, because as I point 

out in my prepared remarks, it clearly is reflected in these very 

dramatic changes in the so-called college/high school skill spreads, 

which have opened up quite materially, and in the obvious arithmetical implication of a significant concentration of income in this 

country. And I’ve always argued that it is very important for a 

democratic society to have full opportunity and fuller capability of 

people to move up throughout the whole structure of the society, 

and that means that we must enhance the capability of our primary and secondary education. 

Chairman BOEHNER. Mr. Chairman, there seem to be two trends 

in the world that I’d like to ask you to comment on. On one hand, 

there are many economically developed nations which are seeing 

their economic position erode and are responding by trying to stop 

that erosion. France, for example, tried to reduce unemployment by 

reducing the maximum number of hours a worker could work, and 

unemployment in France is over 10 percent. Germany tries to protect the wages of workers with generous unemployment insurance, 

and the result is that only very highly skilled workers can find 

work. Japan tried to protect industries, and that government—trying to protect them was very important to them, and as a result, 

entrepreneurs couldn’t get the funds or skilled workers they needed, and Japan has shown practically no growth over the last decade. 

Now the other trend is coming from trading partners like Australia and developing nations like India and China. They seem to 

embrace capitalism, innovation, and education. And it may not be 

absolute, but the trend seems to be unmistakable. And by and 

large, these countries are doing better and seem to be building a 

better future for their citizens. So which way is best for our country? Are we better off trying to defend what we’ve got, or build for 

the future? 

Mr. GREENSPAN. Well, Mr. Chairman, I think that while you correctly describe the more recent history of Europe, the very current 

history of Europe is changing, and it’s changing in the direction to 

which you are suggesting we ought to be moving. 

The work week in France, which was expected to have some considerable difficulty in maintaining a flexible labor market, is being 

recognized as such, and I think that there are actions being taken 

with respect to labor market reform in France which goes in the 

direction in which you were pointing. Obviously similar such events 

are occurring in Germany and is a major problem in that country 

to enhance the flexibility of their labor markets. 

There was a great debate implicitly, oh, through a goodly part of 

the post-World War II period, about the nature of the flexibility of 

labor markets. We, as you know, have taken the position that they 

should be quite flexible, and indeed we very specifically have created a system in which it is relatively easy for an employer to discharge an employee. That of course is not the case in a number of 

other countries in the world. 

15

There was an interesting question as to whether or not that 

would create more unemployment in the United States or less. We 

did not know. Except what we found is that in the event the unemployment rate went down, and the reason it went down is that because employers, perceiving that in the event they make a mistake 

in hiring somebody, can remedy that mistake readily, easily, and 

therefore were far more willing to hire people, take the risk of hiring people. And what we saw is a fairly significant expansion in 

employment, as Mr. Miller pointed out earlier, throughout the ’90’s 

when this issue became paramount. 

I do believe that as far as the economic evaluation of what type 

of labor market one should want, I think there is an increasing 

awareness that flexibility, more of our type, is the way to go. And 

I do believe that we will see that Europe and Japan will be moving 

in that direction within the next years—over the next years. 

Chairman BOEHNER. Mr. Miller. 

Mr. MILLER. Thank you. Mr. Chairman, thank you for your testimony. In my opening remarks I obviously recounted the number of 

Americans that are out of work, the number, some 2 million, that 

have been unemployed 6 months or longer, and the number of people who apparently have stopped looking for work, have dropped 

out of the labor force. And I would just like to ask you whether you 

support or you don’t support a temporary extension of unemployment benefits to these families that apparently cannot find work. 

It’s not that they’re not looking. 

Mr. GREENSPAN. Mr. Miller, I think our unemployment insurance 

system is very well structured, and I think that it’s worked in the 

way that I think we wanted it to work. And remember, the crucial 

issue here is that we do not wish to encourage people who can find 

a job not to do so. Therefore, we have limited the amount of unemployment insurance. 

However, when unemployment is created through no fault of the 

workers’ actions, then I think it is clearly to our advantage to find 

ways of creating support in our system. And as a consequence, in 

times like this, I have supported the issue of extension of unemployment insurance. And while I am fairly well convinced that employment is about to pick up or to be more explicit, new hires are 

going to be picking up reasonably quickly if this economic growth 

rate continues, I think that considering the possibility of extending 

unemployment insurance is not a bad idea. 

Mr. MILLER. Thank you. The issue of outsourcing for a moment. 

We’re not going to settle it here today. But when we first started 

this discussion when we were dealing with the China Free Trade 

Act in relation to China’s entry into the WTO, obviously there were 

many, many American corporations and American brands that 

wanted to establish themselves in China. And early, Proctor & 

Gamble went early, Motorola went early, Ford went early. And the 

idea was that they could sell a billion Chinese cell phones or 

pagers. In the early days, they just made pagers. They didn’t make 

cell phones. Or they could sell them personal care products, and 

that was the market. 

When you look at it today over the last couple of years, what you 

really see now is world class manufacturers of Japan, Taiwan, the 

United States, who are moving to establish platforms for this imVerDate 0ct 09 2002 12:12 Oct 14, 2004 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6602 H:\DOCS\92479.TXT EDUWK PsN: NNIXON
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proving market in China, but also clearly for export, which I think 

is a change of intent in many instances from what people were 

thinking in the ’80’s and the ’90’s. And so people who lead their 

sector of the economy in terms of efficiencies and product and quality have now made a decision that they have got to go there to 

have an edge to export to the United States or to the rest of the 

world. 

And you used argue in economic recoveries who was first in and 

who was last out, or first in and last out, whether it was housing 

or construction or that sort of thing. In the service economy, it appears that if you start selling more Dell computers or more Apple 

computers, maybe the first out of the recovery would be the people 

who then have to service those computers, the call centers that we 

now see that so many manufacturers rely on for the service of their 

products to their customers. 

And what we see now is that those jobs that probably in an economic recovery may well have been created in rural America where 

call centers were located in so many regions of the country, it now 

appears as that demand is picking up that many of those jobs in 

fact are being closed down, as the Wall Street Journal talked about 

what took place in a call center in the south, and USA Today was 

recounting another closure of a call center in the southwest. And 

those jobs that would have, at this point in the economic recovery 

would have happened in the United States, appear to have happened there. 

And I just wonder, what’s the impact of that and how deep into 

the recovery do we expect that to go? Does that happen to, if you 

have manufacturers who are increasing their capability in China to 

export, can we expect the job creation that you would have seen in 

that level—at that stage of manufacturing in the United States 

being transferred offshore? 

That’s part of the economic cycle I think, and I’m not a big one 

of saying you can just erect a barrier and say you can’t do that. 

But I’m just asking, what are our expectations in terms of why this 

has been such a long jobless recovery compared to others? That’s 

a long question, but I know there’s a short answer there. 

Mr. GREENSPAN. I don’t know how to give a short answer. 

[Laughter.] 

Mr. MILLER. That’s what I heard. I don’t know. This is the first 

time I’ve asked you a question. But I can tell you, when you raise 

your hand, those cameras go off. It’s incredible. 

[Laughter.] 

Mr. GREENSPAN. Congressman, I think what you’re describing is 

a process which has been going on for a very long period of time. 

It’s what we call globalization. Globalization basically is the gradual obliteration of national boundaries so far as economic exchange 

occurs. And in this country we saw it in the latter part of the 19th 

century as we moved across state borders, first even county borders. And it’s a continuous, irreversible process. And what we are 

largely beginning to see in the most recent period is the consequences of that as technology enables people and ideas to move 

at a very much more rapid pace. 

And so what we are indeed seeing is exactly what you explained, 

which is a process of trade among nations increasing fairly draVerDate 0ct 09 2002 12:12 Oct 14, 2004 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6602 H:\DOCS\92479.TXT EDUWK PsN: NNIXON
17

matically. I mean, for example, just on imports and exports, the 

ratio of trade to world GDP has been growing inexorably, which 

means effectively that there’s ever increasing exchange between 

countries. And I think that is now becoming even more sophisticated getting into certain service areas such as international 

outsourcing, which we hadn’t seen before, especially by satellite obviously. 

This is a normal process in which the division of labor inexorably 

expands, which creates ever rising standards of living everywhere. 

It is not a zero sum game. And from all of the evidence that I can 

perceive, we in the United States have been the greatest beneficiaries of this process. 

And as a consequence, I think it’s important for us to recognize 

that what is causing our economic prosperity despite all of this 

globalization and churning, despite the fact that we have a very 

turbulent, highly competitive, indeed I call it frenetic is the best 

way to capture it, which causes great turmoil amongst businesses 

and amongst people who are working in businesses, the net result 

has been a very significant increase in standards of living. 

I don’t think we have a choice to go back. In other words, you 

cannot turn ideas around. We cannot forget that silicon is an incredibly important mineral far beyond what we used to think it 

was 50 years ago. And I think, as best I can judge, what makes 

us special in the United States, why even though our educational 

system is falling short of clearly some of East Asian educational 

systems, is we have a political system with a Bill of Rights, and 

rights which are not really existent or enforced anywhere else in 

the world. I often say that the reason for the prosperity in the 

United States is largely our Constitution and our Founding Fathers 

who had the great insights to understand the importance of individual rights, property rights, and an extension of that, the law of 

contracts. 

People want to invest in the United States because they know 

their rights are protected. There’s a great deal of concern about investing in China, even Japan, at least—because we’re not clear on 

what their laws are or any other place. 

I would therefore say that if we can maintain a fairly strong educational system which enables our people to staff this ever more 

complex, very difficult structure, I think we will continue to maintain ever rising standards of living at unemployment rates which 

are low and hopefully lower as this technology improves. 

I think that what we are finding is a number of the laws in foreign countries which impede our movement and impede theirs are 

beginning to come down, and I think in many respects, they look 

to our legal structure as a model to work with, and I think that’s 

to everybody’s benefit. 

Chairman BOEHNER. Mr. Petri. 

Mr. PETRI. Thank you. Chairman Greenspan, I know we ought 

to be concern about deficit spending, and it’s a serious problem, but 

I tend to think that some spending is simply spending and other 

spending is investment. For the sake of our economy and all the 

good things that come from having a strong economy, we need to 

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essary to get supplies to factories, goods to market and workers to 

their jobs. 

We obviously need to fight waste, fraud and abuse everywhere, 

but some kinds of spending are pro-growth rather than a drag on 

the economy even when we do have deficits. I’d like to hear your 

comments on that. 

Mr. GREENSPAN. Well, what specifically would you like me to 

comment on first? That’s a pretty broad subject. 

Mr. PETRI. Well, it obviously is a broad subject. What I’m curious 

to know is whether we should cut back on education and infrastructure investment in order to improve the deficit numbers, or 

whether we should go ahead and invest prudently but maintain 

and even increase investment in infrastructure and education in 

order to get a return from it for the economy which will help us 

reduce the deficit long term. 

Mr. GREENSPAN. We have basically, in my judgment, overcommitted in this country for the longer term. In other words, as 

I’ve said elsewhere, I believe that we have made commitments 

which I think we’re going to have considerable difficulty actually 

delivering on. And it’s essentially a problem which happens to us 

periodically, and we have many such claims on limited resources 

of which education is one, and it is a critical one. 

I think we are fortunate in certain respects in that the private 

sector is picking up a very considerable part of the educational system, the re-education system. I mean, for example, there’s been a 

major increase in what we call corporate universities, where there’s 

a very substantial amount of learning that’s going on within businesses. And the community colleges are rising at a fairly rapid 

rate. Remember, of course, that the vast majority of education 

spending in this country is state and local, and that a limited part, 

I believe less than 10 percent, is Federal. 

I do think that we have to find ways of employing our resources 

as best we can but there is no question that a crucial element in 

any budgetary policy is the aggregate GDP of the United States, 

or put another way, the revenue base from which all other expenditures essentially are financed. If education is a critical issue in creating economic growth, as I hope I tried to demonstrate in my prepared remarks, then clearly that is a major economic policy question. And while I’m not going to presume that I have great insights 

in how you allocate very large numbers of very important programs 

to a limited budget, I would say that I think education in one sense 

is probably more important than infrastructure if I were to have 

to choose between the two. I trust that that does not occur. 

But this is an increasingly idea-related economy, and there is 

less physical things involved in the value added that we are involved with. So I would put education at the top. 

Mr. PETRI. Are there any techniques to maximize productive investment, rather than just throwing money? I mean, we were arguing here in the education area that we were measuring our commitment to education by how much money we were spending rather than by the results of that spending, and we’re trying to switch 

that some. But is there anything that you’d like to highlight in that 

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ment. We need to figure out some way of figuring out whether 

we’re investing wisely or just throwing money at problems. 

Mr. GREENSPAN. I agree that measuring the input, which is putting the money in, is not a necessarily accurate measure of the output. I don’t know enough about how to test various different outcomes in the education system. I do know that it is important that 

we do that, because we are falling behind by any measure in our 

secondary schools. And I should think that we can rest on our legal 

infrastructure for just so much to create our ability to stay in the 

forefront of technology. But I can’t see how we can move forward 

in this economy without having the right people run this very complex economy, which is getting ever more complex every year, 

which means that our student body has got to get ever more skilled 

every year. In other words, it’s not a question of bringing the skills 

up to a specific level. We have to increase them every year or we 

will fall behind. 

Chairman BOEHNER. The Chair recognizes the gentleman from 

New Jersey, Mr. Andrews. 

Mr. ANDREWS. Thank you, Mr. Chairman. Good morning, Mr. 

Chairman, and we thank you for your testimony. This morning you 

have given us two, I think, clearly accurate statements, and you’ve 

given us a difficult reconciliation problem. A minute ago, you said 

that we’ve over-committed to longer-term obligations, and there are 

many claims on limited resources. I think you’re absolutely right, 

that we are in grave fiscal distress for the long term in the country. 

You’ve then said that one of the—the highest priorities to sustain 

economic growth is increasing the skills of our workforce on a continuous basis, which I think is commendable, and admirable, and 

I agree with you. 

I’d like your counsel on reconciling the conflict. Conflict flows 

from this point. Although you are correct that there is a lot of private-sector investment in higher education—the corporate universities, online learning and so forth—it’s also correct that students 

have to pay tuition, whether they’re a laid-off auto worker or a person looking to get a promotion in her job, students ultimately have 

to pay the tuition. And the cost of this tuition is high and rising. 

Rising faster than the rate of inflation. 

Federal financial aid, therefore, is indispensable to the problem 

of getting more people more access to higher education. Let me ask 

for your advice with this set of facts. If we were to double the Pell 

Grant program over the next 5 years, it would cost us on a 5-year 

basis between $65 billion and $70 billion. Above and beyond the 

money we’re spending on Pell Grants right now. 

And if we were to expand the eligibility for, or use some other combination costs about $70 billion. The tax cut that is already law 

from 2006 to 2011, with respect to the top 1 percent of taxpayers 

in the country, will deprive the Treasury of $665 billion of revenue. 

So one of the policy choices that we would have would be to reduce the tax cut for the top 1 percent by about 10 percent. That 

is to say that we’d give the top 1 percent 90 percent of the tax cut 

that they’re getting, and take away about 10 percent. That would 

finance a doubling of Pell Grants over the next 5 years. I would ask 

for your counsel on whether you think that’s a good idea. If you 

think that it’s not a good idea, that we should leave the tax cuts 

20

fully in place and not double the Pell Program, or if there’s a third 

option that I’m missing. And if there is a third option, if you could 

identify it for us. 

Mr. GREENSPAN. You’re merely putting options out there of 

which there can be 50 others very similarly phrased. I am, as I’ve 

stated previously, supportive of keeping the tax base as low as we 

can keep it, on the grounds that we need a very vibrant economy 

in the future to create a revenue base, which a great number of 

these particular outlays—from which these outlays can be met. I 

am concerned that if we start to try to raise tax rates to solve what 

is a very difficult problem with respect to what’s in the budgets, 

we raise to an ever increasing extent a problem that the tax rates 

will become increasingly less productive of revenue. And indeed, 

that’s one of the reasons why I argued, and have been arguing recently, that before we try to fill in the fairly large hole that is going 

to exist out past 2010 from revenues, that we look to what can be 

done— 

Mr. ANDREWS. Mr. Chairman, if I may. Do you think that a 

change as marginal as the one I’ve suggested would have that 

much of a deleterious effect on revenue? I’m suggesting that we 

leave in place 100 percent of the tax cuts for the top 99 percent, 

and 90 percent of the tax cuts for the top 1 percent, in order to finance a doubling of the Pell Grant program. Do you think it would 

have that kind of huge impact on economic growth? 

Mr. GREENSPAN. Well, the reason it’s difficult for me to answer 

is that if you take the particular proposal on Pell Grants, and then 

add 20 others, you all of a sudden find out that in each individual 

case, it’s de minimis. When you add them all up, it becomes a bigger issue. 

Mr. ANDREWS. But you just said education was at the top of the 

list, so if you limit it to that, would you favor that? 

Mr. GREENSPAN. I personally would consider that as important. 

But— 

Mr. ANDREWS. Welcome to the club. We appreciate that. 

Mr. GREENSPAN. —this is an issue which the Congress has got 

to judge. I mean, I don’t have a vote, you do. And— 

Mr. ANDREWS. You have a pretty important vote, too, though, I 

think. 

Mr. GREENSPAN. All I’m suggesting is—and I’ve argued this, and 

I think it’s important—is, prior to even discussing such an issue, 

we ought to get Pay-go back in and discretionary caps, because I— 

Mr. ANDREWS. Amen. Amen. I hope the Republican budget resolution does that. My understanding is that the draft resolution does 

not that’s being considered by the Budget Committee today. 

Mr. GREENSPAN. I think that—I’ve argued since September of 

2000, when it looked as though they were not going to renew Paygo, that not renewing it was a bad mistake. I still believe that, and 

I do not know how one can grapple with the problem that you’re 

showing in microcosm, without having a structure which enables 

choices to be made in a— 

Mr. ANDREWS. Mr. Chairman, we’d like to take you down the hall 

to the Budget Committee and have you give them that advice before they vote on the budget resolution today. Thank you very 

much. 

21

Mr. MCKEON. Chairman Greenspan, thank you for being here 

today, and thank you for your testimony. As you notice, everybody’s 

listening very carefully to the things you have to say. I reviewed 

a study this morning that showed how important the American 

people see education as a life-long basis of our economic stability. 

But skyrocketing tuition rates are making it harder and harder for 

middle and lower income students to pursue the dream of a higher 

education. This is clearly a problem that Congress must address in 

some fashion this year, as we re-authorize the Higher Education 

Act. 

Some believe the answer is increasing mandatory Federal spending on student aid programs by billions of dollars. Some feel that 

we’re at about the correct level right now, but that we should make 

college costs and quality more transparent to give higher education 

consumers—the parents, the students—more information so that 

they can make better decisions in the higher education market 

place. 

In nearly every other sector of the economy, the more transparency and useful information consumers get, the better decisions 

they make, and the more effective market forces are in improving 

quality. Do you think transparency and market forces could have 

the same effect on higher education institutions? 

Mr. GREENSPAN. That’s an interesting question, Congressman. 

Frankly, I haven’t given it terribly much thought, but I must say 

I’m inclined to find your argument somewhat persuasive. 

Mr. MCKEON. Let me ask one other question. And that is, you 

testified recently in the House Budget Committee. I believe you 

made the comment that variable rates have been good for the 

American consumers. Probably with regard to home purchases, and 

the things that—the way the interest rates have gone down the 

last few years. One of the things we’re considering in the re-authorization of the Higher Education Act is variable rates in re-payment 

of student loans. Would that, do you feel, also be of benefit to the 

students? 

Mr. GREENSPAN. Well, Congressman, I think that the notion that 

I was in favor of adjustable-rate mortgages rather than the 30-year 

mortgage was the result of my speaking imprecisely. And actually, 

it was a speech. It wasn’t at a Committee hearing. So, I think that 

adjustable-rate mortgages were a valuable addition, but the 30-

year mortgage has been a crucially important issue in this country, 

which has enhanced home building. 

To what extent do you have choice within student loans, or any 

other form of loan, I think is important. In other words, if there 

was a demand for a certain type of tradeoff between maturity interest rate and the payment schedule, I’d let the market determine 

what basically is the right type of structure for that. 

Mr. MCKEON. Clearly, the ability of our educational system to 

educate significant numbers of scientists and engineers, which 

you’ve addressed, will be critical to our overall ability not just to 

compete in today’s high-tech economy, but to be innovative and create the industries of tomorrow. But our institutions are falling behind in this regard. A 2002 survey found that U.S. higher educational institutions only graduated one-sixth the number of graduates with science and engineering degrees as those in Asia. And 

22

even though we’re about to see an overwhelming increase in college-age students, our traditional higher educational institutions 

are not prepared to handle these increased enrollments. 

Given the nature of the problem, how important is it that we use 

other means and other educational innovations, such as distance 

learning and reducing the restrictions on for-profit institutions, to 

provide these students the education that they’ll need to compete 

in the knowledge-driven economy of the future? 

Mr. GREENSPAN. Congressman, I think that it’s important that 

we flatten out the currently still gradually rising spread between 

college and advanced degree workers, if I may put it in those 

terms, and those with only a high school diploma. The only way to 

do that is to increase the supply, and any means that we have to 

increase the supply of highly skilled workers is to our advantage 

on two fronts. One, it obviously enables our economy to function far 

more efficiently. But it also brings down those premiums, which as 

I mentioned in my prepared remarks, are a significant factor in the 

concentration of income in this country. 

So, I think that anything that we can do that either moves the 

skill levels from fourth grade through high school at a more effective pace, or find other ways to augment our learning ability 

through community colleges, through corporate universities, or 

even, as you say, Internet learning—anything that we can do to enhance the skill level of the American work force is crucial to our 

long-term development and the stability of our society. 

Mr. MCKEON. Thank you very much. Mr. Kucinich. 

Mr. KUCINICH. Thank you very much, Mr. Chairman. Mr. Chairman, any discussion of workers in a new economy should include 

a systems approach. And as Mr. Boehner’s question to Chairman 

Greenspan and his response regarding moving students into the 

system clearly demonstrate, I’m going to focus my questions here 

on those who pass from the new economy work force to retirement. 

Now, Chairman Greenspan, you testified before the Budget Committee that Congress should consider raising the age of retirement 

for full Social Security benefits. In 1982, you chaired the commission that also recommended raising the age of retirement. Congress 

did as you suggested back then, so there is reason for concern that 

Congress might be persuaded to listen to you now. 

You recently justified raising the age of retirement from 67 to 

something higher by citing a rise in life expectancy. You proposed 

that there ought to be an adjustment, and this is a quote, ‘‘So that 

this ratio,’’ and you were talking about life expectancy to the number of years the typical worker will receive Social Security, ‘‘stabilizes.’’ But I would suggest this is not as fair as it would seem. 

Though the average life expectancy is indeed rising, the age at 

which American workers choose retirement is not rising. 

As you surely know, about half of all people reaching 62 retire 

the month of, or month after their 62nd birthday. Nearly two 

thirds are retired by their 63rd birthday. They pay a price for retiring at 62. When people take early retirement, their monthly benefits are decreased to take account of the longer period of retirement 

over which they will receive benefits. 

For example, for people who retire at age 62, their full retirement benefit age is 67, and their monthly benefits will be reduced 

23

by 30 percent. So the super majority of American workers choose 

to retire early, even though it means a reduction in their monthly 

benefits. Now, why do people do it? Well, the reasons are probably 

that people’s bodies are worn out. Their backs and their joints and 

their muscles. They’re not able to keep working, though advances 

in medical technology could keep them alive longer. 

The key point, Mr. Greenspan, is that life expectancy does not 

reflect work life expectancy. In America today, the real retirement 

age is 62. Therefore, the real meaning of raising Social Security full 

retirement age is that it increases the magnitude of the reduction 

in Social Security benefits most Americans can expect to receive 

when they retire. Now, you now propose raising their Social Security retirement age further. Raising the retirement age to 70 will 

decrease the monthly benefits of a super majority of retirees by 40 

percent. 

I find nothing in the record to suggest that concern has been 

shown about the predictable effect of removing full benefits further 

and further away from a population that is not working longer, no 

matter that they’re living longer. And the predictable effects, if I 

could say—our senior citizens are not going to be able to pay their 

mortgages or taxes on their house, or to pay rent, or to pay medical 

expenses, or pay food bills, clothing bills. And such a plan is cruel. 

Now, Chairman Greenspan, what do you say to the majority of 

Americans who retire when they’re 62 years of age, whose monthly 

Social Security benefit will be further reduced if Congress is persuaded to raise again the full retirement age, as you suggest? Do 

you say to them ‘‘You should be working, not claiming retirement?’’ 

Do you say ‘‘Since you choose to retire, you have voluntarily accepted lower income, and therefore should accept that you will have to 

make due with less? Split your pills even further, forego meals, or 

any of the other essentials of modern living?’’ 

Do you say ‘‘You should have saved more when you were working, even though real wages have been stagnant, so people are borrowing, not saving, and the quarterly consumer debt is at a record 

high?’’ Do you say ‘‘Increasing the income of the wealthiest by making permanent the President’s tax cuts is somehow better for the 

common good, including the majority of Americans who retire at 

62, they’re maintaining the monthly Social Security benefits of 

those majority retirees?’’ Or do you say ‘‘You know, it’s not my concern?’’ 

Now, here’s the question. The new economy. There are pressures 

for early retirement. Now, are pressures for early retirement going 

to be increasing because skills are needed, and decreasing in the 

aging population, or are pressures for later retirement, let’s say at 

age 70, going to be increasing because skills are increasing in an 

aging population? 

Mr. GREENSPAN. Congressman, ideally, we should have solved 

the Social Security problem back in 1983, in the sense that at that 

particular time, the projections seemed to create sufficient revenues and a balance of benefits which would maintain the system 

in balance in perpetuity. It’s fairly clear, more recently, that that’s 

not going to be the case, and it’s even more of the case by far, indeed, that we have difficulties with respect to Medicare. 

24

The point that I was making a week or so ago was that we do 

not have enough in the way of real resources to meet the promises 

that we have already made. In other words, we will not, with regrettably a high degree of probability, not be able to fully meet the 

commitments that we have made to the next generation, the Baby 

Boomers, who are retiring. And it’s my judgment that if indeed 

that is realistically the case, we have to construct a pattern in 

which the benefits that we do promise, we do, in fact, deliver, and 

not have these people all retire in very large numbers and find out 

that they were betrayed by government. 

Mr. KUCINICH. Mr. Chairman, I just have one question, though, 

and that is that—are your statements based on your discussions 

with the Social Security Trustees, or have you ever asked for the 

actual actuaries’ assessment, or analysis, to be released? Because 

what I understand is that your statements are based on an analysis offered by the trustees apart from the actuaries. 

Mr. GREENSPAN. No, I would say that I’m merely repeating with 

respect—let me just phrase it from what I was saying to the nature 

of your question. The pointed issue is that we’ve got to make 

choices. And all of the choices, regrettably, are negative. We don’t 

have the resources. And— 

Mr. KUCINICH. Was the $87 billion in tax cuts a negative choice? 

Mr. GREENSPAN. Let me just finish quickly. 

The CHAIRMAN. The gentleman’s time has expired. 

Mr. GREENSPAN. The problem that I’m raising, with respect to 

the issue of tying the age of eligibility to longevity is an issue 

which has been discussed at great length by Social Security actuaries, technicians, economists, analysts. It’s one of the many items 

that are on the agenda to bring the system back into balance. None 

of them are any good in that respect. They’re all negative. That’s 

one of the great difficulties that what this sort of problem is. I’m 

not saying I prefer it. I prefer otherwise. But we have to make 

some choices. 

Mr. KUCINICH. Thank you, Mr. Chairman. 

Chairman BOEHNER. The Chair recognizes the gentleman from 

South Carolina, Mr. DeMint. 

Mr. DEMINT. Thank you, Mr. Chairman. Mr. Chairman, thank 

you for focusing the Nation on the competitiveness of our work 

force today. And as you have discussed, we have a very intense national debate going on at this time about our jobs, how to keep the 

ones we have, how to create the jobs of the future. The two sides 

seem to be giving us two choices. One is, do we hide from international competition with more trade barriers, or do we focus on 

how to make American businesses more competitive? 

There are lots of issues, many of which you’ve discussed. Our tax 

code, our energy costs, our lawsuits, our health insurance, our regulations, that make it more difficult to do business in this country. 

But today, we’re focusing on how to create a more skilled and competitive work force. And I frankly believe, waiting to post-secondary 

levels is waiting too late. We’re losing too many kids, and we’re not 

preparing them for the jobs of the future. 

But my two-part question to you, Mr. Chairman—is trade the 

greatest threat to our jobs, or is it our education system? And in 

that context, do you believe we need to go beyond supporting eduVerDate 0ct 09 2002 12:12 Oct 14, 2004 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6602 H:\DOCS\92479.TXT EDUWK PsN: NNIXON
25

cation with our talk and our money to fundamentally changing our 

primary and secondary education system by teaching academics in 

the context of skills and careers? 

Mr. GREENSPAN. I don’t know the answer to that, Congressman. 

I think it’s the crucial question for our education system. And while 

I’ve been exposed to a lot of people who are professionals in this 

area, I’ve never sensed a satisfactory solution to the type of problems that we see. And I trust that we’ll continue to focus on this 

question, and find ways to enhance our capacity to develop the 

skills that are so crucial to this system. 

Mr. DEMINT. Just back to the trade question, because those 

choices are being presented to us. Do we restrict trade and international competition, or you seem to be saying that the answer is 

not doing it that way, but to make us more competitive as a nation. 

I mean, is that the way I hear you? 

Mr. GREENSPAN. What has made the American economy great is 

that we allow ourselves to be exposed to more competition than virtually anyone else in the world. And as a consequence of that, we 

have honed our skills to the point to raise our level of technology. 

And in that context, raised our standard of living, which would not 

have occurred if we were not exposed to globalization. As I indicated earlier, globalization is a very disruptive process. But at the 

end of the day, it creates major advances in standards of living, 

and all of the things that occur as a consequence of that. 

So I am fearful that we will start to find competition too frenetic, 

and try to rein it in in some form or another. Indeed, we do try 

to do that. I think that’s a mistake. We’ve got to find ways to reach 

forward, to recognize that the more competition we are exposed to, 

the more difficult it is for us. But at the end result, it forces us to 

go to a higher level of production, technology and advancement, 

which I think has been what has made this country great in all respects. And I think if we were to back away on the trade side, I 

think we would find much of the extraordinary gains that we have 

made in the post World War II period would start to fade. 

Mr. DEMINT. I agree, and thank you, Mr. Chairman. 

Chairman BOEHNER. The Chair recognizes the gentleman from 

New Jersey, Mr. Payne. 

Mr. PAYNE. Thank you very much. Thank you, Mr. Greenspan for 

the opportunity that I have had to be on the Committee that you 

came before, and I think that your interest in education is very 

paramount. I’d just like to mention a few things that’s going on 

right now. We hear that tax breaks are still on the table, and people want to make some of them permanent. We’ve heard the administration preach that it’s your money, you can do better with it. 

Why should the government take it? And all that’s good, and it 

sounds great, and I was the average person, yeah, why should I 

give my government all of this money? However, in 2003, we had a military budget of about $360 billion. In March we had a $67 billion emergency. Again in October, another $87 billion emergency. About a $154 billion emergency on top 

of $360 billion basic budget. This year, the military budget is $420 

billion without Afghanistan and Iraq included in it. We don’t know 

what Iran and North Korea has in the back. So, this preaching 

about it’s your money, keep it, government can’t do—you could do 

26

more with it than we can, I think is really irresponsible, especially 

since, at the rate of last year’s appropriations, we’ve spent almost 

$10 billion weekly on military and military-related activities. I 

think it’s irresponsible to tell the American people you should keep 

it in your pocket. 

Secondly, and I think we should have a strong defense, don’t get 

me wrong. However, if we keep preaching that, and it’ll all go to 

military spending, then there would be no discretionary funding. 

We’re down to 4 percent now. The second question is, because of 

the deficits in the states, we’re seeing state colleges, which are 

funded primarily through states and low tuition, having an explosion in their tuitions. Therefore, lower income kids who normally 

go to state colleges are certainly going to be hurt and make it unable to go to these schools in some instances. 

And when we talk about education, Jonathan Kozar, who is an 

education person, talked about the digital divide, about two Americas. And when we talk about education, we’re going to have to talk 

more about just teaching in the classroom, but how do we get computers to people, how do you have an environment that you can 

study in, how do you have adequate houses? So this education piece 

is a big, big piece. 

So my question is, in times of national emergency, we’ve always 

had shared sacrifice. World War II rationing, etc. Food rationing, 

oil rationing, and so forth. If we continue to have these tax cuts 

while we are at war—the President said we’re at war on terror—

that is not shared sacrifice, because a privileged group is going to 

get the tax breaks. 

And so, I wonder what is your opinion in light of our war that 

we’re on at present—Bush says we are—on terror, and the increasing that we’re going to have to spend. It’s a half a trillion dollars 

last year, and it’ll be a half a trillion dollars this year. Over $10 

billion a week on military expenditures. 

Secondly, the other quick question is, in ‘‘The Price of Loyalty’’ 

by Paul O’Neil, he said that he believed that 9/11 only had a small 

impact on the economy, and that the economy fully recovered 

thereafter. And I just wonder what is your assessment on that 

statement? 

Mr. GREENSPAN. Well, it is certainly the case that the American 

economy proved extraordinarily resilient to the events surrounding 

9/11. Indeed, to the events subsequent to that period. We had a 

very shallow recession. Indeed, that’s one of the reasons why the 

recovery started so late. Because it had barely gone down very 

much. On the issue of how one distributes resources is at the core 

of a democratic society. And what I’m arguing strenuously for, is 

to get a budget process in place which facilitates the choices to be 

made by the Congress on issues, Mr. Payne, of exactly those that 

you raised. 

There are differences. I mean, I happen to be concerned about 

the necessity of maintaining a tax structure which will enhance 

economic expansion, enhance the revenue base. But there are other 

opinions which could readily be important, and perhaps carry the 

day. But what I do think is important is to have a structure which 

enables that debate to go on in a manner in which a resolution is 

feasible, rather than people talking at cross purposes. 

27

And that’s why I thought Pay-go and the discretionary caps that 

we put in in the early 1990’s facilitated those debates in a way 

which I frankly was quite surprised. And I think we need to go 

back to that, and until we put on the table all of the various claims 

on national revenues, against the actual revenues available, I think 

it’s going to be an issue of all of us talking at cross purposes. And 

it is important to resolve the question that you are raising. And 

there is a difference in this country on that. 

Chairman BOEHNER. The Chair recognizes the gentleman from 

Delaware, Chairman of the Education Reform Subcommittee, Mr. 

Castle. 

Mr. CASTLE. Thank you, Mr. Chairman. Chairman Greenspan, I 

would like to focus on the connection between education, particularly K-12, and perhaps No Child Left Behind, although I realize 

you’re not necessarily an expert on that. But you’re an expert on 

a lot of things you’re not supposed to an expert on, so who knows? 

You probably know more about it than most of us. And the economy today. My sense is that the economy, as you’ve suggested in 

your testimony and so often before another Committee—I’m on the 

Financial Services Committee—and otherwise publicly, that the 

economy has changed dramatically. And as you’ve indicated, it’s 

probably going to change even more dramatically here in the next 

few years. 

Education does not appear to have made the same changes. In 

my judgment, there’s a direct corollary there. You need to up your 

education to meet what you have to do in the work place. And I’m 

not sure that we have really successfully done that here in America. You’ve cited before, and again today repeated, that we seem to 

do fairly well early on, and then there seems to be a drop-off at 

some point, perhaps from fourth grade on, in education in America. 

We in this Committee passed No Child Left Behind a couple of 

years ago, and that’s out there now. 

As I’m sure, undoubtedly, you have read, it’s being questioned by 

some. Others say it’s under-funded. Nobody really questions, I 

think, the goals of ultimately educating better. One aspect of that 

is that we divide these kids into groups and sub groups, including 

minority groups, English as a second language, children with disabilities, and in an effort go get them all up so the schools are no 

longer under review. A lot of educators are critical of that. They 

feel that the schools are put under too much scrutiny, we’re teaching to the tests, these kids can’t make it, or whatever it may be. 

But within all those stories, I keep seeing that silver lining, 

which is the teachers and the educators are talking about what 

they’re doing in order to get their kids ready, and so they can be 

able to eventually pass the tests and be able to do better. Which 

to me leads to greater economic productivity if we are able to do 

this. 

Are we on the right track with respect to what we have done? 

I’m not asking you to opine necessarily on No Child Left Behind, 

but the whole concept of taking some dramatic gear shifting in 

terms of our educational system? Not in a way that would be punitive to anybody, but in a way that hopefully would be rewarding 

to the students, and giving them the opportunity to be able to compete in our economy. Do we need something of that nature, or can 

28

we just continue to go as we’re going in an educational point of 

view? 

Mr. GREENSPAN. Well, if you believe the statistics on educational 

excellence in this country versus those of other countries—and 

there is, I might add, some question about whether there are biases 

from one country to the other in the data. But the changes are so 

dramatic for the United States. Our fourth graders seem to be 

doing reasonably well. So it can’t be that there’s something inferior 

in the base that we’re dealing with. It’s already demonstrated to 

be effective. 

So we do something which is not the same as a number of other 

countries. Most other countries seem to bring their skill levels of 

the younger educated people in the primary and secondary schools 

up at a faster pace than we do. Now, I don’t know what they do 

to do that. I will say this, however, that in spite of the problems 

that we have, we still manage to make very effective use of the 

work force that we have, or we would not be experiencing the productivity gains that we currently have. 

So there are other things involved other than education per se. 

And as I pointed out, the major issues are the rule of law under 

which we function. But obviously, we can’t go on in a situation in 

which for our highest skilled jobs, the wage rates continue to rise 

much faster than the average. 

Mr. PAYNE. But if I could just follow up quickly, because my 

time’s going to run out. You at the end of your testimony talked 

about equal opportunity requires equal access to knowledge. And 

my sense is, in terms of that equal opportunity, that we need to 

do more to help those who perhaps need greater help. English as 

a Second Language, perhaps the Hispanic American population, 

the African American population, etc. 

Not necessarily get them to the skill levels that are going to create the new jobs, but to be able to fill those jobs, it’s very important. I think that we have a rising tide, here. Would you agree with 

that? I mean, I worry about our population and some of the unemployment questions which are here. But I worry about their skill 

levels to be able to get in there if we don’t educate properly. 

Mr. GREENSPAN. Well, I’ve not been able to fathom exactly what 

the causes of a lot of these particular problems are, but I do know 

that we not only need to raise the skills, but we have to increase 

them year in and year out. In other words, it’s not a static standard that we’re running against, because the conceptual composition 

of our GDP is continuing to increase, requiring ever higher skills 

to run the system. 

So, I can’t address your question directly, as I frankly don’t—I’m 

more puzzled by the question. I’ve got the same problem that you 

seem to express. I don’t know what the answer is. But I know what 

the answer has to be. And what it has to be is something that 

maintains a degree of expansion in skills which is as fast as the 

change in the conceptual content of our output. 

Mr. PAYNE. Thank you. 

Chairman BOEHNER. The Chair recognizes the gentle lady from 

Minnesota, Ms. McCollum. 

Ms. MCCOLLUM. Thank you, Mr. Chair. We live in a global economy, and it’s clear that the American higher education system is 

29

also part of this global economy. For example, we have tens of 

thousands of students from China and India being educated in 

American universities, and these students speak fluent English. 

They understand our culture, they graduate frequently—with advanced degrees, I might add—and they are immediately prepared 

to compete against the American worker at the highest levels in 

our country, or in theirs. 

Yet our country does not possess a similar highly educated population that possesses both the technical skills, as well as the language and the cultural skills to compete in the world’s largest 

emerging markets. China, India, or the Arab world. From a national security perspective, we’ve seen these challenges presented 

in our intelligence and in our defense communities in having Americans with technical skills, but lacking the language and the cultural skills to allow them to function effectively, even in Arabicspeaking countries. 

Mr. Chairman, I know how important it is for this generation 

and the next generation of highly skilled Americans to also be able 

to speak Chinese, Spanish, or Arabic, while possessing the cultural 

skills to compete in this global market place. Or is the Americancentered, mono-language work force going to be sufficient enough 

for our future? And I have another question. 

I serve on the International Relations Committee, and human 

rights in China has recently been discussed. As you so well pointed 

out, foreign entities invest in the United States because we have 

a set of laws that protects their property rights. We know we have 

jobs moving to China in part because of cheap labor. But along 

with property rights in the United States, we have workers’ rights. 

Should we be asking for protections for workers’ rights in the 

countries in which U.S. corporations are now taking our jobs? Does 

not this job gap in protecting workers’ rights have a negative impact on the workers here in the United States? Thank you, Mr. 

Chair. 

Mr. GREENSPAN. Congresswoman, first of all, on the—let me answer the last question first, if I may. Individual cultures create certain rights for people within a society, and it very clearly is the 

case that the higher the standard of living, the more rights exist 

in a society. I mean, for example, in those countries with—who are 

struggling on the edge of maintaining standards of living, we find 

that child labor is rampant. We find that types of labor standards 

are virtually non-existent, and they would argue that they can’t afford them. In other words, they will starve if they don’t have them. 

I think the issue gets down to our putting standards out should 

be an issue not of economics, but of ethics and morality. In other 

words, we shouldn’t be dealing with people who produce good with 

slave labor, or the equivalent. But, if we’re substituting what we 

perceive to be a moral purpose, as really a change in name for 

what truly is protectionism, that we ought to avoid. And I think 

that I fully support what is a very—we are an ethical people, and 

I think we ought to essentially try to spread that around the world, 

but not use ethics as a guise for protectionism, which I fear, in too 

many instances, is really what it’s all about. On the issue of multiple languages, it would clearly be the case—it would clearly be to 

our advantage if we had far greater language skills in this country. 

30

I mean, you take a small little country like Switzerland. There’s 

more multiple languages—which everyone speaks, and speaks exceptionally well—than anyplace in the United States. We have 

been parochial, and for most of our history, we have been remarkably self sufficient. 

And what has happened is, that because of our extraordinary 

economic strength and military strength, English has become a 

major international language. So, the pressure for us to learn second languages has been much less than others. But at you point 

out, we’re now seeing the consequences of that. There is a significant down side. I wouldn’t call it economic, but it is a national security question. And I wish we had the capabilities that we don’t 

have, and I fear that we are seeing certain consequences which 

we’d prefer are otherwise. 

If we had far greater skills—far broader skills in languages—I 

think, other things equal, we’d be more effective. But, while it’s important, there are other things which I think clearly are more important to this society. 

Chairman BOEHNER. The Chair recognizes the gentleman from 

Oklahoma, Mr. Cole. 

Mr. COLE. Thank you very much, Mr. Chairman. And Mr. Chairman, it’s an enormous pleasure to have you here, to, frankly, educate us a little bit, and then hopefully through us, the American 

public. 

Let me ask you, if I may. In the short time I’ve been here, I’ve 

seen very few public purposes for which we spend money that are 

not good public purposes. We may not spend the money as efficiently as we should, we may have some—certainly some waste, 

fraud and abuse, but the reality is, it’s a good thing to defend the 

country, it’s a good thing to educate your people, it’s a good thing 

to fund some sort of social safety net so people have a decent living 

standard. We get very few bad public purposes. Most of our choices 

are difficult choices, because the purposes are good. 

Is there some sort of standard that you would have as to the proportion of national income that should go for public purposes as opposed to private investment and private consumption, that’s commensurate with good economic growth and sound policy? 

Mr. GREENSPAN. Congressman, this is an issue which economists 

have been debating for a very long period of time. And the reason 

that the debate has become so vigorous is, it’s very difficult to 

prove any particular level of income going to public purposes is optimum. And the reason is that, while one can make the theoretical 

case, and I would, that the more that you get to public purposes, 

the lower the standard of living. Because at the end of the day, 

central planning is the ultimate public purpose allocation. Central 

planning has been an utter disaster as an economic policy. As the 

Soviet Union demonstrated, indeed, when the Berlin Wall came 

down, the massive changes around the world away from that, were 

dramatic. So, at the extreme, we know that there is an upper limit. 

We also observe that there are certain countries—relatively smaller 

countries—which have managed to have very high proportions of 

their national income going to public purposes, and still maintain 

fairly high standards of living. 

31

Others have not been able to do that. My own impression is that 

it’s always best to try to get that number as low as you possibly 

can, because I do think history does, in large measure, support that 

maximum economic growth will come from maximum private participation—private competition, which is the real issue. But, there 

are always exceptions to this, and as a consequence, saying that a 

specific number is correct is very difficult to support. 

Mr. COLE. I appreciate the broad perspective. Let me ask you 

this, just as a follow-up. I agree very much with the point that 

you’ve made, that we have over-promised, over-committed in a variety of ways. We’ll have the debate in Congress over which ways 

and how much. But looking forward from where we’re at now, if we 

have to, as we do, come to grips with this, would you come down 

in favor of adjusting the obligations and commitments, as difficult 

as that is, downward in some cases, or at least in some sort of different fashion, or changing the tax rates, and taking a larger proportion of the total income of the country and directing them toward sustaining the public purposes as we’ve defined them so far? 

Mr. GREENSPAN. Well, Congressman, as I’ve testified elsewhere, 

the evidence, even though we can’t get optimum rates of where we 

put taxation is if you continuously raise the tax rate, at some point 

you run into very significant diminishing returns and you will find 

that solving a problem of shortage of resources by increasing taxes 

at the end of the day has high risks associated with it, and so I 

argue that we ought to first focus on the excess of commitment 

over available long-term resources by seeing what we can do on the 

expenditure side first, before we revert to looking at using resources through increased taxation. 

I don’t deny that the size of the gap on what we have committed 

largely to retirees in the baby boom generation is quite significant 

and that it is unlikely to be fully closed from the spending side, because the commitments are so large, but I do think that if we start 

by first raising taxes and then starting to look to what we have to 

do on the expenditure side, I think it is going at it in the wrong 

direction. 

Chairman BOEHNER. The Chair recognizes the gentleman from 

Ohio, my colleague, Mr. Ryan. 

Mr. RYAN. Thank you, Mr. Chairman. Mr. Chairman, it’s a pleasure to be here before you. 

A couple of questions I’d like to ask. 

One, first I represent a district in northeast Ohio which has just 

been devastated by the manufacturing issue that we have and part 

of the problem I think we are facing is that these people, they seem 

to be trapped into a cycle that they just can’t get out of. 

One of the issues that Ms. McCollum discussed is the labor 

standards in these agreements. Would you be willing to support in 

the CAFTA we are going to start debating labor standards? 

Mr. GREENSPAN. Congressman, as I indicated to your colleague, 

labor standards truly based on American ethics is something we 

ought to adhere to but if it is actually protectionism disguised it 

is a mistake. 

Mr. RYAN. If we did it on moral grounds, because as you talked 

about in your statement, which I thought was very eloquent, the 

32

strength of our system is what undergirds our economic system is 

justice and contract law. 

I think it is equally as important for social justice issues too, especially in an era where we have most countries looking negatively 

on our country. So these social justice moral reasons, if we did it 

in that context, would you be willing to support it? 

Mr. GREENSPAN. Well, I think that you can’t impose American 

standards on other people. One of the things that we insist upon 

is that we are free and sovereign and I would presume our foreign 

policy presupposes that those with whom we deal are also free and 

sovereign. 

To tell other countries that they must change their labor laws or 

change their health laws or whatever merely because we think it 

is better I think is clearly inappropriate. 

If, however, we are dealing with the importation of goods for example made by slave labor, that to me is egregious and clearly 

something that we should not be doing, indeed the private sector 

should not be doing and it really shouldn’t require a Federal statute to prevent that. 

But in listening to most of the discussions on this issue, I have 

come to the conclusion, I hope incorrectly, that too much of it is an 

endeavor to put up barriers to imports into this country, which I 

think would be to our disadvantage. 

Mr. RYAN. Can you explain to me, how is it different for us as 

we are negotiating these trade agreements to say to another country we don’t want to impose our labor standards but aren’t we, 

when we deal with intellectual property, aren’t we asking them to 

play on their playing field? 

Mr. GREENSPAN. No, we are in that regard talking about the 

issue of property rights, and with respect to the question of property rights, we are essentially saying to certain countries that some 

of your citizens are involved in theft, theft of our property, and 

with respect to those kinds of rights, say the law of contracts, those 

are the types of principles which we do engage in with respect to 

trade and should. 

But to require that there be a change in the way societies are 

organized with whom we trade I do think is inappropriate. 

Mr. RYAN. So there should be a different standard for property 

rights versus what we would consider human rights? 

Mr. GREENSPAN. No, because we are not trading human rights. 

We are trading property. I mean if we were—I hope we trade in 

human rights. But remember, goods and services are property and 

therefore property rights are the relevant consideration. 

Human rights are issues which I think very crucially come up 

when we are dealing with whether we recognize certain countries 

or not diplomatically, but remember, trade is an economic issue 

and trade refers to physical goods and services and trade cannot 

exist without laws of contract and without property rights. 

Therefore, they are the appropriate mechanisms which we negotiate for. When we are dealing in other areas, for example, as I 

said, whether we recognize a certain country or deal with them, 

then human rights are a very critical and indeed for us to deal 

with countries without recognizing that they don’t meet the standVerDate 0ct 09 2002 12:12 Oct 14, 2004 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6602 H:\DOCS\92479.TXT EDUWK PsN: NNIXON
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ards that we have in this country I think that in dealing with them 

we must recognize that and deal accordingly. 

Chairman BOEHNER. The Chair recognizes the gentlelady from 

Colorado, Ms. Musgrave. 

Mrs. MUSGRAVE. Thank you, Chairman Boehner. 

Chairman Greenspan, in your testimony you alluded to job loss 

to low wage China, and you talked about protectionism coming into 

play as a solution. As I listened to that testimony, you also talked 

about other nations retaliating for that, in effect a simple solution 

to a very complex problem. 

Could you elaborate on what other nations would do in response 

and what the long-term effects would be of that? 

Mr. GREENSPAN. Congresswoman, I think we have the very sad 

experience of the 1930’s to give us the most vivid example of what 

happens when you begin to start a protectionist spiral. 

We, as you are aware, introduced a fairly significant protectionist 

legislation in the late 1920’s, and as the recession turned into a depression trade began to collapse as people pulled in their borders, 

created huge barriers to trade, and indeed exacerbated to the whole 

contraction of that period. 

During the post-World War II period, based on the experience of 

the 1930’s, the United States in the lead started with the Kennedy 

round, the early 1960’s, and developed a major unraveling of trade 

barriers which had developed. As I indicated earlier, this has been 

a major factor in the advance in standards of living of all of the 

trading partners of ours and others. 

We have run periodically into problems with respect to retaliation and fortunately we fended them off. We are currently now, as 

you know, involved in this export tax problem with Europe, and we 

have been involved in many occasions on difficulty in maintaining 

open trade, but by and large we have done remarkably well and 

what I am fearful of is that we will reverse that, in part because 

the trade negotiations over the years have largely made the major 

cuts that are immediately feasible in the sense we have picked the 

low-hanging trade agreement fruit and now we are getting into 

tougher and tougher areas of negotiation. 

But I think it is crucially important for us to move forward because all the evidence that economists have been able to adduce 

strongly suggests that it’s been a major factor in world economic 

growth and especially the growth of the United States. 

Mrs. MUSGRAVE. Thank you, Mr. Chairman. 

Chairman BOEHNER. The Chair recognizes the gentleman from 

Massachusetts, Mr. Tierney. 

The Chair would announce that in cooperation with the Chairman, the Chairman needs to leave at noon, and so it looks like we 

have got time for another member on each side. 

Mr. TIERNEY. I thank the Chairman. I thank you, Mr. Chairman, 

for your testimony here today. 

I am going to ask some questions. I feel compelled to make somewhat of a statement. 

I am glad to hear you say that it is appropriate for us to determine when we are recognizing a country whether or not they meet 

our ethical standards and things of that nature, but I think also 

it is entirely appropriate for us when we negotiate with a country 

34

in a direct bilateral manner or an international forum whether or 

not they are going to recognize human rights and whether or not 

they are in fact going to recognize international law and norms 

with respect to labor or sovereignty in particular with respect to 

our sovereignty when we are dealing with regulations. 

I think that there has been some discussion back and forth here 

today with this being somewhat of a false choice between protectionism vs. innovation and I don’t think that is the case here. I 

think many of us are talking about making sure that we move forward, but we move forward in fair trade. 

Nobody wants to set up walls and barriers but everybody wants 

to move forward in an innovative way that creates some fairness 

and has a fair trade aspect to it. 

Let me ask a question. While the United States is being exposed 

to competition on a regular basis and we are seeing quite a bit of 

dislocation, should we do something to ease the transition for those 

that are displaced? 

I think you already gave us your opinion on the unemployment 

insurance extension and I appreciate that, but with respect to investing in education and training, you mentioned in your testimony 

the effect that the GI bill had. I would think that you might agree 

or tell me whether or not you agree that that type of an investment 

or concentration by us now in an effort of that magnitude, would 

that not be a fair thing to do for the people that are displaced as 

well as a good thing economically for the country moving forward 

on a competitive basis? 

Mr. GREENSPAN. Well, Congressman, I do think that the issue of 

the transition is critical, and indeed the ideal transition really is 

one that takes the person who is laid off, irrespective of the cause, 

and delimits the timeframe in which that person is out of work. 

What all my experience suggests is that it is education which basically enables a person to take certain skills that they had from 

their previous job and generalize what they know, especially given 

the education they have, to actually know how to function in a new 

job or even a new profession, and the timeframe—you want to narrow that as much as we can. 

So education here is crucial. 

Mr. TIERNEY. So that’s a yes? You think that sort of a concentration would be a positive thing for us to do? 

Mr. GREENSPAN. Yes. Now the problem that we have with, for example the G.I. Bill or the like is that we have talked this morning 

about enumerable things, all of which were positive to be done in 

our society, and it is hard to know whether the particular resources 

that would be involved, for example in the new G.I. Bill are better 

used for other things. I don’t know the answer to that. 

Mr. TIERNEY. I appreciate that, but we were talking about education and I just wanted to talk about the focus and the concentration, not necessarily a specific G.I. Bill, but the focus on education 

with that kind of intensity was what I was getting at. 

Let me ask you this also. In health care for people who are displaced I would think that you might think that was important and 

we would do something to help their transition period with health 

care, but also the positive effect it would have on our employers’ 

competitiveness if in this country we could resolve the universal 

35

health care issue, and get that so that we could move forward on 

that. 

Would that be a fair statement? 

Mr. GREENSPAN. I think the health care problem is a very critical 

one, in large part because of our ability to forecast what the expansion and the cost of health care is going to be, not only in Medicare 

but with respect to issues of impact on various companies, impact 

on the society as a whole is really very tenuous. 

I think we have very little judgment as to where Medicare outlays are going to be in the years ahead. 

The problem that we have with respect to medical costs as it was 

reflected in labor costs and business costs is an issue that goes 

back, as you all know, to World War II when we essentially had 

wage controls and we did not have controls on benefits and we created a third party payment system which is what we are living 

with today. 

I don’t know a simple answer to this problem. 

Mr. TIERNEY. Last, we do know the long length of time that people have been unemployed and that is why I talk about the need 

to do things in healthcare as well as education and the unemployment insurance. But as respects jobs that are being replaced, the 

lost jobs were paying about $44,500 annually on average and the 

jobs that seem to be replacing those are said to by paying about 

$35,000 or 21 percent less on an annual basis than the ones we 

have lost. 

Thirty states have fewer jobs than when the recession began. In 

Massachusetts I know that wages for jobs are—replacing jobs lost 

are about 41 percent less on that. So I have some concern. 

When I looked at your testimony and listened to it again today 

you talked about the seemingly relentless pursuit of low product 

prices and high quality, features of the current, frenetically competitive economic structure. A sort of broad remark. I don’t see people standing outside of Wal-Mart demanding in large number that 

they drive those places down at the expense of low paid employees 

with very little benefits, working part time and being shut in overnight so they can’t even get out if they have a medical emergency. 

I think it is more in line with shareholders, or at least the perception shareholders demanding more and more in their dividend 

returns. For those people that are left in that type of jobs, don’t you 

think that it would help our economy as well as them if we had 

some policy in place that would ensure that those people were paid 

a decent amount of money and that they had decent benefits so 

that they in fact could become customers, and wouldn’t that sort 

of trump the idea that if we are going to have to get products from 

overseas, as you said, but at least with respect to the jobs that are 

at home, shouldn’t we be setting policies to protect them, make 

them meaningful and put certain protections in place? 

Mr. GREENSPAN. Well, if you start to subsidize the levels of 

wages in particular areas I don’t know where you stop. I mean I 

don’t know what point you say you want to subsidize this company 

but not this company. 

Mr. TIERNEY. Excuse me a second. I don’t think I mentioned anything about subsidization. I thought there will policies that would 

stop them from driving to the bottom, the policies that might disVerDate 0ct 09 2002 12:12 Oct 14, 2004 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6602 H:\DOCS\92479.TXT EDUWK PsN: NNIXON
36

incline companies to start paying less and less and less and parttime instead of full-time. 

Mr. GREENSPAN. If you stop an individual company from doing 

it, other companies will do it, but what we will find— 

Mr. TIERNEY. That’s why I talked policy. We’re talking about an 

individual company. I just used that for an example. 

Mr. GREENSPAN. I think you will find that it is an extraordinarily 

difficult thing to do and indeed, frenetic as the competition is, remember, we as consumers are insisting upon high quality product 

at a low price. 

Unless that changes, you are going to get people who are going 

to supply that, and if you don’t get it supplied by American companies then we are going to get it supplied by other companies, companies outside the country. 

I don’t think there is actually a practical solution to the issue you 

are raising. I think it won’t work. 

Mr. TIERNEY. Mr. Chairman, I don’t know how you are going to 

get people to set up a retail operation— 

Chairman BOEHNER. The gentleman’s time has expired. 

Mr. TIERNEY. I thought I might get the courtesy of just following 

up on— 

Chairman BOEHNER. I think I have given you the courtesy on 

three questions. 

Mr. TIERNEY. Thank you, Mr. Chairman for your cooperation. 

Chairman BOEHNER. Thank you. The Chair recognizes the gentleman from Michigan, Mr. Ehlers. 

Mr. EHLERS. Thank you, Mr. Chairman. And Mr. Chairman, 

pleased to see you here. I think the last time you were here was 

when I invited you several years ago to talk about math and 

science education. It’ll be no surprise to my colleagues or to you 

that I bring this up again. But following on the question that was 

just asked about the lower wage workers, it seems to me that the 

jobs of the future are going to require better training, because 

we’re going to have the better jobs. We’ll continue to ship the lower 

jobs, or the poorer jobs overseas. 

And I just want to get your comments on that. It seems to me 

that one of the most important things we can do is to reform our 

K-12 educational system so that students have a basic understanding of the concepts of mathematics and science, so that they 

can more easily be trained for these higher-level jobs. Does this 

seem a reasonable approach to you, and do you have any other 

comments on that? 

Mr. GREENSPAN. Well, there are always entry-level jobs in any 

economy. And entry-level jobs, by their nature, are low paying, require very marginal skills, and they’re not meant to be permanent 

in the sense it’s a long-term profession. And the purpose of education is to enable people to move from entry-level jobs up through 

the ladder as quickly as they can. And there’s no alternative to 

teaching people. And I think one of the great advances in this 

country has been the extent to which we’ve created so-called corporate universities, and a whole level of internal company training, 

which goes on almost everywhere. More so than ever before. And 

how we do it, probably, is less important than that we do it. 

37

I think we can do it far better than we are doing it in this country. But at least the pressures for us to recognize that we have to 

escalate the skills of our people are there, and I think that most 

companies, especially those in the areas at the cutting edges of 

technology, find that they have to do a very significant amount of 

training themselves to bring the people up to the level of technical 

skills that are required to actually staff the complex infrastructure 

that we have. 

Mr. EHLERS. Now, it seems to me there are two aspects to it. One 

is the corporate university, or the company training programs. And 

I understand they spend about $26 billion a year at that, training 

for specific jobs. What I’m interested in is, what is our responsibility as a nation to provide the preliminary training, so that people are easily re-trained for these higher-level jobs? 

Mr. GREENSPAN. Well, in your previous occupation, you were 

quite familiar with the nature of these problems, in that knowledge 

has to start off with abstract principles. You need basically to learn 

concepts—how to think in the abstract, before you can apply it to 

a specific application. And what we presumably are teaching in our 

secondary—primary and secondary schools are the basic tools by 

which younger people learn—learn to learn, I might say. That’s 

why arithmetic, geometry, calculus, and hopefully differential equations and beyond are skills which people pick up in the abstract, 

and then can employ them in particular applications. 

Our school systems should be judged on the basis by which they 

produce a generic learning that enables people to be in several professions, or jobs, through their life work. And if you get training 

which is too narrow in the beginning, without the abstract capabilities that one learns, or should learn, in primary and secondary 

schools, your future is limited. And I think it’s so critical that we 

teach people how to learn. 

Mr. EHLERS. Thank you very much, Mr. Chairman. I totally 

agree, and I yield back the balance of my time. 

Chairman BOEHNER. Mr. Chairman, we want to thank you very 

much for taking several hours of your time to come in and to share 

with us your ideas about the knowledge economy, and for those 

Members that didn’t have an opportunity to ask questions, if you 

and your staff would be willing to answer those questions, I’d very 

much appreciate them. 

Mr. GREENSPAN. Thank you very much. 

Chairman BOEHNER. Hit them long and straight. It was nice to 

see you. 

I think we’re going to proceed, and invite our next panel to come 

forward. The schedule on the floor is a bit uncertain. I think the 

best thing that the Committee could do would be just forge ahead. 

It’s my pleasure to welcome our second panel today, and I appreciate the second panel’s willingness to be patient and cooperative. 

Our first witness in the second panel is John Castellani. Mr. 

Castellani, I’m sorry, is President of Business Roundtable, an association of Chief Executive Officers of leading U.S. corporation. 

Business Roundtable boasts a combined work force of more than 10 

million employees in the United States, and $3.7 trillion in annual 

revenues. And Business Roundtable members are considered at the 

38

forefront of public policy, advocating for policies that foster a vigorous and dynamic global economy. 

The second witness is Dr. Jared Bernstein. He’s the senior economist at the Economic Policy Institute here in Washington. His 

areas of research include income and wage inequality, technology’s 

impact on wages and employment, low wage labor markets and 

poverty, minimum wage analysis, and international comparisons. 

Glad that you’re with us. 

And our last witness is Mr. Robert Grady, Managing Director of 

the Technology and Business Services Industries for The Carlyle 

Group. Mr. Grady also serves as a member of the board of directors 

of the National Venture Capital Association, and is a lecturer in 

management at the Stanford Graduate School of Business. And finally, he’s a member of the Advisory Committee on Trade and Policy Negotiations, to which he was appointed by President Bush. 

With that, Mr. Castellani, you may begin. 

STATEMENT OF JOHN J. CASTELLANI, PRESIDENT, BUSINESS 

ROUNDTABLE, WASHINGTON, DC 

Mr. CASTELLANI. Thank you, Chairman Boehner, and Ranking 

Member Miller, and all the Members of the Committee. I am 

pleased to see the Chairman again. He honored us recently at our 

session on the No Child Left Behind Act, and we appreciate your 

leadership and that of Congressman Miller and this Committee on 

this vitally needed education reform, as well as the leadership of 

the bipartisan majority in Congress that passed the law, and continued to support its goals. 

I am pleased to address the critical roles of education and innovation in our economy. American companies are already the world 

leaders in innovation in business. Their innovations produce opportunities to develop new markets for U.S. goods, services, and technologies around the world, which, in turn, helps our economy to 

grow and create jobs here at home. One of the keys to innovation 

is knowledge that empowers companies and workers to re-make 

themselves, so that they can meet new customer demands in the 

worldwide economy. 

But if our workers are to have the knowledge that they’ll need 

to continue to fuel innovation, we must improve the way we educate our young people and train our current work force. Fist, we 

must recognize that our worker training system is outdated. It was 

developed to help a static labor market adjust to cyclical business 

changes. But today, in fact, we have a dynamic labor market that 

must adjust to structural economic changes. 

Across the Federal Government, there are a myriad of work force 

education and training programs, and streamlining these programs 

and making information more accessible to workers will, in our 

opinion, go a long way to improving their effectiveness. The Administration has proposed—their proposed community college initiative 

also holds promise for building partnerships between community 

colleges and employees with high-demand job sectors. 

This kind of partnership has been the model, and has been the 

model in the past, and is the model for needed flexibility and response in a training system designed for the 21st Century. As for 

our system of K-12 education, millions of children receive an eduVerDate 0ct 09 2002 12:12 Oct 14, 2004 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6602 H:\DOCS\92479.TXT EDUWK PsN: NNIXON
39

cation that simply does not prepare them for success in college, or 

the work world. And that is why the CEOs at the Business Roundtable are a strong supporter of the No Child Left Behind Act. 

The recent report of the American Diploma Project offers convincing proof that we must stay the course on the implementation 

of the Act. The report stated that the American high school diploma ‘‘often serves as little more than a certificate of attendance.’’ 

The project found that 53 percent of college students must take at 

least one remedial English or math class. And it also found that 

more than 60 percent of employers surveyed rated graduate’s skills 

in grammar, spelling, writing, and basic math as only fair or poor. 

No Child Left Behind will help us meet these challenges. It establishes a goal of proficiency in reading and math for all students, 

and gives the schools the help they need to get the job done. 

There’s no doubt that the goals of No Child Left Behind are difficult to achieve. But there is also no doubt that we must achieve 

them if we want to continue to have a growing economy and job 

opportunities. We believe that if we give America a school system 

that teaches all children to be proficient in reading and math, and 

prepared for college and the work place, and public policies that encourage growth and innovation, the success of our economy will be 

assured. 

In the last century, most jobs in the American economy required 

only unskilled or semi-skilled labor. Today, the good jobs, professional or skilled jobs, and they represent 62 percent of all jobs in 

the years to come. Our economy is now, and in the future will be 

even more so, a knowledge-based economy. Now, recognizing this, 

U.S. companies invest more than $70 billion a year in job training. 

And let me give you a few examples of how Business Roundtable 

companies are investing in education and innovation. Texas Instruments has announced its intention to build a $3 billion, 300 millimeter semi-conductor manufacturing facility in Richardson, Texas. TI looked at sites in the U.S. and abroad, and what 

clinched the deal for that site in Texas was how the state leaders 

worked with the company to create an economic development plan 

centered on research and development. Under the plan, the University of Texas at Dallas will receive up to $300 million to enhance 

its engineering and research programs to become a center for the 

basic research in North Texas. 

United Technologies is also a company that wants to have the 

best-educated work force, as their Chairman and CEO George 

David says, ‘‘on the planet.’’ Under its employee scholar program, 

United Technologies pays 100 percent of the costs for its employees 

to go back to school. And those who complete their degrees can receive an award in UTC stock of $5,000 to $10,000. 

And last fall, the University of Memphis opened the FedEx Institute—a public-private collaboration to advance world-class interdisciplinary research, and introduce a new generation of highly 

skilled graduates to the work force. FedEx donated $5 million, and 

the Institute has forged relationships with many other companies 

and institutions, and it’s becoming a real force in the Mid-South 

economy. 

Now, these companies and many others have a positive vision on 

how education and innovation can help keep America competitive. 

40

And unfortunately, there is a competing vision that’s called isolationism. And it is difficult to imagine how the U.S. can become 

more prosperous by erecting barriers, or isolating itself from the 

worldwide economy. The Business Roundtable members believe 

that the right path to U.S. prosperity is to expand investment, promote trade, boost economic growth worldwide, and improve education and training. 

And to achieve these goals, the Roundtable supports an active 

policy agenda in key areas. First, we believe that Federal and state 

tax policies should emphasize incentives to make the U.S. more attractive for investments and research so U.S. industries can continue to innovate and be world leaders. Second, the U.S. needs to 

negotiate and force commercially meaningful trade agreements, to 

open foreign markets that remain closed to us, or that give an advantage to our foreign competitors. 

Third, we must spur other countries to adopt growth-oriented 

policies, and do their part to develop the worldwide economy. 

Fourth, education and training programs must include greater assistance to help unemployed workers, or employed workers, to upgrade their skills, and help those who lose their jobs due to domestic competition, foreign competition, new technology, or increasing 

productivity, to train for new jobs. 

And finally, we must raise student achievement and interest in 

math, science, and engineering. If we do not, the talent pipeline for 

U.S. research and innovation is in jeopardy. The business community is committed to working with the government at every level, 

and with the American people, to seize the opportunities that the 

worldwide economy offers to keep our nation prosperous and 

strong. Thank you, Mr. Chairman. 

[The prepared statement of Mr. Castellani follows:]

Statement of John J. Castellani, President, Business Roundtable, 

Washington, DC 

Thank you, Chairman Boehner, Ranking Member Miller, and all the members of 

the committee for giving me the opportunity to testify today. 

I want to begin by congratulating this committee for drawing attention to the critical roles of education and innovation in creating jobs and opportunity for all Americans. America is already the world leader in innovation in business. Our companies 

and workers are constantly evolving to meet new challenges. Their innovations 

produce opportunities to develop new markets for U.S. goods, services, and technology around the world, which in turn helps our economy to grow and create jobs 

here at home. 

One of the keys to innovation is knowledge—knowledge that generates ideas and 

empowers companies and workers to remake themselves so that they can continue 

to lead and meet new customer demands in the worldwide economy. This means 

that America must have the strongest possible focus on the education and training 

of our current workers and our future workers who are now in our nation’s schools. 

America has the best, most productive workers in the world and many of the best 

public schools in the world. Our colleges and universities are the envy of other nations. But there is great concern that our systems of education and training are in 

need of serious repair. We must make these repairs if our workers are going to continue to have the knowledge they will need to fuel innovation. 

First, we must recognize that our training system for workers was developed for 

an economy that no longer exists. It was intended to help a static labor market adjust to cyclical business changes. But for today and the foreseeable future, we have 

a dynamic labor market that must adjust to structural economic changes. 

Across the federal government, there are more than 120 workforce education and 

training programs. Streamlining these programs and making information more accessible to workers will go a long way toward improving their effectiveness. The Administration’s proposed Community College Initiative holds promise for building 

41

partnerships between community colleges and employers in high demand job sectors. This partnership is the kind of model needed in a flexible and responsive training system designed for the 21st century. 

As for our system of K–12 education, millions of children continue to receive an 

education that simply does not prepare them for success in college or the work 

world. That is why the Business Roundtable is a strong supporter of the No Child 

Left Behind Act. It gives us the best chance to equip our young people with the 

knowledge they will need to succeed in a knowledge-based economy. 

Why America needs No Child Left Behind 

The recent report of the American Diploma Project offers convincing proof that we 

must stay the course on implementation of No Child Left Behind. Three distinguished education groups—Achieve, Inc., the Education Trust, and the Thomas B. 

Fordham Foundation—worked together to produce the report, which says, ‘‘For too 

many graduates, the American high school diploma signifies only a broken promise. 

While students and their parents may still believe that the diploma reflects adequate preparation for the intellectual demands of college or work, employers and 

postsecondary institutions know that it often serves as little more than a certificate 

of attendance.’’

The Project found that 53 percent of college students must take at least one remedial English or math class, with the percentage much higher for poor and minority 

students. It also found that most employers say high school graduates lack basic 

skills. More than 60 percent of employers surveyed rated graduates’ skills in grammar, spelling, writing, and basic math as only ‘‘fair’’ or ‘‘poor.’’ Another study estimated that the cost of remedial training in reading, writing, and math to a single 

state’s employers was about $40 million a year. 

No Child Left Behind will help us meet these challenges. It establishes a goal of 

proficiency in reading and math for all students, and gives schools the help they 

need to get the job done. It is improving teacher quality, giving parents more of the 

tools they need to help their children learn, and closing the achievement gaps that 

have held poor and minority students back. 

There is no doubt that the goals of No Child Left Behind are difficult to achieve—

but there is also no doubt that we must achieve them if we want to continue to have 

the best economy in the world. I will make this statement: Give America a school 

system that teaches all children to be proficient in reading and math and prepared 

for college and the workplace, and the future success of our economy will be assured. 

America must have knowledgeable workers for a knowledge-based economy 

The American Diploma Project demonstrates that America’s students lack knowledge and skills at a time when the workplace requires a higher level of knowledge 

and skills than ever before. In the 20th century, most jobs in our country required 

unskilled or semi-skilled labor, and our nation could survive with high school dropout rates of 50, 60, 70 percent or more. But today the good jobs in our economy are 

professional or skilled jobs, requiring at least a high school diploma that represents 

real learning—not just attendance—and a significant additional amount of postsecondary education. 

Perhaps a better way of saying it is this: In the 20th century, our economy was 

based on brawn, while in the 21st century it is based on brains. That is why a Business Roundtable report issued last year was so troubling. It showed that the true 

high school dropout rate in our country is about 25–30 percent—nearly three times 

higher than the 11 percent reported by the federal government. 

Even the most entry-level jobs today require literacy and some proficiency in 

math. A good example is an apprentice training to become a machine operator at 

Eastman Chemical Company in Tennessee, a member company of the Business 

Roundtable. The apprentice must be able to solve multistep problems such as computing the concentration and density of a solution given the weight of each component—a task requiring solid mathematical skills. 

The apprentices who must demonstrate these skills have learned an important 

lesson—our economy is knowledge-based. In the years ahead, high-wage professional 

and skilled jobs will constitute 62 percent of all jobs. Low-paid or low-skilled jobs 

will account for only 38 percent of jobs. Already, the most vulnerable workers are 

those with only a high school education or less. The average U.S. worker today with 

only a high school education makes the same real wage that the average worker 

made 25 years ago. But workers who are more educated are earning, on average, 

a wage premium of 77 percent more than a match group with fewer skills. 

42

Companies are committed to education and training 

Recognizing the need to help educate, train, and prepare workers for lifelong 

learning, U.S. companies invest more than $70 billion in job training, and the Conference Board has reported that 205 large U.S. corporations contributed $1.3 billion 

to education in 2002. Let me give you a few examples of how Business Roundtable 

companies are investing in education in order to remain innovative and competitive. 

Texas Instruments (TI) has announced its intention to build a $3-billion, 300-millimeter semiconductor manufacturing facility in Richardson, TX, that will produce 

the world’s most advanced semiconductors. TI looked at sites in the U.S. and 

abroad. What clinched the deal for Texas was how state leaders worked with TI to 

create an economic development plan centered on R&D. Under the plan, the University of Texas at Dallas will receive up to $300 million from the state and other 

sources to enhance its engineering and research programs. TI sees UT Dallas as a 

center that can help address the increasing need for basic research in North Texas 

and nurture a community of research excellence that can benefit the entire region. 

This is an example of a leading American company partnering with a leading institution of higher learning, and it reminds us of the importance of our four-year colleges in improving learning and supporting innovation in our economy. Community 

colleges play a crucial role as well, serving as worker-training centers in hundreds 

of communities across our nation. 

United Technologies (UTC) is a company with an ambitious goal. Chairman and 

CEO George David has said, ‘‘Our goal is to have the best educated workforce on 

the planet.’’ UTC believes that while no one can guarantee a job forever, it can ensure a future for all of its employees and the best way to do that is by giving them 

an education they can use for a lifetime. Under its Employee Scholar Program, one 

of the most comprehensive employer-sponsored education programs in world, UTC 

pays 100 percent of the costs for employees, both in the United States and internationally, who go back to school. That includes registration, tuition, fees and 

books—and all of it is paid up front. Employees can enroll in classes and obtain a 

degree in any field, whether or not it is job-related. Students can receive up to half 

of their classroom time as paid time off for studying—a maximum of three hours 

per week. UTC further rewards its employee scholars when they graduate. U.S.-

based employees who complete a bachelor’s or graduate degree are awarded $10,000 

in UTC stock and those who receive an associate’s degree are awarded $5,000 worth 

of stock. 

Finally, let me tell you the story about the FedEx Institute of Technology. Last 

fall, the University of Memphis in Tennessee opened the Institute, which is a 

unique public-private collaboration designed to advance world-class interdisciplinary 

research and introduce a new generation of highly skilled graduates to the workforce. FedEx Corp. donated $5 million toward the new facilities. The company has 

more than 219,000 employees globally and expects the alliance will help develop a 

highly skilled recruitment pool. The Institute will house 10 research centers focusing on an array of studies ranging from medical breakthroughs in cancer and alcoholism to artificial intelligence and RFID (radio frequency identification) tags. The 

FedEx alliance helped the Institute to forge relationships with other high-profile 

companies, including AT&T, AutoZone, Avaya, BellSouth, Cisco Systems, Computer 

Associates, Dell, EDS, Landmark Graphics, Methodist Healthcare, Morgan Keegan 

& Company, Steelcase, and Time Warner, and with institutions such as the St. 

Jude’s Children’s Research Hospital, Oak Ridge National Laboratory, the Technology Resource Foundation, and the U.S. Department of Defense. 

And those stories are just a few of the many important programs that Business 

Roundtable companies are undertaking to demonstrate their commitment to America’s leadership in the worldwide economy. American companies make these investments because they understand that education and innovation are part of the same 

package. It will do us no good to have American businesses compete successfully in 

the worldwide marketplace and create good jobs here at home if there are no workers to fill them. And it will do us no good to have our schools and universities 

produce highly educated graduates if companies aren’t creating jobs for those graduates to take. Jobs with no people, or people with no jobs will get us nowhere. Education and innovation will get us where we want to go. 

That is one vision for how jobs and opportunity can be created in our country. 

There is another vision in our country, and it’s called isolationism. Some say that 

economic isolation is the best way to protect American industries and workers. But 

it is difficult to imagine how the U. S. can become more prosperous by erecting barriers and isolating itself from a growing worldwide economy. 

43

A pro-growth agenda 

The Business Roundtable believes the right path to greater U.S. prosperity is to 

expand investment, promote trade, boost economic growth worldwide, and improve 

education and training. To achieve these goals, the Roundtable supports an active 

policy agenda that focuses on these key areas: 

• Federal and state tax policies should emphasize incentives to make the U.S. 

more attractive for new investments and to undertake research so that U.S. industries can continue to innovate and be world leaders. 

• The U.S. needs to negotiate and enforce commercially meaningful trade agreements to open foreign markets that remain closed to U.S. companies and workers or that give an advantage to our foreign competitors. 

• We must spur other countries to adopt growth-oriented policies and do their 

part to develop the worldwide economy. 

• Education and training programs must include greater assistance to help unemployed workers move to new jobs. The Business Roundtable recognizes that participation in the dynamic worldwide economy will lead to benefits for the overall 

U.S. economy, but will not always benefit every worker or business. Government and business, working together, must provide effective assistance to those 

who lose their jobs because of domestic competition, foreign competition, new 

technology, or increasing productivity. 

• We must raise student achievement and interest in math, science, and engineering—the fields that will drive future innovation. New initiatives to attract 

talented young people to math and science teaching careers are especially needed. Without such emphasis, the talent pipeline for U.S. research and innovation 

is in jeopardy. 

Our choice: Innovation or Isolation 

When it comes to securing economic growth and good jobs for America’s workers, 

America has a choice. I call it ‘‘Isolation or Innovation.’’ The Business Roundtable 

does not favor isolation, and our research shows that the American people do not 

support it either. 

We commissioned Voter Consumer Research to conduct a poll of Americans between January 7–11. There were 1,049 respondents for a margin of error of +/- 3 

percent, and we found that the American people truly want to ‘‘work with the world’’ 

to strengthen the U.S. economy and the economies of all nations. The survey found 

that: 

• 92 percent of Americans agree that isolating America from the world is not the 

answer to our economic problems, and that we should help American companies 

to compete in the world economy so that they can create new jobs and build 

economic strength in the U. S. 

• 94 percent agree that American companies will create long-term growth and 

new American jobs if they can meet their customers’ needs around the world. 

• 73 percent favor encouraging American companies to re-make themselves so 

they can stay ahead of the curve, succeed in a worldwide economy, and create 

new jobs in the U.S., as opposed to only 24 percent who favor increasing government regulation on American companies that would make it more difficult for 

them to cut jobs in the U.S. and open up facilities in other countries. 

The business community is committed to working with government at every level 

and with the American people to seize the great opportunities that the worldwide 

economy offers to keep our nation prosperous and strong. Thank you very much. 

Chairman BOEHNER. Thank you, and Dr. Bernstein. 

STATEMENT OF DR. JARED BERNSTEIN, SENIOR ECONOMIST, 

ECONOMIC POLICY INSTITUTE, WASHINGTON, DC 

Dr. BERNSTEIN. I’d like to thank the Chairman for the opportunity to be here today in front of this Committee on this critical 

topic. Few would question the importance of maintaining and promoting a highly skilled labor force. It doesn’t take expert testimony 

to remind us of the importance of education, not solely in terms of 

prosperity and international competition, but also because of the 

enumerable benefits to society, families, and individuals when each 

of us has the opportunity to realize our potential. 

44

These assertions are so widely agreed upon by economists and 

policymakers, that there’s little need to present corroborating evidence. Instead, my spoken testimony will focus on two critical questions. Is there any evidence that the lack of skill is responsible for 

our current employment problems? Can the unusually weak jobs 

recovery that we’re experiencing be explained by the lack of skill 

or education in the American work force? 

And second, while improving skills of our work force is always 

a good idea, is education the best policy solution for Congress to 

offer to the recent challenge posed by the so-called off-shoring of 

service-sector white-collar jobs? 

The answer to the first question I posed is an unequivocal no. 

The weak jobs performance of the last few years is wholly a demand-side phenomenon. The problem is not the lack of skilled 

workers, it’s the lack of jobs. There’s no education or training-based 

solution that will help that problem, because it’s a jobs deficit, not 

a skills deficit that’s hurting the current labor market situation. 

Now, the second question about off-shoring is more difficult to 

answer, given that there’s much that remains unknown about the 

magnitude of this phenomenon. However, the fact that advances in 

computing and telecommunication have created new and far less 

costly access to the large supply—large global supply of skilled, relatively cheap labor, means that our skilled work force now faces a 

level of competition from abroad that has heretofore largely befallen our blue-collar work force. 

What differentiates foreign workers from their domestic counterparts in this discussion is somewhat less a skills gap than a huge 

and gaping wage differential. By off-shoring skilled and semiskilled white-collar jobs, U.S. firms are sending a clear market signal that these off-shored workers are worth the investment made 

by American firms. Note that throughout this recent period, when 

these concerns have surface, firms in affected industries, such as 

information technology, financial services, have been able to maintain historically high rates of productivity and profitability, even 

while their domestic hiring has stalled or contracted. 

Thus, while the extent of the phenomenon is unknown, it’s highly 

likely to increase further, as will the intended anxiety it generates 

among domestic workers in affected sectors. The policy question is, 

can such workers, in our labor market, upgrade their skill sets to 

re-justify the large wage differentials that they currently enjoy? 

And the answer depends on how high the skill bar gets raised by 

off-shoring. But if, for example, our radiologists, our architects, our 

computer scientists are in need of skill upgrades, this may be setting the bar unrealistically high, and such workers could easily see 

their living standards decline. 

Now, one central question for this analysis is whether the lack 

of skilled or highly educated workers is what’s holding back the 

current job growth. And evidence for this claim comes from a set 

of indicators which profile the conditions of labor market facing college-educated graduates. My question is, does the evidence support 

a claim made by an executive in a recent ‘‘New York Times’’ report, 

for example, that the motivation behind the current wave of whitecollar off-shoring was not solely lower cost, but also the lack of 

available, capable American workers. 

45

Now, a good proxy for the extent of labor-market demand for any 

particular group is the share of that population employed. And I 

have a figure that I think is—there’s a figure in my written—there 

it is. That figure shows the trend in the employment rates of college graduates over 25, and particularly of college graduates of age 

25 to 35. In both cases, you can see the employment rates have fallen steeply over the past few years at the end of those series up 

there. And more so than in any other period in the figure, dating 

back to 1979. 

Now, declines in employment rates can occur if older workers are 

retiring or leaving the labor market. But we certainly wouldn’t expect this to be the case for younger college graduates, who have 

every reason to stay in the market, tapping their newly acquired 

skills. But as this figure shows, college graduates age 25 to 35 have 

employment rates that have tumbled far further than any other 

group of college graduates. 

The next figure, figure three, actually, turns to the real hourly 

wages of young college graduates—those 25 to 35. After rising 

sharply through the mid-1980, the wages were flat over the next 

decade. The persistently weak labor market over the past few years 

has taken the momentum out of this series, reversed its course, 

and it has actually contracted over the past couple of years. These 

folks have been losing ground in real terms. 

Now, while the magnitude of the off-shoring trend is immobile at 

this point, the anecdotes suggest that the trend has accelerated. A 

rare academic study of the issue shows that between 2000 and 

2002, job loss was greater in occupations vulnerable to out-sourcing 

than in other sectors of our economy. 

A more tractable question is to what extent the education and 

training is a viable solution for the off-shoring phenomenon. It’s notable that this same solution was offered to manufacturing workers 

displaced by the increase in global trade, that has led to a very significant diminution in their job opportunities. Throughout the 

1990’s, these workers were told to train for expanding industries, 

such as IT, that were thought to be less exposed to global competition. But the fact that these service jobs can increasingly be outsourced provides a whole new set of challenges for the work force 

and the economy. 

I’m trying to move to my summary, here. This supply shock of 

putting our skilled workers in direct competition with a large and 

growing skilled work force overseas threatens to significantly depress the earnings of skilled workers here who enjoy a very substantial wage advantage. Now, the education solution, then, 

amounts to an effort to increase our skills even further, to engage 

in ever-higher value-added work that can support existing wage 

differentials, even in a global market place, with far more skilled 

workers available than were ever before. 

Now, the plausibility of this endeavor depends how high the bar 

is raised. Again, if we’re going head-to-head regarding competition, 

radiology, software design and financial analysis, we are raising 

the education requirements bar to a level previously not contemplated in this debate. 

Let me conclude by saying that my comments should by no 

means be taken to imply that our education system is problem-free, 

46

1These figures were report in the San Francisco Chronicle, March 7, pg. A1: ‘‘Offshoring’s 

Giant Target: The Bay Area.’’ 2For example, articles in the Financial Times from August 19, 2003, report on an Indian financial analysis firm called Office Tiger. The report shows an 8/1 ($96, 000/$12,000) pay differential between American and Indian financial analysts. Another comparison, also from the 

Financial Times, reveals a that US architects are paid about 10 times that of those in Vietnam. 

or that every student is given the opportunity to realize his or her 

potential. In fact, it’s in this very area of the distribution of educational access and quality that clear and very serious problems 

exist. But this is quite a different conclusion than one which implicated the system as a whole is failing to meet the demands of work 

now and in the future. 

I have a set of policy solutions that I would be happy to talk 

about during the course of our discussion, but let me just stress, 

in closing, that these are not on the supply or skill side. I think 

the evidence that I have discussed and showed suggest that we 

have a demand-side problem, and that’s what we need to address. 

Thank you very much. 

[The prepared statement of Dr. Bernstein follows:]

Statement of Dr. Jared Bernstein, Senior Economist, Economic Policy 

Institute, Washington, DC 

Few would question the importance of maintaining and promoting a highly skilled 

labor force. It does not take expert testimony to remind us of the importance of education, not solely in terms of prosperity and international competition, but also because of the innumerable and immeasurable benefits to society, families, and individuals when each of us has the opportunity to realize our potential. 

Congress has long appreciated the critical role of education in our society. One 

needs look no further than the formation of this very committee as a symbol of our 

determination to promote the critical goal of creating and promoting the most effective public policies to advance the role of education in our society and workforce. 

These assertions are so widely agreed upon by economists and policy makers that 

there is little need to present corroborating evidence. Suffice it to say that the evidence overwhelmingly supports the contention that all else equal, a more highly 

educated workforce is far more productive than the alternative. Such a workforce 

is also far more likely to generate the productive innovations that have helped build 

our economy to its world-class stature. 

Instead, this testimony will focus on three critical questions. 

• Is there any evidence that the lack of skill is responsible for our current employment problems? Can the unusually weak jobs recovery be explained by the 

lack of skill or education of the American workforce? 

• Is education the best policy solution for Congress to offer to the recent challenge 

posed by the so-called ‘‘offshoring’’ of service sector, white-collar jobs? 

• Is there evidence of a longer-term skills mismatch? Should our primary strategy 

for ensuring that our economy follows a strong and equitable path be that of 

enhancing educational opportunities? 

The answer to the first question is an unequivocal ‘‘no’’—the weak jobs performance of the last few years is wholly a demand-side phenomenon. The problem is not 

the lack of skilled workers; it’s the lack of jobs. 

The second question is more difficult to answer, given that there is much that remains unknown about the magnitude of the offshoring phenomenon. However, the 

fact that advances in computing and telecommunication have created far less costly 

access to the large global supply of skilled, relatively cheap labor means that our 

skilled workforce now faces a level of competition from abroad that has heretofore 

largely befallen our blue-collar workforce. 

Anecdotal reports reveal a pay gap between skilled workers in this country relative to those in offshoring targets in the neighborhood of 8 to 1. For example, the 

Bureau of Labor Statistics reports that a programmer in Silicon Valley, an area particularly vulnerable to the offshoring of tech jobs, earns about $78,000 annually, including benefits. According to PayScale, a compensation information firm, the comparable job in India pays around $8,000.1 Other reports show pay gaps of a similar, 

or even large, magnitude.2

47

3 Remarks by Chairman Alan Greenspan, The Critical role of education in the nation’s economy. Omaha, Nebraska, February 20, 2004. 4 It is often pointed out that the BLS Household Survey shows better job growth than the payroll survey over this period. However, numerous experts, including the Congressional Budget Office, the Commissioner of BLS, and Federal Reserve Chairman Alan Greenspan have stated that 

the payroll survey is a more reliable measure of employment in the current period. However, 

it is also the case that the current recovery is the worst on record for employment from the 

Household Survey as well. See Gould, 2004 for a discussion of these issues. 

What differentiates foreign workers from their domestic counterparts is thus less 

a skills gap than a huge wage differential. By offshoring skilled and semi-skilled 

white collar jobs, US firms are sending a clear market signal that these offshore 

workers are worth the investment made by American firms. Note that throughout 

this recent period when offshoring concerns have surfaced, firms in affected industries, such as information technology and financial services, have been able to maintain historically high rates of productivity and profitability even while domestic hiring has stalled or fallen. Thus, while the extent of the phenomenon is unknown, it 

is highly likely to increase further, as will the attendant anxiety it generates among 

domestic workers in affected sectors. 

The policy question is: can such workers upgrade their skill sets to re-justify the 

large wage differentials that they currently enjoy? The answer depends on how high 

the ‘‘skill bar’’ gets raised by offshoring. If, for example, our radiologists, architects, 

and computer scientists are in need of skill upgrades, the bar may be set unrealistically high, and such workers could easily see their living standards decline. 

The answer to the third question—is there a skill mismatch between the jobs 

we’re creating and the labor force coming out of our schools—is also difficult to pin 

down. The conventional wisdom, such as that expressed by Federal Reserve Chairman Alan Greenspan in a recent speech, is that this is the case.3 But a closer look 

suggests that the case is not nearly so airtight. 

Historically, our education system has generally provided an adequate supply of 

skilled workers to meet employers skill demands, and lately, the supply of skill, 

along with its productive capacity, has accelerated. In fact, the knowledge of our 

skilled workforce in tandem with capital investment and technological innovation 

appear to have given rise to a new golden era of accelerated productivity growth. 

This may be a particularly surprising finding given the well-known growth in the 

skill premium, or relative wage, of college educated workers. The rise in their pay 

relative to that of less educated workers has been taken as prima facie evidence 

that skill demands have been unmet in recent years, but for reasons discussed 

below, this variable offers only partial evidence of unmet skill demands. 

I thus conclude that: 

• our current, short-term labor market difficulties are by no means skill-related. 

Though the recession is behind us, we continue to suffer a protracted contraction of demand for labor. 

• The practice of American firms outsourcing white-collar jobs to other countries 

poses a potentially huge new challenge for our labor force. While upgrading the 

skill sets of our workers relative to those offered by our trading partners may 

well be the way forward, given the height to which such a strategy raises the 

education bar, it may not be a very realistic policy solution. 

• While it is widely accepted that our schools produce workers whose skills are 

not adequate to employers’ demands, the evidence for this contention is not 

strong. In fact, recent accelerated trends in American skill supply and productivity would suggest that no such mismatch exists. 

These conclusions should not, however, lead us toward complacency; our education 

system is by no means working perfectly. In fact, there are significant problems, especially in our K–12 system of public education, but these are largely distributional. 

Despite the fact that access to quality education is a basic American value, such access does not now exist for too many low income families in disadvantaged communities. 

The Short Run: The Problem is Demand, Not Skills 

As is by now well known, we are in the midst of the worse jobs recovery on record, 

since the Bureau of Labor Statistics began tracking the nation’s payrolls in 1939.4

Despite the fact that we are 27 months into a new recovery, the level of employment 

remains 2.4 million jobs down from the end of the last business cycle peak in March 

of 2001. Never before has it taken as this long to regain the jobs lost in a recession. 

Even in the last jobless recovery of the early 1990s, by this time employment had 

48

5This is the average number of jobs added per month since September 2003, when payroll 

employment began to grow. 6This issues are presented in a New York Times article, ‘‘New Patterns Restrict Hiring,’ by 

Louis Uchitelle, March 6, 2004. 7See ‘‘Chief Executives’ Survey Fuels Hopes of Hiring’’ by David Leonhardt, New York Times, 

March 4, 2004. 

surpassed its prior peak by almost 900,000 jobs and we were adding over 200,000 

jobs per month on average. The comparable figure today is 60,000.5

Economists have tried to explain the persistence of such a weak jobs recovery, 

particularly in the context of what has been fairly strong overall economic growth 

in recent quarters. While it is beyond the scope of this testimony to go into the details of these explanations, the prime candidate is faster productivity growth. As we 

at EPI have noted, this explanation is only partly convincing, given that productivity usually accelerates coming out of a recession (though more so this time). We 

offer other explanations, including employers’ increased reluctance to engage in permanent hires.6

However, the question for this analysis is whether the lack of skilled or highly 

educated workers is what’s holding back job growth. Here, the evidence clearly 

points to ‘‘no’’—it is lack of jobs, not lack of skilled personnel. The problem is on 

the demand, not the supply side. 

Evidence for this claim comes from a set of indicators which profile the conditions 

of the labor market facing college-educated workers. Along with the overall group 

of college graduates, I also provide analysis of younger grads—age 25–35—as these 

workers offer the most direct evidence of the ability of our current labor market to 

absorb those workers with newly minted skill sets. 

The object of this analysis is to see if there is evidence of a skill shortage in the 

current labor market. For example, does the evidence support a claim made by an 

executive in a recent New York Times report, that the motivation behind the current wave of white-collar offshoring was not solely costs, but also the lack of available, capable American workers? 7

A good proxy for the extent of labor market demand for a particular group of 

workers is the share of that population employed. Figure 1 shows the trend in employment rates of all college graduates over 25 and young college graduates, age 25–

35. In both cases, employment rates have fallen more steeply over the past few 

years than in any other period in the figure, dating back to 1979. By this measure, 

demand for skilled workers faltered in the recession of 2001 and has yet to recover. 

Declines in employment rates can occur if older workers retiring or leaving the 

labor market for non-economic reasons. However, we would certainly not expect this 

to be the case among younger college graduates, who have every reason to stay in 

the market, tapping their newly acquired skills. In fact, as the figure shows, college 

graduates age 25–35 have employment rates that exceed those of overall college 

grads by about eight percentage points. As the top line in Figure 1 reveals, their 

employment rates have tumbled even further than those of all college grads. 

Figure 2 uses some of these same data on young college graduates to construct 

a comparison over three roughly similar periods in the business cycle, going from 

an economic peak to three years later. The figure reveals an important difference 

in the current period, as employment rates of young college grads are considerably 

further below their recent peak in this recovery than in the prior two. Clearly, this 

most recent period has been one of uniquely weak labor demand for workers with 

newly minted skills. 

Figure 3 turns to the real hourly wages of young college graduates, those 25–35. 

Note that after rising about 10% through the mid–1980s, their wages were flat for 

the next ten years, before rising sharply in the tight labor market of the latter 

1990s. However, the persistently weak labor market since 2001 took the momentum 

out of the series, and it reversed course in 2002 and 2003. 

The lack of demand for these workers grows directly out of the lack of job creation 

in fields that disproportionately employ them. A salient example is information technology, a sector where many young college graduates found employment over the 

last decade, and a sector that is also relevant to the offshoring debate. As shown 

in Figure 4, net jobs losses since 2001 been particularly steep. 

These results—net job losses, falling employment rates, along with a reversal of 

wage growth—strongly point to weak demand for our existing stock of college graduates, a stock that, of course, continues to expand. The data strongly contradict a 

skill supply-constraint interpretation. 

49

8 Bardhan, Ashok and Cynthia Kroll, UC Berkeley Offshoring Study. 

9Time Magazine, ‘‘Is Your Job Going Abroad?’’ March 1, 2004. 

10Defined here as internet publishing, telecom, and internet service providers. 11 EPI manuf doc 

Offshoring and Skill Supply: Will the Skills Bar Be Raised Unrealistically High? 

As is now widely appreciated, technological advances in computing and telecommunications have combined to enable American firms from our service sector to 

increase the pace of outsourcing production tasks to other countries. A particular 

concern is the so-called ‘‘offshoring’’ of white-collar, skilled jobs, placing our advanced workers in direct competition with those who will do similar work for far 

lower wages. 

While the magnitude of this trend in unknowable at this point in time, anecdotal 

accounts strongly suggest the trend has recently accelerated. A rare academic study 

of the issue showed that between 2000 and 2002, job loss was greater in occupations 

vulnerable to offshoring, however, some of these losses—such as those in IT—are 

clearly related to weak cyclical factors in our economy.8

At any rate, given the difficulties in the current labor market for highly educated 

workers, it is reasonable to ask if these two trends are related. Is increased 

outsourcing of white-collar jobs partly responsible for the weak job market for college graduates, along with the very slow employment gains in industries such as 

IT? 

Again, since the extent of offshoring white-collar jobs is not known, we cannot provide a conclusive answer to the question of its role in the weak recovery. One media 

account suggests that 10% of the over two million net job loss since the recession 

might be attributable to offshoring, and while this is pure guesswork, it is not implausible, though it may represent an upper bound.9

Certainly, circumstantial evidence exists. Job creation has been particularly weak 

in sectors associated with white-collar offshoring, most prominently, information 

technology. The lack of net job creation in that industry has been striking, as shown 

in Figure 4. In fact, while the manufacturing industry is characteristically cited as 

the weakest sector over the past few years, in percentage terms, employment losses 

in IT services 10 outpaced those in manufacturing since the recovery began in November of 2001. IT fell by 16% over this period, compared to 10% for manufacturing. 

Also, the fact that the timing of the above-noted difficulties faced by college-educated workers corresponds to what appears to be an acceleration of the offshoring 

trend has led many observers to ‘‘connect the dots’’ between these phenomena. 

A more tractable question is: to what extent is education and training a viable 

solution for the problem of offshoring white-collar employment, regardless of its 

magnitude? It is notable that this same solution was and is offered to manufacturing workers displaced by the increase in global trade that has in part led to a 

very significant diminution in blue-collar jobs over the past decade.11 Throughout 

the 1990s, these workers were told to train for expanding industries, such as IT, 

that were thought to be less exposed to global competition. The fact that such service jobs can increasingly be outsourced provides a whole new set of challenges to 

our workforce and our economy. 

Still, the recommendation to displaced blue-collar workers to learn new skills commensurate with the evolving economy made sense for two reasons. First, it suggested labor movement from a contracting sector—manufacturing—to an expanding 

one: services. Second, it reasonably suggested that displaced blue-collar workers 

needed a new skill set for jobs in services that most often had quite different requirements than factory work. 

But does this policy solution also make sense vis-a-vis the challenges posed by 

offshoring of service employment? 

With global competition in manufacturing, our less-skilled workers were placed in 

competition with less skilled workers from countries with far lower earnings and 

similar value added. Our comparative advantage, it was argued, was both our large 

relative stock of skilled workers, and our greater ability—relative to our competitors—to produce an increasing flow of such workers. However, some less developed 

countries have been sharply increasing their own supply of skilled workers, meaning 

that offshoring has the potential to vastly increase the global supply of skilled labor, 

eroding our comparative advantage both in terms of stock and flow. 

Comparing data from our education statistics and to a recent report from an Indian IT association provides an instructive example. India is adding about twice as 

many college graduates to its workforce per year as we are (1.2 million in the US 

50

12See ‘‘The IT Industry in India,’’ report by the National Association of Software and Service 

Companies (NASSCOM), 2004. 13These figures were report in the San Francisco Chronicle, March 7, pg. A1: ‘‘Offshoring’s 

Giant Target: The Bay Area.’’ 14See above Financial Times references to financial analysts at the Indian firm, Office Tiger, 

and to architects. Anecdotes of outsourcing programmers jobs are from the SF Chronicle article 

cited above. 

versus 2.5 million in India).12 Of these Indian graduates, over 250,000 were ‘‘engineering degree and diploma holders’’ in 2002 compared to 70,000 bachelor’s degrees 

in engineering awarded here. What’s more, the 2003 entering class for Indian engineers is reported to be 375,000, a large jump suggesting that the Indian population 

is responding to the market signal of forthcoming global demand in this field. 

This supply shock threatens to significantly depress the earnings of skilled workers here, who enjoy a very substantial wage advantage over workers with similar 

skills in less-developed economies. Anecdotal reports reveal that the pay gap between skilled workers here and those in offshoring target countries is in the neighborhood of 8 to 1. For example, the BLS reports that a programmer in Silicon Valley, an area particularly vulnerable to offshoring of tech jobs, earns about $78,000 

annually, including benefits. According to PayScale, a compensation information 

firm, the comparable job in India pays around $8,000.13 Office Tiger, an Indian financial services firm, also reports an 8/1 ($96, 000/$12,000) pay differential between 

American and Indian financial analysts. Another comparison, from the Financial 

Times, reveals a that US architects are paid about 10 times that of those in Vietnam (about $60,000/$600 per year). 

Employers have argued correctly that the costs associated with outsourcing, such 

as language differences and lack of personal contact, reduce the labor-costs savings 

generated by this large gap. But by stepping up their outsourcing activities, they 

are sending a clear market signal that these skilled workers abroad are a better 

value than those whom they are replacing at home. 

The education solution then amounts to an effort to increase our skills even further, to engage in ever-higher value added work that can support existing wage differentials even in a global job market with far more skilled workers available than 

were available to American firms just a few short years ago. 

The plausibility of this endeavor depends essentially on how high the bar is 

raised. If, for example, as has been reported, our hospitals and tech firms outsource 

radiology and programming jobs to low wage counties, are we to assume that radiologists need a better skill set? Such reasoning has an undeniable logic until we realize these persons are already among the most highly educated in our country, if 

not the world. To contemplate the notion that they need to re-skill raises the education-requirements’ bar to a level far above that which we’ve ever contemplated in 

this debate. 

An important piece of information in this regard is how high up the skills’ chain 

do these offshored jobs reach. The evidence, largely anecdotal at this point, is mixed, 

with reports of both low- and hi-tech jobs being outsourced. While the offshoring of 

lower wage/skill, back-office operations, such as billing, claims’ filing, and tech support, has been widely reported, anecdotes abound regarding higher-end jobs, from 

Ph.D. level financial analysts to architects, radiologists, and software engineers.14

Over the Longer Term Are We Producing Too Few Skilled Workers? 

No serious analyst could question the value and importance of a skilled workforce. 

Years of economic research has established that an increasing supply of skilled 

workers is a critical input into production, leading to higher productivity growth and 

better living standards throughout the economy. In addition, the great innovations 

that have helped to establish our world-class economy are clearly linked to the quality of our workforce. 

Yet, many critics of the American education system, particularly K–12 public 

schooling, argue that we fail to produce enough skilled workers to meet employers’ 

demands. For many labor economists, the most convincing evidence of this claim is 

the fact that over the past few decades, at the same time the share of college graduates in the labor force was increasing, the ratio of their earnings to those of lesseducated workers also grew. If demands for skills were adequately met, so this argument goes, percentage wage gains should have been roughly equal between college grads and less educated workers. 

However, there are a number of reasons to question the too-readily accepted notion of a skills mismatch in our labor market, either now or in the future. These 

counterarguments are discussed at length in various papers cited below, and are 

only briefly presented here. 

51

• There are other explanations for the increase in the college wage premium. As 

discussed in Mishel et al, 2002, the rise in the college premium has been partly 

driven by shift in economic structures that have served to lower the wages of 

less educated workers, such as the loss of manufacturing jobs, fewer unions, 

lower minimum wages, and, excepting the latter 1990s, high average unemployment rates. Regarding this last point, note that the skill premium grew much 

less quickly in the 1990s as in the 1980s, despite the fact that the latter decade 

arguably should have seen greater skill demands due to the accelerated dispersion of technology. But tight labor markets—a demand side factor—led to faster 

wage growth for the less skilled. • Contrary to the skills’-deficit argument, the real wages of college graduates 

have not been consistently bid up. Refer back to Figure 3 and note that for 

about 10 years, from the latter 1980s through the mid–1990s, the real wages 

of young college graduates were flat. Their premium may have been rising over 

this period, but as just noted this was partly due to the structurally-induced 

decline in wages of less-educated workers. Presumably, a true skills shortage 

should lead to rising absolute wage levels, not simply relative wage gains. • Occupational employment shifts show steady, not accelerating growth of skill 

demands. It is critical to note that skill demands have always risen over time 

and will continue to do so. However, the ‘‘skills mismatch’’ claim argues that 

the rate of skill demands has increased. In Bernstein and Mishel (2001), we 

present an index of occupational skill demands and show that it has proceeded 

at a steady pace over the past 25 years. 

• BLS occupational projections do not imply an acceleration of skill demands in 

the future. Recent projections of job growth by occupation do not paint a picture 

of difficult-to-meet skill demands. While most of the fastest growing occupations 

call for at least a college degree, these occupations are growing from a low base 

and are thus not contributing the most jobs to the future economy. Conversely, 

of the 30 occupations adding the most jobs over the next decade, only eight call 

for a college degree. These occupations are expected to add 12.6 million jobs 

over the next decade, and only 30% are expected to require at least a college 

degree. 

• At the same time, the quality of our labor supply has increased significantly. 

We have doubled the share of college educated workers, including those with 

advance degrees, from 14.6% in 1973 to 29.1% in 2003. Conversely, we have cut 

the share of high-school dropouts from 28.5% in 1973 to 10.6% in 2003. 

• Our workforce has become more productive over time. This often overlooked 

point poses a serious challenge to the skills-mismatch position and is discussed 

in more detail. 

Not that not only has the quality of the US labor force increased over time, but 

the growth rate of labor quality has accelerated. Figure 5 plots two indexes of labor 

hours from the BLS’s productivity accounts. One series is the usual hours series 

from the labor productivity accounts, and the other is adjusted for skill primarily 

education and experience from the multifactor productivity accounts. Note that the 

two series grow at the same rate until the late 1970s, implying that the quality of 

labor was growing no faster than hours worked and thus was not an accelerating 

factor in the growth of labor productivity. Post–1979 however, the quality adjusted 

hours index grew about 0.5% per year faster than the unadjusted index, implying 

that labor productivity growth was receiving an added boost from the improved education and experience of our workforce. 

This final point, in tandem with recent dramatic productivity gains achieved by 

our workforce poses a challenge to the skills-mismatch argument. Along with rising 

wage differentials, it is common for proponents of the argument to present test score 

data showing our students performing poorly relative to those in other countries. 

While such findings are surely worthy of concern, a better outcome measure is simply the productivity of our workforce. 

By this measure, we are performing quite well in historical terms. Trend productivity growth accelerated by about 1% per year in the latter half of the 1990s—from 

1.5% to 2.5% per year—and has accelerated about another 0.5% since then (though 

many experts suspect that this added boost is less sustainable). Contrary to a skills 

deficit story, the acceleration of this most important economic indicator suggests 

that the knowledge of our skilled workforce in tandem with capital investment and 

technological innovation appear to have given rise to a new golden era of accelerated 

productivity growth. 

Conclusion 

This latter discussion should by no means be taken to imply that our education 

system is problem-free, or that every student is given the opportunity to realize his 

52

or her potential. In fact, it is in this arena of the distribution of educational access 

and quality that clear and very serious problems exist. The goal of ensuring access 

to a quality education for all continues to elude us as a nation. Realizing this goal 

must be a central purpose of education policy. 

But this is quite a different conclusion than one which implicates the system as 

a whole in failing to meet the demands of work now and in the future. As I have 

argued, there is simply no credible argument that our short term labor market 

weakness is skills-related. The problems right now are on the demand side, specifically lack of job creation. In fact, the share of non-employed college graduates is at 

a 25 year high, suggesting ample supply of skill in the short run. 

In the medium term, the offshoring of white-collar jobs poses a serious threat to 

our skilled work force. While evidence is sketchy regarding the extent of the phenomenon, it seems quite clear that technological advances have lowered the transaction costs of bringing potentially millions of skilled workers from low-wage countries into the global labor market. More to the point, many of these workers appear 

to have comparable skills to our own and will work for compensation that is 1/8 or 

even less of domestic workers’ compensation. 

An education solution to this problem suggests that our skilled workers need to 

upgrade their skill sets further to ‘‘re-justify’’ the existing compensation gaps. But 

given the fact that some of our workers affected by offshoring are among the most 

skilled in the country, if not the world, this solution may not be realistic. 

Thus, we must focus not only on the supply-side as in skill-based policies, but 

must also consider policy solutions for creating jobs in the United States and keeping existing jobs here. Examples of legislation that might help in the short-run include: changing government procurement policies to prohibit contracts from being 

performed overseas unless necessary, eliminating tax deferral of profits earned 

abroad, and closing other tax loopholes that encourage, and even subsidize, companies to ship jobs overseas. Funding government-sponsored infrastructure, such as 

the Transportation Bill currently under discussion, has the potential to directly create employment, and increasing our investment in research and development will 

further promote the technological innovations that have been so critical to advancing our economy and providing new opportunities for our highly-educated workers. 

Ideas have been raised to slow the pace of offshoring by raising the costs to firms 

who engage in the practice. A tax on firms that offshore could yield revenues that 

could be dedicated to income support, education, and health care of the workers who 

have lost their jobs overseas. Such a proposal carries a twofold purpose: it lowers 

the incentive by placing a tax on the savings generated by the pay gap that US 

firms are tapping, and it provides benefits to displaced workers. However, in order 

to levy such a tax, we would need to identify both the extent to which firms are 

outsourcing US jobs, and workers that were affected. This identification could prove 

to be extremely burdensome (e.g., while some workers might be able to show they 

lost there job to offshoring, others, such as those who never got hired for an domestic job opening that went overseas, would have no way of knowing). A simpler approach would be a broader tax on any service imports, with revenues dedicated to 

providing a better safety net and training resources for unemployed workers. 

Though I have argued against the existence of a widespread skills mismatch in 

our labor market, there are many who could readily benefit from education and job 

training. It is notable and distressing in this regard that the Administration’s fiscal 

year 05 Budget does not make existing education and training programs a priority, 

but instead proposes significant cuts in their funding. 

In the spirit of today’s testimony, not only should Congress increase funding for 

existing programs, it should expand these programs—such as extending the Trade 

Adjustment Assistance Act (TAA) to cover service workers, providing more generous 

tax credits for health care premiums under TAA, and extend unemployment insurance benefits for the long-term unemployed who have exhausted their regular state 

benefits. This latter idea is particularly relevant given that the weak pace of job creation in the current labor market has led to 20-year highs in the share of unemployed workers jobless for at least half-a-year (22.9% last month). 

Finally, the problems of the economy and outsourcing of jobs do not take place 

in a vacuum, but are intricately linked to other social issues. Long-term policy avenues should also be considered, such as improving access to the health care system 

to both keep employers’ costs down and to ensure that laid off workers maintain 

health insurance, ensuring that all trade agreements have adequate and enforceable 

labor and environmental protections built into the core of the agreement, and coordinating multinational efforts to devalue the dollar against Asian currencies to boost 

exports and regulate the United States’ trade imbalance. 

53

Bibliography 

Bernstein, Jared and Lawrence Mishel . 2001. ‘‘Seven reasons for skepticism about 

the technology story of U. S. wage inequality.’’ In Berg, Ivar and Kalleberg, 

Arne. I. eds. Sourcebook of Labor Markets: Evolving Structures and Processes. 

New York, New York: Kluwer Academic/ Plenum Publishers. 

Gould, Elise. 2004. ‘‘Different sets of employment numbers tell the same story: slow 

job growth.’’ Economic Snapshots. Economic Policy Institute. <http://

www.epinet.org/content.cfm/webfeatures—snapshots—archive—02252004>

Gould, Elise. 2003.‘‘Measuring employment since the recovery: a comparison of the 

household and payroll surveys.’’ Economic Policy Institute. <http://

www.epinet.org/briefingpapers/148/bp148.pdf>

Mishel, Lawrence, Jared Bernstein, Heather Boushey. 2003. The State of Working 

America, 2002/ 2003. Ithaca, New York: Cornell University Press. 

[Attachments to Dr. Bernstein’s statement follow:]

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92479.001
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92479.002
56

Chairman BOEHNER. Mr. Grady. 

STATEMENT OF ROBERT E. GRADY, MANAGING DIRECTOR, 

THE CARLYLE GROUP, ON BEHALF OF THE NATIONAL VENTURE CAPITAL ASSOCIATION, SAN FRANCISCO, CA 

Mr. GRADY. Good morning, Mr. Chairman. Thank you very much 

to you and Mr. Miller, and the Members of the Committee for the 

opportunity to testify. It’s a special pleasure to be back in this 

building, where I started my own career right out of college. 

I’m here to testify on behalf of the National Venture Capital Association, the NVCA, which is the premiere association representing the VC industry in this country. And it represents over 

450 member firms, and the vast majority of venture capital professionally managed in this country. 

My firm, Carlyle Venture Partners, or CVP, is a member of the 

NVCA. What we do is, we make investments in early stage, preIPO companies, in things like semi-conductors, software, security, 

storage devices, RFID technology generally sold to the enterprise 

market, and in medical devices to cure conditions like spine problems, macular degeneration, congestive heart failure, etc. 

Interestingly, although CVP was only started in 1997, the 35 

companies which we helped start, and in which we still hold investments today, employ over 3,700 people. Mr. Miller might be interested to know, I think over 1,000 of them are in the San Francisco 

Bay Area, and quite a large number in the East Bay. The fastgrowing East Bay. Our most recent fund, CVP-2, which was closed 

only in 2002, has helped fuel the growth of startup companies that 

today employ over 1,100 people. 


92479.003
57

My point in highlighting our experience is not to tout our own 

firm, but rather to illustrate the point that venture capital investment has been a major source of job creating capital in the United 

States for the past 30 years. Two years ago, the NVCA commissioned a study by Wharton Economatrics and DRI, which had some 

staggering results. It showed that in the year 2000, venture-backed 

firms accounted for $1.1 trillion in sales. That’s about 11 percent 

of U.S. GDP. 

It also found that venture-backed companies directly employed 

12 and-a-half million people, indirectly accounted for 27 million 

jobs, and it found that venture-backed companies had far higher 

levels than average of R&D spending, patents per employee, etc. 

And it also found that these benefits are spread widely across the 

United States. If you look at last year, for example, $18 billion was 

invested by venture firms into more than 2,700 companies in 48 

different states across a broad array of industry sectors. 

The point being, of course, that venture capital—the leverage on 

venture capital investing in terms of job creation and innovation is 

substantial everywhere in America. So we appreciate the opportunity this morning to offer the Committee our views on how to 

deal with the changing nature of the economy, and how keep the 

kind of environment present here where we can keep creating 

those jobs. 

First of all, our economy has always been extremely dynamic. 

That’s one of its greatest strengths. And innovation has played a 

key role in allowing our economy to constantly change through 

many cycles, while, over time, raising our standard of living, improving the quality of American lives, and creating a significant 

number of jobs. One of the roles of venture capital has been to 

spawn new companies, which in some cases went on to create 

whole new industries. As I mentioned, not just in technology and 

health care, but also in manufacturing, retail trade, business services, construction. 

Venture capital companies spawn the gamut from Genentech, 

which basically invented the biotechnology industry and today employees over 5,200 people, 80 percent of which went to 4-year college, to FedEx, which pioneered what’s today a $27 billion industry, 

to Staples, which, of course reinvented the office supply industry. 

Now, we believe America’s job creation record and economic performance generally is enviable. We are, of course, the largest economy in the world. 

But throughout the last decade, we have created jobs and grown 

faster, more consistently than, for example, the advanced economies in Europe. Even during the boom of the late 1990’s, unemployment rates of Germany and France and other European nations remained stubbornly high, hovering around 10 percent. And 

so it’s worth examining what caused our out-performance relative 

to some of these countries, and thinking about how to chart a 

course for the future. 

The NVCA and I personally believe that the correct response to 

both outsourcing, to the evolving nature of the economy, is to be 

prepared to compete, and to compete well. Today, the issue is not 

so much the short term, because the economy is not in crisis. Our 

unemployment rate is 5.6 percent, inflation and interest rates are 

58

low, economic growth has been strong. But the long term—what 

can we do to be better able to compete in the economy—the knowledge economy of the future? 

So let me just hit four or five points about how we can better 

compete. First, I believe we must ensure the availability of risk 

capital. The businesses that venture capitalists invest in are generally very high-risk. Often they do not succeed. But as I mentioned, they create—they generally contribute greatly in terms of 

job creation. According to the Census Bureau, since 1988, almost 

10 million jobs have been created by companies with less than 500 

employees. 

In that regard, we believe incentive for capital formation should 

remain. As you know, we supported the amendments last year to 

reduce the capital gains rate to 15 percent. We do believe, though, 

it should be made permanent. 

Second. We must maintain transparent, liquid, and trusted capital markets. America’s deep and trusted capital markets are widely acknowledged to be the deepest and most transparent in the 

world. That is a key asset that Congress should do everything in 

its power to correct. And we’ve supported the reforms which would 

improve transparency. That being said, we do not believe that we 

should adopt measures in the name of corporate reform that will 

have the affect of making financial statements less reliable, and 

choke off the innovation I’m talking about. 

So, in that regard, for example, we don’t believe it is either prudent or financially and accounting-wise correct to require the expensing of incentive-based stock options to employees. 

Third. Improving our schools. The NVCA has long believed that 

the health of the schools is essential to the health of the country. 

We certainly congratulate the Committee—Members of both sides 

of the aisle—on the No Child Left Behind legislation. We believe 

there’s a bipartisan consensus to invest more in education at the 

Federal, state and local level. But the real trick, which perhaps we 

can get to in the Q&A, is how to make sure that these resources 

are deployed to maximum effect. That is, how can we attract the 

most talented people to the classroom to teach? How can we use 

technology and better infrastructure in our classrooms? How can 

we address some of these critical problems? 

Fourth, we have to constantly seek to maintain the world’s best 

system of higher education. And here, too, we need to increase the 

proportion of science and math and engineering graduates if we are 

to remain competitive. We do believe that, as Chairman Greenspan 

said this morning, equal access to higher education and to skills is 

critical. And in that regard, just as no child should be left behind, 

no adult in need of higher education or re-training should be left 

behind, either. 

Fifth. We believe it is critical to invest in basic research and development. A key feature of this preeminent university system that 

I mentioned has been the funding of individual investigators 

through the NIH, the NSF, the DOE, the DOD, the other research 

agencies of the Federal Government. And we believe these investments have been critical in terms of spawning innovation in material science, high-performance computing, high-energy physics, biomedical research. 

59

Now, we know that the Congress faces severe budgetary constraints. I would say, in this regard, that venture capitalists in particular recognize that among your constituents are very focused on 

the importance of the future. And most of the investment we’re 

talking about, in education, universities—someone earlier in the 

hearing mentioned infrastructure—are in the domestic discretionary category, which has been most constrained. I think we, in 

particular, therefore recognize that without entitlement reform, investments in the future are going to be under-funded structurally. 

Sixth, maintaining flexible labor markets. There was some discussion of this this morning. I would simply note that in Europe, 

for example, in some countries, if you hire someone for a relatively 

short period of time, they can’t be terminated for up to 2 years. 

And those countries—this has not had the experience of increasing 

employment. It has actually decreased the willingness of people to 

hire people in the first place. Similarly, with extended plant closing 

notifications, it’s a discouragement to hiring people. 

Lastly, expanding world trade. Part of our faith in the innovation-led and knowledge-based economy is the conviction that American ideas and products can compete anywhere in the world. The 

U.S. Trade Representative’s office showed that exports accounted 

for 25 percent of America’s growth, and supported 12 million jobs 

in the last 10 years. In Ohio alone, for example, Mr. Chairman, I 

believe there were two billion—exports increased by $2 billion. 

Finally, it is true that the world remains a highly competitive 

place. As venture capitalists, we see our job as to help find and 

fund those new areas that promise to change for the better, the 

way we live and work. As we sit here this morning, a whole new 

generation of venture capitalists are funding companies in everything from nano-technology to genetics, to energy, to fuel cells, to 

RFID, as I mentioned and security. What do each of these areas 

have in common? In every single one of them, the United States 

is the leader. 

So, obviously, every time, as the economy changes, there will always be the question of whether to continue to pioneer, or whether 

to turn inward to try to consolidate our gains. And the NVCA just 

wishes to be on record in front of the Committee in being in favor 

of making the investments today that we need to ensure our continued leadership tomorrow. 

Because in the end, we believe that it is this combination of innovation and entrepreneurship that will continue to improve our lives 

here in America, to maximize the creation of new jobs to help offset 

the churn, if you will—the erosion that’s always been part of our 

economic landscape, and to provide Americans with the most exciting set of opportunities in the future. Thank you very much. 

[The prepared statement of Mr. Grady follows:]

Statement of Robert E. Grady, Managing Director, The Carlyle Group, on 

behalf of the National Venture Capital Association, San Francisco, CA 

Mr. Chairman and Members of the Committee. Good morning. My name is Robert 

Grady, and I am here to testify on behalf of the National Venture Capital Association, the ‘‘NVCA’’. The NVCA is the premier association representing the venture 

capital industry in the United States, with over 450 member firms, representing the 

overwhelming majority of venture capital funds professionally managed in this 

country. Our mission is to foster greater understanding of the importance of venture 

capital to the U.S. economy, to represent the public policy interests of venture capVerDate 0ct 09 2002 12:12 Oct 14, 2004 Jkt 000000 PO 00000 Frm 00063 Fmt 6633 Sfmt 6621 H:\DOCS\92479.TXT EDUWK PsN: NNIXON
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italists and portfolio companies, to stimulate the flow of equity capital into emerging 

growth companies, to provide reliable industry data, to maintain high professional 

standards in the industry, and to sponsor professional development opportunities for 

our members. On behalf of the NVCA, let me first express my thanks for the invitation to testify. 

My firm, Carlyle Venture Partners, is a member of the NVCA. I serve as the managing partner of Carlyle Venture Partners, which makes investments in early stage 

(generally pre-initial public offering) companies which provide technology infrastructure—such as semiconductors, software, security and storage solutions, and radiofrequency identification equipment—to enterprises, and which develop and manufacture medical devices to treat more effectively conditions such as spine problems, 

macular degeneration, and congestive heart failure. We have offices in San Francisco, California; Tyson’s Corner, Virginia; and Washington, D.C.. Carlyle Venture 

Partners is part of the Carlyle Group, which is by most measures one of the largest 

private equity firms in the world, with about $16.5 billion in private equity funds 

under management and over 500 employees. 

In addition to my work at Carlyle, I have served since 1993 on the faculty of the 

Stanford Graduate School of Business (which I am proud to call my alma mater as 

well), where I serve as a Lecturer in Public Management, teaching courses in the 

investment process and in understanding the regulatory environment. 

Interestingly, although Carlyle Venture Partners was only started in 1997 and 

began making investments then, the 35 companies which we helped to get started 

and in which we still have investments today employ over 3,700 people. Our most 

recent fund, Carlyle Venture Partners II, which was closed in 2002, has helped fuel 

the growth of startup companies that today employ over 1,100 people. 

My point in highlighting the experience of Carlyle Venture Partners to the Committee is not to tout our own firm, although we are proud of its record, but rather 

to illustrate the point that venture capital investment has been a major source of 

job-creating capital in the United States for the past thirty years. 

Two years ago, the NVCA commissioned the firm Wharton Econometrics/Decision 

Resources, Inc. (‘‘Wharton/DRI’’) to undertake a study of the impact of venture capital investing on the U.S. economy. The results of the study were staggering: Wharton/DRI found that, in the year 2000, venture-backed firms accounted for $1.1 trillion in sales—or about 11% of U.S. Gross Domestic Product. Further, the study 

found that venture-backed firms directly employed over 12.5 million people, and directly or indirectly supported over 27 million people. In addition, the study found 

far higher than average levels of R&D spending as a percentage of sales and patents 

generated per employee. Finally, it found that these benefits were widely spread 

across the United States, with venture-backed companies employing people in 49 of 

the 50 states. The point that the study made clear is that the leverage on venture 

capital investing, in terms of job creation and innovation, is substantial—everywhere in America. In 2003, $18.2 billion in venture capital investment was directed 

at more than 2,700 companies in 48 states across a broad base of industry sectors. 

This data shows that, contrary to common belief, venture capital investment is 

not just a Silicon Valley, high technology phenomenon. Opportunities for innovation 

are everywhere, not just in the technology sector of our economy. In addition to 

Genentech, Intel, Cisco and e–Bay, U.S. companies that were originally venturebacked include Airgas, Amazon, Boise Cascade, Costco, Starbucks, Home Depot and 

Federal Express. Collectively, these innovative organizations have obtained countless patents, created business models that have been imitated and leveraged by others, and developed product lines and service delivery channels that never before existed. 

America’s venture capital industry, which has helped fuel so much job creation 

in the past few decades, appreciates the opportunity to offer the Committee our 

views on how to create and foster the type of environment that will allow America 

to keep creating jobs. 

I believe the Committee’s concern this morning is how to respond to the changing 

nature of our economy. For example, there has been, in the press and elsewhere, 

a great concern expressed regarding the so-called outsourcing of certain functions 

to other nations. Our economy has always been extremely dynamic—that is one of 

its greatest strengths. The US economy has continuously reinvented itself cycle after 

cycle through innovation while simultaneously raising the standard of living of 

Americans and improving the quality of our lives. One of the roles of venture capital 

has been to spawn new companies that in some cases went on to create whole new 

industries. Venture capital has been a critical catalyst in creating entire industry 

clusters such as biotechnology, Internet services and software. It has also impacted 

more traditional sectors such as manufacturing, retail trade, business services, and 

construction. 

61

Let me give the Committee two examples: 

• In 1976, a biochemist and a venture capitalist founded a small company to explore a new field called recombinant DNA technology. They called the organization Genentech and went on to help invent the biotechnology industry. Today 

Genentech employs more than 5,200 individuals of which more than 80% have 

college degrees. The company is consistently named one of the Best Companies 

to Work For. Two weeks ago, Genentech received FDA approval for Avastin, a 

therapy for first line colorectal cancer patients. • In 1965, a Yale undergraduate student named Frederick Smith wrote a term 

paper on the inadequate airfreight system in the U.S.. In June 1971, Federal 

Express incorporated and on its first night it delivered 186 packages to 25 US 

cities. The company went on to change the way our country works. Federal Express not only improved business productivity exponentially; it created the $27 

billion U.S. ground and air express market and that spawned more than 

550,000 jobs and innovation through the operations of competitors such as DHL, 

Airborne Express, UPS and the US Postal Service. 

This culture of innovation and entrepreneurship had given our society unique 

characteristics. We have some of the greatest social mobility in the world—meaning 

that in our society, it is still possible for a person to come from humble roots, or 

to be new to this country, and within one lifetime to have a realistic chance of moving up the economic ladder to the upper reaches of our society in terms of income 

or wealth. The data overwhelmingly support this, and this has been our history. 

We believe that America’s job creation record and economic performance generally 

is enviable. We are of course the largest economy in the world, but throughout the 

last decade, we have grown faster and consistently generated more employment 

than, for example, the advanced economies of Europe. Even during the boom of the 

late 1990s, unemployment rates in Germany, France, and other European nations 

remained stubbornly high at around ten percent, and economic growth lagged behind that of the United States. Many of these countries had policies that may have 

sounded attractive, but had the effect of discouraging investment and ultimately discouraging both competitiveness and job creation. So it is worth examining the 

causes of America’s economic out-performance to date in seeking to chart a course 

for the future. 

The NVCA, and I personally, believe that the correct response to the evolving nature of the economy is to be prepared to compete, and to compete well. In the short 

term, America is not in economic crisis. Our unemployment rate is 5.6%, inflation 

and interest rates are low, and economic growth has been strong. But over the long 

term, there is cause for concern—and we believe that we must take the steps today 

that will allow us to innovate and compete in the knowledge economy in the future. 

So what have been the keys to America’s economic out-performance? And what 

are the keys to being able to compete in the knowledge economy of the future? In 

our view, several imperatives stand out: 

• Ensuring the continued availability of risk capital; 

• Maintaining transparent, liquid, trusted capital markets; 

• Strengthening our educational system; 

• Constantly seeking to maintain the world’s best system of higher education; 

• Investing in basic R&D to keep America at the forefront of innovation; 

• Maintaining flexible labor markets; and 

• Expanding world trade. 

Let me cover each of these topics briefly. 

I have already outlined the data with respect to the contribution of venturebacked companies to U.S. employment, but our capital markets are of course deeper 

than that. This culture of risk capital has allowed a wide range of startups to flourish. Data from the Census Bureau shows that since 1988, almost 10 million jobs 

have been created by companies with less than 500 employees. As you know, venture capital is the investment of equity money to support the creation and development of these new businesses. Venture capital deliberately focuses on smaller, 

younger entrepreneurial companies that do not have the track record and stability 

to obtain traditional financing. These businesses carry very high risk and many do 

not succeed. Yet those that do contribute greatly to our economy in terms of job creation, revenue generation and innovation. The NVCA believes that incentives for 

capital formation and risk-taking investment should remain in place. We supported 

the passage of amendments in 2003 to reduce the tax rate on long-term capital 

gains to 15%, and we believe that such a rate should be made permanent. 

Our public capital markets are widely acknowledged as the deepest and most 

transparent in the world. We believe that Congress and the financial system should 

do everything possible to keep them that way. We have supported reforms to improve transparency in reporting and congratulate the SEC and other agencies on 

62

their efforts to curb the abuses of those who have not been accurate in their reports. 

That being said, we believe that we should not adopt measures in the name of corporate reform that will have the effect of making financial statements less reliable 

and will choke off the innovation that is so critical to American success. In that regard, the NVCA does not believe it is either prudent or financially correct to require 

companies, especially small private companies with no public stock price history, to 

expense against income the awarding of incentive stock options to employees. At a 

fundamental level, these options are shares and not claims against the cash resources of the company—they should be counted in the denominator of an earnings 

per share calculation, not double counted against income as well. As a matter of accounting transparency and reliability, a requirement to expense options would make 

income statements less reliable, as there is no agreed-upon method for valuing options, and several of the types of methods proposed rely on estimating the volatility 

of the stocks of companies with no trading history. Lastly, expensing options would 

punish the most successful companies—by valuing most highly the options of those 

companies with the best growth prospects. Expensing would be economically damaging to the country by changing the ability of the most innovative and high growth 

companies to allow people to work for ownership instead of cash compensation. 

Thirdly, if we are to compete successfully, our people have to be trained to do so. 

The NVCA has long been of the view that the health of our schools is essential to 

the health of our country. In this regard, we congratulate the Committee on its leadership in crafting and passing into law the No Child Left Behind legislation to ensure that our schools are performing, our kids can read, and parents of children in 

failing schools have more rights to do something about it. We believe that there is 

a bipartisan consensus to invest more in education at the Federal, state, and local 

level. The trick now is to make sure that the resources this consensus can provide 

are used to maximum effect—attracting the most talented people to the classrooms 

to teach, allowing the use of both technology and better infrastructure in the classrooms, and addressing critical problems. In particular, we would urge the Committee to investigate what can be done, and to support programs, to increase the 

number of students pursuing mathematics, science, and engineering education in 

the United States. This is one area in which America is falling behind. 

Related to this point is of course the condition of our system of higher education—

long acknowledged as the best in the world. Here too we need to increase the proportion of science, math, and engineering graduates if we are to remain competitive 

in a knowledge-based economy. We should be aware that our competitors are making this investment. According to a research report by Think Equity Research, the 

Chinese government has set as a goal to increase the proportion of those in the 18- 

to 22-year old age cohort that attend four-year college or university from its current 

level of four percent to twenty percent, within twenty years. Think reports that this 

will require the building of 10,000 universities the size of the University of Indiana. 

Beyond that, we believe that Americans must ensure that access to education continues—that from K–12 all the way through the community college and university 

system, Americans have access to preeminent education. Just as ‘‘no child should 

be left behind’’ so too should ‘‘no adult in need of retraining be left behind.’’

A key feature of our preeminent university system has been the funding of individual investigators at our research universities through the research agencies of 

the Federal government—the National Institutes of Health, the National Science 

Foundation, the Department of Energy, the Department of Defense, and so on. The 

investments made by this and previous Congresses in the basic R&D enterprise in 

the United States have been critical to spawning innovation and ensuring our economic leadership. The advances this research has promoted in materials science, 

high performance computing, high energy physics, biomedical research—in a wide 

array of areas—has laid the groundwork for American leadership, and American 

competitiveness, in a large number of related industries. 

We hope that this and future Congresses will continue this investment in innovation. We recognize that this year’s budget contains a record amount for Federal 

R&D, but also recognize the budgetary constraints facing the Congress going forward—particularly in non-defense discretionary spending. In this regard, venture 

capitalists particularly among your many constituents are focused on the future. Yet 

many of the investments most critical to that future—in education, in universities, 

in transportation infrastructure, in education—are in this category of discretionary 

spending. Venture capitalists in particular therefore recognize that without entitlement reform, investments in the future will be under-funded. 

One oft-cited point of comparison with the European economies I mentioned earlier is that of labor market flexibility. In several European economies, employees 

who work for a certain relatively short time cannot be terminated, for up to two 

years. This has not had the effect of creating more jobs, but rather of discouraging 

63

employees from being hired in the first place. Similarly, lengthening plant closing 

notification requirements, as some are proposing we do in response to the wave of 

news reports on outsourcing, may simply discourage the opening of facilities in the 

first place. We do not believe that reducing labor market flexibility in the United 

States will create more jobs, and we would urge the Committee to consider that the 

more flexible system extant in the United States today has attracted rather than 

destroyed jobs. 

Finally, part of our faith in an innovation-led, knowledge-based economy is the 

conviction that American ideas and products can compete anywhere in the world. 

The NVCA believes that more open markets will yield more growth, more jobs, better and more affordable products and services, and higher standards of living for 

Americans. According to the U.S. Trade Representative’s office, over the past decade, exports accounted for 25% of America’s economic growth and have supported 

over 12 million jobs. We generally believe that a level playing field that opens international markets to American innovation and the products and services it has yielded, while allowing our innovators to secure the highest quality components and 

services at the best price from wherever they may exist in the world, will contribute 

the most growth to the American economy. In this regard, we congratulate the Congress for its role in making various trade agreements possible and for approving 

them once they have been negotiated and found to be acceptable. 

It is easy to look at the rapidly changing nature of the economy and react with 

fear. This has happened several times in the past, often with adverse consequences. 

In the late twenties, concerns about America’s ability to compete against lower cost 

producers led President Hoover to recommend and Congress to enact the Smoot–

Hawley tariffs. Growth and employment shrunk by a staggering 25% in the years 

that followed. In the seventies, there were concerns about the U.S. automakers ability to compete against Japanese producers, but a new cycle of innovation and product quality later led to market share gains. In the 1980s, Congress and others were 

concerned about our ability to compete in semiconductors—yet the biggest growth 

in value and in job creation in semiconductors in the 1990s was right here in the 

United States. 

Today, it is true that the world remains highly competitive. As venture capitalists, 

we see our challenge as to find and fund new areas that promise to change—for the 

better—the way we live and work. As we meet this morning, a new generation of 

venture capitalists is funding a new generation of companies in emerging area such 

nanotechnology, genetics, photonics, energy, fuel cells, and lasers. What do these 

areas have in common? In every one, the United States is the leader. 

I am here today on behalf of the venture capital community because we share the 

concerns of this Committee of surrounding sustainable job growth in the United 

States. As a country that has been built on the pioneering of new markets and industries, the U.S. will always be faced with the challenge and the question of 

whether to continue to pioneer, or to turn inward in some attempt to consolidate 

our gains. The NVCA wishes to be on the record before this Committee in favor of 

making the investments we need to make today to ensure our continued leadership 

tomorrow. In the end, we believe that it is the combination of innovation and entrepreneurship that will continue to improve the lives of Americans, maximize the creation of new jobs to help offset the job erosion that has always been part of our economic landscape, and provide Americans with an exciting set of new opportunities 

for growth. 

Thank you very much. 

Chairman BOEHNER. We thank you, all three witnesses, for your 

excellent testimony. 

Let me begin with Mr. Castellani. We all know that education is 

the great equalizer in American society, and now and in the future, 

jobs are going to go where the people are the best educated. Yet 

over the last several years, American schools by and large have 

only achieved mediocre performance, particularly in math and 

science, despite spending more money per student than any nation 

on the planet. 

So I guess my question is this. For our economy, how important 

is it to have a goal not just of adequacy, but of excellence in our 

schools? And how important is it to drive innovation and reform in 

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our schools so that our performance meets our investment, and 

what are the consequences if we don’t? 

Mr. CASTELLANI. Well, certainly we agree that it is absolutely 

vital to the future of the U.S. economy, to job expansion, and to our 

ability to participate in worldwide markets. One of the things that 

we had learned over the last 20, 25 years in American business has 

been that the more we focus on improving the quality of our products and our services and that we measure the improvement and 

the quality and the products of those services, the better that we 

do. And one of the things that caused us to be very aggressive and 

continues us to be very aggressive in supporting No Child Left Behind is precisely what’s embodied in that Act, and that is we set 

high standards of excellence and we measure our progress against 

those standards. We think that is absolutely critical to improving 

the nation’s education system. And without that improvement, we 

either will become less productive or less able to sustain the kind 

of growth that we want with new product and service innovation, 

or we’ll have to look elsewhere in the world. 

And there’s a second part to that, and that is, is not only do we 

have to improve the basic education that we provide, which we believe No Child Left Behind will do, but we also have to encourage 

those people who are going into our institutions of higher learning 

to go into the kinds of skills that we will need in the future. 

Sciences, mathematics, and engineering are those kinds of skills 

that while we are graduating, and I agree with Dr. Bernstein, we 

are graduating a lot of very well educated young men and women 

for our colleges, but as is in my own personal case, I’ve paid for 

the education of a very highly educated political scientist who is 

now running a pizza parlor. 

What we need is to encourage people to go into those key skills, 

and a critical part of that is what else we know, and that is 60 percent of the graduates from our universities and colleges in the future will be women. And traditionally, they do not go into those 

fields of study. So we need to do all we can do to encourage women 

to go into it. 

So the answer to the question is, it’s absolutely vital for the future, and it’s vital not only at the K through 12 level but also the 

university level. 

Chairman BOEHNER. There’s been a great deal of discussion over 

the last few months about outsourcing of jobs. But I’ve been surprised that I haven’t heard an analysis or a discussion of the great 

many jobs that we have in the U.S. that are there as a result of 

our exports around the world. 

Do any of the three of you have some estimates on the number 

of jobs that exist in America based on exports of product services 

around the world? Mr. Grady? 

Mr. GRADY. In my home state of California, for example, the level 

of trade has grown by 10X, by tenfold, just in the last 25 years, 

from $31 billion in 1978 to over $350 billion today. And I think 

California probably first among the states is most dependent on 

trade. I believe one in six jobs in California is dependent on trade. 

I was reading some testimony the other day from U.S. Trade 

Representative Zelick who said that about 25 percent of the ecoVerDate 0ct 09 2002 12:12 Oct 14, 2004 Jkt 000000 PO 00000 Frm 00068 Fmt 6633 Sfmt 6602 H:\DOCS\92479.TXT EDUWK PsN: NNIXON
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nomic growth that we’ve experienced in the last decade has been 

due to exports. 

Dr. BERNSTEIN. May I add a comment? When we talk about the 

export side of the equation in isolation, it’s a little bit like going 

to a baseball game and saying I saw a great game last night, you 

know, our team scored five runs, and you leave it at that. You need 

to talk about the import side as well, because if the other team 

scores ten runs, you’ve lost. 

The problem is while there are certainly jobs and good jobs associated with exports, the problem is that we have been running such 

large and persistent trade imbalances that we’ve lost far more jobs 

to imports than we’ve gained through exports. 

Mr. CASTELLANI. I think, Mr. Chairman, the other thing that 

needs to be looked at, and we know a vital part of the economy is 

exporting, but we also know that a vital part of the economy is participating in a worldwide marketplace. Those companies who participate in the global marketplace tend to have better paying jobs 

that last longer, and they are more viable than companies that do 

not. So the jobs are better and they pay better and they last longer. 

More importantly, we have to look at the 6.5 to 7 million Americans who are employed directly by companies who invest in the 

United States that are from other countries. Not only is that the 

core level, but also there’s the multiplier effect associated with 

those jobs, and certainly those are valuable jobs, that is valuable 

investment. 

And third, I think we have to look at what has become a rhetorical issue here, and the way this is being characterized. You know, 

we did a poll in January where we tried to gauge Americans’ sentiment toward this whole issue of working with the world, and we 

found that rhetoric is important. 

Our survey found that 92 percent of Americans that were surveyed agreed that isolating America from the world is not the answer for the economic problems, that rather we should help American companies to compete in the world economy so they can create 

new jobs and build economic strength. 

We also saw that 91 percent favor programs for funding and retraining that helps people who lose their jobs remake themselves 

for a new career. And when we gave the survey participants a 

choice between increasing government regulation so it’s more difficult to cut jobs and open facilities in other countries, or giving 

American companies the freedom to remake themselves to stay 

ahead of the economic curve, Americans chose that in our poll in 

an overwhelming majority, 73 to 24. 

So we’ve got reality that is very different than perception at this 

point, and it rally comes down to very much a rhetorical issue. But 

what we do know is that if we don’t have access to those foreign 

markets, if we don’t have access to working with the world, then 

we will not have opportunities to grow the economy and create the 

jobs that we all want. 

Chairman BOEHNER. We thank you. Mr. Miller. 

Mr. MILLER. Thank you very much. Very often the suggestion is 

somehow here that this is a question of mindless, sort of mindless 

globalization or isolationism, and you get to pick your side, which 

one you want to be on. 

66

It seems to me the question, and Mr. Grady, you pointed it out, 

the question is really how do we compete and compete well? How 

are we smart engagers of this? And so as a policymaker, I’m trying 

to think where’s this going. 

And I think Dr. Bernstein made a very important point. We now 

are watching people make what they view from their point a rational, calculated economic decision that they’re going to trade in 

the people who are reading X-rays in this country for people who 

can read those X-rays with the same confidence that they want to 

give to their patients in India. That’s a decision. That’s happening. 

They’re trading in those well-trained radiologists in the United 

States for apparently well-trained radiologists in India. Call centers are taking people who have the set of skills. People have invested millions of dollars in developing call centers in the United 

States. They’re simply saying we’re going to take this call center 

and we’re going to move it to India. 

That is what companies do because you have to ask yourself, how 

are we going to get through the next year? How are we going to 

get our profitability? How are we going to get our earnings? How 

is this going to happen? How are we going to compete? Those are 

decisions that people make, and some people would argue that 

those are smart, and that’s real. That’s happening. 

So this isn’t, as Dr. Bernstein pointed out, this isn’t that those 

radiologists reading those X-rays aren’t qualified. It’s simply that 

you can get those for 30 to 40 percent less in another country. So 

that’s happening. 

Then I think if you look at this, you ask what are people in your 

business doing, venture capitalists? And if you read, you know, 

stock analysts and venture capitalists about different companies, 

about saving this economy, there’s an awful lot of people in your 

business who are saying going to China, India, outsourcing in one 

form or another—you know, in different industries, it will be different countries—that just has to be part of your plan you have to 

think about because the cost savings are so big. Not the skill savings—the skills are so much better. That is coming, I think, if we 

don’t shape up in this debate today about education. 

But the fact of the matter is, people who—I always like to see 

what people who are betting with their own money are doing. I 

think you can learn more about global warming by following the reinsurance industry around the world and their discussions and 

where they’re putting their money and where they’re not putting 

their money than you can from all of the political debate in Congress. 

So I spent a lot of time, and again, if you go to Asian journals 

and you go to Asian stock analysts, they have—they’re telling you 

where they think this going and what they’re telling you is that 

much of this just the beginning of a very logical dynamic followon to what we like to think is the American dynamic economy. 

The companies you name are hallmarks in innovation. They’re 

the leaders. But the question is, it may be that the next step in 

their innovation is outsourcing for reasons of their corporate entity, 

and that decision may be different than what’s good for American 

workers. As we know, sometimes what’s good for American brands 

isn’t necessarily good for American workers. You can sell, you 

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know, Coca-Cola all around the world. It doesn’t have to be made 

in Atlanta. And it’s in fact not made in Atlanta, because they won’t 

let you sell it in some countries if you make it in Atlanta. 

So it’s very good for the American brand, but that doesn’t necessarily mean you’re going to increase the employment in that company in America. 

I mean, those are the sort of—what’s going on in the economy 

today. We can say we don’t want to talk about it, but the fact is, 

that’s what’s happening and that’s part of the dynamics. 

Mr. GRADY. May I make a comment? 

Mr. MILLER. Sure. 

Mr. GRADY. I think that the examples you mentioned, call centers, for example, or radiology, are two out of thousands of industry. 

Mr. MILLER. Yes, but I can show you auto design. I can show you 

computer design. I can show you program design, all of which— 

Mr. GRADY. Right. But let’s think about what happens in that 

global dynamic. Intel, for example, makes microprocessors all over 

the world, including in the United States, including in Santa Clara 

County. If you look at an Intel microprocessor 30 years ago, it could 

send 100,000 instructions per second. 

Mr. MILLER. I understand. 

Mr. GRADY. Today it can send 3 billion instructions per second, 

and guess what? It is cheaper than it was 30 years ago. 

Mr. MILLER. No question. 

Mr. GRADY. By a lot. 

Mr. MILLER. No question. 

Mr. GRADY. What happens, in my view, and I think what is observable, is that as that product becomes faster, cheaper and better, it opens up whole new applications that give way to whole new 

industries. 

Mr. MILLER. There’s no question. 

Mr. GRADY. So, for example, that faster microprocessor makes 

possible an infrared camera— 

Mr. MILLER. Mr. Grady, that’s going to happen. My concern is 

that the expansion of the remark that I said in talking to Chairman Greenspan— 

Mr. GRADY. No, but those new products— 

Mr. MILLER. Silicon Valley is where you start a company. China 

is where you grow it. America is where you start a company for a 

whole host of reasons because of our history innovation, competition and all the rest of that. The question will be, is America where 

you then grow that company? 

And I don’t think—I think you’re denying, people are denying the 

reality if they suggest that somehow that innovation will grow companies in America to the same extent in the future that it has in 

the past. I think that’s just—that’s a fact. Now we have to figure 

out how to deal with that in terms of the impact on our economy 

and on families. 

Mr. GRADY. Two little points. I do believe it is continuing to grow 

companies in America by making products that open up whole new 

markets. You can radically— 

Mr. MILLER. I wouldn’t dispute that at all. 

68

Mr. GRADY.—increase the number of applications. Health care, 

distribution, you name it. 

Mr. MILLER. I wouldn’t dispute that at all. 

Mr. GRADY. And I can give you case after case of examples in 

sensors or RFID or some of the areas— 

Mr. MILLER. No, no question. 

Mr. GRADY. Second, I think when you look at the China case you 

mentioned and people going to China, I think one of the things 

that’s happening today, people are investing in China in part because of the great growth of incomes in China. They’re making 

products there that are going to be sold in China, not necessarily 

exported to the United States. 

Mr. MILLER. Well, there’s an awful lot of people who are telling 

their shareholders they’re going there to built platforms for export, 

and they’re very top line companies; that they must go there to 

compete for export. I agree, they’re selling, you know, they hope to 

be able to sell into the Chinese market for 50 years. 

Chairman BOEHNER. We have three votes on the House floor, 

and because of the patience of our witnesses, what I’ll do is, I think 

Mr. Castle has a short question then I think we’ll wrap it up. 

Mr. CASTLE. Actually, I’ll convert it to a brief statement so if 

somebody else wants to ask a question, Mr. Chairman, that would 

be fine. 

I will just say this. I missed part of the testimony but I have 

read what you said, and there’s a real difference I think in what 

Mr. Castellani is saying and what Dr. Bernstein is saying that 

frankly concerns me. I’ve got to tell you right now that I am very 

concerned about educational groups in this country who are trying 

to undermine No Child Left Behind and then not admitting to it 

all the time, subsets of groups or whatever it may be. I’m not going 

to name names here. 

But I’m very concerned about that, because my judgment is, in 

talking to a whole variety of employers and other people in this 

country in this Committee and back in Delaware is that we need 

some basic, fundamental changes in education. I’m not suggesting 

No Child Left Behind is perfect. In fact, some changes are going 

on right now. But the concepts of it sure as heck are something 

which has been needed to grab hold of education in this country 

and to make very vital and fundamental changes. 

And I agree entirely with that, and I haven’t spoken to an employer yet ever in probably my last hundred visits to various employers who have not mentioned education as being a significant 

factor in terms of who they’re employing, not employing and generally deploring the state of education in America today. And so I 

obviously side with a lot of what you said, Mr. Castellani, in your 

testimony. 

In the case of Dr. Bernstein, and I don’t necessarily disagree 

with all Dr. Bernstein stated here because I think some of his 

points are valid. For example, you can’t blame the lack of education 

alone as being the sole reason for structural unemployment today. 

But on the other hand, not all unemployment is offshore. A heck 

of a lot of employment in America is just the ordinary employment 

that goes on. In fact, that’s probably the vast majority of it. 

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And we get talking about this sort of offshore concept versus onshore or whatever it may be, and I repeat what I just stated, and 

that is I’ve had so many employers tell me, we simply can’t hire 

people. I forget who it is. Somebody told me the other day that 

they—it was one of the fast, not fast food, but one of the convenience market type places—they have I think a 10-part question or 

a 20-part question they ask, and it’s pretty simple stuff, and it was 

amazing the number who can’t answer those questions and therefore can’t even make change for operations such as that. 

And I think to suggest that the lack of more skilled educational 

techniques in America in terms of the workforce of people in America, maybe individually if not the overall collective workforce, is 

something we need to be very careful about how we state, because 

to me, it is a fundamental and underlying problem that does tie 

into our economy, it does tie in at least to personal unemployment, 

and I think to structural unemployment to a degree. 

And again, not suggesting there are not other economic reasons 

for this. We all understand that. And I just think it’s something 

that we need to pay attention to. And I would just re-encourage all 

of us to make absolutely sure that we’re challenging education, 

funding education, doing all that we can in order to provide people 

an opportunity. That has got to be part of dealing with the structural employment and income problems in this country. And I yield 

back, Mr. Chairman. 

Chairman BOEHNER. Mr. Wilson, if you’ve got something quickly 

before we go vote. 

Mr. WILSON. Yes. And thank you, Mr. Chairman, for putting this 

together. It was extraordinary. I’m sorry I missed a lot of it. But 

to have Dr. Greenspan and now the three of you, thank you for 

being here. And as I came in, I was particularly happy to hear Mr. 

Grady’s comments about reducing capital gains taxes. I was a real 

estate attorney for 25 years. I know the consequence of the jobs to 

be created from reducing capital gains taxes, and then that generates additional construction and then additional tax money for 

education, and the cycle is in place. 

And so I want to thank you all for being here today and thank 

the Chairman for having this hearing. 

Chairman BOEHNER. Let me thank all of you for your excellent 

testimony, and we appreciate your willingness to come in, and I’m 

sure we’ll be talking with you soon. 

Thank you. This hearing is adjourned. 

[Whereupon, at 12:49 p.m., the Committee was adjourned.] 

[Additional material submitted for the record follows:]

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Response to Questions Submitted for the Record from Hon. Alan 

Greenspan, Chairman, Board of Governors of the Federal Reserve System


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