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SHARPENING OUR EDGE—STAYING COMPETITIVE

IN THE 21ST CENTURY MARKETPLACE

HEARING

BEFORE THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

FEBRUARY 9, 2006

Serial No. 109–122

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

CHRISTOPHER SHAYS, Connecticut

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

CANDICE S. MILLER, Michigan

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

CHARLES W. DENT, Pennsylvania

VIRGINIA FOXX, North Carolina

JEAN SCHMIDT, Ohio

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

BRIAN HIGGINS, New York

ELEANOR HOLMES NORTON, District of

Columbia

———

BERNARD SANDERS, Vermont

(Independent)

DAVID MARIN, Staff Director

ROB BORDEN, Parliamentarian

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

(III)

C O N T E N T S

Page

Hearing held on February 9, 2006 ......................................................................... 1

Statement of:

Gutierrez, Carlos M., Secretary, U.S. Department of Commerce ................. 19

Ruiz, Hector de J., Ph.D., president and chief executive officer, Advanced

Micro Devices; M. Brian O’Shaughnessy, president and chief executive

officer, Revere Copper Products; Richard S. Garnick, president, North

American Services, Keane, Inc.; Deborah Wince-Smith, president,

Council on Competitiveness; and Dave McCurdy, president, Electronic

Industries Alliance ........................................................................................ 57

Garnick, Richard S. ................................................................................... 77

McCurdy, Dave .......................................................................................... 103

Ruiz, Hector de J. ...................................................................................... 57

O’Shaughnessy, M. Brian ......................................................................... 70

Wince-Smith, Deborah .............................................................................. 89

Letters, statements, etc., submitted for the record by:

Cummings, Hon. Elijah E., a Representative in Congress from the State

of Maryland, prepared statement of ............................................................ 124

Davis, Chairman Tom, a Representative in Congress from the State of

Virginia, prepared statement of ................................................................... 16

Garnick, Richard S., president, North American Services, Keane, Inc.,

prepared statement of ................................................................................... 82

Gutierrez, Carlos M., Secretary, U.S. Department of Commerce, prepared

statement of ................................................................................................... 22

McCurdy, Dave, president, Electronic Industries Alliance, prepared statement of ........................................................................................................... 106

Mica, Hon. John L., a Representative in Congress from the State of

Florida, information concerning various charts ......................................... 6

O’Shaughnessy, M. Brian, president and chief executive officer, Revere

Copper Products, prepared statement of .................................................... 73

Ruiz, Hector de J., Ph.D., president and chief executive officer, Advanced

Micro Devices, prepared statement of ......................................................... 60

Turner, Hon. Michael R., a Representative in Congress from the State

of Ohio, prepared statement of .................................................................... 46

Wince-Smith, Deborah, president, Council on Competitiveness, prepared

statement of ................................................................................................... 93

(1)

SHARPENING OUR EDGE—STAYING COMPETITIVE IN THE 21ST CENTURY MARKETPLACE

THURSDAY, FEBRUARY 9, 2006

HOUSE OF REPRESENTATIVES, COMMITTEE ON GOVERNMENT REFORM, Washington, DC.

The committee met, pursuant to notice, at 9:09 a.m., in room

2154, Rayburn House Office Building, Hon. Tom Davis (chairman

of the committee) presiding.

Present: Representatives Tom Davis, Ros-Lehtinen, Mica, Gutknecht, Miller, Turner, Issa, McHenry, Foxx, Cummings, Van

Hollen, Ruppersberger, and Norton.

Staff present: David Marin, staff director; Ellen Brown, legislative director and senior policy counsel; John Hunter and Jim

Moore, counsels; Rob White, press secretary; Drew Crockett, deputy

director of communications; Brien Beattie, professional staff member; Teresa Austin, chief clerk; Sarah D’Orsie, deputy clerk; Leneal

Scott and J.R. Deng, computer systems managers; Krista Boyd, minority counsel; Adam Bordes, minority professional staff member;

Earley Green, minority chief clerk; and Jean Gosa, minority assistant clerk.

Ms. ROS-LEHTINEN [presiding]. The committee will come to order.

We thank the Secretary of Commerce Carlos Gutierrez for appearing before us this morning. Congressman Davis is on his way. I

apologize for my casual attire, but we have a retreat in Maryland.

The buses leave in just a few moments.

Some of the Members are going to stay around, Mr. Secretary,

to hear your testimony as well as to hear from our private panel

as well. And they will be going to meet us in a little bit.

But I wanted to open up the meeting and give Members an opportunity to make opening statements, and I would just like to say

what a delight it is for me to be with you, Mr. Secretary, because

certainly our economy is in great shape, and I think that has a lot

to do with the steady hand with which you have dealt with your

department to stimulate the economy, to diversify our workforce

and to make sure that we can do all we can to have all of the

economies of the world be free. And I notice that you refer to that

freedom quotient in your testimony from the Heritage Foundation,

and I thank you for that.

You have a compelling personal story that in my congressional

district is well known, and I think it speaks to the many opportunities that are available here in the United States of America for any

immigrant, for any refugee who wants to come here, study, work

hard, play by the rules and become an America success story. And

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that, Mr. Secretary, you truly are. You’re a role model for all of us,

and we take great pride in my congressional district especially to

see you sitting here being the Secretary of Commerce. It’s always

a pleasure.

With that, I’d like to turn to Congressman John Mica, my Florida

colleague, for opening statements, for the beginning of them.

Mr. MICA. Thank you, Madam Chairwoman, and good morning.

I am pleased to have Secretary Gutierrez with us this morning and

two other distinguished panels. I too will be joining my colleagues

on the majority side of the aisle as we convene to plan our agenda

for the balance of the year, and actually one of the most important

questions that we could consider is staying competitive in the 21st

century marketplace and sharpening our edge, which is the title of

this morning’s hearing.

I think it’s particularly important, I have been on Government

Reform with Ileana Ros-Lehtinen I think for 14 years. I don’t know

that we’ve really spent much time focusing on this. We did look at

a trade and business commerce reorganization back in the 90’s. But

I think this is extremely important.

I commend the President on looking at how we focus on a workforce for the future, and I think some of the elements that have

been proposed as far as increasing our capability with science,

math, education and job training are absolutely essential elements

and will strongly support the administration’s proposal.

I think that—actually, I read all of the testimony last night, and

it was very enlightening. You have a great array of expert witnesses who actually deal in business and commerce and some of

the cutting edge of where the opportunities are for the future. And

they have also identified tax policy, health care and a number of

other challenges that we face in the global marketplace to keep up

with some very good expertise witnesses.

What I wanted to do is just take a few minutes though and talk

about one thing that isn’t here. It’s one of my favorite subjects. As

we all know, we have a $700 billion trade deficit. We are projecting

this year about a $400 billion budget deficit. I am more concerned

about the trade deficit than I am the budget deficit. We’ll work our

way through that. In the Reagan era, when we dealt with the challenge of international communism, we had to spend money to protect and defend and also keep us secure. We are doing the same

thing now in the war on terrorism. But a $700 billion trade deficit

should really be of concern, and some of the proposals the President put forth are longer term.

Now, one of the things I think we need to do and I want to focus

just a second, I think we have the Secretary—I thought we had

somebody, too, from the Department of State was on this before,

but they—I don’t see them now but we’ll get a copy of this because

they both play an important role in international trade as far as

the government is concerned. How do we increase trade and deal

with this deficit? It’s pretty simple. You deal with trade assistance,

trade promotion, trade finance and trade negotiation on the international scene.

Unfortunately, I still maintain—and some have heard this song

and dance before—that the way the United States conducts international trade, business and commerce is somewhat dysfunctional.

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I have a chart that’s up there, and you can see it. It hasn’t changed

much. We have put a little bit of lipstick on the pig, but it is still

a rather dysfunctional array of activities where negotiation is out

here; finance out here. Commerce has something; State has something, and a host of other agencies that we see. We try to coordinate it, but we don’t always get the best results.

One of the additional problems that we have in addition to having a dysfunctional trade organization is that our competition,

China, the European Union, have actually come together, are more

organized for trade, for trade finance. You can’t tell where business, government, finance and trade negotiation begins and ends.

And that is the competition that we face, and we don’t have a

structure to deal with that in the 21st century.

I want to talk a little bit about trade assistance and promotion

and one of the challenges we face right now. I have another chart.

If you look at really what we spend on trade assistance—international trade administration accounts for 4 percent of the Department of Commerce budget. If we look at the 40,000 people we have

in the Department of Commerce, you might say that 1,200 directly

deal with business and trade. So the Department of Commerce is

somewhat a misnomer. It’s sort of a weather department, and also

NOAA, Bureau of Census, take up 65 percent of the resources, very

little with trade.

What is even worse is that the amount of money that we are

spending, the net amount of money—if you could put chart 4 up—

because of some of the things Congress has done—you can’t see

that very well—but trade administration started out in 2005 with

$403 million, went down to $398 in 2006. This wouldn’t be bad

enough, that we’re reducing the amount of resources dedicated to

promoting trade, business assistance and the activities to sell overseas, but we also have a capital cost sharing requirement, and that

means that they are being charged against their budget for security and improvements that are usually wherever this foreign commercial service operation is located overseas. So actually you have

a net reduction in the amount of money that’s spent. And, actually,

I have heard of offices, potential offices being closed.

So these are on the front line of doing business overseas, and

we’re decreasing our resources, not the Secretary’s fault. It’s the

Congress’ fault, OMB and others who deal with these issues.

I wanted to also say that, in addition to a net reduction in our

resources to assisting business, most of this is not directed to the

Ford’s or to the—well, God knows, Ford has its problem and the

large U.S. corporations, because most of them can deal overseas,

but to medium and small business, which have the most difficulty

in competing overseas, then the structure that we have as far as

foreign commercial service operations—I have a chart, foreign commercial service operations by region. And we have a total of 79 foreign commercial service operations. And in some countries, we have

them where we probably don’t need them. We have about 80-some

countries where we have no foreign commercial service operation.

Now that wouldn’t be bad enough if those who have the responsibility—we don’t have a foreign commercial service operation; we

have the responsibility given to the Department of State. The Department of State has—I queried the Department of State, and I

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think we have 290 foreign commercial service officers under the

Secretary located overseas.

The bulk of the positions overseas that deal with the economic

assistance and promoting U.S. business and aid to business overseas, we have 497 officers who are economic officers under the Department of State.

If this doesn’t have you confused, I’ll totally confuse you in a

minute. We have a total of 1,319 economic officers, foreign service

officers. That’s within the Department of State. So they’re not located overseas, so most of those are probably in Washington or

wherever. So 497.

Then we asked, what do they do? And this is the response and

the way they said it: The difference is accounted for by the fact

that many economic officers are entry level officers who in their

first one or two tours in the foreign service fill rotational or counselor positions. So that’s what we’re sending in the areas where we

have no foreign commercial service officers, sort of our rookies to

assist business.

So the structure is dysfunctional, the resources are being cut

back, and then we send rookies in to do the job. When you want

to promote business, assist business, you have to have people who

know what they’re doing, and we send in sometimes the least capable.

We do have the same problem in Congress. Nobody is responsible

specifically for putting together a comprehensive trade and business package. We have the same jurisdictional problems Department of Commerce has with dealing with State and the myriad

other agencies we saw.

Just, in conclusion, for example, in the Baltic areas, Lithuania,

Estonia, Latvia, I think we have one foreign commercial service officer for three of the biggest emerging markets, and we’re about to

lose that person.

Some years ago, through some political wheeling and dealing, I

got a foreign commercial service officer assigned to the Slovak Republic. When we did that—you can see the figure when he first

came in was $225,000; this is with one position—up to a quarter

of a billion dollars of U.S. business. In addition to what you see

here and not accounting for are about six Boeing aircraft worth

more than $1 billion. That’s in a short period with one person.

So in most countries, again, we have no foreign commercial service officer or rookies. In the emerging markets, we have very limited resources. And to do business—put back up the embassy. Having been in international trade for 7 years in the private sector—

where is the picture of one of the embassies?

I defy you to try to conduct business as an American businessman or someone overseas—this is one of our embassies—and penetrate from that gate to get into the foreign service commercial offices. Most of the assistance is located within the embassy. This

isn’t the Citadel that most of them are, but it was difficult as me

as a former chief of staff in the U.S. Senate with sort of credentials

to even penetrate into this and talk to anybody, again, with my

standing.

So this is the system that we have in place now for assisting U.S.

trade and business. Mostly the small guys. On top of that, we have

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a system of penalizing them. We charge them a fee. Most countries

do not charge a fee. Some underwrite their international trade and

business efforts, not to mention research and development and all

the other things that are done.

So not many people are familiar with this structure. I raise this

as something continually that we need to pay attention to. I thank

you for allowing me the time, Mr. Chairman. We filled a little with

your coming in.

What we’re talking about here today is very important. I support

the initiatives proposed. I think we need to even look beyond that.

Thank you.

[The information referred to follows:]

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Chairman TOM DAVIS [presiding]. Mr. Secretary, you have limited time here; is that correct? You have a limited period of time.

Secretary GUTIERREZ. Yes.

Chairman TOM DAVIS. Let me ask Members if we can hear from

the Secretary and do questions, and then I’ll put my statement in

the record.

[The prepared statement of Chairman Tom Davis follows:]

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Chairman TOM DAVIS. So why don’t you proceed at this point. It’s

our policy we swear you in before you testify, so raise your right

hand.

[Witness sworn.]

Chairman TOM DAVIS. We very much appreciate you being here.

This is an important hearing. This not only fits into what the

President mentions in the State of the Union but something a lot

of us have been talking about for a long time, a changing world

economically and America’s being ready to compete in that world.

Go ahead. Thank you.

STATEMENT OF CARLOS M. GUTIERREZ, SECRETARY, U.S.

DEPARTMENT OF COMMERCE

Secretary GUTIERREZ. Thank you, Mr. Chairman. I appreciate

the opportunity to be here. Members of the committee, I am very

pleased to have this opportunity to discuss American competitiveness, and with your permission, Mr. Chairman, I’d like to make a

brief opening statement and submit my written testimony for the

record.

Let me say at the outset that American companies and American

workers are the most competitive and innovative in the world. And

I would like to just repeat that because it’s often good to remind

ourselves again and again that we are the most competitive economy on the face of the Earth.

Our GDP per capita is among the highest in the world. Over the

past 4 years, the United States has experienced faster growth in

real GDP than any other major industrialized nation. Our 2005

GDP per capita is higher than that of Japan, the UK, Germany,

France, Italy and Canada. So therefore we have the highest GDP

per capita of any other G7 nation.

Just to give you an idea, the U.S. economy is growing well over

twice as fast as the European Union, so the European Union being

a very large economy in the worldwide context, our economy is

growing twice as fast as that of the European Union.

Our unemployment rate is 4.7 percent. This is lower than the unemployment rate in Canada, in Italy, in Germany and in France,

and in many of those countries the range there is anywhere from

6.5 all the way up to 9 percent.

The United States is the world’s leading exporter of goods and

services. U.S. productivity has had one of the fastest 5-year periods

of growth in almost 40 years. We have created over 4.8 million jobs

since April 2003. An estimated 72 percent of the world’s total venture capital spending is invested in U.S. companies.

So America’s willingness and ability to compete has made our

Nation’s the most powerful economy, and the great thing is that we

have the numbers and we have the results and we have the facts

to show it. The challenge of course is, how do we maintain our

leadership role as the most competitive economy in the world? How

do we keep it going? And how do we step it up even more in light

of the fact that the world is getting more and more competitive?

In his State of the Union address, President Bush announced an

ambitious American competitiveness initiative. The centerpiece is

the President’s commitment to doubling funding for Federal research and development in the physical sciences and engineering

20

over the next 10 years. To maintain our economic leadership, we

need to generate new technologies. We need to continue to invent

the future the way we have been doing so for decades and decades.

The American Competitiveness Initiative calls for a 24 percent

increase in funding for our world class laboratories at the National

Institute of Standards and Technology. This funding will allow scientists there who have won three Nobel Prizes to advance research

in such promising fields as nanotechnology, hydrogen and quantum

information. This could lead to new cancer therapies, fuel cells to

power pollution-free cars and unbreakable codes to protect electronic financial transactions, among many other innovations. Research on nanotechnology data alone is crucial to the private sector

success in a market that could reach $1 trillion over the next decade.

The second major component is investing in human capital.

President Bush is proposing investing $380 million in fiscal 2007

to improve math and science skills in K through 12 schools. His

plan also provides for job training, supporting universities that

offer world class education and research opportunities, and attracting and retaining the best and brightest high skilled workers from

around the world by supporting comprehensive immigration reform.

In addition to the American Competitiveness Initiative, the

President is committed to fostering a business environment that

encourages entrepreneurship and risk taking, and we know what

it takes to have an environment that is innovation friendly.

We need to continue to keep taxes low, and we need to make the

President’s tax cuts and the Congress’s tax cuts permanent, and we

need to recognize that not making them permanent is the same as

taking a tax increase, and the last thing our economy needs today

is a tax increase.

We need a regulatory climate that is responsible and reasonable.

We need to ensure that entrepreneurs who are creating a business

and trying to create new products and creating jobs aren’t sabotaged by frivolous lawsuits.

We need a health care system that is efficient, affordable and

portable. We need to protect innovation through intellectual property rights, and we need an economy that is open to the global

marketplace.

Compared to other countries, America has a powerful business

environment, and that is why we are leading the world, and that

is why there is no other industrialized Nation that comes close. But

we are not complacent, and we know we still have work to do.

When we open our markets to 3 billion new consumers, we also

open up to 3 billion new competitors. To thrive in an open world,

economies like ours compete on the basis of innovation, on the

basis of talent and on the basis of the business environment that

we create.

Mr. Chairman, the President, the Commerce Department, and

this administration are committed to maintaining America’s leadership and competitiveness in today’s dynamic global economy. I

want to thank you and the members of this committee for your

support. I want to recognize your foresight, Mr. Chairman, in callVerDate 11-MAY-2000 12:16 May 13, 2006 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 D:\DOCS\26331.TXT HGOVREF1 PsN: HGOVREF1
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ing these hearings, and I would welcome your comments and suggestions, and I’d be pleased to take your questions.

[The prepared statement of Secretary Gutierrez follows:]

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Chairman TOM DAVIS. Thank you very much. I think you noted

accurately that, compared to Europe and the Western Hemisphere,

we’re doing very well economically, but a lot of new competition

we’re seeing now is from the other direction, from the Pacific Rim.

In terms of the production of engineers, scientists, computer scientists and the like, basically, we see jobs migrating to those areas.

The one thing we seem to have, as I talk to technology leaders in

my district and around the country, is a lot of the innovation is still

coming from the United States. You can put it in a box and give

it to engineers in China and India and somewhere else, and they

can solve the problem but the innovation really is coming from here

because that’s part of our culture, that’s part of our economic system, and it’s not just something they have grown into at the same

rate.

But there is a problem when I talk to my tech leaders about getting qualified leaders in some of these high end areas. We’re producing fewer engineers than we did a generation ago. A majority

of the graduate students in engineering, the physical scientists and

computer scientists in American universities are foreign born, and

it’s going to take some integration of immigration policy and a

change in education to try to keep us holding the edge that we

have in some of those areas. Because there the test is not just Europe, as you noted, but also from the Pacific Rim.

Any thoughts on that?

Secretary GUTIERREZ. Sure. Today we have—and I think what

you’re saying is exactly why we have the best economy in the world

and why we are determined to keep it that way is because we are

never satisfied; we are never complacent. I think many countries

around the world would marvel at this conversation that we’re having, given the state of our economy.

What is becoming very clear in this day and age is that the business environment that countries create can have a big role in how

much innovation is done in that country. We know that innovators

prefer to do innovation in the United States because the tax laws

are transparent, because the rule of law is transparent, because

they’re not going to get hit with frivolous regulations, because their

intellectual property will be protected. We know in many countries

around the world that isn’t happening. So that’s another advantage

that we have.

We have 5 percent of the world’s population. We have one-third

of the world’s engineers and scientists. The key thing is we have

to keep it going, and that’s exactly why the President has issued

not just an initiative but what I would call a national calling to get

behind math and sciences, to get behind education, to get behind

our business environment; that every company ask the question,

what can we do to become more competitive? That’s what the President is calling for at this point in time so that we can continue to

be the greatest and most competitive economy on Earth.

Chairman TOM DAVIS. If you go back 100 years, a visionary in

1900 might have seen that oil would in fact be a dominant force

in economic growth in the 20th century. And it was the companies

and individuals and countries who had the oil, who could get it out

of the ground, refine it, get it to markets that dominated much of

the economy.

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But you fast forward 100 years, the oil of the 21st century is information. And it is indeed those countries, those companies, those

individuals who are able to get that information, collate it, transfer

it across lines that are in fact the fastest growing companies. The

fastest growing economy in the Middle East is Jordan, with no oil,

surrounded by Syria, Palestine and Iraq. A tough neighborhood.

But they get it.

Where our concern, is these areas continue to grow. Every company is an IT company now. Burger King is an IT company. Their

product component is burgers but in terms of getting it and being

productive and so on.

Our question is, we are going to need to continue to produce people not just at the innovative level—that’s our niche—but also

below. What suggestions do we have really for getting more of

these engineers either through immigration or, more importantly,

educating through our own system that’s producing fewer engineers than 20 years ago?

Secretary GUTIERREZ. That’s a great question, and if we go back

to the President’s No Child Left Behind Act, which that’s really

where it started, the recognition that we need to do a better job

from K through 12. We know that our students at the fourth grade

level are doing great versus other countries and somehow as we

head toward the senior year of high school, we slip. So the President is saying, let’s raise standards, let’s ensure that all students

have the benefit of our confidence that they can achieve higher

standards. We are already beginning to see results.

Chairman TOM DAVIS. Our problem is getting qualified science

and math teachers into some of these areas.

Secretary GUTIERREZ. That’s correct.

Chairman TOM DAVIS. I don’t know if we need to look at special

incentives for that or whatever. If you’re good in math and you’re

good in science, you can make a lot more money doing something

other than teaching.

Secretary GUTIERREZ. What the American Competitiveness Initiative calls for is 70,000 new qualified math and science teachers.

The other thing we’d like to pursue which we believe is part of this

national calling is to get retired executives, engineers, folks who

have been in the actual practice of engineering, in the math and

sciences to dedicate time and volunteer and come out to the schools

and teach our children.

So it’s not just the teachers we hire but also to tap into the great

talent that we have throughout the country who want to contribute

to this calling that the President has asked for which we call the

American Competitiveness Initiative.

So it starts in K through 12. We need to start at the pipeline

level. And we believe that math and science is an important starting point, as well as what you say, which is computer sciences. We

shouldn’t forget that because, you are right, Burger King is an information company, and every manufacturing company has a huge

component of services, and very often it’s down to information.

Chairman TOM DAVIS. Thank you very much.

Mr. Van Hollen.

Mr. VAN HOLLEN. Thank you. Thank you, Mr. Chairman, and

thank you for holding this hearing on this very important issue.

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Welcome, Mr. Secretary. Thank you for your testimony. I would

like to commend the President for his initiative in the State of the

Union address on the American Competitiveness Initiative. It is an

issue that many of us here in the Congress, as the chairman said,

have been concerned about for some time. There are a number of

pieces of legislation that have already been introduced that would

implement parts of what the President is calling his American

Competitiveness program. A number of us unveiled something

called the innovation agenda.

I think there is bipartisan support in the country for moving forward on this. Of course the whole question of globalization has

been popularized in many ways by one of my constituents books,

Tom Friedman’s book, the World is Flat, where he makes the important observation that Beijing, Bangor and Bethesda, MD, in my

congressional district, are all really neighbors now in the good

sense of being able to share information, but also in the sense we’re

now major competitors, and we want to make sure that competition

works to the benefit of everybody instead of having big winners and

losers. And if we’re not in front of this issue, we are going to be

losing out. And I would just quote from what I think was a very

important report put together by a group that was assembled by

the National Academies of Sciences and Engineering, chaired by

Norm Augustine, former chairman and CEO of Lockheed Martin,

where they, last October, came out with a report which I think was

really sounding the alarm on a range of issues, and they made a

number of recommendations. But just let me read from the report

because it underscores the seriousness of the issue. This was a bipartisan group of experts in our country, and they said: ‘‘It’s the

unanimous view of our committee that America today faces a serious and intensifying challenge with regard to its future competitiveness and standard of living. Further, we appear to be on a losing path.’’

They go on to say: ‘‘One need only examine the principle ingredients of competitiveness to discern that not only is the world flat,

but, in fact, it may be tipping against us.’’

And then they go through a number of criteria and measurements to make their case, including what the chairman alluded to.

For example, about two-thirds of the students studying chemistry

and physics in U.S. high schools are taught by teachers with no

major or certificate in the subject. In the case of math taught in

grades 5 through 12, the fraction is one-half. Many students are

being taught math by graduates in physical education.

They also go on to point out that the number of graduates in our

universities are more than well over half of them or close to half

are foreign born and that those students are more and more thinking about returning to their home countries because there are

greater opportunities there than there were before in countries like

India and China and many others.

So I think we’re agreed on the problem, and the question is, what

are we going to do with it? And I think the President’s initiative

was good as far as it goes, but when the budget came down the

next day, I must say, I’m not sure whether the reality of the budget

met the rhetoric of the State of the Union speech.

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About 75 percent of the investment the President’s proposing to

make in this area is simply a 1-year extension of the R&D tax credit. I’m a supporter of that, but if you look elsewhere in the budget,

what you’re finding in many areas is taking money out of one pocket, even in the education area, and putting into another.

For example, in the math and science area, we’re talking about

$380 million for that initiative; $115 million comes out of a program called Even Start, which is intended to give youngsters a

good start in life, which I think any scientist, including neuro scientists, will tell you is an important time to make that kind of investment.

I also, while I applaud the increase in NIST, I think that is a

very important investment, and the increase in physical sciences,

which I do think have been neglected in terms of basic R&D, I

think it’s a mistake to essentially have a decrease in real terms in

our investment in the biological sciences. If you look at the NIH

budget, 18 of the 19 institutes see a cut in funding, and I think

that if we’re going to be competitive in those areas going forward,

that’s a mistake.

So I would like to ask you, Mr. Secretary, with respect to the investment in education, which I really do believe is an investment

in the sense that it provides a national return, and one of the

things that Norm Augustine and his panel pointed out is, what

other countries are doing now is sort of learning the lessons of the

United States. Investments we have made in the past in science

engineering and math are a big reason for why we are doing well

today, and if we don’t continue to make those investments, we will

not be ahead in the future.

So I’d ask you really two questions. One is the No Child Left Behind funding, because I agree No Child Left Behind has been a

positive initiative in our country, but if we want to make sure that

we have our local school systems in a position to hire the teachers

who are qualified in math and sciences and engineering, who have

many other opportunities, they are going to have to be in a position

to pay those teachers a decent salary.

My question to you is, the Congress passed the No Child Left Behind legislation and set forth a marker as to what we thought

would be necessary funding. The Education and Work Force Committee which I serve on had an authorized level. The Senate passed

it. The President signed the bill. Shouldn’t we as a Nation fully

fund the amounts that were authorized for the No Child Left Behind in order to meet the goals that we all agree we need to meet

for our Nation’s competitiveness?

Secretary GUTIERREZ. I appreciate the question, and, respectfully, Congressman, I believe your question is better answered by

the Secretary of Education. I will say that the American Competitiveness Initiative adds $380 million to the area of education and

is very targeted at math and sciences, K through 12, and really

building on the No Child Left Behind. There’s an important component on community colleges, which is also part of our competitiveness; worker retraining. So the subject of education is very, very

much part of this initiative. And I would be very glad to take up

the specific question about funding for No Child Left Behind.

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Mr. VAN HOLLEN. If I may, Mr. Chairman, this is the Secretary

of the Department of Commerce, and your role in the competitiveness issue, would you not agree that it makes sense for the Congress and the President to fund the No Child Left Behind initiative

at the levels that were set out in the authorization bill?

Secretary GUTIERREZ. I believe that the passion that the President and Secretary Spellings have for this project and for this initiative and the recognition of the importance of it, that if they have

put a number to it and they believe that is what it takes, I am fully

supportive of that.

Mr. VAN HOLLEN. I guess you’re supportive of it being $15 billion less a year than what the Congress authorized and $55 billion

short since the bill was signed. I think we need to be honest with

the American people.

Chairman TOM DAVIS. Thank you.

Mrs. Miller.

Mrs. MILLER. Thank you, Mr. Chairman. And, Mr. Secretary, I

certainly am delighted to see you here today. We share the same

background coming from Michigan, so I’m so happy to see you here,

and we miss you in Michigan, but we’re delighted to share you with

the rest of the country here. You’re doing a remarkable job certainly for the country.

In Michigan, of course, we have some rather unique dynamics in

our economy right now; most of them negative, quite frankly, in a

very frightening way. We’re going through a transformational economy, what’s happening to the automobile industry. We have the

highest unemployment in the Nation, lowest personal income

growth in the Nation. Bond rating obviously is bad in the State.

A number of different things that have happened to us in a relatively short period of time and yet we look to the Federal Government to provide the environment so businesses can do what they

do best, which is to incentivize for job creation and investment and

those kinds of things.

I do think that the President’s economic growth package has

been, and some economists have said it, has been historically the

best-timed package to really stimulate the economy, and so we see

that happening. The best economy of any of the industrialized nations, etc., but obviously, in Michigan, we have, as I said, some

rather unique dynamics that have our total attention at this particular time.

One of the things that I think hampers—I look at the automobile

industry—but in so many different businesses is the very onerous

burden of regulatory kinds of things that the government places on

our businesses; their ability to compete and their ability to be competitive in a global marketplace. The old saying, I’m from the government, I’m here to help you; I think the businesses dive under

the desk when they hear that, but when you look at the National

Manufacturers Association, I know we’re going to, on the second

panel, have some representatives from them, doing a study that

shows that our structural costs for American manufactured goods

are 22 to 23 points higher than foreign competitors, Canada, Mexico, wherever, and small business looking at $7,000 to $8,000 per

employee just to comply with the regulatory burden. My question,

I guess, would go to, how closely does your Department interact

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with the other agencies that are promulgating some of these regulations?

And I give you just one example that I’m aware of, hexavalent

chromium, which is maybe not the most interesting subject in the

world unless you’re involved in aerospace or metal finishing or

these kinds of things. Our government, the EPA is currently promulgating a rule that will take the standard that was 50 points per

billion—I believe is how they measure it—from 50 to zero. There

will be thousands of jobs that we are going to lose as a result of

that. I have a lot of consternation about that.

The smaller mom and pop shops, I have a lot of those in my district. Many of them have said they’re going to close up because of

that. I’m wondering, how closely does the Commerce Department

work with some of these other agencies? We need to have regulations, of course, but they need to be reasonable.

Secretary GUTIERREZ. I totally agree with what you’re saying. We

do get involved in impact assessments of regulations, and I can’t

talk specifically about the impact assessment of that regulation,

but we’re all tied to the President’s direction, and that is that if

we have new regulations, they should add value. And regulations

should not be put in place that simply create an obstacle to doing

business and that we should recognize that what drives this economy and what drives our country, what drives our growth is private sector risk taking, entrepreneurship and people wanting to go

out and make a difference.

To the extent that regulations get in the way of that, we’re not

following that lead. So the President has been very clear on that,

and it’s being followed throughout the administration.

Mrs. MILLER. I appreciate that. I do think there always has to

be a cost-benefit analysis of some of these things being done, and

I sort of think if some of the other agencies, particularly your agency, could be a little more interactive, because it does impact commerce, obviously.

My final question would be, and I appreciate it in your opening

statement when you were talking about hydrogen fuel research.

Again, being from Michigan, we light up when we see that. I think

it is so important. I absolutely believe that understanding security

equals economic security actually equals national security. They

are all interrelated. It is so important. So I was delighted to hear

the President say openly we are a Nation addicted to oil, and we

have to get off this dependence on foreign sources of oil. You see

what’s happening around the Nation.

I’ll conclude here. Ethanol and biodiesels and some of these other

kinds of sources of energy are so important for us to continue to

advance. So I am very appreciative that you are picking up the

mantel as the President has requested you to do so.

Secretary GUTIERREZ. If I may say, I think that’s one of the boldest statements that was said that evening during the State of the

Union, a lot of bold statements, but a very very bold statement is

to say that through technology we are going to reduce our dependence on oil. And we are going to look back 20, 30 years from now

and realize that statement and that determination set us on a

course that will do just that. He said we’re going to do it through

technology, and part of that is why we are investing more in the

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Department of Energy. And you can see it throughout the country.

I see it in manufacturing plants. I was at the Ford plant in Kansas

City. They are already producing hybrid cars. I believe you are

going to see a wave of investments and interest in this area as part

of the President’s calling. I appreciate that.

Chairman TOM DAVIS. Thank you very much.

Mr. McHenry.

Mr. MCHENRY. Thank you, Mr. Chairman. Thank you for calling

this important hearing. Secretary Gutierrez, thank you so much for

taking the time to be here, and I appreciate your leadership in the

Department of Commerce. It’s been very good working with you. I

think you are one of the outstanding Bush administration appointees, and I certainly appreciate your hard work and dedication.

Thank you.

The initiative we’re talking about today, the Competitiveness Initiative is very important. My district in North Carolina, western

North Carolina, is going through a time of immense change. Overall unemployment nationally is somewhere around 5 percent.

That’s wonderful. Historic lows.

In North Carolina, we are facing nearly full employment. In

some cases, some economists would call it beyond full employment.

Unemployment around 4.7 percent. My district, however, is facing

a time of change. We have been traditionally relying on textile and

furniture industry jobs, manufacturing jobs. I have two counties

that led the State in unemployment. One faced last year for a few

months an unemployment rate of around 13 percent. Another country faced an unemployment rate of around 11 percent at its height.

That’s mainly due to loss of furniture industry jobs.

Now certainly there are trade issues that we are dealing with,

competitiveness issues with China, the fact that China won’t float

their currency. That’s a question I’ll leave up to Secretary Snow at

the Department of Treasury. I will not burden you with those questions.

The focus that I have tried to place in my district is on getting

the skills and the training necessary to compete going forward. We

can’t be reliant on yesterday’s jobs, we have to train for tomorrow’s

jobs and today’s jobs.

As a district, representing a district that is termed in the Almanac for American Politics as the most blue collar district in America, we are certainly going through change.

I wanted to ask you, what would you propose for a district like

mine? What can I go home and tell my people that we should be

doing?

Secretary GUTIERREZ. I recall we talked about this when we traveled together to North Carolina, and at that time, you were talking

about a national education coordinating council, which I believe is

the sort of initiative that you need throughout the country but especially in communities, as you said, where there is change that’s

happening because what ultimately will help our people is to upgrade their skills, adjust their skills, but enable them to move forward with the economy and enable them to move to jobs of higher

paying wage but give them the ability to constantly be training and

retraining.

43

So I would just say that your foresight on that and your vision

on that is absolutely right to the extent that we can help to execute

that vision, that will—that should help. Because that’s what we’ve

seen in communities that have made the transition. It has been

about getting——

Chairman TOM DAVIS. Can you pull that mic closer?

Secretary GUTIERREZ. Getting the right programs in community

colleges that are tied to the jobs that are available, and that’s the

sort of execution that needs to take place locally.

On textile, as you know, we just signed an agreement with China

for 3 years. Hopefully that will give, and it’s intended to give, both

retailers and manufacturers transparency and predictability as to

what’s going to happen over the next 3 years to enable them to do

what needs to be done to become more competitive.

So I hope that has been helpful, but I would urge you to stay on

this coordinating council, and I think it’s the right focus.

Mr. MCHENRY. I appreciate that. I did enjoy speaking with you.

We had about 2 or 3 hours that day to talk on that trip, and I appreciated that opportunity.

Is there any expertise in the Department of Commerce you could

point to that folks, my folks at home, could reach out and get help

with?

Secretary GUTIERREZ. Depending on the specific area, but I

would point to the ITA area where we do have an office for textiles,

specifically focused on textiles. And I would also lead you toward

Economic Development Administration [EDA], because their role is

about economic development and helping communities create jobs,

becoming more attractive to private sector investment. So I would

start there, and I think those two areas could be very helpful.

Mr. MCHENRY. My predecessor had the foresight to actually work

with the Department of Commerce to get a Regional Economic Development survey done to point us in the right direction, so we’re

very much appreciative, through an issue we call Future Forward

for my region.

A final question for you, where do we need to go in terms of

changing the Tax Code to be competitive internationally, around

the world. There are a number of different initiatives. A previous

statement pointed to the fact that we are held back by regulation

and taxation in this country and lawsuit abuse that actually hampers our ability to sell products around the world because the

added expense and cost of that.

Secretary GUTIERREZ. I would say two things there; one is just

the recognition that the tax cuts that Congress and the President

enacted have worked, and there is no question that the basic principle of putting more money in the hands of business and putting

more money in the hands of consumers and that they will be able

to allocate that money better than a centralized body is working.

The challenge now is to make those tax cuts permanent and to recognize that, if we don’t make them permanent, we’re raising taxes.

Because that will also incentivize investors to bring more capital

to the country.

And then on the innovation front, we have the R&D tax credit.

We believe there’s work that can be done to simplify it. It is a little

bit complex. It’s subject to some interpretations, and we believe we

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can make it more effective so that it yields more innovation. Those

are two things I would do to work on tax policy.

Mr. MCHENRY. Thank you, Mr. Secretary.

And thank you, Mr. Chairman.

Chairman TOM DAVIS. Thank you.

Mr. Turner.

Mr. TURNER. Thank you, Mr. Chairman. Thank you for having

this important hearing on an issue that is on the minds of many

Americans. As they look to our economic recovery, many people are

concerned about how our ability to sustain economic growth, specifically in the manufacturing area, will be faced in the future.

Mr. Secretary, I want to thank you for being here and for your

dedication to probably what is the most important function that we

can do as a government, and that is encourage an environment for

job creation.

I want to encourage you in your support of both General Motors

and Adelphi and the automotive industry as they look at their

transition. I know that you are aware that those jobs are very important not only to families throughout our country, but they provide opportunities for economic mobility. They are important for

the innovation culture that we have.

Many of the innovations that we have arise out of the automobile

industry, its engineering and its manufacturing. It’s important for

our defense industry, as we look to our manufacturing capability.

My community has a very large presence of General Motors and

Adelphi. In fact, Adelphi, as you know, is the former Delco. The D

in Delco is from Dayton, OH; it is from Dayton with the Dayton

Electronics Corporation. So our community is very tied to the future of the automobile industry, and your attention there would be

very much appreciated.

I also want to thank you and your staff for assistance in another

industry sector that is important to my community, and that is the

aerospace industry. Eric Stewart of your staff and others have been

very supportive of an international air and space trade show that

we are looking at trying to promote our aerospace industry.

One of the components, of course, for our success in international

markets is our ability to market ourselves. The many industry sectors that have trade shows have those trade shows outside of the

United States, which does not permit second- and third-tier suppliers to effectively market their goods in international markets.

Our ability to encourage those types of trade shows where we can

show off innovation, technology that is here in companies that are

smaller companies, that can’t necessarily participate in the large

international shows off our shores, is important, and your support

and the support of your staff, as we look to how we might support

the aerospace industry.

I want to put one footnote on this. I am on the Armed Services

Committee, and a stunning response to a question, General Jumper

was before the Armed Services Committee, and they asked him

what one of the greatest threats was to our ability to maintain a

preeminent Air Force. Many people thought it might be some issue

of technology, some emerging country that was our threat. His answer was the ability of the U.S. aerospace industry to continue to

support the Air Force in leading technology and in production. So

45

it’s so important not only for jobs, families and economic mobility,

but also, as you know, our defense that we maintain our manufacturing base.

So I want to thank you. I would love to hear your thoughts on

both the automobile industry and the aerospace industry.

[The prepared statement of Hon. Michael R. Turner follows:]

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47

48

Secretary GUTIERREZ. Well, we have all been very close to the

automobile industry, and I can tell you that any time we read

about layoffs or jobs lost that it hurts, and these are great companies. These are industries that not only are large from an economic

standpoint, but they are also large symbolically. We have, and I

can tell you I believe, that they are going to pull it through.

They are going through a lot of tough choices. This is a very

tough time for them, but they are focused on innovation. They are

focused on getting their costs down. They are focused on getting

the right types of products on to the marketplace. I believe they

will be able to do that, because these are great companies, these

are great workers, these are great people, and they are going

through a rough time.

But we need to continue to give them the environment and create the environment that allows them to pull their companies

through. They don’t need a tax increase. They don’t need regulations that simply create an obstacle. At this point they need a playing field where they can innovate, create new products, and focus

on the future and unfortunately get through this very tough period

they are going through.

Chairman TOM DAVIS. Thank you very much.

Ms. Norton, any questions?

Ms. NORTON. No, thank you.

Chairman TOM DAVIS. Mr. Ruppersberger.

Mr. RUPPERSBERGER. I am sorry, I just came here late.

The issue of regulation, I think, is very important, I think. To

have a good business attitude, partnerships between business and

government are extremely important.

I do want to get into the issue, though, if you are going to talk

about tax cuts, you have to talk about deficit, and the impact of the

deficit—I think one of the last things that Greenspan—the issue—

one of the issues he raised is that if we don’t deal with the deficit,

and the interest rates go up, that is going to be less investment in

business, and that we have to deal with that issue.

How would you compare the tax cuts to the deficit, and what

would you do to resolve that issue as it relates to what we are talking about here today?

Secretary GUTIERREZ. Sure. I would think about the deficit as the

short-term deficit from now to the year 2009, and then the longerterm deficit that we have to face. We are on track to cut the deficit

in half by 2009. Last year our deficit came in about $100 billion

better than what we had expected, because tax receipts are coming

in so much better than we had expected.

So it’s quite an irony that after we reduce taxes, we are getting

more revenues from taxes. And last year we had record levels of

tax revenues.

So we are confident that we can manage through the next several years and cut the deficit in half. We will see some fluctuations

in the short term. We have had to deal with the gulf coast spending, and that will have an impact next year. But we are headed

down the track of cutting the deficit in half by 2009, and that

would put us at a position where the deficit is—as a percent of

GDP is actually below our historical average.

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Where we should be concerned is the deficit 15, 20, 30, 40 years

from now, with programs such as Social Security, where we are

going to have more retirees than what the current system can support. That’s not going to happen over the next 4 years, it’s not

going to impact us over the next 4 years, but it will impact us over

the next 20, 30 and 40 years.

I am confident that we can manage our way through cutting the

deficit in half by 2009. I would just say what we should be concerned about is longer term, 20, 30, 40 years from now, sir.

Mr. RUPPERSBERGER. How are you going to deal with the issue

of cost as it relates to health care then? My concern is if you have

to cut taxes, you have to stop spending. One has to go with another, or it’s not going to work. With all of the obligations of the

war, Katrina, we haven’t really gotten into the health care issue

yet. It is something we need to look at.

But let’s get back to the issue of where we are, and we are all

concerned about that. We are all concerned about China graduating

more physicists, mathematicians and engineers. You know, if we

don’t invest in our future, if we don’t invest in education, it’s going

to start to impact on our national security, it’s going to impact on

what we do in business, and it already has.

I think the way we turn that around is through education. To

give you an example, Allison Transmission, which is in the district

I represent, one of the most modern manufacturing plants in the

United States. What happened, how that developed, is that there

was an older plant in Baltimore that was closed down, but the

workers at the older plant were retrained on how to operate and

to work in a plant that deals with robotics and technology. As a

result of that, that allows Allison, and Allison Transmission, to be

able to compete worldwide, which is what we have to do with respect to technology and training.

My concern—I don’t see a program out there yet that really is

focused on educating, giving incentives to the—our younger generation to get into the area of engineering, math, science, physics,

things of that nature. I think we have a lot more to do. We need

to roll up our sleeves in a bipartisan way to do it.

To cut right now, if we are going to cut, cutting priorities, to cut

in the area of scholarships, it’s not going to work unless we reinvest. Do you have any comment on that?

Secretary GUTIERREZ. Well, I totally agree that this is the focus,

and this is the focus of the education piece of the American Competitiveness Initiative. I think you are absolutely right. It has to

be done in a bipartisan way. Sometimes a savings in the budget,

or a reallocation to make the money work harder, can be perceived

as a cut, but not all reductions are just sheer cuts of activity. I

would look at some areas where it looks like a cut, but it’s actually

a savings. We are doing things more efficiently, we are doing

things more effectively. We are reallocating the money to areas

where we get more bang for the buck.

I think those are the types of things that we will have to do to

address your concern of how do we deal with the deficit and at the

same time not raise taxes. So it’s always a matter of choices. And

every day there are tough choices, and that is the challenge of

managing through our current budget.

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I believe we can do it, and I believe we can do it in a way that

increases our competitiveness the way the President has called for.

Mr. RUPPERSBERGER. So far we haven’t been able to do it. I hope

we can do it for the benefit of our country as far as the spending

side is concerned. But, again, I think everyone wants a tax cut, and

I don’t disagree with you that it can help the economy, but sometimes you can’t afford—and the issue that we have with respect to

the war, with respect to Katrina, some of these costs, and then

there’s some things that aren’t getting done, like what we are talking with today, doesn’t mean that we maybe—we might even want

to consider a postponement.

What, in your opinion, would a postponement of a tax cut do

until we are able to take care of our existing expenses and take

care of our priorities now? Do you have any opinion of a year or

two after a tax cut?

Secretary GUTIERREZ. Well, what the President proposes is just

to make the cuts that have been made permanent. It’s not really

a further cut, but let’s just make the cuts permanent. And if we

don’t do that, what we are saying is we are increasing our taxes.

Part of the issue here—and I saw this managing a smaller company, obviously not a company the size of the Federal Government,

but very often a tax cut brings in more money, and that money will

be spent, and it may—it may give us the impression that we have

a lot of money coming in, and, therefore, the challenge is to spend

more, not to cut more.

One of the advantages of having our taxes where they are is that

it will force us to be more efficient. It will force us to do better

things with taxpayers’ money. I believe that’s the big challenge, it’s

the big management challenge. Every company in the country has

that challenge, and there’s no reason to believe that we in the Federal Government don’t have the same facts.

Mr. RUPPERSBERGER. But the facts are that hasn’t happened yet.

That’s my concern. Is the discipline there with the administration

to be able to do that?

One more question, then I will stop. It’s my understanding that

we have one of the largest deficits in the history of our country,

and that 50 percent of that deficit is based on the tax cut, the revenue not coming in. Is that your understanding? Do you have a comment on that? Am I correct in my assumption?

Secretary GUTIERREZ. I haven’t seen those numbers, sir. As I

mentioned before, the tax revenue in absolute dollars last year

were an all-time record. So what we are finding is that when we

cut taxes, the economy grows faster, and that yields more revenues.

Mr. RUPPERSBERGER. Again, it’s my understanding—I think we

will relook at the numbers, I am sure, because this issue will be

before us again in the next couple of weeks, that 50 percent of the

deficit is based on the tax cut, the revenues that would normally

come in that would not.

The issue that I raise with you is if, in fact, the tax deficits will

continue to have interest rates move up, that lack—because of that,

there will be a lack of capital investment in our business, which,

in the end, will negatively impact on what we are trying to do here

today. Do you care to comment?

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Secretary GUTIERREZ. Again, I am not familiar with that 50 percent cut, but in terms of businesses, the way to continue to motivate business is to invest in our country, is to keep the tax rate

low, to make the R&D tax incentives permanent.

You know, we have renewed the R&D tax incentive 12 times.

The problem with that is it doesn’t give business the certainty that

they like, because an R&D investment, as you know, is a 10-year

investment, but they don’t know if they are going to have that tax

incentive for 10 years. We give it to them one chunk at a time, 1

year at a time, a couple years at a time.

We should make it permanent and let them know that we are

committed to a long-term incentive that will really take our country in the future with a long-term continuous plan and not a stopand-start plan which doesn’t really do the job. So I would just——

Mr. RUPPERSBERGER. That’s a good point.

Chairman TOM DAVIS. Thank you.

I think one of the problems, though, is that you could look at

these; if the tax level were at this point, we could expect X number

of revenues, but that doesn’t take into account the economic activity because of the tax cuts. One of the problems in scoring at CBO

and at the Office of Management and Budget is that they don’t

have dynamic scoring models for that.

So if you were to raise the taxes, that doesn’t mean that you

halve the deficit, because you get decreased economic activity? I

think that’s the question.

Secretary GUTIERREZ. That’s exactly right. That’s exactly right.

It’s a little bit like do you sell more if you raise prices? Not always.

Chairman TOM DAVIS. Mr. Gutknecht.

Mr. GUTKNECHT. Mr. Chairman, as a former member of the

Budget Committee, I just want to clarify. I think under the Congressional Budget Office’s static scoring, they estimate that only

about 20 percent of the current deficit is related directly to the tax

cuts. The rest has been a change in economic activity or, I must

say, more spending. I think that’s something that Congress needs

to do more about.

I want to thank you for coming today, because I think—I actually, believe it or not, just finished the Earth is Flat, and I think

it does raise some pretty tough questions about policy in the

United States. I think there are factors within the economy that

can’t be accounted for in just the terms that the author outlined.

I think there is an issue, though, that I would like to have you

talk about a little bit, and that is this whole issue of affordability.

In some respects, and we have heard you talk a little bit—well, we

have to spend more on education. I think that’s always something

we all say. But I think at some point we have to ask ourselves, OK,

how much does it cost, in some of these other countries, to educate

a Ph.D. in physics or even to educate a high school student? I think

one of the things that the Commerce Department could really provide for us that would be beneficial would be an honest and objective comparison of what it is costing to educate people in the

United States versus Europe, versus India, versus China, versus

Japan.

I think what we would find is—the reason I say this—we have

gotten a lot of criticism recently about student loans. Well, there

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was an article in the Minneapolis paper last week that said over

the last 5 years, the cost of higher education to students in the

State of Minnesota has gone up 60 percent. That’s an average of

over 11 percent per year. Now, that’s even faster than the cost of

health care has gone up.

So at some point I think we have to have an objective measure

in terms of how much we pay and what ultimately we get in return. I think we have to put some pressure on the folks in that

part of our economy to find efficiencies as well.

The other issue of affordability, I think this is important, and I

think we can do something about this, that is the cost of energy.

It was mentioned by Mrs. Miller from Michigan. I understand right

now, for example, on the equivalent basis, we are paying about $13

or $14 per million cubic feet for natural gas. People in China and

India and other parts of the world are buying it for as little as $5.

That’s a big difference, particularly if you are in the petrochemical

business. As a result, we are losing a share of that.

Finally, in terms of these ideas, I would like to have you bounce

them off—in terms of energy, I would like to have you come out

to Minnesota sometime. We will show you some plants where we

are producing today ethanol for $0.95 a gallon.

I am told—and the refineries are a little bit slow to give us the

information—but the real cost of producing a gallon of unleaded

gasoline today is north of $1.50 a gallon. Even on a BTU-basis-toBTU-basis, right now ethanol is cheaper than gasoline.

That’s a story that almost no one knows. It is better for the environment, it is better for the economy, and, by the way, it is cheaper. We need to get that story told. People say, well, if it is cheaper,

why aren’t we using more of it?

Well, the answer is, I think, because the oil companies currently

have 98 percent of the market, and they are not going to give up

market share voluntarily. I think we have to have not only a goal,

but a specific matrix to measure how well we are getting to that

goal, because we have had a goal of energy independence since

1974, and we are in worse shape today than we were then.

Finally, the last point, and this was raised by a union leader in

my State, but it’s a very good point and one I think we have to at

least think about and discuss. He said one of the problems with

dealing with countries like India and China is they haven’t learned

the Henry Ford principle.

The Henry Ford principle—and I think this is a great one. He

said that people in factories have to be paid enough that they can

afford to buy what they make. Until those countries begin to learn

the Henry Ford principle, it strikes me that we are always going

to be way behind the eight ball.

I wonder if you could just react to a couple of those points, and

I would appreciate it. Thank you.

Secretary GUTIERREZ. And these are great questions, and hope to

add a little bit of value to what you have already stated. But, yes,

on the education piece, the one thing I would say is that qualitatively, we have the best advanced education system in the world.

That’s why students from all over the world want to come to the

United States to study.

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What the President has proposed and what he talked about in

the American Competitiveness Initiative is that we should be keeping some of those students, the best and the brightest, to work in

our country instead of training them in the best universities money

can buy, and then sending them home to compete with us. So there

is a qualitative aspect to our education system that I would just

add to the comments that you made.

Natural gas is an interesting one. You mentioned that we have

had a goal of energy independence since 1974. We have not built

a natural gas terminal since the 1970’s. We have not built a refinery since the 1970’s. As you well know, this requires decisions, and

it requires a commitment to energy independence. The President

laid out a plan 5 years ago, and it was deemed to be a little bit

too long-term in nature, but here we are 5 years later, and I wish

we would are have had it in place 5 years ago.

So when price—when oil prices are up, we would like a solution

immediately; when oil prices were down, the only one talking about

a long-term energy plan was the President.

But it is interesting, 1974, we said energy independence, we

haven’t built a natural gas terminal since the 1970’s, and we

haven’t built a refinery since the 1970’s. I don’t have the answer.

I would just ask, as a challenge to all of us in the Federal Government, what do we need to do to change that?

Mr. GUTKNECHT. Mr. Secretary, let me correct you though. We

have built 93 refineries in the last 5 years. They are called ethanol

plants. We can build a lot more. The truth is there’s not a city or

a town or a county in a State in the United States that wouldn’t

welcome more ethanol plants. They are refineries. They do exactly

the same thing.

Secretary GUTIERREZ. You are absolutely right. If you recall, the

President mentioned ethanol in his State of the Union Address,

and this is part of the drive to get us off the addiction of oil.

Part of the challenge that we have today is cars that take ethanol and consumers don’t know it; then consumers who know it but

can’t find ethanol. So we do need to have enough communication,

and an education to ensure that we take advantage of things like

ethanol, and the President is right there. He talked about it in his

State of the Union Address. It’s a huge opportunity. It’s one of

those leaps that we can make beyond oil.

Mr. GUTKNECHT. Mr. Secretary, a goal is a dream with a deadline. It strikes me that I appreciate what the President said, and

I appreciate what you are saying, but we have to set a specific goal.

Then we have to measure our progress. I would submit we tonight

have to spend a lot more money. With oil at $60 a barrel, right now

there is plenty of money in the energy pipeline to encourage people

to produce alternate forms of energy. What they need is access to

the market.

The oil companies are never going to do this voluntarily. They

want to solve the energy problem when they have sold the last

quart. If you really want to get at this problem, you have to begin

to specifically require certain percentages of our fuel supply, as the

State of Minnesota is doing right now, and you will be amazed at

how many people will invest in alternate energy if they know that

there is an access to market.

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I yield back.

Mr. GUTKNECHT. If I may add, I think that when the President

of the United States says that we are going to wean ourselves off

the addiction to oil, I think we will also be surprised at the impact

that will have.

Mr. ISSA [presiding]. Thank you, Mr. Secretary, and certainly I

share with the President the view that weaning ourselves off or at

least percentage-wise cutting back on that specific fossil fuel also

encourages, Mr. Gutknecht, I am sure, would agree, competition

where there isn’t competition for alternative for oil.

I am proud to say that every Indy car that goes around the track

at the Indianapolis 500 doesn’t use a drop of gasoline. So there are

a few notable places.

Like Mr. Gutknecht, I just finished the World is Flat. But maybe

a little differently, because I come from a business background, I

may have gotten different interpretations, in some cases, of what

action we should take.

I am reminded that when I first started in business, one of my

first salesmen, when describing my product versus the competition,

said, you know—his first meeting, he said, well, you know, it is just

like the product I was selling last week, except now I am representing this guy. It is basically the same thing, it has only got two differences. It’s a little bit better and more reliable, and it’s just a little bit cheaper, but other than that, it’s the same thing.

As you travel and I travel, and we have often bumped into each

other around the world, that really is the difference of whether or

not we succeed versus any European or any other competitor is are

we just a little bit better? We don’t have to be a lot better.

Bringing together what some of our colleagues to my left and

right both asked about, which was sort of this education and

skilled workforce, and particularly your last comment related to

people that we educate here, that we recruit from around the

world, the best and the brightest, but then they go home to help

their home countries compete, because we don’t allow them to stay

here.

I know immigration policy is a hot button. It’s a hot button on

this side of the dais, and certainly it’s a hot button for the administration. But what are your views as the Secretary of Commerce,

looking at our competitiveness of how we should restructure our

immigration policy vis-a-vis the half million that come here illegally every year, the half million or so that are allowed to immigrate here legally, the makeup of those people—and I think in fairness, disproportionately at the bottom of the economic rung, education rung, historic opportunity rung—versus the kind of people

that you just talked about that you noted that we should try to retain or potentially attract? How big a shift is that if, let’s say, a

half million people a year were suddenly the best and the brightest

people, already with education and drive, versus such a disproportionate amount of family unification or basic workers?

Secretary GUTIERREZ. There are two aspects to immigration.

There is the high-skilled and then the lower-skilled workers that

I believe you are talking about.

I would say two things, Congressman. One is we need to be more

aggressive about enforcement, and I think that’s just a very logical

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position that we should know who is coming into our country, who

is working, especially at a time when national security is such an

important factor. So that is one aspect of the immigration dilemma.

The other aspect is we have jobs that are available that are necessary and that Americans don’t want. I think it says a lot about

our economy that we have moved on, we are seeking for other jobs,

we are seeking higher-paying jobs, but these jobs are available.

Therefore, why not recognize that reality, recognize that it says

a lot about our economy, and give these workers a guest worker’s

program, and not—because there is demand for the job, not force

them to be coming in the dark of night and then hiding and having

to be subject to people smugglers and all that is happening that we

can get rid of by enforcing our borders and recognizing the economic reality that we have.

Mr. ISSA. I appreciate that. I certainly share with the President

the need to enforce the borders and find a long-term solution for

the labor force. But, if you will—and I know this is a conjecture,

but, obviously, you are the Secretary for the next generation. What

you do today will mostly be felt a decade from now.

As we consider immigration reform, if we were to fundamentally

change the ratio and, let’s say, reduce by 100,000 a nondescript

group of legal immigrants and replace it with 100,000 designated

best-of-class hires, what would be the impact to the economy of

100,000 or 200,000 net increases in, if you will, preferential hiring,

for people who come with classically the H1B-type skill sets, the

best, the brightest, those either with education or those who have

been educated here that would otherwise return home?

Secretary GUTIERREZ. Well, specifically on the numbers—and I

don’t know what 100,000 more would do or 100,000 less. I think

conceptually what we have seen throughout our history is that students will come to our country. They fall in love with the freedom,

with society, with the tolerance. They decide to apply their skills

here, they contribute to our society, they have a family. Their children become first generations, and they become as American as

any of us.

That has been our history, and they add energy, they add ideas,

they add a sense of hope, and they see that there is more promise

here than maybe back home, and, therefore, they try as hard as

they can to contribute. And I don’t think I am saying anything

new; I think I am simply just reciting the history of our country.

Mr. ISSA. Well, in closing, would you say then even if you can’t

quantify it, that a little bit like that salesman that taught me the

business, we would be just a little bit better if we had that change?

Secretary GUTIERREZ. I think that new ideas, attracting the best

and the brightest, making this the country that people yearn to live

in is very good for us. It has been very good for us in the past. It’s

been very good for us in the future. I do believe that in this day

and age we have a national security component that we didn’t have

in the past, so we have to be more diligent. We have to be more

deliberate about it.

Mr. ISSA. Thank you, Mr. Secretary.

Chairman TOM DAVIS [presiding]. Thank you very much.

We talked about the deficit. I think my friend over here talked

about the all-time highest deficit, but as the economy grows, the

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deficit in absolute numbers grows, but as a percentage of GDP, I

think we are historically in line with where we have been. Isn’t

that correct?

Secretary GUTIERREZ. That’s correct. That’s correct.

Chairman TOM DAVIS. Doesn’t mean we don’t want to get it

down, or we shouldn’t strive to get it down.

Let me just ask, although this may be a little bit outside your

expertise, there’s always a concern that with the size of the deficit,

which is compared to some of our European competitors, and this

is like not out of whack, but that there comes a tipping point where

foreign investors in American dollars may take their money somewhere else. I don’t know where they will take it at this point. The

euro obviously has problems, but that is one concern about the deficit. Do you have any thoughts on that at all, or would you refer

that to the Treasury Secretary?

Secretary GUTIERREZ. Well, I would refer any questions about

currency to the Treasury Secretary.

I would just say that we have—as you were saying, Mr. Chairman, where else—the question is, is there a better place in the

world in which to invest than the United States? What we are trying to do with the American Competitiveness Initiative is to continue to make the answer to that question no. The more we can do

that, the better off we will be.

Chairman TOM DAVIS. Well, I want to thank you very much.

Secretary GUTIERREZ. Thank you.

Chairman TOM DAVIS. We are going to let you go. We are going

to convene the second part of our hearing. I am going to try to

move our second and third panels together, so we can move it in

one set of questions. We will take about a 3-minute recess to get

that ready. I will be back. I think Mr. Issa will reconvene in about

3, and I will be back in about 5 altogether.

[Recess.]

Mr. ISSA [presiding]. Ladies and gentlemen, I appreciate your all

being here so that we could do a combined panel. I must apologize,

because there’s no votes on the floor today, the Members will be

going in and out as they prepare for, on one side of the aisle, a retreat, and on the other side of the aisle, I suspect, a retreat back

to their districts.

But I am pleased today to welcome all of you. Dr. Hector de J.

Ruiz, I hope I did that somewhat right, president and CEO of Advanced Micro Devices; Brian O’Shaughnessy, who will be joining

us, who has joined us, perfect timing, president and CEO of Revere

Copper Products; Mr. Richard S. Garnick, president of North American Services for Keane, Inc.; Ms. Deborah Wince-Smith, president

of the Council on Competitiveness. I will do this one without reading—and former Congressman Dave McCurdy, presently president

and CEO of the Electronic Industries Alliance, which includes the

vast majority of divisions involved in consumer, industrial defense.

Dave, good to see you. I have to confess, I was a member of his

board for a number of years, so we go back—I don’t go back to Congress when he was here, but I do go back to the industry when he

joined us.

As is the requirement of this committee, I would ask that you all

rise to take the oath.

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[Witnesses sworn.]

Mr. ISSA. Dr. Ruiz, we would be honored if you would lead off

this panel.

STATEMENTS OF HECTOR DE J. RUIZ, Ph.D., PRESIDENT AND

CHIEF EXECUTIVE OFFICER, ADVANCED MICRO DEVICES; M.

BRIAN O’SHAUGHNESSY, PRESIDENT AND CHIEF EXECUTIVE

OFFICER, REVERE COPPER PRODUCTS; RICHARD S.

GARNICK, PRESIDENT, NORTH AMERICAN SERVICES,

KEANE, INC.; DEBORAH WINCE-SMITH, PRESIDENT, COUNCIL

ON COMPETITIVENESS; AND DAVE McCURDY, PRESIDENT,

ELECTRONIC INDUSTRIES ALLIANCE

STATEMENT OF HECTOR DE J. RUIZ

Dr. RUIZ. Thank you, Mr. Chairman, members of this committee.

Thank you for the opportunity to be here before you today. As

chairman and CEO of Advanced Micro Devices, the question of

competitiveness is of particular interest to us, and to the semiconductor industry as a whole.

AMD is a Silicon Valley company—and just a brief description of

what we do. Every segment of the economy of any country is now

based on the information technology, from agriculture, to the

health industry, to transportation, and, of course, to computers.

We are one of the two companies that make microprocessors in

the world. The other one is Intel. So we view ourselves as being

at the heart of every segment of the economy, of every single part

around the world. For we are also aware that the world is changing, because we witnessed it firsthand, and we know that past performance is no guarantee of success in the future.

And we know that America’s ability to compete in the 21st century economy hinges on one factor more than anything else, and

that is our ability to innovate. Those of us in the semiconductor industry understand that better than anyone. The products that we

make are the fuel that power the technology-driven economy.

We understand that leadership and innovation requires innovative leadership. AMD applauds President Bush’s new American

Competitiveness Initiative, and we believe that recent proposals by

Members of Congress are similar steps in the right direction. We

also applaud Mr. Chairman Davis’ leadership in this particular

arena. AMD fully supports these important efforts, and we urge all

the makers to enact them.

We must increase Federal support for basic research. We must

make permanent the R&D tax credit, and we must improve the

quality of education, particularly in our K–12 schools. We must create a regulatory environment that is streamlined, effective and responsive to business, and we must enhance our public policy infrastructure to encourage and support innovation in both the public

and the private sector.

But there is more. To this end I want to focus today on three

critical points that I believe to be the three keys to enhancing

American competitiveness in this increasingly flat world. First, you

cannot have competitiveness without competition. Second, government procurement is competitiveness policy in action; and, third

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and finally, investing in education is building competitiveness for

the future.

Let me explain. First, you cannot have competitiveness without

competition. All of the investment, research, specialized education

in the world will not amount to a growing, dynamic economy without competition. We know that America’s abilities to compete and

lead in the 21st century economy and enhance the standard of living of citizens depends upon our ability to innovate.

Companies that fail to embrace innovation as a core business

value will fail, as global competitors will do. Innovation is how we

can take and maintain the lead, and competition is the heart and

soul of innovation, because innovation happens when we feel like

we have no choice but to think and act in different ways.

Competition drives us to push past all limits, to extend our vision beyond what we believe to be possible. It pushes us to achieve

something greater, and it is competition that turns innovation into

the real advantages that allows us to compete on a global scale.

We need competition to drive us to think outside the box. Fair

and open competition is a necessity for our share of success, and

we have a responsibility to ensure that no one is sheltered from

competition. Everyone, every company and every nation deserves

an equal chance to compete and succeed on the merits of the innovation that they offer to the world.

Enforcement of antitrust laws and standards of market conduct

are critical to a competitive society, and the United States must

serve as an example for the rest of the world in promoting free

trade and protecting fair and open competition. At the same time,

our public sector must serve as an example for our private sector.

That brings me to the second key. Government procurement is

competitiveness policy in action. AMD recently commissioned a

study, the results of which were released yesterday, showing that

the Federal Government, and U.S. taxpayers, would have saved between $281 million and $563 million by adopting performancebased procurement standards for microprocessors. At a time when

we face budgetary belt-tightening across the board, government

contracts should favor the best technology at the best price, not a

single company or a best-known brand.

The final key to ensuring U.S. competitiveness is one which is of

great personal importance to me: investing in the improvement of

our K–12 education system. Too often we think of competitiveness

policy only in terms of graduate and specialized education, but I

know from my own experience that our entire educational system

is critical to our competitive business. It begins with making a considerable investment in improving our K–12 education system

across all subject areas.

But I believe we must go even further. We have to plant the

seeds for future economic growth. In this respect the private sector

has a responsibility to lead. With that in mind, AMD has begun to

form partnerships with leaders around the world. We invested a

great deal in our 50x15 Initiative, a commitment to empower 50

percent of the world’s population with affordable Internet access by

the year 2015.

Today that number is less than 15 percent, so we currently have

a great deal of work to do in the next decade, but I believe we can

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accomplish this goal, and, perhaps more important, to maintain

U.S. competitiveness in this century, I am saying that we must

achieve that goal.

We are developing new technologies and solutions that will make

Internet access and computing affordable and accessible in places

that are far removed from this promise. The first step has been the

development of a personal Internet communicator, which provides

Internet access to first-time technology uses, and this is a sophisticated device that sells for around $200. Without having any familiarity with computers, people in lower-income and remote locations

can, within minutes, access endless amount of information and stay

in touch with family members and search the Web.

In Brazil, Russia, China, India and my native Mexico, our goal

is to connect billions of people with a chance to—Internet providers

to learn about the world, communicate with others, and become

part of the growing economy.

We are bringing hope and possibility to places that have not simply been left behind, but have been completely left out. It may

sound like charity, but it is not. It is central to our business strategy for the future, because while we are connecting people in the

developing world to a greater opportunity, we are also building

long-term relationships with infrastructure providers, government

institutions and consumers themselves that are going to reap the

benefits for many years to come.

In closing, let me leave you with one final thought, an explanation of why this issue is so important to me. I grew up in a small

village in Mexico, and, to me, America beckoned as the land of opportunity. Each day I walked across the border to attend high

school in Eagle Pass, TX, knowing that I was on the path to a better future. Education in the United States was my opportunity, the

key to unlocking my potential.

But far too many of today’s children don’t have that opportunity

that I was granted. With a public education system that consistently falls behind the rest of the world, the United States is failing

our children right here at home in the most fundamental of ways.

We have a responsibility to them and to future generations to ensure that America remains the land of greatest opportunity.

Indeed, America is still a Nation where opportunity not only exists, but a balance. The key to competitiveness in this century lies

in giving our citizens the tools that will allow them to capitalize

on that opportunity, the tools that will allow them to innovate, to

compete and to lead.

Thank you, Mr. Chairman.

Mr. ISSA. Thank you, Dr. Ruiz.

[The prepared statement of Dr. Ruiz follows:]

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Mr. ISSA. Mr. O’Shaughnessy.

STATEMENT OF M. BRIAN O’SHAUGHNESSY

Mr. O’SHAUGHNESSY. Good morning, members of the committee.

My company, Revere Copper Products, was founded in 1801 by

Paul Revere. We believe we are the oldest manufacturing company

in the United States. We don’t make pots and pans anymore. That

was sold to Corning about 20 years ago. So for about 75 years, we

made them. The rest of the 205 we made sheet, strip and coil products of copper and brass. Think about an aluminum rolling mill

and those big coils that you see. We do the same thing, but we

make them out of copper and brass. We do that in Rome. We have

a small plate mill over in New Bedford, MA, not far from the original plant built by Paul so long ago.

Now, you are thinking, here is an old-line manufacturing company, right? Let me explain something. Eighteen years ago, when

I acquired the company—I am somewhat of an entrepreneur—we

had a payroll of about 750 people. Three had degrees in engineering and computer science. Within 3 years, our payroll was 550, and

we had 55 people who had degrees in engineering and computer

science.

We are not a low-tech company, we are a high-tech company.

When you look at our rolling mills, you will see a lot of electronics

on those rolling mills. We are customers for those PCs and other

chip devices to run our machines. When you look behind our machines up on the wall, you will see a glass window, and behind that

window you will see $3, $4, $5 million worth of computers to run

that one machine, that one mill.

Now I want to talk about why are we losing manufacturing jobs

to the rest of the world? The numbers are about to come out. I

think it will be somewhere around $200 billion deficit with China

on manufactured goods in the United States. The EU is going to

probably come out $150 million. I am just rounding off to the nearest $50 million there, because I don’t know——

Mr. ISSA. Please, stay with the billion, I get confused.

Mr. O’SHAUGHNESSY. I am sorry, did I say million?

Mr. ISSA. It happens here all the time.

Mr. O’SHAUGHNESSY. All right. First of all, let’s talk about what

it is not. A local furniture company up in Booneville, NY, shut

down, and they consolidated their operations down into the Carolinas somewhere. They had five plants; they went down to three.

They announced they were consolidating and doing all of this.

Their press release didn’t say that they were now buying furniture

from China and shipping it in.

My point here isn’t about outsourcing. I think outsourcing is a

phony issue. I think it has—it’s an effect, not a cause of our problems. The point I am trying to make is that the press release the

company put out didn’t mention that we are not making those

products here now because the costs are too high and this and that;

we are going to make them in China.

Similarly, a lock set manufacturer in California, and in this case

I will mention the company’s name, Schlage Locks—do you know

what lock sets are? Those are on doors where you get the door hanVerDate 11-MAY-2000 12:16 May 13, 2006 Jkt 000000 PO 00000 Frm 00074 Fmt 6633 Sfmt 6633 D:\DOCS\26331.TXT HGOVREF1 PsN: HGOVREF1
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dle, the brass plate, the whole mechanism. That is all called a lock

set.

Well, they said they were moving closer to the market, and so

they and every other lock set manufacturer in the United States

left the country. Nobody has left to serve this market. But that

isn’t true. You walk into any big box store, you walk into WalMart, Kmart, Ace, and pick up anything that is made of brass, and

you will see it is made in China.

So again my point is the press release doesn’t tell you the story.

I don’t think America knows the full story of what is going on in

manufacturing and what is causing this big deficit.

So, if it’s not us—and I will answer questions on that later if you

like. It is certainly not the tax policies, the dividend cuts, the death

tax cuts, the income tax reduction. No. Those are all good things,

and those are things that need to continue.

Several years ago I started walking down a path that led me to

understand better what was going on in manufacturing and the

competitive situation of the United States. Our plant in New Bedford was facing very strong competition from a plant in the U.K.

We were competing with them in the Middle East, in Japan and

South Korea, and in the United States. But the owners of that

plant were having a tough time because we were outperforming

them insofar as productivity. The owner decided he had enough,

and he wanted to sell.

So we looked at his books. What we discovered were, to our chagrin, to our amazement, was that his tax load was much smaller

than ours. We couldn’t believe this. It just happens that the VP

and general manager of my plant in New Bedford is British. So he

said, well, Brian, look at it, here is the situation. In that country,

they have a VAT tax structure that takes up part of the costs of

manufacturing. When they export to the United States, we have to

face them here, they get that back, and they do everywhere else.

So I started looking around and discovered this huge discrepancy

that has to do with VAT taxes, and that we are the only major industrial country that does not have a VAT tax system.

Now, what I would like to do is to put into the record my view

of what a good VAT tax structure is. But, I want to make a very

strong cautionary note here. It’s very easy to make things worse.

Here is what you can do. You can put a VAT tax in and leave the

existing system and use VAT taxes to try to close some deficit.

You will make it worse for manufacturing. That would be a horrible, horrible approach to take. If you are interested in reviewing

this document, you can also go to reverecopper.com and just click

on VAT USA.

I quickly want to go into another couple of major points on energy. The sad truth about windmills is, you know, when they first

came out, everyone was concerned about environmentalism. We

wanted them to work. We wanted them to be effective. But the

windmills, if we increased our number of windmills 10 percent a

year for 20 years, the effective addition to our Nation’s capacity

would amount to 1 percent. Windmills are one of those incredible

things where 1 and 1 doesn’t make 2, because if the windmill is

operating, the standby plant shuts down. When a windmill doesn’t

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operate, the standby plant comes up; 1 and 1 doesn’t make 2, it actually makes about 1.08.

Now, some States have pushed that up to 12 percent, even 20

percent. I suspect some of those people are the ones that did the

calculations on the dam in New Orleans.

Finally, on currency. China’s Government recognizes the great

truth that an entity that provides or creates skilled jobs is a precious thing. It is not something to be taxed, sued and regulated to

death. The challenge, the impact of the regulated currency on the

United States and the rest of the world is astonishing, and the

world is sleeping.

So I will just ask you one question. If Paul Revere rode into this

room today, what do you think he would say? The Chinese are coming. Unfortunately, they are already here, and they are taking our

jobs. Thank you.

Chairman TOM DAVIS [presiding]. Thank you very much.

[The prepared statement of Mr. O’Shaughnessy follows:]

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Chairman TOM DAVIS. Mr. Garnick.

STATEMENT OF RICHARD S. GARNICK

Mr. GARNICK. Thank you very much, Mr. Davis and members of

the committee. Thank you very much for holding this important

hearing. I applaud you and your committee for your leadership in

the area of concern of American business and family.

The United States economic competitiveness and technology in

the years ahead is at stake. I am president of Keane, Inc., a Boston-based information technology and business process servicing organization.

As to my performance in the context of my comments, I would

like you to know that prior to joining Keane late last year, I spent

4-plus years as a senior executive for one of the leading IT services

firms based in India, serving as the only American on the management board of any major Indian IT services firms. Thus, I think I

have a unique perspective of the global landscape and the competitive threat to U.S. providers.

Many of the comments of the World is Flat I have lived over the

last decade. I am also here today in another capacity, and that is

as a board member of the Information Technology Association

[ITAA], which represents over 325 member companies in the information technology industry.

These are the companies that are the enablers of the information

technology economy that Dr. Ruiz spoke about. These range from

startups to some of the largest corporations in North America, and

they serve companies on a truly global basis. We are united by our

concern that if the United States is to remain at the forefront of

global high tech economy, we must take practical, prudent steps to

preserve our competitiveness today and tomorrow.

I would like to begin my remarks by stating that I truly believe

the way forward is clear. Without disciplined, purposeful action,

the Nation’s high tech future and therefore its economic future is

at risk. To remain globally competitive, America must at least double the number of science, technology, engineering and math—or I

will use the term ‘‘STEM’’—graduates over the next 10 years, from

approximately current levels of 430,000 to 860,000. If we don’t create a more equitable platform for global competition and a larger,

better equipped technology workforce, we will surely lose much of

the economic edge we have enjoyed for the past 50 years.

Consider, global environments where global collaboration enabled

by powerful high speed networks level the traditional barriers to

domain expertise and professional interaction. A burgeoning appetite for white collar employment pits country against country in a

race to perform services in competitive bidding heretofore unimaginable, target national investments in science education, develop a

large cadre of STEM workers to pursue those global opportunities

and in the process rewrite the rules of global economic engagement.

The big question in front of us is can a high standard of living

country like the United States compete in this transformed business environment? Unequivocally in my opinion, the answer is yes.

But innovation and creative scientific engineering and technical

disciplines may be the last line of defense against an otherwise uncomfortable future.

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In the past, scientific discovery could yield practical knowledge

in commercial products capable of sustaining an entire community

for years. Scientific innovation has produced roughly half of all

U.S. economic growth in the last 50 years. Foreign suppliers certainly contributed to the value chain during this time, but they did

not supplant it.

The road to the future, STEM. In the early days of the Republic,

the Nation’s manifest destiny lay on the trails and canals running

West. Pioneers used these difficult avenues to pursue a still more

difficult American dream of individual freedom and national

strength. Today and into the foreseeable future, the road to global

competitiveness, and therefore America’s destiny, runs through

education and the STEM fields. We fundamentally need more trailblazers from our entire diversified community of Americans, and

they will be needed because the more we have, the more trails we

can blaze.

The power of computers, software communication is enormous

today, but will be dwarfed by computational resources available to

typical users 10 years from now, again due to the thanks of the

semiconductor industry and all the providers of technology platforms like Dr. Ruiz’s company. This computational power sets the

stage for enormous discoveries in virtually all aspects of human endeavor, ranging from preventing diseases to modeling behavior of

markets. Advances in technologies like data mining, data storage,

high speed networks, etc., will launch a new information revolution

and endow these societies able to harness this power with global

economic leadership.

STEM graduates will channel this force and allow the United

States to realize its fullest potential. As Brian spoke about earlier,

he lowered his number of total workforce but increased the high

quality of his workforce and improved productivity of his business.

But there are warning signs out there. U.S. self-sufficiency in math

and science is at issue.

We spoke about it through earlier sessions, but American universities granted 50 percent of the doctorate degrees in computer

science to foreign born students working in industry. The percentage of doctoral degrees in engineering is even higher; 22 percent

of our science and engineering jobs in the United States are now

held by the foreign born. While the Nation may be able to meet

short-term labor shortages by relying on this talent pool, such

workers may ultimately decide to repatriate, taking with them

their advanced degrees and American industry experience.

The number of undergraduate degrees awarded to science and

engineering students is falling. Between 1985 and 2000, bachelor

degrees awarded to engineering and math and computer science,

etc., had fallen by 18.6 percent. Roughly one-third of the students

declaring an engineering major switch prior to graduation. The

number of newly declared computer science undergraduates has

dropped 33 percent, and computer science master’s degree candidates have declined 25 percent since only 2002.

In addition, tighter customs and immigration controls in response to homeland security concerns are dissuading foreign students from study in the United States. A 2004 survey by the Council of Graduate Schools found that a number of foreign students in

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U.S. science and engineering programs is down 24 percent in terms

of the former and 20 percent in terms of the latter. Moreover, foreign students who are electing to study hard science disciplines

may face a harder time with visa screenings and the entire processes.

So this brings us to the question: How do we sharpen America’s

competitiveness and edge in the 21st century? From my perspective, it means that we need to begin by focusing on three things:

Education, government policies and industry efforts in partnership.

Education. The STEM workforce. The key is expanding this.

Again, we have to at a minimum double the workforce over the

next 10 years. This seemingly monumental goal will still put us at

a competitive disadvantage in the way of pure numbers to the

STEM workers in India, where I spend so much time, China, where

I spend a lot of time, as we continue to lose ground due to demographics and emphasis of their overall economy.

In 2004, the Academy of Natural Sciences reported that 350,000

students from China graduated with bachelor of science degrees,

compared to only 140,000 in the United States.

Last, India is graduating over 300,000 engineers in 1 year alone

and that is expected to continue to grow to over half a million. And

that compares to our graduating of less than 75,000 engineers a

year.

Competition is a numbers game, and at a minimum doubling the

number of STEM graduates is necessary to best position the United

States for economic prosperity.

Government policies. How can the government step up and lead?

You can help by helping facilitate the doubling of the STEM workforce. Doubling this will pull adequate student enrollments from

groups that are currently underrepresented in the math and

science professions. We have a major disconnect. Women are one

dramatically underrepresented group. The percent of women in the

IT workforce declined from a high of 41 percent in 1996 to 32.4 percent in 2004, while the total number of women getting college degrees has grown.

Just 3 percent of 12th grade African Americans and 4 percent of

Hispanic Americans are proficient in science, a situation that

doubtlessly limits the number of minority students in the STEM

college programs and the STEM workforce over all.

The actions I have described today will play out over many years.

There are, however, practical steps that can be taken in the near

term to hone the Nation’s competitive advantage. One such step is

in the area of increased access to foreign born talent.

Congress should move to make the current limits on business,

immigration programs reflect real world conditions. In the real

world, the 65,000 visa cap placed on the issuance of H1B visas in

2006 was reached 2 months prior to the start of the fiscal year.

Other important policy steps to double the number of STEM

graduates: Extending training and assistance to workers in services industries, to workers when they are displaced through other

means of economic transformation, controlling health care costs. In

addition, there are other fundamental policies that need to be evaluated, policies that support free but fair trade. We need economic

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policies that support an equitable platform for stimulating investment for enterprises.

Companies out of India, software services companies, pay zero

taxes on revenues and profits for the services that they render.

That creates a disequilibrium in their ability to invest back into

their businesses.

Our industry is a national agenda item for many countries or regions of the world, including China, India, Eastern Europe, South

America, just to name a few, because our industry is truly transforming their economies.

I would like to correct the record earlier today. One of the Congressmen spoke about the Henry Ford principle. One of the things

that our industry is doing in India is creating a stronger middle

class that is creating potential markets for free trade, so Dr. Ruiz

can sell chips to the PC manufacturers that sell PCs to companies

like I that put them on the desktops for companies and the employees that are over in India and for the computers that they build

on their own. However, there is a competitive disadvantage due to

some tax burdens and other factors that the government has put

in place.

Industry. What role do we have? In addition to the action by government, the industry can play a role through community involvement, scholarships, mentorships, internships. The STEM workforce

will grow only to the extent that young people see a future in career opportunities. U.S. high tech companies must help the newcomers see the potential of careers, interesting work and interesting opportunities.

One of the things I have done since joining Keane is we are going

to be initiating programs to ensure that we attract the best talents

and give opportunities to the best and brightest out of colleges and

universities here in North America. We are investing programs to

recruit and train college graduates for positions throughout North

America and help in the next generation of managing teams globally, and truly making global work work.

So in conclusion, true leadership requires reasoned responses to

present evidence. Despite its many comparative advantages—a

democratic tradition, a system of laws, access to education for all,

protections for intellectual property and a culture which nurtures

and rewards entrepreneurship—the United States has entered an

era of unprecedented global competition. At the same time American students are turning away from math and science programs

that would equip them to compete for the future.

The Nation’s best response to the new competitive reality posed

by these nations is to apply American ingenuity and innovation

across the spectrum of human endeavor. As a businessman who

has been involved deeply in the international high tech marketplace, I can tell you that the global race has not only started but

that countries, including China and India, are pulling ahead in

many areas. They are making the investment in education. They

are producing world class research and development, and they have

the will to win. And so must we.

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I would like to thank the committee for this opportunity and I

look forward to working with you on legislative proposals to eliminate our disparities in education and workforce development.

Chairman TOM DAVIS. Thank you very much.

[The prepared statement of Mr. Garnick follows:]

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Chairman TOM DAVIS. Ms. Wince-Smith.

STATEMENT OF DEBORAH WINCE-SMITH

Ms. WINCE-SMITH. Chairman Davis and members of the committee, thank you for this opportunity to present testimony on the

competitiveness of U.S. businesses and the pivotal role that government can play in supporting America’s business success at home

and successful competition in a fiercely global economy.

I would like to thank Secretary Gutierrez for his leadership because he truly is a champion of economic competitiveness, as is the

Deputy Secretary. They are indeed forceful advocates for the innovation imperative that will drive our productivity and ensure prosperity for all Americans.

I would also like to commend my colleague and friend Dave

McCurdy, and he serves on the leadership council of our National

Innovation Initiative. But I want to also recall his leadership back

as a Congressman when he was one of the sponsors of the 1988 National Super Conductivity Competitiveness Act. And I was working

in the Reagan White House at the time. And it was a fabulous example of bipartisan moving forward, which really signals today

where we are with the bipartisan legislation, with the Innovate

America Act and the new PACE legislation. So really we are at a

threshold, or a tipping point, for national awareness, commitment,

and bipartisan action.

In the State of the Union address last week, in the President’s

unveiling of his American Competitiveness Initiative, he really

clearly set forth a policy and an investment platform for students,

for workers, for entrepreneurs and our global business, and the

Council on Competitiveness commends the President and his administration for this groundbreaking initiative.

The Council, by the way, is entering its 20th anniversary, and

our CEO, University Presidents and labor leaders are all committed to developing an action agenda to drive competitiveness and

productivity. Indeed, it is our enduring mission and the reason we

were created by John Young over 20 years ago.

In January, we welcomed our new chairman, Chad Holliday, the

president and CEO of DuPont, who succeeded Duane Ackerman,

the chairman of BellSouth. And I can’t help but mention that from

its inception DuPont’s business has been innovation driven. And indeed, some of the talk this morning about the transformation in energy renewables, sustainability, moving away from petroleum

based products is already underway at DuPont, and we are going

to see that really permeate our business in the years ahead.

The National Innovation Initiative is a flagship work of the

Council and it is entering its third year and we are very proud. It

is led by Craig Barrett, the chairman of Intel and Bill Brody, the

president of Johns Hopkins. These are leaders that have taken forward the work that we launched back in 2004 under the leadership

of Sam Palmisano of IBM and Wayne Clough of Georgia Tech. But

this is an initiative that galvanized over 500 leaders across the

country to probe the changing nature of 21st innovation and then

construct a policy agenda for America.

Now when it comes to competitiveness, I think Americans tend

to veer between complacency and hysteria. On the one hand many

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Americans find it hard to conceive of a world where we are not the

world innovation leader, but others recognize that our leadership

is being challenged by other nations who are taking our model to

heart.

Indeed, if current trends continue—and we have heard many of

these trends and statistics this morning—our economic prowess

and national security will be seriously compromised. The United

States is still the global leader and benchmark for competitiveness.

As the Secretary described this morning, our economy continues to

deliver unprecedented productivity growth while productivity

growth in the rest of the world is relatively stagnant. And we have

low unemployment and our creativity and entrepreneurship and

business models and business innovation is indeed the envy of the

world.

Yet we know that the waters we must navigate in the future 21st

century that we are in today are not those that propelled us to a

safe harbor in the 20th century. The pace of technological change,

its rapid deployment across the globe, the emergence of new competitors, fueled by a demand driven economy with powerful consumers in charge, means that the policies of the past cannot be the

policies of the future.

Low wage nations around the world are developing high skilled,

high performing workforces, investing in their talent, in their R&D

and in their infrastructure and creating optimal business climates

and tax incentives to indeed propel their innovation. They are hungry for the world’s work. And let’s accept the reality. Every day it

is easier to ship that work around the globe in bits and bytes. Indeed, at the Council we believe and know that if work is routine,

rule based, digitized and reliably codified, there will be a source of

labor somewhere in the world to compete for that investment and

that job. So we cannot compete on standardized services, commodity products, only on innovation.

And let me define innovation, because I think we all talk about

it but what is it really? At the Council we say it is 1 to the fifth

power. It is the intersection between ideas, imagination, insight, invention and implementation, and it is ultimately about new value

creation.

We have to have an innovation ecosystem with a highly skilled,

creative and flexible workforce, the investment in the long-term

basic research at the frontiers, and this infrastructure of regulations as well as the physical and digital world that enables our people and businesses to harness their knowledge and new ideas and

technology to indeed be competitive globally. The recommendations

in our NII agenda reflect this, and indeed we look at the whole system as a very dynamic innovation ecosystem.

But we are not stopping still. While we will continue to push on

the legislation and the President’s initiative, we are already undertaking what we refer to as the over horizon innovation challenges,

with new initiatives to propel America into the leadership role in

21st century manufacturing. There is indeed a renaissance in manufacturing. It is in transformation, with the power of desktop fabrication, T to T sensing, the use of supercomputing in design and

the power of logistic supply chain control.

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We are also focused on how to have the users and the demand

side of the energy equation drive our independence and sustainability.

In implementing our NII recommendations, we also are focusing

on what is going on in the United States in our regional innovation

capacity. Working with the Department of Commerce’s Economic

Development Agency and the Department of Labor, Secretary Chao

rolled out right after the State of the Union a fantastic new initiative called WIRED, regional economic development for workforce

innovation, and we believe that this is going to catalyze and trigger

across our country the emergence of innovation hotspots consistent

with the public-private partnerships that we are talking about

today.

And I might say that every week at the Council we are having

requests from all over the world to talk about innovation hotspots

and why in the United States we really have a lot of the ingredients and road map for that.

But of course the government also has a very, very important

role across the continuum of talent investment and infrastructure.

The government has to ensure that in the United States we have

this optimal, high performing, innovation friendly climate for our

enterprises to develop and compete at home and abroad.

And this deals with the whole issues of the balance between risk

and reward, our regulatory system to protect our citizens but not

hurt our companies. We really need to get the R&D tax credit permanent. It’s been on the book for years and years and years. It is

kind of time to put that, I think, behind us. And of course the protection of intellectual property, ensuring the rule of law and transparency globally, all of these things the government has a strong

responsibility for.

And let me say that with our commitment for STEM education

and ensuring that our children have the skills, the analytical capability, and the creativity to go forward, we have to increase this investment in the frontiers of knowledge through NSF, the Office of

Science mission, and our DOD world.

But I want us not to forget that we should draw on our culture

of creativity. I believe that America is indeed a place that has a

mix of creativity that is unsurpassed in the world. And so as one

of our members said, we need artists who can think like engineers

and engineers who can think like artists.

And finally, let me share with you, it was not—I think it was

very powerful that the President mentioned two areas in his

speech, nanotechnology and supercomputing. We are leading in

nanotechnology. Are we going to capture the value here in the

United States or will it be in China and other parts of the world?

Our manufacturing prowess depends on that. And clearly supercomputing and enabling that down to the level of our small suppliers and entrepreneurs will give us a huge competitive advantage.

And again we are on a renaissance in that world.

Let me conclude by sharing with you a comment from one of our

members, Roger Enrico, the former CEO of Pepsi and now the CEO

of Dreamworks Animation. He recently talked about the importance of making big changes to big things, and change in progress,

he explained, will never come if we don’t free ourselves from the

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tyranny of incrementalism. Dramatic results do not come from

undramatic action, and innovation is a race with no beginning and

no end. And it is time for all of us to get started and ensure that

we create a legacy for our children that takes the power of innovation to the next level.

And I would be happy to answer any questions and look forward

to working with this committee.

Chairman TOM DAVIS. Thank you very much.

[The prepared statement of Ms. Wince-Smith follows:]

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Chairman TOM DAVIS. David, welcome back.

STATEMENT OF DAVE McCURDY

Mr. MCCURDY. Thank you, Mr. Chairman. I want to specifically

thank you for your leadership. It feels like old home week when I

come to testify before you and Darrell Issa. I don’t know of two

Members of the House that have more experience in high technology and bring business acumen to this process and only wish

half the other Members had as much experience and your dedication to technology.

I know time is short. I guess I am the cleanup batter here, so

I am not going to take the whole bucket of balls here. I just ask

that my statement can be admitted into the record.

Chairman TOM DAVIS. Without objection.

Mr. MCCURDY. I would like to just make a couple of quick points.

As you know, EIA has been deeply involved in the issue of innovation. As a matter of fact, since we do represent such a wide range

of the technology in this country and high tech, we frame all of our

initiatives within the context of innovation and global competitiveness because that is where our industries succeed. We have a foundation.

You know, everyone talks about math and science education. In

1981, actually my first legislative victory and disappointment was

to have an amendment attached to the Higher Education Act. Carl

Perkins was the Chair, and it became authorized to provide scholarships to math and science teachers and summer internship programs with industry in order to supplement their income and provide some real-world experience. Unfortunately, in this place, you

not only have to worry about authorization, you have to get the appropriations, and it was not appropriated, and I think we have

missed some opportunities.

So as much as we have this momentum, and I think there is

good momentum for innovation in the innovation agenda, we have

to be very diligent and continue to keep an eye on where this actually ends up.

Our foundation at EIA called NSTEP, National Science Technology Education Partnership, has been working; and Darrell Issa

has contributed and others not only financially but to provide

mentorship for young Americans to understand math and science

and how it affects them in their daily lives.

TIA, our communications sector, has an incredible research division. Meredith Singer is here, and they have a CTO Council which

has provided in incredible detail about the decline of research and

development in the communication side and where we need to provide some emphasis.

Last, I just want to mention just a quick commercial. Over 21⁄2

years ago, we published this document based on a prosperity game

that we played with CEOs and academics and industry leaders and

members of government that came up with a series of 40 recommendations to improve innovation; and even though I am an absolute passionate advocate of innovation, I think we have to be

very, very careful about our rhetoric and the hyperbole.

I think most of us agree—and Deborah and I have worked on

this issue a long, long time. She has provided incredible leadership.

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But we are really not at a crisis yet. We are really at a crossroads,

and I think now is the time for the leadership of our country to

step up and say we do have some tough choices to make. We need

to make the investments now.

That is why I agree with everyone that has appeared before this

panel today, the Secretary of Commerce and my association colleagues, when we say that the Secretary is right, the President was

right. We are pleased that he raised the level of attention in this

State of the Union for innovation.

But there is a very important movement here on the Hill, in the

Senate. We see extremely strong leadership with Senator Ensign

and Senator Lieberman with their bill.

After the Augustine report, we see very broad-based legislation

from Senators Alexander and Bingaman and others, with over 60

cosponsors in the Senate, bipartisan. I know the Democratic leadership in the House has advocated an innovation agenda, and I understand that the Speaker and Mr. Goodlatte will be unveiling the

Republican leadership proposal on innovation perhaps today.

My only hope is that from past experience and one who admires

this Institution is that we do our best to make this a bipartisan effort. This should not be a partisan issue.

Quickly, in just one quick insertion on a thought, as much as we

want this legislation to pass and the budgets can be an improvement and we want to see the prioritization and the emphasis, I

would certainly urge your leadership in strong support for reducing

the number of congressional earmarks when it comes to research

and development in science, which I think really does hamper the

ability to have an effective U.S. leadership.

I mentioned R&D. We all support making permanent the R&D

tax credit. It is costly. But I think it is one of the best investments

we as a Nation can make. I will mention again there are a number

of very good proposals not only with the President’s outline but also

in these key bills.

But I want to give one example of an area when it comes to business climate, and this is the one point I will finish with. That is

innovation, and the key to innovation is having IT diffused

throughout the economy. That is why we have an advantage over

other countries. But they are reading our blueprints on our success,

and they are going to try to copy it.

They have had these—Europe has their six framework, China

has a 5-year plan, Japan had a 5-year plan. They all have these

plans, and the United States is yet to really step forward with a

clear vision for innovation, and that is why we encourage you to

provide leadership on.

But the one area, an example, is from the semiconductor space,

and Dr. Ruiz talked about the need for competition.

But it is a simple fact that when the cost of a new fab production

capability for semiconductors costs $1 billion more in the United

States to build and operate than it does in China, Israel, Ireland,

parts of Asia—two-thirds of the No. 30 millimeter fabs are being

built in Asia—but when there is such a discrepancy in the cost, it

is no longer a question of are you protecting American jobs or are

you a patriot—and we heard those arguments, those fallacious arguments in the past about the Benedict Arnold CEOs. That is

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wrong. That is not the case. They are real business decisions when

you are talking about that kind of investment and that kind of

change. So those differentials are important.

I know this is not the Ways and Means Committee, but I do

think we need to look at some of the proposals of where these incentives are being laid out, why the United States has a 35 percent

corporate tax rate and in Ireland it is 12.5 percent. China provides

a fab 5-year tax holiday and then, after that holiday, half the normal rate of taxes for the next 5 years. Israel has a 20 percent capital grant. A new fab going up in Israel.

An example I heard the other day, a real-life example, the State

of Arizona is having a new fab built in the State that provided up

to $20 million in incentives. It is good. It is positive. Same plant

in Israel has a $700 million set of incentives. So, at some point, the

shareholders themselves start to say, how can you disregard the economics? So I think there is a very important point.

And, last, we don’t want to forget about small business. They live

and the startups live and die by the sword of innovation, and we

shouldn’t just ignore their capabilities as well.

Mr. Chairman, thank you; and I will be glad to answer any questions.

Chairman TOM DAVIS. Thank you very much.

[The prepared statement of Mr. McCurdy follows:]

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Chairman TOM DAVIS. Let me just start. You ended your comments on small business. Sometimes the only way a small business

can get into the marketplace is with a congressional earmark.

I just met with a company yesterday out of Syracuse, NY, that

is doing work on IEDs. They have a breakthrough technology that

we think has proven far more effective. They couldn’t go through

the Defense Department and get any kind of traction, so they had

to go through the Appropriations Committee who brought them to

front.

The difficulty with earmarks is there are good ones and bad ones.

Many times we use the earmark process for a full employment

process for Members’ districts, and that is not good. On the other

hand, we have a responsibility to kind of bring new technologies to

the fore that if they work their way through the established chains

in the bureaucracy get shut down. So I don’t know what the right

balance is. But I would hate to throw the baby out with the bath

water when we talk about Congress’ ability to intervene. It helps

when some of these emerging technologies that may not be able to

get their way through the minimal process.

Mr. MCCURDY. Mr. Chairman, can I make one quick comment on

that?

I agree there are many times—I was on the R&D Subcommittee

of the Armed Services. I was on the Science and Space Committee.

I chaired the Intelligence Committee. It is important for Congress

to raise the level of awareness on many types of technology, but I

do hope that we can work with—something is wrong when the Department of Defense and these other agencies are not recognizing

that their acquisition policies are biased against some of these new

capabilities. In fact, we also are constantly talking to some of our

large multinational corporations to don’t forget the R&D and some

of the real innovation that is coming out of the small business.

Chairman TOM DAVIS. Absolutely, and any time we do the Trade

Agreements Act and Buy America, it cuts down our ability to get

out there. Yet there is a strong urging with some Members that we

ought to be buying America, not recognizing that when we do that

other countries set up barriers in retaliation; and, No. 2, that

means we may not get the best body armor for our troops if it is

not American made, if we don’t do the best in everything in this

day and world, and our taxpayers deserve to get the best product

for their tax dollars. I agree.

I want to go to this idea of innovative friendly climate, because

there has been a thread throughout the testimony today in both

panels that America is still the innovators, that they can produce

the scientists and engineers abroad, but we are the innovators because we have a political culture and economic culture that is different from other countries, and I guess to some extent that is true.

But Mr. Garnick, let me start with you. Other countries—although we have had 200 years in the free enterprise experience

and in the democratic experience and some of these other countries

are getting it in a kind of hopscotch fashion, just because we have

been successful as innovators doesn’t mean that we will stay that

way. Can you talk a little bit about your experience as you go

around the globe with that?

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Mr. GARNICK. Sure. I don’t think it is an entitlement that we

dominate the innovation and continue the self-fulfilling prophecy

that we will always dominate it. I think it comes down to economics and an environment where it is a game of numbers.

In India, for example, it is recognized clearly they have made tremendous progress since they opened up their economy in only

1991. It has only been 16 years since they really started liberalizing their economy. The rate of change of their infrastructure is so

fast and with so much investment and resources available, just

human resources, that they are capable of I think over the next

couple decades of displacing or at least inhibiting our career leadership in that area.

Is that a bad thing for America? I don’t think it is necessarily

a bad thing. It is just a changed environment that we need to deal

with.

Competition, as Dr. Ruiz said, is critical to continue to raise the

bar for our own economy and our own companies serving that economy. However, it should be recognized that these countries recognize that innovation is critical. They have created an environment

where they are extremely bright, motivated individuals that aspire

not to be viewed as back-office engineers just doing coding or body

shopping as often relayed or doing just work that is redundant and

repeatable, that is digitized and moved over. The workforce is motivated to changing their environment and changing their environment in such a way that they are reading our blueprint. That again

is something we should be proud about but recognize the reality

that is what we are facing.

You know my own old organization, we had an organization of

45,000 people that worked for me. We had the ability to dedicate

over 1,000 engineers almost to the innovation segment of the business that in my current company, with 10,000 employees and a different economic model, I am not capable of matching that 1,000

people head count in innovation. Over time, that will inhibit or create a different economic value proposition.

The company I was with in the past is about a $2 billion company on a trajectory of rapid growth. Today, this current company

I am with, Keane, is a $1 billion company. We are accelerating the

growth, but our ability to invest, because of the economic platform

that is in front of us, is different. We have to think through different ways of solving the problem; and it is both technological, it

is business model, and it is economic. But we will get there. But

I think we have to recognize that we do not own a patent on innovation in the world.

Chairman TOM DAVIS. Anyone else want to comment?

Ms. Wince-Smith, I like your comment about artists thinking like

engineers and engineers thinking like artists, because that is really

what innovation is, as opposed to just the drudgery of performing

the work. Our tax system, to some extent, as we see from some of

the testimony is not helpful in this area. We have a Tax Code that

was designed for a different time in a different era. In the chip

business we are seeing the chip business in America just migrating

over to Korea and to Japan and other areas. And if China will ever

get their intellectual property rights together, the chip business,

they dominate that and we see us losing in those areas as well.

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What is the future for American manufacturing as we stand

today? Anybody want to comment on that? Mr. O’Shaughnessy?

Mr. O’SHAUGHNESSY. I would, because Revere Copper prospered

from Revere and Son to Revere Cooper Products over 200 years because the country had low-cost energy. And one of the solutions

that we need is, in my opinion, nuclear energy. France uses—80

percent of it is nuclear; Sweden is about 35; South Korea, I was

told the other evening by a South Korean businessmen, is about 40

percent. China is building 20 new nuclear plants in the next 20

years. We need to do the same.

What we ought to do is the Federal Government ought to precertify site selections. Pick out five sites and then use a BRAC-type

process to get it done. Because nobody wants any kind of a facility

in their backyard, nuclear or otherwise. I mean, there are cows,

citizens opposed to windmills. So I think the Federal Government

has to step in with site selection, get energy right, make it cheap.

The fundamental way you raise a country up is to provide it with

good, low-cost energy; and we can do it.

Chairman TOM DAVIS. We get a crowd out in Fairfax to oppose

cell towers going up. You get better cell phone service, so I can talk

to my kids on the bullet train in Japan faster than I can driving

through Bethesda or Vienna.

Mr. Van Hollen.

Mr. VAN HOLLEN. Thank you, Mr. Chairman.

Let me thank all of you for your testimony and just really pick

up where Chairman Davis left off.

We, in this country, have been able to keep ahead in many ways

because of our technological edge, our innovation. Despite the fact

that other countries have been able to produce products at lower

wages, we have been able to keep that edge through productivity

gains and other issues.

Now, Mr. McCurdy referred in his testimony to the fact that

there comes a point where simply the cost of manufacturing a product overseas is cheaper. And as you have these others—you know,

we don’t have a monopoly on innovation. We have been a leader,

and we need to invest to keep ahead, but we don’t have a monopoly. As you know, the population in India and China and others

sort of adopt our model and invest in education. That is why we

are here today, is to talk about that loss of edge, which means that

the actual cost of economics is obviously a big issue.

You mentioned different corporate tax rates. Another big issue

we well know is the question of health care. We haven’t talked

about it a lot this morning, but we all know and we have heard

the figures. When GM rolls a car off the plant, the first $1,500

whatever goes to provide health care. We recently saw that IBM

decided to discontinue some of its pension benefits.

We, for historical reasons, have had a system where we have an

employer-based health care, and yet at the same time we spend

more as a percentage of GDP on health care than any other country in the world. And at the same time we have 40 million Americans unemployed.

How do we deal with this issue going forward? It seems to me

that many of our competitors, as the employers, don’t have to pay

that cost to health care; and yet, at the same time, I think we all

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agree that one of the things we want to do in this country is to provide health care universally as possible that is our goal. How do

we deal with this very important issue as a Nation?

Dr. RUIZ. If I could, you know, I am the farthest thing from an

expert on the health care, but I do understand the cost of health

care in our business. And the one thing that seems apparent to me

in not only health care but many other issues similar to that is

that we have not put technology to its fullest use to solve those

issues.

I happen to know, for example, Mr. Paul O’Neill, who used to be

in the government here, a Secretary, who has done some research

and found that—and I have seen the work—he is very compelling

that through the use of IT technology as we know it today, without

making any improvements to the technology, that health care costs

could be reduced by 40 percent. And I think one of the things perhaps we could find a way to collectively encourage and embrace is

the use of technology to solve these issues.

IT, information technology, is very powerful; and I believe that

it could go a long way to address health care rather rapidly. But

it would take a very concerted effort between industry, government

and just the population at large.

Mr. MCCURDY. Mr. Van Hollen, I spent a good deal of my career

working on health care issues. I am married to a physician. I have

a daughter in medical school, and my wife sometimes wonders why

my daughter wants to go into medical school, considering the

changing nature of health care and litigation and some of the costs.

It is an interesting fact that we in the United States pay more

on litigation than China spends on R&D as a nation. I would love

to sometime talk about just China, because there is a great deal

of reaction to what China is doing. I think the thing that we need

to realize is with China physics it is really not the mass right now

that is the issue. It is the velocity of their growth. It is the velocity

of growth, pace of change which is so dramatic. They have mass

with the potential for this huge market and the labor force. But we

have some advantages, but I am not sure we are maximizing that

advantage.

In America, we are going to grow—we have grown rich before we

are growing old as a Nation, but our baby boom generation is approaching the older age, and we have this savings mismatch in the

world. There is a world imbalance with regard to national savings.

We are the richest nation in the world, and yet we have negative

savings. And you go to China, one of the poorer nations of the

world, believe it or not, and they have a huge savings rate. Why?

Because they haven’t had the institutions of Social Security, Medicare and others. They are going to hit a wall there, and I will tell

you this is not going to be 10 percent annualized growth indefinitely. I had a CEO tell me the other day that he believes that

right after the Olympics you are going to see some really major

problems. Experts have told me in 6 to 8 years you are going to

see huge roadblocks in China’s development. Now there are international implications of that and potential nationalism and all the

rest, but I think we have to be very mindful of what is happening

there.

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We have to look at—and someone earlier in the committee talked

about the trade deficit meaning more than the national deficit.

Much of my background is in international economics; and, quite

frankly, I would reverse that and say the way you start dealing

with trade deficits is you get the national savings rate and the deficits here under control, because that has a huge impact on the cost

of money and the potential cost of money over time.

So, actually, I spend most of my time dealing with China; and

I would like to get on that at some point.

But I think the point you raised about the cost of health care,

our industry is not going to remain competitive if they are strapped

with this huge cost. The question is where they shift it to. If the

Federal Government is where we see it currently—and I don’t care

about halving the deficit. I am talking about the need to have true

savings and the ability, flexibility to deal with this burgeoning crisis which—it doesn’t effect just individual consumers and the elderly. These businesses cannot compete. Our industry cannot remain

the best if all of a sudden they become a pension manager, an insurer of last resort and the provider of health care.

Ms. WINCE-SMITH. I’d just like to take the Chinese analogy a little bit and carry it into health care, because it’s ironic that our system is really like a Chinese rice bowl. If the rice bowl is broken,

you don’t have health care.

So the whole portability issue I think is absolutely critical. And,

this is one of a few sectors in our economy that is not consumer

driven. It’s almost an inverse relationship between—as more innovation comes, the costs go up, and there is a specter of rationing

and quality.

So clearly when we think of innovation, we need a lot of innovation in the design of this health care system to meet some of the

realities that we’re talking about and really bring it back to a patient-controlled system, which it is not right now.

And the other link into manufacturing with this is that there are

very advanced sectors of manufacturing where nobody can beat us

in the world. And when you look at those, there are a number of

reasons why. I mean, Proctor & Gamble, they are producing what

you would think of as low-value consumer products, toothpaste, potato chips, diapers. Here in the United States, competitive throughout the world, they’re using high performance computing to completely change the cycle, and the value of a lot of their manufacturing is in the design; it’s in the logistics supply chain.

And also we have to factor in what’s going on in labor. Timkin

has, I’m told, I have not seen it, one of the most advanced facilities

in North Carolina for this T to T sense manufacturing where within minutes or hours they can move from very, very complex fabrication. And then we have the other situation in Ohio with the real

hostile relationship between business and labor.

So there are a lot of things going on in manufacturing. But if

Brazilian companies can be competitive in the United States, owning steel mini-mills, there’s some things that are going on here.

But back to the health care, I think looking at this sector and

the productivity that will come from some innovative design I think

we have to really do, and that’s a big, big challenge.

Chairman TOM DAVIS. Mr. Issa.

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Mr. ISSA. Thank you, Mr. Chairman.

Dave, a little bit like Europe, not using the whole bucket of balls.

I notice I’m last over on this side of the dais. I’d like to wrap up

a couple of things I heard here today and make sure that we are

all as unified as I think this panel has been. I would like to congratulate you. Often we have an A-B panel in which one side is

saying one side and the other side is talking completely past, and

that doesn’t seem to be the case today. I think I have heard far

more similarities. Matter of fact, I haven’t heard any real differences in any subjects, which is good. Of course it also isn’t very

bright. It’s kind of gloomy, all your predictions, but at least we’re

on the same sheet of music.

Mr. O’Shaughnessy, I don’t have a question for you, but I do

have a comment. I really believe that when the trademark dispute

that was—had your company in bankruptcy for so many years,

hoping to be able to preserve the identity, the unique identity of

your—formally your copper clad product, I wish that had been decided in the opposite way in which Revere Wear’s unique look

would have been recognized by the courts.

Having said that though, the question I have is, do you think if

they had, if you were still in that business, or let me rephrase, if

whoever was still in it had that protection, intellectual property

protection, do you think those pans and pots would be made here

in the United States or would they have gone to China regardless?

Mr. O’SHAUGHNESSY. First, when I acquired the company, Revere

Wear had already been sold, and they had the use of that logo, and

I could use it for our type of products but not for cookwear for 5

years. So we could have gone into cookwear.

What happened is Corning bought the company, and after producing the cookwear in the United States for an additional 5 or 7

years, they moved the facilities to, I believe, Thailand, and then

they sold them.

In their case—I think you make a good point in general, and I

agree with it, but in their case, in that particular product line,

technology passed them by. Copper is still the best conductor of

heat that there is, but all of those beautiful ceramic dishes and

new cookwear, that’s what did them in.

Mr. ISSA. I see. I always wanted to because I still believe it’s a

fine product.

Mr. O’SHAUGHNESSY. Thank you.

Mr. ISSA. And, besides, I thought it was the best example of a

secondary meaning; when you said Revere Wear, it really meant a

particular product.

Dr. Ruiz, I asked the Secretary, and this question is open to all

of you, but I asked the Secretary earlier if a change in immigration

policy—and I think your testimony is very on point, you were

among the best and the brightest and most ambitious to cross the

border each day to seek out an education and relentlessly try to

better yourself, and today you’re at the pinnacle of the corporate

ladder.

However, our immigration policy today, I’m talking about legal

immigration, is a business, a family reunification. It does not in

any way, except for the H1B and some other limited areas, it does

not promote a best of X type competition.

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If you have a Ph.D., or even a lesser degree, but if you are incredibly skilled through whatever process, including a U.S. education, you’re not at a particular advantage in getting that 500,000

or so opportunities to become an American on a permanent basis.

In your opinion, particularly with a technology company like this,

if we were, during our debate on immigration reform, to provide either new, significantly new, several hundred thousand, large quantity, or take a different approach to the existing amount and increase a net, let’s say 200,000 highly skilled, highly educated as a

preferential class in immigration in this country, what would that

do to your business and to your ability to recruit and succeed

against global competition?

Dr. RUIZ. Well, we have a near-term problem, in industry, particularly in high tech, is we are short of talent in this country. Any

immigration reform that allows us to fill that stop gap problem or

stop gap the challenge that we have would be very helpful to high

tech and I believe that, without a doubt, would have a very positive

impact on industries such as ours. There’s no question about that.

One of the reasons, whether you call it an H1 visa or whatever,

there is a method by which you can get a Ph.D. from India or

China or Germany to come work in this country in our industry,

that would be a welcome immigration reform that would certainly

help our industry. However, I would like to emphasize that our

whole industry is also strongly encouraging the fact that while that

may be a short-term solution, that the long-term view of this problem, which is we still have minorities and women in this country

not being able to go to get the kind of education that they need,

that we could make a huge impact in the shortage of the people

that we need over the long run if we just could address our own

deficiencies in our education system.

Mr. ISSA. I certainly agree with the latter, but I asked my question narrowly, recognizing even half a million immigrants with

high skills would pale in comparison to a shift in U.S. education.

But because immigration reform is at the top of the President’s

agenda and it’s high on the agenda of the House, I was hoping to

get a comment from each of you. Go right down the line.

Mr. O’SHAUGHNESSY. I absolutely agree with you. Revere has

taken immigrants and run them through the process to get electrical engineers and so on. I’m Canadian originally; maybe you’re

aware, with the experience Canada did out of Hong Kong.

Mr. ISSA. I actually—my suppliers from Hong Kong are now

some of the Vancouver residents.

Mr. O’SHAUGHNESSY. I totally agree with you. It’s so logical.

Mr. GARNICK. For our business, it’s paramount. I think it’s critical we create ease of access to find talented people. I fully support

that endeavor, but I would reiterate Dr. Ruiz’s comment about long

term. We’ve got to build a foundation to tap into our vast untapped

community that needs to migrate to a technology community. It’s

interesting from a standpoint of what we do graduate here in

North America. We promote an environment that is rewarding

areas of industry and other facets that are just not producing longterm productivity results to the economy, including litigation. We

produce more lawyers than many other countries in their entirety.

Nothing negative about lawyers, but we need to repartition a large

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portion of that population seeking that career into the technology

community to improve the outlook long term.

Ms. WINCE-SMITH. I would support what my colleagues have said

but I would add to that one of the very powerful pieces of our network for retraining our workers as these jobs change, which we

should not ignore investing in, are our community colleges. We

know people are going to have many jobs and many skills over

their life. It’s hard to think of someone who’s 50 or 55 in a displaced manufacturing environment moving into one of these, but

we certainly should be targeting our young people in their 20’s and

30’s.

One of our proposals at the council that was a little extreme, but

we had a lot of support for it, even inside the administration in

talking with people, was when we invest in the education and our

colleges and universities, the best and brightest from all over the

world, we are investing in these people as taxpayers. And when

they receive their degrees, we think they should be given an automatic green card. And everything that’s done on the security

checks should be done up front when they apply.

And so when they come in, it’s as if a business person, you invest

in an asset, and you’re ready now to reap the reward, and you say

that’s gone. So I think that would be something that would really

kind of be very, very transformational, and, again, it’s a bold thing

to address a bold need.

Mr. ISSA. Only in this body could someone be forced to say something was extreme when it was clearly common sense.

Dave.

Mr. MCCURDY. I want to commend and associate myself with

Deborah’s statement with regard to the green card. There is an interesting statistic, though, and this is where you all have jurisdiction and probably could help some, too. We cannot find a Federal

agency that can tell you how many and where the students are in

graduate schools around the country, especially in the areas of

math, science, physics and others.

The one person who has that is at Oak Ridge National Labs, and

there is a group there, and the statistic is that 58 percent of foreign

born postgraduate students remain in the United States. Now

that’s still a fairly significant number, and so that’s a good investment because that is the best and brightest from around the world,

but we should be able to raise that number, notwithstanding all

the other issues, long term, improving our own supply here.

Another interesting fact is that a lot of these H1B caps are used

by family members of the person with the special skills, and they

should not be counting against—why have a family of four count

for really the one person who is the Ph.D. That needs to be the attracted person here. We don’t want to be separating families.

Mr. ISSA. If I can, just one small followup. Dave, with your intelligence background and following up on the chairman’s statement,

you know the predator system was an earmark. And I would certainly say that we need to find a way to make sure that those of

us who look at so many more projects do preserve certain rights to

look for innovative products in some well thought out way even if

it’s not 14,000 well thought out ways a year—for good earmarks

and against bad earmarks.

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Mr. MCCURDY. You need to change the term earmarks. I think

there is a misperception about the ability of committees to do its

constitutional right in the Armed Services Committee or wherever,

and Predator was one.

Let me just put one bug in your ear before we wrap up for perhaps a future hearing. I keep coming back to this because this is

my favorite topic, but with regard to China, the single biggest issue

that the technology industry faces vis-a-vis China is intellectual

property. And we as an association—and our industry is working

and will soon release similar to this play book we did on innovation, which was broadly embraced by Congress and many people,

we’re doing one on intellectual property protection and working

with some experts that have great experience in the trade world

and China. And I think that at some point it would be worthwhile

for this committee perhaps to spend some specific time on that

issue because I think it has great leverage for us.

Chairman TOM DAVIS. Let me just say, Tom Friedman has been

a leader in writing about observing what globalization has done,

but if you go back a generation to when I was in college, Toffler

wrote about the third wave and basically talked about how this

would be similar to the Industrial Revolution, that every major institution would end up changing. And from hearing you today, our

tax system has to be overhauled to keep us competitive, immigration system, educational system. That’s where we’re going.

The sooner we do it, probably the better. Because they get closer

and closer and closer. These aren’t ifs, it’s whens. And, hopefully,

the parties can come together on this. We’ve had some arguments

over trade that were needless, in my opinion, but we had them. But

on some of these other areas, we need to work together as Americans or the American economy as we know it is going to be running

third or fourth place.

Mr. GARNICK. If I could just add a comment on that. We see, as

we consult with many companies on IT and business processes,

there’s a fundamental shift with many companies transforming

themselves. And I think much to your point, the government and

our systems need a full transformation to compete on this new

global landscape. Not to throw, as somebody said, the baby out

with the bath water. We’re doing so many good things. But you

can’t wait until, in a business or an economy in a country, we can’t

wait until the problem is beyond us and we’d have to do it in a period of weakness. It’s better to transform in a period of strength.

And we recommend corporations that we help transform to take decisive action to recognize the facts, to not stick your head in the

sand and deal with the issues on a fact-based environment, and

transform in a period of strength versus waiting until you’re in a

period of weakness.

So think through that and if we can as an organization, as a corporation and as an association help the process, we would be glad

to participate in any way we can.

Chairman TOM DAVIS. Let me just add, I mean from my own experience, January 1, 1992, I took over as the head of the county

government in Fairfax County, VA, which is across the river. We

were in desperate shape. We didn’t have enough money in the bank

to make our payroll the next month. Our commercial tax base had

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dropped over 30 percent in 1 year. We had, from a real estate perspective, a depression.

The thing I asked in every decision we made, are these decisions

going to attract capital or chase capital away from the county?

When Tony Williams took over as a mayor, I said, you need to ask

that fundamental question. You have all these issues coming at you

that are unrelated; social issues, justice issues. But fundamentally,

you have to ask these questions, either attract capital or chase it

away?

We just can’t be making decisions as a government that’s going

to chase it somewhere else. Because once it migrates there, it stays

there and gets a hold, and those are just fundamental issues we

ought to ask. We can disagree on social issues or we can disagree

on some other issues, but on those issues, we need a competitive

policy that is going to continue to attract capital, keep our dollar

where it is and everything else.

I think this has been very helpful toward that. I would just add,

in Fairfax now I think our economy is the envy of the world. Succeeding boards have continued to ask those kind of questions. It

doesn’t mean no regulation or no taxes, because you have to invest.

We’ve asked intelligent questions, and ultimately, we asked, is this

going to attract capital? That’s what we need to continue ask here

because our competitors are doing that around the globe. They’re

doing some innovative things we wouldn’t even think of doing.

Mr. Ruiz, as you said, competition is good. We’re going to get better as a result of this. But competition isn’t just among companies;

it’s among nations. And we need to stay on top. And this has been

very, very helpful, and I appreciate everybody being here today.

The hearing is adjourned.

[Whereupon, at 12:10 p.m., the committee was adjourned.]

[The prepared statement of Hon. Elijah E. Cummings and additional information submitted for the hearing record follow:]

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