U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

95–613 PDF 2004

S. HRG. 108–582

NOMINATIONS OF: N. GREGORY MANKIW

STEVEN B. NESMITH, JOSE F. TERAN

JAMES BROADDUS, PAUL D. PATE

LANE CARSON, AND C. MORGAN EDWARDS

HEARING

BEFORE THE

COMMITTEE ON

BANKING, HOUSING, AND URBAN AFFAIRS

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

ON

NOMINATIONS OF:

N. GREGORY MANKIW, OF MASSACHUSETTS, TO BE A MEMBER OF

THE BOARD OF DIRECTORS OF THE COUNCIL OF ECONOMIC ADVISERS

STEVEN B. NESMITH, OF PENNSYLVANIA, TO BE

ASSISTANT SECRETARY FOR CONGRESSIONAL AND INTERNATIONAL RELATIONS

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

JOSE F. TERAN, OF FLORIDA, TO BE A MEMBER OF

THE BOARD OF DIRECTORS, NATIONAL INSTITUTE OF BUILDING SCIENCES

JAMES BROADDUS, OF TEXAS, TO BE A MEMBER OF

THE BOARD OF DIRECTORS, NATIONAL INSTITUTE OF BUILDING SCIENCES

PAUL D. PATE, OF IOWA, TO BE A MEMBER OF

THE BOARD OF DIRECTORS, NATIONAL INSTITUTE OF BUILDING SCIENCES

LANE CARSON, OF LOUISIANA, TO BE A MEMBER OF

THE BOARD OF DIRECTORS, NATIONAL INSTITUTE OF BUILDING SCIENCES

C. MORGAN EDWARDS, OF NORTH CAROLINA, TO BE A MEMBER OF

THE BOARD OF DIRECTORS, NATIONAL INSTITUTE OF BUILDING SCIENCES

MAY 13, 2003

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah

WAYNE ALLARD, Colorado

MICHAEL B. ENZI, Wyoming

CHUCK HAGEL, Nebraska

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

JOHN E. SUNUNU, New Hampshire

ELIZABETH DOLE, North Carolina

LINCOLN D. CHAFEE, Rhode Island

PAUL S. SARBANES, Maryland

CHRISTOPHER J. DODD, Connecticut

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

ZELL MILLER, Georgia

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

JON S. CORZINE, New Jersey

KATHLEEN L. CASEY, Staff Director and Counsel

STEVEN B. HARRIS, Democratic Staff Director and Chief Counsel

PEGGY R. KUHN, Senior Financial Economist

MARK A. CALABRIA, Senior Professional Staff

MARTIN J. GRUENBERG, Democratic Senior Counsel

JONATHAN MILLER, Democratic Professional Staff

JENNIFER FOGEL-BUBLICK, Democratic Counsel

PATIENCE R. SINGLETON, Counsel

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator

GEORGE E. WHITTLE, Editor

(II)

CONTENTS

TUESDAY, JULY 22, 2003

Page

Opening statement of Chairman Shelby ................................................................ 1

Opening statements, comments, or prepared statements of:

Senator Specter ................................................................................................. 2

Senator Dole ...................................................................................................... 4

Senator Reed ..................................................................................................... 5

Senator Allard ................................................................................................... 8

Senator Corzine ................................................................................................ 9

Senator Carper ................................................................................................. 11

Senator Sarbanes .............................................................................................. 13

Senator Schumer .............................................................................................. 26

Senator Santorum ............................................................................................ 34

Prepared statement ................................................................................... 48

Senator Grassley .............................................................................................. 48

NOMINEES

N. Gregory Mankiw, of Massachusetts, to be a Member of the Council of

Economic Advisers ............................................................................................... 3

Biographical sketch of nominee ....................................................................... 50

Responses to written questions of Senator Johnson ...................................... 112

Steven B. Nesmith, of Pennsylvania, to be Assistant Secretary for

Congressional and International Relations, U.S. Department of Housing

and Urban Development ...................................................................................... 36

Biographical sketch of nominee ....................................................................... 68

Jose F. Teran, of Florida, to be a Member of the Board of Directors

of the National Institute of Building Sciences ................................................... 40

Biograhpical sketch of nominee ....................................................................... 74

James Broaddus, of Texas, to be a Member of the Board of Directors

of the National Institute of Building Sciences ................................................... 41

Biograhpical sketch of nominee ....................................................................... 85

Response to a written question of Senator Shelby ........................................ 113

Paul D. Pate, of Iowa, to be a Member of the Board of Directors

of the National Institute of Building Sciences ................................................... 43

Prepared statement .......................................................................................... 49

Biograhpical sketch of nominee ....................................................................... 92

Lane Carson, of Louisiana, to be a Member of the Board of Directors

of the National Institute of Building Sciences ................................................... 44

Biograhpical sketch of nominee ....................................................................... 98

C. Morgan Edwards, of North Carolina, to be a Member of the Board of

Directors of the National Institute of Building Sciences .................................. 45

Biograhpical sketch of nominee ....................................................................... 106

(III)

(1)

NOMINATIONS OF:

N. GREGORY MANKIW, OF MASSACHUSETTS

TO BE A MEMBER OF

THE COUNCIL OF ECONOMIC ADVISERS

STEVEN B. NESMITH, OF PENNSYLVANIA

TO BE ASSISTANT SECRETARY FOR CONGRESSIONAL

AND INTERGOVERNMENTAL RELATIONS

U.S. DEPARTMENT OF HOUSING AND

URBAN DEVELOPMENT

JOSE F. TERAN, OF FLORIDA

JAMES BROADDUS, OF TEXAS

PAUL D. PATE, OF IOWA

LANE CARSON, OF LOUISIANA, AND

C. MORGAN EDWARDS, OF NORTH CAROLINA

TO BE MEMBERS OF THE BOARD OF DIRECTORS

NATIONAL INSTITUTE OF BUILDING SCIENCES

TUESDAY, MAY 13, 2003

U.S. SENATE,

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,

Washington, DC.

The Committee met at 10:02 a.m., in room SD–538 of the Dirksen Senate Office Building, Senator Richard C. Shelby, (Chairman

of the Committee), presiding.

OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

Chairman SHELBY. The Committee will come to order.

We have several nominations this morning. I appreciate the willingness of the nominees to appear before the Committee today. We

will take them in three panels.

Our first panel will be Mr. Nicholas Gregory Mankiw, nominated

to be a Member of the President’s Council of Economic Advisers.

The Council of Economic Advisers, established by the Employment

Act of 1946, provides the President with economic analysis and advice on the development and implementation of domestic and international policy issues.

Mr. Mankiw most recently held the Allie S. Freed Professorship

in Economics at Harvard University, where he spent the majority

of his professional career. I will note Professor Mankiw’s previous

experience at the Council of Economic Advisers. He served two decVerDate 11-MAY-2000 11:43 Sep 01, 2004 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 95613.TXT SBANK4 PsN: SBANK4
2

ades ago as a Staff Economist on the Council. Dr. Mankiw is also

a research associate with the National Bureau of Economic Research and adviser to the Federal Reserve Bank of Boston and the

Congressional Budget Office. He is a graduate of Princeton University and earned his Ph.D. from MIT.

Our second panel is Mr. Steven Nesmith, nominated to be Assistant Secretary for Congressional and Intergovernmental Relations

at the U.S. Department of Housing and Urban Development. Mr.

Nesmith most recently served in the Office of Congressional and

Intergovernmental Affairs at the U.S. Department of Commerce’s

Economic Development Administration. Perhaps more importantly,

he was recognized by the Washington, DC Basketball Hall of Fame

during his senior year at American University.

Our third panel will include Mr. Jose Teran, Mr. James

Broaddus, Mr. Lane Carson, Mr. Morgan Edwards, and Mr. Paul

Pate. All are nominees to the Board of Directors of the National Institute of Building Sciences. The National Institute of Building

Sciences has the mission of improving the building regulatory environment, facilitating the introduction of new and existing products

and technology into the building process, and disseminating nationally recognized technical and regulatory information.

We have with us today, and I know that he has a busy schedule,

Senator Arlen Specter. Our colleague is the senior Senator from

Pennsylvania, and I want to recognize him first and let him proceed to introduce one of the nominees.

Senator Specter.

STATEMENT OF ARLEN SPECTER

A U.S. SENATOR FROM THE STATE OF PENNSYLVANIA

Senator SPECTER. Thank you very much, Mr. Chairman.

It is a pleasure to be here today to introduce Steve Nesmith, Esquire, who is nominated to be the Assistant Secretary for Congressional and Intergovernmental Relations for the Department of

Housing and Urban Development. Mr. Nesmith is a very impressive man, impressive in stature, and his background and resume

match that.

As the Chairman has already noted, Mr. Nesmith has achieved

celebrity status as a 4-year varsity basketball team member, team

captain, and scholarship award-winner at American University.

After that distinguished academic and athletic career, he returned to his native city, Philadelphia, where he was a clerk for the

Chief Justice of the Pennsylvania Supreme Court, then was an associate with the distinguished law firm, Wolfe, Block, and then

Saul Ewing. He also served in the mayor’s Office for Community

Services, was Senior Counsel of the Legislative Strategies group,

and has had quite an extensive service in governmental matters.

He currently serves as Deputy Assistant Secretary for Congressional and Intergovernmental Relations for the Department of

Commerce’s Economic Development Administration, and he now

comes to this position, which is quite a career advance, calling for

Senate confirmation.

It is a great pleasure for me to introduce Mr. Nesmith, and also

his wife.

3

Chairman SHELBY. Thank you. Senator Specter, I know that you

have other committees that you have to go to. We appreciate your

early appearance here and we will take this nomination up second.

Thank you so much.

Senator SPECTER. Thank you very much, Mr. Chairman.

Chairman SHELBY. Dr. Mankiw, would you come to the table?

First of all, would you stand and be sworn? Hold up your right

hand.

Do you swear or affirm that the testimony that you are about to

give is the truth, the whole truth, and nothing but the truth, so

help you God?

Dr. MANKIW. I do.

Chairman SHELBY. Do you agree to appear and testify before any

duly-constituted committee of the Senate?

Dr. MANKIW. I do.

Chairman SHELBY. Dr. Mankiw, do you want to introduce your

family?

Dr. MANKIW. Yes. I am here today with my wife and my daughter, Catherine. I have two young sons who are at home at school

today in Massachusetts.

Chairman SHELBY. We welcome you to the Committee. You have

been nominated by the President to what I believe is a very, very

important job.

I know you have an opening statement. Your written statement

will be made part of the record in its entirety.

You may proceed as you wish.

STATEMENT OF N. GREGORY MANKIW

OF MASSACHUSETTS, TO BE A MEMBER OF

THE COUNCIL OF ECONOMIC ADVISERS

Dr. MANKIW. Thank you, Mr. Chairman, and Members of the

Committee.

I am honored to be here today as the President’s nominee to

chair the Council of Economic Advisers. For more than half a century, the Council has offered Presidents professional analysis concerning the state of the economy and the issues facing economic

policymakers. I have great respect for the tradition and, if confirmed, I will make every effort to maintain the Council’s high

standards.

The United States has long been a land of great economic opportunity, and the story of my own family reflects that fact. My four

grandparents emigrated from Ukraine to the United States almost

a century ago, looking for a better life. None of them had more

than a fourth grade education. But the U.S. economy was more

than ready to reward their hard work and determination. When my

grandmother opened her small candy store in Trenton, New Jersey,

in the 1920’s, her goal was to give her children and grandchildren

more opportunities than she had. She had ample success.

I am one of the lucky beneficiaries of those efforts. As a student,

I attended Princeton and MIT—two of the best universities in the

world. For the past 18 years, I have been a Professor of Economics

at Harvard. My career has been dedicated to studying the economy

and teaching students about the principles of economic policy, both

in the classroom and through the two textbooks I have written.

4

I am also a husband and father of three wonderful children. My

wife Deborah and daughter Catherine are here with me today. If

there is one hope I have for economic policy, it is for it to create

an environment where the children of every family have access to

the opportunities that my father has enjoyed since my grandparents arrived in their new homeland.

The U.S. economy remains one of the most vibrant in the world,

but we have also faced some significant challenges in recent years.

The economy’s production of goods and services has grown over the

past 18 months, but not fast enough to put people back to work

after the recent recession. There are several causes of the economy’s troubles. The overhang from the high-tech bubble of the

1990’s, a series of corporate-governance scandals, and the increased

uncertainties after the September 11 terrorist attacks have all put

downward pressure on economic activity.

At the same time, monetary and fiscal policymakers have acted

vigorously to stimulate the economy. Interest rate cuts by the Federal Reserve, and tax cuts enacted by Congress and signed by the

President, have helped offset these contractionary forces and contributed to the recovery. I believe that passage of the President’s

Jobs and Growth package would add to this effort. It would help

put people back to work in the short-run, as well as encouraging

capital accumulation and economic growth in the long-run.

Despite these recent challenges, the future of the U.S. economy

is bright. I often point out to my students that Adam Smith, the

founding father of economics, published his great book, ‘‘The

Wealth of Nations,’’ in 1776, just as our Nation was declaring its

independence. This is no coincidence. History teaches that economic

liberty goes hand in hand with political liberty. That lesson goes

a long way toward explaining the success the United States has enjoyed over the past two centuries.

If confirmed, I will be honored to play some role in helping to

shape our Nation’s economic policies. I know that public service is

a great opportunity and a great responsibility. I look forward to

working with you and the other Members of Congress in the

months and years to come.

Thank you.

Chairman SHELBY. I am going to yield my time to Senator Dole

right now. I believe she has to go to another meeting.

Senator Dole.

STATEMENT OF SENATOR ELIZABETH DOLE

Senator DOLE. Thank you so much, Mr. Chairman. I certainly

want to recognize and welcome all the nominees who are before the

panel this morning.

I was especially pleased to recognize Paul Pate and Colvin Edwards, who are on the third panel, who are both very special

friends of mine.

Both are nominated to the Board of Directors for the National Institute of Building Sciences, which serves as an authoritative voice

for the Nation on building and construction issues.

They each bring an enormous amount of experience and knowledge to their positions. Paul currently serves as Mayor of Cedar

5

Rapids, Iowa, and President and Owner of Pate Asphalt Systems,

P.M. Systems Corporation.

He has been named Iowa Businessman of the Year by the U.S.

Small Business Administration and a blue chip award-winner for

the U.S. Chamber of Commerce. He is also a former State senator,

Secretary of State for Iowa, and a cherished friend.

Colvin Edwards, known as Morgan to his friends, brings a similar amount of expertise. He is a retired Navy reservist. He served

as a Division Chief within Pennsylvania’s Building Code Administration and Economic Development Director for the City of Philadelphia, Pennsylvania.

Colvin is a native of North Carolina and served as an Assistant

Secretary at the North Carolina Department of Transportation.

Mr. Chairman, both of these individuals have been an enormous

asset to me personally. In the time I have known each of them,

they have been very supportive and very generous with their time.

Today, it gives me great pleasure to voice my strong support for

their nominations.

I know from experience what a great contribution each of these

men will make to the National Institute of Building Sciences.

America is lucky indeed to have their service.

I wish I could remain to hear the statements of all of the nominees and to discuss some of the issues with them that are before

our Committee, but unfortunately, I do have other obligations that

require me to leave.

Let me just wish each of the nominees the very best and express

my support for them.

Thank you very much, Mr. Chairman.

Chairman SHELBY. Senator Reed.

STATEMENT OF SENATOR JACK REED

Senator REED. Thank you very much, Mr. Chairman, and welcome, Dr. Mankiw.

We are in a period of economic distress which is measured in

many ways. One way is the number of unemployed Americans,

which the Economist reported that the proportion of workers who

exhaust their unemployment benefits before they find work is the

highest since the records began in the early 1970’s.

There are some of us who feel that we should be aggressively

supporting the extension of the unemployment benefits. Some of

that is the result of some work in economics.

I’ll quote your eminent textbook:‘‘When the economy goes into a

recession, workers are laid off, more people apply for unemployment insurance benefits. This automatic increase in Government

spending stimulates aggregate demand at exactly the time when

aggregate demand is insufficient to maintain full employment.’’

Would you agree that we should extend the unemployment benefits program?

Dr. MANKIW. As you know, the President has worked with the

Congress to extent unemployment benefits in the past, and I am

sure that he will work with Congress again on this issue.

I think the general question of unemployment insurance raises

a whole set of economic issues, both long-run and short-run.

6

There is no question that by putting money in people’s pockets,

unemployment insurance maintains aggregate demand at a time

when the economy needs more demand for goods and services, and

that was the quote that you mentioned.

It also provides insurance, which is the ostensible goal of helping

people when times are difficult.

Another thing to keep in mind, though, is that it also has incentive effects. There is a large literature in economics that establishes that people with unemployment insurance search less hard

for new jobs and the existence of unemployment insurance probably

does raise the normal level of unemployment. It is what economists

call the natural rate.

You see this probably in most dramatic form in some European

countries, where unemployment insurance, or its equivalent, goes

on sometimes indefinitely and it really causes long-run structural

problems.

And so, in thinking about unemployment insurance, you have to

balance all these considerations and decide what the right mix is.

Senator REED. We are coming to a decision point. The extended

unemployment benefits expires May 31. To keep this program

going, we are going to have to have a decision. Would you advise

the President before May 31 to extend the benefits?

Dr. MANKIW. I am sure that this is something that the President

will be working with Congress on. As I said, I would state to him

what I just said to you, which is balancing all of these considerations and there are pros and cons.

Senator REED. It seems to me on the other factors, and I will

make one final point about extended unemployment benefits, is

that the economy is changing. I do not think that anyone quite

knows precisely in which direction.

But my observation is that the people who are finding it difficult

to find employment are not low-skilled individuals. They are people

who are in middle age, who work for companies that have downscaled significantly. So they used to be a vice president of human

resources, but there aren’t any more VP human resources positions

in the local area.

They used to work for financial institutions, but they have been

displaced by computers. So they are looking for a job that basically

will be something comparable to what they had, and it is been

months and in some cases, years, and they haven’t found it. And

in that context, not to extend benefits is to me wrong and disreputable. I would hope that you bring that message back to the President to include in the balance.

Let me ask another question, and that is, Henry Aron, who is an

eminent economist, suggested in some testimony that he gave several weeks ago, that the most difficult challenge that we face as a

Nation, aside from the momentary issues of recession and the business cycle and others, is providing for the expected retirement of

a huge number of Americans, the Baby Boom generation.

Do you agree that that is the most significant challenge that we

will face in the next decade?

Dr. MANKIW. It is certainly a significant challenge. The entitlement issue, Medicare, and Social Security, are no question issues

7

that the Administration and Congress will be thinking about and

should think about in the years to come.

The President has talked about wanting to modernize these entitlement programs and to make sure that they are there for future

generations. He has talked about personal accounts in Social Security. He has talked about moving Medicare in the direction of more

private competition.

I think there is no question that the retirement programs are

going to need to be modernized for future generations.

Senator REED. What does modernization mean? Does that mean

that we cut the benefits of people who already assume that they

will receive these benefits? Or we increase the amount of money

that current employed individuals have to pay?

Dr. MANKIW. I do not think that anybody is proposing to cut benefits for people who are now receiving them.

There are different approaches to modernizing these programs.

The President has talked a lot about personal accounts. For example, in Social Security, where people would have a stake and ownership of assets.

Senator REED. How do you create a personal account and still

pay the beneficiaries who have earned their benefits without either

increasing taxes to put in these accounts or to decrease the benefits

that will be paid? How do you do that mathematically?

Dr. MANKIW. There have been a variety of proposals floating

around about how to reform Social Security and Medicare and the

President said that he wants to move in the direction of more personal accounts and more competition in Medicare.

I do not have my own personal plan to propose here for you

today, Senator.

Senator REED. In the November 2000 Fortune article, you wrote,

‘‘Admittedly, some of Bush’s arguments are off the mark. When he

compares the 2 percent real return a worker now gets from Social

Security with the 6 percent real return offered by a portfolio of

stocks, he neglects to mention that the Social Security fund still

owes a huge amount to those now or soon-to-be retired. This liability, the overhang from giving earlier generations more than they

put in the system, doesn’t disappear with privatization. Whatever

system Bush comes up with, it won’t give young workers a 6 percent return.’’

So, if that is his modernization plan, I think you go back to the

initial question—how do you pay for it?

Dr. MANKIW. I believe in that same article, actually, I did say

that it was actually a good idea to move in the direction of personal

accounts, but I was questioning some of the particular arguments

used to support that.

I was not raising skepticism of the policy, but some of the ways

that the arguments were framed. I think there is no question that

these are big challenges. I think everybody agrees that they are big

challenges.

If you look at the President’s budget, he has a chapter called,

The Real Fiscal Danger, which is precisely about the entitlement

problem looming on the horizon.

I do not think there is any disagreement over the basic facts and

the difficult choices that will have to be made in the future.

8

Senator REED. I do not think there is any disagreement about

the challenge. I think the disagreement comes when we would be

much better prepared for that challenge if we weren’t undertaking

a huge tax cut at the moment that will, by any definition, constrain

our ability to make the transition, to make the modernization. And

that is the point I would like to leave you with.

Thank you very much.

Chairman SHELBY. Senator Allard.

STATEMENT OF SENATOR WAYNE ALLARD

Senator ALLARD. I have a couple of questions, one dealing in relation to the transportation system of the country and the other

one dealing with the housing policy of this country.

As you are probably aware, we are moving forward with the reauthorization of the highway transportation bill, and there is discussion among the various Members of the Senate as to how we

will pay for that.

Some have suggested that we have a two-cents-per-gallon increase on gas taxes, and others have been calling for an increase

of as high as 12 cents per gallon.

The State of Colorado, for example, has the highest, or one of the

highest gasoline taxes in the country. Would you talk a little bit

about the economics, as you see it, being impacted by an increase

in the gas tax?

Do you see the economic development in roads in highways offsetting the negative impacts of a tax increase at various levels; and

how might the impact of those States that have a higher gasoline

tax, differ from those States with a lower gasoline tax?

And if you can do that within the next two minutes——

[Laughter.]

—we would appreciate it. But if you can give some brief thoughts

on that, I would appreciate it.

Dr. MANKIW. That is not an issue that I have studied, so I

shouldn’t say anything very specific. As with any public project like

that, you have to apply a cost/benefit test. You have to figure out

what the benefits of the public good you are providing are and compare that to the costs of the taxes you are raising, including any

distortionary effects those taxes have. So it is not only the direct

effect, but any indirect effects on the economy.

That is how I would approach the subject. But on the specifics

of the legislation you are talking about, I am just not that familiar,

but I am happy to get back to you with a written answer.

Senator ALLARD. Are you generally of the view that building new

roads is an economic development instrument that could be used

by the Congress to stimulate the economy?

Dr. MANKIW. I think you really have to do it from a cost/benefit

standpoint. Obviously, some roads are a good thing and not all

roads are a good thing. I do not think there is a blanket answer

to whether building a new road is a good thing or not. It really depends on the specifics and whether it passes the cost/benefit test

in that particular case.

Senator ALLARD. Okay. Many homeowners have been blessed in

the last few years by a marked increase in the equity in their

9

home. I think housing is one of the parts of our economy that has

been pretty self-sustaining as we move forward.

Not only have we been getting more families into homes—I think

we are at record levels as far as that is concerned—but we also are

seeing those homes increase in value.

Are you concerned about the increasingly common use of home

equity or second mortgages? And should our economy suffer a more

serious setback in the future, would there be consequences of these

practices for both families and the overall economy?

I wonder if you would talk about that a little bit.

Dr. MANKIW. I think there is no question that we have a financial system that allows people access to credit in ways that is unusual around the world and probably unusual historically. But I

think most economists think that that is probably a good thing in

the sense that most people who borrow understand what they are

doing and are doing things to smooth over tough times.

I have a home equity line that we use sometimes and not use

other times. The instances of these financial markets benefits most

families. You are right that sometimes people may use them unwisely. But I think, by and large, the economy is better off and people are better off by virtue of having access to credit markets.

Senator ALLARD. Mr. Chairman, I see that my time is expiring.

Thank you very much.

Chairman SHELBY. Senator Corzine.

STATEMENT OF SENATOR JON S. CORZINE

Senator CORZINE. Thank you, Mr. Chairman. I appreciate the

service that we can expect from Dr. Mankiw.

One of the things Senator Reed started, it is always good to look

at these words that are written in books brilliant people put together—The Essentials of Economics—because it always allows for

raising questions about issues that one might feel strongly about.

Let me refer to one quote from a textbook that Dr. Mankiw

talked about: ‘‘The most basic lesson about budget deficits follows

directly from their effects on the supply and demand for loanable

funds. When the Government reduces national savings by running

a budget deficit, the interest rate rises and investment falls.’’

Is that a premise that you continue to believe in economic analysis, and how does it relate to what appears to be a growing period

of budget deficits that are projected by almost all economic analysts, whether in the private sector, the public sector, CBO, and

even the President’s own numbers?

Dr. MANKIW. Yes, I have not changed my mind since that edition

of the book came out 2 months ago.

[Laughter.]

And I think reducing the budget deficit is one priority of public

policy, and I think the President shares that view.

If you look at another chapter in that same book that you are

holding, you will also see that tax cuts can stimulate the demand

for goods and services, raise production and employment, and be a

way of stimulating the economy with excess capacity. I think that

lesson also needs to be kept in mind.

Whenever you are thinking about fiscal policy, you are obviously

balancing a variety of concerns—effects on demand for goods and

10

services and supply of goods and services, effects on the short-run,

effects on the long-run.

And one of the most important priorities right now is to put people back to work, is to get demand back up so that the economy

grows more quickly and more people become employed.

The recession is over in the sense that GDP is growing, and that

is the good news. The bad news is that it is not growing fast

enough to put people back to work.

The purpose of the President’s Jobs and Growth package is to increase aggregate demand. Certainly one of the purposes is to increase aggregate demand and put people back to work in the shortrun, as well as encouraging capital accumulation and economic

growth in the long-run.

Senator CORZINE. Do the deficits in the long-run work against

the possibility of economic expansion because of the kinds of competition for capital that I think is implied in the statements that

you have made?

Dr. MANKIW. Other things equal, yes. Other things equal, we

would rather not have the budget deficits. And the President has

talked about spending restraint as an important part of his program, and under the President’s budget, the deficits will be shrinking over time.

But, once again, one has to balance that against other factors. An

important part of the President’s plan is eliminating the double

taxation of dividends, which is a distortion that discourages capital

accumulation and economic growth.

Senator CORZINE. Would you argue that the exemption for dividend is of a rank ordering of elements that would stimulate the

economy, one of the highest order policy initiatives that would actually generate short-term demand in the economy?

Dr. MANKIW. I think the tax package is put together with an eye

on both the short-run and the long-run. I think fiscal policy always

has to keep an eye on different horizons.

My own judgment is that accelerating the marginal rate cuts is

going to provide a tremendous amount of short-run stimulus, but

obviously, it is going to have very little long-run effect because

those rates cuts will go into effect anyway in the long-run. So that

is going to be explicitly temporary.

Reducing the double taxation of dividends is great tax policy in

the long-run. I have not yet talked to an economist who thinks that

a good tax code double taxes dividends.

I think it would also have some short-run stimulus effect coming

from increased wealth as equity markets respond.

That in part depends on how much equity markets respond, and

that is something that is obviously very hard to predict. But as a

matter of economic theory, if you tax dividends less, the stock market should rise as it reflects the higher present value of after-tax

cashflows and that should make people wealthier and that should

induce them to spend more, as well as lowering the cost of capital

for businesses and inducing them to invest more.

Senator CORZINE. So you would argue that this is going to have

significant short-run stimulative impact, the dividend exclusion?

Dr. MANKIW. Yes. If people believe that this dividend exclusion

is credibly going to be permanent, that it is not just come and go,

11

but it is going to be a permanent feature of tax policy, as I certainly would think it should be, then that should affect the value

of the stock market, which in turn should affect households’ wealth

and businesses’ cost of capital.

Senator CORZINE. Thank you, Mr. Chairman.

Chairman SHELBY. Senator Carper.

STATEMENT OF SENATOR THOMAS R. CARPER

Senator CARPER. Thanks, Mr. Chairman.

Dr. Mankiw—have I correctly pronounced your name?

Dr. MANKIW. That is correct. It rhymes with ‘‘thank you.’’

[Laughter.]

Senator CARPER. Thanks for joining us today. Thanks for your

willingness to serve our country in this capacity.

Are members of your family here?

Dr. MANKIW. Yes. My wife is right here, as is my daughter, Catherine, who is 11 years old.

Senator CARPER. Catherine, welcome aboard. Thank you for sharing your dad, and Ms. Mankiw, thank you for sharing your husband with us. I missed those introductions. I am sure they were

made earlier.

A couple of months ago Chairman Greenspan sat in your seat

and he talked a bit about double taxation of dividends, which he

thinks is a bad thing, and he called for eliminating them.

He also called for doing it in a way that did not exacerbate our

long-term budget deficit. He talked about maybe instead of doing

it on the individual income taxpayer’s side, to think about doing it,

making the change on the corporate side, much as we allow corporations to expense debt, to consider possibly letting them expense

their dividend payments.

I have been floating an idea in the last couple of weeks with people who are a lot smarter than me, to ask them to react to this notion. Let me just ask you to do the same as well.

We have seen some who have suggested that what we do is we

phase out over 3 years the taxation on dividend income, and then

it comes right back again, much as our phasing out of the estate

tax is going to proceed along and then come right back again at the

end of this decade.

I thought that one of the things that businesses need to be successful and to grow and one of the factors for a strong economy is

some certainty. And with respect to estate tax and with respect to

a dividend tax proposal like I described earlier, not a whole lot of

certainty for anyone.

Let me just run this notion by you and just ask you to respond

to it. If you think it is a bad idea, I am not offended. But I would

like to have your thoughts.

Currently, we let businesses expense, as I understand it, about

100 percent of what they pay in debt service. We do not let them

expense the dividend income of the dividends that they declare.

And someone said, we need some parity there. And there is different ways to get at the parity. One of the ways is to, over a period of time, maybe reduce somewhat the percentage of debt service

that can be expensed and to gradually increase the amount of dividends that can be expensed, until we reach some kind of parity. I

12

do not know if it would be 50 percent or 75 percent. I do not know

how many years it would take, but several years at least.

Would you just respond to that notion and tell me if I have lost

my mind entirely?

Dr. MANKIW. Yes, there is different ways of eliminating the double taxation of dividends.

In some sense, the similarity of different ways of eliminating

them is maybe more important than the differences in the sense

that all these different ways of doing that would reduce the cost

of capital and encourage capital accumulation, which in turn would

encourage productivity growth, and that is one of the motivations

behind the President’s dividend exclusion.

To do it at the corporate level is slightly different from doing it

at the personal level because it would exclude income that is never

going to be taxed.

So, for example, Harvard University doesn’t pay taxes on its dividends because it is a tax-exempt corporation. Right now, that income is in some senses taxed once. It is taxed at the corporate

level, then not taxed at the level of Harvard University.

If you deducted the dividends at the corporate level, which is another way to do corporate integration, the income that is earned

that flows to Harvard University would not get taxed once, whereas, under the President’s plan, it is only income that is taxed once

already that gets excluded.

The President, I believe, was motivated by the idea that we want

to eliminate double taxation of dividends, so he wants to reduce the

tax on things that have already been taxed once. But if things

haven’t been taxed once, then he wasn’t going to propose reducing

that tax.

As I said, I think the most important thing is reducing the cost

of capital, and any way of lowering the tax on capital income would

have that effect and therefore, would tend to be stimulated toward

investment.

Senator CARPER. We have had some focus here today on the

budget deficit, and you will hear a lot more on that, I hope, as we

go forward. I am one of those people who believes that budget deficits do matter. And the idea of running a deficit in the short-term

is okay—wars, recessions and that kind of thing.

The idea of having deficits for as far as the eye can see is troubling to me, and I hope it is still troubling to you and certainly my

colleagues here.

I want us to focus on a different kind of deficit for just a moment.

That is the trade deficit. The trade deficit has continued to grow.

I think the trade deficit for this year is put at some $400 billion.

My wife came back from a business trip to China late last year and

she said, I am not sure what we are going to be making in this

country 10 to 20 years from now because they are making just

about everything.

I met recently with people in Delaware who were involved in

training people for technology jobs, jobs in information technology.

And they are starting to see a shift of those jobs to places like

India, the Philippines, and other countries.

In fact, they are setting up a training center now in the Philippines in order to help meet that demand. So we are seeing not

13

just an exodus of manufacturing jobs, but software jobs, technology

jobs, that I find troubling.

A scenario has been painted for me, and I just want you to react

to the scenario, if you will. We face a growing trade deficit. As I

understand it, in order to continue to buy ever more from the rest

of the world than they buy from us, somebody from around the

world has to invest. There has to be a movement of capital for investments in this country.

Do we reach a point where people in other countries may be becoming less inclined to invest in the United States? If so, what are

the implications for interest rates and for monetary policy in terms

of raising interest rates to make investments here more attractive?

How does that affect our ability to stimulate and to move the

economy forward?

Dr. MANKIW. You are absolutely right that the flip side of the

trade deficit is a capital accounts surplus, meaning that we are importing more goods than we are exporting precisely because people

abroad are eager to buy U.S. assets, eager to buy stocks, bonds,

and foreign direct investment in the United States.

In some sense, you can view that as a vote of confidence in the

U.S. economy, that foreigners want to be holding U.S. assets. They

want to buy our stocks and bonds. I think history teaches that

trade deficits come and go and as long as the economy is well-run,

they are not a problem in and of themselves.

In the 1980’s, we saw big trade deficits and we saw trade deficits

disappear and we saw them come up again. I am not tremendously

worried about the trade deficits. It is obviously something to keep

an eye on. But I do not see any reason why, if our policies are

right, if our economy is growing, that foreigners would lose their

appetite for U.S. assets. It is certainly the best place in the world

to invest.

Indeed, to a large extent, the reason that we have this large

trade deficit is precisely because the United States has been growing faster than much of the rest of the world, that even though we

are not growing fast enough, we are doing better than either Europe or Japan.

That is encouraging people to invest here rather than abroad,

and that is partly what the trade deficit reflects.

If Europe starts growing faster, I think the trade deficit will

shrink because people will start buying more of our goods.

Senator CARPER. I wish I were as sanguine as you are on this

point. Maybe we will have an opportunity to discuss it at a different day. And I hope that history will show that you are correct.

I am not so sure.

Chairman SHELBY. Senator Sarbanes.

STATEMENT OF SENATOR PAUL S. SARBANES

Senator SARBANES. Thank you Mr. Chairman, and thank you for

scheduling these hearings on these nominees as the Committee

continues to move ahead in discharging its responsibilities.

Mr. Mankiw, you have a very distinguished professional record—

summa graduate in economics from Princeton, Ph.D. in economics

from MIT. And of course, you have been on the Harvard faculty

since 1985, first as an assistant professor and then a full professor.

14

I am very much interested in the Council of Economic Advisers.

I actually worked there for a year when Walter Heller was the

Chairman.

The Council was established by the Employment Act of 1946: ‘‘To

provide the President with objective economic analysis and advice

on the development and implementation of a wide range of domestic and international economic policy issues.’’

The Chairman has been regarded as the senior policymaking position of the economics profession within the Federal Government.

I think it has ebbed and flowed in meeting its professional standards. I think it actually has varied considerably.

The first question I want to ask you is how do you envision your

role in commenting on economic issues? Do you come at it that you

have to operate within the parameters that the President is setting

by his political statements on economic questions?

Or do you think the Chairman has the responsibility to call the

economic issues as he analyzes them on economic terms?

Dr. MANKIW. I do not have any doubt that the history of the CEA

has been a very noble one in providing very objective advice to

Presidents, both Republican and Democratic.

I certainly view my role as to analyze things as a professional

economist would and in a way that my professional colleagues

would respect and to tell the President my unvarnished advice.

At the same time, I recognize that the President is the economic

policymaker. I am not. But it is certainly our job to provide the

back-up support and the analytic apparatus that he needs so that

he can make fully informed decisions.

Senator SARBANES. What am I to make of the fact that much of

your writing, and I could quote it at some length. I probably choose

not to do so here this morning for the sake of time—doesn’t jibe

with the current economic proposals of the Administration.

Some of it has already been quoted to you. But what are we to

make of that?

In fact, it has provoked Stephen Moore, the President of the Club

for Growth, to say that you ought not to hold this position.

What are we to make of all of that?

Dr. MANKIW. The particular passage that Mr. Moore referred to

is a passage where I had raised skepticism about claims that tax

cuts would generate so much economic growth as to be completely

self-financing. I remain skeptical of those claims.

That is different from saying that I am opposed to tax cuts,

which I am not. It is different from saying that tax cuts will not

partly pay for themselves, which they will.

The most extreme advocates of tax cuts I think sometimes paint

an excessively rosy picture about what they can get out of them.

I do not think that this Administration has done that. I think the

President has called for spending restraint as part of his package

of tax cuts. And I feel completely comfortable with a policy of cutting taxes, together with spending restraint, in order to get the

budget deficit under control.

Senator SARBANES. Does that jibe with your National Bureau of

Economic Research paper which you and Larry Summers co-authored, ‘‘Are Tax Cuts Really Expansionary?’’

15

And then in your introduction, you say: ‘‘Existing empirical work,

therefore, provides little evidence upon which to evaluate the

standard conclusion that tax cuts are expansionary.’’

Dr. MANKIW. Yes, that was a paper written about I think 15 or

20 years ago.

Senator SARBANES. Yes, 1984.

Dr. MANKIW. Almost 20 years ago, during a time when the Fed

was pursuing a monetary policy of targeting monetary aggregates.

And it was particularly asking the question of holding monetary

aggregates constant, would a policy of tax cuts expand aggregate

demand for goods and services, which is the standard textbook conclusion. That is a very different environment than we face today,

where the Fed is not, by anyone’s description, targeting monetary

aggregates.

Senator SARBANES. Let me just say to you that I really hate to

see, and I hope you will keep this in mind, a highly competent professional turn himself inside out, twisting like a pretzel, in order

to put forth economic analysis that conforms with what I regard as

essentially political proposals.

And I think if you are going to be an effective Chairman of the

CEA, you have to be very much on guard about that because the

political game is one thing, but professional standards is another.

And if you completely undercut the latter, it may serve a short-run

political purpose of others, but it is really going to compromise your

own professional standing as an economist.

And I just forewarn you because it seems to me that given your

writings, you are going to have a lot of tension or conflict.

Mr. Chairman, are we going to do another round to ask a couple

more questions?

Chairman SHELBY. Sure. We will.

Senator SARBANES. All right. I have some other questions I want

to ask.

Chairman SHELBY. We will take another round in a few minutes.

Thank you, Senator Sarbanes.

Doctor, the risk of deflation has been talked about recently. Last

week, the Federal Reserve left its target interest rate unchanged

and expressed its concern that, ‘‘The probability of an unwelcome

substantial fall in inflation, though minor, exceeds that of a pickup in inflation from its already low level.’’

This adds to the concerns that others have raised regarding deflation. What advice would you give the President regarding this

possibility?

I am sure that that would be private.

[Laughter.]

What actions should we be taking basically to minimize the probability of moving into a deflationary environment?

Dr. MANKIW. You are absolutely right that a deflationary environment is something that we want to avoid. It has happened several times in U.S. history. It happened in the late 19th century,

leading to William Jennings Bryant’s famous Cross of Gold speech,

was motivated in part by deflation.

It happened in the 1930’s.

Chairman SHELBY. There is a huge down side to that, isn’t there?

16

Dr. MANKIW. Right, a huge down side. And we have seen it in

Japan recently and obviously a much milder form than in the

1930’s in the United States. But there is a huge down side.

What we need to do is to increase aggregate demand, increase

spending, to get rid of the excess capacity and high unemployment

that we now have.

That is exactly why I think monetary and fiscal policy has been

acting as it has, monetary policy by cutting interest rates, fiscal

policy, by cutting taxes, both aimed at increasing aggregate demand and both should reduce the risk of deflation.

Chairman SHELBY. As far as the tax cut, we have been talking

about that some here.

Wouldn’t the President’s tax cut proposal also provide some improvement in corporate governance, something that this Committee

is very involved in, and something that is needed in today’s financial environment.

Dr. MANKIW. Absolutely. Economists have for many years talked

about how we tax capital income creates a variety of distortions.

One of the distortions is encouraging debt over equity finance, including discouraging firms from paying dividends and instead encouraging retained earnings.

To the extent we can undo that and have a neutral tax policy,

firms will start paying dividends again, which is going to change

the whole structure of how the economy valuates firms.

Right now, many firms do not pay dividends because it is so taxdisadvantaged. And that means that we have to rely on accounting

statements.

Chairman SHELBY. That would be a more traditional evaluation.

Dr. MANKIW. That is right. Relying on accounting statements is

basically relying on opinions of professionals, but opinions. Whereas, relying on the dividends to evaluate a firm is relying on

cashflows and, in that sense, it is less easy to manipulate.

Chairman SHELBY. What would be the overall effect from your

judgment on the tax proposals on investment in job growth?

Dr. MANKIW. The Jobs and Growth package will have positive effects, both in the short-run and the long-run.

In the short-run, it will increase aggregate demand, both by increasing consumption and increasing investment, by lowering the

cost of capital.

And the CEA, using a very conventional macroeconomic model,

has estimated that it will create 1.4 million jobs by the end of 2004.

It will also increase growth in the long-run by encouraging capital accumulation and also by allowing the existing capital stock to

be allocated more efficiently.

Right now, there is a distortion—corporate capital is taxed more

heavily than noncorporate capital, and that is an inefficiency.

By eliminating the double taxation of dividends, that is an inefficiency that would be undone. And whatever capital stock we have

would be allocated more efficiently and that would raise aggregate

productivity, incomes, and wages for everyone.

Chairman SHELBY. Government debt in our future, just generally. One of the topics raised in your textbooks is the size of the

Government debt and Government spending.

17

You cite how the aging of the population will have a profound

impact on fiscal policy and it being one of the great challenges facing the next generation of policymakers.

Senator Reed got into that a little bit earlier.

As the population ages, government expenditures rise from 21

percent of GDP in 2000 to 43 percent in 2050. How would you advise the President and the Congress to deal with this great challenge? When does this issue come to a crisis situation?

Dr. MANKIW. The numbers you quoted I believe are from my

textbook, which cited the Congressional Budget Office’s forecast of

that. So the CBO was the ultimate source of those numbers.

As we discussed earlier, there is no question that the real fiscal

danger, as the President’s budget put it, is in the entitlement programs—looking forward over the next 75 years, which I guess is

the horizon that Social Security looks at.

In the next 75 years, there is a large unfunded liability, and that

has to be dealt with. There are a variety of proposals on the table

the President has endorsed—personal accounts and Social Security.

The President has endorsed a move toward greater competition in

Medicare. And I think that those are both constructive steps.

But it is clearly a big challenge facing the country and it is something that is going to have to be dealt with in a bipartisan fashion

because it will certainly affect all of our children.

Chairman SHELBY. In your role at the CEA, will you be making

any recommendations to the President on moving to a more predictable framework, such as explicit inflation targeting, if you saw

the need?

Dr. MANKIW. The issue of inflation targeting is an issue for the

Federal Reserve. As you know, we have an independent Federal

Reserve and I probably shouldn’t comment.

Chairman SHELBY. But you do have some observations on it, I

am sure, as an advisor to the President.

Dr. MANKIW. I will probably be spending most of my time thinking about fiscal policy.

Chairman SHELBY. Okay. Thank you.

Senator Allard.

Senator ALLARD. Here in the Senate, we evaluate tax policy on

predominantly, static economic theory.

Some States, like my home State of Colorado, use more of a dynamic scoring. Would you comment on the shortfalls of static economic analysis as opposed to dynamic economic analysis, and how

that fits into your view that tax cuts, although not fully, but at

least partially offset on costs may actually lead to a greater tax cut

with the dollars that we have available in the budget?

Dr. MANKIW. The standard scoring of tax cuts, as you said, is

called static scoring, and it is based on the assumption that the

economy, the gross domestic product does not change with the tax

code. That assumption is made, I think, only for simplicity. I do not

think any economist fundamentally believes it. So the real question

is, is it good to have a precise answer to the wrong question or an

approximate answer to the right question?

And clearly the right question, when you think about tax policy,

is how much is revenue going to change? That is one of the questions you want to know, as well as what economic effect it is going

18

to have. Dynamic scoring tries to get at the true budgetary cost of

any tax policy by looking at the feedback effects from the tax code

to real GDP and then in turn, to the tax base.

That is a very difficult task and it is a task that economists are

wrestling with. And because of that, it is going to be less precise

than the static numbers. There is going to be a range of estimates

based on different economic models.

But there is no question that it is an important task for economists to undertake if we are going to give policymakers useful feedback and analysis of the proposals they are endeavoring to do.

There have been a variety of attempts at doing dynamic scoring

and I suspect there will be more. And I suspect over time, you will

see a convergence of economists toward a standard set of models

and tools for doing that.

One of the implications I should note of dynamic scoring is that

not all tax cuts are created equal. Tax cuts that are particularly

aimed at economic growth, at lower marginal tax rates, that encourage savings and investment, are going to generate more

growth, more GDP, and therefore, be more self-financing than tax

cuts that do not cut marginal tax rates and generate as much

growth. So it not only gives you an accurate view of tax changes

in general, but also of comparing one tax change versus another

tax change.

Senator ALLARD. So you would agree with the President’s policy

that tax cuts, particularly when our taxes are as great a share as

they are of gross domestic product today, would in effect create

some revenue to the Federal Government?

Dr. MANKIW. Absolutely. It does it really through two channels.

It does it in the short-run by putting people back to work, especially in a situation where there is so much excess capacity as we

have now and so many unemployed people who are looking for jobs.

And it does so in the long-run by changing incentives and increasing the aggregate supply of goods and services. That is, increasing

the incentive to work, increasing the incentive to accumulate capital and start businesses and so on.

Senator ALLARD. If you listen to the stock market on ‘‘Today,’’ it

sounds like they had a pretty good day yesterday, and there is a

lot of optimism. The bottom line is creating jobs.

Do you agree that the President is on the right track in creating

more jobs today for the rapid growth of our economy?

Dr. MANKIW. Absolutely. It is standard textbook economics to say

that when you cut taxes, you increase aggregate demand and increase employment.

That you can find in virtually every economics textbook in the

country. That is part of the President’s plan, is to do precisely that,

is to accelerate the marginal rate cuts, the child care credit, and

the marriage penalty and it is going to put money in people’s pockets and increase aggregate demand.

Senator ALLARD. So you have no problem in putting forward your

economic theories to the President and feel that he would seriously

consider what you propose to him?

Dr. MANKIW. That is correct.

Senator ALLARD. Thank you, Mr. Chairman.

Chairman SHELBY. Senator Carper.

19

Senator CARPER. Mr. Mankiw, I met with Dan Crippen a month

or so after he stepped down as CBO Director. We talked about the

impact of tax cuts to stimulate the economy. And we talked about

how much of a tax cut you need and what particular kind of tax

cut is most helpful in getting the economy going.

He looked ahead over the next 10 years and he said, think of the U.S. economy as about $140 trillion GDP. And he said, think of a

tax cut that is $600 billion or $500 billion and think of it over the

next 10 years as a 50-cent or 60-cent investment on $140 economy.

And he said, we like to think that when we make a tax cut, it

is really going to have a huge impact and it will get things moving

in the right direction. But he said, sometimes we fool ourselves and

give ourselves too much credit for the kind of effect that we are

going to have.

Would you take a minute and respond to that observation?

Dr. MANKIW. I think that it is certainly right that there are

many forces affecting the economy and fiscal policy is only one.

So it is probably wrong to give credit or blame to fiscal policymakers to any economic change you see because lots of forces, domestic and from abroad, that can affect the course of the economy.

On the other hand, fiscal policy is one important piece of the picture. Historically, there have been some important tax changes

that have acted to stimulate the economy, the classic case being the

Kennedy tax cuts in the early 1960’s to stimulate the economy

when there is excess capacity.

We are in a situation now where inflation is very low, interest

rates are very low. There is clearly excess capacity. Look at past

utilization and there is really a lot of excess capacity there.

Unemployment is higher than most estimates of the equilibrium

level of unemployment. If there is ever a case for cutting taxes, the

situation of excess capacity and low inflation and interest rates,

very, very low, at 11⁄4 percent, it is probably it.

Senator CARPER. There are a number of proposals that are out

there on both sides of the aisle to encourage particularly smaller

businesses to make capital investments. I think they are able to expense, I believe up to about $25,000 annually, the investments that

they make. And we are seeing a variety of proposals.

Can you just describe for us what approach you think makes the

most sense and why?

Dr. MANKIW. There is a variety of ways to cut the cost of capital.

In some sense, you can think of a lot of different proposals that are

out there as being different mechanisms to achieve the same aim

of reducing the cost of capital for businesses.

The President’s plan of eliminating the double taxation of dividends is I think one way to do that, and my preferred. But there

are other ways of doing it, such as expensing, bonus depreciation,

or something. There are also other mechanisms. In some sense,

achieving a similar aim, reducing the cost of capital, stimulating

investment, increasing demand for goods and services, and increasing employment.

Senator CARPER. I have seen proposals, for example, to increase from $25,000 per year to $75,000, the amount that could be expensed this year, maybe next year. There are some proposals to

make it permanent.

20

My question was which of these approaches would you think

would make the most sense? Could you describe one?

Dr. MANKIW. Well, I would have to look at the specifics of the

proposal and if you want to submit which proposals you are referring to, I would be happy to have—if confirmed, I would be happy

to have the CEA staff look at them and provide you an analysis.

Senator CARPER. Thank you. Last, just lay out for us maybe two

or three good ideas to get the economy moving.

Set aside the tax package and the discussion on taxes. What are

some other things that you think we should do, not just the Congress, but as a Nation. It could be Executive Branch, Legislative

Branch. It can be outside of Government as well.

Just two or three good ideas.

Dr. MANKIW. I think there are a variety of things that most

economists would agree on. Most economists are very committed to

free trade and the President has certainly moved forward on a

very, very aggressive free-trade agenda. I think that that is something that economists of all political persuasions would endorse.

I think you can always look at regulations and see, are there regulations that we have in place that are standing in the way?

Certainly monetary policy is playing an important role and it has

been very active in trying to stimulate the economy. Fiscal policy

through tax changes as well.

Senator CARPER. Any thoughts on productivity and its role?

Dr. MANKIW. Productivity can at times seem like a problem because it can look like people are getting laid off because of, say,

computerization or increasing productivity in the work place. But

there is no question that, in the long-run, it is a good thing. The

reason that we are richer today than we were a generation ago is

precisely because of productivity. And the reason that we are richer

than most countries around the world is precisely because the

United States is a very productive economy.

So we should do absolutely everything we can to try to increase

productivity because even thought it might at times cause temporary dislocations, there is no question that, in the long-run, it is

better for everyone.

Senator CARPER. All right. Thanks very much.

Thank you, Mr. Chairman.

Chairman SHELBY. Senator Sarbanes.

Senator SARBANES. Dr. Mankiw, do you think one of the reasons

that we have used a static analysis for the impact of tax cuts or

spending increases, for that matter, is really a conservative effort

to avoid the impact of charlatans and cranks in the making of fiscal policy?

Dr. MANKIW. I think there is no question that static scoring has

the benefit of being simple and it requires absolutely no judgment.

You are going to assume a zero impact on real GDP and zero is

a number that nobody can argue with.

Zero is zero.

The problem with zero is that it is probably not correct. That is,

depending on the tax change you are considering, there could be

substantial impacts on GDP and therefore, on the tax base.

21

But, certainly, those people who are worried that dynamic scoring might give overestimates, find zero an attractive number, and

I think probably the best——

Senator SARBANES. Well, dynamic scoring would open the door

for the charlatans and the cranks, would it not?

Dr. MANKIW. I would hope that we could open the door for accurate analysis, the best guess, without opening the door for charlatans and cranks as well.

Senator SARBANES. I thought you warned us pretty effectively

about that in your book, Chapter 2, Thinking Like an Economist.

Let me just quote it:

Anyone can adopt the title, economist, and claim discovery of some easy fix to the

economy’s troubles. These fads often tempt politicians who are eager to find easy

and novel solutions to hard and persistent problems.

Some fads come from charlatans who use crazy theories to gain the limelight and

promote their own interests. Others come from cranks who believe that their theories really are true.

An example of fad economics occurred in 1980, when a small group of economists

advised Presidential candidate Ronald Reagan that an across-the-board cut in income tax rate would raise tax revenue.

This is you now, not me.

They argue that if people could keep a higher fraction of their income, people

would work harder to earn more income. Even though tax rates would be lower, income would rise by so much, they claim, that tax revenues would rise.

Almost all professional economists, including most of those who supported Reagan’s proposal to cut taxes, viewed this outcome as far too optimistic. Lower tax

rates might encourage people to work harder and this extra effort would offset the

direct effects of lower tax rates to some extent.

But there was no credible evidence that the work effort would rise by enough to

cause tax revenues to rise in the face of lower tax rates.

George Bush, also a Presidential candidate in 1980, agreed with most of the professional economists. He called this idea, voodoo economics.

Nonetheless, the argument was appealing to Reagan. It shaped the 1980 Presidential campaign, the economic policies of the 1980’s.

Then you go on to note:

After Reagan’s election, Congress passed the cut in tax rates that Reagan advocated, but the tax cut did not cause tax revenue to rise. Instead, tax revenue fell,

as most economists predicted it would, and the U.S. Federal Government began a

long period of deficit spending, leading to the largest peacetime increase in the Government debt in U.S. history.

Now if you open up the door for the cranks and charlatans, do

not you run a very high risk of an inappropriate fiscal policy?

Dr. MANKIW. Yes, in the passages, as I mentioned earlier, I expressed skepticism that tax cuts would generate so much growth,

as to be fully self-financing.

I am not sure that means that one has to go to the view that,

therefore, we are going to assume going forward that tax cuts generate no growth at all.

It is certainly true that we need to guard against excessive optimism. On the other hand, I also think that we should guard

against excessive pessimism.

What we really need is an accurate assessment of the effects of

fiscal policies. And what dynamic scoring is trying to do is to try

to come up with an accurate estimate.

Senator SARBANES. In The Washington Post, last fall, the following story appeared, and I’ll just quote the outset of it: ‘‘President Bush took a ride on the Laffer Curve yesterday and espoused

a tax cut theory that his father once derided as voodoo economics.’’

22

After meeting with his Cabinet, the President was asked about

the Federal budget deficit.

Well, we have a deficit because tax revenues are down, he said. Make no mistake

about it, the tax relief package that we passed, that should be permanent, by the

way, has helped the economy, that the deficit would have been bigger without the

tax relief package.

That is orthodox supply side theory, the notion that tax cuts, by

stimulating the economy, actually increased the Government’s tax

revenue. Such thinking, popularized by Arthur Laffer and his

Laffer Curve, was the ideological fuel for Ronald Reagan’s tax cuts.

I have a couple of right-and-now questions I want to ask you.

Chairman SHELBY. Go right ahead.

Senator SARBANES. First of all, on unemployment insurance. I

wasn’t here for your exchange with Senator Reed. But the extension is about to run out. Many of us think we need to further extend the unemployment insurance benefits.

What is your position on that?

Dr. MANKIW. The President, as you know, has worked with Congress before on the unemployment insurance extension. So my expectation is that he will do so again.

Senator SARBANES. That doesn’t tell me what your view is, as the

potential President’s chief economic adviser.

Dr. MANKIW. Yes, sir. I was just going there.

Unemployment insurance has pros and cons as a policy. The two

advantages are that, obviously, it provides insurance for people in

a difficult time in their lives. And also, it provides some stimulus

to aggregate demand, sometimes called an automatic stabilizer, by

maintaining people’s incomes and spending.

Senator SARBANES. Now that is in fact what you said in your

textbook, ‘‘Essentials of Economics,’’ when you said:

When the economy goes into a recession and workers are laid off, more people

apply for unemployment insurance benefits. This automatic increase in Government

spending stimulates aggregate demand at exactly the time when aggregate demand

is insufficient to maintain full employment.

Correct?

Dr. MANKIW. That is correct. All right. And those are the two advantages of the policy.

Senator SARBANES. Yes.

Dr. MANKIW. There is also a large literature that concludes that

the existence of unemployment insurance affects the search effort

of the unemployed and tends to therefore raise the economy’s natural rate of unemployment.

We see this in the most extreme form in many European countries where unemployment insurance or similar systems go on

sometimes indefinitely and they have much higher structural unemployment than we have.

So in terms of thinking about unemployment insurance, you have

to weigh some positive effects against some negative effects.

Senator SARBANES. And do you think those negative effects are

present in the U.S. system?

Dr. MANKIW. There is a large literature that has established that

they are, that workers, the rate of job finding jumps precipitously

when UI expires.

23

I think that it is not a literature that I have contributed to, but

I certainly have read it.

Senator SARBANES. How is a worker supposed to find a job in a

labor market that is contracting?

The unemployment rate last month was at 6 percent. That is the

highest it is been in about 10 years. I am a worker who got laid

off. I am drawing unemployment insurance. I am looking for a job.

I cannot find a job, and I am running out of unemployment insurance benefits to help address the problem of supporting my family.

I guess you are telling us, well, you should get out there and

really hustle and find a job. Then I say, well, the labor market in

which I am trying to find a job is getting worse, not better. The

unemployment rate is going up. Private employment is down even

further. This thing is tightening up. How am I expected to find a

job in that labor market context? What is your answer to that?

Dr. MANKIW. Well, there are two sides to the labor market. There

is the supplier and demand and it is the behaviors of both the suppliers of labor and the demanders of labor that is going to determine the level of employment and the level of unemployment.

And there is no question in my mind that the existence of unemployment insurance does affect the behavior of the people on the

supply side of the market. That is, the workers looking for jobs.

There is a tremendous amount of evidence from that, on that point.

There is also no question that it has been a labor market that

has been a difficult time for workers and that is precisely why the

President has proposed his Jobs and Growth package, precisely to

stimulate the economy, precisely to increase the demand for labor.

Senator SARBANES. Where are you on the extension of the unemployment insurance? Where do you conclude?

We have lost 500,000 private-sector jobs over the last 3 months.

Chairman Greenspan, when he was before this Committee and we

had a chance to ask him about his thoughts on extending unemployment insurance benefits, and he testified, ‘‘Extending unemployment insurance provides a timely boost to disposable income.’’

Chairman Greenspan acknowledged that we are currently in a

period where jobs are falling and he stated, ‘‘I have always argued

that in periods like this, that the economic restraints on the unemployment insurance system almost surely should be eased.’’

Do you disagree with that?

Dr. MANKIW. I think that there are pros and cons. I tried to lay

out for you what I think the advantages and disadvantage are.

Senator SARBANES. Why are people paying into the unemployment insurance trust fund, which has built up quite a large balance. Employers make regular payments into the unemployment

insurance trust fund for the purpose of paying benefits in an economic downturn.

We now have an economic downturn. We have quite a large balance in the trust fund. Why shouldn’t we be drawing on that balance in order to meet both the human needs of the individuals who

are unemployed and also contribute toward addressing aggregate

demand in providing an economic stimulus?

What do you propose to do with that big trust fund balance?

Dr. MANKIW. I do not have any particular proposal for the trust

fund balance. People are drawing, people are applying for unemVerDate 11-MAY-2000 11:43 Sep 01, 2004 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 95613.TXT SBANK4 PsN: SBANK4
24

ployment insurance. The issue I believe we are talking about extension of unemployment insurance.

And I am just saying that the unemployment insurance system,

while it does have the advantages of providing insurance for down

times, does have the advantage of propping up aggregate demands

in times of weak aggregate demand, also has adverse incentive effects on job finding efforts and probably raises the average level of

unemployment in the long-run.

You see this in many European countries where they have very

generous policies toward of the unemployed and the result is much

higher structural levels of unemployment.

Senator SARBANES. I understand that argument, but it seems to

me that the economic circumstances in which we find ourselves

really negates that side of the ledger, as Greenspan himself recognized in his testimony before this Committee.

We have a serious problem of unemployed people. They are about

to run out of their benefits. We have a large balance in the trust

fund. If these benefits stop being paid out, we are going to have

a major jolt to aggregate demand. And you are in here telling me

the con side of the argument to extend unemployment insurance

benefits at a time when the economic circumstances, it seems to

me, scream out for it to be extended.

Dr. MANKIW. Senator, I believe I was telling you both the pro

and con side. I was trying to be on the one hand, on the other.

Senator SARBANES. Truman, once confronted with that, said he

wanted a one-armed economist.

Dr. MANKIW. Well, I have two.

[Laughter.]

Senator SARBANES. They asked him why? He said, I am tired of

getting this, on the one hand, and on the other hand.

What is your recommendation to the President going to be on extending unemployment insurance benefits?

Dr. MANKIW. I would tell the President what I told you, that

there is advantages and disadvantages and he has to weigh those

advantages and disadvantages, recognizing they are both there and

work with Congress on how to weigh those pros and cons.

That is how the process works.

Senator SARBANES. What would you say if the President said, I

have to go get myself a one-armed economist if this is the line of

advice I am going to get.

[Laughter.]

Dr. MANKIW. Well, it certainly will be my expectation that whenever any policy comes up, I will give him both the pro and con side

of every policy.

Senator SARBANES. You have all the factors. You have to weigh

them. You are a professional economist. This is what you’ve spent

your career doing. You are supposed to do the analysis. You know

what the current circumstances are and what the situation is.

Where do you come down on the question of whether we need to

extend unemployment insurance benefits?

Dr. MANKIW. I come down thinking that there are pros and cons

and the both—and the first best policy is to create jobs, not to pay

people to be unemployed.

25

And it is the purpose of the President’s Jobs and Growth package

to stimulate the economy so that those jobs will be there, and not

so we can pay people to be unemployed.

Senator SARBANES. I will come back.

Thank you, Mr. Chairman.

Chairman SHELBY. Doctor, I think you are pointing out that in

Europe, where they have continually extended unemployment benefits and that this is a basic economy that has created no net new

jobs that we know of in a long time.

Is that correct?

Dr. MANKIW. That is exactly right.

Chairman SHELBY. So there is evidence on both sides, although

we do want to help people when they are out of work. We all do.

We do want to temporarily help them.

But in the long-run, they are best to help themselves.

Isn’t this true?

Dr. MANKIW. That is right.

Chairman SHELBY. Now, if we want to be more like Europe, we

would just layer on and layer on and layer on these benefits.

But the bottom line is Government doesn’t create jobs. At least

I do not know that they do, in the long-run. And if we are going

to have a free-market economy, the law of supply and demand, and

have it work, if the Government intervenes more and more and

layer after layer, that doesn’t mean that we are not far temporarily

helping people that are out of work.

If we continue to do it, won’t it have an impact on the economy?

Dr. MANKIW. That is exactly right.

Chairman SHELBY. That is the argument, right?

Dr. MANKIW. That is exactly right. It is a balancing act between

helping people who are down on their luck and at the same time

propping up aggregate demand, both without creating adverse incentive effects, like the European labor market.

Chairman SHELBY. And as Senator Sarbanes said, that fund is

created, has been created for people for unemployment benefits.

Is that correct?

Dr. MANKIW. That is correct.

Chairman SHELBY. Now, you mentioned earlier that your grandmother’s candy store got your family surviving in this country.

Dr. MANKIW. Right.

Chairman SHELBY. And I assume this was a small- or mediumsized business.

Dr. MANKIW. Very small.

Chairman SHELBY. Do you see a role for the Council of Economic

Advisers in advising the President on ways to reduce regulatory

burdens on small businesses, knowing, as you do as an economist,

that a great percentage of our job creation in this country has been

and will be, the jobs will be created by small and medium-sized

businesses?

Dr. MANKIW. Absolutely. There is no question that the U.S. economy is incredibly vibrant. It is vibrant because it is an economy

where it is very easy for an individual to start their own business,

hire a few workers, and create wealth for their family and for others at the same time.

26

And what I view the role of Government is to create an environment to facilitate that.

Chairman SHELBY. And an overburdensome regulatory hang on

small businesses cripples that, doesn’t it?

Dr. MANKIW. That is right. Regulations are like taxes, but taxes

where no revenue gets collected. But, obviously, each regulation

has to look at the cost-benefit. You go through a cost-benefit calculation and say, does this make sense, taking into account both

the benefits of the regulation, as well as the costs in terms of job

creation and productivity.

Chairman SHELBY. Senator Schumer.

STATEMENT OF SENATOR CHARLES E. SCHUMER

Senator SCHUMER. Thank you, Mr. Chairman. I want to welcome

you, Professor Mankiw. I think you are a very accomplished man.

My daughter is using your textbook in economics.

She says it is a very good textbook, although it is hard.

She says it is hard.

[Laughter.]

We are glad you are here. I would like to ask you a few questions, a few following up on the lines of Senator Sarbanes.

I intend to be supportive of your candidacy. I think you are a

good man. But I am a little concerned. I knew Steve Friedman

pretty well and he was a Concord Coalition guy and he joined the

Administration.

Your statements are pretty strong about Arthur Laffer and all of

that, and now you are joining. Yet, very few people who are serious

in this who are not ideologue seem to feel this idea of cutting taxes

and raising the deficit into oblivion is the right thing to do.

Now I am for a tax cut—I know Alan Greenspan says we do not

need a tax cut to stimulate the economy. I would do on. So I would

like to ask you questions along that line.

The first is, could you just tell me again—I know Senator Sarbanes went over this—but do you think that the Laffer theory has

validity?

Do you think cutting taxes stimulates growth? And do you think

that it is the number-one way to stimulate growth? And do you

think on your cost-benefit analysis at this point in time, the down

sides really do not outweigh the upsides, as most economists seem

to feel?

What do you think of Chairman Greenspan’s admonition that if

we are going to cut the dividend tax, that we should find other

areas to make up for it?

He did not say that a year and a half ago. He’s saying it now.

You are a respected man. And obviously, having you in a position

of power is a good idea, probably, and I do not expect that we are

going to agree on everything. But there is some view here that the

Administration’s policy is not supported by most people, not supported by most economists, not supported by others.

And you are going to now join and be one of the respected voices

as a trumpet for it.

So give me your views, the general views. I am not talking about

this tax cut, on the supply side. Just cut taxes and growth goes up

and everything is fine.

27

You know, free lunch.

Dr. MANKIW. As a matter of economic theory, the idea that taxes

could be so high as to be on what is called the wrong side Laffer

Curve is certainly right.

It is possible theoretically that cutting taxes could raise revenue.

Very few economists think that in the range the United States is

in today, that that is the case.

Senator SCHUMER. Do you?

Dr. MANKIW. No, I do not.

Senator SCHUMER. Okay.

Dr. MANKIW. That is different, on the other hand, from what I

think is believing a substantially weaker statement, which is that

taxes, tax cuts would raise growth. And because they would raise

growth, they would, to some extent, pay for themselves.

And being on the wrong side of the Laffer Curve says that they

would completely pay for themselves.

Senator SCHUMER. Right. But the Administration’s theory doesn’t

seem to be the second theory. It seems to be the first theory, because first, their tax cut is not aimed immediately.

A huge percentage of it, particularly let’s talk about the dividend

cut, which is the centerpiece, doesn’t take effect immediately. It

doesn’t put money in the hands of average people.

We all know that it is in short demand.

Let me ask you this. If your goal were simply to get the economy

going quickly, given that it is soggy, in the words of someone who

will be one of your confreres, wouldn’t it be better to a 1- or 2-year

payroll tax cut, to a certain extent, than do a dividend tax cut?

If you only had a limited amount of dollars, tell me which would

be better and why.

Dr. MANKIW. When you talk about tax cuts, you have to keen an

eye on both the long-run and the short-run considerations.

Senator SCHUMER. No, but I limited my question. I said, if your

only goal were to get this soggy economy going right away, would

you prefer, with the same amount of money, a payroll tax cut or

a dividend tax cut?

[Pause.]

Dr. MANKIW. I would have to think about the precise numbers

and the precise proposals and the timing and so on.

The one thing to say about the dividend tax cut is, even though

some of the money is——

Senator SCHUMER. Could the reporter show that there was a long

pause before Professor Mankiw answered the question.

Sorry.

Dr. MANKIW. Even though the dividend tax cut is in some sense

forward-looking, some of the effects will show up today in the cost

of capital, will show up today in the value of the stock market, and

therefore, will have effects on demand today.

Part of an answer of what is the short-run effect of the dividend

tax proposal is an independent part of how the market perceives

it, whether the market perceives that the Congress is going to

credibly commit to it in the long-run, or whether this policy will get

reversed.

28

Senator SCHUMER. Most of the Wall Street economists in the big

firms say that it is not going to do much and the market has not

perceived it as well as the Administration thought it would.

Dr. MANKIW. The CEA has actually done a survey of some of

these firms. There is a range of estimates that go from 5 to 15 percent on the value of the stock market.

If you really do get something like that, if you get a 10 percent

rise in the stock market from this, that will have a significant effect on wealth, which in turn would affect consumption and also investment through the cost of capital.

Senator SCHUMER. Don’t you think a carry-forward of losses if

you buy new stocks would cost less money and give you a bigger

rise in the stock, immediately in the stock market?

Dr. MANKIW. I would have to look at that proposal.

Senator SCHUMER. Basically, if you have previous losses, right,

you can buy new stocks. And if you make money on those stocks,

lay their profits tax-wise against the losses that you have already

had, everyone that I know says that if your sole goal is to stimulate

the stock market, and I think it is a real guessing game whether

it can or not, you would be better off doing that kind of proposal,

wouldn’t you?

Dr. MANKIW. I would have to look at that proposal. But I wanted

to take exception to the assumption that the sole goal is to stimulate the stock market.

There is a lot of benefits here beyond stimulating the stock market. The current tax code has a bias against equity finance in favor

of debt finance as a bias against dividends in favor of retained

earnings.

Those are two inefficiencies that economists have talked about

for years having an undesirable feature of the tax code.

And one of the purposes of the President’s plan is to undo——

Senator SCHUMER. If you had $300 billion and you could do tax

cuts, $350, and you had your choice of tax cuts, would the dividend

tax cut be number one on your list, given the present state of the

economy?

Dr. MANKIW. It would certainly be very high.

Senator SCHUMER. Would it have been 6 months ago?

[Laughter.]

Dr. MANKIW. I have long thought that double taxation of dividends is an undesirable feature of the tax code.

Senator SCHUMER. Let me ask you another. What about, a number of us are trying to get local aid into this stimulus plan, based

on the theory that if the Federal Government gives John Q. Citizen

a $200 tax break or $300 tax break, but local governments or State

governments raise taxes by that amount, there is no money in

there, and a 1-year shot into the arm of local governments, like

revenue-sharing, would help create a greater stimulative effect.

The Administration proposed something like that initially in

their budget and took it out at the last minute.

What is your view of that kind of proposal which is now being

talked about? It was talked about yesterday in Nebraska.

Dr. MANKIW. Yes. As you said, if the President did not include

the State aid as part of his proposal. But my understanding is that

he’s willing to work with Congress on that issue.

29

Senator SCHUMER. But what is your normative view as an economist who is not yet part of the team? Is it a good idea?

Dr. MANKIW. I think probably providing the tax relief directly to

the taxpayers is probably the best idea. And you are right, that

some of that may be undone by the States. But that is something

that the States should be deciding.

Senator SCHUMER. Pardon? I did not hear the last part.

Dr. MANKIW. Pardon me?

Senator SCHUMER. I did not hear the last part.

Dr. MANKIW. I am saying, I think the best tax relief is directly

to the taxpayers. It is possible that some of that will be undone by

State tax increases. I hope that that wouldn’t happen.

But that might occur in some States’ cases. And that would undo

part of the effect of the tax cut.

Senator SCHUMER. So wouldn’t, at least from a stimulative effect,

say $40 billion to the States and localities this year, do more to

stimulate the economy than an additional $40 billion for, say, a

dividend tax cut that would take effect in 2006?

Dr. MANKIW. I am not sure I would say that.

Senator SCHUMER. Okay. What about Mr. Laffer’s theory again?

Again, I know that Senator Sarbanes read this. But you were so

strong when you said, when politicians rely on the advice of charlatans and cranks, they rarely get the desired results they anticipate. Maybe we should say, when economists rely on the advice on

politicians on how to run the economy, they rarely get the desirable

effects they anticipate.

But do you think that the Laffer view, of just cutting taxes and

growth takes off, has been pretty much discredited, in your mind?

Dr. MANKIW. The view of Arthur Laffer is not that tax cuts generate growth. I think that that is a view associated with many

economists.

The particular view that is associated with Arthur Laffer is the

idea that it would generate so much growth, as to raise revenue.

Senator SCHUMER. Revenue, right.

Dr. MANKIW. And while certainly it is conceivable as a matter of

economic theory, it is probably not true of the level of taxation in

the United States.

Indeed, that is why when they President talks about cutting

taxes, he talks about restraint on the spending side at the same

time. Because if one really believed that cutting taxes raised revenue, then we wouldn’t need spending restraints.

Every time you had a new spending program, we would cut taxes

some more. That is obviously not the Administration’s view.

Senator SCHUMER. Thank you, Mr. Chairman. And I thank you,

Professor Mankiw. I glad you are—even though you are not stating

your views as fulsomely as I would like, I am glad you are joining

the Administration.

I am proud to support your nomination.

Dr. MANKIW. Thank you, Senator.

Chairman SHELBY. Senator Allard.

Senator ALLARD. Mr. Chairman, I would like to discuss the

Laffer Curve with you.

30

It takes things to two extremes and says that there is an ultimate area in between where you will maximize revenue, depending

on your level of taxation.

It says that if you tax everything 100 percent, your revenues are

going to be low. If you do not tax anything at all, they are going

to be low. And there is a bell curve that somewhere in between

there, a balance to be reached between the level of taxation and

your economy that will maximize revenues to the Federal Government. If you step over that line, then revenues begin to decrease.

If you are on the other side, you can in some cases actually increase taxes and increase revenues, depending on where that balance is, and that balance is not a set figure.

Would you agree with that?

Dr. MANKIW. That is correct.

Senator ALLARD. And so, in making your recommendations to the

President, what you are going to be recommending is good, sound

economic policy as to what you think would be most apt to create

jobs and that is the sole goal. And what the President is trying to

do right now, is not necessarily increase revenue or benefits to individuals, but increase jobs.

Dr. MANKIW. That is exactly right. The President did not propose

a Jobs and Growth package in order to raise revenue for the Government. He did it in order to create jobs and economic growth.

Senator ALLARD. Thank you, Mr. Chairman.

Chairman SHELBY. Senator Sarbanes.

Senator SARBANES. I have one other area that I want to explore

with Mr. Mankiw.

I do want to observe, though, I guess your textbook is going to

have to be extensively revised as I listen to your testimony and as

I anticipate your performance in this office. I am very concerned.

This is your quote: ‘‘When the Government reduces national saving by running a budget deficit, the interest rate rises and investment falls. Because investment is important for long-run economic

growth, government budget deficits reduce the economy’s growth

rate. Of course, you are heading us right down the deficit path.’’

Let me ask you about foreign indebtedness. You said earlier in

response to a trade deficit question, well, trade deficits come and

trade deficits go, as I recall your answer. I think that is essentially

what you said. If I am not putting it correctly, I invite you to correct that.

Dr. MANKIW. That is correct. We have had substantial fluctuations in the trade deficit over time and the macroeconomic impacts

have not been huge.

Senator SARBANES. In the last several years, the U.S. current account deficit, and therefore, net foreign borrowing, has reached 5

percent of GDP. Five percent.

We now have a net international liability position of about 25

percent of GDP. We had a positive international asset position of

10 percent of GDP just 20 years ago.

So we have gone from having a positive international asset position of 10 percent of GDP. In 20 years’ time, we now have a net

liability position of 25 percent of GDP. And our trade and current

account deficits are sinking us further into debt by roughly an additional 4 to 5 percent of GDP each year.

31

Do you think this position can be sustained?

Dr. MANKIW. I do not think there is any imminent crisis on the

horizon forcing it to change in the short-term. It will very likely

change over time as it did in the 1980’s where we had large current

account deficits and then they shrunk back to zero.

Partly, this is a reflection that the United States is a great place

to invest. The United States is growing fast—despite our slow

growth and growth that is not fast enough—we are growing faster

than Europe and Japan. And if you are looking, where do you want

to invest your assets, the United States is probably the best place

in the world. And that is what the current account deficits are reflecting, that people want to invest their assets here.

As we talked about earlier, the current account deficit is a reflection of a capital account surplus. I expect it will probably disappear

once Europe and Japan start growing again, and we certainly hope

that is soon.

But it is hard to imagine what kind of action we would take to

address the current account deficit now that would be desirable for

the economy.

Senator SARBANES. You know the Tennessee Williams play,

‘‘Streetcar Named Desire’’?

Dr. MANKIW. I read it many years ago in high school, yes.

Senator SARBANES. Blanche Dubois in that play has a line about

being dependent on the kindness of strangers. Dependent on the

kindness of strangers. Isn’t that where the United States is now,

given this international position? Aren’t we dependent on the kindness of strangers?

Dr. MANKIW. I wouldn’t put it that way. A lot of people work for

firms where some of the capital comes from abroad. If BMW wants

to open up a plant to make cars in the United States and employ

American workers, I do not see why we should, as a Nation, be adverse to that. That creates jobs in the United States just as if General Motors opened up a plant.

Senator SARBANES. Where is the inflow coming now?

Dr. MANKIW. I do not have those numbers off the top of my head.

I know it fluctuates in composition over time.

Senator SARBANES. It is coming from foreign governments now,

isn’t it, overwhelmingly? It’s no longer coming from private lenders

or investors. It is now coming overwhelmingly from foreign governments, is it not?

Dr. MANKIW. As I said, I do not have those numbers in front of

me, but I believe that share has increased.

Senator SARBANES. Now would you perceive that as a concerted

effort on their part to prop up the dollar, to keep the currencies

from appreciating and to gain a trade advantage? Why are the foreign governments doing that?

Dr. MANKIW. That is not an issue I have looked at. I think the

U.S. dollar-denominated assets are considered a very safe assets

for lots of institutions around the world. The dollar is very much

a standard of security.

Senator SARBANES. Do you think that there are countries that

are seeking to manipulate the currency to gain trade advantage?

Dr. MANKIW. I have not seen any evidence of that, sir.

Senator SARBANES. China.

32

Dr. MANKIW. I have not seen any evidence of that.

Senator SARBANES. Mr. Chairman, I have gone over.

Chairman SHELBY. Thank you, Senator Sarbanes.

Senator SARBANES. Thank you.

Chairman SHELBY. Doctor, thank you very much for your appearance here today. We will try to move your nomination forward.

Senator SCHUMER. Mr. Chairman?

Chairman SHELBY. Do you have another question?

Senator SCHUMER. Yes, I do.

Chairman SHELBY. Senator Schumer.

Senator SCHUMER. If you do not mind, Mr. Chairman. I know you

have a lot of people to go through. I just wanted to follow up one

thing on Senator Sarbanes’ question.

Is there a worry that the Euro could replace the dollar, at least

in some eyes, as the currency of choice? I mean, this relates to the

question that Senator Sarbanes—it is not a political question. I am

just interested in your view. I have heard that from some people

who are pretty smart about this stuff.

Dr. MANKIW. It is conceivable, but I would not bet on it. I think

the U.S. economy is still in some sense the best run in the world

and it is still the most productive.

I think we have a variety of long-run institutional advantages

over any other country of the world. And I would expect as long

as the U.S. economy ran strong, the dollar would remain the standard bearer for world financial markets.

Senator SCHUMER. We haven’t had a competitor I guess since

Bretton Woods, right?

Dr. MANKIW. Right.

Senator SCHUMER. And finally, the Euro is edging back.

I do not know. I read a statistic somewhere that now, in terms

of bond trading or something, 40 percent was done in Euros, as opposed to dollars, which is brand new.

And so, we do have the strongest economy. I worry if the President’s whole, full-fledged tax bill goes through, that it wouldn’t be

seen as that strong any more.

Well, let me ask you that.

Do you think the fact that we are now heading on a path of increasing our deficit after some years of fiscal surplus, encourages

people to drop the dollar and go to the Euro?

Dr. MANKIW. I think the most important thing is to get growth

going in this economy again.

Senator SCHUMER. No, I understand. But do you think that is

true, that more deficit financing, and particularly a view among

Europeans and some others, that we now lost our restraint which

we gained back throughout the 1990’s, might encourage people to

drop the dollar and go to the Euro.

Dr. MANKIW. Under the President’s budget, the deficits will be

shrinking over time. And according to the Congressional Budget

Office, the estimate of the Government’s budget, the debt-to-GDP

ratio will not be very different 10 years from now as it is today.

So, I do not see in those numbers any reason for concern.

Senator SCHUMER. They are not worried about the 5-year where

it goes up?

33

Dr. MANKIW. No, because it is standard textbook economics that

recession and wars are the two canonical times you should run a

budget deficit. And we are had a recent recession and we just had

a war.

Senator SCHUMER. Yes. But you keep jumping on both sides of

the lines, in all due respect.

If we are using war and recession, then we should be priming the

pump. And much of the President’s tax plan again is not aimed at

priming the pump. Everyone agrees to that. But, rather, a change

in the overall structure.

We can debate it—reducing the taxes on unearned income, which

might make the stock market go up. That is the only growth portion of it. There are other parts of the tax cut that do not do that,

do not get me wrong.

And so, if that is the case, given all of this and given—why

wouldn’t it be better to put more dollars in the front end, in the

2003 and 2004, and get it into the hands of people, average people,

who would spend it?

You really haven’t answered that question adequately for me. It

is not a question of whether it is good to have tax cuts or good to

get rid of the double taxation of dividends.

But if your goal was to strengthen growth, to increase growth to

deal with the dual problems of war and recession, or creating a deficit of money that we had to spend, but recession saying prime the

pump, why wouldn’t it be better to do something that puts more

money directly in people’s hands than a dividend tax cut?

It is a comparison because we do not have unlimited dollars.

Dr. MANKIW. I think the President is motivated by both shortrun and long-run considerations. He’s thinking not only to put people back to work today. He also wants to create a tax code that is

going to generate capital accumulation and long growth a decade

from now.

Senator SCHUMER. But doesn’t that desire, which I am not debating with you now, cut against priming the pump and getting

growth going quickly again?

In other words, if your sole goal were quick, get the economy out

of this sogginess, wouldn’t you put far more dollars into people’s

hands immediately, rather than the dividend tax cut, which everyone admits only has its effect over a long-term in terms of the

money it gets in people’s hands?

Dr. MANKIW. I do not think it only has an effect on the longterm. I think it is the part of the plan that is going to have an effect on the long-term. But I think it also has effects on the shortterm through lowering the cost of capital and by increasing wealth.

Senator SCHUMER. One other question. Do you think $750 billion

of tax cut is too high?

Dr. MANKIW. Actually, I think the President’s package was well

designed.

Senator SCHUMER. Okay. Is a billion too high?

Trillion. Sorry.

A billion is not too high, even in my book.

[Laughter.]

Is a trillion dollars too high? I mean, when do we get into a feeding frenzy? Is a trillion too high?

34

Dr. MANKIW. I think it depends on the entire budget.

Senator SCHUMER. Now. Right now. We have to vote on the bill

in the next month. And there is a billion dollars, increasing the deficit over the next 10 years by a trillion dollars.

Is that too high?

Dr. MANKIW. That is in an economy that over that period of time

will have a GDP of $140 trillion.

Senator SCHUMER. Whatever the CBO projects or the President

projects.

Dr. MANKIW. Compared to the size of the economy and the following 10 years, no, I do not think so.

Senator SCHUMER. How about $1.5 trillion? When do we get to

a point where it is crazy already? Everyone knows it is, except the

small band of people around the President. And now you are becoming one.

I would hope that you would inject some sense into this, even if

privately. And when you get up here and you tell me, that even

double the President’s plan is not too high, in terms of our deficit,

in terms of the worries about the dollar, in terms of the worries

about interest rates, in terms of the worries about all of this—you

do not strike me as an idealogue.

I think the President’s policy is ideologically driven more than

anything else. It gets its greatest support not from business people

I speak to or hear about, but from ideologue who just hate the Federal Government, hate taxes, certain editorial pages.

I will conclude with this because I do not want you to say anything because I am supporting your appointment. I do not want

you to say anything to jeopardize it.

[Laughter.]

But I hope you will be a moderating voice there. I really do. The

country demands it right now.

Thank you, Mr. Chairman.

Chairman SHELBY. Any other questions?

Senator SANTORUM. Mr. Chairman.

Chairman SHELBY. Senator Santorum.

STATEMENT OF SENATOR RICK SANTORUM

Senator SANTORUM. Just one comment.

With support like that, huh?

[Laughter.]

Let me just say that I think you were correct in your answers

and I appreciate your answers. I think what the Doctor was trying

to say is, the amount of tax cut is always driven by the policy and

it is the short-term and long-term policy that is the most important

thing to get accomplished.

And if you can do it with 350, you do it with 350. And if you can

do it with 7, you do it with 7. If you can do it with 1.5—whatever

the best policy is to accomplish your goals is what is needed.

And I think it is very arbitrary to pick a number out, as the

President did not do, because you heard conversations earlier this

year talking about $300 billion or $500 billion was his package. But

he changed the number driven by the policy of what he wanted to

accomplish for the economy for the short-term and the long-term.

35

We are fixated far too much in this Congress with numbers. We

have to look at what the policy is underlying those numbers. Numbers are important. I am not saying they are unimportant. They

are important, but not the only thing that we need to consider

here.

And when you consider some of the other numbers that we are

looking at, which is record low inflation—in fact, one of the reasons

we are always concerned about deficits is because of the inflationary pressure.

We do not have that inflationary pressure now. What we have

is slow growth and we need to look at ways to increase growth.

So, I appreciate your comments. I do not think that they are

ideologically driven. I think they are driven and were appropriately

driven by what is best for this country as far as the economy is

concerned.

Senator SARBANES. But the numbers are themselves a very important policy——

Senator SCHUMER. Exactly.

Senator SARBANES. —since they bear on the deficit and the debt

and the prospects for future growth.

You cannot simply say, well, let’s do a tax policy on all the tax

policy considerations, and say, that is policy, without recognizing

that the sum total of those changes that you may want to make

in terms of the aggregate number itself becomes a very important

policy in terms of the fiscal direction of the country and its prospects for our economy.

Senator SANTORUM. I would agree with that. I think I made that

balance.

Senator SCHUMER. If my colleague would yield, you could have

a policy that says, no taxing unearned income. But it might cost

$5 trillion and you wouldn’t do it.

I could have a policy—national health care for everybody. That

would cost $5 trillion and I could not do it.

The numbers in the policy have to interact.

Senator SANTORUM. If I could reclaim my time. I do not think I

said that we should ignore numbers. In fact, I was very clear. But

to just focus solely on numbers I thought was inappropriate and

that is all the comment I would make.

Mr. Chairman, I will yield back my time.

Chairman SHELBY. Thank you.

Senator SCHUMER. Mr. Chairman.

Chairman SHELBY. Doctor, as you would say, numbers do have

consequences. But I believe you were alluding earlier to the size of

the tax cut compared to the size of our economy, in a sense.

Is that correct?

Dr. MANKIW. That is right. $726 billion may seem like a large

tax cut, but not compared to the economy over a 10-year period.

Chairman SHELBY. Sure. Thank you for your appearance.

Dr. MANKIW. Thank you very much.

Chairman SHELBY. We will have our second panel: Mr. Steven

Nesmith. Come on up, sir.

He has been nominated to the be the Assistant Secretary for

Congressional and Intergovernmental Relations, U.S. Department

of Housing and Urban Development.

36

We have with us the other Senator from Pennsylvania who will

be recognized to say anything that he wants to about the nominee.

Senator SANTORUM. Thank you, Mr. Chairman.

It is an honor for me to be here for Steve. I want to welcome him

and his wife Christelle, and I think his son Steven Jr. is here, at

least I thought I saw him.

There he is. I cannot see him behind the chair there.

Welcome all of you to the hearing today. It is a real personal

privilege for me to introduce Steve to the Committee. He’s been

someone that I have worked with in Pennsylvania for a number of

years since I have been in the U.S. Senate. I have worked with him

both at the Department of Housing and Urban Development and

his previous—well, current position, I guess, as well as with the

Economic Development Administration.

He has been a very strong, active voice in economic development

in our State, working with EDA, and has a distinguished resume

of Government service and service outside of Government.

He has a great resume of education. He was a clerk for our Supreme Court Justice in Pennsylvania. The laundry list is long. And

I would like to put my full statement in the record.

Chairman SHELBY. Without objection, it is so ordered.

Senator SANTORUM. And just say that it is a pleasure to be here.

The Secretary is going to be very-well served as having Steve be

the Assistant Secretary for Congressional and Intergovernmental

Affairs.

It is a pleasure to be here.

Chairman SHELBY. Mr. Nesmith, would you stand and hold up

your right hand?

Do you swear or affirm that the testimony that you are about to

give is the truth, the whole truth, and nothing but the truth, so

help you God?

Mr. NESMITH. I do.

Chairman SHELBY. Do you agree to appear and testify before any

duly-constituted committee of the Senate?

Mr. NESMITH. I do.

Chairman SHELBY. Thank you. Your written testimony will be

made part of the record in its entirety. You proceed as you wish.

STATEMENT OF STEVEN B. NESMITH, OF PENNSYLVANIA

TO BE ASSISTANT SECRETARY FOR CONGRESSIONAL

AND INTERGOVERNMENTAL RELATIONS

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Mr. NESMITH. Chairman Shelby, Ranking Member Sarbanes, and

other Members of the Committee, I thank you for your willingness

to consider my nomination during such a busy time in Congress.

My wife, Christelle, and son, Stevie, Jr., were already introduced.

I want to take the time, and I am happy that they are here with

me today. I also have a beautiful daughter by the name of Alexandra. She is only 3 months old, so we thought it was best that

she not come today and disturb the proceedings. Finally, even

though my mother, Ruby Nesmith, has passed on and she is not

physically with me today, I know she is here with me in spirit.

I would like to thank Senators Santorum and Specter for the

very generous introductions today. It has been an honor for me,

37

and a privilege, to work with both Senators in this Administration

on economic development issues for Pennsylvania and, therefore,

the country during my tenure at the U.S. Commerce Department.

I also want to thank the many people who have supported me leading up to this process and helped me prepare for this hearing. And,

of course, I want to thank the senior staff here at the Senate Banking Committee. I am most grateful for their help.

Most importantly, I am deeply grateful to President Bush and

Secretary Martinez for according me the honor of this nomination.

If confirmed, it is with great humility that I will discharge the duties of the position.

As someone who grew up in public housing and as a so-called

‘‘at-risk child’’ in the ghetto of Philadelphia, Pennsylvania, I am

sure that many people could never imagine that I might sit here

today before such a prestigious group of U.S. Senators as the President’s nominee for the Assistant Secretary position at the U.S. Department of Housing and Urban Development.

I hope that my experiences, growing up in public housing and

working on economic development issues in Philadelphia’s Empowerment Zone, in addition to those as a Government Relations

Lawyer, and as Deputy Assistant Secretary of the U.S. Department

of Commerce Economic Development Administration, will assist me

in thinking through the housing issues from the perspective of both

community and economic development and the U.S. economy.

In closing, I recognize that there will be challenges ahead for us,

whether they are a specific program at HUD or issues facing the

broader housing community. Nevertheless, I believe that we must

address these issues in a bipartisan manner in order to find longterm solutions.

And I thank you.

Chairman SHELBY. Mr. Nesmith, as Assistant Secretary for Congressional and Intergovernmental Affairs, you would serve as the

information conduit between HUD and Capitol Hill.

What are your thoughts on improving the flow of information between the Department and the Congress?

Mr. NESMITH. Well, I think that one of the first things that is

important and that I talked with Secretary Martinez about is that

the various program areas sometimes operate in business silos, if

you will, like individual businesses at HUD. Instead, the program

areas must come together more regularly and the Office of Congressional and Intergovernmental Affairs must be the leader in

bringing those program areas together on issues relating to legislation, on specific program issues.

I have talked to Secretary Martinez about this approach and, if

I am confirmed, I will take the lead in implementing this concept.

For example, when someone says, you know, I haven’t heard that

much from this other assistant secretary. I haven’t heard much

from this program area. I think that the Office of Congressional Affairs must take the leadership in making sure that we pull everyone together and take the responsibility in getting not only timely

responses to members of your senior staff and to the Members of

this Committee directly, but also substantive responses.

38

Chairman SHELBY. You will also be the point of contact between

HUD and interested external parties, external to the Department.

That is a very important communication medium, too.

How are you going to handle that?

Mr. NESMITH. As a former athlete, I would like to use athletic

analogies. One of the things I have in my playbook, so to speak,

is that we convene interest groups who have the most interest in

the housing, community and economic development and ask them

to come to HUD on a regular basis.

We do not always have to go to them. Instead, bring them into

the HUD’s departmental conference room, and do a better job at

briefing them about policy issues and have more of an intimate relationship with these groups.

Chairman SHELBY. Or any issues that affect them, right?

Mr. NESMITH. Yes, sir. And so, I believe that what we need to

do is bring those interest groups that have issues before HUD,

bring them in and make them part of HUD’s family when we are

making decisions about the Department.

So that we can sit down together, rather than HUD staying

where it is physically located and the interest groups being located

out where they are.

Chairman SHELBY. Senator Sarbanes.

Senator SARBANES. Mr. Chairman, I do not have any questions

of Mr. Nesmith. I look forward to supporting his nomination and

I want to commend you for scheduling his hearing in such an expeditious manner.

We had the opportunity to meet in advance of this hearing and

explore a number of issues. There is just one I want to put on the

public record.

A number of us on the Committee, and in fact, other Members

of Congress, both Democrats and Republicans, have had some problems with the responsiveness of HUD to inquiries from the Hill, requests for information, efforts to consult on the evolution of policy

and so forth.

This is not intended to be a criticism of the Congressional Relations staff at HUD. Our perception is that they work quite hard at

staying in touch with Committee Members and Committee staff.

But they apparently were encountering difficulties in getting

their counterparts in the program areas of the Department to respond to concerns raised by the Committee.

I won’t enumerate them, but there are a number of examples

where it took really months to get responsive answers out of the

Department. And my understanding is that the Congressional Liaison Office was doing its very best to get their counterparts in the

policy substantive areas of the Department to respond.

Now, obviously, there will be times when we agree or disagree

about specific policy prescriptions or legislative proposals. But, in

any event, it is our responsibility as the Committee of jurisdiction

to review policy and oversee operations of the Department.

I, previously as Chairman, and now Chairman Shelby, have

stressed the oversight responsibilities of this Committee. To meet

that responsibility, we need more cooperation from HUD.

You seemed to understand that concern when we met and discussed the problem. I do not know whether you want to add anyVerDate 11-MAY-2000 11:43 Sep 01, 2004 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 95613.TXT SBANK4 PsN: SBANK4
39

thing to that at this point. But I think it is an extremely important

issue, and as you are about to undertake or embark on these important responsibilities, I, frankly, perceive it at the moment as a

major challenge which you will confront.

Mr. NESMITH. I appreciate that comment. As you both, both

Ranking and Chairman, know, as you both were athletes, and I

know that Senator Shelby, but for some events in life, maybe he

would have been a Hall of Famer football player from Alabama, but

for an accident that occurred, physical, that is——

Senator SARBANES. You are going to great lengths to compare it

to——

Chairman SHELBY. We are going to confirm this man fast.

Senator SARBANES. Yes.

[Laughter.]

Mr. NESMITH. And I know that Senator Sarbanes, it is my understanding, was a good athlete in basketball, in fact, at Oxford University. You both were athletes, you understand the concept of

leadership.

Senator SARBANES. A shooter there at Princeton.

Mr. NESMITH. But I really see this as an issue of leadership, Senator Sarbanes. And I think that is my responsibility.

I think that the issue you laid out is a very important one. So,

therefore, I pledge to you to take the leadership role in making

sure that what you described never happens with the team that I

have around me.

And therefore, if you do not see a substantive improvement on

this issue, I think leadership should be called to task and therefore,

I will be willing to join you in your office.

Chairman SHELBY. Thank you. And as I just told you, we are

going to move your nomination fast, Senator Sarbanes and I.

Mr. NESMITH. Thank you.

[Laughter.]

Chairman SHELBY. Thank you for your appearance. Thank you

for your statement.

We looking forward to supporting you.

Mr. NESMITH. Thank you very much.

Chairman SHELBY. Our third panel are nominees for Members of

the Board of Directors for the National Institute of Building

Sciences: Mr. Jose Teran, Mr. James Broaddus, Mr. Lane Carson,

Mr. Morgan Edwards, and Mr. Paul Pate.

I have also been asked on behalf of Senator Grassley that he has

a statement in support of Mr. Paul Pate of Cedar Rapids, Iowa,

and I want to make his statement as part of the record, without

objection.

I would ask that all of you stand and let me administer the oath

to you, if you would raise your right hand.

Do you swear or affirm that the testimony that you are about to

give is the truth, the whole truth, and nothing but the truth, so

help you God?

Mr. PATE. I do.

Mr. BROADDUS. I do.

Mr. EDWARDS. I do.

Mr. CARSON. I do.

Mr. TERAN. I do.

40

Chairman SHELBY. Do you agree to appear and testify before any

duly-constituted committee of the Senate?

Mr. TERAN. I do.

Mr. CARSON. I do.

Mr. PATE. I do.

Mr. EDWARDS. I do.

Mr. BROADDUS. I do.

Chairman SHELBY. Thank you, gentlemen. Your written testimony will be made part of the record in its entirety.

You know that we have had a long meeting here today. You had

to endure it.

If you will sum up as quickly as you can, in a very abbreviated

manner, we would be deeply appreciative.

We will start with Mr. Teran.

STATEMENT OF JOSE F. TERAN, OF FLORIDA

TO BE A MEMBER OF THE BOARD OF DIRECTORS

NATIONAL INSTITUTE OF BUILDING SCIENCES

Mr. TERAN. Mr. Chairman and Members of the Committee, I am

Jose Francisco Teran, born in Nicaragua and a citizen of the

United States of America since 1989.

I want to acknowledge the presence of my wife of 41 years, Maria

Lourdes, and two of my youngest daughters, Maria Lourdes and

Gabriela. And I am especially proud to have here also Mr. Carlos

Ulvert, who is the Ambassador of Nicaragua to the United States,

and his wife, Carmen Lucia.

Chairman SHELBY. We welcome them here.

Mr. TERAN. Who happens to be my wife’s niece.

Chairman SHELBY. Thank you. And we congratulate you, with

your family and what you have done.

Mr. TERAN. Thank you. It is a great honor to have been nominated by President George W. Bush to be a Director of the National

Institute of Building Sciences.

Today, I come before you to make a brief statement of what I believe to be my qualifications for this position, and to thank the

Members of the Committee for your review of my nomination and

allowing me to appear before you this morning.

My story, as it relates to this nomination, starts with a quality

primary and secondary education at the Christian Brothers and Jesuits schools in Nicaragua. It was at this time that I laid the four

pillars for my intellectual life: Mathematics, Science, Philosophy,

and Art. For this reason, I decided to become an architect.

I had my university training as a freshman at Wilson Teachers

College, Catholic University of America, and George Washington

University. I spent 5 more years to get my Bachelor and Master

of Architecture Degrees at the University of Michigan in Ann

Arbor. I have taken the Harvard-sponsored course in advanced

management at INCAE.

Upon graduation, I was invited to join the design team of Minoru

Yamasaki in Birmingham, Michigan. I worked intensely under the

guidance of Gunnar Birkerts. At that time I was in the teams that

designed the Oberlin College Conservatory of Music, the Wayne

State University College of Education, the first international airVerDate 11-MAY-2000 11:43 Sep 01, 2004 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 95613.TXT SBANK4 PsN: SBANK4
41

port in Dahran, Saudi Arabia, and the Michigan Consolidated Gas

Company Building in Detroit.

I then went back to Nicaragua and between 1960 and 1979,

formed the largest architectural, engineering, construction, industrial, and financial group of companies. Buildings such as the

Ruben Dario National Theatre, the INCAE-Harvard campus, the

Central Bank Building, the National Light and Power Company

building, and many other office, hotel, and hospital projects were

successfully planned and constructed in the country. Over 14,000

single-family, low-cost houses were produced in model communities

with the assistance of the Agency for International Development.

I came with my family to Houston in 1980 to work for a small

developer. Several office and commercial projects were developed.

In 1984, I founded my own company, Natex Corporation, that has

operated continuously to this day. Two separate activities were the

key targets of Natex: Real Estate Development and Management

and Architecture. One of the most important projects was the coordination and technical direction of the Managua Metropolitan

Cathedral donated by Thomas S. Monghan, the owner of Domino’s

Pizza, in 1993. The project designed by Ricardo Legorreta of Mexico

won the 1994 Award from the American Institute of Architects.

I have been a team member all my life. I highly value the benefits of working together with others. I have been in the private

sector all my life, but I have had interesting interactions with all

sectors of Government, both in the United States and abroad.

I value highly the purpose of the institution I have been nominated to serve. The National Institute of Building Sciences’ mission

to join the private and governmental sectors to improve the regulatory environment and allow the faster and more efficient incorporation of technology into our building process is of utmost importance to the welfare of our people. It is of particular importance

today as the problems of homeland security soar with the terrorist

threats.

I am perserverant and like to see results. I strive for the highest

level of quality, to the best of my ability in what I do.

Again, many thanks for your consideration. I look forward to answering any questions that you may have.

Chairman SHELBY. Thank you, Mr. Teran.

Mr. Broaddus.

STATEMENT OF JAMES BROADDUS, OF TEXAS

TO BE A MEMBER OF THE BOARD OF DIRECTORS

NATIONAL INSTITUTE OF BUILDING SCIENCES

Mr. BROADDUS. Chairman Shelby, Ranking Member Sarbanes,

and distinguished Members of the Committee, I am honored to appear here today as a nominee to become a Member of the Board

of Directors of the National Institute of Building Sciences. In attendance with me today is my wife of 33 years, Kay, whose love

and support has enabled my presence here today. I would also like

to recognize the attendance of two very special people, both of

whom work diligently in Washington on a daily basis: Sharon

Gressle, with the Congressional Research Service of the Library of

Congress, and Jim Kuhn, my close friend and business colleague

here in Washington, who as an Assistant to the President served

42

as the Personal Executive Assistant to Ronald Reagan during his

second term. Three very special family members could not attend

are my son Scott Broaddus and daughter-in-law Courtney, who remain in Texas because of their jobs. Our youngest son also could

not make it due to job-related duties. First Lieutenant Jeffrey

Broaddus is an infantry platoon leader with the 1st Battalion 5th

Marines. After a 1,200-mile tour of southern Iraq and downtown

Baghdad, he remains in-country there, awaiting transportation

back home.

I was honored and most grateful to President Bush for his trust

and confidence in me to nominate me to serve on the Board of

NIBS. I also appreciate the Senate Committee on Banking, Housing, and Urban Affairs for considering confirmation of my appointment for which I am awed and humbled to be considered. For many

years, I have been aware of the good work of NIBS and its contribution to the building sciences on a national scale. However, I

never contemplated that I would be entrusted to help set its strategy and oversee its direction. Hopefully, the Committee will consider my background well-suited for this appointment.

After completing my civil engineering degree at the University of

Texas, I began my working career as Navy Civil Engineering Corps

Officer and Navy Seabee where I served 20 years. From 1970 to

1990, I served in 11 different assignments all over the world, which

included project management responsibilities from the field construction site to the Washington level. Following my constructionoriented Navy career, I finished my Ph.D. degree at UT Austin,

and remained there working for the Construction Industry Institute, a national research center for the design and building industry. My imbedded Seabee penchant for project work brought me

back to the real world of projects and in 1994, I became Director

of Facilities Planning and Construction for the 15-campus University of Texas system. During my 41⁄2 years there, we completed

$1.5 billion statewide in a wide variety of projects using new and

improved project management methods and contracting strategies.

In 1998, I returned to Washington, DC to lead the Design-Build Institute of America in developing integrated and streamlined approaches to design and construction. In late 2000, fulfilling a

dream I held on to since my early college years of having my own

professional practice. I started Broaddus & Associates as a project

management firm to help mostly public owners manage major complex projects from the earliest planning through design, construction, and initial operation. Today, at Broaddus & Associates, we are

managing $300 million in projects in the State of Texas and provide management consulting to facility owners and throughout the

United States.

As a professional, my career has focused on improving the project

process. While our industry is always in need of better technology

and materials, I know from research and practical experience that

significant inefficiencies exist in the management of projects that

ultimately cost taxpayers and consumers alike. I look forward to

working with NIBS to carry on their highly effective efforts and to

promote new high payback programs that can materially improve

one of the largest industry sectors in our economy. NIBS was chartered to be the public/private interface for the building industry.

43

The private sector has much to offer in making our public projects

more cost-effective, both in initial capital outlay and life-cycle costs.

I see the opportunity to bring private sector ideas to the Government projects every day in the projects we manage at Broaddus &

Associates. I look forward to bringing that perspective to the Board

of NIBS.

Your approval of this nomination will be one of my highest honors and I can also assure that I will be an active and contributing

Board Member, keeping NIBS mindful of its intended public purpose. There is much to be done in our industry, and I feel NIBS

can play an ever-expanding role in improving construction.

I would be pleased to answer any questions you may have.

Chairman SHELBY. Thank you.

Mr. Pate.

STATEMENT OF PAUL D. PATE, OF IOWA

TO BE A MEMBER OF THE BOARD OF DIRECTORS

NATIONAL INSTITUTE OF BUILDING SCIENCES

Mr. PATE. Thank you, Mr. Chairman. Greetings, honorable Senators and staff.

It is an honor to introduce myself to the U.S. Senate Banking,

Housing and Urban Affairs Committee. My name is Paul D. Pate

and I am the Mayor of Cedar Rapids, Iowa. I am a nominee for the

Board of Directors of the National Institute of Building Sciences.

This personal milestone is made possible by a family effort.

Although they could not join me today in person, I am who I am

because of the absolute support and love of my wife Jane, my children Jennifer, Amber, and Paul III, my grandson Brandon, my parents Paul, Sr. and Velma, and my entire family, which God has

blessed me with.

My parents provided me the strong values of working hard to

achieve dreams and giving back for the good of the community.

Serving the public through elected office and pursuing other opportunities to reach out through business ownership are two ways I

have acted on the foundation they gave me. These two kinds of professional experiences are the leading qualifications I bring as a

nominee to the National Institute of Building Sciences.

I have the honor of being Mayor of Iowa’s greatest and strongest

city—Cedar Rapids. Prior to serving as Mayor, I served as Iowa’s

Secretary of State and a State senator, totaling more than 11 years

of executive and legislative experience at the State and local government levels.

I am a third-generation builder with 27 years’ experience in the

professional development trade. I currently own Pate Asphalt.

Thanks to the foundation of the values instilled in me by my father

and grandfather, I worked my way from the ground up, and still

work to complete the highest quality work. This family tradition

means I offer a firsthand understanding of the perspective of builders to the National Institute of Building Sciences.

I’m qualified to serve in this position not only because of my private business and Government service experience, but also because

I view the position as an opportunity to do my best, keep moving

forward and help create common benefit through effective partnerVerDate 11-MAY-2000 11:43 Sep 01, 2004 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 95613.TXT SBANK4 PsN: SBANK4
44

ships. I listen attentively to all perspectives offered, which allows

me to be a proactive team member on this Board of Directors.

If confirmed, I will actively engage myself in all aspects of the

Institute’s public mission to improve the building regulatory environment, facilitate technology introduction, and disseminate information. I have already started this process in my community.

For example, I founded the Mayor’s Development and Building

Task Force in Cedar Rapids last year. The group is a successful

case study that may be replicated in other areas of the country.

The group meets to streamline the processes local businesses must

face when they are expanding their physical footprint. This has a

great impact on keeping economic development moving forward.

In closing, I would like to thank President George W. Bush for

this nomination and appreciate the Senate’s consideration of my

confirmation for this position. I look forward to applying my passion for service if confirmed for this position.

As a leader and former President I admire, Teddy Roosevelt once

said, ‘‘The first requisite of a good citizen in this republic of ours

is that he shall be able and willing to pull his weight.’’

If confirmed, I will carry the honor and personal responsibility

this statement implies forward, applying the best of myself as a

Member of the Board of Directors of the National Institute of

Building Sciences.

I would appreciate your support of my nomination and stand

ready to answer any questions and listen to any guidance.

Thank you.

Chairman SHELBY. Thank you.

Mr. Carson.

STATEMENT OF LANE CARSON, OF LOUISIANA

TO BE A MEMBER OF THE BOARD OF DIRECTORS

NATIONAL INSTITUTE OF BUILDING SCIENCES

Mr. CARSON. Chairman Shelby, Senator Sarbanes, first, my wife

Laura could not be with us today because she’s getting report cards

out back in Mandeville Junior High in Louisiana, final report

cards, of course. And my son Chris is about to be a senior at the

United States Naval Academy and is in the process of getting

ready for commissioning week.

But it is an honor to be here and it is an honor to be appointed

by the President, and it certainly would be an honor to be confirmed by you.

As a youngster, I grew up in a working community in Louisiana.

My dad is a member of Local 60, Steamfitters and Plumbers, and

my brother is also. So I had a chance to work personally with these

men and really get to know what working people are all about.

After going to school at LSU and serving my country in Vietnam,

I went on to Tulane Law School in the vocational rehabilitation

program. And after that, I had an opportunity to serve the handicapped community by working on the Architectural Transportation

Barriers Compliance Board in the Reagan Administration.

Briefly working at the health department in the State, I had an

opportunity to work with the construction decisions regarding hospitals. And after all that, finally got a contractor’s license and a

45

broker’s license and have maintained and operated apartments and

office complexes.

I guess my biggest attribute to the Board would be as an attorney, for 18 years being in the trenches of local county government,

trying to make it work, all the issues of zoning, land use, building

codes, all the things that are important to the people back home.

And that would be my key offering, Mr. Chairman. So with that,

I offer my candidacy and would appreciate your confirmation.

Chairman SHELBY. Thank you.

Mr. Edwards.

STATEMENT OF C. MORGAN EDWARDS, OF NORTH CAROLINA

TO BE A MEMBER OF THE BOARD OF DIRECTORS

NATIONAL INSTITUTE OF BUILDING SCIENCES

Mr. EDWARDS. Good afternoon, Mr. Chairman, Ranking Member

Sarbanes, ladies, and gentlemen. I first would like to thank you for

this opportunity to be here today and I especially would like to

thank Senator Dole for that kind introduction.

I would like to express my gratitude to President George W.

Bush for his confidence in nominating me as a Member of the

Board of Directors of the National Institute of Building Sciences.

If confirmed, I look forward to serving in this important position.

A few years ago, I had a unique opportunity when I was asked

to oversee two major building laws that were enacted by the Commonwealth of Pennsylvania. It was my job to design, develop, and

manage the regulatory programs for statewide inspection program

of mobile home and modular housing.

For 3 years, I worked to develop these programs and then carried

out the actual management for an additional 4 years. During this

time, I served on many National standard-writing committees, including the National Fire Protection Association, the American Society for Testing Materials, and the National Conference of States

and Building Code Standards. I was also a Member of the original

HUD Mobile Home Standards Advisory Group.

Prior to my State code experience, I was in the U.S. Naval Reserve, on active duty for 4 years. Following this, I served several

years in corporate America middle management, including Campbell’s Soup and Philco Ford, which is now called Ford Aerospace.

I spent time as a Management Consultant. After returning to

North Carolina, I was appointed Assistant Secretary in the North

Carolina Department of Transportation by then-Governor James

Martin, who was also a Member of Congress.

I recently retired and I spend most of my time, or much of my

time, practicing real estate on a part-time basis.

I would like to thank you, Mr. Chairman, and Ranking Member

of the Committee for this opportunity and I am grateful for your

time and look forward to addressing any questions you may have.

Chairman SHELBY. I want to thank all of you.

An important concern of mine is seeing that the opportunity to

own a home is available to all Americans, and I am sure that you

bring a lot of collective experience there.

What role do you see for the National Institute of Building

Sciences in helping to reduce some of the regulatory burden placed

on home construction.

46

We will start with you, Mr. Teran, and anybody who wants to

comment. How do we reduce the regulatory burden placed on home

construction?

Mr. TERAN. I think the basic problem is one of approach mentality. Housing is a social and economic problem more than an architectural and construction problem. We sometimes put the architectural and construction importance that really hampers the affordability of the home.

I believe that there is a lot that has to be done to really go into

the nitty-gritty of the regulations on housing, particularly local

housing, in our inner-cities and our decayed neighborhoods. But

also, beyond that, in our rural areas, and make sure that those regulations are such that they will allow a great deal of latitude to the

homeowners to build their own houses, to their communities to

help in building houses, and to make community programs where

people can help each other build their own houses.

Chairman SHELBY. Mr. Broaddus, do you have any comments?

Mr. BROADDUS. The only thing I can say on that, and that would

carry that message back to our board, if confirmed. But one of the

issues in any effectively delivering construction, whether it be

homes or in the commercial sector, is the length of the process, and

the length of the process ultimately costs all of us money.

And so, there is a lot of conflicting regulation. There is a lot of

overlap. And I know one of the purposes of NIBS is to try to standardize that and unify some of those codes. I think that could also

be a major contribution to the affordability of housing and also the

availability of it.

Chairman SHELBY. Mr. Pate.

Mr. PATE. I would just encourage continuing to expand on the

role of the public-private dialogue to understand what the impact

is, to do the cost analysis of some of the actions we are taking, both

on the Federal level, as well as the local level, because when it gets

down to the local level, obviously they are trying to interpret the

Federal guidelines that are being set.

I think that is where NIBS plays a good role in bringing these

industrial groups together to have that early dialogue. But I also,

Senator, hope that the rest of the local levels keep their part going.

Chairman SHELBY. That is very important.

Mr. Carson.

Mr. CARSON. At least in Louisiana, Mr. Chairman, the permitting process sometimes adds a lot to the cost of construction,

whether it is zoning, land use——

Chairman SHELBY. Regulatory burden, isn’t it?

Mr. CARSON. Regulatory burden sometimes, and lots of times

wetlands issues. Areas that are dry as you could think, by looking,

walking, and observing, are ready to be built upon. But because of

a technical definition within the wetlands law, prevents that from

being used, or it is a lengthy process to have to swab it out to put

it into a nonwet area. That takes up our time and money.

Chairman SHELBY. Mr. Edwards.

Mr. EDWARDS. While on the Mobile Home Advisory Commission,

I guess it is called manufactured housing, I fought very hard to

maintain low cost, as I had been able to do in Pennsylvania. In

spite of that, the standard tripled the price of a mobile homes.

47

I look forward to an opportunity to reintroduce that concept and

keep the price of homes down.

Chairman SHELBY. I am going to ask all of you a question for the

record because time is moving here today.

What are some of the things—and I wish you would think about

it—which could be done to provide greater building safety in tornado-prone areas? I guess a lot of the country is tornado-prone,

even in the last few days.

But that is a real tough issue. But think about this. I would like

for you to see what we can do to help you or help people survive

the tornados.

We will do that for the record.

I thank all of you for coming here. I look forward to helping move

your nominations. We appreciate your participation.

Thank you.

Mr. EDWARDS. Thank you.

Mr. CARSON. Thank you.

Mr. PATE. Thank you, Mr. Chairman.

Mr. BROADDUS. Thank you.

Mr. TERAN. Thank you, Mr. Chairman.

Chairman SHELBY. The hearing is adjourned.

[Whereupon, at 12:28 p.m., the hearing was adjourned.]

[Prepared statements, biographical sketches of the nominees, and

responses to written questions supplied for the record follow:]

48

PREPARED STATEMENT OF SENATOR RICK SANTORUM

Mr. Chairman, it is my great honor to introduce Steven Nesmith, the President’s

nominee to be Assistant Secretary for Congressional and Intergovernmental Affairs

at the U.S. Department of Housing and Urban Development (HUD). I also want to

welcome Steve’s family—his wife Christelle, and his son Steve, Jr.

If Steve is confirmed, he will serve as the principal adviser to the Secretary, Deputy Secretary, and senior staff with respect to legislative affairs, Congressional relations, and policy matters affecting Federal, State and local governments, and public

and private interest groups. This is an especially significant position to those of us

on the Committee as we interact with HUD. HUD has a set of challenges all of its

own to face, and I am confident that Steve is prepared for this task. I am appreciative of the work he has already done in his consultant role to HUD.

In my interactions with Steve as I have worked to bring much needed economic

development funds into Pennsylvania, I have found him to be evenhanded, professional, and a true compassionate conservative. Steve is from Philadelphia and spent

some time in public housing while growing up. I think this experience will give him

a unique perspective on his work at HUD. His position at the Economic Development Administration (EDA) at the Department of Commerce as Deputy Assistant

Secretary with responsibilities over Congressional and Intergovernmental Affairs,

Public Affairs, National Technical Research Auditing Divisions, and Executive Secretariat functions has also prepared him well for the position for which he has been

nominated.

That experience has included work on some high profile issues such as the Trade

Promotion Authority bill. He has also served as a member of the Agency’s Senior

Executive Management Team and was the Agency’s principle representative with

the White House, OMB, Congress, and other Federal agencies on NYC’s Post September 11 Economic Recovery Task Force; the White House Homeland Security Economic Consequence Task Force; and as ‘‘lead negotiator’’ for the Agency’s reorganization with the Federal employee’s union.

A graduate of American University with a BA in Criminal Justice, Steve also captained the basketball team. He continued his education at Georgetown University

Law Center. He went on to clerk for Chief Justice of the Pennsylvania Supreme

Court Robert N.C. Nix, Jr. as an opinion writer and subsequently worked for two

of Philadelphia’s law firms. Steve went on to work as Director of Operations in the

Mayor’s Office of Community Services with the Philadelphia Empowerment Zone.

In 1999, he moved to Washington, DC and served as Senior Counsel at The Legislative Strategies Group. In this work, he focused on assisting State and local governments acquire Federal economic development funding. This experience will also give

him a good perspective of the needs of States and localities as they look to HUD

for assistance.

I am very pleased that President Bush has nominated Steve Nesmith for this position, and I am hopeful that the Committee will act quickly to send his nomination

on to the full Senate for a vote. Steve has done great work, and I am certain that

he will continue to do so at HUD.

—————

PREPARED STATEMENT OF CHUCK GRASSLEY

A U.S. SENATOR FROM THE STATE OF IOWA

Mr. Chairman and distinguished Members of the Senate Banking Committee,

thank you for allowing me the opportunity to say a few words about my friend and

colleague, Mayor Paul Pate of Cedar Rapids. I have worked closely with Mayor Pate

for many years, and know that he a gentleman of integrity and dedication.

Today, Paul is being nominated to the National Institute of Building Sciences. In

1974, Congress recognized the need for a community development organization that

could serve as a link between government and the private sector. For 19 years, the

Institute has been a working group of professionals, industries, consumers, and

elected officials that are committed to our country’s housing and development

issues. I have no doubt that Mayor Pate will be a fine addition to the Board of Directors for the National Institute of Building Sciences. He has always worked with

the community at large to solve problems, many times before they anise.

In 2001, Paul was elected as the 55th Mayor of Cedar Rapids. Before his mayorship, Paul Pate was a small business man, a distinguished member of the Iowa Senate, and served as Iowa Secretary of State under Governor Branstad.

Mayor Pate has become known for his openness and seeking the counsel of all

segments of the community, to transform the landscape of Cedar Rapids. I am

49

pleased to work with him to meet the city’s goals. Part of the city improvements

he has been working on is revitalizing underutilized sections of the community, including rehabilitating old industrial buildings into multi-use structures or preparing

them for high-tech industry. For these. reasons and many others, the City of Cedar

Rapids was recently ranked number 10 in smaller metro areas in the United States

by Forbes magazine in their ‘‘Best Places for Business and Careers Survey.’’

I support Mayor Pate and appreciate your allowing me a few minutes today on

his behalf.

—————

PREPARED STATEMENT OF PAUL D. PATE

MEMBER-DESIGNATE, BOARD OF DIRECTORS

NATIONAL INSTITUTE OF BUILDING SCIENCES

MAY 13, 2003

It is an honor to introduce myself to the U.S. Senate Banking, Housing and Urban

Affairs Committee. My name is Paul D. Pate and I am the Mayor of Cedar Rapids,

Iowa. I am a nominee for the Board of Directors of the National Institute of Building Sciences.

This personal milestone is made possible by a family effort. Although they could

not join me today in person, I am who I am because of the absolute support and

love of my wife Jane, my children Jennifer, Amber and Paul III, my grandson Brandon, my parents Paul Sr. and Velma and my entire family, which God has blessed

me with.

My parents provided me the strong values of working hard to achieve dreams and

giving back for the good of the community. Serving the public through elected office

and pursuing other opportunities to reach out through business ownership are two

ways I have acted on the foundation they gave me. These two kinds of professional

experiences are the leading qualifications I bring as a nominee to the National Institute of Building Sciences.

I have the honor of being Mayor of Iowa’s greatest and strongest city—Cedar Rapids. Prior to serving as Mayor, I served as Iowa’s Secretary of State and a State

senator, totaling more than 11 years of executive and legislative experience at the

State and local government levels.

I am a third generation builder with 27 years’ experience in the professional development trade. I currently own Pate Asphalt/PM Systems Corporation. Thanks to

the foundation of the values instilled in me by my father and grandfather, I worked

my way from the ground up and still work to complete the highest quality work.

This family tradition means I offer a firsthand understanding of the perspective of

builders to the National Institute of Building Sciences.

I am qualified to serve in this position not only just because of my private business and government service experience, but also because I view the position as an

opportunity to do my best, keep moving forward and help create common benefit

through effective partnerships. I listen attentively to all perspectives offered, which

allows me to be a proactive team member on this Board of Directors.

If confirmed, I will actively engage myself in all aspects of the Institute’s public

mission to improve the building regulatory environment, facilitate technology introduction, and disseminate information. In fact, I have already started this process

in my community.

For example, I founded the Mayor’s Development and Building Task Force in

Cedar Rapids last year. The group is a successful case study that may be replicated

in other areas of the country. The group meets to streamline the processes local

businesses must face when they are expanding their physical footprint. I know this

has a great impact on keeping economic development moving forward.

In closing, I would like to thank President George W. Bush for this nomination,

and appreciate the Senate’s consideration of my confirmation for this position. I look

forward to applying my passion for service if confirmed for this position. As a leader

and former President I admire, Teddy Roosevelt once said, ‘‘The first requisite of

a good citizen in this republic of ours is that he shall be able and willing to pull

his weight.’’

If confirmed, I will carry the honor and personal responsibility this statement implies forward, applying the best of myself as a Board of Director with the National

Institute of Building Sciences.

I would appreciate your support of my nomination and stand ready to answer any

questions and listen to any guidance.

Thank you.

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

100

101

102

103

104

105

106

107

108

109

110

111

112

RESPONSES TO WRITTEN QUESTIONS OF SENATOR JOHNSON

FROM N. GREGORY MANKIW

Q.1. Is the goal of the President’s tax proposals to raise the fraction

of the economy that goes to national saving, or to lower it?

A.1. The proposal is intended to increase employment in the shortrun by boosting aggregate demand and to increase GDP growth in

the long-run by improving economic incentives, particularly by lowering the taxation of capital income. In the short-run, the proposal

may reduce national saving by adding to the deficit. In the longrun, the proposal is likely to increase national saving, as private

saving is encouraged by the removal of the double tax on corporate

income and the expansion of tax-free savings accounts. The President has said that he also favors spending restraint, in order to reduce the deficit and increase national saving.

Q.2. Do you believe that a tax cut worsens or improves the budget

balance?

A.2. Holding Government spending fixed, a tax cut worsens the

budget balance to some extent. However, tax cuts that improve economic incentives also promote economic growth, which generates

additional revenue. This revenue feedback partly offsets the direct

revenue loss, so that a tax cut reduces the budget balance by less

than one-for-one. The President has said that he believes that

spending restraint is an important counterpart to tax relief.

Q.3. Do you believe that a budget deficit raises interest rates relative to what they would otherwise be?

A.3. Budget deficits moderately raise interest rates. The 2003 Economic Report of the President (pp. 55–58) estimated that every

$200 billion of additional Government debt causes a long-run increase of 3 basis points in interest rates. The impact of budget deficits on interest rates is one reason why the President is concerned

about the deficit and favors spending restraint.

Q.4. Do you believe that an increase in the budget deficit crowds

out private investment?

A.4. In the short-run, budget deficits may actually increase investment by stimulating aggregate demand. In the long-run, all else

being equal, budget deficits crowd out private investment by raising interest rates (as discussed above). However, if the budget deficit is associated with tax cuts that encourage private investment,

such as the President’s proposal to remove the double tax on corporate income, the tax cut may provide an offsetting boost to private investment. The President favors spending restraint to reduce

the deficit and prevent the crowding out of private investment.

Q.5. Do you believe the official projections from the Office of Management and Budget are a realistic best-guess forecast of the likely

path of budget surpluses or deficits over the next 5 or 10 years?

A.5. Although I am not an expert on budget forecasting, I am confident the Office of Management and Budget does a capable and

professional job, in a volatile economic environment, of forecasting

the Federal budget under different assumptions about policy decisions. One set of OMB projections is based on the assumption that

the President’s proposed policies will be adopted and another is

113

based on the assumption that current policies will be maintained.

Even aside from economic uncertainties, the actual budget surplus

or deficit will differ from these projections if different policies are

enacted.

RESPONSE TO A WRITTEN QUESTION OF SENATOR SHELBY

FROM JAMES A. BROADDUS

Q.1. What are some of the things which could be done to provide

greater building safety in tornado-prone areas?

A.1. Mr. Chairman, the National Institute of Building Sciences

(NIBS) is working vigorously on the issue of tornados and their disastrous effects. HAZUS is a nationally applicable, standardized

methodology and software program for estimating potential losses

from earthquakes, floods, and wind. HAZUS is being developed by

the Federal Emergency Management Agency (FEMA) under a cooperative agreement with the NIBS. It now has the capability to estimate earthquake losses, and flood and wind models are being developed. The NIBS has established a committee of wind engineering experts to provide technical oversight and guidance to the

project.

Development of the wind model will continue after 2003, to increase the capability of the model to allow estimating indirect economic losses and impacts to lifelines, and to add the capability to

assess the effects of extra-tropical cyclones, tornados, thunderstorms, and hail.

The HAZUS wind model will be an improvement over existing

loss estimation models by using a wind hazard-load-damage-loss

framework. The model will address wind pressure, wind borne debris, surge and waves, atmospheric pressure change, duration/fatigue, and rain.

The model will have the following features:

• A building classification system that depends on the characteristics of the building envelope and building frame.

• The capability to compute damages based on building classes and

the effects of rain, progressive failure.

• The capability to compute damage to contents and building interior.

• The capability to estimate tree blowdown and structure debris

quantities.

• Loss estimates will include direct and indirect economic loss,

shelter requirements, and casualties.

• Modules will be included to facilitate future assessment of mitigation, benefit cost, and building code issues.

When confirmed as a Board Member, I will monitor the progress

of this program, making suggestions as necessary to ensure its

value and payback to the Nation’s citizens.