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35–409 PDF 2007

THE ROLE OF PUBLIC INVESTMENT

IN PROMOTING ECONOMIC GROWTH

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

MARCH 23, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–17

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

C O N T E N T S 

Page 

Hearing held on: 

March 23, 2007 ................................................................................................. 1

Appendix: 

March 23, 2007 ................................................................................................. 31

WITNESSES 

FRIDAY, MARCH 23, 2007

Drake, Michael, M.D., Chancellor, University of California, Irvine .................... 14

Haughwout, Andrew F., Research and Statistics Group, Federal Reserve Bank 

of New York .......................................................................................................... 21

Rapoport, Miles S., President, Demos .................................................................... 16

Rohatyn, Ambassador Felix G., Rohatyn Associates LLC .................................... 2

Winston, Clifford, Senior Fellow, The Brookings Institution, Washington, DC . 18

APPENDIX 

Prepared statements: 

Drake, Michael .................................................................................................. 32

Haughwout, Andrew F. .................................................................................... 45

Rapoport, Miles S. ............................................................................................ 55

Rohatyn, Ambassador Felix G. ........................................................................ 65

Winston, Clifford .............................................................................................. 73

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THE ROLE OF PUBLIC INVESTMENT 

IN PROMOTING ECONOMIC GROWTH 

Friday, March 23, 2007

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 2:05 p.m., in room 

2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. 

Present: Representatives Frank, Maloney, Moore of Kansas, 

Green, Cleaver; Neugebauer, and Campbell. 

The CHAIRMAN. The gentleman from Texas is from Houston. He 

has been Mr. Hospitality this year because his City is the lead 

place where people have been welcomed from New Orleans, so he’s 

been in a very welcoming mood for longer than he should have had 

to be. 

This hearing of the Committee on Financial Services will come 

to order. I begin with an apology and expression of gratitude to the 

witnesses. It has been a busy week, and I had anticipated unnecessarily that we might have a spillover this morning. I very much appreciate your accommodating us on a busy Friday afternoon. I understand that Mr. Rohatyn is going to have to leave, and it’s our 

fault, not the fault of any members of the panel. We are appreciative. 

We’re going to get right into this. This committee has, of course, 

legislative jurisdiction in specific areas involving housing and financial services. We also have jurisdiction over the HumphreyHawkins Act and the question of economic policy in America in 

general. 

One aspect of this that we are focused on is the problem we are 

confronting in the United States, as well as in other parts of the 

world, about how you go forward with economic growth in a way 

that does not exacerbate social problems and in a way that does 

not provide more inequality. Obviously, our capitalist system requires inequality. It is a good thing in the appropriate amounts, 

but too much inequality can become socially dysfunctional. It might 

even become politically dysfunctional, and this committee is going 

to be talking to thoughtful people all year about how we go forward. 

One aspect that I believe in very strongly is being overlooked in 

the current situation and that is the contribution that should be 

made by the public sector. I do not regard support for a vigorous 

public sector as in any way a denigration of the private sector. Our 

system requires both. And when you talk about diminishing inVerDate 0ct 09 2002 17:29 Jul 03, 2007 Jkt 035409 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 K:\DOCS\35409.TXT HFIN PsN: TERRIE
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equality, not getting rid of it, but preventing it from growing as 

growth comes, I believe we need more reliance on the public sector 

as a part of that effort than we’ve had. How you do it, we can talk 

about. 

So this is a piece of that discussion. It’s the role of public investment in promoting economic growth, and in promoting economic 

growth in a way that makes it sustainable by giving the great majority of the public a view that they have a stake in it. 

Do either of the other members wish to make an opening statement? If not, we will begin with our witnesses, again with my 

thanks for accommodating us. We’ll begin with Mr. Rohatyn. Ambassador, please go forward. 

STATEMENT OF AMBASSADOR FELIX G. ROHATYN, ROHATYN 

ASSOCIATES LLC 

Mr. ROHATYN. Mr. Chairman and members of the committee, it’s 

a great privilege to be here today to discuss a critical issue—the 

need for large-scale public investment in projects that will modernize our Nation and enrich our people. 

Throughout our history, and until the 1960’s, the Federal Government played a dominant role in our level of public investment, 

while the States played a secondary role. This has changed since 

then. Public investment has, by tradition, meant infrastructure: 

roads, trains, bridges, public transportation, public schools, etc., 

have provided the private sector with the complementary investments which improve business productivity, our standard of living, 

and our quality of life. Largely the product of a Federal, State and 

local partnership, it was badly neglected over the years, principally 

by the failure of the Federal Government to maintain its level of 

participation. 

The American Society of Civil Engineers has estimated that it 

would take $1.6 trillion dollars over a 5-year period to bring America’s infrastructure to a reasonable standard of adequacy and that 

this requirement increases by about $300 billion every 2 years. 

Mr. Chairman, I have for many years recognized our government’s historic role as the indispensable investor in the economy of 

our country. I hope that your support will encourage the Congress 

to undertake the major effort needed in rebuilding America before 

it is too late. In order to do so, we must counteract the present theology that all public investment is wasteful and that neither taxes 

nor borrowing can be justified for that purpose. 

It is also worth noting that the financing of public infrastructure 

creates hundreds of thousands of private sector jobs, which is particularly important when globalization is putting pressure on 

American industrial employment. 

Fortunately, past American political leaders did not always think 

this way. As we look to our Nation’s future, we should also look 

back at the history of great public investments, at the precedents 

set by leaders who made many of the critical commitments that became the backbone of our Nation; we should reflect on the actions 

of those leaders who used government power and public finance to 

make the investments that formed this country; and we should celebrate their historic achievements by continuing to invest boldly 

and wisely in America’s future. 

3

As the political, geographic, and economic structure of America 

took shape in the 19th and early 20th centuries, public investments 

such as the Louisiana Purchase, the Erie Canal, the Transcontinental Railroad, the RFC, and the interstate highway system 

shaped our economy and our security structure. Although the private sector has been the mainstay of our economy, it could not exist 

without this platform and the political leaders who made those decisions—Jefferson, DeWitt, Clinton, Lincoln, FDR, and Eisenhower. 

Since the beginning of the Republic, transportation, infrastructure, and education have played a central role in advancing the 

American economy: whether it was the canals in upstate New York 

or the railroads that linked our heartland to our industrial centers; 

the opening of education to average Americans by land grant colleges and the GI Bill, making education basic to American life; or 

the interstate highway system that ultimately connected all regions 

of the Nation. 

This did not happen by chance, but was the result of major investments financed by the Federal and State Governments over the 

last century-and-a-half. Mr. Chairman, we need to make similar investments now. 

Of course, not all government investments have been successful. 

The endless earmarks, political pork in too many projects, corruption in military contracts, and the recurring problems in NASA and 

many others are proof that there is no such thing as perfection in 

the public sector any more than in the private sector. But the private sector has also had its Enrons and its Worldcoms, as well as 

its earlier scandals, which caused Teddy Roosevelt to break up the 

trusts and FDR to regulate the securities markets. 

But the consistent ideological attack on public investment is 

bringing this country to its knees. Witness the outrage of New Orleans, the state of our public schools, our pollution, and our wasteful use of energy. Without adequate levels of public investment, our 

private sector will lose much of its competitiveness and outsource 

more and more of our requirements in goods as well as services, 

constantly increasing our foreign debt and losing domestic jobs. 

The recent decades have been the best of times for private investment. For public investments, they have been disastrous. 

My views on economic and social issues have been shaped not 

only by my years in business and in government, but also by my 

experiences as a child and as a refugee fleeing from the Nazis and 

seeking asylum in America during World War II. During the war 

years, I had from to time heard FDR’s voice on the radio, sometimes on clandestine sets, which shaped almost by osmosis my 

views of America. To me, America was the platform for freedom, 

fairness, and opportunity, and I have never wavered from these 

views. 

My involvement in public life began in the spring of 1975 when 

New York City was caught in a financial death spiral. In the 

1960’s, the City had lost 300,000 private sector jobs, and in the 

early 1970’s, the City’s economy had slowed sharply during a national recession, aggravated by the Arab oil embargo. Our capital 

investment program had been wiped out. The City was shut out of 

the financial markets and headed for bankruptcy. 

4

To regain market access, we needed a plan which would revive 

the City’s economy, eliminate its deficit, and revive its moribund 

capital investment program. We needed a plan with Federal backing. 

In the summer of 1975, when Governor Carey appointed me 

chairman of New York’s Municipal Assistance Corporation, I believed that bringing the City back to the market would take a few 

months. It actually took several years and required the courageous 

political leadership of Governor Carey and Mayor Koch, the strong 

support of the City’s labor unions and of its banks, and ultimately, 

it required credit from the Federal Government in the form of seasonal loans. 

The Federal credit support enabled the union pension funds and 

the private financial institutions to bring their own support to the 

City, and as a result, the City balanced its budget, reentered the 

financial markets, and for the next 20 years, the City’s economy 

was strong, its budgets were balanced, and it was able to make the 

vital investments in its infrastructure. It could not have happened 

without the credit support of the Federal Government and the sacrifices of its citizens. 

It is also worth noting that the City repaid 100 percent of its 

debt to the Federal Government ahead of schedule, and that the 

Federal Government did not have to face the staggering national 

cost of a New York City bankruptcy. 

Today, support for any government intervention in the economy 

has become anathema, and this has frightened too many Americans into ignoring the long and positive history of government investment in our land. Furthermore, the illogical rules of government accounting and the fear of further deficits make this a very 

difficult political issue. 

As opposed to businesses, States, and local governments, the 

Federal Government accounts do not differentiate between longterm investment and everyday operating expenses. They treat construction of a dam as if it were a welfare check and record the debt 

incurred as a deficit without the offsetting assets represented by 

the dams. If our private sector companies were to keep their books 

in this fashion, they would report losses instead of profits, they 

would cut back on investment and employment in order to show 

earnings, and they would ultimately go out of business. 

The idea that government intervention is always bad has had 

consequences. The recent catastrophe of New Orleans was an event 

waiting to happen. If not in New Orleans, it would have happened 

somewhere else. It is the result of a national failure to make public 

investments adequately and intelligently—in the case of New Orleans, inadequate investment necessary to prevent the flooding of 

New Orleans, and the failure to have in place an effective emergency response system. 

Modern market capitalism and the links of the financial markets 

to advanced information technology have created a formidable engine for the creation of wealth, and we have, in my judgment, the 

best economic system in the world. This wealth, however, is heavily 

weighted toward the private sector, and has resulted in the neglect 

and decay of public facilities, including that of our public schools. 

The sensitivity of the financial markets to government spending beVerDate 0ct 09 2002 17:29 Jul 03, 2007 Jkt 035409 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\35409.TXT HFIN PsN: TERRIE
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came a powerful brake on public investment, because the arbiter 

of financial policy is a government accounting system that treats 

investment as an expense and a bond market fearful of deficits, regardless of their origins. 

The combination of these notions, namely, that government cannot do trading agreement right, and that long-term public investments are the equivalent of welfare payments, has caused a steady 

erosion in Federal funding for infrastructure and other initiatives 

that would spur progress and economic growth, leaving more and 

more to State and local governments, which cannot provide adequate support. That is the road that led to New Orleans. 

As we fail to make large public investments— 

The CHAIRMAN. Mr. Rohatyn, could you sum up in another 

minute, and then— 

Mr. ROHATYN. Certainly, sir. 

The CHAIRMAN. Thank you. 

Mr. ROHATYN. I certainly can. A Federal capital budget would 

help correct our problems. You all know the political hurdles of 

such a budget, but their existence should not automatically doom 

the idea. However, if we are unable to institute a capital budget, 

there is a recent development that suggests another remedy—the 

return of the 30-year Treasury bond, because long-term bonds 

should finance capital assets, and their issuance should be dedicated to that purpose. Even longer maturities, such as 50-year 

bonds, should be envisaged. That is what the European Union does 

to fund its systems. 

To help deal with our shortage of capital investment, the Congress could authorize a trust fund to be financed over a 5-year period by special purpose 50-year Treasuries. The fund could be used 

to co-finance high priority national, regional, and local infrastructure programs, as well as special projects which generate advanced 

intellectual property. Private capital should be an integral part of 

the program. Tight control should be applied to the operations, and 

it should be subject to the Federal limit. 

Jefferson, Lincoln, FDR, and Eisenhower proved that public investment can generate vast returns. The Federal budget should be 

a tool to encourage such national investment instead of writing it 

off. 

Thank you very much, Mr. Chairman. 

[The prepared statement of Ambassador Rohatyn can be found 

on page 65 of the appendix.] 

The CHAIRMAN. Thank you very much, Mr. Rohatyn. Next, Dr. 

Michael Drake, who is the chancellor of the University of California 

at Irvine. 

Oh, I apologize. We agreed to do an immediate round of questions for Mr. Rohatyn because he has to leave early, so let me 

begin. 

It’s important, because you’ve had a very distinguished career in 

the private sector as an investment banker, as well as your public 

sector work. One of the arguments we’ve heard is that the expansion of the public sector is somehow inimical to the private sector. 

I do think it’s important for you to comment from the perspective 

you’ve had as an extremely successful private financial markets individual as to the compatibility of the two and whether or not the 

6

benefits you urge from an expanded public sector could in fact be 

done through the private sector instead. 

Mr. ROHATYN. Well, Mr. Chairman, the experience that I’ve had 

in the public sector essentially was my work as chairman of the 

Municipal Assistance in New York. And that for me was an eye 

opener in terms of how bad the need is for the public and the private sector to work together. New York City would have gone bankrupt if we hadn’t had access to public money, to government assistance. And we were able to do that by at the same time bringing 

the private sector, the banks, as well as the public sector unions, 

into the process. 

And it turned out—probably turned out even better than we 

thought it might. But without it, the City would have gone bankrupt, the Nation would have suffered a terrible, terrible economic 

loss, and socially, it would have been a catastrophe. 

So I am absolutely convinced that the public and the private sector have to work together, that they’re complementary, and they’re 

not at all in opposition to each other; that business and labor have 

to work together, and that political parties have to work together. 

If we don’t do that, we are going to always be in trouble. 

The CHAIRMAN. Thank you. A related question, because one of 

the arguments often made on the Floor of the House and elsewhere 

when we talk about government spending is there is a general view 

that less government spending is better, unless it’s war or maybe 

going to Mars, or subsidizing agriculture. Those are the three exceptions that we often hear. 

But there is a general view that if you cut government spending, 

that’s better, and particularly we hear, when we’re not talking 

about defense contracts, and this is a verbatim quote I have heard 

many, many times. Let me show off most of my Latin. I now quote 

you verbatim what I have heard ad nauseam. 

[Laughter] 

The CHAIRMAN. And it is that government cannot create jobs, 

that government spending cannot create jobs, that only the private 

sector creates jobs, and that government funding that is theoretically motivated by somehow increasing employment is almost a 

contradiction in terms. Would you comment on that? 

Mr. ROHATYN. Well, my simplest comment is that public investment leads to private employment. Most of the people put to work 

by public investment are private sector employees, and most of the 

entities that benefit from public investment are private sector corporations. The notion that these are contradictory to each other 

doesn’t make any sense to me. 

The CHAIRMAN. In the book that you’re working on, and the comments you’ve made, you talk about some major decisions involving 

significant public expenditure. Is it your view that private employment, private sector employment in the economy around those, subsequent to those events, was greater than it would have been if 

they hadn’t been made? 

Mr. ROHATYN. Oh, absolutely, Mr. Chairman. I mean, the decision by Lincoln, for instance, to finance the Transcontinental Railroad, if we hadn’t had a Transcontinental Railroad, the economic 

development of this country would have been infinitely slower. To 

me, this is self-evident. The things that— 

7

The CHAIRMAN. You hold that truth to be self-evident? 

Mr. ROHATYN. I do indeed. I mean, the build-up to World War 

II, which was an extraordinary accomplishment both politically and 

economically, resulted in an enormous increase in private employment and private investment as Roosevelt was building the country 

up for World War II. 

The CHAIRMAN. And I take it—I will turn it over to my colleague—but what it seems to me you were saying, what I read in 

here you’re saying is that the job creation that results is not simply 

from the expenditure itself, which might sort of be self-evident in 

that sense, but enhances the creation for further private sector investment. That done well, public investment increases the level of 

private sector activity subsequently? 

Mr. ROHATYN. Absolutely, Mr. Chairman. I would argue, if we 

did a better job in our public schools, we would have a much better 

functioning economy as a result. It may be 10 years later, but it 

starts right there. 

The CHAIRMAN. The gentleman from Texas. 

Mr. NEUGEBAUER. I thank the chairman. Mr. Chairman, I want 

to be clear. Are we just going to direct these particular questions 

to— 

The CHAIRMAN. Just to Mr. Rohatyn, and then we’ll do the rest. 

Mr. NEUGEBAUER. I just wanted to be clear about that. Thank 

you, Ambassador, for—you know, I, number one, I concur with you 

that infrastructure is a vital part of our economy. 

In fact, you know, one of the things I tell folks—and I’m a land 

developer, so I understand infrastructure probably as well as anybody, because I’ve put a lot of infrastructure in, and I look for infrastructure when I’m doing a land development project—I would 

say that you’re right when you look at putting in the transportation infrastructure, for example, that we put in this country, 

opened up opportunities, bringing electricity to other parts of the 

country. And probably in those days, you know, there was no other 

financing source for some of those projects than the Federal Government. 

But due to the sophistication of financial markets today, and the 

fact that we have the ability to put capital together, really for just 

about anything. I mean, we now have in Texas, under proposal, a 

private company to build a road and to build a toll road in our—

do you see our role in the government is not necessarily—I noticed 

you’re a proponent of going back to a 30-year bond or even a 50-

year bond. One of the problems I had with that is, we have trouble 

up here getting a budget passed for a 1-year project, much less a 

30- or 50-year project. But do you see the government being an 

augmenter of some of these marketplace activities now and letting 

the private sector fill in the gaps on this infrastructure? 

Mr. ROHATYN. Sir, I believe, as I said, that there is a partnership 

always—usually a partnership role for the public sector and the 

private sector. I would give priority in terms of looking for capital 

to looking for capital in the private sector, even as we deal with 

public investment. 

But I’ve also had experience, especially with the refinancing of 

the City of New York, with the fact that a relatively small amount 

of government involvement and public capital plays an enormous 

8

role in encouraging the other players, the insurance companies, the 

unions, everybody else, to put in the majority of the capital. 

Also, there are projects where the public purpose is more important than necessarily the profit margins of the business, which 

have to be put in equilibrium. 

So my position would be that there has been a huge improvement in the technology of finance, if you will, and that can be put 

to use now in any number of private and public activities. And to 

make use of that as much as possible, but to have an instrument 

where if you have three governors who need to do a regional project 

that’s complicated, and where the profitability isn’t self-evident, to 

have a government financed entity that is professionally competent 

and then can put up enough of the money to encourage private sector people to come in. 

Mr. NEUGEBAUER. Well, you’re kind of leading to my next question, and want you just to expand on that. Where do you see the 

areas today where we don’t see private capital coming to—showing 

much interest in infrastructure? Can you identify some of those 

areas for me? 

Mr. ROHATYN. Well, I think that by and large, you can encourage 

private capital to look at investment practically anyplace. On the 

other hand, that is not always consistent with the profitability of 

the projects that would come about, because it just doesn’t lend 

itself to that kind of thing. So I am for having all of the instruments that you need, both financial and nonfinancial. 

For instance, you cannot—you’re not going to put a private sector—at least I don’t think, on a large scale, in the public school system of most cities in America today. You may do it in some places, 

but you’re not going to do it on a massive scale. 

So I think you have to do what works, and what works is some 

combination of private and public involvement, both in the financial and the operating area. 

Mr. NEUGEBAUER. You know, in the education mode, I think the 

jury is still out on that, because, you know, it’s a relatively new 

concept of—there are some very successful private institutions. 

Mr. ROHATYN. Oh, I agree with you, sir. I just— 

Mr. NEUGEBAUER. Yes. And so I think we have to be careful of 

characterizing that. I would say this. We have made a tremendous 

investment in education. People say we need to invest more in education and maybe that’s true. But when you look at the money over 

the history of this country, of the amount of money that we have 

put into education, it’s a pretty—if you graph it, it’s a pretty steep 

graph. 

And I think the question that people are—should be asking more 

is, instead of putting more money into education, I think what we 

are saying now is that we want more education for our money. I 

think that’s particularly the road I’m going down, that before we 

continue to pour extremely large amounts of money into education, 

I think we have to go back and kind of look at the overall model 

and say, is this working? Because the money has been coming into 

education. 

Mr. ROHATYN. I agree. I was actually mostly arguing about the 

need to build buildings where the water doesn’t come through the 

roof onto these kids who are trying to learn the alphabet. 

9

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

The CHAIRMAN. I now recognize the gentlewoman from New 

York. 

Mrs. MALONEY. Thank you, Mr. Chairman, for calling this important hearing, and it is a tremendous honor, Ambassador, to have 

you here today in Congress to share your knowledge with us, and 

I want to really personally thank you for your many contributions 

to our economy and really to helping our country, not only New 

York during the 1970’s, and during our time of crisis, but you’ve 

continued to be a voice that everyone listens to. 

And I have wanted to ask you this question for a long time, and 

even though it’s a little bit off point, could you comment on the 

weak dollar and what that means to our economy now and your 

thoughts about the impact on our country long term with this? It 

appears to be a policy of the Administration to weaken the American dollar. And I would just welcome any of your analysis or 

thoughts on this subject. 

Mr. ROHATYN. This is kind of a suicidal subject that you’re asking me to comment on. 

[Laughter] 

Mr. ROHATYN. To some extent, the weak dollar is a result of our 

foreign deficits, and our foreign deficit is partly a result of the competitiveness of countries like China, India coming along, and our 

domestic deficits. So I think in today’s world where the financial 

markets are so huge that it’s very difficult to simply control them, 

that the weak dollar is a result of the economic position of our 

country in the world and our internal financial policies. 

I’m not a fan of a weak currency in terms of its social repercussions and in terms of its standing in the world. So I would prefer, 

personally, a strong currency, economic growth, low inflation, and 

a relatively balanced budget, but I wouldn’t make a fetish out of 

balancing the budget every year, mostly because I have no confidence in the accounting system of the government, which I don’t 

think reflects at all the financial condition of the country. 

So I’m not sure that’s a very good answer that I’m giving you. 

I’m not sure there are very good answers to that question, frankly. 

But the weak currency is a result of a huge imbalance in our economic position, in our trade deficit as well as our Federal deficit, 

and the fact that countries like India and China are coming along 

like gangbusters and are going to make things very, very difficult. 

Mrs. MALONEY. I heard a comment from Shirley Tillman, the 

president of Princeton, recently. She was asked what she thinks is 

the greatest crisis confronting our government. We feel that we’re 

facing a crisis every day; there’s something happening all the time. 

And I just would like to ask you the same question. Her response 

was the fact that our country is not investing in science and mathematics and really research and sort of cutting edge technologies, 

which has kept our country really on the curve, on the leadership 

curve in the world. And she saw the fact that we seem to be cutting 

back in—or we are cutting back in investments in science and technologies. And since we are—and mathematics. And since we are 

talking about public investments today and how it helps our economy, where do you think we as a Nation should be investing? Obviously, we need to invest in many areas, but if we had to be straVerDate 0ct 09 2002 17:29 Jul 03, 2007 Jkt 035409 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\35409.TXT HFIN PsN: TERRIE
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tegic, where do we need to put our dollars to help the most people 

and to really keep our country competitive in this very, very competitive world? 

Mr. ROHATYN. Well, I would say education and infrastructure. 

Mrs. MALONEY. You would say education and? 

Mr. ROHATYN. Infrastructure. 

Mrs. MALONEY. And infrastructure? 

Mr. ROHATYN. Yes. 

Mrs. MALONEY. Thank you. 

The CHAIRMAN. The gentleman from Kansas. 

Mr. MOORE OF KANSAS. Mr. Chairman, I want to welcome the 

witnesses who are here to testify today and thank them for their 

testimony. 

I think Mrs. Maloney has asked some of the questions I would 

ask, and I would ask another question. Mr. Ambassador, if you 

don’t feel comfortable answering, if you don’t feel like this is in 

your area, please say so. I’m not trying to push at all. I’m just asking. 

We have in this Nation an— 

The CHAIRMAN. We may be one of the few committees in the 

Congress who is not subpoenaing people. 

[Laughter] 

The CHAIRMAN. So you’re here voluntarily. You can answer or 

not. 

Mr. MOORE OF KANSAS. Right. Right you are, Mr. Chairman. We have in this country an $8.8 trillion national debt. About 40 percent of that debt right now I understand is financed by foreign nations. And a question was asked, I believe by Mrs. Maloney, about 

our currency and our situation. Do you have concerns about foreign 

nations holding such a substantial portion of our debt? And what 

might be the result if those foreign nations decided they didn’t 

want to hold our debt any more? 

Mr. ROHATYN. I think, first of all, there is somebody from the 

Federal Reserve, thank God, on this committee, who can hopefully— 

Mr. MOORE OF KANSAS. And I’m happy to have anybody if you 

care to answer it try to take stab at that. I’m trying to ask a legitimate question here. I’m not trying to put anybody— 

Mr. ROHATYN. Totally. And it is obviously a risk to have this 

kind of imbalance in our accounts. 

Mr. MOORE OF KANSAS. Yes, sir. 

Mr. ROHATYN. And to have as much of our capital in hands that 

today are cooperative and tomorrow might not be. On the other 

hand, it does create a situation where we’re all kind of in the same 

boat, and— 

Mr. MOORE OF KANSAS. And what do you mean by that, sir? 

We’re all in the same boat? 

Mr. ROHATYN. Well, it will not help China to destroy the dollar. 

Mr. MOORE OF KANSAS. Would their selling off our debt destroy 

the dollar? 

Mr. ROHATYN. Well— 

Mr. MOORE OF KANSAS. Or would it affect interest rates at all? 

Mr. ROHATYN. It depends to whom and in what amounts and in 

what way. So I’m sorry not to be able to be very precise. 

11

Mr. MOORE OF KANSAS. I understand. 

Mr. ROHATYN. But this is a—first of all, it’s a very delicate question. 

Mr. MOORE OF KANSAS. Yes, sir. 

Mr. ROHATYN. And secondly, it’s something that I don’t think 

anybody has the answer to. I think the only answer is to be as orderly in the way we run our economy and as prudent as we can 

be as to invest as much as we can in things aimed at economic 

growth and social support, and try to run our—both our import-exports and our internal budgets with as much equilibrium as possible. But that requires political decisions. This is not an issue that 

has no solution, if we want to do it. 

Mr. MOORE OF KANSAS. Yes, sir. Well, I appreciate, and frankly 

agree with you, that as much as we can invest in infrastructure 

and education, that’s going to be to the advantage of the people in 

our country. I think ultimately my concern is that our debt is getting so high and we sometimes end up borrowing money to make 

those investments, and I just—that’s my concern of where do you 

find the appropriate balance? And if the gentleman from the Federal Reserve cares to comment, I’d be happy to hear anything you 

have to say. I know that since Chairman Greenspan has gone, everybody thought that the markets didn’t listen to him any more. 

And when he talks about the possibility of a recession, I guess we 

were wrong that people, in fact, do still listen to Chairman Greenspan. Any comment at all, sir? 

Mr. HAUGHWOUT. Well, Congressman, this is really not an area 

in which I specialize. 

Mr. MOORE OF KANSAS. Okay. 

Mr. HAUGHWOUT. I’m afraid I don’t— 

The CHAIRMAN. Yes. In fairness, he wasn’t asked for this purpose. 

Mr. MOORE OF KANSAS. Okay. 

The CHAIRMAN. Will the gentleman yield to me briefly? 

Mr. MOORE OF KANSAS. Absolutely, Mr. Chairman. 

The CHAIRMAN. I appreciated the colloquy with the gentleman 

from Texas and Ambassador Rohatyn about the importance of education, and we talked about how much money has gone in there. 

In fact, I think if you look at education and measure by money, as 

we often do, as a value, we don’t treat it very seriously. 

We’ve just been through a markup with some amiable contention 

about CEO salaries, and we were told that those of us who thought 

that CEO salaries might have gotten a mite high were being meanspirited, and we had to pay for performance. Look at what we pay 

teachers. If you look in this society at the salary of teachers—let 

me put it this way. If you didn’t know what the occupation was, 

and you just ranked compensation, and then you said based on the 

amount of compensation, how strongly do you think the society values that profession, you’d figure teaching wasn’t very highly regarded around here. We don’t pay teachers very much at all. 

So when you look at overall expenditures, there are a lot of 

things that go into it, but I believe it is in fact a sign that we have 

not as a society valued education when we pay the people who are 

trying to teach 5-, 6-, or 7-year-olds, particularly those who have 

12

had difficult lives previously. So, yes, I do think that that’s a good 

measure. 

Now, money can be well spent or badly spent. But if you start 

out by substantially undercompensating people compared to so 

many other professions in this society, we shouldn’t be surprised. 

And I’m just off on this tangent, but we used to be able to get away 

with that because we had a good thing to help us get teachers even 

though we underpaid them. It was called sex discrimination. 

If you were a woman interested in chemistry or physics or biology 40 years ago, you could go be a teacher or a nurse. And as the 

society has made some progress in diminishing discrimination, 

women have other options. So, you know, we had an artificial supply of good teachers because of sex discrimination, and that artificial supply is no longer there. Supply and demand, I think, have 

not yet rebalanced. 

I appreciate the indulgence. The gentleman from Texas. 

Mr. GREEN. Thank you, Mr. Chairman. And I thank all of the 

persons who are appearing today, as well as the ranking member. 

Just a comment before I ask a question, and it has to do with education as well. We from time to time hear of problems in police departments, corruption, if you will. And rarely do we talk about 

eliminating police departments or police services. We usually will 

conclude that we should fix the problem. We should hire more police officers, pay them more, and buy better equipment. We should 

do those things necessary to maintain what we know to be a good 

system. 

And unfortunately, I agree with what the chairman has said, we 

have not taken a similar attitude, I think, as it relates to education. We want to leave no child behind, but in the process, we 

seem to overlook the fact that we have to leave no teacher behind 

if we’re going to leave no child behind. And I want to associate myself with the comments of the chairman on education. 

Mr. Ambassador, I hate to be the one to ask you to go into specifics. You mentioned education in the main, but what aspect of 

education would you conclude that we should focus on? Should it 

be Head Start, higher ed? Where should we go in your opinion, 

with our public influence by way of emolument? 

Mr. ROHATYN. Sir, I am not an expert on education, and, therefore, I will give just an off-the-cuff answer, if I may. My wife is involved—and I should have brought her here. It would have been 

much more productive. 

There are two areas of education that to me seem vital. One is 

to start very early, not to wait for a child to be 5-, or 6-, or 7 years 

old to begin concentrating on what to do. And secondly, as I mentioned earlier, to give working facilities to children in schools a 

clean and safe environment. And in working at MAC in the city, 

I got involved in this subject, because we created a building fund 

for the schools as we were starting to run surpluses. So I spent a 

lot of time walking around the schools. And it is the most distressing and depressing situation in most of the schools that you 

can think of. And I think that unless you start children very young 

in a decent environment to study in, it’s hopeless before you start. 

But, you know, the rest is how you—what the curriculum should 

be, and how this should be organized. I’m not an expert on that. 

13

Mr. GREEN. Thank you. Mr. Chairman, I will yield back the balance of my time in the interest of time. 

The CHAIRMAN. I thank the gentleman. The gentleman from 

California. 

Mr. CAMPBELL. No questions. 

The CHAIRMAN. I thank the gentleman. The gentleman from Missouri. 

Mr. CLEAVER. Thank you, Mr. Chairman. I really appreciate your 

comments, Mr. Ambassador, with regard to public financing. Here’s 

a conundrum. I think we should invest in public financing for the 

same reason that you stated, and I’ve seen it in my City. I’m a 

former mayor of Kansas City, Missouri, and I’ve seen public investment generate all kinds of private economic development around 

the public investment. 

The problem is—and it’s been touched on by my colleague from 

Kansas, I think everybody here to some degree—we are borrowing 

so much money that, frankly, we’re financing everything with borrowed money. We are a debtor nation. And $7 billion for Katrina 

in the supplemental that we approved earlier today. And so there’s 

a public investment going into New Orleans. And when you think 

about the infrastructure declining on the Federal highways and in 

the cities. Most cities on the Eastern seaboard are functioning with 

stormwater and sanitary sewers that are over a century old, and 

they’re crumbling. But if we try to do public investment, you know, 

some kind of a contemporary TVA, we’re going to have to borrow 

money to do it. 

Now the only other option is to figure out how to reverse the 

trend toward a minus zero savings rate in this country. We have 

to borrow from foreigners because we don’t have—we don’t save 

money in this country, whereas in Asian countries, the savings rate 

in some rise above 20 percent, and we are like 0.6 or something. 

I’m not sure exactly what it is right now. What can we do, or is 

there anything that we can do, that you would suggest, to generate 

a savings rate? Or is it that the economy is not as good as we are 

being told it is, and people cannot save, and, therefore, they are 

spending all they earn and then borrowing to make it? 

Mr. ROHATYN. Well, sir, I hate to bring up something that is 

probably considered impolite in this City, but I would just— 

Mr. GREEN. Nothing is impolite in this City. 

Mr. ROHATYN.—refer to the fact that no other country in history 

has ever gone to war and cut taxes at the same time. And when 

you start with contradictions of interest that are so profound, I 

don’t know what to say to you with respect to ultimately running 

a balanced economy that deals with these things, because you’re 

eliminating revenues to an extent that it’s finally impossible. 

So, most of the problems that this country has, I think, because 

we are still the strongest economy in the world. We have great 

science. Every other year we invent something new like Google or 

Yahoo or things that 5 years ago just didn’t exist. But we can’t 

seem to agree among ourselves on a balance between spending and 

saving. So, these are not rocket science, but they do require some 

unity of interest and some unity of philosophy in terms of what 

kind of an economy and what kind of a society you want to run. 

14

Mr. GREEN. I have a question. Have you seen this TV commercial 

where this guy starts out walking from his home and he says I 

have this beautiful home and great family, then he’s driving 

around and cutting his grass on a tractor, and the next thing he’s 

cleaning his swimming pool. They have a gorgeous swimming pool. 

And he says, ‘‘How do I do it? I’m up to my eyeballs in debt.’’ And 

every time I see that, I just—I think about our country, our Federal Government. 

Thank you. 

The CHAIRMAN. Thank you. Thank you, Mr. Rohatyn. You’re excused now, and I appreciate your coming to see us. 

Mr. ROHATYN. Me, too, and I apologize. 

The CHAIRMAN. No, no, we changed this around. I’m very grateful to the others for staying here, and I’m sorry that we don’t have 

control over the schedule, and we are indebted to you for your indulgence. 

We’ll now resume the statements. Dr. Michael Drake is the chancellor of the University of California, Irvine. And I guess the closer 

people were, maybe then they can go early, and then get home. 

You’re stuck for the night. So, thank you for staying. Go ahead, Dr. 

Drake. 

MICHAEL DRAKE, M.D., CHANCELLOR, UNIVERSITY OF 

CALIFORNIA, IRVINE 

Dr. DRAKE. So I’ll talk low and talk slow and I won’t say too 

much. 

The CHAIRMAN. Two out of three won’t be bad, Doctor. 

Dr. DRAKE. Okay. Good afternoon, Chairman Frank, Ranking 

Member Bachus, and committee members. Thank you for the opportunity to appear before you today to discuss the important issue 

of Federal investment in basic science research. 

I am Michael Drake, chancellor of the University of California 

Irvine, one of the 10 campuses of the University of California system. At UC Irvine, we educate nearly 26,000 students and conduct 

research in a wide range of the sciences, supported by the National 

Institutes of Health, the National Science Foundation, the Departments of Defense and Energy, NASA, NOAA, and several other 

Federal research agencies. 

Our Nation’s system of higher education, and particularly its 

public universities, are a unique example of a public investment 

that has paid enormous dividends. Starting with the GI Bill, Federal student aid has helped shape postsecondary education since 

World War II. Thanks to the Federal Government’s commitment, 

including your recent action to increase the Pell Grants, students 

with need have increased access to higher education. 

America’s colleges and universities produce human and intellectual capital, the twin engines of economic growth. Public investment is the critical factor that has made our research universities 

the envy of the world. There is no doubt that university research 

is critical to our Nation’s R&D enterprise. Universities perform 

over 60 percent of the Nation’s basic research. 

Economists attribute as much as 50 percent of our national economic growth over the last half century to innovation. To quote 

Alan Greenspan in 2001, ‘‘Had the innovations of the recent decVerDate 0ct 09 2002 17:29 Jul 03, 2007 Jkt 035409 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\35409.TXT HFIN PsN: TERRIE
15

ade, especially in information technologies, not come to fruition, 

productivity growth during the past 5 to 7 years, arguably, would 

have continued to languish at the rate of the preceding 20 years.’’ 

Public investment in basic research has an added benefit—the 

integration of research and education. At both the undergraduate 

and graduate levels, students learn by doing, both in the lab and 

in the classroom. Research takes place in the institutions that develop our young future scientists. Other countries, particularly 

China and India, are struggling to emulate this. As you well know, 

Mr. Chairman, from your personal experience, it is that formula 

that spawned the root 128 phenomena in Massachusetts, as well as 

the Silicon Valley phenomenon in my own home State of California. 

Our country’s higher education system is so successful that we 

often forget how big a role federally supported university research 

has played in changing Americans’ lives. For example, in my field 

of medicine, for the second consecutive year, annual cancer deaths 

in the United States have actually fallen. This drop, a first in history, is occurring despite the aging of our population. 

On the physical sciences side, basic research in physics led to the 

development of the Global Positioning System, which has been an 

invaluable aid to our military, and also to wayward travelers, I 

should add. Imagine as you leave here what you will do and be impacted with; dozens of things that were unthinkable a generation 

ago, whether it be listening to an MP3 player, using the Internet, 

or using your ATM card. I mention a number of other examples in 

my written testimony. 

The Federal familiar in basic research has had an excellent return for American taxpayers. It has been estimated at between 28 

to 40 percent per year. But why does the Federal Government have 

to do this? Why shouldn’t the private sector do more? Well, the fact 

is that business spends an enormous amount of money on development, but the characteristics of basic research are not attractive to 

short-term investors. Basic research is just that; basic. It is longterm and uncertain. It is a fundamental building block for the future. Basic research doesn’t conform to the investor cycle of quarterly reports. Norm Augustine, the former CEO of Lockheed Martin, frequently tells how his company proudly announced a program 

of long-term investment in basic research, only to watch its stock 

price fall. 

With few exceptions, my State of California being one, States 

simply lack the means to invest heavily in research. State support 

is a very small portion of the total basic research done at our universities. But the Federal commitment to basic research has had a 

mixed record in recent years. It is true that Congress recently doubled funding for the NIH, and thank you. But since 2003, NIH 

funding has declined in real terms by 12 percent. Physical sciences 

and engineering research have been nearly flat funded over some 

3 decades. Given the growing importance of interdisciplinary research, adequate funding for both the life sciences and the physical 

sciences is essential. 

I am here today as the chancellor of a research university, but 

I am also a physician and an NIH-funded researcher for over a 

quarter century. I marvel at how diagnostic tools, therapies and 

16

preventive knowledge have transformed the practice of medicine 

and enhanced the quality of life for all Americans. 

Mr. Chairman, I want to thank you and your colleagues for the 

recent actions taken by this Congress in its funding decisions this 

year. I respectfully request that the Congress continue its support 

for research. Only the Federal Government has the resources and 

ability to support this vital research. We can afford these investments. Indeed, we must make them if we want to continue to lead 

the world. 

I thank this committee for bringing the Nation’s attention to this 

incredibly successful partnership and hope it will continue to 

spread the message through the Congress and the Administration. 

I’d be pleased to answer your questions. 

[The prepared statement of Dr. Drake can be found on page 32 

of the appendix.] 

The CHAIRMAN. Thank you. Our next witness is Mr. Miles 

Rapoport, who is the president of Demos. And I should have said 

before, any written material that any of the witnesses wish to insert in the record, without objection, will be inserted. Go ahead. 

STATEMENT OF MILES S. RAPOPORT, PRESIDENT, DEMOS 

Mr. RAPOPORT. Thank you. I deeply appreciate the opportunity to 

be here, and I thank the committee for turning its attention to this 

important issue. To introduce myself briefly, I am the president of 

Demos, a network of ideas and action. Demos is a nonpartisan public policy and research institute founded in 2000. We focus on problems of democratic participation, economic opportunity, and the important question you are considering today, the proper role of government in our society and the economy. 

In the 1980’s and 1990’s, I was in State government in Connecticut, both as secretary of the State, and also for 10 years in the 

legislature where I was a member of the Finance Committee. The 

role of public investment was central to all that experience. I was 

a freshman legislator in Connecticut when the Mianus River 

Bridge in Greenwich collapsed after years of deferred maintenance. 

I was there for an ambitious initiative called U Conn 2000, which 

spent 10 years investing in the University of Connecticut with fabulous results. And 10 years ago, the City of Hartford received a significant state of investment, which has had an enormous important 

and salutary effect on that City and its economic vitality. 

These cases were my education, both in what happens when we 

underinvest in our infrastructure and the public structures that 

undergird our economy and quality of life, and they were my education in the leading and positive role that public investment can 

play in economic development. 

I believe it is important to restore a broad understanding of the 

role played by public investment and the public sector in our economy and in the quality of our lives. America’s signal achievement 

after World War II, the creation of a broad and vibrant middle 

class, was accomplished with policies that included major public investments. The Veterans Administration and the FHA helped millions of young families buy homes. The GI Bill, and later the Pell 

Grants and Stafford loans, helped millions of young people get an 

education. These public investments created opportunities for 

17

young people—young families, rather—to get a leg up and build a 

future for themselves and their children. 

Unfortunately, this commitment to investing in shared prosperity 

has waned. Over the past 30 years, public investment has been systematically devalued. There has been a sustained and relentless 

critique not only of government’s excesses but of government itself. 

The ideals of the marketplace have been elevated and extended 

into arenas previously occupied by an understanding of a shared 

common good. 

In the 1970’s and 1980’s, we embraced privatization, deregulation, and the liberation of the global marketplace. It all boiled 

down to one simple message: the market is better. This has left 

Americans with a very negative view of government. Careful research undertaken for Demos over the last 2 years shows that people have two dominant images of government, both negative. The 

first is of politicians fighting and attacking one another, and the 

second is of an ill-defined, bureaucratic monolith that has little to 

do with people’s daily lives. Most people give little conscious 

thought to the number of ways in which every day, government, 

properly run, assists us all. And it is a very long list. 

The consequences of devaluating public investment have been severe. Let me mention a few. The first is inequality, which has increased dramatically in America over the last 30 years. The rewards of private investment have gone to a small or smaller number of people who have pulled far ahead of the rest of us. It is by 

now a familiar tale. The top 10 percent of Americans have increased their share of personal income from about 30 percent in the 

postwar era to 46 percent in 2004. The share of income going to 

the bottom 60 percent has plunged from 32 percent in 1967 to 26 

percent in 2005. Is this connected to the lack of public investment? 

I believe that it is. 

The second consequence is the highly disturbing fact that for the 

first time in recent American history, the next generation will not, 

as a whole, be better off than the previous one. Tamara Draut of 

Demos, in her book, Strapped, makes it very clear that in comparing young Americans today to my generation, it has become far 

more difficult to achieve the hallmarks of middle-class adulthood: 

getting a college degree and paying off your debts; buying a home; 

having children; and getting a job with health insurance. In each 

of these areas, our investments have declined significantly. 

Third, there are areas of our economic life where government can 

not only achieve economic goals more equitably than private markets, but more efficiently as well. Health care is probably the clearest case. Public Medicare is far more efficient than its private counterparts. The VA hospital system does a better and more cost-effective job than its fragmented private sector counterparts. But thus 

far, our market-oriented blinders have kept us from seeing this 

clearly. 

Let me mention just three specific realms in which I think public 

investment could make a major difference. The first is investment 

in early childhood education, particularly programs for children 

born into disadvantaged circumstances. The work of Nobel Prize 

winning economist James Heckman shows that investment in early 

childhood programs gives children a much larger chance to succeed. 

18

From a strictly income-generating viewpoint alone, according to 

Heckman, such programs can increase earnings by 15 to 17 percent 

over a lifetime. 

Another arena for investment is to make college more affordable. 

Education is a requirement for people to succeed in the workforce, 

and for our economy to compete in the global arena. But many students are either avoiding post-high school education altogether, or 

graduating with enormously burdensome levels of college-related 

debt. According to recent studies, 168,000 academically qualified 

high school students every year don’t attend college because they 

can’t afford it, and a large number attend 2-year colleges rather 

than 4-year colleges for the same reason. 

The Pell Grant, which used to cover three-quarters of the cost of 

attending public universities, now covers only a little more than a 

third. Grants have largely been converted to loans, and tuition in 

our public 4-year universities has more than doubled. 

A last arena—and this is a very personal experience for me—is 

making a needed public investment in our democracy itself. Elections in this country have literally been run on a shoestring, and 

we have paid a heavy price and lost confidence in our election system. The patchwork of laws, rulings, and equipment purchasing decisions, has all of us on edge about procedural chaos every time a 

major election comes up. We need a strong national agency with serious and sustained investment in research, testing, standard-setting, training, and enforcement, and we need sustained support for 

States in improving their system. 

Let me conclude by saying that our Nation’s future and that of 

its people depends on a set of public structures that give everyone, 

businesses and individuals alike, the chance for success. These 

structures, whether they are scientific research programs, as the 

chancellor said, levies, bridges, roads, colleges, or children’s programs, promote the common good and shape our common future. 

We need to reverse the undervaluing of public investment and our 

government’s overall role. This committee’s hearing today is an important contribution to that conversation. I thank you for allowing 

me to be part of it. 

[The prepared statement of Mr. Rapoport can be found on page 

55 of the appendix.] 

The CHAIRMAN. Next is Mr. Clifford Winston, who is a senior fellow of economic studies at the Brookings Institution. 

STATEMENT OF CLIFFORD WINSTON, SENIOR FELLOW, THE 

BROOKINGS INSTITUTION, WASHINGTON, D.C. 

Mr. WINSTON. Thank you, Mr. Chairman, and members of the 

committee. I’m happy to be here to talk about public investment. 

Public investment encompasses both investment in physical infrastructure and investment in human capital. I’ll confine my remarks 

to investment in physical infrastructure or physical capital, but a 

lot of what I have to say, I think, also applies to investments in 

human capital. 

Any economic intervention in a market calls into question how 

the markets are doing. This is not necessarily an attack, a general 

attack on markets, but one has to ask the question, why is government involved in public investment? So the first thing I want to 

19

talk about briefly is just some justification for what I call public 

production. That’s what we’re dealing here with, physical capital. 

Then I’ll assess how government policy has performed in this task, 

and then I’ll briefly conclude with some policy suggestions. 

All right. Justification. The main justification for economic involvement in public production is market failure. That is, there is 

the view that the market would not provide a good or service that 

is socially desirable even though it’s privately unprofitable. For example, roads. The roads system is extremely expensive to construct. It would be extremely expensive and difficult for the private 

sector to raise all the capital to build the interstate. Even if they 

could raise the capital, they’d be encumbered by such great debt 

that they’d probably never make a profit. 

Or, for example, an urban rail system. It may not be that they’re 

going to be able to attract sufficient demand, or with competition 

from autos get higher fares to support a private sector rail system 

that’s profitable. But these things could be socially desirable in 

terms of the benefits to the public exceed the subsidies that are required to keep them going. 

So, if the public is involved then in doing this, and we see this 

in a number of areas, certainly in the transportation infrastructure—highways, airports, inland waterway systems, public investment involved there—public land management—and then services—urban bus, urban rail, and inner city rail service, that is Amtrak, Postal Service the like—all areas of public investment. The 

question is, how well has the government done? Has it performed 

efficiently? This is not a question of whether these things are desirable. Presumably they are. The question is, are they being provided 

in an efficient way? 

My assessment will be drawn from my book. The book is entitled 

Government Failure Versus Market Failure. It’s actually available 

for free on my Web site. Don’t tell Brookings I’ve said that if you 

want to see it, but it is on my Web site. What the book is about 

broadly is retrospective assessments by the economics profession 

about what we really know about how government has performed 

in this area. Some of the work I’ve done, obviously, or I probably 

wouldn’t have written the book, but mainly the work is done by a 

lot of other economists. 

The general lesson you get out of the work is that research accumulates. We don’t start from square one. We now have really a 

core of knowledge that we can build on to get to, ‘‘truth’’; that is, 

at least the state of knowledge we have at the time, and this could 

be quite powerful, I think, in our understanding. 

Let me begin before getting to that evidence with just some descriptive statistics to get some intuition. You observe growth in 

highway congestion and delays, something probably all of you live 

with, you see that. Growth in air travel delays. You certainly hear 

about that. Growth in urban transit deficits. You probably hear 

about that, or certainly the issue of the Dulles extension costing $4 

billion raises questions and obviously, you’re all aware of the big 

dig, that costing a little bit more than we planned on it costing. 

So that suggests that public investment might be characterized 

by serious inefficiencies. It need not be. These things may be just 

the price of getting socially desirable goods and services. However, 

20

the academic evidence that I mentioned actually does reinforce intuition that in fact there have been tremendous inefficiencies in all 

these areas that have cost of hundreds of billions of dollars and are 

a drag on economic growth. 

There are a number of sources for where the problems lie, but 

I’ll just touch on two—inefficient pricing and inefficient investment. 

Quick examples. The problem with pricing like in the area of highways. Highways are underpriced in the sense that the users who 

contribute to congestion don’t have to pay for that congestion, so 

there is demand for capacity but people do not have to pay for that. 

And that’s a wrong signal for investment. We think we need more 

roads, but if we price them efficiently, perhaps we wouldn’t. 

Trucks. Trucks tear up the roads because they’re big and heavy 

and all that, but the damage is related to the weight per axle. That 

is, if you have more axles, that is good, that helps your weight and 

you do less damage. It displaces your weight. You do less damage 

to the road. However, the way we price roads is with a gas tax, 

which is perverse. It penalizes trucks who do the least damage, because they’re the ones with more axles, but they get less fuel economy, okay. But this is exactly the kinds of ways that we are allocating resources in roads. 

Road investment. Pavements. They should be trading off up-front 

capital costs for ongoing maintenance costs. A thick road doesn’t 

have to be maintained as much. What’s happening is, we 

underbuild roads, they’re maintained a lot. They don’t last as long, 

and we wind up increasing expenditures, okay. These are some of 

many examples that I could talk about just in terms of specific policies that have led to serious inefficiencies in public production and 

public provision of infrastructure. As noted, the implication is, a lot 

of waste and resources, as I said, hundreds of billions of dollars a 

year; a drag on economic growth, so you actually see the return on 

investment in these areas is low. I’ve estimated that one dollar of 

spending on highways reduces congestion costs only 11 cents. So I 

guess I’m suspicious of claims that we should increase spending. 

Why do we want to increase spending when we’re getting such low 

rates of return? Usually, that’s not where you want to be putting 

your resources. 

Where then do I see policy? First, you look at what the source 

of the problem is. A lot of this, obviously, deals with political economy, and you could actually give better testimony than I could 

about the pressures to lead to waste in spending, also rigidity of 

agencies. The real concern, regardless of what you think, the story 

is these inefficiencies has persisted for decades, and there are real 

concerns about seeing reform, but growing interest in when the private sector could do better. 

So here is where I think we now have to have a broader vision, 

not just public-private partnerships, but serious consideration of 

the, ‘‘counter factual,’’ that is, privatization. 

We could, in all these areas of the private sector, do better. I 

think it would be premature to recommend this, but the success of 

deregulation, not only as a policy, but getting bipartisan support, 

was through experiments, that is without knowledge of what intrastate airline competition was doing, lower fares compared with 

interstate, without knowledge of deregulated commodities, how 

21

they compared to the price of regulated commodities, I do not think 

Congress will be enthusiastic about deregulation. 

What I am calling for is growing interest in experiments of privatization, in a variety of areas. Obviously, I do not have enough 

time to go into how this could be done. I think there is a lot more 

thought that goes into it. 

I would suggest that such experiments might reveal ways that 

the private sector can help in far greater ways than we could possibly imagine, and transform a lot of our infrastructure in urban 

services in ways that we could not imagine just as how deregulation has transformed our inner city system and generated such 

high benefits. 

Thank you. 

[The prepared statement of Mr. Winston can be found on page 

73 of the appendix.] 

The CHAIRMAN. Thank you. 

Our final witness, and then we will have questions, is Mr. Andrew Haughwout, who is a member of the Research and Statistics 

Group of the Federal Reserve Bank of New York. 

Mr. Haughwout? 

STATEMENT OF ANDREW F. HAUGHWOUT, RESEARCH AND 

STATISTICS GROUP, FEDERAL RESERVE BANK OF NEW YORK 

Mr. HAUGHWOUT. Chairman Frank, and members of the committee, thank you very much for the opportunity to speak to you 

on the subject of public investment. 

Today, I will be discussing research on public investment and its 

relationship to economic growth and wellbeing. 

All of the views I will express are my own and are not those of 

the Federal Reserve Bank of New York or the Federal Reserve System. 

Physical public capital, what I will refer to as, ‘‘infrastructure,’’ 

is the dominant component of the Nation’s publicly owned wealth, 

and it is that kind of investment that my own research is focused 

on. 

Infrastructure consists largely of highways and streets, buildings 

like schools and city halls, and sewer and water systems. 

Public capital is a very important part of the Nation’s wealth. 

Public investment in physical capital was over $430 billion in 2006, 

adding to a stock of publicly owned physical capital that would 

have cost nearly $8 trillion to replace in 2005. 

About 90 percent of the non-defense public assets in the United 

States are owned by State and local governments. Nonetheless, the 

Federal Government plays a large role by helping to finance the 

construction of capital goods that State and local governments own. 

The ultimate goal of the large amount of resources devoted to 

public investment is improvement of the welfare of the American 

people. 

Today, I will discuss three crucial issues surrounding public infrastructure: its effects on economic growth; its effects on household 

quality of life; and how these benefits are influenced by the way 

we finance and locate new investments. 

The first issue is the relationship between infrastructure and 

economic growth. Well-functioning infrastructure systems are critVerDate 0ct 09 2002 17:29 Jul 03, 2007 Jkt 035409 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\35409.TXT HFIN PsN: TERRIE
22

ical to a well-functioning economy, but it is clear that the United 

States already has extensive public infrastructure. 

The evidence we currently have points to a conclusion that additional infrastructure investments do increase productivity but those 

effects are probably smaller than the benefits of private capital. 

Early estimates from the 1980’s had indicated that infrastructure’s contribution to private output was approximately twice as 

large as that of private capital, which led to concerns of a severe 

infrastructure shortfall. 

More recent research has resulted in significantly lower estimates of the productivity of infrastructure, and most economists 

now agree that the earlier estimates were too high. 

The second central issue, which has received far less attention 

from economists, is the direct benefits that infrastructure provides 

to households. An example may clarify what I mean. 

Imagine that a State builds a new road from your home to your 

place of work that cuts your one way commuting time by 15 minutes. Will you arrive earlier at work each day or sleep later? 

The way economists have thought about infrastructure implies 

that all employees will get to work earlier, increasing the output 

they produce. At least some workers will probably sleep later or 

read the paper longer each morning. This increased leisure will not 

be accurately measured in standard studies of income or productivity, but it is still a real benefit since it improves quality of life. 

These quality-of-life benefits of public investments have been less 

well studied, but some evidence is available. In my own work, I 

have estimated that the value to households of increases in infrastructure is considerably higher than the comparable benefit to 

firms. 

The issue of infrastructure’s effect on wellbeing is broader than 

its effect on income. 

The third issue I would like to emphasize is that the way we finance and select infrastructure projects affects location patterns. 

This dimension is important since where activities occur has significant effects on levels of productivity and income growth. 

Thus, an important way in which infrastructure policy can potentially affect economic growth is through its effect on location patterns. 

Research indicates that private firms in dense urban environments are more productive than in less developed areas. Because 

they are often placed in relatively undeveloped areas, public investments provide individual firms and households with incentives to 

move from more to less dense environments, but if this re-distribution of activity reduces productivity growth, then the placement of 

new infrastructure in relatively undeveloped areas may not be the 

most effective use of public monies. 

The complex way we finance public investments allows localities 

to receive the benefits of public works, while much of the cost is 

paid by taxpayers elsewhere. 

Regional decisionmaking bodies are authorized to allocate transportation investment budgets, but do not typically control the size 

of these budgets. 

23

Maximizing the effectiveness of our public investment budget requires careful attention to both the level of funding and the design 

of institutions for allocating infrastructure investments. 

Thank you. 

[The prepared statement of Mr. Haughwout can be found on page 

45 of the appendix.] 

The CHAIRMAN. Thank you all, very much. 

It is 3:00 on a Friday afternoon. We are through with votes. 

There are five members here and a couple of others in and out. 

There is some interest in this, and we intend to continue to discuss 

it. 

Mr. Winston, to get a sense of this, you talk on pages two and 

three about transit pricing—three and four. You talk about how it 

is below what is needed. 

Would you recommend raising the fares for public transit? You 

say it would be privatized. Would a private company doing the 

transit then raise the fares? 

Mr. WINSTON. Let me step back. 

The CHAIRMAN. No, please do not step back. We do not have 

time. That is the question. 

Mr. WINSTON. Ultimately, yes. My expectation would be that the 

subsidies are something that would not be sustained in a private 

system. 

The CHAIRMAN. You would advocate turning it over to a private 

company which would raise the fares? 

Mr. WINSTON. I would advocate a private company to do two 

things. First, try to minimize the cost of service. That is a critical 

part. My expectation, even with a lower cost of service, is that fares 

would probably be higher; yes. 

The CHAIRMAN. Thank you. 

Dr. Drake, one of the things that concerns me is that we are told 

by some—Alan Greenspan, Ben Bernanke—that yes, we have more 

inequality than it is healthy for society to have, and they have argued, and others have argued, that the major way to diminish it, 

never to try to even come close to abolishing it, is through education. 

I believe they are putting too much of a burden on education 

going forward, and certainly education does not take care of all the 

people who are already in their 30’s and 40’s, but even if we are 

talking about education going forward, my view is that part of the 

problem is if you simultaneously are an advocate for steady reduction in government spending kind of across the board, you are 

going to have problems. A critical element in the education is going 

to have to come from public funding. What is the state of the current level of Federal and State funding for education? 

Can the private sector make up for it? Do you think we need 

more public support for education, particularly higher education? 

Dr. DRAKE. A complicated question, and I think a challenging 

one. I believe that Federal support for public education is a critical 

factor that has made this country what it is. 

I speak from the higher education point of view first, and say 

that if we look at the United States in the last half of the 20th century, compared to the United States in its history before that time, 

things that made us a leader among nations were things that came 

24

from our higher education compact, and things that we brought to 

society from the education system, and a lot of the growth over this 

last several decades has been the result of Federal investment of 

research and other things that have come from higher education. 

I would say at the same time, from the time I grew up going to 

public schools, that the level of investment and the level of quality 

in public schools across the country is just very different than it 

seemed like it was when I was attending. 

The CHAIRMAN. When I talk about, ‘‘public,’’ I am talking about 

public support for higher education. That is what concerns me. 

What is the current projection—I agree with you that higher education has been important. From the standpoint of diminishing, reducing inequality, it seems to me that there is going to need to be 

a public funding element of higher education. 

What is the state of that today? In terms of the accessibility of 

people from poor families, lower income families, what kind of access do they have to your institution? 

Dr. DRAKE. We at the University of California actually have a 

very proud record of access to lower income families, about a third 

of our students, 30 percent of our students, are PELL grant eligible, which is the highest of any comparable institution in the country. We are very proud of that. 

I will say that every year there is increasing stress on families 

to be able to support their students in our education system. As 

fees go up, the stretch and strain on families, particularly middle 

income families, becomes an increasingly large burden. 

We work quite hard to try to do everything we can to keep costs 

as low as possible while maintaining the excellence that is required 

to be leaders nationally. 

I will say that State support is the way that we would see it 

most actively. From the time I was a medical student at the University of California, San Francisco, now 30 years ago, the percentage of State support has dropped to about half of what it was before. I think that is troublesome. 

The CHAIRMAN. That is very troubling. State universities in general say that well, the trend has been much lower. I just wish 

when people talk across the board for lower public expenditures, 

they will understand that among the expenditures that have been 

lowered is support for higher education. 

My time has expired. The gentleman from Texas. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. I will say this has 

been a great panel. 

Dr. Drake, I want to go back to something that you said that I 

agree with. The country has been an enormous benefactor of the 

research that has gone on in many of our universities in the technology. You pointed out the GPS, and that is not only something 

we enjoy in the military. 

As a policymaker, one of the things we face is something that 

you were kind of alluding to, we have this huge appetite from our 

research universities that if you will give us more money, we can 

do more research, and in fact, provide a better educational opportunity for our students who are coming there. 

25

Then the other piece of it is that we hear more and more of our 

students are having trouble at the other end of the spectrum, of becoming a student. 

What are some things that you think we can do at our level to 

do that? Either we are going to be giving you folks more money for 

research or we are going to be helping more students get into the 

system. Somewhere in the middle, I guess, is the appropriate balance. I do not know that we have found that yet. 

Dr. DRAKE. Yes. I was going to say both, but I guess it was not 

one of my options. 

Mr. NEUGEBAUER. Everybody who comes up here, that is their 

answer. We are looking for some solutions here. 

Dr. DRAKE. I understand. I would say a couple of things. One, 

I am here to support research. I think supporting students is also 

critically important, and there really is a balance. We do what we 

can actually, and in a lot of our research, we do educational research also, to look at how we can help to improve the educational 

system. 

In fact, in California, we have recently started a new initiative 

at the University of California to go and do something called the 

Science and Math Initiative, where people from our campuses work 

in K–12 to try to help the production of K–12 individuals be stronger in the science and math areas particularly, those things that are 

important for technology as it goes forward. 

It is a critically important balance. I think you often have the 

challenge—I do not mean to make the analogy, but as a chancellor, 

all day I have people coming to me with good things that they 

would like for me to do, and then more good things than we can 

do, and there is a balance between those two. 

As a country, we have done very, very well over these last several decades in that balance. I think it is important to stay the 

course. 

Mr. NEUGEBAUER. Thank you. 

Mr. Winston, I was listening to your discussions about infrastructure and to the extent of letting the market forces be much a part 

of that as you can, and I agree with that. 

One of the interesting concepts that I have been toying with as 

a former city council member and then later working on a transportation project, is a concept of buying down. 

Do you know what to buy down a mortgage is? To pay fees up 

front to make the interest rate less on a mortgage, so you pay some 

up front. 

One of the things I have been a proponent of is letting the public 

sector buy some of that down to an economic level and where it 

makes sense for then the private sector to be able to take that. 

That leverages those dollars. Let’s just say we could build a road for $1 million, using all public money. Dr. Drake here needs money for education and those 

kinds of things. If we could put, say, $100,000 of public money into that transportation system and let the private sector put the other $900,000 in, 

and let the private sector maintain that road and keep it up from 

that point forward, that frees up my $900,000 for education and 

schools and research and other kinds of things. 

26

That creates an interesting debate. There are a lot of laws 

against mixing private and public money and taxpayers’ money together. 

What are your thoughts on that concept? 

Mr. WINSTON. My concern about that is that although you can 

sort of name, in your example, hard fees, $100,000 versus 

$900,000, in practice, once we go down a road like that, there is 

the risk that the $100,000 is not enough, that the private sector is 

involved. 

We sort of got a sense of this in private investment possibly in 

a high speed rail, inner city rail, there were supposed to be projects 

that were going to go in that way, but the private sector initially 

was interested, and then after making further inquiry into what it 

was going to cost, they came back and said, ‘‘No, we are going to 

need more money.’’ 

If we could really agree there were going to be limits and that 

these limits we could identify were sort of the tipping point that 

would be just what the private sector needed to attract them, that 

would be great. 

I think as a practical matter, the system could be gamed, and 

once they get in, there can be problems. 

I am weary about that. I am also weary about the incentives for 

the most important thing that I am really looking for in this area, 

which is innovation. 

When the private sector fully has a stake in these systems, then 

they start to think out of the box and start making the kinds of 

technological changes and innovations that are unencumbered by 

the public sector, and that often can give you the sort of biggest 

return, the things you just cannot anticipate and you cannot see. 

Unfortunately, I cannot say that I am enthusiastic about those 

kinds of arrangements. 

Mr. NEUGEBAUER. Thank you. 

Mr. GREEN. [presiding] The gentleman’s time has expired. I will 

now yield myself 5 minutes. 

If I may, I would like to visit with you, Mr. Rapoport. I would 

like to go to page six of your codified instrument. 

On page six, near the very bottom of the page, the language 

reads, ‘‘Public Medicare is enormously more efficient than its private counterparts, with far fewer administrative costs. 

‘‘The VA hospital system, with its efficiencies of scale, long-standing patient relationships, and comprehensive care, does a better 

and more cost effective job than its fragmented private sector counterparts. 

‘‘But in the health care debate thus far, our market oriented 

blinders have kept us from learning these lessons.’’ 

What I would like to know is, and this may not be the best time 

to talk about the VA system, given some of the things we have 

heard in the news lately, please, if you would, tell us what we can 

learn from this in terms of health care for people in the main. 

Mr. RAPOPORT. The most recent information that I drew from in 

talking about the VA was a very interesting piece from the Boston 

Globe by Drake Bennett on March 11th, which sort of looked very 

closely at what the actual cost and quality implications were of the 

27

VA, which obviously as you know, does not impact running the 

Walter Reed Hospital, it is a separate system. 

And what they found is because there was such a long term clientele, if you will, that is people who use the VA system as their 

main source of health care, that there was an up front investment 

in the proper testing and the proper long term care that they got, 

which actually lowered the costs of medical care, gave them very, 

very good care, had a very high satisfaction rate, and a relatively 

low administrative cost, as opposed to in the privatized system 

where patients are going from one place to another to another to 

another, and often not as properly coordinated. 

The administrative costs were low and the quality of care was actually quite good. It sort of came as a surprise to the writer of the 

article as he investigated it, but that is what he came back with. 

Mr. GREEN. How would you respond to the notion of some sort 

of nationwide health plan that covers everyone that has government involvement? 

Mr. RAPOPORT. This is somewhat out of my area of full expertise. 

I would generally say that as an area of needed public investment, 

creating a health care system where we have universal coverage for 

everyone with administrative costs that are kept under control 

would be an extraordinarily important investment for the health, 

wellbeing, and ultimate productivity of society. 

Almost every other industrialized country that our businesses 

compete with pay for the health care of their citizens in one holistic 

system as opposed to putting the burden onto the corporations or 

putting it onto the individual. 

I think that would be a very productive way to do it. By the way, 

one very easy way to think about this would be to expand Medicare 

to a different age population. It has fairly low administrative costs, 

and I think that would be a good step forward. 

Yes, I think as a matter of an area for public investment that 

would pay very high returns, I happen to believe that would be a 

good one. 

Mr. GREEN. Would anyone else care to comment? 

Dr. DRAKE. I should. This has been my field. I am also chair of 

a group now called the Association of Academic Health Centers for 

the United States, where we look at this very carefully. 

It would be incredibly helpful for the efficiency of the health care 

system in this country and for the health of our citizens. 

Mr. GREEN. Thank you. At this time, I will yield 5 minutes to 

the gentleman from California, Mr. Campbell. 

Mr. CAMPBELL. Thank you, Mr. Chairman. Welcome all, and a 

special welcome to you, Chancellor Drake. 

The University of California, as I recall, a few years ago, about 

18 percent of its total budget was State funds, total revenue, income, if you will. I do not remember how much was Federal or how 

much was tuition or how much was privately raised. 

Can you tell me what that is either for the University of California, of which I am an undergraduate product, by the way, or 

UCI? 

Dr. DRAKE. At Irvine, the State funds for Irvine are just under $300 million a year in a budget of $1.4 billion. You can do the 

math. We come out at around 20 percent. It is higher at campuses 

28

that have no medical facility, because that is a big part of our 

budget at Irvine. 

At Santa Cruz or Riverside, the percentage of State funding 

would be higher. It would be lower at a place like UC, San Francisco, where it is closer to 10 percent. 

Mr. CAMPBELL. How much is private? 

Dr. DRAKE. There is $300 million, State. Our Federal research 

grants and contracts are around 200 to $250 million a year, so we 

are looking toward about $600 million for us. A lot of the rest of that, about $600 million of that, would be in 

the health care part of our budget. A large part of the health care 

budget then is Medicare and other things, probably about half of 

that. 

The private investment in our research enterprise is actually relatively small. Students also pay fees at our institution—25,000 students at a fee of about $7,000 to $8,000 per student also is a big 

part of our budget. 

Mr. CAMPBELL. And you have private contributions as well? 

Dr. DRAKE. And we have private contributions. Last year, about 

$100 million, for a campus of our size. It is a public/private partnership in that way. 

Mr. CAMPBELL. I am sure you would like to see more of everything. That is your job. Is that balanced? How does that balance 

feel to you or is there an objective within the University of California to change that balance? 

Dr. DRAKE. Yes. There is an objective in two ways. I will tell you 

the places that we have looked at, and the place that is in the private sector and the place that is in the public sector. 

In the private sector, we look actually for more fund raising. As 

the State, in this case, not the Federal Government, has decreased 

its support for higher education on a percentage basis, that puts 

stress on our ability to be able to compete for faculty and others 

with private institutions who charge much, much more for what 

they provide, 5 times as much, almost, for tuition. 

We have a hard time competing if the State fraction goes down, 

unless we have private support to help us. 

The place where it is most important for us to have Federal support is what I mentioned today, which is one of the most important 

places, which is in the research enterprise. 

As we grow forward, that funding of basic research is not as attractive to the private sector. There is some. We have a lot of public/private partnerships. We care a lot about those. True basic research, when you are not even necessarily thinking about the product, is something that the private sector tends not to invest in very 

heavily. 

Mr. CAMPBELL. You mentioned the doubling of NIH funds. I have 

heard some criticism, not specific to NIH, but that lots of money 

goes into research and where there is not a lot of product, output. 

You talked about basic research, which can have a very long gestation period. 

Is there something we could or should be doing with NIH to 

make it more effective or efficient? 

Dr. DRAKE. I think that NIH is the envy of the world. As we 

travel around the world, when other countries are trying to emuVerDate 0ct 09 2002 17:29 Jul 03, 2007 Jkt 035409 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K:\DOCS\35409.TXT HFIN PsN: TERRIE
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late the great success of the United States, they try to put together 

something like the NIH, where you have a fund of money that is 

peer reviewed by scientists looking at the best ideas and the best 

new science that has a long enough period of support that a young 

scientist can become involved in an area and create a career by 

making real discoveries. 

This has been an incredible model for us. As I mentioned, as we 

look at the United States in the last 60 to 70 years, and the real 

advances, particularly in the area that I work in, which is in medicine, we see them coming from discovery upon discovery that builds 

this great foundation. 

I am a supporter. I worked in the lab and did basic research. I 

am a supporter of basic research based on peer reviewed merit, so 

we look at the best ideas and lead those forward, and then actually 

as that becomes a part of our knowledge, we then can look at ways 

to apply it later on. 

We have done it awfully well in this past period. 

Mr. CAMPBELL. No suggestions? 

Dr. DRAKE. I would say that continuing to fund it at an adequate 

level is the most important thing. I am being as honest as I can. 

It really has worked. It is really the envy of the world. It has 

worked quite well. It needs your continued support. 

Mr. CAMPBELL. Let me ask anybody who wants to answer. I am 

a CPA, so this is a bean counter oriented question. 

One of the things that is unique to government accounting is 

that when public money is spent on something that has a useful 

life that is long, such as a road or a building at the University of 

California, Irvine, or wherever, we expense it all when the cash is 

put out, when the building is bought, which outside of government, 

that is not done at all in accounting. 

Obviously, that affects decisionmaking. Has anybody ever 

thought about that or does anybody think that government should 

act more like private entities and set up an asset and depreciate 

those? 

Yes. I will butcher your name if I say it. I will let you say it. 

Mr. HAUGHWOUT. I am Andy Haughwout from the Federal Reserve Bank of New York. 

I think it is important to note that State and local governments 

budget more in the way you are describing the private sector budgeting, that is to say they have capital budgets, which allow the use 

of debt to finance along with capital projects, and then pay for operating expenses, including maintenance, out of current revenues. 

I think for those governments, that kind of institutional arrangement allows for the kind of long term planning you were alluding 

to. 

Mr. CAMPBELL. Mr. Rapoport, a question for you, and I guess 

probably my last question. 

Right now, Federal Government spending is about 20 percent of 

gross domestic product, and Federal taxes are slightly below that, 

hence, the deficit, I think 18.6, something like that. 

That is about the historic average since 1960. A lot of the things 

that you suggest in your testimony would obviously increase that 

dramatically. That is just the Federal Government. I cannot recall 

the number with State and local, but I think it is somewhere north 

30

of 30-something percent of GDP that is government related activity. 

I would assume with the things that you are suggesting that you 

would take taxes considerably higher than the 18.6 they are at now 

and government spending higher than that. 

Is there some place you think that can go without hurting the 

economy? 

Mr. RAPOPORT. Yes, I would take it higher, actually. I think one 

of the places to look for comparison—the costs for health care, for 

instance, are borne somewhere. They are either borne by the government or they are borne by major corporations who pay for 

health care, or they borne by the individual. The costs are done. 

In a number of the European countries, which in fact have done 

reasonably well in the global economy and on a trading basis as we 

have and have not had the kinds of inequality increases that the 

United States has had over the time, the taxation levels are up 

closer to 30 percent and yet if you actually take the costs to a consumer or taxpayer, and if you take out the health care costs that 

they no longer need to pay or the other costs, it may not be a much 

greater cost. 

I might go up to the upper 20’s and lower the costs for people 

in society in other ways. 

Mr. CAMPBELL. Be more like Sweden. 

Mr. RAPOPORT. Not a bad idea. 

The CHAIRMAN. The other countries, how many are spending $100 billion a year on a war in Iraq? 

Mr. RAPOPORT. Is that a question? 

The CHAIRMAN. Yes. 

Mr. RAPOPORT. None that I know of. 

The CHAIRMAN. Thank you. 

With that, the hearing is adjourned. 

[Whereupon, at 3:42 p.m., the hearing was adjourned.] 

(31)

A P P E N D I X

March 23, 2007

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