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THE GLOBALIZATION OF WHITE-COLLAR JOBS:

CAN AMERICA LOSE THESE JOBS AND STILL

PROSPER?

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

WASHINGTON, DC, JUNE 18, 2003

Serial No. 108–20

Printed for the use of the Committee on Small Business

(

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

COMMITTEE ON SMALL BUSINESS 

DONALD A. MANZULLO, Illinois, Chairman 

ROSCOE BARTLETT, Maryland, Vice 

Chairman 

SUE KELLY, New York 

STEVE CHABOT, Ohio 

PATRICK J. TOOMEY, Pennsylvania 

JIM DEMINT, South Carolina 

SAM GRAVES, Missouri 

EDWARD SCHROCK, Virginia 

TODD AKIN, Missouri 

SHELLEY MOORE CAPITO, West Virginia 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

TRENT FRANKS, Arizona 

JIM GERLACH, Pennsylvania 

JEB BRADLEY, New Hampshire 

BOB BEAUPREZ, Colorado 

CHRIS CHOCOLA, Indiana 

STEVE KING, Iowa 

THADDEUS MCCOTTER, Michigan 

NYDIA VELA ́ ZQUEZ, New York 

JUANITA MILLENDER-MCDONALD, 

California 

TOM UDALL, New Mexico 

FRANK BALLANCE, North Carolina 

DONNA CHRISTENSEN, Virgin Islands 

DANNY DAVIS, Illinois 

CHARLES GONZALEZ, Texas 

GRACE NAPOLITANO, California 

ANI ́BAL ACEVEDO-VILA ́ , Puerto Rico 

ED CASE, Hawaii 

MADELEINE BORDALLO, Guam 

DENISE MAJETTE, Georgia 

JIM MARSHALL, Georgia 

MICHAEL MICHAUD, Maine 

LINDA SA ́ NCHEZ, California 

ENI FALEOMAVAEGA, American Samoa 

BRAD MILLER, North Carolina 

J. MATTHEW SZYMANSKI, Chief of Staff and Chief Counsel 

PHIL ESKELAND, Policy Director 

MICHAEL DAY, Minority Staff Director

(II) 

C O N T E N T S 

WITNESSES

Page 

Johnson, Hon. Nancy L., U.S. Representative, Connecticut ................................ 4

Mehlman, Hon. Bruce P., U.S. Department of Commerce ................................... 7

Engardio, Pete, Business Week Magazine ............................................................. 9

Hira, Ron, Columbia University ............................................................................. 11

Challenger, John, Challenger, Gray & Christmas, Inc ........................................ 13

Palatiello, John, COFPAES .................................................................................... 15

Kenton, Christopher, Cymbic, Inc .......................................................................... 17

Almeida, Paul, AFL–CIO ........................................................................................ 19

APPENDIX

Opening statements: 

Manzullo, Hon. Donald A. ................................................................................ 43

Velazquez, Hon. Nydia ..................................................................................... 55

Prepared statements: 

Johnson, Hon. Nancy L. ................................................................................... 57

Mehlman, Hon. Bruce P. .................................................................................. 59

Engardio, Pete .................................................................................................. 69

Hira, Ron ........................................................................................................... 77

Challenger, John ............................................................................................... 84

Palatiello, John ................................................................................................. 86

Kenton, Christopher ......................................................................................... 108

Almeida, Paul ................................................................................................... 112

U.S. Chamber of Commerce ............................................................................. 116

(III) 

(1)

HEARING ON THE GLOBALIZATION OF 

WHITE-COLLAR JOBS: CAN AMERICA LOSE 

THESE JOBS AND STILL PROSPER? 

WEDNESDAY, JUNE 18, 2003

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, D.C. 

The Committee met, pursuant to call, at 2:03 p.m. in Room 2360, 

Rayburn House Office Building, Hon. Donald Manzullo [chairman 

of the Committee] presiding. 

Present: Representatives Manzullo, Velazquez, Schrock, Akin, 

Capito, Shuster, Franks, Beauprez, Chocola, King, Ballance, Christian-Christensen, and Bordallo. 

Chairman MANZULLO. Good afternoon and welcome to this hearing of the Committee on Small Business. I especially welcome those 

who have come some distance to participate. 

Today we are going to talk about the globalization of white-collar 

jobs. Most Americans do not realize the significant link between 

manufacturing and services. I hope it becomes clear by the end of 

this hearing. 

You know my passion for manufacturing, so why are we talking 

about the service sector today? I want people to begin to understand that what has been going on in manufacturing is not because 

manufacturing jobs are less important than service sector jobs. As 

goes manufacturing, so goes the economy. 

I have heard over and over again from pretty well educated people that we should not worry about manufacturing since we have 

such a strong service economy, as though services has some sort of 

a hedge of protection from foreign competition. 

There is a false sense of security. It is foolish to think that way. 

Engineers, accountants, architects, programmers, and other highlyskilled professionals are learning quickly that someone equally or 

more qualified than they are is taking their job for far less money 

both here in the U.S. and halfway around the world. Here is the 

connection. 

According to a recent National Science Foundation study, 48 percent of our engineers work in the manufacturing industry. These 

are the folks that create the designs, engineer processes, and drive 

innovations for manufactured goods. The U.S. economy is trying to 

grow and trying to create jobs. It is just that Americans are not filling those jobs. They have been moved overseas where foreigners 

will work for a lot less. 

2

Some would argue that pure free trade theory should prevail. 

Whatever can go overseas should go. I would put my free trade voting record against anybody’s, but the theorists miss a very important point. Free trade does not operate in a vacuum. It presumes 

that all countries participating are playing by the same rules, 

whatever those rules may be. The problem is that not all of our 

trading partners play by the rules and even our own laws have 

loopholes that allow for some of this. 

The February 3rd edition of Business Week had on the cover, ‘‘Is 

your job next? A new round of globalization is sending up-scale jobs 

offshore. They include ship design, engineering, basic research, 

even financial analysis. Can America lose these jobs and still prosper?’’

Examples include radiologists in India interpreting—Congressman Kirk, did you have a constituent you wanted to——. 

Mr. KIRK. John Challenger. Nobody knows more about outplacement for these economic times——. 

Chairman MANZULLO. If you can stick around for a couple of 

minutes as soon as we finish our opening statements I will let you 

introduce your constituent. Do you want to do that? 

Mr. KIRK. Sure. 

Chairman MANZULLO. Just have a seat over here. Thank you. 

Examples include radiologists in India interpreting CT scans for 

U.S. hospitals. Accountants are assessing loan risks for homes halfway around the globe. Five technicians sit at a computer in Ghana 

processing New York City parking tickets. Blueprints for a staircase in a New York City building get drafted in Shanghai. It is interesting stuff. 

This is what globalization is supposed to be about. Everybody 

wins, right? Wrong. 

According to Forrester Research, 3.3 million white-collar jobs and nearly $140 billion in wages will shift from the U.S. to other nations over the next 12 years. This does not count the number of displaced Americans resulting from loopholes in our immigration 

laws. Increased global trade was supposed to lead to better jobs 

and higher standards of living for Americans by opening markets 

around the world for U.S. goods and services. 

The assumption was that while lower-skilled jobs would be done 

elsewhere, it would allow Americans to focus on higher-skilled, 

higher paying opportunities. 

What do you tell the Ph.D., professional engineer or architect or 

accountant or computer scientist to do next? Where do you tell 

them to go? What higher academic credentials are they to aspire 

to next? They did what we said: Go to school and get the best education you can. Get a job in the technical field and you will be good 

to go. Now that this can be done for less elsewhere should we be 

satisfied with having the intellectual capital of this nation draining 

out to other countries? Should we sit back and wait for China or 

India or Singapore or Poland to tell us what the next great technological breakthrough is going to be? Should we be concerned about 

our national security when our intellectual capital is being shipped 

overseas? 

Our nation’s international economic competitiveness depends absolutely on the U.S. labor force’s innovation and productivity. AcVerDate 0ct 09 2002 18:52 Mar 31, 2004 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 G:\HEARINGS\92655.TXT NANCY
3

cording to economist Joel Popkin, if our innovation processes, represented by our scientists, engineers, and technicians shift to other 

countries, ‘‘A decline in U.S. living standards in the future is virtually assured.’’ That is from the NAM’s white paper issued just 

two weeks ago. 

Wanting to keep jobs in America is not protectionism. It is in fact 

the very thing needed to promote free trade. Without the high productivity of the American worker and high levels of consumption 

by American families free trade will have no solid foundation on 

which to thrive. 

The challenge is whether we can ensure that our optimism for 

a free and fair global market place can become a reality. 

I look forward to the opening statement of Mrs. Velazquez. 

[Mr. Manzullo’s statement may be found in the appendix.] 

Ms. VELAZQUEZ. Thank you Mr. Chairman. 

As the tech industry grows, tourism flourishes and the global 

market expands, it is apparent that our world is shrinking. 

Today people travel between nations as easily as they do between 

states. Globalization which allows economic, political and cultural 

systems to cross national borders freely has caused a shift in the 

economic phase of our nation. We have witnessed the effects of the 

first wave of globalization when U.S. manufacturing moved production and American jobs overseas. 

Now we are experiencing a second wave of globalization which is 

impacting the strong and profitable service sector here in the 

United States. It is by far the largest component of our economy, 

accounting for 81 percent of private sector output and providing 

roughly 95 million jobs. In fact the majority of companies within 

the services industry are small businesses. 

As this sector braces for the effect this new reality will have on 

the economy just as the manufacturing sector did a decade ago, analysts foresee the flight of white-collar jobs abroad. It has been predicted that the United States service industry should expect to lose 

at least 3.3 million white-collar jobs while $136 billion in wages 

will shift from the U.S. to low-cost countries by the year 2015. 

For many businesses, both large and small, the global marketplace offers an array of opportunities, especially for growth. Yet it 

also presents one major drawback—job outsourcing. Companies in 

the service sector are able to find skilled labor abroad at lower 

wages. High-end service work such as writing software code and 

processing credit card receipts is being moved to developing countries like India, China, Russia, and Eastern Europe. This has the 

potential to worsen our nation’s already suffering economy which 

has lost an estimated 2.7 million jobs since the start of the Bush 

Administration. 

There are a number of policies linked to this trend that have 

caused the shift in service sector jobs away from American workers. One is immigration policy. As non-immigration programs are 

being used and abused to obtain cheap labor. 

It also does not help that the rising cost of benefits in the U.S. 

makes cheap labor overseas and less worker protections more attractive. After all, U.S. companies are trying to cut costs and make 

a profit in this economic downturn. 

4

In addition, a strong dollar has led to a trade imbalance that favors importing foreign produced goods and services because it is 

more cost effective. The technological ease with which companies 

now do business creates an atmosphere where overseeing workers, 

assessing production, and managing transactions in Jakarta is just 

as easy and probably cheaper than here in the United States. 

As globalization now permeates the service sector it is still too 

soon to know exactly how small businesses will be affected. Since 

small businesses dominate the service sector it is critical to factor 

them into the equation making sure that policies like immigration 

help instead of hurt them. 

In working to protect the small business sector, we can better ensure that it does not meet the same fate as the manufacturing sector. This will be another serious blow for the American economy, 

possibly making the current downturn longer and even more severe. 

Thank you, Mr. Chairman. 

[Ms. Velazquez’s statement may be found in the appendix.] 

Chairman MANZULLO. Mr. Kirk, if you could take no more than 

90 seconds to introduce your constituent. 

Mr. KIRK. Thank you, Mr. Chairman. 

I am just here to welcome John Challenger who is the head of 

Challenger, Gray and Christmas, probably our Chicago-land’s number one expert on outplacements. That is such a critical moment 

in people’s careers and a critical part of the economy. I am looking 

forward to his testimony, and thank you for coming. 

Chairman MANZULLO. Thank you for coming. You can stay as 

long as you like. 

Congresswoman Johnson, we look forward to your testimony. 

STATEMENT OF HON. NANCY JOHNSON, A REPRESENTATIVE 

IN CONGRESS FROM THE STATE OF CONNECTICUT 

Ms. JOHNSON. Thank you very much, Mr. Chairman and distinguished members of the Committee. 

I appreciate your invitation because I believe we are experiencing 

a real crisis in our job market. While our pro-growth tax policies 

will help, there are still far too many people unemployed, and beneath that aggregate unemployment numbers lies an even more 

disturbing trend. 

Unlike past instances of high unemployment, the ranks of the 

jobless are increasingly composed of highly skilled, college educated 

workers that typically had little difficulty finding a new job in the 

past. Today they are suffering lengthy periods of unemployment. 

There are a host of reasons for this persistent weakness in the 

labor market but I believe that we are inadvertently making the 

situation worse through our generous guest/worker visa program. 

During the April recess I had an opportunity to visit with a 

group of constituents who told me a very sobering story. These constituents, all unemployed information technology workers, told me 

that their former employers were replacing them with cheaper 

workers brought in from overseas on H–1B or L–1 visas. 

My constituents claim that companies are using foreign workers 

because they can pay them less. Due to the fact that the foreign 

5

workers’ stay in the United States is contingent upon the employer, 

these foreign workers are also more easily managed. 

In some cases the American worker has been instructed to train 

the new arrival only to be summarily dismissed and replaced by 

the foreign worker. 

If this is true it directly contradicts the intention and spirit of 

our immigration law. 

I was so alarmed by these stories that I contacted several of my 

local employers to ascertain what their policy was regarding guest 

workers. While to the best of my knowledge none of the companies 

are violating the law, I have subsequently discovered that my constituents’ experience is not unique nor is it isolated and we need 

to change the law. 

As you are aware, the L–1 visa program was created to enable 

multinational corporations to bring in key executives to work in the 

United States for up to seven years. It was thought that the business community needed a special class of visas to expedite intercompany transfers. You will see the rationale for that in the Chamber letter. 

More recently, however, a cottage industry has emerged to exploit the L–1 visa program. These companies can be constituted 

with the express purpose of funneling workers into the United 

States. IT consultancies with operations overseas, for example, are 

using the L–1 visa program to import workers who are then contracted out to domestic companies and there is no annual limit on 

the number of L–1 visas. 

The L–1 visa program is not subject to any of the constraints or 

governance that the H–1B visa dependency program is. If you are 

a dependency company then you have to look and see is there an 

American who can do the job and you have to pay them the same. 

If you are not a dependency company, and practically no one is because you have to have 15 percent of your employees H–1B visa 

employees, if you are not a dependent company then you do not 

have any of those constraints. You do not have to look and see if 

an American can do the job and you do not have to pay them the 

prevailing wage. 

I find this absolutely outrageous and more egregious than corporate expatriation to Bermuda which has received a lot of attention in this Congress because the expatriation is at least a paper 

operation. These operations directly take jobs, well-paying jobs, 

skilled jobs, from American workers. 

There are several steps I believe Congress can take to address 

this situation. 

First we should initiate a thorough and detailed reevaluation of 

the various guest worker programs, and I believe there is a very 

important role for guest worker programs to play in many sectors 

of the economy. The H–1B visa program, for instance, was increased in 1999 to address the apparent shortage in qualified IT 

workers leading up to the year 2002. That was true. We allowed 

the cap up. If the shortage no longer exists then the justification 

for the inflated number is moot. We have no public interest in 

keeping qualified American workers unemployed in order to accommodate guest workers. 

6

We should also examine the rules governing the L–1 visa program. Clearly the law was not intended to promote the wholesale 

importation of contract consultants. 

I am the cosponsor of a bill introduced by Representative Mica 

that will close the loophole that allows consultancies to bring in 

guest workers for contract work. If a company was supposed to be 

allowed to bring in people from their own companies abroad so they 

could learn domestic management styles and a lot about how the 

company operates. Perfectly legitimate. But when it is a consultant 

company bringing in people who are consultants and farming them 

out to an American business, that is a whole different issue. 

We should devote more resources to worker training, and companies certainly have a legitimate need for talented, knowledgeable 

IT workers, but ironically now that we have used some of that H–

1B visa money to build up our IT capability, we have kids in those 

classes taking those courses unable to find a job upon graduation. 

Throughout my congressional career I have been a strong proponent of free trade and open markets. My support is not contingent or qualified because I believe in the end free trade means 

more jobs for Americans and greater worldwide prosperity, but we 

cannot allow an individual to be compelled to lower their standard 

of living to compete with individual immigrants not covered by the 

same rules applied to H–1B dependent companies. U.S. companies 

that cultivate a workforce that is skilled and well trained, develop 

teamwork and make wise capital investments can compete and 

thrive in the world market. Companies that pay multi-million dollar salaries to their top executives and cut $20,000 here and there 

from significant skilled jobs are in my estimation setting themselves on a downward spiral. They are undermining our strength 

as a national economy and compromising our ability to compete. 

I thank you very much, Mr. Chairman, for having this hearing. 

I believe it is an important one, and I thank you for your time and 

attention. 

Chairman MANZULLO. Thank you very much Congresswoman 

Johnson. 

Did you want that letter from the Chamber made part of the 

record? 

Ms. JOHNSON. Yes, I would like to do that. Actually it is to you. 

Chairman MANZULLO. That is correct. It is also to the Committee. 

Any time that you would want to leave, Congresswoman, please 

feel free to do so. 

Ms. JOHNSON. I would like to hear as much testimony as I have 

time to hear. 

Chairman MANZULLO. We appreciate that. 

Ms. JOHNSON. Thank you. 

[Ms. Johnson’s statement may be found in the appendix.] 

Chairman MANZULLO. Our next witness is Bruce Mehlman. He 

is Assistant Secretary of Commerce for Technology. I have known 

him for a period of years. He is a very, very bright attorney. 

Prior to going into your testimony, Mr. Mehlman, if you could 

take just a few seconds or half a minute to tell exactly the nature 

of your position and the purpose of it. That would help lay the 

7

groundwork for the rest of your testimony. Once you do that, I can 

start your 5 minute clock. How does that sound? 

Mr. MEHLMAN. Very good. Certainly, Mr. Chairman. 

Chairman MANZULLO. Thank you. 

Mr. MEHLMAN. Thank you. 

I lead something called the Office of Technology Policy within the 

Technology Administration of the Commerce Department. Our office focuses, for the most part, on four areas with the mission of 

maximizing technology’s contribution to America’s competitiveness, 

to our job growth, and to our long-term prosperity. 

Our office serves as policy analysts. The most recent thing, and 

I brought copies for the Committee today as well as we are going 

to be distributing them to all Members of Congress, is the Secretary’s report to Congress on education and training for the information technology workforce which is a 225 page, fairly exhaustive 

report. We sat with workers, we sat with employers and other business leaders, business leaders, to try and understand the nature of 

this very complex and rapidly evolving training landscape; in part 

because we believe and Congress believes that to remain competitive and to have our workers be successful we are going to need 

a dynamic reskilling environment. 

We also take a look at other technology-influenced long term 

trends including things such as the deployment and usage of 

broadband networks, biotechnology policies, particularly in the area 

of bio-defense vaccines and immunologics. 

We have looked at IT workforce questions for quite some time. 

We are taking a look at technology transfer through Bayh-Dole and 

Stevenson-Weidler which are the acts that gave birth to our office 

back in the 1980s. 

We really do have an exciting area and we are trying to advise 

as best we can both Congress and the Administrative branch on 

policies and policy recommendations and on technology trends that 

we think America needs to know about to remain competitive. 

Chairman MANZULLO. That is a great introduction of yourself. 

Now I can start the five-minute clock. 

Mr. MEHLMAN. Very good. 

Chairman MANZULLO. Thank you. 

STATEMENT OF THE HONORABLE BRUCE P. MEHLMAN, ASSISTANT SECRETARY FOR TECHNOLOGY POLICY, U.S. DEPARTMENT OF COMMERCE, WASHINGTON, D.C. 

Mr. MEHLMAN. Chairman Manzullo, Ranking Member Velazquez, 

members of the Committee. Thank you for inviting me to appear 

before you here today and for your leadership. The issue of global 

competition for white-collar service work is an important and a 

timely one. 

Few Americans are feeling greater uncertainty these days than 

our information technology and communications workers. I know 

this both in my professional capacity and through prior personal 

experience having been at an information technology company, and 

I have many friends who express many of the concerns that were 

reflected in that Business Week article. 

Over the past five years IT workers have endured multiple 

shocks to IT spending and employment, including the end of the 

8

year buildup in 1999, the bursting of the Internet and telecom bubbles in the year 2000, dramatic reductions in corporate IT spending 

during the 2001 recession that began in January of that year, the 

9/11 terrorist attacks, investor and business uncertainty as many 

business scandals of the late 1990s came to light, continued market 

caution preceding the liberation of Iraq, and of course accelerating 

global competition. 

As detailed more fully in my written testimony, it is difficult to 

precisely separate American IT job losses due to this post-bubble 

business cycle from slower job growth resulting from global competition or off-shoring of work. It is certainly clear, however, that 

as the growth of U.S. IT jobs has slowed dramatically for many 

reasons, the volume and value of offshore work has grown rapidly. 

Most analysts agree this competition and IT services will increase as offshore IT service providers improve their quality, their 

processes, and their expertise; as improved telecommunications 

connections, especially broadband, enables more business customers to out-source and offshore work effectively; and as these 

business customers including very many manufacturers determine 

they can realize value and gain competitive advantage through 

outsourcing. 

As with so many global trends there is significant disagreement 

over the implication of competition in white-collar service work for 

American prosperity and competitiveness. One might note so far 

that America has benefited from trade in IT services. In 2001, U.S. 

cross-border exports of IT services totaled $10.9 billion while our 

imports totaled $3 billion, yielding a trade surplus of $79 billion. 

Yet we must all be concerned with the impact of this growing competition on American jobs, on wages, and on workers. I think the 

Committee’s concern is very well placed. 

Certainly we will need further investigation and analysis to understand the dynamics at work and to formulate appropriate policy 

responses. As I mentioned, we today released an exhaustive report 

on the education and training landscape for IT workers and we 

very much hope that our findings are going to contribute to policymakers’ understanding and thinking on this topic. 

One thing we already know is that U.S. workers and employers 

are going to face unprecedented global competition going forward 

and permanent innovation will be absolutely essential to our longterm success. We need to be ready. 

The Bush Administration has an aggressive pro-job growth, protechnology innovation agenda. I have detailed it a bit longer in my 

written submission, but specifically we aim to promote innovation 

through greater research and development investments, through 

stronger intellectual property rights protection, and through a billion dollar program through NSF and the education department to 

improve math and science teaching. 

We intend to support entrepreneurship, especially among small 

businesses through appropriate tax, trade and regulatory policies. 

We are aiming to improve our innovation infrastructure including 

broadband, spectrum, energy and of course critical infrastructure 

protection, an area particularly highlighted post–9/11. 

9

And last but hardly least, we need to empower and we are enacting policies to empower current and future generations of American 

workers through education and through e-government. 

Education clearly sits at the heart of our future competitiveness 

and as evidenced by H.R. 1, the No Child Left Behind Act, we are 

focused on this challenge. 

We must continue to aggressively pursue reform and improvement in education as we implement this landmark legislation. 

We will additionally need to find ways to boost the productivity, 

flexibility, creativity and effectiveness of American IT workers to 

enable them to overcome global wage disparities by leveraging a 

dynamic and responsive reskilling landscape that lets us compete 

and win on our own terms. We hope the extensive report we released today might prove a constructive first step. 

Global competition accelerates so-called creative destruction, a 

fairly ugly economist term that refers to the process by which new 

ideas, jobs, technologies and industries replace older ones. That can 

be good for innovative and market-based economies overall at the 

macro level. But creative destruction is terribly difficult for displaced communities and it is unacceptable for individuals. 

America must compete in the global marketplace but we must 

never compete in the losing battle to see who can pay their workers 

the least. Only sustained innovation can ensure that we do not 

have to. 

There are many real challenges facing our nation but I remain 

very optimistic about America’s future and I have tremendous confidence in the quality and dedication of our workforce. 

The Administration looks forward to working with this Committee and others in Congress to ensure we provide American 

workers with the tools, the technology, and the skill sets and the 

talents they need to compete and win in the 21st Century global 

economy. 

Thank you, Mr. Chairman. 

[Mr. Mehlman’s statement may be found in the appendix.] 

Chairman MANZULLO. Thank you for that excellent testimony. 

The complete statements of all the witnesses will be made part 

of the record. 

Our next witness is Pete Engardio, Senior News Editor for Business Week. You are also the author of this article. 

We look forward to your testimony. 

Mr. ENGARDIO. Thank you very much. 

STATEMENT OF PETE ENGARDIO, BUSINESS WEEK, NEW 

YORK, NY 

Mr. ENGARDIO. You have the article, I believe, in the record so 

I will just kind of summarize very quickly. 

We have followed this trend in Business Week for quite a while. 

I wrote my first long article about outsourcing of white-collar work 

10 years ago, when I was based in Asia. Back then we were talking 

about data processing in the Caribbean, software, code writing in 

India, some call center work, some kind of processing of loan application and credit card paperwork in Malaysia. So this trend is not 

new but it has picked up steam tremendously in the past decade 

and now it is really hitting critical mass. You now are seeing corVerDate 0ct 09 2002 18:52 Mar 31, 2004 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 G:\HEARINGS\92655.TXT NANCY
10

porations hiring people in the Philippines, India, China, setting up 

operations with 500 people to 5,000 people each. 

Companies like AIG, General Electric probably have 10,000 service workers overseas. And you are seeing just a vast acceleration 

happening right now. It is happening because of digitalization. Almost every kind of work process can be codified and written into 

bits and bytes. This happened because of a dramatic improvement 

in IT infrastructure overseas, especially in developing countries. 

There are very, very good providers now that have years of experience, companies like Wipro, which we mentioned, and the American companies like General Electric and IBM Services are now becoming very global in the services they provide. And corporations 

are under extreme cost pressure which is why we are seeing the 

explosion I think of this work right now. 

So it fits into the outsourcing trend that has been going on in the 

country. The difference is now it is moving abroad to where the 

workers are. Rather than the workers having to come here, having 

to get H–1B visas, the work can now go to them at a fraction of 

the cost, wages at their level. 

In addition, education is improving dramatically in the developing world. So we are not talking about sweat shops, we are talking about architects working for Fluor Daniel in the Philippines 

which has 700 of them doing the blueprints for the most advanced 

power plants and factories and semiconductor wafer fabs that are 

being built in this country and around the world. 

But these are highly qualified, over-qualified draftsmen. Often, 

many have a master’s degree in architecture, a master’s degree in 

accounting. The Philippines has an over-abundance of them. China 

graduates 70,000 mechanical engineers a year, hundreds of thousands of chemical engineers every bit as well educated as ours. In 

our country there is right now a shortage of these skills, at least 

that is what companies say. 

But these workers that are working in call centers, almost all are 

college graduates. We have talked to a number of them in many 

countries and we have been to a number of call centers. These 

workers see these jobs as careers. They are working for American 

Express. They are working for Delta Airlines and they are proud 

of it. To them this is a dream come true. So they are getting very 

well paid in their local standards. They do not feel exploited, the 

ones that we spoke with. They are happy to get the work. 

The numbers you saw I think being quoted by Forrester, 3.3 million is obviously a real guess, but I think many other consultancies 

are coming up with similar kinds of studies that kind of are along 

those lines. DeLoitte & Touche just released a study estimating 

about two million financial services workers alone will be going to 

developing countries over the next ten years or so. About 800,000 

of those from the United States. 

So I do believe this is a megatrend that is just starting to hit 

critical mass right now and is going to snowball and snowball. 

Right now, even though we have spent a tremendous amount of 

work on this project, we are just still scratching the surface. 

Quickly, about who wins and who loses, it is way too early to tell. 

Obviously the developing world gains tremendously from this. 

Countries like India, the Philippines, that really have never been 

11

that great at manufacturing are now developing much more rapidly 

because of service industries. It is good for them. It is good for their 

workers. And it is also skills that they are picking up with American companies are being used to develop much better service industries domestically which means they do not have to export. 

They do not have to export manufacturing. So it is good for them, 

clearly. 

Is it good for the United States economy? We do not have a clue. 

We have not come across any serious analysis of this subject. Every 

big trade economist that we spoke with said they had not started 

looking at it. It is all very intriguing. 

Is it good for the American worker? It really depends I think on 

what job category you are looking at. I do not think it makes any 

difference for a mechanical engineer since there is a shortage of 

them. I believe that is true for chemical engineers too. 

Obviously, IT support workers, and as the gentleman from the 

Commerce Department said, it is very hard to make the direct correlation. But clearly people are being laid off right now and are 

being substituted in India in certain categories, and wages are declining. 

Chairman MANZULLO. Very good. 

[Mr. Engardio’s statement may be found in the appendix.] 

Our next witness is Ron Hira. Mr. Hira is Chair of the IEEEUSA Research, Development and Policy Committee. He holds a 

Ph.D. in Public Policy from George Mason, an M.S. in Electrical 

Engineering, a B.S. in Electrical Engineering. His interests include 

R&D, policy, et cetera. 

We look forward to your testimony. 

STATEMENT OF RON HIRA, PH.D., P.E., COLUMBIA UNIVERSITY, CENTER FOR SCIENCE, POLICY AND OUTCOMES, 

WASHINGTON, DC 

Mr. HIRA. Thank you, Mr. Chairman. Thank you and the other 

distinguished members of the Committee for inviting IEEE–USA to 

talk about this very important issue. 

My name is Ron Hira. I am a post-doc fellow at Columbia University at the Center for Science, Policy and Outcomes. I am testifying here on behalf of the 235,000 U.S. members of the Institute 

of Electrical and Electronics Engineers also known as IEEE–USA. 

We are a professional society with individual memberships. Our 

members are electrical engineers, computer engineers, software engineers, you name it. They work in industry, in government, in university, as professors of students, as managers, as engineers. About 

20 percent or so work for small businesses directly. 

I think Pete Engardio and his colleagues at Business Week have 

done a really great job of framing what is going on and I am just 

going to reiterate that the trend is gaining momentum by the day, 

outsourcing. 

Let me give you a quick example. Just this morning on 

CBSMarketWatch.com I downloaded an article that says EDS, 

Electronic Data Systems which is the largest of the IT services 

companies in the U.S., is going to cut 2700 jobs to save cash. 

Yesterday there was an article in the Economic Times of India 

which is the largest financial daily newspaper there that says EDS 

12

plans to expand operations in China and Hariana, India. So at the 

same time that EDS is cutting jobs, it is also expanding operations 

in India. 

Why are companies doing this? Clearly cost is one driver. If you do a simple back of the envelope calculation a $70,000 salary for 

an engineer in the U.S., a Russian engineer would be equally 

happy with $14,000. Just do the simple calculations based on what 

economists call purchasing power parity. There is a big difference 

in terms of the standard of living, cost of living in those countries 

and engineering talent is much cheaper there. 

But it is not going to be just engineering or information technology, but also research and development and accounting and law 

and so on and so forth. And even though India is most often discussed as a nation, it is not going to be in India. In fact I spent 

a few weeks in Romania about two years ago working with some 

IT companies there. You would be surprised at how good their 

English is, the educated population there. 

Not only that, but part of their strategy is to try to target these 

types of jobs. 

What are some of the impacts? Clearly I think there are going 

to be some impacts on the unemployment situation for domestic 

workers. Right now electrical engineers, computer engineers, software engineers are facing unprecedented levels of unemployment. 

Seven percent for electrical engineers; 6.5 percent for computer 

hardware engineers; and 7.5 percent for software engineers. You 

would expect maybe one to two percent generally in those categories. So this is an incredible waste of human capital, some of 

our best and brightest in America. 

Secondly there are going to be a number of impacts in terms of 

the economic security and military security, homeland defense. It 

is almost universally agreed that technology and technological innovation is what drives economic growth as well as military advances and defense advances, and as more work and more sophisticated work goes offshore, it will be more difficult for us to sustain 

an economic growth rate that is reasonable as well as sustain our 

military advances. 

And location really does matter in the innovation process. This 

is pretty well agreed upon no matter what side you are on ideologically. You just look at Silicon Valley. Things feed on themselves, 

technological advance does. 

For our members it is not an ideological or a theoretical issue, 

it is a practical one. They are not able to find positions. 

John Gibson who is the head of our section down in Research 

Triangle Park, North Carolina, says that even if Congress expands 

unemployment benefits his members down there have been unemployed for so long that it is just meaningless. 

Lastly I just want to touch on a couple of quick public policy alternatives. First, I will reiterate that timely and reliable statistical 

information on what types of positions and how many are going 

abroad is very important. We have heard the 3.3 million quote over 

and over again and it is not clear to me what that is based on. 

Secondly, the current non-immigrant system has actually accelerated the movement of work offshore. The H–1B and L–1 visas need 

to be reformed. 

13

Lastly, Congress needs to look at the WTO general agreement on 

trade and services and follow what is going on there because these 

developing countries are actually pushing for much laxer regulations in terms of the H–1B and L–1. 

Thank you. 

Chairman MANZULLO. Thank you very much. 

[Mr. Hira’s statement may be found in the appendix.] 

Chairman MANZULLO. Our next witness is John Challenger who 

has already been introduced. We look forward to your testimony. 

STATEMENT OF JOHN CHALLENGER, CEO, CHALLENGER, 

GRAY & CHRISTMAS, INC., OAKBROOK, IL 

Mr. CHALLENGER. Thank you Mr. Chairman, Ms. Velazquez, and 

members of the Committee. I am very pleased to have the opportunity to appear before the Small Business Committee today. I am 

John Challenger, CEO of Challenger, Gray & Christmas. 

When responsible companies lay off workers or release executives 

and middle managers they offer outplacement services to those people. We work closely with the discharged people to shorten their 

time out of work and improve the quality of the job that they find. 

My father, who fathered the company in the industry in the mid 

1960s, created this process. 

Thank you for allowing me to share my ideas with you. In regard 

to the issue of permanent job loss in a global economy. 

It would be arrogant to think that only unskilled and semiskilled jobs can or will be done overseas as many have already testified. The United States is certainly not the only natural sanctuary for the most skilled. Our education system is not number one 

in the world and certainly we must strive to improve our education 

system, a critical factor in the long-term health of our country. We 

must change our paradigm that leads most people to consider their 

education completed by their early 20s. 

To try and stop the globalization of the workforce is futile. It is 

a natural force that is happening. As certain kinds of jobs dry up 

here there is no reason to think that our talented workforce will 

not redeploy their skills in new directions and endeavors. In fact 

the entrepreneurial spirit and the minimal structural barriers for 

business startups in the U.S. is the envy of the world. 

The movement to a global economy workforce will be filled with 

disruptions and hardships. The globalization of manufacturing has 

stranded many people in their 40s and 50s. Some go back to school 

for retraining, others work in poor paying jobs, some have left the 

workforce and are on disability or in prison. Many transition to 

new jobs. 

In 2002 we saw just under 50 percent of the people who came 

through our programs change industries for a new job. We must 

look for ways to help them. Their children look to newer jobs and 

careers and their parents must insist they get more education to 

accomplish those goals. 

We must restructure the education system to reflect the fact that 

lifelong education is crucial. Programs that encourage companies 

and government entities to offer skills training and tuition reimbursement programs to adults throughout their lives are crucial. 

14

When looking for lessons about how the U.S. and other first 

world countries must manage the transition to a global economy 

look to West Germany’s swallowing of East Germany. Technology 

is paving the way for and making inevitable the globalization of 

skilled jobs. The decline in cost of technology, the growth in computer power, Moore’s Law, the long term expansion of airport and 

aerospace infrastructure, and the 24/7 work week, all these factors 

and many more are laying the foundation for the global village and 

economy. 

Millions of jobs will never be moved en masse overseas because 

they require proximity and are essentially in-person work. Some 

examples include store personnel, nurses, doctors, teachers, musicians, golf professionals, construction workers, counselors, social 

service professionals, pilots, cooks, executives, librarians, movie 

makers, soldiers, security workers and entrepreneurs. 

The job loss scare we are seeing now parallels what we saw in 

the early 1990s when the first wave of downsizing hit and everybody talked about how we were de-layering America. Middle management was disappearing. 

In the late 1990s we saw the same kind of thing happen when 

we thought that the world was going to become virtual. All the jobs 

were going to disappear, all companies were going to disappear and 

people were going to do their work at home. 

We see how discredited those ideas are now, the dot-com era fear 

of job loss from technology. Now the fear, and it is another part of 

that same feeling, is that globalization is going to consume the job, 

and that is bubble mentality. And it is also recession mentality. 

Out of fear people misidentify the issue as permanent job loss. 

The problem is more about effective job transition rather than permanent job loss. Effective transition revolves around education and 

the development of programs and resources to help people make effective job changes. Entrepreneurs and small businesses create 

most of the jobs in this country. It is the big companies who can 

achieve the global reach to move and outsource major segments of 

their operations overseas. 

Skilled and unskilled workers are equally migratory. As jobs 

shift around the U.S. and the world, so will people. Many more jobs 

today are just in time. When a company’s revenues fall it is much 

quicker to let people go; when it expands, the company hires more 

workers. We saw almost 2.5 million jobs created each year in the 

1990s during the long boom. Since February of 2001, really the recession period here, the slowdown with the economy in this condition, there have been 2.5 million jobs lost. We created 2.5 million 

every year in the 1990s. As the economy expands and contracts, so 

do jobs. 

One last point from the Bureau of Labor. Severe labor shortages 

are likely in fact to return within ten years. Many are predicting 

this already. Some companies may begin to feel the pinch within 

24 to 48 months. Certain industries like health care, construction, 

are already suffering badly. 

Chairman MANZULLO. We are a little bit out of time here and I 

want to get through before the bells go off. 

Mr. CHALLENGER. Sorry. 

Chairman MANZULLO. That is okay. I appreciate your passion. 

15

[Mr. Challenger’s statement may be found in the appendix.] 

Chairman MANZULLO. Our next witness is John Palatiello, Administrator, Council on Federal Procurement of Architectural and 

Engineering Services. We look forward to your testimony. 

STATEMENT OF JOHN PALATIELLO, ADMINISTRATOR, COUNCIL ON FEDERAL PROCUREMENT OF ARCHITECTURAL AND 

ENGINEERING SERVICES (COFPAES), RESTON, VA 

Mr. PALATIELLO. Thank you, Mr. Chairman, members of the 

Committee. 

The Council on Federal Procurement of Architectural and Engineering Services is a coalition of the nation’s leading associations 

in architecture, engineering, surveying and mapping. Under the 

SBA size standards, more than 99 percent of our members are from 

small business firms. 

For some time the A&E community has been concerned about 

the practice of some firms sending drafting, data conversion, scanning, digitizing and other design and mapping services offshore to 

subcontractors. 

Before September 11, 2001 there was discussion in the community about whether this was a good business practice and whether 

it was ethical. Like many other aspects of American life, things 

changed on September 11th. 

In his State of the Union Address in January of 2002, President 

Bush said, ‘‘Our discoveries in Afghanistan confirmed our worst 

fears. We have found diagrams of American nuclear power plants 

and public water facilities, surveillance maps of American cities, 

and thorough descriptions of landmarks in America.’’

Since the September 11th attacks there has been an increased 

concern about this issue of offshore subcontracting. This is because 

access to the drawings, mapping data, and other work products of 

architects and engineers if in the wrong hands can be used for nefarious and destructive purposes. 

For example, after September 11th GSA announced a new policy 

regarding access to the A&E drawings of federal buildings. A number of federal agencies revised their public web sites and removed 

maps showing the location of our critical infrastructure. 

While these may have been prudent and necessary steps, if the 

work has gone offshore at the front end when these maps and blueprints were created, these actions could be the case of shutting the 

barn door after the horse has escaped. 

Sending A&E work offshore raises a number of issues regarding 

access to data about the location of power plants, buildings, pipelines, water supply systems, underground utilities, and other critical infrastructure by individuals in foreign countries who have not 

been through any degree of security clearance, and where control 

of access to the data simply does not exist. It is occurring not only 

in commercial work but on federal contract work as well. 

In your letter of invitation you asked for suggestions on policies 

that could help protect U.S. jobs from this practice. Let me offer 

a few. 

With regard to A&E work we would urge a review of the potential danger to homeland security of sending A&E drawings and 

maps of critical infrastructure to offshore entities. As you know, 

16

Mr. Chairman, the Buy America Act generally does not apply to 

services so that law does not help us. There is, however, potential 

help under the Service Contract Act. Action would be needed to 

close a loophole in that law because currently it actually encourages firms to send work offshore. 

Federal contracts and subcontracts for services require the payment of the prevailing wage under the Service Contract Act, and 

as you may know many state and local governments have similar 

prevailing wage laws. But the act in its regulations apply only to 

contracts performed in the United States. Thus if Firm A is submitting a proposal to a federal agency and it will perform the work 

domestically, it is covered under the Service Contract Act. If Firm 

B is submitting a proposal and it will perform the work through 

an offshore subcontractor, it is exempt from the Service Contract 

Act. 

This clearly undermines the intent of the law. It puts firms that 

propose to perform work domestically and its employees at a severe 

competitive disadvantage. 

We would urge the Committee to investigate this loophole in the 

SCA and insist on a regulatory or legislative solution. 

Firms that send work offshore do so to take advantage of lower 

labor costs. We would ask the Committee to explore if a firm were 

to send federal contract work offshore, take advantage of the lower 

labor rates, fail to pay the prevailing wage rate, pocket the difference, all without the client agency’s knowledge is that a violation of contract clauses and does it subject the firm to fraud, criminal penalties, and possible federal contracting debarment? 

We would urge the Committee’s investigation of these questions. 

I would also bring to your attention, Mr. Chairman, the fact that 

we are deeply concerned about the predatory nature of federal prison industries. How does that relate to the discussion today? 

As the Committee knows from its hearing held last November in 

which I was honored to be able to testify, FPI is rapidly moving 

into services, particularly commercial services claiming that a 1930 

statutory ban on the interstate commerce of prison products does 

not apply to services. So what is FPI targeting for its expansion? 

Commercial services, those where domestic prison labor performance would replace those activities that are going offshore. One of 

the services entered is mapping and digitizing of engineering and 

facilities management drawings. 

Thus we are concerned that the trend towards offshore performance of A&E and mapping work results in a double whammy for 

U.S. small business—low wage competition from offshore sources, 

as well as unfair competition from federal prison industries. So we 

would urge Congress to prohibit federal and state prisons from engaging in commercial services in the open marketplace. 

The recent trend toward offshore subcontracting is particularly 

troublesome to our small business member firms. They are not as 

able as large firms to set up offshore subsidiaries and negotiate 

teaming arrangements in foreign countries and we are concerned 

about the long-term impact. 

Finally, we generally support free trade. We are generally resistant of government intrusion into our business affairs. For obvious 

anti-trust reasons only government actions, not professional or code 

17

of ethics actions, can govern this. We would urge your attention, 

but we would urge you to proceed very cautiously. 

I have several documents that are based on my testimony that 

I would like to enter into the record. 

Chairman MANZULLO. Those documents will be made part of the 

record. 

[Mr. Palatiello’s statement may be found in the appendix.] 

Chairman MANZULLO. We are being subjected to the tyranny of 

the bells. I understand it is three votes. It could be as long as 45 

minutes before we come back, so we would indulge your patience 

on that. 

This Committee is adjourned. 

[Recess.] 

Chairman MANZULLO. The good news is no more votes for the 

rest of the day. 

Our next witness is Christopher Kenton, President and co-founder of Cymbic, Incorporated, a technology marketing firm based in 

the San Francisco Bay area. 

Mr. Kenton, we look forward to your testimony. 

Is your testimony on your computer there? 

Mr. KENTON. Yes. 

Chairman MANZULLO. However you want to do it. You may have 

to crank up the mike higher and pull it a little bit closer. 

We look forward to your testimony. 

Mr. KENTON. Thank you, Mr. Chairman. 

STATEMENT OF CHRISTOPHER KENTON, PRESIDENT, CYMBIC, 

INC., SAN RAFAEL, CALIFORNIA 

Mr. KENTON. Mr. Chairman, members of the Committee. While 

I do not presume to speak for the small business community I am 

grateful for the opportunity as a small business owner to add my 

perspective to the debate on the outsourcing of white-collar jobs. 

Cymbic has been in business for 15 years in the San Francisco 

Bay area providing marketing services to large technology companies like Motorola, Intel and Dell as well as to startups like Ascend 

Communications, a company with whom we worked from the time 

there were five partners working in a garage until they were sold 

to Lucent Technologies for $24 billion. 

We are all familiar with the process of creative destruction and 

Cymbic has even seen that process in our own business. 

Two years ago we had grown to 35 employees earning more than 

$3 million a year in revenue, but in the wake of 9/11 we lost 95 

percent of our sales and we were forced to lay off 90 percent of our 

people. 

Our principles have had to face down both business and personal 

bankruptcy while losing our offices and most of our equipment. We 

have made heroic efforts to survive in the current economy. Part 

of our survival effort depends on developing new products and services to remain competitive. In the past we relied on our own software programmers to develop new products or we used one of our 

many development partners, but with literally no labor or capital 

resources available to us today we simply cannot afford it in these 

economic times. 

18

Recently we defined a new piece of software that we wanted to 

develop for a new service. We took local estimates averaging about 

$5,000 to build that software. That may sound like nothing, but 

when you consider that every investment in our business is competing with a mortgage payment it changes the perspective. 

Through an on-line search we were able to find a programmer in Argentina willing to develop our software for under $200. The software is now in the final stages of development and we will be offering it as a new service to our clients within the next six weeks. 

This represents a new opportunity for much-needed revenue for our 

company. 

Our project pales in comparison to the million dollar outsourcing 

deals among large corporations but it highlights a lesser-known 

trend of overseas outsourcing among small businesses. My concern 

today is that what is becoming a growing cry for new regulations 

to deal with outsourcing on larger corporations will have an unintended consequence for small businesses like mine that use overseas development to create opportunities that would otherwise not 

be available to us. 

Since many of my clients are large technology companies I am 

very well aware of the plight of workers who have lost jobs to L–

1 and H–1B visas. Personally I strongly believe that we should not 

allow the immigration system to be exploited for the production of 

cheap labor, but I also believe that we should not allow trade policies to be exploited for preventing the development and patronage 

of offshore labor markets. 

While the intended effect of this policy is the protection of American jobs, I believe the unintended consequences will be a stifling 

of opportunities for small business. 

The potential loss of white-collar jobs is certainly a legitimate 

concern for Congress but before we consider new regulation I think 

we need to be honest about the root causes. 

It is ironic that many of the technology jobs moving overseas 

today are the very same jobs that created the infrastructure that 

makes outsourcing possible. I think it is naive to believe that the 

loss of such jobs can be stemmed by preventing outsourcing. Today 

thousands of programmers are working on advanced systems like 

ASML which is the abstract state machine language to automate 

much of the programming done by humans today, creating the opportunity to outsource to the cheapest labor source of all, computers. 

The simple fact is that the driving purpose of technology is and 

always has been since the creation of the wheel, the reduction and 

elimination of human labor. As technology eliminates time and distance it becomes ever more efficient. 

While we try to reduce the impact of issues like outsourcing 

there are already systems on the production line ready to create 

the next wave of upheaval. This so-called creative destruction ensures that the mix and definition of jobs that comprise the American economy will continue to change unless we decide we want to 

forestall technological innovation altogether. 

The process certainly creates new jobs with new technology as 

well as a burgeoning industry of training but whether it leads to 

a net increase or a loss in jobs I think is a huge unknown. 

19

Since we are then forced to manage rapidly changing symptoms, 

I think that we need to act consistently according to a set of fundamental principles, and that is where I believe the true debate lies. 

The first principle that I believe is important is to focus on policy 

that increases the parity in the standard of living among nations 

rather than building walls to prevent encroachment on our own 

standard of living. 

I do believe in a roll for the government in many areas of regulatory policy, but I think the creation of trade barriers to prevent 

outsourcing would be costly, problematic and ineffective. I would 

rather see efforts geared toward leveling the playing field among 

competing nations. 

There are serious issues that make outsourcing unnaturally attractive including the manipulation of currencies by foreign governments, the suppression of workers rights, and the absence of environmental regulations. Although the gap between the standard of 

living in other nations and our own has created an opportunity for 

cheap labor today, I believe that focusing our trade policy on eliminating those gaps provides the greatest benefit in the long run. I 

believe that approach is consistent with our role as a world leader, 

in this case leading other nations to a better standard of living 

rather than simply focusing on protecting our own. 

The second principle I think is important to consider is differentiating between outsourcing for organizational efficiency and 

outsourcing for innovation. I think we need to explore the differences between large and small businesses and how regulations 

may cause unintended consequences. Small businesses provide 

much of the energy in our economy, driving innovation and pushing 

larger businesses to evolve. Small businesses like mine also play 

important roles in the success of larger businesses by providing 

critical support services and expertise. 

While I can see problems and indeed some abuses among larger 

corporations pursuing ever-lower costs and higher margins, I think 

any policies designed to mitigate those abuses should be examined 

for their impact on small business. 

Larger companies use reduced development costs in global labor 

markets to improve margins but small companies may use the opportunity to innovate in ways that would otherwise require increasingly costly investment capital. 

Mr. Chairman, members, thank you very much for your consideration. 

Chairman MANZULLO. Thank you very much. 

[Mr. Kenton’s statement may be found in the appendix.] 

Chairman MANZULLO. Our next witness is Paul Almeida, President of the Department for Professional Employees, AFL–CIO. We 

look forward to your testimony. 

STATEMENT OF PAUL ALMEIDA, PRESIDENT, DEPARTMENT 

FOR PROFESSIONAL EMPLOYEES, AFL–CIO 

Mr. ALMEIDA. Mr. Chairman, members of the Committee, thank 

you for the opportunity to testify today on behalf of the Department for Professional Employees of the AFL–CIO. 

We are very alarmed at the recent trend of outsourcing of whitecollar and information technology jobs. This trend which is clearly 

20

accelerating is affecting workers at all levels and education levels. 

Technology companies are laying off American workers with high 

paying, desirable jobs while they add thousands of jobs overseas. 

The surge of outsourcing can be traced to the explosion in the 

last five years of H–1B and L visas which saw in excess of one million foreign guest workers enter the U.S.. As they developed their 

core competencies in high tech and other fields they have returned 

home and taken these and future white-collar and other jobs with 

them. 

Based on a survey of the world’s 100 largest financial service 

firms, Deloitte Research found that these companies expect to shift 

$356 billion worth of operations and about two million jobs to low 

wage countries over the next five years. 

If these trends continue to accelerate we will see even more dramatic job loss and wage erosion affecting workers throughout the 

income scale. This will severely impact the wages and job security 

of American middle class in addition to depriving state, local and 

federal governments of tax revenues. 

Policymakers must recognize and acknowledge the severity of the 

problem and act quickly to stem the job loss. 

When manufacturing jobs started moving offshore we were told 

not to worry, that the U.S. comparative advantage was in services 

and high tech. We were assured that in the new global division of 

labor it was both natural and benign. We would keep high paying, 

high skilled jobs while the developing countries would do the actual 

work of making things. For decades American workers were told to 

simply acquire more skills and education in order to succeed in the 

U.S. job market. 

Now engineers with Ph.D.s and recent college graduates alike 

are hearing that they are too expensive, that their jobs can be done 

more cheaply abroad. 

Federal Reserve Chairman Alan Greenspan has warned that at 

almost five percent of GDP the current account deficit is dangerously high and unsustainable. 

There is another deficit that is a direct result of outsourcing and 

that is the social security deficit. As fewer and fewer workers are 

paying into the system, outsourcing will bring the program further 

into harm’s way at a date much earlier than projected. The 

outsourcing is not spurred by a lack of skills or education here in 

the United States as 2003 saw record numbers of college graduates 

at all levels. 

All these factors taken together should be setting off alarm bells 

for Congress and other policymakers. If an advanced degree and 

years of experience and excellent work habits are not enough to 

land a job and the U.S. advantage in service and high tech has seriously eroded, what does the future of work look like for the 

United States? 

If these cost-saving job shifts are taken to their logical extreme, 

even American corporations should be wondering where their future consumers will be located and how will they pay for the goods 

and services that are offered? 

Just as the labor movement has fought hard for trade and tax 

policies that will help the U.S. manufacturing sector thrive and 

21

survive, we also need to take a close look at the politics that impact 

the service sector and information technology jobs. 

First, we should make sure that our tax policies are consistent 

and coherent at the national, state and local level. Many of the 

companies rushing to outsource jobs have received and continue to 

receive tax breaks negotiated on the assumption that they would 

support local job creation. We need to target tax relief to companies 

that support their own communities with decent jobs. 

Second, we can and should ensure that government tax dollars 

are spent to support strong communities and jobs domestically. 

Third, we should support both transparency and openness on the 

part of companies that are outsourcing and more research to understand better the scope of the problem. 

Finally, we need to reexamine our trade policies to make sure 

they are reflecting the concerns and interests and American workers as well as U.S.-based corporations. 

In conclusion I would like to thank the Committee for holding 

this hearing and inviting me here today to testify. I look forward 

to working with you as we craft effective policy responses to the 

very great challenge facing us in this area. 

Chairman MANZULLO. Thank you very much for the excellent testimony. 

[Mr. Almeida’s statement may be found in the appendix.] 

Chairman MANZULLO. We are done with votes for the day so 

what I would like to do is have the members limit their questions 

and responses to five minutes. Then we can move through several 

rounds so we will all have an opportunity. 

Mr. Almeida, I was looking for ‘‘the’’ question to ask to everybody 

on the panel and you asked it. Here is the question. 

If these cost saving job shifts are taken to their logical extreme, 

even American corporations should be wondering where their future consumers will be located and how they will buy the goods and 

services that are offered. That is the question. 

Who would like to take a stab at that? 

Mr. KENTON. One of the points that I made is that I think there 

are two ways to approach the policy. One is to focus on protecting 

ourselves from encroachment and the other is to try and use our 

policy to have an effect on the issues that are making the labor so 

cheap in foreign countries. 

In some areas of the world there are already shifts in labor organization. I think it was in Peru recently where there was a very 

large protest among service workers. 

The first thing I would say is I think it is naive to believe that 

we are going to maintain a standard of living that is so high above 

the rest of the world, and that the rest of the world is not going 

to work passionately to try and attain it. I think that as they do 

attain a better standard of living they are going to go through the 

same shifts that we have made, where laborers as they see an increase in wages, as they see greater education, are going to make 

greater demands on their own governments for more freedom, for 

more possibilities, and that in turn I think, although it is a long 

term process, will be the future markets where we are selling our 

goods as well. 

Chairman MANZULLO. Anybody else want to try and tackle that? 

22

Mr.MEHLMAN. Yes, thank you, Mr. Chairman. A couple of 

thoughts. 

First, one might remember in a bit of U.S. history as some jobs 

were moving from the North in the South in some areas such as 

textiles, there were similar questions asked. How will the Northern 

economy survive and is this something that the overall union can 

allow? Of course in the end the success of all states in America 

proved greater because they were open to one another and because 

they would trade with one another and they would take advantage 

of their comparative advantage. 

Mr. Almeida talked about comparative advantage and he said 

that we had always been told that our comparative advantage is 

in services or in technology. I do not think that is quite right. I 

think our comparative advantage is in innovation. I think it is in 

the ability to be more productive, to apply technology and creativity 

to whatever areas we are in. 

For one, I am not prepared to and I know Mr. Chairman you are 

not prepared to write off manufacturing. I think we can and must 

retain a core and a base of manufacturing, and I think the key to 

doing so is being innovative. In fact, next Wednesday we are having, as part of the Secretary of Commerce’s Manufacturing Initiative, a roundtable bringing in some of the national thought leaders 

including someone else from the AFL–CIO to examine the question 

of the future face of manufacturing: Manufacturing 2020. What do 

we need in terms of policies and resources so that manufacturing 

can continue to thrive and flourish? 

To do so it seems that we have to leverage the comparative advantage that my testimony describes that we have enjoyed historically. 

Chairman MANZULLO. Let me try to answer that question for 

you. If you take a look at Roll Call, we have inserted provisions 

into the defense bill, and the Pentagon is fighting us tooth and nail 

on it, big time. I am at 11 percent unemployment. Nancy Johnson 

is being cored out, Rob Portman is being cored out. The manufacturing base of this country is being systematically destroyed and 

the Pentagon is a part of it. I have said that publicly and I am 

going to stand behind it. 

If you take a look at the provisions that have been put into the 

defense bill as it came through the House, it increases Buy America provisions from 50 to 65 percent so that anything that is purchased by the Department of Defense for military use has to have 

at least 65 percent U.S. content. OMB and Pentagon are fighting 

us on it. 

We added into the defense bill the fact that we think that tires 

are strategic. We have to have a base in this country that will 

make tires. The Pentagon and OMB are fighting us on it. 

We added into the defense bill provisions that would add to it 

some type of language saying if you have a new acquisition over 

$5 million and you need to buy a machine tool, that tool has to be 

made in America with at least 70 percent U.S. content. OMB and 

the Pentagon are fighting us on it. 

Also that you have to have the tools and the molds that are made 

in America. OMB and the Pentagon are fighting us on it. 

23

I think we have to take the $240 billion of procurement in this 

country and use it as a tool to level the playing field. 

Northrop Grumman, one of the prime contractors for the F–35, 

instead of going to Ingersoll Milling in Rockford to give them a contract for a sophisticated drilling machine told me to my face there 

is not a company in American that can make the type of machine 

that we can make in Spain. So U.S. taxpayers’ dollars are going to 

Spain on the F–35, the Joint Strike Fighter. Ingersoll filed bankruptcy. There is one company left in America that builds those big 

machines and that is Cincinnati Milacron and they are hanging on 

by their nails. 

The guys that make the orders do not even know what is made 

in America because at the same time that Northrop Grumman said 

Ingersoll cannot build their machine to do the sophisticated drilling, Ingersoll had a contract with Lockheed Martin to build the 

very same sophisticated drilling machine. 

That is what is going on. The message that we would like you 

to bring back to the White House and to the Secretary of Commerce is let us start with the Pentagon. 

We had Steve LaTourette who got into a big fight with the Pentagon when they went to Germany to buy a million dollars worth 

of topping. He got in a dragged-out battle with them. It all started 

here two and a half years ago when this Chairman insisted that 

the Pentagon was not going to buy black berets from Romania, Sri 

Lanka, India, South Africa and China. There are 614,999 Chinesemade black berets rotting in the warehouse in Mechanicsburg, 

Pennsylvania because I put down my foot, and this panel did. 

Now if you want to bring back American manufacturing, let us 

start with the orders. People are looking for orders. The Pentagon 

has got all kinds of orders. But they have to stop sending those orders overseas. That is the message that we would like you to bring 

back to the Secretary. 

We commend the Secretary and Grant Aldonis for the great work 

that they are doing in trying to get their arms around this whole 

issue of manufacturing. We look forward to working with you on 

that issue. 

Thanks so much. 

Mr.MEHLMAN. Thank you, Mr. Chairman. 

Chairman MANZULLO. Ms. Velazquez? 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Mr. Mehlman, companies that outsource jobs normally seek 

places where labor laws are weak so that they can pay lower 

wages. You saw it here, you heard it here. That is what our witnesses are telling us. 

If this is the case, why in the recent Chile and Singapore agreements did the Administration find it appropriate to pursue, and I 

will quote, ‘‘enforce your own labor law policy.’’

As stated in the agreement, each country commits its signatories 

to enforcing its own domestic labor law. It does not actually commit 

the signatories to have labor laws in place or to ensure that the 

labor laws meet any international standard. 

Are not these kind of policies just inviting companies to 

outsource even more American jobs to this country where they can 

24

exploit their labor force regardless of if it is white or blue-collar 

jobs? 

Mr.MEHLMAN. Thank you for your question. 

I may take issue briefly with the predicate in terms of the companies that I have spoken to are not looking for nations to 

outsource to that have weak labor laws. They are looking for where 

they can get the best value, the best return on investment or bang 

for their dollar. 

There are nations with worse labor laws than, for example, even 

India, but the reason that businesses outsource, the reason that 

manufacturers and others do is because they are trying to invest 

their dollars on their core and strategic areas, and if they can get 

equal or higher quality information technology service work done 

then that is where they are going to go. 

So first, I do think it is, companies are targeting where they are 

going to get the highest quality. 

First in that regard it means as a competitiveness issue we need 

to make sure the quality of the American worker and the tools and 

technology and the talents that we help them have are better. 

Ms. VELAZQUEZ. Sir, can you tell me why labor laws were included in the Jordan agreement and not on this one? 

Mr.MEHLMAN. I cannot. 

Ms. VELAZQUEZ. You cannot. 

Mr.MEHLMAN. No. 

Ms. VELAZQUEZ. Mr. Almeida, would you please comment on my 

question to Mr. Mehlman? 

Mr. ALMEIDA. I am not quite sure——. 

Ms. VELAZQUEZ. I am asking him if we say that companies in 

America are outsourcing jobs in foreign countries because labor 

laws in those countries are weak, and therefore then they can pay 

lower wages, I asked him why is it that the Administration in their 

negotiation of the Chile Singapore agreement did not include labor 

laws, therefore inviting companies to go and outsource jobs there. 

Mr. ALMEIDA. I think you have answered the question. Because 

it just makes it further cost effective for them to do it without any 

labor laws. 

Ms. VELAZQUEZ. Thank you. 

Mr. Mehlman, will you please submit to this Committee a written answer as to why labor laws were included in the Jordan 

agreement and not on this one? 

Mr.MEHLMAN. I can tell you what I will pledge to try to do. I will 

try to get the United States Trade Representative and the International Trade Administrator, Grant Aldonis, to answer the question as best they can. I would not want to offer guess work similar 

to Chairman Manzullo’s last comment Secretary Rumsfeld has 

proven a readiness and facility at speaking for himself, and I will 

try to defer to the experts. But yes, I will do my best to get you 

an answer. 

Ms. VELAZQUEZ. Mr. Mehlman, on January 31, 2003 Business 

Standard published an article entitled ‘‘Bush Party to Raise Funds 

Via India.’’

Can you share your comments on the irony we have here? As we 

discussed, the problem associated with job outsourcing especially in 

the white-collar sector, the Republican party is conducting 

25

outsourcing itself by contracting telemarketers in India to conduct 

its fundraising. 

Mr.MEHLMAN. I am not familiar with that article or the facts 

therein. I would expect with respect to the way the article was 

phrased, after the 1996 elections and a lot of the foreign contributions that clearly happened in those elections, from the contribution perspective you are going to see greater caution by both parties in the 2004 election cycle. 

With respect to where work is done, I am not aware of how——

. 

Ms. VELAZQUEZ. My question is not about contributions, sir. My 

question is about outsourcing telemarketers in India. 

Mr.MEHLMAN. I am not aware of the Republican National Committee’s choices of vendors and whether they are U.S. or not U.S. 

based. 

Ms. VELAZQUEZ. Just tell the Administration it does not look 

good. 

Can you comment, Mr. Engardio, can you comment on the fact 

that most economists believe the offshore outsourcing trend is not 

substantial enough yet to have a big impact on the broader U.S. 

economy? 

Mr. ENGARDIO. For one it does not seem to be that big in terms 

of the total U.S. job force, as far as we can tell. We can see it in 

terms of—Are you talking about physical transfers of work that we 

otherwise would have had here? We can see it in a few professions 

like information technology support, which is a big profession. But 

that is one area where jobs are declining in the United States, 

where wages are declining and hiring is increasing abroad. But 

that is a very small part of the U.S. job force. 

So I am just saying that we consulted about three or four labor 

economists of various stripes and nobody has really looked into it 

and it is not measurable yet. 

So when you are seeing these big numbers that Forrester is putting out and others, this is real speculation. These are projections 

over ten years. 

So it has not hit yet. It has not hit in a measurable way yet. 

That is why we are cannot tell you. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Chairman MANZULLO. Mr. Schrock. 

Mr. SCHROCK. Thank you, Mr. Chairman. 

The Chairman pretty much said it all. I like the way he says it 

and I would probably have said it the same way. Let me make a 

couple of comments. I think at the start we talked about our trading partners. Our trading partners are really not playing by the 

rules and I believe Secretary Mehlman said it, free trade yes, but 

fair trade. And that is clearly not happening. 

I think sometimes up here on Capitol Hill we create laws and 

regulations that have unintended consequences. I think Mr. Kenton 

mentioned it. 

By the way, are those your children? 

Mr. KENTON. No, nieces and nephews. 

Mr. SCHROCK. They are neat kids. You have the baby in the 

back. That is a nice sound, believe me. 

26

Chairman MANZULLO. Mr. Schrock, could you suspend for a second? 

Mr. SCHROCK. Sure. 

Chairman MANZULLO. We have some very special guests here. I 

would like to know, these three children over here, is your father 

one of the witnesses testifying here? Your nieces and nephews 

here. Okay. And we have the little guy back there, and that is your 

family. Very nice. We are glad to have you here as our special 

guests. 

In fact these two nieces here, would you like to come up here and 

have a seat? And the nephew. Would you like to sit up here? No 

questions, but you are welcome to come up if you like. 

[Laughter] 

Any time you want to come up you can do that. You are welcome 

to do that. 

We are going to start your clock all over again. 

Mr. SCHROCK. I think we needed to mention the family because 

I am sure Christopher Kenton would not be nearly what he is without his family, is that right? 

Mr. KENTON. Absolutely. 

Mr. SCHROCK. You were saying unintended consequence, and I 

think sometimes the things we do up here create that and that is 

why we have half the problems we have. But free trade, fair trade. 

I would certainly agree with that. 

And clearly we are going to be facing competition. It is not going 

to end. We have lost the manufacturing sector. I think the only 

thing we do now is build war machine and cars and that is about 

the only thing we do. As you heard the Chairman say, the DoD 

wants to buy offshore and I am really opposed to that. I just do not 

think that is a good thing. 

Now if a certain country is the only country that produces a 

widget that needs to go in a tank somewhere, that is a different 

story, but that is probably not going to be the case. 

I think the problem with that is if we get into conflict with a 

country that makes that one widget that makes our war machine 

go they are going to say we are not going to give it to you because 

we do not want you fighting the war. So we have to be very, very 

careful how we do that. 

These are probably three of the best testifiers we have ever had 

in here. 

[Laughter] 

They are what it is all about. 

But you know business is not the bad guy. It is the regulators, 

and I mean like us. We are the ones that create this stuff and then 

we have some bureaucrat downtown trying to enforce these things. 

I think that is what is driving a lot of this stuff offshore. 

Yes, we are going to face competition. Are the problems with the 

trade policies we have? Probably. The regulatory policies? Probably. 

The tax system? Absolutely. We are just messing over these businesses something fierce with the tax policies we have. Until we 

change that this is not going to change. 

Is it the high cost of labor? We keep talking about labor costs. 

Mr. Almeida, maybe you can comment on that. 

27

I have a feeling a lot of these countries are going, I know they 

are, they are going to countries where they can pay less, they know 

they are not going to have strikes, they know they are going to 

have a lot of these different things. Now right or wrong, and it is 

probably wrong, but that is what they are doing. Because what it 

is, they want to go to a place where they can produce a product 

so we in America can buy it as cheap as we want. I am as bad as 

the next guy. I would go to Wal-Mart and look to see which one 

is cheapest. I think that is just human nature. 

But at some point we have to get our hands around that so we 

can bring this business back to here, and we in Congress have to 

make sure we are business friendly. That we are making sure 

these people want to stay here by the laws that we create. 

Every law we create has unintended consequences. Every time 

we pass a law up here Americans and business loses more and 

more of their freedom. We have got to stop doing some of that stuff. 

So until we are willing to get our hands around it I do not know 

how we are ever going to solve this thing. I do not know if you 

want to comment on that or if you just think I am a madman, but 

that is the way I feel about it. We have got to do some changing, 

we have to do it up here. 

From these kids back, these are the people, this is where it has 

to be done. 

Chairman MANZULLO. Mr. Engardio? 

Mr. ENGARDIO. One observation. We are talking about service 

jobs. A lot of these jobs I do not believe are unionized in the United 

States to begin with. 

Mr. ALMEIDA. That is not right. 

Mr. ENGARDIO. Okay. 

One thing I want to point out, when we talk about some of these 

things like some very sophisticated semiconductor work is being 

done in India and companies are opening up theses R&D facilities. 

I have gone to Silicon Valley many times. I have gone to Bangalore, 

I have gone to Singapore. When I go into U.S. companies, in the 

1990s you could go into Sun Microsystems, Intel, HP, you walk into 

the R&D Division and they are two-thirds Chinese and Indian. Silicon Valley, there are a lot of studies on how many businesses have 

been started up by Indian and Chinese immigrants, including Taiwanese. About one-third to two-fifths of tech startups in the United 

States in the Silicon Valley are by Chinese and Indians. 

What we are talking about is why? Is this is because Silicon Valley has had a unique environment in the world for a long time that 

no other country could replicate? The best world talent came here 

because it was the best environment to do R&D and do creative 

work. 

What is happening now is that other cities around the world are 

finally starting to replicate some of this environment. Bangalore is 

starting to get there. In many areas it is getting attractive. A lot 

of the engineers that we spoke with said, ‘‘I would have gone to the 

United States five years ago. I would have gone to the United 

States to work for TI. I would have gone to Seattle to work for 

Microsoft. But now they are coming here, I do not have to.’’

28

These are people that would have gotten H–1B visas before. So 

this is what you are dealing with. It is the environment getting 

better overseas. 

That is one thing if you want to talk about the implications. 

Mr. SCHROCK. Mr. Chairman, I know my time has expired, but 

it boils down to the education system. Our education system has 

been dumbed down so much we are not creating these geniuses 

that can do this sort of thing. Half the children in the area where 

I represent, Virginia Beach and that area, the valedictorians and 

salutatorians of those high schools are of Asian descent. It is because they come from a culture where they promote education and 

the parents make sure the kids get the education. We do not. We 

just expect our society to take care of itself and that is not going 

to happen. 

One more quick comment. 

Were you listening to all the different professions that have gone 

offshore? 

Mr.MEHLMAN. Yes. 

Mr. SCHROCK. Did you mention movie makers? 

Mr.MEHLMAN. I did not mention movie makers. 

Mr. PALATIELLO. I mentioned it as one that could still be here. 

There are certainly movie makers in India. 

Chairman MANZULLO. They are going to Canada. 

Mr. PALATIELLO. Canada and——. 

Mr. SCHROCK. Some of the garbage the movie makers are making, they can go as far as I am concerned. 

Chairman MANZULLO. All right. On that note——. 

Mr. SCHROCK. On that note. 

Chairman MANZULLO. They can make some beautiful movies in 

the American Virgin Islands. Dr. Christian-Christensen. 

Ms. CHRISTIAN-CHRISTENSEN. Thank you. I want to make a point 

about that too, but first I want to thank you Mr. Chairman and our 

Ranking Member for this hearing. As usual our Committee is 

ahead and being very proactive on an issue that really we have not 

begun to feel the full impact or even a little of the impact yet. 

Globalization has its pros and cons and we on this Committee do 

have a responsibility to look at it and the potential impact on small 

businesses and also small jurisdictions and see what can be done 

to maximize the positives and minimize the negatives. 

In my district it presents some unique challenges for me and 

Guam, who also sits on this Committee, who rely on duty-free status to be competitive. But also in the case of outsourcing we find 

that a lot of the outsourcing that is being done bypasses jurisdictions like ours which have incentives programs to attract the investment but meet all of the U.S. standards. Which because of our 

size has very, very little impact on the U.S. economy but has tremendous positive impact for us. 

So I am saying that to say that apropos of unintended consequences as we look at outsourcing to foreign jurisdictions we do 

not want to be lumped into that. We are American citizens and we 

are very small jurisdictions and outsourcing which has not really 

gotten hold in our territories as yet could benefit us. And as I said, 

we are not foreign, we are U.S. jurisdictions. 

29

The other concern that I would have about this is with regard 

to the H–1B and the other work visa programs. Relying very heavily on that as we have done in recent years and not paying enough 

attention to ensuring that our public school system is given what 

it needs to prepare our own citizens for these jobs. So I agree with 

Mr. Mehlman and some of the other panelists who spoke about 

that. 

My first question would be, I guess I would direct it to you, Mr. 

Mehlman. Given the fact that some of our more educated people in 

the field of technology are finding themselves without jobs, and recognizing that we do have to improve the educational system and 

the training so that people are able to take these jobs, do you think 

that will have an impact on the outsourcing trends that we are seeing ? Would the jobs tend to stay here if we had the trained workforce given that most of the incentive is really around the salaries, 

the lower salaries in other jurisdictions? 

Mr. MEHLMAN. I think that is the $64,000 question as it were. 

What do we do in a world with global competition—By the way, I 

was hoping you were going to ask a question that was going to 

merit a field hearing in your district. 

[Laughter] 

Ms. CHRISTIAN-CHRISTENSEN. We are working on that. We are. 

Mr. MEHLMAN. I have family there and have spent a substantial 

amount of time there and I share your sentiment, that I think it 

has probably been overlooked and is a natural place as a way to 

service a lot of businesses and have better economic growth than 

it has had. 

With respect to the question, my sense first and foremost is to 

be competitive yes, improving the education system it is not just 

more degrees. It is higher quality, higher productivity, higher flexibility, and higher creativity. 

One example, albeit it is a little off the IT services space, we are 

recently seeing IBM, one of our bigger companies, successfully getting semiconductor contract manufacture work back into New York. 

Reported in Business Week, I do not think by you, Pete, but they 

brought it back to New York. 

I called them because my office spends a whole lot of time trying 

to focus on what do we do to get just those types of results? What 

IBM is doing is they are taking their smartest engineers and they 

are saying you come and you bring your chip design work here and 

we are going to help you improve it and we are going to help you 

make it better. 

They are not lower cost than the Taiwanese where they were 

taking the work from, amazingly, but rather they are adding a 

value add based upon, IBM hires the true best and brightest, but 

based upon values that only this American company and only these 

American workers may be able to add. They are bringing jobs back 

to the United States, high tech manufacturing jobs, based upon 

added valuer and added skills. 

My sense in the IT work space is there will be some areas, call 

centers may be one example, that are going to be a real challenge, 

and there are going to be a lot of other areas where we are going 

to make sure if our people do have the skills and do have the tools, 

that they are able to out-compete because they are able to deliver 

30

value that nobody anywhere else regardless of their cost is able to 

add. 

Ms. CHRISTIAN-CHRISTENSEN. Thank you. 

I see my time is up, Mr. Chairman. 

Chairman MANZULLO. Thank you. 

Mr. Beauprez? 

Mr. BEAUPREZ. Thank you, Mr. Chairman. This has been a great 

hearing. 

Like many of the issues we get into, I am not sure that there is 

a singular simple solution, but certainly we have identified the 

problem. 

It seems to me, and this is not only from testimony today but in 

visiting with some of the businesses in my district and in my state, 

which is Colorado, in and around the Denver area, a fairly high 

concentration of some high tech companies. Many people that have 

gone through serious downsizing. White-collar folks out of work. 

The issue of visas has really come up just recently. I think we do 

need to take a serious look at it Mr. Chairman, within this Committee and within this Congress. What is an appropriate level. 

But in thinking about the situation in total I go back to one of 

my basics and that is that you usually get what you incentivize for. 

I would submit to this Congress, certainly this Committee, the 

question of whether or not we have truly incentivized for jobs in 

this country. To just put it right on the table. Is that really what 

we want? If we really want that, have we done a good job of laying 

those incentives out when I think most of us understand health 

care cost is increasing 15 to 20 percent a year. Somebody has got 

to pay for that. 

Taxation, we know what the levels are. I think somewhere I read 

that the United States business tax is about the second highest in 

the world. Second highest. 

The cost of complying with taxation, I read recently that, anybody can estimate whatever they want, but the number I see is 

somewhere between $200 and $300 billion a year, the B word, $200 

and $300 billion just to figure out how much you owe before you 

pay it. 

I read just this morning, that the cost of government regulation, 

is about eight percent of the gross domestic product, roughly $843 

billion a year. 

I heard education talked about a lot. I think it is fair to ask the 

serious question, have we really, as a society, incentivized the kind 

of education requirements and advanced degrees that are going to 

be attractive for the kind of jobs that we are talking about today. 

Sadly, I come back to a statement that one of my friends in my 

district told me when I looked at his business, about 25 employees, 

all high tech, all well paid. The vast majority were Indian or African here on visas. I said why do you not hire local folks? This was 

now a couple of years ago, and I am quite certain that the job market has changed, but he said I cannot get qualified applicants. A 

very sad indictment on our education system again. When we were 

pushing kids out of our local school system that looked just like 

these folks, genetically I am sure just as good or superior perhaps 

to those folks, capable. But we were not giving them the education. 

31

So I come back to you all and looking for that hard and fast recommendation. Where is it? I have not heard a serious one. We have 

to adjust the tax code, we have to adjust the regulation, we have 

to address some of the hard issues that are out there, but I think 

if what we really want is what my granddad came here for, an opportunity to get a really good job and keep it and produce something so you can own something for yourself and your family and 

pass it on, the old American dream stuff, I am not sure that we 

are incentivizing that, especially as we look at the global market. 

If we still believe in the same foundation. 

So I was going to address that kind of subject rather than a 

question, Mr. Engardio, to you. I think maybe you have as broad 

a perspective as anybody. 

Mr. ENGARDIO. I can tell you what companies tell me. One is that 

there seems to be a real mismatch in the kinds of skills that our 

universities are producing and to what they could really use for 

that kind of pay. If you have a chemical engineer we do not want 

somebody that is going to do process engineering. They do not want 

them to do the mundane parts of that. They want somebody who 

can manage an R&D project, that can supervise international 

staffs, that can also be broad enough to start looking into biotechnology applications and things like that. They cannot get—We 

have a limited pool of chemical engineers that are not very well allocated in this country and they say——. 

And it applies to other professions. It goes to architectural services. The graduates coming out of school are doing still kind of commodity kind of work when they should be doing much more. 

So now you are comparing people doing work that can be replicated very easily overseas for a tenth of the cost. There is just no 

contest. 

On the other side of it, I do think it has gotten to the point now 

where companies, it has gotten beyond just skill shortages in some 

areas and where it really is coming down to just huge cost discrepancies in wages. In IT support. There are a lot of people getting 

laid off that cannot find work that are very, very good. They are 

just paid three times more, five times more than a comparable Indian with maybe a doctorate degree. 

I think it is just a painful transition that is going to occur in 

some of these fields. I do not see any way out of it. 

Mr. BEAUPREZ. That is a fair answer. 

I would just say, Mr. Chairman, I think we have really got to 

focus as a Congress and as a government on what do we want the 

end product to be. If we want our corporations and our employees 

to be as competitive in the global market as possible then our laws 

and our regulations ought to reflect that. 

Chairman MANZULLO. I appreciate that. 

Mr. Miller? 

Mr. MILLER. Thank you, Mr. Chairman. 

This is the second Committee hearing just like this or almost just 

like this that I have attended in the last month. I am also a member of the Science Committee and within the last month we had 

a Committee meeting on how to prevent or what to do about the 

outsourcing of manufacturing jobs. The concern of all the witnesses 

at the Committee was that we did need to have a manufacturing 

32

economy, we did need to make things. We could not all just give 

golf lessons to each other. That our economy could not possibly 

prosper that way. But the witnesses also said we very badly need 

a policy on how to protect manufacturing jobs, how to develop new 

manufacturing jobs, how to protect the ones that we have if we can 

protect them, and that we did not have anything resembling the 

policy. 

To paraphrase the old country music song, if it were not for bad 

policy we would have no policy at all. 

Mr. Engardio, do you think we need a policy? Do we have a policy? 

Mr. ENGARDIO. One of the conditions for my magazine, journalists often do not come to these Committees but one rule is we are 

not supposed to be advocating policy. We can spit back what people 

say. 

Mr. MILLER. Without advocating one, do you know one when you 

see it? 

[Laughter] 

Mr. ENGARDIO. Gosh, it just seems that it comes down to education. In terms of restricting the forces of what is driving this 

globalization of skilled work, it seems like it is so beyond the control of policymakers. Also the cat is out of the bag. It has gotten 

to the point where an EDS, an IBM, an Accenture has no choice 

but to hire thousands and thousands of Indians in order to compete 

because the cost structure of this industry has now changed. Permanently, I believe. So it is very hard to go back the other way. 

It is like manufacturing. Once it got to be, a few manufacturers 

went out to make the garments, nobody else could compete with 

them. Everybody had to do it to stay in business. Productivity only 

does so much. I think that is kind of where we are in some of these 

areas. 

Mr. CHALLENGER. You could offer tax incentives to companies for 

training their people, if you begin to think of education as not 

something that ends at 22 but something that is lifelong, then to 

offer companies that retrain their workers and continue to upgrade 

their skills, then those companies are going to make more efforts 

in that direction. 

Mr. MILLER. Mr. Challenger and Mr. Engardio, you said much 

the same thing and I think several of the witnesses mentioned 

training. Mr. Engardio, you mentioned the mismatch between what 

colleges or universities train for and what the job needs are in the 

market. 

Probably the place in our economy where those job skills are 

matched to the specific training is at technical and community colleges. 

Mr. ENGARDIO. Exactly. 

Mr. MILLER. Among the first calls that an employer makes in the 

community is to the technical or community college to say this is 

how many folks we need, these are the job skills they need, can you 

develop a curriculum to deliver that workforce with those very 

skills? 

Does it make any sense to you at all to cut funding for vocational 

training at technical and community colleges? 

Mr. ENGARDIO. I do not know enough about it. 

33

It is clearly where the problems are happening I think are at the 

polytechnic level, community college, as you say. The premier universities are dealing with the upper end of the talent pool. These 

guys are going to be okay. They are going to adjust. They are going 

to be creative. It is the lower levels where you hear that the curriculum is just not up to date. Many companies say they keep going 

to these schools and saying you have to change. 

I cannot give you an answer as to whether funding is adequate 

or not, but that is where the problem is. 

Mr. CHALLENGER. It also may very well be not just the Asians 

and the Indians and the Africans who are creating the businesses, 

running Silicon Valley, the new entrepreneurs. It is the Indian 

Americans and the Chinese Americans who are creating those businesses and then creating the jobs and the infrastructure that results from that. 

Mr. MILLER. Mr. Kenton? 

Mr. KENTON. Yes. First of all, I appreciate the tremendous hospitality that the community has extended to my family. It made a 

trip to Washington very personal. 

I think one of the issues is that the so-called process of creative 

destruction consumes technology and training so fast. Among the 

technical workers with whom I work it is a constant process of having to go out and learn the latest technologies. It is a process that 

does not stop. I think there are always going to be gaps between 

the development of the new technologies and the ability of the 

school to catch up. Almost by the time they catch up they are already moved on to something else. So I think there is a fundamental problem there. 

To get back to something that Mr. Schrock said, I think there is 

also a fundamental problem in regard to just leadership of what is 

it that we are doing? If you look at why would programmers be involved now in creating software that is going to make them obsolete in ten years? The reason for that is, they are paid for it. If you 

are able to go out and have a job on the cutting edge that is going 

to assure you a high salary and benefits for a certain period of 

time. If you happen to be one of those lucky people that creates one 

of those breakthrough technologies that inevitably makes you obsolete, you get to cash out of the system because you make millions 

of dollars and it no longer matters to you any more. 

But I think that what that process does it is shows a lack, I 

think, of a fundamental sense of direction. I think we have abrogated a lot of our sense of vision to unfortunately marketing. Everybody wants to go out and make money as fast as they can, and 

that is essentially the structure that we have built. 

Mr. MILLER. Mr. Almeida? 

Mr. ALMEIDA. The answer to your question is obvious, that there 

should be no cuts in the funding. 

The small businesses have to rely on the community colleges and 

the technical pools for their pool of workers, it is clear. 

Chairman MANZULLO. Mr. King? 

Mr. KING. Thank you, Mr. Chairman. Thank you for holding 

these hearings today and I would like to thank the panel for their 

presentation. 

34

As I sit here and listen to your remarks and the questions and 

comments of the other panel members and of the Committee a 

word pops into my mind that I have not heard involved with the 

educational system in a long time, and that word is meritocracy. 

There are a few places in the world where they do promote such 

an idea, and that used to be the American creed. Where people who 

actually produced were the ones that got ahead, and they stood on 

their own merits regardless of individual rights, individual merit. 

There has been some reference to that today in that we are seeing 

folks come from other parts of the world that are competing at an 

advantage within this environment in this country. 

One of the statistics that I would point out would be that in 1995 

the Asian composition of the student body at University of California at Berkeley was 12 percent, by design, by formula. And a 

short five years later after Proposition 209 was passed, that composition went up to 46 percent. 

Now you can do the math on that. To me, it looks like there were 

a lot of folks that were not getting the opportunity that they might 

have otherwise if it had not been for that, I will call it a goal system because we do not use that other word even though it in effect 

is the other particular moniker. 

So I would go to a meritocracy. Then eliminate preferential treatment. Put people out and give everybody equal opportunity. If they 

can succeed by equal opportunity they can chase their dreams and 

their goals. 

The other part of this economy that strikes me as being something that I have not heard anyone frame either, we are talking 

about manufacturing jobs, industrial jobs. It has been the heart of 

America’s economic might since the inception. 

As I watch the jobs transfer out of the United States, and we 

have talked about that considerably here today, the lower skilled 

jobs are going to the developing countries and they will, as you 

said, continue to accelerate their effort to get a larger and larger 

share of that market. 

Our salvation I do not think is in trying to get any of those jobs 

back. I think there is some merit in seeking to slow the loss of 

those jobs. 

The other side of this is the high tech industry where we need 

investment capital, research and development, high tech education. 

That is where the new jobs, the high paying jobs are going to come 

from. 

So if we can expand this, we can slow the loss of the low skilled 

jobs, we can accelerate the creation of the high skilled jobs, that 

is probably the best we can hope for within this environment for 

us to compete against the rest of the world. 

So then it brings me to that single solitary solution that Mr. 

Beauprez remarked upon. There probably is not one. But I think 

there is a formula that helps us substantially. I would pose this 

question to I think Mr. Mehlman. That would be if we could discount all of the products that we export overseas by 22 percent, 

could you speculate on the impact of the loss of those low skilled 

jobs that are going overseas? 

Mr. MEHLMAN. I guess if the question is if our products going 

overseas were less expensive relative to the markets in which we 

35

are trying to sell them, we would undoubtedly have more success 

in selling those products. 

One of the things I think is currently being reported on by Business Week and others is as the dollar’s value is not what it was 

a year ago, we are seeing our manufacturers and some of our exporters having greater success in selling their products into some 

markets where a year ago or two years ago our products were relatively priced out of the range of customers. 

Mr. KING. Have you speculated in your own mind as to which 

policy I am addressing when I say 22 percent discount? 

Mr. MEHLMAN. I have a guess after visiting with Mr. Rumsfeld 

and Mr. Zelnick. I am off to see Secretary Snow. 

Mr. KING. That would be of course a national consumption tax 

where we have an embedded cost of 22 percent in all of our export 

and our domestic products. And our exports also hinge upon one or 

two percent. That is the margins on when we are promoting products overseas. One or two percent makes a significant difference in 

all of these large markets, and yet we have the embedded costs of 

22 percent in our taxes. 

Mr. Beauprez mentioned that I think the number was around 

$300 billion, the cost of just getting prepared to pay the federal 

taxes. But nobody is talking about the disincentive that is in place 

because of the cost of the taxes. There are millions of people in this 

country that make decisions day by day that is, ‘‘I worked hard 

enough, I risked enough capital, I am not going to go out another 

hour this week or this month because the federal government takes 

too much and consumes too much of our productivity.’’

If you add those dollars up that come from the dollars of what 

we have to pay the IRS, what we have to pay to force compliance, 

what we have to pay other folks to do our taxes and what we ourselves take out of our productivity to keep record of all of that, then 

the disincentive, I am going to tell you I believe that that cost of 

our federal tax system is over a trillion dollars a year. And what 

a huge anchor we could cut the chain to and how that would help 

so much our export markets. It would also incent the formation of 

capital, research and development, high tech, higher education. 

That comes I think as close as anything to a solution and the onestop shopping for a solution. 

I had to do this for Mr. Beauprez’s benefit here. I knew it would 

help his day out. 

Thank you very much, Mr. Chairman. 

Chairman MANZULLO. I think Mr. Mehlman had a response to 

that. 

Mr. MEHLMAN. Just with respect to both Congressman King an 

Congressman Beauprez. I think you both are right on. There is 

somebody who has been talking about the competitive dynamic of 

the high state of taxation or regulation, litigation, health care 

costs, for example. It is the President. So much of the Administration’s initiatives on the fiscal side and on the regulatory side have 

been aimed at helping our businesses compete and be more successful globally in part by making sure the taxes and the regulations we have are all that we need to have but not more and are 

not sufficient burden upon our exporters and upon our producers 

36

that we either price ourselves out or put money into taxation or tax 

compliance as opposed to into production and competing. 

Chairman MANZULLO. Thank you. 

Mr. Ballance? 

Mr. BALLANCE. Thank you, Mr. Chairman. This very interesting 

debate, testimony I should say this afternoon. 

I live in rural eastern North Carolina. Most of the folk that I represent are not being debated about here today. They have already 

lost their jobs in textiles. 

Since I only have five minutes, by show of hands how many of 

the panelists believe that we as representatives of the U.S. government can do anything about this problem? 

[All hands raised] 

Mr. BALLANCE. Well, that is good. 

The question I have and what I read as a free enterprise society, 

businesses can do what they want to do within certain regulations. 

What can the government do to stop a company from shipping its 

jobs to China or wherever they want to ship them? 

Mr. KENTON. One thing that has not been mentioned so far is 

benefits. For a small business the cost just of medical care, providing medical care for employees is prohibitive. So when I look at 

the possibility of hiring a new employee, I have to look at that 

against the cost of providing the benefits for that employee. I do 

not want to say that is as much as the tax burden, but it is a very 

significant burden. 

Mr. BALLANCE. If I am the government what can I do about that? 

To keep a private company from sending its jobs to Taiwan? 

Mr. KENTON. I think that is a whole other panel. But I think the 

issues with the cost of health care and the requirements for providing health care are issues that need to be resolved. 

Mr. BALLANCE. Mr. Challenger, what do you say about that? 

What can we do? Can we craft a policy with Mr. Manzullo leading 

the way to keep some of our jobs in America? 

Mr. CHALLENGER. One of the efforts that Chairman Manzullo 

may be making is that defense is something that is under the control of the government. Those contracts can be given out to local 

businesses. So certainly government can take steps to award contracts to the businesses they want in. In terms of creating long 

term jobs it may also be heavy focus back to the education issue. 

That is what are the new jobs of the future? If textiles are not 

going to be here what are the jobs and how can we train our workforce to attract businesses in this area? 

Mr. BALLANCE. I do not want to cut you off, but from what I understand all of those folk that got laid off were well educated. They 

were Ph.D.s and they had great degrees, but they were given pink 

slips or whatever kind of slips they got. 

Mr. CHALLENGER. Nobody is invulnerable to job loss. We are seeing people today change jobs now seven, eight times in a career. 

That is a far cry from say 10, 20 years ago where you might have 

worked for one company all your life. That was the way it went. 

So the question then becomes how do you help people make those 

transitions from company to company because everybody is going 

to have to go through periods of job loss. We need to get people to 

not only equip them with skills to make those changes, just in 

37

terms of how to search and how to get at it, but also give them incentives to move to where the jobs are and give them training to 

also take on new jobs. 

Mr. BALLANCE. It would seem to me, I do not know who is the 

tax expert on the panel, but it seems to me that we could in our 

tax policy, the way we treat American businesses, that that is one 

way we could impact. Also I agree with the Chair and the Ranking 

Member that certainly how we spend our money, we can impact 

that. But does anybody think that tax policy on companies that offshore their jobs would be one way we could look at it? 

Mr. MEHLMAN. I have never heard, any company that I have 

talked to has not raised taxes as an issue to me. 

Mr. PALATIELLO. To some extent we are the victims of our own 

success. We have created in a lot of the industries and professions 

represented in this panel high paying white-collar high quality 

jobs, and now we are almost being punished for doing that because 

we are being undercut by lower paying jobs in other countries. 

I think the cost of labor is certainly a significant factor, but I 

think the comments that several members have made is there is 

also a cumulative cost of doing business. There is a cost of taxation, 

there is a cost of regulation, there is a cost of litigation. A lot of 

those things are driving up the cost of doing business in the United 

States and if you do not have those same costs of doing business 

in other places and you add to that a lower wage labor base it is 

going to be very difficult for us to be competitive. 

I would go back to a couple of comments that people have made. 

The federal government spends over a quarter of a trillion dollars 

a year in contracts. That is just the federal government, not to 

mention money that is given out in grants and assistance to state 

and local governments. 

If in the wisdom of the Congress you believe it is in the country’s 

best interest that service work be done domestically, certainly Congress is within its power to encumber that money whether it is by 

direct federal contracts or subcontracts or grants and assistance to 

state and local government to say the work will be performed domestically. 

Chairman MANZULLO. Does anybody else want to comment on 

that question? 

Mr. Engardio, then Mr. Mehlman. 

Mr. ENGARDIO. I would just say, I can maybe put it in perspective in terms of a manufacturing job, and I think the same things 

apply in a lot of the service jobs we are talking about. 

When you ask companies and consultants that help them relocate what are the factors they are considering, wages is one. It is 

not the only thing. The Shanghai area, we looked at why are jobs 

going from Japan to China? Land cost of Shanghai area is about 

one-fifth the price of Japan; it is about one-third the price of Malaysia which is a low-cost country. Water costs are about half. 

Cargo handling fees are about a half of any comparable Asian 

country. It gets into a lot of things. In that mix taxes are not, in 

some countries it is a factor. In a lot of countries it is not. So there 

are about five or six things going on. The shipping costs, physical 

shipping costs from that place to the United States. 

38

If you were to break down what is a competitive advantage of 

Manila in call center work for Delta Airlines which has like 500 

people working there, wages is one. But they have a lot of very 

cheap office space. They have nine at least office centers, very modern office complexes around the Manila area. Their telecom costs 

are about a half to a third. This is a very big factor. They have very 

cheap broadband connections. We do not in this country. 

There are a lot of things. Maybe you can identify those six or 

seven factors and say what areas are within any government influence? 

I hope that helps. 

Chairman MANZULLO. Mr. Mehlman, did you have a comment on 

that? 

Mr. MEHLMAN. Yes, sir. 

I do think there are things the government can do and I certainly 

think we are trying to and in fact are doing a lot of them from the 

Administration. One caution offered by others on the panel that I 

would echo is to be aware of the sort of the only unrepealable law 

in Washington, the law of unintended consequences. 

Right now in the global competitive market for IT services, the 

U.S. comes out ahead in 2001 by $7.9 billion. We are exporting to 

other nations $7.9 billion more than we are receiving in IT services 

back on-shore. 

If we say we are not purchasing any more, other nations might 

also and that would put us deeper into the current account deficit 

by $7.9 billion. 

The other unintended consequence that we have to I think meaningfully consider is that a lot of the businesses that are looking 

globally for IT service work are not doing so out of a lack of patriotism or a lack of love for their country or their neighbors or where 

they live. They are doing so because they are competing globally for 

making semiconductors or cars or whatever they are making. They 

are trying to be as competitive an enterprise as they can possibly 

be. 

To what the Chairman said in the government context, I imagine 

that is a similar consideration. In New Jersey there was a well 

publicized circumstance where the state Division of Family Planning, which is a welfare organization that tries to help provide benefits to those who need welfare in the State of New Jersey. They 

had a call center and they sent it offshore because it meant they 

could have more money for welfare recipients. 

There was a storm of protest that nine jobs were sent offshore 

so they brought them back. They increased their costs by 20 percent so their administrative costs went up by 20 percent and the 

money they had available for those who are on welfare was reduced 

by a commensurate amount. 

It means that we are going to need some real good economists 

to understand when it is better to have the money go to the strategic core purpose for which the money is intended, even if it 

means you are using equal value but offshore work, and when it 

is better to increase the cost and have less dollars for R&D or 

whatever the ultimate product you are trying to do, but use domestic information technology or other service work. 

39

I think that is a tough calculation that a lot of businesses are 

trying to weigh. 

Chairman MANZULLO. Ms. Bordallo before I turn over the microphone to you, I would just make this comment. The very government that is responsible for all the high costs is the same one that 

says we are going to go offshore and purchase because it is too high 

to purchase here. That is where the line gets drawn in the sand. 

You cannot have it both ways. That is why we are in this huge dispute with the Pentagon, because of the continuous overseas purchasing of goods, equipment, and services that could be done here 

in the United States. 

Ms. Bordallo? 

Ms. BORDALLO. Thank you very much, Mr. Chairman. I just 

wanted to say how much I appreciated the meeting we were at yesterday in your office to discuss some of these problems. 

I represent the island of Guam in the Pacific area. I would like 

to express my sympathies for the situation that has been described 

by our witnesses today. 

An example from Guam, to highlight the need to address the loss 

of service sector jobs. 

The economy on my island is largely supported by two service 

sector industries. The first is tourism including hotels and small 

business tour operators. The second is the support of military operations on Guam such as a ship repair work, logistics and base operations servicing which requires a highly skilled workforce. 

Now you would think that if anything were safe the procurement 

of services for the Department of Defense would be immune from 

the globalization trend that we have been discussing here today. 

However, I would like to share with you one example of how 

outsourcing of ship repair services has impacted a small business 

with fewer than 300 employees on our island of Guam. 

The Navy is allowed under current law to repair military Sealift 

Command vessels outside the United States if they have no designated home port. Using this loophole the Navy waits two years 

until a ship needs repair, and then announces it is being deployed 

to Singapore, for example, bypassing the U.S. ship repair services 

on Guam. There they can do repair work with no regard for American fair labor practices, worker protection, or environmental 

standards. 

The result is that the Guam shipyard cannot sustain the workforce they need of highly skilled repair workers. They cannot afford 

training programs. And over time the knowledge base on Guam 

will not be replaced. Once this happens foreign firms will have no 

American competition in the Western Pacific. 

I was very impressed yesterday with the Chairman telling us the 

story about the black beret scandal of the Army and how we were 

able to, he was able to get to the bottom of that and turn it around. 

So I feel as some of you do gentlemen that we can do something 

about this. 

What we are doing here, our own country, is eroding our manufacturing base and causing an increasing rise of unemployment in 

our own country. We are responsible for it. 

I do not know what the solution is now, but I am very interested 

to work with the Chairman and the Ranking Member of this ComVerDate 0ct 09 2002 18:52 Mar 31, 2004 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 G:\HEARINGS\92655.TXT NANCY
40

mittee to help and protect our small businesses and our manufacturing firms around our country. 

Thank you very much, Mr. Chairman. 

Would anyone like to respond to that? 

[No audible response] 

Thank you. 

Chairman MANZULLO. Mr. Mehlman, I like your spirit. This 

panel has been great. We three weeks ago had a gentleman by the 

name of Wayne Fortun. He runs a company called Hutchinson 

Technology in Hutchinson, Minnesota. He is the sole survivor of 38 

U.S. manufacturers of CD springs. He has several thousand employees in Minnesota, Wisconsin and North Dakota. He is going 

head to head with the Chinese and succeeding. He is exporting 98 

percent. 

Some members of our staff are going to take a look at his facility. 

We would like to invite you to go up there with them because we 

are obviously on the right target. 

You are looking for the success stories and want to know how 

these guys are doing it, so we look forward to you thinking about 

it and joining us on that trip. 

Mr. MEHLMAN. It sounds great. Thank you. 

Chairman MANZULLO. I have just a couple of comments and then 

Ms. Velazquez has some questions. 

First or all I want to thank you all. This is tremendous testimony. The area of the country that I represent, Rockford, Illinois, 

has a 25 percent manufacturing base. We are at 11 percent unemployment and it is getting worse. 

I think Mr. Challenger you had mentioned that as the economy 

improves those jobs are going to come back. They are not. The 2.7 

million manufacturing jobs that are gone, they are gone. The factories are closed. The work has been outsourced overseas. At one 

time this Committee had people in China, Southeast Asia, and 

Brazil combing for contracts for manufacturers. That is just our 

Committee. That is the amount of time we spend on manufacturing 

and international trade. Those jobs are gone forever. 

The tool and die industry is being absolutely demolished in this 

country. It is being savaged. We just cannot get our government to 

wake up to the fact that, and I hate to use the word protect, but 

I like to call it national industrial base. That is absolutely necessary—We have in this country, in Tiffin, Ohio, the last manufacturer of the cold forming machine. That machine makes bullets in 

one step, about 500 a minute. Otherwise you have to machine each 

bullet for military use, hand by hand. 

Every time we try to bring these things to the attention of the 

people in the Pentagon it just falls on dear ears. No one gets it. 

The environment of Washington, D.C. with 1.5 percent unemployment. The inflation rate in Washington is five times higher 

than it is in the rest of the country. The price of an average single 

family home is $540,000. The average or the medium income, per 

household income in Washington, is close to $100,000 a year. 

This city is so out of whack of what is going on in the rest of 

America that it is very difficult for may policy leaders and makers 

to try to understand. That is why Members of Congress—we are 

fighting back for our manufacturing jobs. Regardless of how people 

41

have voted on these trade issues, because we know what is going 

on. 

I could tell you, Mr. Engardio, what is going on in my district. 

engineering jobs are going to Poland. 

Mr. ENGARDIO. What industries? 

Chairman MANZULLO. Aerospace. Let me give you an example 

here. 

If this item were exported from the United States and let us say it is $100 million sale. So this shows up on the trade surplus merchandise ledger as plus $100 million even though it could contain 

$99 million worth of imported parts. 

There is no index. There is no indicator, there is no study to indicate the extent of imported parts in our exported items. 

I would estimate that our trade deficit is five times greater than the $500 billion that it is. Otherwise how could you possibly come 

up with the fact that we are supposing the process of recovery and 

unemployment in my district is going up. 

The latest study that just came down from the FDIC on sectorial 

manufacturing job losses, a 47-page document. FDIC.gov. It takes 

it sector by sector by sector. 

The latest study by the NAM, the very last sentence in the executive summary is saying essentially the United States is becoming 

a third world country because of the massive destruction of our industrial base. And no one seems to get it. 

About every two days we revise our challenges to manufacturing 

power point, and we passed out 60 copies today. We are always 

adding yet another reason in there. 

Somebody brought up our own version of forced labor in America: 

Prison industries. Peter Huxtra in Michigan lost 600 jobs in one 

day! Then we found out that those people at the FDIC in violation 

of their own charter, Federal Prison Industries, those people were 

taking things and saying they had been manufactured or assembled in factories, in prisons when in fact all the were doing was 

slapping their label on them, acting as a warehouse. $550 million 

right there to start in manufacturing. It is all over the place. It is 

always a government policy that is involved. 

Let me throw out another one, and I do not know if this is presently the law on it. I bought a WI-FI. This is the cat’s pajamas. 

It is just unbelievable. I turn on my laptop and I am on the Internet. 

Now the particular box says Toshiba. I do not know if it is made 

in Japan, made in the United States, but it says on the box, ‘‘This 

item may not be exported to any country except Canada without 

a validated license by the Bureau of Export Control.’’ I do not know 

if that is changed. It had to be an older box because the Bureau 

of Export Control now has a new name. But what is it? We always 

come back to a particular government policy. 

So what happens is the very things that we make best in our 

country we cannot sell. 

We held a hearing here two weeks ago on bringing in people 

from tier three countries to look at items that we manufacture, 

even though they are not covered by a valid manufacturing license. 

Four axis cutting machines. And two tremendous public servants 

from the FBI and from the Department of Consular Affairs at the 

42

State Department sat on this panel here and explained the problem, working towards a resolution. I think we are going to come 

up with some tremendous progress, bringing people in to this country that want to buy things without having to wait months and 

months on it. 

Anyway, Ms. Velazquez, you have——. 

Ms. VELAZQUEZ. Sure. Just one more question. 

Mr. Mehlman, you espoused so enthusiastically on this cause the 

Administration views regarding fiscal policies and taxes. Can you 

please comment for this Committee what are your views on the effect of running one of the largest deficits in the nation in the last 

30 years? 

Mr. MEHLMAN. Sure. Thanks for the question. 

Obviously I have a lot of respect for some of the leading folks in 

the Administration who helped formulate tax policy. My belief and 

expectation, though, hearing from both manufacturers as part of 

the Secretary’s initiative, certainly hearing from more than two 

years from high tech companies, what they need right now is they 

need customers making capital expenditures, they need investors 

returning to the market, and they need employers hiring again, 

and the appropriate efforts right now with respect to fiscal policy 

are to try to get investment being made again, capital expenditures 

happening again, businesses able to hire again so that as we retrain folks they have employers who are willing and ready and able 

to hire them. 

Ms. VELAZQUEZ. Do you think running a deficit is healthy for our 

economy? Do you think that will help us grow? 

Mr. MEHLMAN. I am hardly the expert on fiscal policy, but right 

now yes. I believe the tax policies and budgetary policies that have 

been offered by the White House are very much the right policies 

to promote jobs and to promote growth. And if this year there is 

a deficit, it is a deficit with the goal of creating jobs because the 

jobs are the key to the tax base. I think we saw back frankly in 

the Hoover Administration what happens when you slam on the 

fiscal brakes during a period of tough economic times when in fact 

there should be greater access to capital and greater access to jobs. 

Ms. VELAZQUEZ. We saw that happen under the Ronald Reagan 

Administration with a huge deficit. The money went away with the 

taxes and the jobs disappeared. 

Thank you. 

Mr. MEHLMAN. Thank you. 

Chairman MANZULLO. Thank you all very much. Tremendous, 

tremendous testimony. And thanks to our very three special guests 

for coming here. 

This Committee is adjourned. 

[Whereupon at 4:48 p.m. the Committee was adjourned.]

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92655.054
115


92655.055
116


92655.056
117


92655.057
118

Æ


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