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42–371PS 2008

AMERICAN DECLINE OR RENEWAL?

HEARINGS

BEFORE THE

SUBCOMMITTEE ON INVESTIGATIONS AND

OVERSIGHT

COMMITTEE ON SCIENCE AND

TECHNOLOGY

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

MAY 22, 2008

and

JUNE 24, 2008

Serial No. 110–105

and

Serial No. 110–111

Printed for the use of the Committee on Science and Technology

(

Available via the World Wide Web: http://www.science.house.gov

(II)

COMMITTEE ON SCIENCE AND TECHNOLOGY

HON. BART GORDON, Tennessee, Chairman

JERRY F. COSTELLO, Illinois

EDDIE BERNICE JOHNSON, Texas

LYNN C. WOOLSEY, California

MARK UDALL, Colorado

DAVID WU, Oregon

BRIAN BAIRD, Washington

BRAD MILLER, North Carolina

DANIEL LIPINSKI, Illinois

NICK LAMPSON, Texas

GABRIELLE GIFFORDS, Arizona

JERRY MCNERNEY, California

LAURA RICHARDSON, California

PAUL KANJORSKI, Pennsylvania

DARLENE HOOLEY, Oregon

STEVEN R. ROTHMAN, New Jersey

JIM MATHESON, Utah

MIKE ROSS, Arkansas

BEN CHANDLER, Kentucky

RUSS CARNAHAN, Missouri

CHARLIE MELANCON, Louisiana

BARON P. HILL, Indiana

HARRY E. MITCHELL, Arizona

CHARLES A. WILSON, Ohio

RALPH M. HALL, Texas

F. JAMES SENSENBRENNER JR.,

Wisconsin

LAMAR S. SMITH, Texas

DANA ROHRABACHER, California

ROSCOE G. BARTLETT, Maryland

VERNON J. EHLERS, Michigan

FRANK D. LUCAS, Oklahoma

JUDY BIGGERT, Illinois

W. TODD AKIN, Missouri

JO BONNER, Alabama

TOM FEENEY, Florida

RANDY NEUGEBAUER, Texas

BOB INGLIS, South Carolina

DAVID G. REICHERT, Washington

MICHAEL T. MCCAUL, Texas

MARIO DIAZ-BALART, Florida

PHIL GINGREY, Georgia

BRIAN P. BILBRAY, California

ADRIAN SMITH, Nebraska

PAUL C. BROUN, Georgia

SUBCOMMITTEE ON INVESTIGATIONS AND OVERSIGHT

HON. BRAD MILLER, North Carolina, Chairman

JERRY F. COSTELLO, Illinois

EDDIE BERNICE JOHNSON, Texas

DARLENE HOOLEY, Oregon

STEVEN R. ROTHMAN, New Jersey

BRIAN BAIRD, Washington

BART GORDON, Tennessee

F. JAMES SENSENBRENNER JR.,

Wisconsin

DANA ROHRABACHER, California

DAVID G. REICHERT, Washington

PAUL C. BROUN, Georgia

RALPH M. HALL, Texas

DAN PEARSON Subcommittee Staff Director

EDITH HOLLEMAN Subcommittee Counsel

JAMES PAUL Democratic Professional Staff Member

DOUGLAS S. PASTERNAK Democratic Professional Staff Member

KEN JACOBSON Democratic Professional Staff Member

BART FORSYTH Republican Counsel

TOM HAMMOND Republican Professional Staff Member

STACEY STEEP Research Assistant

(III)

C O N T E N T S

American Decline or Renewal?—Globalizing Jobs and

Technology

May 22, 2008

Page

Witness List ............................................................................................................. 2

Hearing Charter ...................................................................................................... 3

Opening Statements

Statement by Representative Brad Miller, Chairman, Subcommittee on Investigations and Oversight, Committee on Science and Technology, U.S. House

of Representatives ................................................................................................ 5

Written Statement ............................................................................................ 7

Statement by Representative Ralph M. Hall, Ranking Minority Member,

Committee on Science and Technology, U.S. House of Representatives ......... 8

Written Statement ............................................................................................ 8

Prepared Statement by Representative Jerry F. Costello, Member, Subcommittee on Investigations and Oversight, Committee on Science and

Technology, U.S. House of Representatives ....................................................... 9

Prepared Statement by Representative Eddie Bernice Johnson, Member, Subcommittee on Investigations and Oversight, Committee on Science and

Technology, U.S. House of Representatives ....................................................... 9

Panel I:

Dr. Ralph E. Gomory, Research Professor, New York University Stern School

of Business; President Emeritus, The Alfred P. Sloan Foundation

Oral Statement ................................................................................................. 10

Written Statement ............................................................................................ 13

Biography .......................................................................................................... 25

Dr. Margaret M. Blair, Professor of Law, Vanderbilt University School of

Law

Oral Statement ................................................................................................. 25

Written Statement ............................................................................................ 27

Biography .......................................................................................................... 61

Dr. Bruce R. Scott, Paul Whiton Cherington Professor of Business Administration, Harvard Business School

Oral Statement ................................................................................................. 61

Written Statement ............................................................................................ 65

Discussion

A New Metric for Corporate Accountability ....................................................... 100

Corporate Incentives That Encourage Long-term Profit .................................. 101

Executive Compensation ..................................................................................... 102

Corporate Governance ......................................................................................... 104

Proposed Rule for New York Stock Exchange ................................................... 105

Free Trade and Equality ..................................................................................... 106

Pension Funds ...................................................................................................... 107

Hedge Funds ......................................................................................................... 108

Page

IV

Panel II:

Mr. James R. Copland III, Chairman, Copland Industries/Copland Fabrics,

Burlington, NC

Oral Statement ................................................................................................. 109

Written Statement ............................................................................................ 111

Biography .......................................................................................................... 160

Mr. M. Brian O’Shaughnessy, Chairman, Revere Copper Products, Inc.; Member, Board of Directors, Coalition for a Prosperous America

Oral Statement ................................................................................................. 160

Written Statement ............................................................................................ 162

Biography .......................................................................................................... 169

Mr. Wes Jurey, President and CEO, The Arlington, Texas Chamber of Commerce

Oral Statement ................................................................................................. 170

Written Statement ............................................................................................ 173

Biography .......................................................................................................... 178

Discussion

Predatory Pricing ................................................................................................. 181

More on Free Trade ............................................................................................. 184

A Comprehensive Solution .................................................................................. 185

Job Training and Competitiveness ..................................................................... 186

Appendix 1: Answers to Post-Hearing Questions

Dr. Ralph E. Gomory, Research Professor, New York University Stern School

of Business; President Emeritus, The Alfred P. Sloan Foundation ................. 192

Dr. Margaret M. Blair, Professor of Law, Vanderbilt University School of

Law ........................................................................................................................ 194

Dr. Bruce R. Scott, Paul Whiton Cherington Professor of Business Administration, Harvard Business School ....................................................................... 201

Appendix 2: Additional Material for the Record

The Global Competitive Environment, Drivers of Change, and Potential Implications for Federal Policy, Congressional Research Service, May 21, 2008 .... 204

C O N T E N T S

American Decline or Renewal? Part 2—The Past and

Future of Skilled Work

June 24, 2008

Page

Witness List ............................................................................................................. 218

Hearing Charter ...................................................................................................... 219

Opening Statements

Prepared Statement by Representative Bart Gordon, Chairman, Committee

on Science and Technology, U.S. House of Representatives ............................. 225

Statement by Representative Brad Miller, Chairman, Subcommittee on Investigations and Oversight, Committee on Science and Technology, U.S. House

of Representatives ................................................................................................ 221

Written Statement ............................................................................................ 222

Statement by Representative F. James Sensenbrenner Jr., Ranking Minority

Member, Subcommittee on Investigations and Oversight, Committee on

Science and Technology, U.S. House of Representatives .................................. 223

Written Statement ............................................................................................ 224

Page

V

Prepared Statement by Representative Jerry F. Costello, Member, Subcommittee on Investigations and Oversight, Committee on Science and

Technology, U.S. House of Representatives ....................................................... 225

Prepared Statement by Representative Eddie Bernice Johnson, Member, Subcommittee on Investigations and Oversight, Committee on Science and

Technology, U.S. House of Representatives ....................................................... 225

Witnesses:

Dr. John B. Russo, Coordinator, Labor Studies Program; Co-Director, Center

for Working-Class Studies, Williamson College of Business Administration,

Youngstown State University, Ohio

Oral Statement ................................................................................................. 226

Written Statement ............................................................................................ 228

Biography .......................................................................................................... 230

Mr. Frank H. Morgan, Attorney, White & Case LLP, Washington, D.C.

Oral Statement ................................................................................................. 230

Written Statement ............................................................................................ 232

Biography .......................................................................................................... 304

Mr. Howard F. Rosen, Visiting Fellow, The Peterson Institute for International Economics; Executive Director, The Trade Adjustment Assistance

Coalition

Oral Statement ................................................................................................. 304

Written Statement ............................................................................................ 306

Biography .......................................................................................................... 366

Ms. Jeanie Moore, Vice President, Continuing Education Programs, RowanCabarrus Community College, Salisbury, North Carolina

Oral Statement ................................................................................................. 366

Written Statement ............................................................................................ 369

Biography .......................................................................................................... 385

Dr. Thomas I. Palley, Founder, Economics for Democratic and Open Societies

Project, Washington, D.C.

Oral Statement ................................................................................................. 385

Written Statement ............................................................................................ 388

Biography .......................................................................................................... 401

Ms. Diana Furchtgott-Roth, Director, Center for Employment Policy and Senior Fellow, The Hudson Institute, Washington, D.C.

Oral Statement ................................................................................................. 401

Written Statement ............................................................................................ 403

Biography .......................................................................................................... 405

Discussion

Job Protection ....................................................................................................... 407

Wages and Inflation ............................................................................................. 410

A New Metric for Corporate Accountability ....................................................... 410

The DOD Model of Community Assistance ........................................................ 413

Trade Adjustment Assistance ............................................................................. 414

The Service Industry and Trade Adjustment Assistance ................................. 417

Challenges and Lessons for Community Colleges ............................................. 419

The Emotional Cost of De-industrialization ...................................................... 421

Part-time Training and TAA ............................................................................... 423

Supporting and Developing a Healthy Workforce ............................................. 424

Health Care Costs ................................................................................................ 426

Appendix: Additional Material for the Record

The Globalization of R&D and Innovation: Scale, Drivers, Consequences, and

Policy Options, Committee Print, Serial No. 110–A, May 2008 ....................... 430

(1)

AMERICAN DECLINE OR RENEWAL?—

GLOBALIZING JOBS AND TECHNOLOGY

THURSDAY, MAY 22, 2008

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON INVESTIGATIONS AND OVERSIGHT,

COMMITTEE ON SCIENCE AND TECHNOLOGY,

Washington, DC.

The Subcommittee met, pursuant to call, at 10:05 a.m., in Room

2318 of the Rayburn House Office Building, Hon. Brad Miller

[Chairman of the Subcommittee] presiding.

2

3

HEARING CHARTER

SUBCOMMITTEE ON INVESTIGATIONS AND OVERSIGHT

COMMITTEE ON SCIENCE AND TECHNOLOGY

U.S. HOUSE OF REPRESENTATIVES

American Decline or Renewal?—Globalizing Jobs

and Technology

THURSDAY, MAY 22, 2008

10:00 A.M.–1:00 P.M. 2318 RAYBURN HOUSE OFFICE BUILDING

Purpose:

The purpose of this hearing is to assess the effects of the globalization of jobs and

technology on the American economy, and to develop an understanding of the incentives and disincentives that influence United States firms’ decisions on whether to

locate at home or abroad the production and research facilities that are critical

sources of value creation and high-paying jobs. Firms’ thinking both on whether to

retain or to offshore existing U.S.-based capacity and on where to locate new investment will be explored.

The Committee on Science and Technology annually authorizes the expenditure

of billions of dollars to support scientific research. It therefore has a direct interest

in the extent to which the benefits of the innovations spawned by this federal funding are captured by the U.S. national economy and for the taxpayers with whom

the funding originates. The Committee has a specific interest, through its connection

to the National Institute of Standards and Technology, whose budget it authorizes,

in the health of the Nation’s manufacturing industries. Finally, the vigor of the Nation’s scientific research enterprise, like the health of the economy that supports it,

is closely linked to its ability to sustain value creation—in the form of both technological innovation and high-value added production—within its borders.

This hearing has been designed to help the Committee in identifying measures

that might increase the likelihood of high-value-added activity’s remaining, increasing, and succeeding within U.S. borders, and thereby contributing to the future

health of the America’s economy and the future prosperity of its citizens.

Witnesses:

Panel One

Dr. Ralph E. Gomory currently serves both as Research Professor at the NYU

Stern School of Business and as President Emeritus of the Alfred P. Sloan Foundation. A mathematician who was a longtime Director of Research at IBM, he is author with the economist William J. Baumol of the book Global Trade and Conflicting National Interests.

Dr. Margaret M. Blair is a Ph.D. economist who serves as Professor of Law at

Vanderbilt University Law School. She is the author of numerous scholarly articles

on corporate governance and of the book Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century.

Dr. Bruce R. Scott is the Paul Whiton Cherington Professor of Business Administration at Harvard Business School. One of the founders of the competitiveness debate in the 1980s, he has a new book, Capitalism, Democracy, and Development, due

to be published in October.

Panel Two

Mr. James R. Copland III is the Chairman of Copland Industries, Inc., and

Copland Fabrics, Inc., located in Burlington, NC; he served as the companies’ President, Treasurer, and CEO from 1986 until 2004. He is also the founder of two banks

and currently serves as Director of four banks.

Mr. Brian O’Shaughnessy has been Chairman since 1988 of Revere Copper Products, Inc., in Rome, NY, and until recently served as President and CEO as well.

He also serves on the Board of Directors of the Coalition for a Prosperous America,

4

three copper industry trade associations, and three manufacturing associations in

New York State.

Mr. Wes Jurey is the President and CEO of the Arlington Chamber of Commerce

in Arlington, TX. He founded the Center for Workforce Training & Preparation in

El Paso, TX, and currently serves as Chair of the U.S. Chamber’s Institute for a

Competitive Workforce and as a member of the Texas Workforce Investment Council.

5

Chairman MILLER. Thank you to all of you, and welcome to this

interesting hearing today, American Decline or Renewal?—

Globalizing Jobs and Technology. The jurisdiction for Oversight is

more indulgent than the jurisdiction the Committee has for legislation. If this committee tried to claim jurisdiction for legislation

coming out of any of the discussions today, we probably would be

in a death struggle with other committees that would probably win

that struggle, but part of our jurisdiction is to consider American

competitiveness generally. There are several items in our jurisdiction that give us that broader authority at least to think about how

American business needs to be more competitive, and much of the

Committee’s work in the last two years has been on that subject.

And certainly this hearing today gets at that subject as well.

The former Vice Chairman of the Federal Reserve Board, Alan

Blinder, observed, ‘‘What I’ve learned is anyone who says anything

that obliquely sounds hostile to free trade is treated as an apostate.’’ Actually, that apostasy is very welcome in parts of my district that has suffered a great deal of job loss in the last decade,

in the last generation.

The faith that Blinder has recently begun to question himself has

guided both our policy and international economic policy for more

than two decades. Its credo is that lowering trade barriers while

curbing regulation produces the greatest growth. According to its

doctrine, this new order would provide undiluted benefits to an advanced nation like ours. It would free Americans trapped in traditional jobs for more sophisticated, remunerative work, while flooding the world with goods and services made in the United States.

I represent a lot of folks who do not feel that they were trapped

in traditional jobs but really wish they still had those jobs.

But 15 years after the ratification of NAFTA and 13 years after

the birth of the WTO, the ranks of the doubters seem to be growing.

Could this reflect America’s net loss of 3.5 million manufacturing

jobs since 2001? Many workers have been freed from being trapped

in traditional jobs, but have not found other jobs that are as wellpaid, or as easy to support themselves and a family on as the jobs

that they lost.

Could it reflect the fact that the United States’ merchandise

trade deficit has risen every year but one over the last decade and

has hovered around three-quarters of a trillion dollars for three

years running? Our trade surplus in services is tiny by comparison.

In 2007, it was only around one-eighth the goods deficit’s size.

Could this reflect the Nation’s assumption since 2001 of $10 trillion in new debt, $6.5 trillion by households, $3.5 trillion by the

Federal Government? Is that an indication that we have not produced anywhere near the level at which we would like to consume?

Could it reflect anxiety over the rise of colossal sovereign wealth

funds that are using what they take in from us to buy up our industrial and financial assets?

In this context, the hardships of working Americans are proving

longer lasting and are deeper. Lawrence Summers, the Treasury

Secretary under President Clinton and before that, Chief Economist of the World Bank, a strong supporter of globalization in the

past, last month wrote of ‘‘a world where Americans can legitiVerDate 11-MAY-2000 19:05 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00015 Fmt 6633 Sfmt 6601 C:\WORKD\I&O08\052208\42371 SCIENCE1 PsN: SCIENCE1
6

mately doubt whether the success of the global economy is good for

them.’’ He also acknowledged that ‘‘growth in the global economy

encourages the development of stateless elites whose allegiance is

to global economic success and their own prosperity rather than the

interests of the Nation where they are headquartered.’’

When even folks like Summers, one of the architects of the current international trading system, are now feeling and saying out

loud concerns like that, it heralds a significant change in the public

debate on the global economy and the values of the global economy

to American workers. No longer can we in good conscience avoid

the question, what are we to do about it? If we are to find effective

answers, we must be open to new ideas, even ideas that might

have seemed apostasy in the past. We must be prepared to discover

that we know less than we thought about the consequences of

globalization or even that some of our basic views on the subject

may rest on mistaken assumptions.

The panelists in the first panel today point out that much of our

economic theory is built on a society in which the baker sells his

bread to the candlestick maker who sells his candles to the miller

who sells his flour to the baker. And with the kind of size, the kind

of capital, the kind of labor force required for the economy today,

that may not be the best model. It may not be one that truly describes the economy of the world that exists now.

We have two panels, each of which will, in its own way—in different ways—help us consider these apostate ideas.

The first panel will offer their perspectives on the beliefs that

have, for several generations, shaped the design and governance of

our world trading system, as well as our expectations of proper behavior by corporations. One of the members of the panel, Dr. Ralph

Gomory, last year testified before the Science and Technology Committee that the interests of U.S.-based multinational corporations

are no longer necessarily in step with those of a healthy American

economy, certainly an apostate idea. Today the members of this

panel will question things we think we know, about the role and

responsibilities of corporations, about the relationship of the state

and the market, about the ability of technological innovation to ensure our country’s economic prosperity in the absence of changes in

the trading system. And they will suggest some measures that

might strengthen America for the future.

The second panel is testimony from the trenches. Two heads of

domestic companies will talk about their commitment to producing

at home, what they do out of concern for the well-being of their employees, the viability of the communities in which their businesses

are located, and the sustainability of the Nation’s economy. They

will tell us about the cost of upholding that commitment under the

current trading system and suggest how the Federal Government

might help lighten their burdens now. Joining them is a regional

development expert who will explain what it takes to attract investment as the lure of off-shoring becomes more prevalent, and

will add some ideas of his own about how to improve American

competitiveness.

I will yield back the balance of my time which expired a long

time ago and recognize now the distinguished Ranking Member,

not Mr. Sensenbrenner, but Mr. Hall for his opening statement.

7

[The prepared statement of Chairman Miller follows:]

PREPARED STATEMENT OF CHAIRMAN BRAD MILLER

‘‘What I’ve learned,’’ former Fed Vice Chairman Alan Blinder has observed, ‘‘is

anyone who says anything even obliquely that sounds hostile to free trade is treated

as an apostate.’’

The faith that Blinder has recently begun to question has guided both U.S. and

international economic policy for more than two decades. Its credo is that lowering

trade barriers while curbing regulation produces optimal growth. According to its

doctrine, this new order would provide undiluted benefit to an advanced nation like

ours. It would free Americans trapped in traditional jobs for more sophisticated, remunerative work, while flooding the world with goods and services made in the

U.S.A.

But 15 years after the ratification of NAFTA, and 13 years after the birth of the

WTO, the ranks of the doubters seem to be growing.

• Could this reflect America’s net loss of 3.5 million manufacturing jobs since

2001?

• Could it reflect the fact that the U.S. merchandise trade deficit has risen

every year but one over the past decade, and has hovered around three-quarters of a trillion dollars for three years running? By the way, our trade surplus in services is tiny in comparison. In 2007, it was only around one-eight

the goods deficit’s size.

• Could this reflect the Nation’s assumption since 2001 of $10 trillion in new

debt, $6.5 trillion by households, $3.5 trillion by the Federal Government—

an indication that we have not produced anywhere near the level at which

we wish to consume?

• Could it reflect anxiety over the rise of colossal Sovereign Wealth Funds that

are using what they take in from us to buy up our industrial and financial

assets?

In this context, the hardships of working Americans are proving enduring and

profound. Lawrence Summers—Treasury Secretary under President Clinton and, before that, Chief Economist of the World Bank—last month wrote of ‘‘a world where

Americans can legitimately doubt whether the success of the global economy is good

for them.’’ He also acknowledged that ‘‘growth in the global economy encourages the

development of stateless elites whose allegiance is to global economic success and

their own prosperity rather than the interests of the Nation where they are

headquartered.’’

That even such a figure as Summers, one of the architects of the current international trading system, is now expressing such concerns heralds a significant

change in public discourse on the global economy. No longer can we in good conscience escape the question: What do we do about it? If we are to find effective answers, we must be open to hearing new ideas. We must be prepared to discover that

we know less than we thought about the consequences of globalization, or even that

some of our basic views on the subject may rest on mistaken assumptions.

Today we have two panels, each of which will, in its own way, help us along this

path.

The first panel will offer new perspectives on the beliefs that have, for several

decades, underlain the design and governance of the world trading system, as well

as our expectations of proper behavior by corporations. One of its members, Dr.

Ralph Gomory, last year testified before the Science and Technology Committee that

the interests of U.S.-based multinational corporations are no longer necessarily in

step with those of a healthy American economy. Today the members of this panel

will question things we think we know—about the role and responsibilities of corporations, about the relationship of the state and the market, about the ability of

technological innovation to ensure our country’s economic prosperity in the absence

of changes in the trading system. And they will suggest some measures that might

strengthen America for the future.

The second panel will bring us into the trenches. Two heads of domestic firms will

talk about their commitment to producing at home, which they do out of concern

for the well-being of their employees, the viability of their communities, and the sustainability of the Nation’s economy. They will also tell us about the cost of upholding that commitment under the current trading system, and suggest how the Federal Government might help lighten their burdens now. Joining them is a regional

development expert who will explain what it takes to attract investment as the lure

8

of offshoring becomes more prevalent, and will add some ideas of his own on how

to improve American competitiveness.

With that I yield back my time—which has, in fact, already expired—and recognize the distinguished Ranking Member for his opening statement.

Mr. HALL. Thank you, Chairman Miller, and you very adequately

gave an opening statement that covers I think everything that

ought to be covered, and I am not here to take Mr. Sensenbrenner’s

place. I’m just here to carry out the bylaws that there has to be

a Minority here before he can hit that gavel down and we get started hearing your testimony. But don’t be alarmed that for the lack

of Members that are here. And Mr. Sensenbrenner is not here because he fell yesterday, and the good news is that he was not badly

injured. He is all right, and he will be back with us shortly.

But all the empty seats, most all of us have about three or four

things to do every hour of the day here; and your testimony under

the Chairman’s guidance is taken down. It is even being televised,

and everybody in the Congress will read it and see it. So you are

not talking to the empty chairs. You have the most important people, staffers back here, that tell us what you said, you know, when

we get back to our offices. But I won’t even be here very long, but

I have great admiration for the Chairman, and I know he is going

to handle it well. I yield back my time. I ask unanimous consent

to put my opening statement in the record.

Chairman MILLER. Certainly, without objection.

[The prepared statement of Mr. Hall follows:]

PREPARED STATEMENT OF REPRESENTATIVE RALPH M. HALL

Today’s hearing will address a topic that this committee has looked at several

times in the past year—globalization. This new global marketplace has created

many opportunities and challenges that corporations, governments, and workers

must now adapt to. Today’s hearing will touch on a number of broad issues both

in and out of this committee’s jurisdiction.

While our thinking should not be limited by such artificial boundaries, we should,

however, be cognizant of what we can actually affect. STEM education and Federal

Research and Development are clearly topics that this committee should address.

From the National Academies Rising Above the Gathering Storm report, to the

President’s American Competitiveness Initiative, to this committee’s COMPETES

Act, this committee is actively engaged in maintaining America’s preeminence in

Science and Technology. It is in these areas that we can continue to influence how

our nation responds to a globalized economy.

I look forward to the witness’ comments on other topics such as currency manipulation, subsidization, corporate governance, price fixing, regulatory policy, patent reform, and tort reform. These issues are certainly an important aspect of

globalization, but ultimately may not be the most appropriate topics for the Science

Committee to address. Nevertheless, much like the intertwined global economy,

many of these issues are also interrelated so I look forward to hearing our guests’

perspectives.

Thank you. I yield back the balance of my time.

Chairman MILLER. I hope the Members did not really believe

that every Member of Congress is going to read the transcripts of

today’s hearings, but I do still think, even if a relatively small

number of people even learn in the most general terms what was

discussed, it will advance the debate and allow us to consider these

questions in ways we haven’t before but need to.

And I ask unanimous consent that all additional opening statements submitted by any Member be included in the record. And

without objection, it is so ordered.

[The prepared statement of Mr. Costello follows:]

9

PREPARED STATEMENT OF REPRESENTATIVE JERRY F. COSTELLO

Chairman Miller, thank you for your continued attention to one of the most important issues facing our nation. The changing nature of the international economy

has had profound effects on the American workforce. How we confront the long-term

effects of this phenomenon is critically important for our future economic health.

It is a familiar refrain over the last 15 years: more jobs, particularly manufacturing jobs, have left the U.S. and gone overseas, where workers are paid substantially less. And this activity has not been limited to blue collar jobs. As China and

India produce more and more engineers and other high-tech workers—that also

work for less than their American counterparts—white collar jobs are lost abroad.

While our economy slows and rising food and gas prices are squeezing families,

the average American worker’s wages have stagnated, and most manufacturing

workers that lose their jobs make less in their next job.

Our country’s success has been underpinned to a great degree by the fact that

a person without a college education could find a good-paying job, enough to raise

a family, afford an occasional vacation, and generally live a higher standard of living than his parents.

For many Americans, that ideal is in jeopardy. Service sector jobs do not pay as

well as manufacturing jobs, and often come without benefits. While our economy remains the most innovative in the world, not everyone will be able to acquire the

skills to survive the demands of the 21st Century workforce. My overarching question to our panelists is, how do we rebuild the U.S. job base?

Mr. Chairman, thank you for holding this hearing. I look forward to the insights

of our witnesses and appreciate their taking the time to discuss these issues with

us today.

[The prepared statement of Ms. Johnson follows:]

PREPARED STATEMENT OF REPRESENTATIVE EDDIE BERNICE JOHNSON

Thank you, Mr. Chairman. I want to commend this subcommittee’s work on today’s hearing.

The topic is of great interest: an in-depth analysis of the incentives and disincentives when it comes to global outsourcing of high technology jobs.

A simple Internet search for global outsourcing in Texas yields several large corporate business names.

These businesses advertise themselves as being proficient and helping other businesses outsource their work, globally.

Mr. Chairman, I believe that as information technology continues to improve, that

global outsourcing will be the way business is done. This trend will become ever

more routine.

My concern is regarding which jobs stay in the United States, and which jobs go

to other nations.

Science, technology, and engineering jobs are among the higher paying, more rewarding ones. The fruits of this work pay untold dividends to a society.

There will always be a place, here and abroad, for attorneys, manufacturers,

teachers, bankers, and business people. These can be high-paying and valuable professions.

I believe that STEM jobs—those involving science, technology, engineering and

mathematics—present critical sources of value creation and prosperity to individuals and to society.

Let us use Silicon Valley, for an example. Had the Internet boom occurred initially in India, would that nation now surpass us in computer science innovation?

Some would argue that, in some sectors, it is already doing so.

I am pleased that our witnesses bring expertise from the academic standpoint as

well as the business perspective.

Hopefully, the information will enable the Subcommittee to get a sense of decision-making that goes into firms’ thinking both on whether to retain or to offshore

existing U.S.-based capacity and on where to locate new investment.

Thank you, and I yield back.

Chairman MILLER. It is now my pleasure to introduce our witnesses today. The first is Dr. Ralph Gomory who currently serves

as a Research Professor at the NYU Stern School of Business and

is President Emeritus of the Alfred P. Sloan Foundation. Dr. Margaret Blair is a Ph.D. economist who serves as Professor of Law at

Vanderbilt University School of Law. Dr. Bruce Scott is Paul

10

Whiton Cherington Professor of Business Administration at the

Harvard Business School. You will each have five minutes for your

oral testimony. Your written testimony will be included in the

record for the hearing. When you complete your testimony, we will

begin with questions. Each Member will have five minutes to question the panel. As this is an Investigations and Oversight Subcommittee, it is our practice to take testimony under oath. The

likelihood of a perjury prosecution coming out of this hearing seems

remote, but we do still take testimony under oath.

Do any of you object to being sworn? All right. And you also are

allowed counsel if you prefer. We ask you these questions to put

you at ease.

Ms. JOHNSON. Mr. Chairman?

Chairman MILLER. Yes, Ms. Johnson?

Ms. JOHNSON. Pardon me for breaking in but I have a markup

starting at 10:30——

Chairman MILLER. Yes, ma’am.

Ms. JOHNSON.—and I notice on the witness list here there is

someone from my area, the President and CEO of Arlington Chamber of Commerce, and I simply want to welcome him and then reiterate Mr. Hall’s comment about us getting the information even if

we are not here. But I do have a markup.

Chairman MILLER. Ms. Johnson, would you like to introduce—he

is on the second panel, but if you would like to introduce him now

that would be fine.

Ms. JOHNSON. I don’t even know him.

Chairman MILLER. Well, thank you. I will be pleased to welcome

him for you and for the rest of the panel, and I wish you well at

your markup.

And none of you have counsel? All right. If you would now all

rise and raise your right hand, do you swear to tell the truth and

nothing but the truth? Thank you. The record will reflect that all

answered that they did so swear.

Dr. Gomory, you may begin. You do need to turn on your microphone.

Mr. GOMORY. I am sorry.

Panel I:

STATEMENT OF DR. RALPH E. GOMORY, RESEARCH PROFESSOR, NEW YORK UNIVERSITY STERN SCHOOL OF BUSINESS; PRESIDENT EMERITUS, THE ALFRED P. SLOAN FOUNDATION

Dr. GOMORY. I am here just representing myself, not the Sloan

Foundation, not New York University. For myself, let me say how

pleased I am to have this opportunity to discuss these crucial

issues, and I thank you, Mr. Chairman, and Members of the Committee for having organized this hearing.

I will make only one basic point in my testimony, and that is

that in this era of globalization, the interest of global corporations

and their countries have diverged; and if most Americans are to

benefit from globalization, we must change this situation and there

are ways to do that.

11

After all, what is it that countries want of their corporations? I

say two things. One, countries have looked to their corporations to

be productive at making what they make, and second, to enable the

people of the country to earn a living by being a part of these productive organizations.

Now, if we look at the behavior of corporations, it is clear that

profit is something that really matters to corporations.

Globalization has now made it possible for global corporations to

pursue their profits by building capabilities abroad and instead of

investing along side U.S. workers and using that investment in

R&D and all the rest to increase their productivity, corporations

today can produce goods and services abroad using low-cost labor

and import those goods and services into the United States.

But increasing their profits this way, they are not fulfilling the

social purpose of allowing Americans to participate in the production of goods. Economists correctly point out that this often results

in the availability of cheaper goods and that itself is a social good,

and that is certainly true; but it is also true that as we lose our

capabilities in many areas, we have less to trade for those goods

so that eventually, the cheaper goods become expensive in real

terms and you come out behind, not ahead.

The idea that the industrial development of your trading partner

can actually become harmful to your total GDP has appeared in the

economic literature from time to time. With a detailed understanding that Professor Baumol and I have added to that viewpoint

in our book, there is a good reason to think that the rapid industrialization of some Asian countries is harmful to the United States

overall, not just in some areas.

Now, let me say that U.S. corporations were not always purely

profit oriented. When Reginald Jones became the CEO of General

Electric in 1972, he announced that his responsibilities would be

equally split among the company and its shareholders, its employees, the American industry, and the Nation; and that sense of

broad responsibility was at that time—and I remember it myself—

pervasive in American industry.

But in the years since then, that view of corporate leadership has

been largely replaced by the idea that the business of business is

solely to make profit for shareholders and that in the pursuit of

profits or shareholder value, all other values should be sacrificed.

And what has been the result of that?

During the three decades after 1973, GDP increased steadily as

new technologies were introduced that increased productivity; but

during this period, the gains from this increase were distributed in

a very skewed fashion. Over those 30 years, most Americans have

seen little or no growth in real wages. The gains from this impressive productivity growth have been going to the wealthy and, even

among them, to the very wealthy primarily.

While many explanations have been brought forward for this remarkable divergence of the richer and poorer in our country, one

very simple one has received little attention. But let us note that

the shares of corporations are held overwhelmingly by those who

are already wealthy. Ninety percent of shares are held by the top

20 percent or by those like top executives who will become wealthy

if share values go up. And if corporations focus on share value to

12

the exclusion of anything else, this is an automatic mechanism for

increasing inequality and the skewed distribution.

But with the onset of globalization, the capital, know-how, and

technology that once made American workers the most productive

in the world are being transferred overseas to other workers who

will do the same job for a fraction of the wage. This makes for excellent corporate profits, but it leaves American workers out and it

will leave most Americans as losers, not winners from

globalization.

Can anything be done about this? The answer is yes, but we will

have to do some new things. While the United States has no national stated strategy aimed at the goal of greater GDP, there is

no lack of individual suggestions about ways to improve the U.S.

economic situation. This often translates into asking for improved

K through 12 education, et cetera, et cetera, et cetera; and I discuss all these in my written testimony. However, the main thrust

of this testimony today is on the issue of better aligning corporate

and national goals. We need to consider a U.S. economic strategy

that provides incentives to companies to have high value-added

jobs in the United States. If we want high value-added jobs, let us

reward companies for having such jobs. Let us consider a corporate

income tax that does that, and we don’t care how they do it, whether it is through R&D, advanced technology, or by just plain American ingenuity exercised at every level. Such a tax could be revenue

neutral, low on producers and high on the non-producers. Such a

tax would encourage corporations to return to what a country

wants of them, high output and jobs in this country.

Many people would oppose this or any similar move, saying that

our national economic strategy is and should be to leave markets

alone and take whatever free markets produce. But when you think

for one second, you realize there is no one free market. All markets

are affected by all our regulations and our tax structures. And so

the question simply remains, which free market are you describing

and which free market do you want?

However, we cannot do these things that I have described or anything effective if we do not balance trade. If we do not balance

trade, we cannot be in control of our own destiny. We will continue

to be the victims of merchantless practices and there is nothing to

prevent U.S. corporations from leaving the country and working

from abroad if they prefer that to what it means to be a U.S. corporation.

But trade can be balanced. There are many approaches to this,

but in this limited time, I would only mention one, a remarkable

approach described by Warren Buffet and based on what he calls

import certificates.

If most Americans are to benefit rather than lose—let me summarize—if most Americans are to benefit rather than lose from

globalization, we need to re-align the goals of corporations with

those of the Nation, and we must balance trade to control our own

destiny and there are ways to do both these things. Let us start

now.

[The prepared statement of Dr. Gomory follows:]

13

PREPARED STATEMENT OF RALPH E. GOMORY

Mr. Chairman and Members of the Committee:

Thank you for the opportunity to take part in this hearing. The subjects that we

are to discuss today are the ones to which I have devoted much of my working life.

For almost 20 years I was the head of the research effort of a major international

corporation, (IBM). For the last 18 years I was the head of a major foundation (Alfred P. Sloan) deeply interested in science and technology. Today I am a Research

Professor at New York University’s Stern School of Business.

In addition, for almost my entire adult life, I have been active as an individual

researcher—first in mathematics and more recently in economics. I am pleased and

honored to be here today and to have this opportunity to testify.

Some of you may remember that I testified to the full Science and Technology

Committee on June 12 of last year on the subject of the globalization of R&D. At

that time I stated:

The effect on the United States of the internationalization of the scientific and

technical enterprise can only be understood as one part of the revolutionary

process of globalization, which is fundamentally revising the relation of companies to the countries from which they have originated. In this new era of

globalization the interests of companies and countries have diverged. What is

good for America’s global corporations is no longer necessarily good for the

American economy.

My testimony today will bear on this same question, viewed in the broader context of the evolving relation of countries and companies. I will address the impact

of these events on the overall ability of this country to produce a large GDP (value

of the total national product), as well as on the rapidly growing problem of extreme

inequality in the distribution of that national product. Nonetheless, my conclusion

will be exactly the same:

What is good for America’s global corporations is no longer necessarily good for the

American economy.

To see why this is so, let us review the fundamental social role that the corporation fulfills in this country and in other developed countries.

The Basic Social Function of the Corporation

For a very long time most of the work of the world was done on farms or in small

shops. An individual could learn the printing trade or shoe making and graduate

to his own shop; a family could run a farm. In both cases an individual or very small

groups of people could grow crops or make shoes that could be sold to others and

thus have the money to supply what was not made at home.

But today the goods we consume cannot be made at home; they are complex and

require large organizations to create them. You cannot manufacture a car in your

garage; it takes a large-scale organization to do it. The food you eat is not produced

by a family on a nearby farm, but is made by large organizations on highly mechanized farms with machinery produced by other large organizations. The food itself

then travels on highly organized transportation networks to get to huge outlets,

where nearby you can pick up a refrigerator made by another large organization or

a television set that no individual or small group could ever build.

The same is true of services: there is no way to build your own telephone service.

And even medicine, one of the last strongholds of the individual practitioner, is rapidly agglomerating into large-scale enterprises.

A person must now be part of an organization that makes or distributes the complex goods and services that people buy today. Being part of an organization is what

people must do to earn a living and support themselves and their families. The fundamental social role of corporations and other businesses is to enable people to participate in the production of the goods and services that are consumed in the modern world; the corporation enables them to earn a share of the value produced for

themselves and their families.

My testimony bears on the question of how well America’s global corporations are

fulfilling that fundamental purpose today. The whole thrust of my testimony is that

in the last few decades the shift in corporate motivation toward emphasizing profits

above everything else has had a deleterious effect on the way they are fulfilling that

role. That deleterious effect is now being enormously accelerated through

globalization.

14

1See References 1–6.

2This is summarized from Reference 7.

The Role of Profits and Competition

Business organizations today do not proclaim the social mission that I have just

described; rather, they make clear that they are there to make profits for their

shareholders.

I understand very well that profit is a creative force. Companies come into existence to create profits, and to do that they create GDP, the goods and services that

constitute a nation’s economic output. And in constantly striving for more profits,

companies tend to become ever more efficient and create ever more GDP. As Adam

Smith pointed out, ‘‘It is not from the benevolence of the butcher, the brewer or the

baker that we expect our dinner, but from their regard to their own interest.’’

Today’s butcher and baker are corporations, and their interest is profits.

But while it is true that profit can be a creative force it is also true that emphasizing profit above everything else can be bad for the Nation. Profit under the right

circumstances can be an energizing force that creates GDP. But we should remember that from a national point of view, profit is a means to the end of creating GDP,

not an end in itself.

The Divergence of the Profit Motive and the Fundamental Role

Globalization has now made it possible for global corporations to pursue their

profits by building capabilities abroad. Instead of investing alongside U.S. workers

and using their investment and R&D to increase their productivity, corporations

today can produce goods and services abroad using low-cost labor and import those

goods and services into the United States. But in creating their profits this way, they

are building up the GDP of other countries while breaking their once tight links

with America’s own GDP.

Economists will sometimes argue that this development of capabilities abroad is

good for the U.S. economy as a whole. For one thing, we get cheaper goods. That

is certainly true, but it is also true that if we lose our superior capabilities in many

areas and are less competitive, we have less to trade for those goods, so that eventually the cheaper goods become expensive in real terms. I do not intend to repeat

today the arguments that I have already outlined to the Full Committee in my earlier testimony and that are spelled out in the book on global trade and its consequences that I co-authored with Professor Will Baumol.

I would like to point out, however, that the view that the industrial development

in your trading partner can be harmful to your total GDP is not new. There is a

long history of well known economists making that observation, most recently Paul

Samuelson.1 What Professor Baumol and I have added to that long history in our

book ‘‘Global Trade and Conflicting National Interests’’ is the realization that the

benefits of your trading partner’s economic development occur in the early stages

of its development, and as your partner becomes more fully industrialized and is no

longer confined to low value-added industries, further development is harmful to

your GDP.

This result, which we derive rigorously from the most standard economic models,

corresponds to the intuitive notion that we do well when we lose low-wage jobs and

not well when we start losing high-wage or high-tech jobs .And that is what we are

seeing today. And as I said in my previous testimony, in agreeing with my co-panelist Professor Alan Blinder, there are many reasons to believe that the impact on

the United States will be severe.

In addition to the impact on GDP, the Effect of Globalization on Inequality

Globalization was not the beginning of the divorce between corporate profits and

the economic welfare of the American people. It is rather a very large next step

down a long road already traveled. To see how far we have come, let us look back

35 years.

Reginald Jones became CEO of General Electric in 1972, and shortly thereafter

made two remarkable speeches to the Business Roundtable and the National Press

Club.2

Mr. Jones said that with his appointment as CEO, he would henceforth view his

responsibilities as being equally split among the company and its shareholders, employees, American industry, and the Nation. This sense of broad responsibility became pervasive in American industry. In fact, urged on by Jones, the Business

Roundtable—the organization of major company CEOs intended to look after the interests of business in the public policy arena—formally endorsed in 1981 the policy

that shareholder returns had to be balanced against other considerations.

15

3This is discussed in much greater detail in Reference 8 Chapter 1, especially pages 22 and

23 and in Reference 9 Chapter 7. See also Reference 7. 4From Reference 7.

5 Reference 8, page 23.states that almost that 90 percent of shares are held by the top 20 percent of stock owners and has further data.

In the intervening years that view of corporate leadership has waned, largely replaced by the idea that the business of business is solely to make profits for shareholders, and that in the pursuit of profits, or shareholder value, all other values can

be sacrificed.

In the decades from 1973 to now, GDP increased steadily as new technologies

were introduced that increased productivity. If the gains in productivity had been

reflected evenly in incomes, a typical worker would get 35 percent more today than

in 1973. In fact, the typical worker saw a far smaller gain. Median household income grew about 16 percent since 1973, much of that gain being due to the fact that

many households became two-earner households. So, instead of looking at households, if we look instead at individual workers—for example, men in the 35–40 age

bracket—their inflation-adjusted wages have in fact decreased in real terms since

1973.

In fact the gains from productivity growth have been going to the rich—and even

among the rich, primarily to the very rich—while most Americans have seen little

or no growth in real wages.3 While details can be disputed, as is the case with much

economic data, the general trend toward a sharply increasing degree of inequality

in incomes and wealth cannot be disputed; and we are seeing today a concentration

of wealth at the very top, unmatched since the days of the so-called ‘‘robber barons’’

at the close of the 19th century.

And just to remove any ambiguity about what is going on, in 2004 the Business

Roundtable revised its earlier position on CEO responsibility and publicly asserted

that the obligation of business is only to maximize shareholder wealth.4

While many explanations have been brought forward for this divergence of the

richer and the poorer in our country, one very simple one has received remarkably

little discussion. Companies today are aimed primarily at maximizing shareholder

gains, and their shares are held overwhelmingly by those who are already wealthy5

or by those, like top executives, who will become wealthy if share values go up. Corporations today are motivated to cut wages and benefits whenever they can to increase profits and shareholder value. The money saved from wages and benefits

comes out of the middle and lower income groups; the gain in profits goes to the

wealthy.

As we remarked above, important American corporations have found that the

easiest way to maximize shareholder wealth today is to take their technology, knowhow and capital overseas to wherever labor is cheapest and subsidies are the greatest. The capital, know how and technology that once made American workers the

most productive in the world are being transferred overseas to other workers who

will do the same job for a fraction of the wage. This makes for good corporate profits, but it leaves American workers far behind. Corporate goals, as they are now

being stated, have been diverging for a long time from what is good for the country.

Now, however, that decades-long history of workers and more generally the middle

class losing share in the productivity gains is being accelerated by globalization. In

globalization, jobs leave the country altogether and only the corporate profits remain.

We need to realize that the interests of the American global corporation, whose

interest is profit, and the interests of most Americans, who want a higher standard

of living, have been diverging. Globalization is causing that divergence to occur faster and further than ever before.

Can Anything Be Done?

This testimony does not pretend to take on in any systematic way the task of answering the question, ‘‘What is to be done?’’ I will be content if I can contribute to

the clarification of some of the issues.

While the United States has no stated national strategy aimed at the goal of

greater GDP, there is no lack of individual suggestions about ways to improve the

U.S. economic situation vis-a`-vis the more rapidly developing nations. This often

translates into asking for improved K–12 education, especially in science and technology. While improved education can only do good, education improvement is hard

to come by and it is hard to imagine an improvement in education so profound that

it turns out Americans who are so productive that they are worth hiring in place

of the four or five Asians who can be hired for the same wage.

16

Another emphasis is the quest for innovation, usually innovation that is closely

linked to R&D. More R&D can only help. But the role of science and technology in

globalization needs to be understood. R&D does not contribute to a nation’s wealth

directly by employing large numbers of people in high value-added or high-wage

jobs. It contributes by supporting a small number of people whose work is intended

to give a competitive edge to the end product, whether that is goods or services. It

is these end products, whether they are cars or computers or medical services that

make up the bulk of a corporation’s revenues and support the wages of its employees.

If in the process of globalization the production (or delivery in the case of services)

of the good moves overseas, so do the wages. Even if R&D remains behind, the vast

bulk of value creation has moved to another country, and it is there that it supports

the wages of employees.

It is also hard to envision a significant industrial advantage vis-a`-vis other countries derived from more university research, when a large fraction of graduate students in science are from Asian countries and who return home after obtaining their

advanced degrees. Understand, too, that the great global companies Intel and Microsoft have research centers in leading universities and are well positioned to spread

the latest research to their labs and development sites in other countries around the

world.

Proposals of this sort about education and R&D can be helpful. But they can also

be harmful if they create the mistaken belief that these measures alone can deal

with the problem.

Another class of suggestions points to the U.S. infrastructure, correctly observing

the crumbling bridges, crowded airports, and the inadequate broadband, which restricts the bit traffic of the future. Again, addressing these domestic needs is worth

doing as it does add to U.S. productivity across the board.

The main thrust of this testimony, however, points to the divergence of company

goals, focused almost exclusively on profit, and the broader goals of greater GDP

and less inequality in the United States. Therefore, we need to turn our attention

not only to the familiar suggestions I have just listed, but also to the issue of better

aligning corporate and national goals.

Aligning Country and Company

Some Asian countries, for example Singapore and China, have national strategies

aimed at the rapid increase of their GDP. As past of that strategy they align corporate goals with their national goals. They have made it profitable for foreign

(often U.S.) corporations to create high value-added jobs in their countries. They do

this by offering tax and other incentives that make it profitable for corporations to

locate high value-added jobs in their countries.

We need to consider a U.S. national economic strategy that includes incentives for

companies to have high value-added jobs in the United States. If we want high

value-added jobs, let us reward our companies for producing such jobs—whether

they do that through R&D and advanced technology, or by just plain American ingenuity applied in any setting whatsoever.

The Asian countries have done this usually by individual deals with individual

companies. We have neither the tradition nor the knowledge nor the inclination in

the U.S. Government to do that. An approach that is better suited to what the

United States can do, would be to use the corporate income tax. We have already

used the corporate income tax to spur R&D, so why not apply it to directly reward

what we are aiming at—high value-added jobs.

For example, the corporate tax rate could be scaled by the value added per fulltime employee, by the workers of corporations operating in the United States. A

company with high value-add per U.S. employee would get a low rate, a company

with low value-add per U.S. employee would get a high rate. This tax could be made

revenue neutral by having a high tax rate for unproductive companies and a low

(or even negative) tax rate for productive companies. Depending on the rates, it

could be as strong or as weak an incentive as desired. This is quite doable, as valueadd is measurable. It is measured today in Europe as the basis for the value-added

tax.

Critics may say that our national economic strategy is, in fact, to leave markets

alone and take whatever free markets produce. They may also suggest that this is

the best possible economic strategy. But ‘‘free market’’ is not a single, simple concept. Do we mean free markets with or without anti-trust laws, with or without

child-labor laws or with or without the ability for labor to organize? Do we mean

free markets that do or don’t have access to government sponsored research, etc.,

etc.? The presence or absence or degree of these restrictions or abilities will produce

17

6See Interview in Reference 10.

7 Reference 11.

very different results, all coming from ‘‘free markets’’; as will different tax policies

or special loans for special industries, and so on and so on.

On the subject of government incentives, a present day General Electric CEO Jeffrey Immelt recently stated:6

If the U.S. Government ‘‘wants to fix the trade deficit, it’s got to be pushed,’’

he said. ‘‘GE wants to be an exporter. We want to be a good citizen. Do we want

to make a lot of money? Sure we do. But I think at the end of the day we’ve

got to have a tax system or a set of incentives that promote what the government wants to do.’’

On Inequality

In this part of my testimony I have discussed mainly total GDP. But we have seen

that who benefits from GDP is important too and that globalization affects the distribution GDP of wealth as well as the total GDP.

So far I have discussed mainly increasing GDP. But there is also the question of

extreme inequality, the concentration of wealth and power, and the influence over

government that goes with it.

To reduce the natural forces working toward extreme inequality we should obviously consider what can be done through taxes, individual or corporate, but also consider charters for corporations that require consideration of other factors than profit

maximization. Today in the United States, a Delaware-chartered corporation gives

nothing in return for its charter. It is interesting that Theodore Roosevelt saw the

role of corporations quite differently from the current Delaware perspective. Roosevelt’s agenda was to control and regulate corporations in the public interest.

‘‘Great corporations exist only because they are created and safeguarded by our institutions,’’ he stated in his 1901 State of the Union Message. ‘‘And it is therefore

our right and our duty to see that they work in harmony with these institutions.’’

We have an interesting mild precedent for broadening the goals of corporations

in the British Corporations Law of 2006. This law is explicit in allowing directors

to consider employees, the community and many other factors in their decisions.

Many U.S. states have in recent years passed similar statutes, but they have had

little impact so far on the actions of corporations.

Controlling Our Own Destiny

To obtain the benefits of trade in the narrow sense we need free trade. This

means, in particular, that we need to address the major distortions in the market

caused by the systematic mispricing of Asian currencies and other mercantilist practices. If we do not have a free market in currencies we cannot claim that the benefits of free trade are being achieved.

If the imbalance of trade continues there is nothing to stop the current trend of

selling off pieces of the United States to Sovereign Wealth Funds to balance the import of underpriced foreign goods. There would also be nothing to prevent U.S. companies from leaving the country, and, working from abroad, continuing to send in

goods and services thus exacerbating the imbalance and weakening the productive

capabilities of the country. On the other hand, if trade is balanced, the value of

goods imported is matched to the value of goods exported from the country; and

those goods and services are provided by corporations that comply with the U.S.

standard of what a corporation should be. Balanced trade therefore is necessary if

we are to control our own economic destiny.

Again, there is a litany of approaches to balancing trade ranging from jawboning

to tariffs. One simple approach advanced and advocated by Warren Buffet, however,

could really make a difference. It is well described in his 2003 article in Fortune.7

This approach, in contrast to import quotas or tariffs aimed at imports from particular countries, creates a free market in import certificates. It would balance trade

and would give us control over own economic destiny. Since the import certificate

approach is a major departure from the past it should be introduced gradually. But

we should take this approach seriously. In fact, a bill based on the Buffet approach

has been introduced into the Senate by Senator Dorgan and Senator Feinstein.

Conclusion

We live in a world of rapid technological change. That change has made possible

a degree of globalism in economic development that was previously not possible. In

so doing it has strongly accelerated the emerging gap between the goals of global

18

corporations and the aspirations of the people of individual countries. This is true

not only in the United States but also in less developed countries. Even when

globalization increases a country’s wealth, which it does not always do, most of the

gains are going to a thin upper crust, and the bulk of the people do not participate.

We need to change this and better align the goals of corporations and the aspirations of the people of our country. This is not an idle dream, the growth we had

in America in the decades after WWII and before 1970 was both rapid and well distributed. Americans of almost every stripe benefited.

To do this today we must realign the interests of global corporations with those

of the country. We have given a few examples of changes that could push in that

direction. However, much more thought is needed in that direction. If we look we

will find more and better ways to do this.

In addition, in a globalizing world where nations pursue their own interests with

mercantilist policies, we must balance trade if we are to control our own destiny.

Fortunately, there is at least one way to do that, the Buffet proposal.

There are many things we can work on to make the United States a stronger nation. Let us clear our vision and start now.

References

1. Hicks, J.R. 1953. An Inaugural Lecture. Oxford Economic Papers 5: 117–35.

2. Dornbush, Rudiger W., Stanley Fisher, and Paul A. Samuelson 1977 Comparative advantage, trade and payments in a Ricardo model with a continuum of

goods, American Economic Review 67, pp. 823–829.

3. Krugman, Paul R. 1985. A ‘‘Technology Gap’’ Model of International Trade in

K. Jungenfelt and D. Hague eds. ‘‘Structural Adjustment in Developed Open

Economies,’’ New York, St. Martin’s Press, pp. 39–45.

4. George E. Johnson, Frank P. Stafford ‘‘International Competition and Real

Wages, American Economic Review, Vol. 83, No. 2, Papers and Proceedings of

the Hundred and Fifth Annual Meeting of the American Economic Association

(May, 1993), pp. 127–130.

5. Samuelson, Paul A, 2004, Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization, Journal of Economic Perspectives Volume 18, Number 3, pp. 135–146.

6. Ralph E. Gomory and William J. Baumol, 2001, Global Trade and Conflicting

National Interests, MIT Press.

7. Barron’s On Line Monday, August 13, 2007 ‘‘A Plea for Corporate Conscience’’

by Leo Hindery Jr.

8. Robert Kuttner, 2007, ‘‘The Squandering of America,’’ Alfred A. Knopf Publisher.

9. Paul Krugman, 2007, ‘‘The Conscience of a Liberal,’’ W.W. Norton & Co. Publisher.

10. Jeffrey Immelt, Interview in Manufacturing and Technology News, November

30, 2007, Volume 14, No. 21.

11. Warren Buffet, Fortune Magazine, October 2003, ‘‘America’s Growing Trade Deficit Is Selling the Nation Out From Under Us. Here’s a Way to Fix the ProblemAnd We Need to Do It Now.’’

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BIOGRAPHY FOR RALPH E. GOMORY

Ralph E. Gomory is a Research Professor at the Stern School of Business of New

York University (NYU) and is President Emeritus of the Alfred P. Sloan Foundation.

Dr. Gomory received his B.A. from Williams College in 1950, studied at Cambridge University and received his Ph.D. in mathematics from Princeton University

in 1954. He served in the U.S. Navy from 1954 to 1957.

Dr. Gomory was Higgins Lecturer and Assistant Professor at Princeton University, 1957–59. During this period he invented the first integer programming algorithm. He joined the Research Division of IBM in 1959, was named IBM Fellow in

1964, and became Director of the Mathematical Sciences Department in 1965. In

1970 he became IBM Director of Research with line responsibility for IBM’s Research Division. Under his leadership the Research division made major contributions to the computer industry, such as the invention of the Relational data base,

and also won two Nobel Prizes. Dr. Gomory became an IBM Vice President in 1973

and Senior Vice President in 1985. In 1986 he became IBM Senior Vice President

for Science and Technology. In 1989 he retired from IBM and became President of

the Alfred P. Sloan Foundation. Under his leadership the foundation pioneered in

on-line education and supported major scientific efforts such as the Sloan Sky Survey and the Census of Marine life. In December 2007 he became President Emeritus.

Dr. Gomory has served in many capacities in academic, industrial and governmental organizations. He is a member of the National Academy of Science, the National Academy of Engineering, and the American Philosophical Society. He was

elected to the Councils of all three societies. He was a Trustee of Hampshire College

from 1977–1986 and of Princeton University from 1985–1989. He served on the

President’s Council of Advisors on Science and Technology (PCAST) from 1984 to

1992, and again from 2001 to the present. He served for a number of terms on the

National Academies’ Committee on Science, Engineering and Public Policy

(COSEPUP) and is presently a member of the National Academies Board on Science

Technology and Economic Policy (STEP).

He has been awarded eight honorary degrees and many prizes including the

Lanchester Prize in 1963, the John von Neumann Theory Prize in 1984, the IEEE

Engineering Leadership Recognition Award in 1988, the National Medal of Science

awarded by the President in 1988, the Arthur M. Bueche Award of the National

Academy of Engineering in 1993, the Heinz Award for Technology, the Economy and

Employment in 1998, the Madison Medal Award of Princeton University in 1999,

the Sheffield Fellowship Award of the Yale University Faculty of Engineering in

2000, the International Federation of Operational Research Societies’ Hall of Fame

in 2005, and the Harold Larnder Prize of the Canadian Operational Research Society in 2006.

Dr. Gomory has been a director of a number of companies including the Washington Post Company and the Bank of New York (now Bank of New York–Mellon).

He is currently a director of Lexmark International, Inc., and of two small startup companies. He was named one of America’s ten best directors by Director’s Alert

magazine in 2000.

In recent years, while continuing his mathematical research, he has written on

the nature of technology and product development, industrial competitiveness, technological change, and on economic models of international trade. He is the author

of a 2001 MIT Press book (with Professor William J. Baumol) on conflicts in international trade.

Chairman MILLER. Dr. Blair.

STATMENT OF DR. MARGARET M. BLAIR, PROFESSOR OF LAW,

VANDERBILT UNIVERSITY SCHOOL OF LAW

Dr. BLAIR. Thank you. I knew to turn his on, I just didn’t know

to turn mine on. Thank you, Mr. Chairman, for the opportunity to

speak to your Committee today. I am Dr. Margaret Mendenhall

Blair. I am an economist, and I am also a Professor of Law at Vanderbilt University Law School; and I specialize in corporate law,

corporate finance, and corporate governance.

What I want to speak to you today about is a question that has

to do with the fiduciary obligations that corporate directors have,

26

by law, in this country. In particular, I want to address a claim

that is often made in the press, and by members of what a Delaware Court judge has recently called the ‘‘corporate governance industry.’’ This is the claim that corporate directors have a legal duty

to maximize share value or maximize profits, if you want to think

of it in those terms.

What I hope you will take from my testimony today is that this

claim is, at best, a misleading overstatement; and at worst, this

claim is false, but is often asserted as a weapon to try to persuade

corporate managers and directors that they should take actions

that benefit a particular group of shareholders of a given corporation, regardless of whether those actions may impose high costs on

creditors, employees, the communities where the corporations operate, or other stakeholders, or sometimes even on the long-run ability of the corporation itself to compete effectively for market share,

or to develop the next technology.

Let me begin with an indisputable legal fact: There is no statutory requirement in the U.S. that corporations must maximize profits or that directors are responsible for maximizing share value.

The Model Business Corporation Act, Section 3.01 says simply,

‘‘Every corporation has the purpose of engaging in any lawful business unless a more limited purpose is set forth in the articles of

incorporation.’’ That is it. That is all it says about what the goal

of corporations is.

Delaware Corporate Law just says that a corporation ‘‘may be .

. . organized under this chapter to conduct or promote any lawful

business or purposes.’’ State statutes assign all powers to act for

a corporation to its board of directors, but do not in any way prescribe how directors are to carry out this task.

Courts recognize that directors and managers must have very

broad discretion to balance competing interests in a business enterprise because business decisions are often very complex. Courts further recognize that they should not be making business decisions

for directors, or interfering in the actions that directors take in

good faith. This legal doctrine is called the ‘‘business judgment

rule.’’ What this means is that directors are very rarely found in

breach of their duties unless they engage in blatantly self-dealing

behavior.

Now, I by no means intend to suggest today that in today’s world

corporate directors and managers are not under significant pressure to find ways to increase share value, sometimes even at the

expense of the long-run performance of the company. But let me be

clear that this pressure comes from the media, from shareholder

advocates, from financial institutions in whose direct interest it is

for the company to get its share price to go up, and from self-imposed pressure created by compensation packages that provide

enormous potential rewards for directors and managers if stock

price goes up. And by the way, those compensation packages also

impose very little downside cost on the managers or directors if, in

their attempt to goose the company to get share price to go up, it

should not work out and the stock price declines. This means that

managers and directors often have huge incentives to cause their

companies to take very big risks in their effort to achieve higher

share prices.

27

1Leo E. Strine, Jr., Toward Common Sense and Common Ground? Reflections on the Shared

Interests of Managers and Labor in a More Rational System of Corporate Governance, 33

JOURNAL OF CORPORATION LAW 1, 1 (2007) at 5, (describing the ‘‘Corporate Governance

Industry’’ as ‘‘the strange admixture of public pension fund administrators, proxy advisory and

corporate governance ratings organizations, corporate law scholars, and business journalists,

who profit in monetary and psychic ways from corporate governance tumult.’’ Strine is ViceChancellor of the Delaware Chancery Court. He further adds that ‘‘to say these folks profit from

tumult is not a normative argument; it is a positive claim.’’ Id. 2 In a recent article in FOREIGN AFFAIRS, for example, Robert Reich asserted that we cannot rely on corporations themselves to change the rules of the game that are driving them to

lay off employees, cut wages, and move production overseas. ‘‘Corporate executives are not authorized by anyone—least of all by their investors—to balance profits against the public good,’’

he claimed. Robert B. Reich, How Capitalism is Killing Democracy, FOREIGN POLICY, September/October, 2007. Typical of the share-value maximization rhetoric in the financial press

is this quote from a financial analyst discussing Yahoo’s recent decision to turn down an acquisition offer from Microsoft: ‘‘ ‘While Yahoo!’s board has a fiduciary duty to maximize shareholder

returns, running the risk of derailing a deal is dangerous to Yahoo! shareholders,’ said Jefferies

analyst Youssef Squali.’’ Zachery Kouwe and Peter Lauria, Board Bucks Yang, NEW YORK

POST, Feb. 15, 2008, available at http://www.nypost.com/seven/02152008/business/

board¥bucks¥yang¥97797.htm. Similar claims are repeatedly made in conversations about

Yahoo’s recent rejection of Microsoft’s bid on blogs that follow those companies. See, e.g., Isn’t

Yahoo! Management Supposed To Work For Its Shareholders? posting by Timothy Lee to

TechDirt Blog http://www.techdirt.com/articles/20080304/192104440.shtml (Mar. 5, 2008

10:24 a.m.). (‘‘If I were a Yahoo! shareholder, I’d be pretty unhappy that things are being framed

that way. Yahoo! management has a fiduciary responsibility to me, the shareholder, to maximize

the value of my investment.’’)

These pressures might be alleviated with certain policy actions

that this body and/or other regulatory bodies could, in theory, take.

In Britain, for example, the British Companies Act of 2006 explicitly codified what most lawmakers believed had already been the

rule under case law in Britain, and it provides that directors have

duties to multiple stakeholders. A change in the tax rules, for another example, might reduce the current tax preference given to

compensation packages that are based on stock options and that

makes those stock options so much more attractive than other

forms of compensation.

In sum, decisions by managers and directors of U.S. corporations

to choose investment strategies that may be profitable in the short

run, but that sell our country short by moving value-creating activities offshore, are decisions that those managers and directors

must take personal responsibility for. These decisions are not in

any way mandated by law.

[The prepared statement of Dr. Blair follows:]

PREPARED STATEMENT OF MARGARET M. BLAIR

Thank you for the chance to speak to your Committee today.

I am Dr. Margaret Mendenhall Blair. I am an economist, and a Professor of Law

at Vanderbilt University Law School where I specialize in corporate law, corporate

finance, and corporate governance.

I want to speak to you today on a question about the fiduciary obligations that

corporate directors have, by law, in this country. In particular, I want to address

a claim often made in the financial press, and by members of what a Delaware

Court judge has recently called the ‘‘corporate governance industry.’’ 1 This is the

claim that corporate directors have a legal duty to ‘‘maximize share value.’’ 2

What I hope you will take from my testimony today is that this claim is, at best,

a misleading overstatement. At worst, this claim is simply false, but is often asserted as a weapon to try to persuade corporate managers and directors that they

should take actions that benefit particular shareholders of a given corporation, regardless of whether those actions may impose high costs on creditors, employees,

the communities where corporations have their operations, or other stakeholders, or

sometimes even on the long run ability of the corporation itself to compete effectively for market share, or to develop the next technology.

Let me begin with an indisputable legal fact: There is no statutory requirement

in the U.S. that corporations must maximize profits, or that directors are responsible for maximizing share value. The Model Business Corporation Act, §3.01 says

28

3DGCL §101(b). 4 ‘‘All corporate powers shall be exercised by or under the authority of the board of directors

of the corporation, and the business and affairs of the corporation shall be managed by or under

the direction . . . of its board of directors.’’ MBCA §8.01(b). ‘‘The business and affairs of every

corporation organized under this chapter shall be managed by or under the direction of a board

of directors. . . .’’ DGCL §141(a). 5 Revlon v. MacAndrews & Forbes Holdings, Inc., Del 506 A.2d 173 (1986). 6 ‘‘In carrying out their managerial roles, directors are charged with an unyielding fiduciary

duty to the corporation and its shareholders.’’ Smith v. Van Gorkom, 488 A2d 858 (Del. 1085).

Directors ‘‘are charged with an unyielding fiduciary duty to the corporation and its shareholders.’’ Guth v. Loft, Inc., 2 A.2d 225 (Del. Ch. 1938), aff’d, 5 A.2d 503 (Del. 1939). 7Law and economics scholars have claimed that, since shareholders are understood to be the

‘‘residual claimants’’ in corporations, maximizing value for shareholders should be equivalent to

maximizing total wealth created by the corporation. See Margaret M. Blair, OWNERSHIP AND

CONTROL: RETHINKING CORPORATE GOVERNANCE FOR THE TWENTY-FIRST CENTURY, Brookings, 1995, at 227, for a discussion of this line of economic argument. 8Finance theory makes it clear that shareholders can be made better off at the expense of

other corporate participants by shifting risk onto them. Because shareholders may not be held

liable for corporate debts (a protection granted to shareholders under the corporate law doctrine

known as ‘‘limited liaiblity’’), share value can be increased if the corporation engages in highly

risky ventures, where shareholders have a chance for substantial gain if the venture works out,

but most of the cost of failure falls on creditors. 9 In a classic case establishing the relevant legal doctrine, shareholders of the Chicago National League Ball Club Inc., which owned the Chicago Cubs, sued directors on grounds of negligence and mismanagement because they would not install stadium lights in Wrigley Field so

that the Cubs could play night games. See Shlensky v. Wrigley, Illinois Appellate Court, 1968,

237 N.E.2d 776. The court dismissed the complaint for failure to state a claim. See Margaret

M. Blair and Lynn A Stout, A Team Production Theory of Corporate Law, 85 Virginia Law Review 247 (1999), noting that a series of court decisions in the mid- to late-20th century have

‘‘allowed directors to sacrifice shareholders’ profits to stakeholders’ interests when necessary for

the best interest of the ‘corporation.’ ‘‘ Courts, for example, have sanctioned directors’ decisions

to expend corporate resources for charitable purposes, to avoid risky undertakings that would

increase profits at the expense of creditors, and to fend off corporate takeover bids that threatened to harm employees or the community. Id., at notes 140–148 and surrounding text. 10Separate entity status for the corporation serves a crucially important economic function:

it allows the corporation to hold assets in the name of the corporation over an indefinite time

period, so that, unlike what would happen under default rules of partnership, the assets of a

corporation will not be broken up and distributed when a shareholder dies or becomes insolvent

or wants to re-deploy her wealth. The shareholder is instead free to sell her shares, but she

cannot force dissolution of the corporation itself. The ability to keep assets invested in an enterprise for an indefinite time was critical to the development of the railroads, and other businesses

that required long-lived specialized capital investment. For an extensive discussion of how these

rules developed under corporate law in the 19th Century U.S., see Margaret M. Blair, Locking

In Capital: What Corporate Law Achieved for Business Organizers in the Nineteenth Century,

51 UCLA LAW REVIEW, 2 (2003), 387.

simply, ‘‘Every corporation . . . has the purpose of engaging in any lawful business

unless a more limited purpose is set forth in the articles of incorporation.’’ Delaware

Corporate Law just says that a corporation ‘‘may be . . . organized under this chapter to conduct or promote any lawful business or purposes.’’3 State statutes assign

all powers to act for a corporation to its board of directors, but do not in any way

prescribe how directors are to carry out this task.4

Case law, which, in the U.S. is mostly made in the courts of the State of Delaware, also does not require share value maximization, except in one very narrow

circumstance: When, in the course of buy-out negotiations, it becomes inevitable

that a corporation will be sold, the Delaware Supreme Court has said that directors’

duties then change ‘‘from defenders of the corporate bastion to auctioneers charged

with getting the best price for stockholders at a sale of the company.’’ 5 Note that,

implicitly at least, this formulation of the law accepts the proposition that directors

may in all other circumstances act to preserve the long-run viability of the corporation itself, even if other actions might be more immediately rewarding to shareholders.

To be sure, courts often note that directors have a duty to act in the best interest

of ‘‘the corporation and its shareholders.’’ 6 In theory, and sometimes in practice,

these interests coincide with one another.7 But not always.8 For this reason, courts

have always interpreted the mandate to act in the ‘‘best interest of the corporation

and its shareholders’’ very broadly, to give directors wide discretion.9 Moreover, in

applying this mandate, courts implicitly or explicitly recognize that the corporation

is a separate entity from its shareholders, and that directors’ duties normally run

to the corporation first. (My colleague Prof. Bruce Scott will say more about the importance of the corporation being a separate legal entity, and I have written about

the historical importance of this feature of corporate law.10 I would be happy to

elaborate on this point if this committee wants to hear about this.)

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11 A classic statement of this position is the court’s opinion in Shlensky, supra note 7 (‘‘We

are not satisfied that the motives assigned to Philip K. Wrigley, and through him to the other

directors, are contrary to the best interests of the corporation and the stockholders. For example,

it appears to us that the effect on the surrounding neighborhood might well be considered by

a director who was considering the patrons who would or would not attend the games if the

park were in a poor neighborhood. . . . By these thoughts we do not mean to say that we have

decided that the decision of the directors was a correct one. That is beyond our jurisdiction and

ability. We are merely saying that the decision is one properly before directors and the motives

alleged in the amended complaint showed no fraud, illegality of conflict of interest . . . we feel

that unless the conduct of the defendants at least borders on one of the elements, the courts

should not interfere.’’ See also In re Caremark International, Inc. Derivative Litigation 698 A.2d

959 (Del. 1996) (‘‘Whether a judge or jury considering the matter after the fact, believes a decision substantively wrong, or degrees of wrong extending through ‘stupid’ to ‘egregious’ or ‘irrational,’ provides no ground for director liability, so long as the court determines that the process

employed was either rational or employed in a good faith effort to advance corporate interests.’’

(emphasis in original) ) 12See e.g., Aronson v. Lewis, 473 A.2d 805 (Del. 1984), at 812 (‘‘The business judgment rule

is an acknowledgement of the managerial prerogatives of Delaware directors under Section

141(a). It is a presumption that in making a business decision the directors of a corporation

acted in an informed basis, in good faith and in the honest belief that the action taken was

in the best interests of the company. Absent an abuse of discretion, that judgment will be respected by the courts.’’) 13 Numerous shareholder proposals filed with the SEC, seeking to urge or compel directors to

take certain actions, including selling off divisions, paying special dividends, or accepting a takeover offer from another company, justify their proposal on the grounds that the action would

‘‘maximize share value.’’ See, e.g., Schedule 14A filed with the Securities and Exchange Commission by Wisconsin Central Shareholders Committee to Maximize Value, SEC File 0–19150, Oct.

23, 2000, announcing a proxy fight against directors of Wisconsin Central Transportation Corp.

(‘‘Edward A. Burkhardt, former Chairman, President and Chief Executive Officer of Wisconsin

Central Transportation Corporation (NASDAQ:WCLS), today announced the formation of a committee to improve company performance and to maximize share value.’’). Available at http://

www.secinfo.com/dsvRs.55Wm.htm 14 (1) A director of a company must act in the way he considers, in good faith, would be most

likely to promote the success of the company for the benefit of its members as a whole, and

in doing so have regard (amongst other matters) to-

(a) the likely consequences of any decision in the long-term,

(b) the interests of the company’s employees,

(c) the need to foster the company’s business relationships with suppliers, customers and others,

(d) the impact of the company’s operations on the community and the environment,

(e) the desirability of the company maintaining a reputation for high standards of business conduct, and

(f) the need to act fairly as between members of the company.

Companies Act 2006, c. 46, § 172, available at http://www.opsi.gov.uk/acts/acts2006/

ukpga¥20060046¥en¥13#pt10-ch2

Courts recognize that directors and managers must have very broad discretion to

balance competing interests in a business enterprise because business decisions are

often very complex. Courts further recognize that they should not be making business judgments for directors, or interfering with actions directors take ‘‘in good

faith.’’ 11 This legal doctrine is called the ‘‘business judgment rule.’’ 12

What this means is that directors are very rarely found in breach of their duties

unless they engage in blatantly self-dealing behavior.

I by no means intend to suggest here that, in today’s world, corporate directors

and managers are not under significant pressure to find ways to increase share

value, sometimes even at the expense of the long run performance of the company.13

But let me be clear that this pressure comes from the media, from shareholder advocates and financial institutions in whose direct interest it is for the company to get

its share price to go up, and from the self-imposed pressure created by compensation

packages that provide enormous potential rewards for directors and managers if

stock prices go up. And by the way, those compensation packages also impose very

little downside cost on managers or directors if stock prices decline, which means

that managers also often have huge incentives to cause their companies to take very

big risks in their efforts to achieve higher share prices.

These pressures might be alleviated with certain policy actions that this body and/

or other regulatory bodies could, in theory, take. In Britain, for example, the British

Companies Act 2006 explicitly codified what lawmakers believed to be the rule

under their case law, which provides that directors have duties to multiple stakeholders.14 A change in the tax rules, for another example, might reduce the current

30

15For a general discussion of how stock options receive favorable tax treatment, see Shevlin,

Terry J. and Hanlon, Michelle, Accounting for the Tax Benefits of Employee Stock Options and

Implications for Research (April 2001). University of Washington Working Paper. Available at

SSRN: http://ssrn.com/abstract=271310 or DOI: 10.2139/ssrn.271310

tax preference that makes compensation packages based on ‘‘stock options’’ so attractive relative to other approaches to executive compensation.15

In sum, decisions by managers and directors of U.S. corporations to choose investment strategies that may be profitable in the short-run, but that sell our country

short by moving value-creating activities offshore, are decisions that those managers

and directors must take personal responsibility for. These decisions are absolutely

not mandated by law.

(I have some thoughts about how and why the notion that corporate managers

must maximize share value came to be so widely accepted in the last three decades.

But that is a longer story that I will not undertake to tell here unless the Committee wants to hear it. Instead I attach to this testimony a copy of Margaret M.

Blair, Shareholder Value, Corporate Governance and Corporate Performance: A

Post-Enron Reassessment of the Conventional Wisdom.’’ CORPORATE GOVERNANCE AND CAPITAL FLOWS IN A GLOBAL ECONOMY, Peter K. Cornelius and

Bruce Kogut, eds., Oxford University Press, January 2003 Available at SSRN: http:/

/ssrn.com/abstract=334240)

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BIOGRAPHY FOR MARGARET M. BLAIR

Research interests: The legal structure of business organizations, corporate governance, role of corporations in globalization

About Professor Blair

Margaret Mendenhall Blair is an economist who focuses on business and management law. She joined the Vanderbilt faculty in 2004 as part of the team supporting

the Law and Business program, which the law school offers in conjunction with the

Owen Graduate School of Business at Vanderbilt. She moved to Vanderbilt from

Georgetown University Law Center, where she became a visiting professor in 1996

and from January 2000 to June 2004 served as a Sloan Visiting Professor, teaching

Corporations and Corporate Finance, and as Research Director for the Sloan-GULC

Project on Business Institutions. She has also been a Senior Fellow in the Economic

Studies Program at the Brookings Institution, where she wrote about corporate governance and the role of human capital in corporations. Her current research focuses

on three areas: the legal structure of business organizations, team production issues

and the theory of the firm, and the role of corporations in globalization. She served

on the Board of Directors of Sonic Corporation from January 2001 through January,

2006, and current serves on the Board of WRAP (Worldwide Responsible Apparel

Production).

Representative Publications

‘‘The New Role for Assurance Services in Global Commerce,’’ with Cynthia A. Williams and Li-Wen Lin, 33 JOURNAL OF CORPORATION LAW, 2, 325–360

(Winter 2008).

‘‘Locking in Capital: What Corporate Law Achieved for Business Organizers in the

Nineteenth Century,’’ 51 UCLA L. Rev. 2 (December 2003). Republished in Top

10 Corporate Practice Commentator (2004).

Unseen Wealth: Report of the Brookings Task Force on Intangibles (author and editor, with Steven M.H. Wallman), Brookings, 2001. Chinese translation distributed by the Chinese Social Science Publishing House. Japanese translation distributed by Chuokeisai-Sha Publishing Company.

Trust, Trustworthiness, and the Behavioral Foundations of Corporate Law, (with

Lynn Stout), 149 UNIVERSITY OF PENNSYLVANIA LAW REVIEW 1735–

1810 (November 2000).

A Team Production Theory of Corporation Law, (with Lynn Stout), 85 VIRGINIA

LAW REVIEW (March 1999).

Ownership and Control: Rethinking Corporate Governance for the Twenty-first Century, Brookings 1995. Chinese translation republished by the Chinese Social

Science Publishing House, Beijing. This book won an academic book publishers

award.

Chairman MILLER. Dr. Scott.

STATEMENT OF DR. BRUCE R. SCOTT, PAUL WHITON

CHERINGTON PROFESSOR OF BUSINESS ADMINISTRATION,

HARVARD BUSINESS SCHOOL

Dr. SCOTT. Thank you, Mr. Chairman. I teach at a business

school and started my studies looking at how firms are managed

and doing case writing here and in Europe and switched from that

to looking at those same ideas at the level of countries and saying

countries have strategies as well.

This has been a very lonely thing to be doing for the last 20

years. It really has. It has been completely out of touch with what

is going on in most of organized economics. It is very strange to see

this beginning to be used as a set of terms and saying, we have

to think about it differently.

Having said that, what I would like to say to you is that if you

think about this problem in terms of globalization, you are never

going to get there. Globalization means you are integrating the

62

markets, that is all. There is another way to look at it which is how

the countries are managed, which has something to do with what

you people on this Committee do all the time; and the operational

way to think about this is in terms of the government’s systems

that operate within all the countries. Capitalism is a system of governance for economic affairs; democracy is the one that almost everybody uses for the political affairs. But you have got two governance systems that are working together that influence each other

all through this, and you need to begin to pick that up I think as

a way to see what you can do. It is very hard to do this, and certainly, teaching at a business school, most people simply turn off

and say, ‘‘It is too hard to do this. I can’t figure out how the pieces

fit together.’’

So let me suggest there is a way to think about this that is simple enough that anybody can catch it very quickly. The analogy is

that organized competition in all the major sports is organized the

same way a capitalist system is in a country. It is a three-level system that starts with a political authority. It depends upon which

one of those sports you like, but if it is football, it is the NFL. If

it is baseball, it is Major League Baseball. They operate as a political authority. They operate—so that they can operate as a state.

Now, every one of these has the power to create the rules. They decide who gets hired as the regulators and referees. You have a set

of institutions, the rules, the regulations, everything, which is exactly the same as a capitalist system. I had somebody I was talking

with a couple of weeks ago about this who is a Canadian banker,

and he said, ‘‘Well, I am really uncomfortable about this notion of

regulation.’’ I asked, ‘‘Well, do you watch hockey?’’ ‘‘Yeah, of course

I watch hockey.’’ ‘‘How would it work if you had no referees?’’ ‘‘Unimaginable.’’ Well, it is the same thing. You can’t—and if you are

on Financial Services, Mr. Chairman, you must have had at least

the chance to think about what happens when we have the number

one regulator in the financial services sector say, ‘‘I really think the

private sector can do it without government.’’ That is how we got

to where we are. Football would work that way, hockey would work

that way, all of them would work that way if you don’t have rules,

the referees, and—most of what we focus on is the games. The

games and the sports correspond to the markets that you see in

capitalism.

Well, if I turn from the sports to capitalism, you just say, look,

it is the same three levels. You have a government, that is you in

this, the rules and then the market framework. And thinking about

it this way gives you something that is easy to work with. If you

have ever watched football, you have got to recognize that—and especially for the men—you end up saying, I have got to watch until

the last two minutes, you can’t tell who is going to win.

Yeah, but that is basically because the National Football League

organized and said, ‘‘We are going to split the television revenues

equally. Green Bay is going to have the same television revenues

as Los Angeles or Boston or anybody else. We are going to equalize

the revenues. Our function is close games. Close games get people

watching until the last of the game, and that is what sells the advertising revenue.’’

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If I go to baseball, they have not done that yet. They have teams

that have five, six times the revenue of other teams. Football decided that entertainment was best when the games were close. The

purpose of the capitalist system is very different, but the governance process is just exactly—I mean, this three-level governance

system works as a way to understand it.

Most of our attention, I think, in the description of how capitalism works, is built around the product markets. That is the part

we see, and that is the fruit stand, the automobile dealership,

whatever else. The really decisive things that distinguish one country from another are not in the product markets, they are in the

factor markets, meaning: How do you deal with land, how do you

deal with labor, how do you deal with financial capital, how do you

deal with intellectual property? And unlike the simple-minded

models that are used so much of the time where we assume that

we have got voluntary transactions among people that are consenting adults that have equal information, there is virtually no

way to get equal relations in the factor markets. You are dealing

with unequal power as well as unequal information.

All you have to do is think about somebody going to apply for a

job. The organization that you are applying to may be 100 people,

it may be 1,000 people, it may be 100,000 people. There just aren’t

equal relationships in there. You have to have rules and regulations in how these things work to make it at all a plausible thing

in a democratic society. It can be done, but that is not the problem.

The problem is recognizing the fact that we are not dealing with

equal relationships, especially not in the factor markets.

Let me take this—I was just thinking just what you were talking

about with the competition and the model of it. This is a homely

little chart, a model of unregulated competition has existed for a

long time. The Brits had it in the Middle Ages. It is the common

pasture, and just imagine that we have got a bunch of poor people

that live in those little brown houses to the side of it, and we have

got one big house. And so the castle there has got his grounds, the

other folks don’t have much, but the other folks share the common.

They can take their goats or their cattle or whatever they are onto

the common, and if it is an unrestricted system, what happens is

you keep on adding cattle until you destroy the common. And people understood that the way to do this was—and in the British

case, what they did was sell—privatize. And then we are going to

have somebody in control, and we won’t have the excessive usage

and in addition we will have people that will invest money to improve it, to drain it, to change what we do from one crop to another.

Well, this is a useful thing to think about because there really

are several ways to deal with this, but the easiest one to think

about is, that it is not an insoluble problem at all. All you’ve got

to do is have a fence around the common, have a gate, and have

somebody at the gate.

If the somebody at the gate is a legitimate gate keeper, he can

just say, ‘‘Look, you are on Mondays and Wednesdays and your

staff is on Tuesdays and Thursdays and this is all you can have.’’

But, you got to have either legitimacy or you got to have coercive

power to manage the gate. Much the same thing is true when you

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are thinking about your global economy. That is exactly what the

circumstances are. The biggest of the common resources is not the

land for the grass. It is the savings of a society, it is the technologies of a society, and in my sense, above all, it is the legal

frameworks that are effectively the collective capital of the capitalist system. Just take as an example a country that joins Western

Europe at this stage, the EU. If you ask, what are the terms of

joining, the terms of joining are you must accept the whole framework, and the whole framework used to mean a few hundred pages,

then a few thousand pages. Now a new member that joins Europe

has to sign on for 100,000 pages of regulation, and there is no discussion. You either sign up for it or you can’t belong. But, that is

the accumulated wisdom of somebody building this thing up over

a period of time. That is one of the most precious things that they

have.

If I take this and say what is it applied to the United States, the

United States was set up in an utterly unusual set of circumstances because the Constitution gave the right to charter

firms to the states. So, they start of with in effect 13 people, 13 organizations that can charter firms to compete in the market. And

then the right to regulate the competition was held by the Federal

Government. Well, it very quickly got us into a set of circumstances

as soon as we got the continental market, we began to have abuse

of the market just exactly like the folks grazing on the common.

And the most obvious abuse turned out to be companies trying to

have holding companies and quasi-monopolies. And they were prohibited from doing that by every state until New Jersey changed

its law. And in 1888, New Jersey authorized holding companies,

and we have a rush to incorporate in New Jersey, then New York,

and then in Delaware; and you change the whole structure, both

of the firms and of competition in the United States, not by act of

Congress, but by the vote of a State legislature.

Congress tries to come back and find a way to deal with this, and

Theodore Roosevelt is the first one that I think really understood

what he was doing, saying, ‘‘We are going to have to create something that has a regulatory framework that corresponds to the

global market.’’ So they brought back the idea of the federal charter. Federal charter was initially posed by Madison at the Constitutional Convention, and people decided that if it had been put in the

Constitution, the chances were the Constitution would never have

been ratified. It would have symbolized too much power in the

hands of the Federal Government. So there was no federal charter.

You had initially 13—it is ineffective commons with 13 gates to

start with. As you go along it goes to 30, then 40, then 50. So you

have no regulation of who uses it. You have to have a regulatory

regime that has oversight over the whole thing, and Roosevelt recognized we didn’t have that. And so he and William Howard Taft

both proposed for over a period of about 11 years that they either

create a federal license or a federal charter which is the same

thing. And they can’t get it through. The hitch is when we got the

big companies, we ended up with big companies having enough

power to dominate State legislatures. State legislatures were appointing people who were not going to allow the regulation of the

firms.

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1Scheduled for publication later this year by Springer Verlag, Heidelberg.

How about if I stop there?

[The prepared statement of Dr. Scott follows:]

PREPARED STATEMENT OF BRUCE R. SCOTT

U.S. Capitalism: a system of governance is challenged

Mr. Chairman and Members of the Committee:

I am a faculty member of the Harvard Business School, and have been for many

years. My initial field of study was in General Management, meaning the strategies

and governance of firms. I migrated from that field to its analog at the country level

in the 1960s while studying French attempts to formally plan their economic development.

In recent years I have been working on a book entitled Capitalism, Democracy

and Development.1 The title of the book is indicative of a shift in my own thinking

from a focus on substantive economic strategies of countries to a focus on the processes of governance. From my comparative case studies on countries it has gradually become clear to me that much of a nation’s economic strategy is embedded in

the institutions through which that particular nation is governed, and that the existence of institutions imply a certain strategy. For instance, deregulation in the

U.S. as practiced since 1980 was a strategy designed to promote efficiency but it

was also designed to favor capital at the expense of labor. Likewise, tolerance for

the omission of the cost of stock options from profit and loss statements was nominally a way to promote performance, but also implicitly a strategy for redistributing

wealth in favor of those with the power to secure grants of such options.

In this paper I will introduce several ideas from my book and then append some

pages of explanation from two chapters of the text.

Capitalism is a system of governance

If there is one idea that I would urge this committee to consider in its studies

of the offshoring process, it is to go beyond a focus on markets to consider how capitalism works as a system of governance for economic affairs. Markets are part of

that system of governance, with the invisible hand acting as an automatic form of

governance within the prescribed frameworks of the markets. But markets are only

part of the system, and a dependent part at that. All formal or organized markets

require laws, regulations and physical and social institutions for their

underpinnings. These laws and institutions are created through human agency and

as a result they are likely to differ in significant aspects from one nation to another.

These institutional variances imply that there are different variants of capitalism,

and this in turn implies that the so-called Anglo-American style of capitalism is but

one style. We should not assume that other countries are trying to be more like us

unless we have sound empirical research to so indicate. In the meantime, we should

pay close attention to the idea that capitalism is a system of governance where

other countries could have economic strategies quite different from our own.

Gabriel Almond, a professor of political science at Stanford and former president

of the American Political Science Association, called attention to this notion of capitalism as a system of governance when he wrote that the economy and the polity

are the two chief problem-solving systems of a society, interacting with and transforming each other, as suggested in Slide number one. Almond’s idea was expressed

in an article in Political Science and Politics titled ‘‘Capitalism and Democracy’’ and

thus I understand ‘‘economy’’ and ‘‘polity’’ to more specifically reference ‘‘capitalism’’

to ‘‘democracy,’’ respectively. Thus, in his view and mine as well, capitalism refers

to something very different from globalization—and if today you frame your inquiry

in terms of the former, meaning comparative capitalist systems, your inquiry may

take you in quite a different direction.

To explain: Globalization refers to the integration of markets, and market integration is being driven by very powerful forces such as declining transport costs and

trade barriers, as we all know. Firms operate within markets and are greatly influenced by the forces of supply and demand that are manifested within them. Firms

must learn to adjust to those market forces if they are to survive, let alone prosper.

However, the market frameworks themselves are created, legitimated, monitored

and periodically modernized by government and not by economic actors. To frame

your inquiry in terms of how globalization works will risk ignoring how the markets

66

2 Cf. Fernand Braudel, Civilization and Capitalism, 1400–1800, Volume 2, page 237 for some

of the history of definitions.

have been structured and how these structures determine the actual operations that

take place within the markets.

The market frameworks that facilitate and constrain economic activity are created

through legislatures; as a result, they reflect the relative power of different interest

groups in the political markets of legislatures at any point in time, as you all know

better than I. It is legislative markets that create the frameworks within which

firms operate, and the frameworks that underpin economic markets can be tilted to

favor capital versus labor or the reverse, producers versus consumers, lenders

versus creditors, and so on. The notion that the economic markets of capitalism

somehow reflect a benign set of circumstances where parties voluntarily come together to achieve mutually beneficial transactions may be an adequate description

of commerce at a roadside fruit and vegetable stand or a flea market, but not for

much of the transactional activity of a modern economy. This notion of a benign,

self regulating capitalism where almost all transactions are voluntary and therefore

mutually beneficial is based upon an unexamined assumption that the legislative

markets have done their job in a flawless way to begin with, which would be quite

remarkable if true. Thus, as a more realistic alternative I suggest that we see capitalism as a three level system of governance which is designed to mediate commerce among actors with different purposes, different access to information, and

radically different access to economic power as well.

Capitalism as a three level system of governance

Capitalism is a concept which has been used to describe processes of governance

that are partly political, partly legal and partly economic, and which interact in a

system or systems that continue to evolve through time. It is not surprising that

such a complex system has defied any standard definition for more than a century

and that many books that analyze capitalist development do not even attempt to

define it.2 Given this situation, I have found it very helpful to define capitalism relative to some much smaller, simpler and more tractable governance systems, notably those for organized sports Thus, as shown in Slide number two, I define capitalism as an indirect, three level system for the governance of economic activities

analogous to those used to govern team sports such as baseball, basketball, football

and hockey. As in the governance of these sports, the essential principle is that the

economic agents, like their analogs in sports, are free to use their powers as they

wish, whether as individuals or as members of a firm, so long as they stay within

the physical bounds of the competitive arena, and so long as they obey the rules

and regulations of their particular capitalist system. I spell these ideas out more

fully in three excerpts from Chapter 2 of my book, which are attached.

Crudely put, the three levels consist of the economic markets, the legal and other

institutions that underpin those markets, and the political level through which new

institutions are created and older ones maintained and modified. These three levels

permit the harnessing of human energy that is called forth through competition,

whether among sports teams, firms or individuals. The actions of the competitors

are coordinated in part by their own social organizations (teams or firms) and in

part by the rules, regulations and institutions that govern the competition, but in

any event not by an immediate hierarchical authority with or without a central

plan. Hence capitalism is an indirect system of governance, in contrast to one that

is governed directly through a hierarchy.

Slide number three shows the three level model in more detail, distinguishing the

factor markets (e.g., those for land, labor, capital and intellectual property) from

those for goods and services. The distinction is very important for two reasons.

First, historically speaking, it was the establishment of factor markets and not the

trade in product markets that was the hallmark of capitalism. While some scholars

have claimed that the Aztecs had ‘‘capitalism’’ before the Spanish arrived, I disagree. In 1500 the Aztecs, like most of the known world, did not have free mobility

for land or labor; they had feudalism and even forced labor instead. Trade was compatible with feudalism but free mobility of land and labor were not. And, as we remember from Shakespeare’s Shylock, returns on financial capital were not seen to

be legitimate in Venice pre-1600.

The second reason for calling attention to the factor markets is that they are the

frameworks for the development and trade of resources, and thus a prime area

where a government can influence its developmental prospects. Governments can

favor saving versus consumption, for instance, and a number of East Asian nations

have had saving rates at more than twice the American level since World War II.

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3The name comes from a paper by Garrett Hardin, an eminent biologist.

4See Karl Polanyi, The Great Transformation, Beacon Press.

This has allowed them to finance growth rates superior to ours without the need

to be open to foreign capital, for example in China in recent decades. Higher saving

rates can be achieved through restrictions on consumer credit, high down payments

on consumer durables such as housing, or mandatory payroll saving plans such as

those in Australia, Chile or Singapore, where money is automatically deducted from

paychecks and deposited in defined saving plans. In addition, countries can have

quite different distributions of incomes between wages and profits and can use wage

reductions as a preferred way to achieve a result similar to devaluation of the currency.

Capitalist countries that believe in an active role for government can have active,

government led or supported strategies, a concept that is quite alien to those who

think that completely decentralized decision-making is the sure route to optimal efficiency. For instance, government supported strategies can embark on attempts to

accelerate the acquisition, adaptation, and production of new, typically higher technology products instead of remaining specialized in existing products, (e.g., the Taiwanese government successfully invested in semiconductor manufactures starting

virtually from scratch).

Common property is key resource in most if not all capitalist systems

While capitalism is usually defined as a system based upon private property and

free enterprise, this is a remarkable oversimplification. As already noted, it is based

in part upon regulated enterprise and in part upon common access to certain resources, such as air, water, light, and use of land for purposes of transportation.

Historically, capitalism was also associated with the abolition of common land for

grazing purposes in order to improve efficiencies. The choices in how to deal with

common resources can be seen in terms of a hypothetical common, symbolized in

the green area of Slide number 4.

When common land is left unfenced or unregulated, the situation is ripe for what

is known as ‘‘The Tragedy of the Common,’’ i.e., the tragedy that arises when economic actors have unrestricted rights to the use of a common resource such as a

pasture.3 If unregulated, the actors (e.g., the farmers or shepherds) will have a tendency to keep adding more animals to their herds until they cause the overgrazing

of the field and damage or even destroy it. Still more obviously, it will be difficult

for such a group of actors, if they act as individual competitors, to maintain the fertility of the field let alone improve it, and thus it will be very difficult for them to

improve its productivity over time. Thus, the availability of a common resource is

a classic case where unregulated competition produces undesirable results.

However, it is also a problem which can be readily solved by putting a fence

around the field, adding a gate, and having someone lock and/or guard the gate.

Given an enclosed field, the agent in control of the gate can regulate the number

of users and/or their frequency of usage, thereby avoiding the over usage that would

destroy the usefulness of the field as a source of food. What this means is that the

so-called ‘‘tragedy of the common’’ is only a concern for an unregulated common. But

simple as it might sound to have a fence, a gate, a guard and some rules and regulations that limit usage by the various actors, no regulatory framework can be expected to work unless it has been established by a legitimate political authority that

can back enforce its actions by coercive force if need be, unless it is one that starts

out with coercive force and without legitimacy.

This simple example illustrates some of the critical forces at the heart of what

is needed for effective regulation of any common resource, such as air, water, sunlight or access to a right of way for travel. And solutions might seem simple, but

in reality they are not. In Britain, where the idea of enclosing the common has been

much studied, the common areas were privatized over several centuries, typically

by acts of Parliament, and typically by awarding the land in question to the nearby

manor or large landowner. Thus, the Enclosure Acts that were credited with improving productivity through improved methods of farming were redistributing land

in favor of the rich while impoverishing most of their neighbors. In addition, these

same acts have been credited with creating the pauper class that helped energize

the workshops that preceded the Industrial Revolution and then the much larger

factories of the latter era.4 Enclosing the common in a legitimate, effective, and socially ‘‘just’’ or ‘‘democratic’’ way is therefore quite a difficult task for any political

authority to undertake.

These developments in Britain illustrate the close connection between the system

of economic governance and its political counterpart. The small landowners symbolVerDate 11-MAY-2000 19:05 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00077 Fmt 6633 Sfmt 6621 C:\WORKD\I&O08\052208\42371 SCIENCE1 PsN: SCIENCE1
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5For a fascinating and famous account of these events see Karl Polanyi, The Great Transformation.

ized by the small houses in Slide number 4 had no representation in Parliament

until late in the 19th century, by which time the Enclosure Movement was long

since over. Parliament was dominated by the great landowners even after the Great

Reform Bill of 1832, so the landowners could simply vote to grant themselves the

right to take the land legally.5 This illustrates one of the great risks of capitalism;

powerful people can use the system to appropriate common resources from their

neighbors, all in the name of greater efficiency through privatization. Power passes

back and forth between the economic system and the political, and concentrations

of power in either can subvert normal processes in the other. However, redistributing the land among the peasantry in the small brown houses is no sure answer

either. When tried in a number of countries, for example in Mexico when it broke

up its ejidos, it was a recipe for creating farming plots that were too small to be

viable, and thus it led to declining productivity and poverty.

Market frameworks as a key common asset of capitalism

In my view one of the great common assets of capitalism is hidden right in plain

sight. It is the market frameworks that underpin the various markets for factors

of production as well as trade in goods and services. These market frameworks are

expressed in laws, regulations, and, in many countries, the law books that explain

precedents from previous cases. Since these frameworks originate in legislatures

they are by definition common property. This is also the case for later supporting

regulations and court decisions. And, if a legislature has truly met Abraham Lincoln’s notion of governing the people for the people and not just by the people, then

it has created a form of commonwealth as surely as if it had voted to authorize new

schools or highways to benefit all, as expressed in Slide number 5.

The state and the firm

Firms have a somewhat different relationship to the state in the U.S. than in

many other industrial countries, and this difference is very germane to your inquiry

into the off-shoring of activities by U.S. firms. As noted in Slide number 6, in most

countries firms are chartered by a single authority speaking for the Nation. In contrast, in the U.S. the Constitution did not give the Federal Government this power

to charter firms, for fear that this power might make the central government appear

so powerful that the Constitution itself would be rejected during the ratification procedure. This meant that there were initially 13 gates (i.e., the 13 states at the time)

to the common of the U.S. market during the colonial and early federal era. This

governance structure suited the market of the time; transport costs were so high

that, once one was away from navigable water, the U.S. market amounted to something much closer to 13 distinct State markets and, indeed, many smaller markets

than to a single, national market. In these circumstances, a state was granting authority to firms to operate in markets that might in reality be a good deal smaller

than a state and thus able to be managed by the regulatory power of the state in

question. U.S. states typically granted these early charters for public purposes, such

as for universities and canals, and, given their local monopoly power in chartering,

could accordingly ask for something in return. Since capital was scarce and corporations were rare until the early 19th century, few, if any, issues over firm power

arose. The corporation existed as a legal entity because of a grant of power from

the state and was at the same time accountable to the state and its chartering

standards.

As time passed and transport improved, trading radiuses grew larger, and there

were more and more requests for charters to establish a legal vehicle more permanent than a partnership. At much the same time, the concept of limited liability was

developed, increasing the value of and demand for charters for incorporation even

more. In order to speed up the processing of such requests and reduce the corruption in the legislatures over who would be favored, the states gradually shifted to

‘‘general charters’’ that notably lacked specific, public purposes. This movement to

the general charter without specific firm objectives and standards reduced the apparent dependence of the firm on the state. Accordingly, legal doctrine gradually

evolved toward seeing the firm as the beneficiary of a free contract with the state

and, eventually, as a ‘‘free entity’’ altogether, as though firms and indeed capitalism

were born from and existed independent of the state.

What this meant was that by the 1870s, as the railroads linked regional markets

into a nationwide system, the Nation had 30–40 gates or states admitting firms to

the market. States competed for the funds generated by corporate taxes and thus

69

raced to the bottom in issuing charters that granted generous terms to firms. It was

a case where unregulated competition was clearly not in the public interest. And

the clearest example came in 1888 when New Jersey decided to break ranks with

the other states and authorized its firms to create holding companies to buy or

merge with other (often rival) firms, no matter where these firms had been incorporated and no matter whether such growth would reduce industry competition. As

New York and eventually other states followed New Jersey’s lead, the gates to the

national market or common were opened wide to quasi-monopoly capitalism. The

following years were marked by a stampede of mergers and the creation of much

larger firms. Indeed, this change in New Jersey law would undermine almost all

regulation of firm behavior, facilitating a great change in the structure of U.S. firms

and industries, all of it aimed at larger size with the implication of much greater

economic power. And though this changed the nature of interstate commerce dramatically, the U.S. Congress had little or no say in the matter as it lacked the constitutional right to intervene in the chartering process.

President Theodore Roosevelt understood this imbalance of power and attempted

to correct it by supporting proposals to create a federal right to charter or license

firms, as is discussed in the attached excerpt from Chapter 13. However, neither

he nor his successor, William Howard Taft, was successful. What this meant was

that the U.S. Government had little right to regulate its own market prior to the

passage of the 17th Amendment in 1914, an amendment which switched the selection of U.S. Senators away from State legislatures in favor of direct election. This

amendment was viewed as essential to establishing more adequate power in Washington to regulate the national market. Thanks to their extraordinary influence in

State legislatures, the big firms had been able to ensure the appointment of enough

Senators friendly to their interests to dramatically limit the regulatory powers of

the Federal Government. Thus, the U.S. market had become much like the unregulated common discussed earlier, except that the agents taking advantage of the situation were firms advised by lawyers and not poor shepherds or goat herds, as suggested in Slide number 7.

Today’s global economy is much like the U.S. in the later 19th century

In today’s economy, nations and states charter firms to compete in a global common, but no chartering authority exists that wields the political power to impose

rules on these global markets. While there are rules for trade, the chartering of financial firms in particular invites a race to the bottom to escape taxes as well as

regulations. At the same time, some countries are imposing conditions on foreign

firms as a condition for doing business in their countries. This issue is particularly

important in the case of a few very large countries, notably China. These countries,

with priorities that favor rapid growth, are using national power to partner with

U.S. firms on the condition that the latter move some of their activities to China.

These countries are behaving much the way New Jersey did in an earlier era, taking advantage of an inadequately regulated common.

In light of the inadequate regulation of the global markets for capital and technology movements, I suggest that you consider reopening the question of a federal

charter or license for U.S. firms as a way to specify certain requirements for behavior. For instance, a federal charter might state that any U.S. firms may choose to

work for stakeholder interests if they so choose, a choice that they already have,

in fact, but often seem to not be aware of. This would be a weak form of guidance.

I think it would be better to consider the establishment of a mandatory standard

of stakeholder welfare. In addition to the fact that it would put U.S. firms more

nearly in step with some of the major European countries in this respect, I believe

it would be a healthy step in its own right, in that it would help limit the steadily

increasing inequalities of income in this country. And, as another possible standard,

there could be a mandate that any incentive compensation, other than that taking

the form of restricted stock that is held for at least five years, would be subject to

a very high rate of taxation, so as to more nearly align managerial incentives with

those of shareholders.

Incentive compensation systems should have a downside risk as well as upside potential, and the only way to achieve this will be by uniform regulation; otherwise,

any firms that did so voluntarily would risk a loss of key employees. The incentives

in our market framework have become very problematic in encouraging CEOs to

take risks in circumstances where they are not subject to comparable down side consequences if they fail. The costs of failure are borne by shareholders, lower level employees and, on occasion, by taxpayers. Our market frameworks, like the pastoral

common of old, need regulatory standards to reduce the likelihood of opportunistic

behavior that inflicts losses on other users of the same common.

Thank you.

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Chairman MILLER. That would be fine.

Dr. SCOTT. That is your problem.

DISCUSSION

A NEW METRIC FOR CORPORATE ACCOUNTABILITY

Chairman MILLER. I think all the witnesses spoke for more than

five minutes but less than 50, so I appreciate the restraint.

Mr. Baird just left. I was going to call upon him. All right. I now

recognize myself for five minutes of questioning. I won’t pause to

say I now recognize myself for a second round. I think you will understand I get to keep asking questions nonetheless.

Dr. Blair, I was interested in your discussion of the various constituencies and considerations that boards of directors should take

into account, not just the financial interest of shareholders. My

question is, who shall guard the guardians? How do we hold directors accountable and on what basis and how are they chosen? If

they are elected by shareholders, why would shareholders not elect

the members of the board who would do the most to act in their

interest, their financial interest?

Dr. BLAIR. That is an excellent question. It goes right to the

heart of one of the things that has driven what I regard as a cultural change in the last 20 to 25 years to bring directors around

to thinking that they have to maximize share value. That is the argument that if they don’t focus on a single metric, we don’t have

any way of holding them accountable. And my response to that is

on several levels. First of all, the notion that, if you maximize

shareholder value, it is really clear what you have to do, is crazy.

Nobody knows what you are going to have to do to maximize share

value, and so maximizing share value doesn’t translate into a specific set of actions that directors are supposed to take, and at any

point in time there is disagreement and contention potentially

about whether or not the actions that the board is trying to take

serve to maximize share value. My own view of this is that the corporation was formed with the idea in mind that what corporations

should do is maximize the total wealth-creating capacity, and that

that would mean that, you know, in an economic sense, if the

shareholders are made better off, it should not be at the expense

of some of the other stakeholders.

That is a vague mandate, which doesn’t translate into specific instructions as to what they should do on a day-to-day basis. And I

think up until about 25 years ago, the larger corporations, because

they were very visible and because they had a brand and an image

that they had to protect and because they tended to have loyalties

to the communities where they were incorporated, the executives—

maybe not perfectly, absolutely not perfectly—but at least they

tended to think in terms of, ‘‘what are we doing for the long run

health of the company, what are we doing and how is it going to

affect the communities where we operate and how is it going to affect our customers?’’ I think that the emphasis on share value has

caused many company directors and managers to lose sight of that

bigger picture. Can you make them do it? Can you force them to

do it? Probably not, but my first point is that we can’t force them

to maximize share value, either. That is my point.

101

But at a second level, when you think about what we can make

corporations do, what I am a strong believer in is disclosure, and

I think increasingly, we have had a tug and pull in the 1930’s after

the financial collapse—the Congress moved to put into place a system that would require publicly traded companies to disclose a lot,

disclose a lot more than they used to. There is still an enormous

amount they don’t disclose, and I think if they are required to disclose what it is they are doing on a number of different fronts, they

are going to be more responsible about what they do.

Chairman MILLER. I would love to pursue that further, but I will

now yield back the balance of my time in the first round of questioning so that Mr. Baird, who I understand also has a markup like

Ms. Johnson, may ask questions. Mr. Baird for five minutes.

CORPORATE INCENTIVES THAT ENCOURAGE LONG-TERM

PROFIT

Mr. BAIRD. I really am fascinated by the topic of this hearing and

thank the Chairman for holding it. Dr. Blair, I thought your testimony was quite enlightening because there is a sense that the fiduciary responsibility obligates the company to just look at sort of

short-term profits. And you are saying that is not the case at all.

You are saying that that is maybe an urban legend or something.

Dr. BLAIR. Yes.

Mr. BAIRD. It is not valid. What other incentives and what can

or should the government do or not do—and this is not just for Dr.

Blair, for all of our panelists—to try to get that longer-term commitment to the well-being not only of just the shareholder in the

short-term but the communities in which the businesses operate,

the workforce that may have been loyal to a company for 30 or 40

years or more, what kind of reforms can or should we do or not do?

And that is to any of the panelists.

Dr. BLAIR. I will start if that is okay. I think the first and most

important thing is that we need to make sure that there are not

incentives in place that cause company executives and directors to

have this preference for risk and preference for strategies that

produce instant profit rather than long-term profit.

Now, there was an attempt in a sense—it is kind of ironic because there was a big push in the 1980’s when corporate directors

and managers were under a lot of pressure from the hostile takeover market. Then they began to say, well, if we have executives

who are compensated in stock or in stock options, they will focus

on share value and then they will be less vulnerable to takeovers.

And prior to that, corporate managers were saying, you know, we

have these other responsibilities and so we don’t necessarily think

that just because these outsiders think they can come in and buy

the company for more that we should be required to sell it. And

so we fixed that problem by radically changing the way corporate

executives were compensated, to tie their compensation much more

tightly to not just share value but to the value of the options which

are a one-sided gamble. And stock options have a huge tax advantage relative to compensation in shares. I think if directors were

paid and managers were paid in restricted stock that they had to

hold for 10 years before they could sell it, that would cause them

to have a very different set of incentives than what they have with

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the compensation and stock options. That is where I would start.

It is a big problem, but I think I would start there.

Mr. BAIRD. Dr. Gomory.

Dr. GOMORY. I agree with what Margaret has just said, but I

have had I don’t know whether it is 60 or 70 man years on corporate boards, and I have concluded that the people on those

boards are humans and they are subject to the normal human emotions and attachments, all right? And when this whole business

first became visible to me, it was in a world in which the directors

wanted their companies to be successful and they cared quite a bit

about the employees. I was an officer of IBM during its golden period.

Now, I think that they are still humans, but I think there are

two problems. One is they believe the thing that Margaret says

isn’t there and she is right, which is it isn’t their legal duty they

believe it is to maximize shareholder value. The second thing, the

compensation being tied to the share price and the sheer volume

of shares given to leading executives is such that for most people,

that amount of wealth is overwhelming.

I agree with Margaret that restricted stock—which goes up and

down, not just one way—is a much better vehicle, but I would

think that there should be less compensation, honestly, because

these people do care about their companies and their people as

anyone does who associates for a long time with them. But, they

are overwhelmed in my opinion by what they see as the legal imperatives, some pressure from some of the totally financially oriented shareholders, and that overwhelms what was in the past and

remains their natural instinct to care about their people, their community, and the other things because they are human, too. And I

think we have in some sense overcome that normal tendency which

had existed for decades and decades before the 1980’s by a concerted effort to line them up with very active financial shareholders

with these tempting, huge packages. I think they should not be

there.

Mr. BAIRD. Did you want the time back, Mr. Chairman? I have

got more questions, but I would be happy to give it up.

Chairman MILLER. Given that you have a markup and there is

nobody else, why don’t you go on?

EXECUTIVE COMPENSATION

Mr. BAIRD. Terrific. What are your thoughts about dealing with

golden parachutes and retirement packages for executives? You

know, we see increasingly these takeovers and mergers, et cetera,

or business decisions that basically drive a company into the dirt,

and the employees lose much of their retirement benefits but the

guys at the top walk away with enormous compensation levels. Any

merit to tying the fate of employees’ benefit packages to the fate

of the executive or board packages?

Dr. BLAIR. I like it in principle. The devil is going to be in the

details, but yeah, I like it in principle.

Dr. GOMORY. And I feel exactly the same as Margaret. I think

that is a very good direction. I mean, we don’t have to have and

we didn’t have in the past corporate executives who were paid hundreds of times more than everyone else and who had these enorVerDate 11-MAY-2000 19:05 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00112 Fmt 6633 Sfmt 6601 C:\WORKD\I&O08\052208\42371 SCIENCE1 PsN: SCIENCE1
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mous retirement packages at a time when the pensions of everyone

else were being cut. But that is what we have now, and it is a distortion and I think it is one that we do not need.

Mr. BAIRD. Do you think that could be remedied statutorily, possibly?

Dr. GOMORY. Yes. I do agree with Margaret. It is not as simple

as it sounds, but as a direction, it is the right way to go.

Mr. BAIRD. Are there any other incentives driving—one of the

issues here is the globalization of jobs and the economy. What are

other perverse incentives that you are aware of that may incline

businesses to export jobs, particularly manufacturing jobs, that

they might not want to do but that inherent structures in our legal

code or our tax incentives don’t force them to do but certainly reward them for doing? Have you identified some of these?

Dr. BLAIR. I have not focused on that in my work. I don’t actually

have a good answer for you.

Mr. BAIRD. Dr. Scott.

Dr. SCOTT. Yeah. We are into a transaction-driven system. Let

me back up just one second. Executive compensation in this country has no parallel anywhere else, okay? It is much higher. And if

you take a look at this over a period of time, just to go back to the

’70s, the CEOs of our big companies are being paid on the order

of 30 times their mean employee, and in Europe it was about 20.

And that is what it was when I went to start doing research in Europe in the ’60s. As we get to the end of the ’70s, we begin to break

away; and when we go through the ’80s, we are out of bounds on

this. But the reason for this, I think, is that we created the stock

option, and the stock option cost was not a cost on the P&L statement. And in 1992, 1993, 1994, the Financial Accounting Standards Board said it ought to be, and there was enough pressure

brought by people down here to say, ‘‘If you really try to put that

on the P&L statement, we are going to so curtail your budget that

you are not going to be able to do anything.’’ And Arthur Levitt has

written a very interesting account of what happened, and he just

simply tells the Financial Accounting Standards Board, if you try

to put this on the P&L statement, I will not back you. And the Accounting Standards Board only recommends, it was the SEC decision to say, ‘‘We are going to allow this to continue to go.’’ So you

have created a transaction-oriented system where you don’t have to

pay for it. The cost of the stock options drops directly to the bottom

and doesn’t have to go through the P&L statement until we get to

2004. So you have given the directors the right to give people free

money, and that is what they did. And you can raise your earnings

and raise your stock price by doing a deal with the Chinese, you

can do it any way you want. It is the transactions that drive the

stock and that drive your compensation. It is really a pernicious

system.

Mr. BAIRD. What do you think we should do about that?

Dr. SCOTT. If I were doing it, I would find a way to outlaw the

stock option entirely, and that may sound really weird——

Mr. BAIRD. You mean as a mechanism of compensation or——

Dr. SCOTT. Yes.

Mr. BAIRD. Okay.

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Dr. SCOTT. Margaret mentioned the other alternative. The other

alternative is treat the CEO more like a shareholder and say, ‘‘We

are going to give you stock’’; and when you do that, you have to

record a cost. You can’t give away stock without—you can give the

option. Now you have to put something on it. But you have to give

the stock, and if you are getting restricted stock you can’t sell it

for a good deal of time. Therefore, if the company has a down on

this thing, you take it down along with the shareholders. It is a

tremendous change. We have created a set of—this is a big part of

your problem over in Financial Services, and if you go back to Martin Wolf writing about this in the Financial Times back in January,

he said unless this is changed and unless it is changed by legislation, you are never going to correct this problem. The runaway is

creating financial incentives—Margaret mentioned this just briefly—that have an upside that encourages people to take risk and no

downside. The downside is paid by the shareholder and the taxpayer but not by the person taking the risk.

Dr. GOMORY. Let me add something to that. So far we have

talked mostly about, you know, let us not have stock options, let

us not do this, let us not do that. But I think we ought to decide

what we want a corporation to do, we as a nation; and that might

have something to do with where the jobs are and whether they are

productive and things like that. And then we ought to make sure

that our tax structure rewards that, not just pure profit because

they won’t get to keep it if they don’t meet certain other criteria.

If they are not productive, if they don’t treat people right, if their

skew of compensation is crazy. Why don’t we try and incent the

corporations to behave in the way we want them to? I think that

is worth thinking about.

Mr. BAIRD. Thank you. Thank you for your indulgence, Mr.

Chairman.

CORPORATE GOVERNANCE

Chairman MILLER. Thank you, Mr. Baird. I want to pursue the

corporate governance issues that I had begun with Dr. Blair. This

has also been debated as Dr. Scott suggested in the Financial Services Committee and corporate governance issues, specifically in executive compensation. And there are other critics of corporate governance who say that if actually corporations were acting to benefit

20 percent of the population, the 20 percent that Dr. Gomory says

owns most of the stock, that would be more revolutionary than anything the Bolsheviks did or what happened in 1789 in France. That

would be a remarkable change. The corporations are not actually

even being governed to benefit the shareholders, that corporate

boards are made up of CEOs of other corporations; and they all

think that they are underpaid and they know that the salary or the

total compensation for the CEO of a company on whose board they

sit will be looked at by their own board as what their compensation

should be. And the single best predictor of what exactly compensation will be is how many CEOs sit on the board, and particularly

on the compensation committee.

There are critics. Dr. Blair spoke less than admiringly of shareholder advocates, but there are shareholder advocates who argue

that if boards were required to act on behalf of the shareholders,

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it would be a vast improvement in corporate governance, that actually executive compensations now have become a fairly significant

part of overall profitability. And in fact, even these massive pension funds can’t get to 50 percent because 70 or 80 percent of stock

is now legally held by someone who is not the beneficial owner. In

other words, brokerage houses that hold the stock of shareholders

who never see the piece of paper, never actually claim the legal

title to the stock, but are the beneficial owner. And they vote for

the incumbent or for the slate of corporate boards proposed by the

incumbent directors and California, North Carolina, UAW, any

combination of pension funds can’t outvote them.

Dr. Blair, do you disagree with that critique and why?

Dr. BLAIR. I think——

Chairman MILLER. I think you turned it off.

Dr. BLAIR. I think the critique has been taken way too far. I

think it started out as a well-intentioned effort to try to make sure

that corporate officers and corporate directors and managers were

more accountable, but it has become an obsession and it has become an industry. The Delaware judge I quoted was Vice Chancellor Leo Strine, that over time we now have shareholder advisory

firms, we have a substantial number of academics who are keenly

interested in pushing a position in which we can create more and

more control rights for shareholders. I think it is a very dangerous

direction. I personally don’t think that Carl Icahn knows better

about what Yahoo should do than Yahoo’s executives do.

Chairman MILLER. Dr. Gomory.

Dr. GOMORY. I think that you may have already made the point

that I want to make, but I would like to—my actual experience

with boards and worrying about takeovers and things like that is

that a board of any significant corporation today knows there is a

short list of people who control the shares. In this company that

I have dealt with, it is about fourteen. Almost all are as you suggested I think earlier—they are financial houses of one sort or another. So when we are talking about having shareholder control,

people’s minds go to people, individuals. Not so, folks. It is really

the financial houses.

Now, putting more control in their hands is not at all necessarily

a good idea because you have to look——

Chairman MILLER. Are you talking about the brokerage houses

that are buying shares for which they are not the beneficiary——

Dr. GOMORY. Yes, that is——

Chairman MILLER. Are you talking about——

Dr. GOMORY. Yes, exactly. Exactly that. Because you have to look

at how those individuals are compensated in their financial firms.

And if they are very sensitive—in hedge funds it is terrible, of

course—through the share price, all you are doing is making the

company more directly a financial object to be manipulated. You

are not going to the people, you are going to the financial people

and a small group of them.

PROPOSED RULE FOR NEW YORK STOCK EXCHANGE

Chairman MILLER. There is a proposed rule for the New York

Stock Exchange—I think I am getting this right—that has been at

the SEC for one and one-half years, not acted upon. Are you familVerDate 11-MAY-2000 19:05 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00115 Fmt 6633 Sfmt 6601 C:\WORKD\I&O08\052208\42371 SCIENCE1 PsN: SCIENCE1
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iar with that proposed rule? It would limit what the legal owner

of stock could vote on, even if it deprived the board or the shareholder meeting of a quorum for some issues, unless they had specific directions from the beneficial owners, which would essentially

mean the brokerage houses couldn’t vote for board members, et

cetera.

Dr. GOMORY. To answer your question, I am not aware of that,

but I think it is an excellent direction.

Chairman MILLER. Dr. Scott.

Dr. SCOTT. I would have to disagree. If you go back to roughly

1960, the average share was held for somewhere between six and

eight years, and so it was reasonable to speak of somebody as having a long-term interest. It doesn’t mean they know anything about

the company, but at least with a six- or eight-year holding, you are

talking about somebody that has a long-term connection with the

company. The average shareholding now is about one year. So

when you are talking about a shareholder and saying does the

shareholder have some kind of a long-term interest in the company,

you have no way to have any bet on that at all. The change is we

have, quote, ‘‘democratized ownership,’’ but we have also reduced

the cost of trading. People are trading much more. I mean, just go

and pick up the statement of any mutual fund and look and see

what is the average turnover on their funds. The average turnover

on a lot of them is two times a year. Their real interest—and by

the way, I think you are missing a term when you say it is brokerage houses. It is not brokerage houses, it is mutual funds and pension funds and insurance companies. And if you ask what is their

big business, their big business is trying to attract additional assets that they manage. They don’t want to antagonize any firm at

the risk of losing its pension funds business. So they don’t even

want to have to vote their shares, they don’t want to have to vote

anything that would be considered hostile to management. They

are trying to grow assets under management at the mutual fund,

the pension fund, or whatever else, not really worrying about how

the company is managed.

Chairman MILLER. I want to pursue that at another time, I

think. Stocks held in street name, which are 70 to 80 percent of

stocks are actually not stocks held by pension funds.

Dr. SCOTT. No, but your big holders are mutual funds.

FREE TRADE AND EQUALITY

Chairman MILLER. Dr. Gomory, obviously international trade affects not only American workers but workers all over the world,

and when I was considering the CAFTA vote, I was lobbied vigorously by advocates for human rights in the CAFTA countries who

said it would actually be bad for the workers in those countries,

too, which is perhaps contrary to the common impressions of what

the effect of trade is.

What is the effect of free trade, international trade, unrestricted

international trade on workers in other countries, and what is the

effect then on the distribution of wealth in those countries?

Dr. GOMORY. Well, first of all, I would like to say this is not a

subject on which I have deep knowledge. I have had an awful lot

of experience in the United States, but very limited in other counVerDate 11-MAY-2000 19:05 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00116 Fmt 6633 Sfmt 6601 C:\WORKD\I&O08\052208\42371 SCIENCE1 PsN: SCIENCE1
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tries, and I will simply report the impression that I have from

those who know more, and the impression that I have received is

that the globalization has reinforced whatever the economic structure was in these countries. If you had a ruling elite as you did in

many—I am not talking about China of course, but take South

American countries or others—that this has simply—they have

been the principal gainers from globalization. So as I see that, in

the United States, the wealthy have been also. That pattern I am

told is repeated in other countries, but I am really relaying to you

the opinions of others, not my own direct experience.

Chairman MILLER. Dr. Gomory, is there an economic benefit besides simply having a more fair society, of having a more even distribution of wealth, income, and what is that benefit?

Dr. GOMORY. Well, let us just stick to the United States. In the

United States, we have had a productivity increase for 30 years,

but people are, from the middle class on down, struggling to pay

their bills. And it is not that the productivity increase wasn’t there,

it is just that they didn’t get it. That is the downside.

Chairman MILLER. Dr. Scott.

Dr. SCOTT. Yeah, I would answer that very differently, not in any

way contradictory. It has a huge impact in the United States. We

are almost alone in operating our educational system at the first

12 grades on a market, and the market is local real estate taxes.

You want to get a good school system, you now look and you say,

‘‘Who has the good school systems?’’ It is the people that have the

big tax base. The big tax base is then wealthy people, and they are

attracting more and more; and now we are getting segregated

schooling all over the country out of this. Other countries pay their

school teachers typically either by a province or by a Federal Government. We are paying them by local real estate taxes. So as you

are building this, you are building a self-reinforcing thing. We no

longer have mobility of the labor force that is greater than Europe.

It is the other way around. So you are creating something where

a whole lot of people are being deprived of the chance for a good

education because they are in a school district that doesn’t have

the money to do it, and that is particularly what is going on around

our big, urban areas. So yes, it does. We are going to deprive all

sorts of people of a good education as the wealth concentrates and

people learn to buy their way into a place where they can get a

good school.

Chairman MILLER. Mr. Baird, do you wish to ask another round

of questions?

Mr. BAIRD. I would, if I might.

Chairman MILLER. All right. Mr. Baird.

PENSION FUNDS

Mr. BAIRD. Given that incredible amounts of money are available

in State and federal pension funds, can you talk a little bit about

constructive or counter-productive roles pension funds can play and

some of the kind of reforms you talked about?

Dr. BLAIR. Let me take that on. It is true that State and local

pension funds have been among the most activist in the shareholder rights movement if you want to call it that. And it does

seem to me that some of them have played very constructive roles

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in the almost behind-the-scenes conversations that they have had

with companies than the rhetoric that you see in the newspaper

would tend to suggest—when General Motors was really in serious

trouble in the 1980’s, CalPERS, the California State Public Employees Retirement System, did some behind-the-scenes maneuvering along with a number of other institutional shareholders to

pressure the board to change management and to make changes

that needed to be made. And I certainly think that they have the

potential to play a role in insisting on the overall performance of

the company because they have a constituency that is in the state

where they are operating in the community. So they ought to be

paying attention to other beneficiaries as well—and what is good

for the beneficiaries—both in the financial terms and in the larger

picture. Ironically, corporate pension funds are actually precluded

from doing that because of a Department of Labor ruling that said

that pension funds that are regulated under ERISA are required

to pay attention to the financial interest only and not to pay attention to other interests that might affect the beneficiaries of those

pensions. It was kind of a perverse rule, but it was put in place

in the 1980s, and it is not—as I understand it, it is a Department

of Labor regulation, rather than a statute.

The thing about pension funds is that they tend to have the most

long-run interests because there is money flowing into pension

funds that is to be held there for 10, 20, 30 years for the beneficiaries. So they intend to have a more long-run focus. I don’t

think the problem is coming from pension funds, and I think they

have a potential role that could actually be productive.

HEDGE FUNDS

Mr. BAIRD. Let us look at a different—and you may have mentioned this already so forgive me—the role of hedge funds in this

issue in either making the problem worse or possible ways they

could improve it.

Dr. BLAIR. I am not an expert on hedge funds. One of the things

that really troubles me about hedge funds is that they don’t disclose anything. They are not required to disclose anything. So we

don’t know how their executives are being compensated. There are

stories that the hedge funds management gathers two percent of

the gross amount of money under management plus 20 percent of

the profits annually. That produces some outrageous results in

which they can, by taking very high risk strategies, they get their

two percent every year and then they can take off 20 percent when

their strategy wins but they don’t have to give any back when their

strategy loses. And so they are in a heads-I-win, tails-you-lose situation. Now, what is puzzling to me is that the market hasn’t regulated it, and I think the reason why the market hasn’t regulated

that so far is partly because they had a string of good years, and

so it caused a lot of money managers, and even like private endowments, to say, ‘‘Well, let us put some of our money with these

hedge funds.’’ I would hope that in the wake of the financial crisis

that has resulted from the mortgage lending and the securities that

were based on mortgage lending, you will see some of these institutions saying, ‘‘Oops, maybe that wasn’t such a good idea. Maybe we

should not invest so much of our money with hedge funds.’’ But I

109

am a strong believer in disclosure. I think if hedge funds had to

disclose more of what they were doing that they would then be subject to embarrassment, and I believe in embarrassment as a regulatory device.

Mr. BAIRD. May I ask one other question, Mr. Chairman?

Chairman MILLER. I am sorry. I thank all the witnesses in the

first panel for their testimony. If we could now have the testimony

of the second panel, I think we will be called to votes before too

much longer. I would like to see if we can get in the second panel’s

testimony. But, I thank all of you.

Panel II:

Thank you. I would now like to introduce our second panel. The

first witness is Mr. James R. Copland, III. Mr. Copland is the

Chairman of Copland Industries and Copland Fabrics located in

Burlington, North Carolina. It is not in my long-term interest for

all Americans to realize that some Southerners when they act unsophisticated and guileless actually have a pretty good idea of exactly what they are doing. They may just be playing you, and I

pointed out to Mr. Copland that I did know in the past that he was

a Morehead scholar at the University of North Carolina at Chapel

Hill and son, Jason, who now works in the family business, has a

Master’s degree from the Amos Tuck School of Business at Dartmouth. So welcome, Mr. Copland, and I hope you don’t give our secret away. Second is Mr. Brian O’Shaughnessy, who is the Chairman of Revere Copper Products located in Rome, New York, and

third, Mr. Wes Jurey, the President and CEO of the Arlington

Chamber of Commerce in Arlington, Texas. Mr. Jurey, I am sorry

you did not get to meet your charming and capable Member of Congress, Eddie Bernice Johnson, but you are lucky to have her.

And now, all of you know that your oral testimony is limited to

five minutes, and after that the Members of the Committee will

have the opportunity to ask rounds of questions. Again, to put you

at ease, we would like to put you under oath under penalties of

perjury. Do any of you have an objection to being sworn in? And

do any of you—are any of you represented by counsel? No? All

right. If you would all now stand and raise your right hand? I understand Jason may also be testifying, so if you would stand as

well? Do you swear to tell the truth and nothing but the truth? All

right.

Mr. Copland, you may begin.

STATEMENT OF MR. JAMES R. COPLAND III, CHAIRMAN,

COPLAND INDUSTRIES/COPLAND FABRICS, BURLINGTON, NC

Mr. JAMES COPLAND. First, thanks for the opportunity to speak

before this esteemed committee.

America needs a new manufacturing policy. I don’t believe that

anyone in America is opposed to free trade as long as it is fair

trade, but when foreign governments subsidize, manipulate their

currency, flout legal requirements and tactically condone worker

and environmental abuses, it is impossible for Copland or any domestic manufacturer to compete. Under such circumstances,

Copland isn’t competing against foreign companies but they are

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competing against foreign governments. This is bad manufacturer

policy.

Let us look at the People’s Republic of China. They are the 800-

pound gorilla in international trade. As a communist country, most

of China’s industry is government owned or quasi-government

owned. The Chinese government buys their capital equipment, or

in the case of quasi-government-owned companies, it guarantees

the purchase. Chinese companies often end up paying zero capital

costs, a tremendous advantage that no U.S. competitor can overcome.

In many cases, the Chinese government subsidizes utility and

transportation costs but that is not all. China also provides a 17

percent export subsidy on goods shipped to the United States when

it fully rebates value-added taxes. China’s currency is pegged to the

dollar and it is undervalued by approximately 40 percent. If our

dollar goes down, the Chinese currency goes down. The yuan is not

allowed to float on the world market like other currencies. This

subsidy makes China’s goods 40 percent cheaper in the market.

Finally, China has no EPA, no OSHA, no workmen’s compensation, no unemployment insurance. Their whole system is different

from ours, a communist system, yet U.S. manufacturers must compete against them, an impossible task.

People often talk about wage rights. Sure, China’s wages are a

mere fraction of ours with no child labor laws, no overtime, few

benefits, but let me be perfectly clear. Wages are not the only

issue. U.S. workers are much more efficient. In many cases, if a

Chinese company’s labor costs were free, they still could not compete without subsidies from their government. U.S. manufacturers

would win hands down, absolutely. No company can compete when

your competition is a foreign government determined to spend

whatever it takes to force you out of the market and the U.S. Government does nothing about it. The U.S. Government recognized

problems with the communist Soviet Union but for some reason it

fails to see it with China. This is one of the things I mean when

I say in my written testimony that the United States has an uncompetitive manufacturing policy.

I also want to talk about one aspect of trade agreements that has

not been given proper emphasis, the human factor. Millions of

Americans are losing their jobs. Their jobs are being moved overseas and they can’t get other jobs. Don’t think there are high-tech

jobs available for those folks, because there aren’t. They are being

shipped to China and India too. Moreover, many of the factory

workers being laid off in the United States aren’t trained for those

jobs, even if they did exist. If those that were laid off are lucky,

they have landed jobs flipping hamburgers or as a greeter at some

retail store. Every American deserves the right to provide for his

family, to own a home and to educate his kids, but our flawed manufacturing and trade policies are taking this away. Our Constitutional preamble says a government of the people, by the people and

for the people. We have forgotten about the words ‘‘for the people.’’

Go to the small towns in North and South Carolina. Mills are

closed. Stores are closed with weeds growing up around them. But

you know it is really bad when you see the churches closing. Someone needs to think about the hardworking people and what is hapVerDate 11-MAY-2000 19:05 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00120 Fmt 6633 Sfmt 6601 C:\WORKD\I&O08\052208\42371 SCIENCE1 PsN: SCIENCE1
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1Source: U.S. Office of Textiles and Apparel.

pening to them. They are left out of the thought process when

flawed manufacturing and trade policy is made. Let me say that

the big multinational companies, the importers and big retailers

have exactly what they want. They couldn’t have written a book

and had it more perfect for their world. Buy at the China price, sell

at the U.S. price and don’t worry about whether the average American has a job or he can make ends, meet but their world is not

what is good for America.

You hear a lot of political candidates talking about the economy,

our financial crisis and health care. They talk about the result but

they don’t talk about the cause. Subprime mortgages have been

around for decades, car loans as long as there have been cars, credit cards for decades. The primary reason people can’t make their

payments now is because they don’t have any money. In most

cases, the reason they don’t have any money is because they have

lost their jobs or they now have jobs making a fraction of what

their pay was before their jobs were exported. If these people had

their manufacturing jobs, they wouldn’t have the economic problems and financial problems we now have. People often got their

health insurance from their jobs. Now many of those jobs have

moved offshore because of our flawed trade agreements. No wonder

we have a health care crisis. Americans just want their manufacturing jobs back. The U.S. Government’s policy is creating millions

of jobs, all right, but they are creating them in the People’s Republic of China and Vietnam at the expense of hardworking Americans

here at home.

Our country should be ashamed, totally ashamed of what our

government has done to working people in America. People are

angry now, and when they connect the dots, and they are going to

connect them, they are going to know where to focus their anger.

[The prepared statement of Mr. Copland follows:]

PREPARED STATEMENT OF JAMES R. COPLAND III

Introduction

My name is Jim Copland and I am the Chairman of Copland Industries/Copland

Fabrics, a company located in Burlington, North Carolina. Copland Industries/

Copland Fabrics is a textile company whose main business historically serviced the

home furnishings industry in the United States. We manufactured fabrics for curtains, draperies and blinds among other home furnishing products. Due to the U.S.

home furnishing market being overrun by imports, especially by those of the subsidized variety from China, employment at Copland Industries/Copland Fabrics has

fallen from more than 1,000 in recent years to less than 300 and we have been

forced to exit many of our traditional business markets.

To give you an example of the one of the competitive challenges faced by Copland

Industries/Copland Fabrics, in the man-made fiber curtain and blinds tariff lines not

included in the U.S.-China textile bilateral agreement due to expire at the end of

this year, U.S. imports from China exploded by 6,912 percent, jumping from 845,000

kilograms in 2001 to 59.265 million kilograms in 2007.1 China accounted for almost

107 percent of the total U.S. growth in imports for those products during the time

period, meaning the rest of the world actually lost U.S. import market share. In

2007, China held a 90.2 percent U.S. import market share for man-made curtains

and blinds not under quota compared to a 7.7 percent market share in 2001. A flood

of imports from China in products like the ones for which we used to make fabric

is one of the main reasons why my home town of Burlington has lost nearly 40 perVerDate 11-MAY-2000 19:05 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00121 Fmt 6633 Sfmt 6621 C:\WORKD\I&O08\052208\42371 SCIENCE1 PsN: SCIENCE1
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2Source: U.S. Bureau of Labor Statistics.

3Source: U.S. Department of Labor. See: http://www.bls.gov/news.release/disp.t07.htm 4Source: U.S. Bureau of Economic Analysis.

5Sources: U.S. Bureau of Economic Analysis and U.S. Census Bureau.

6Sources: U.S. Department of Commerce, U.S. Bureau of Economic Analysis, and MBG Information Services. 7Sources: U.S. Department of the Treasury, U.S. Department of Commerce and MBG Information Services.

cent of its manufacturing jobs since 2001, making it the hardest hit metro area for

manufacturing job loss in North Carolina.2

Copland Industries/Copland Fabrics also is a member of the American Manufacturing Trade Action Coalition (AMTAC), a lobbying organization dedicated to preserving and promoting domestic manufacturing. On May 1, 2008, my son Jason

Copland, CEO of Copland Industries/Copland Fabrics, participated in a conference

call press event where AMTAC released a comprehensive report on North Carolina

jobs and manufacturing that provides the basis for much of the following testimony.

The two main points I want to drive home are these: (1) the U.S. Government’s

uncompetitive manufacturing policy is responsible for much of the steep decline in

manufacturing employment and investment that significantly is hindering economic

growth in the United States and in my home State of North Carolina and hurting

working people; and (2) U.S. manufacturing will continue to suffer unless Congress

and the Bush Administration intervene with policies that encourage rather than discourage manufacturing investment in the United States—and the first policy step

in this direction is countering the predatory trade practices of China and other

countries.

If the United States comprehensively were to address its manufacturing competitiveness policy problems, domestic manufacturers likely would rebound strongly.

This is because only the most efficient, productive, nimble, and innovative companies have been able to survive the severe manufacturing economic downturn since

2001.

But let me be clear. As long as the current status quo on the U.S. Government’s

manufacturing policy continues, the United States will have much more difficulty

ameliorating the pain an economic recession will inflict on its citizenry in a timely

manner. To wit, the 2006 U.S. Department of Labor study of the 1.085 million U.S.

manufacturing workers who were displaced between 2003 and 2005 from jobs that

they had held for three or more years showed that only 64.5 percent of those workers gained reemployment and that just 20 percent of them found a job that paid

better than the one they lost.3

Record Debt Stimulus Should Have Created Booming Domestic Manufacturing Sector

U.S. manufacturing is mired in the midst of a crisis unprecedented since the

Great Depression. Deeply flawed U.S. trade policy toward domestic manufacturing

is the single most important root cause of the illness, undermining U.S. manufacturing competitiveness on a global basis.

Absent a rational U.S. trade policy, U.S. manufacturing should be experiencing

the best of times. Consider the following. Since 1950, U.S. Gross Domestic Production (GDP) has grown 550 percent in inflation-adjusted terms4 while the U.S. population has doubled from 150 million to 303 million. Since 1990, U.S. GDP has grown

by a little more than 50 percent in inflation-adjusted terms while the U.S. population has increased by 54 million.5

Moreover, the percentage of U.S. GDP used for consumer consumption has been

above 70 percent in each of the previous six years.6 Noting this figure, it should not

be surprising that U.S. household and Federal Government debt has skyrocketed to

unprecedented levels. Together, household and federal debt almost have doubled

over the past seven years, soaring by $10.4 trillion to reach $23.1 trillion, an

amount 64 percent larger than the entire Gross Domestic Product (GDP).7 In comparison, total U.S. household and federal debt was 27 percent larger than GDP at

the end of 2000. While the current record debt level is the basis for the debt crisis

that now has plunged the United States into a new and possibly severe recession,

in recent years it should have served as the greatest stimulus to U.S. manufacturing

since the need for production to fight and win World War II.

Instead, the United States by far suffered its slowest seven-year job growth since

the demobilization following World War II. Although the U.S. Census Bureau estimates that the U.S. population grew by 6.9 percent, expanding by 19,622,932 people

from 283,946,833 on January 1, 2001 to 303,569,765 on January 1, 2008, the United

States added only 5,587,000 jobs for a seven-year employment increase of 4.2 perVerDate 11-MAY-2000 19:05 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00122 Fmt 6633 Sfmt 6621 C:\WORKD\I&O08\052208\42371 SCIENCE1 PsN: SCIENCE1
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8Source: Federal Reserve Board’s price-adjusted ‘‘Broad’’ Index of currency values.

cent, growth far short of the 9,140,000 job creation figure necessary to maintain employment participation rates at January 2001 levels. The U.S. manufacturing sector

suffered even worse, losing 3,361,000 jobs.

Additionally, annual inflation-adjusted U.S. GDP growth has been weak, averaging just 2.55 percent per year for the seven-year period ending in 2007.

Indicators of the National Manufacturing Crisis

Rather than showing strong gains in employment, capacity, output, and investment that normally would be expected in an economy experiencing the level of consumer stimulus that the United States has seen in recent years, the evidence instead demonstrates that U.S. manufacturing has slumped severely.

Last year, the United States ran a trade deficit of $708.5 billion, including a

$498.9 billion deficit in manufacturing goods. The cumulative numbers even are

more troubling. Since 1980, the cumulative U.S. trade deficit is $6.365 trillion, with

manufacturing goods accounting for $5.249 trillion of that figure. Of even greater

concern, almost 59 percent of that trade deficit in manufactured goods, $3.08 trillion, has been accumulated since 2001. Even the U.S. dollar’s 24.2 percent fall

against the U.S. Federal Reserve Board’s price-adjusted ‘‘Broad’’ Index of world currency values since January 20028 has failed to increase U.S. exports enough materially to stanch the trade red ink.

The United States cannot continue to withstand the problems associated with a

runaway trade deficit indefinitely. But don’t just take my word for it; others agree:

• ‘‘The present level of the current account deficit is enormous, it is unprecedented and I believe it is unsustainable.’’

— Martin Feldstein, Professor of Economics at Harvard University, former

Chairman, Reagan Council of Economic Advisors

• ‘‘[T]he United States must now attract almost $7 billion of capital from the

rest of the world every working day to finance its current account deficit and

its own foreign investment outflows.’’

— C. Fred Bergsten, Director, Institute for International Economics

• ‘‘[O]ur trade deficit has greatly worsened, to the point that our country’s ‘‘net

worth,’’ so to speak, is now being transferred abroad at an alarming rate. A

perpetuation of this transfer will lead to major trouble.’’

— Warren Buffet, Chairman, Berkshire Hathaway

So, how can it be that the United States, a country that possesses the most sophisticated industrial complex in the world, spends billions on research and development and product innovation, and has one the world’s most advanced transportation, communication, and higher educational infrastructures, cannot run a trade

surplus in virtually any manufacturing sector?

The reason why the United States runs massive trade deficits in products where

free-trade theory posits America should have a comparative advantage is because

foreign government intervention negates comparative advantage with value-added

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9Source: Federal Reserve Board, Industrial Capacity, Manufacturing (SIC), Not Seasonally

Adjusted. 10Source: Federal Reserve Board, Industrial Output, Manufacturing (SIC), Not Seasonally Adjusted.

tax schemes, manipulated currencies, State sponsored subsidies, lack of protections

for intellectual property rights, below market interest rates, and non performing

loans that create an absolute advantage for their manufacturers.

These foreign predatory practices often are compounded by other factors such as

pennies-per-hour labor, blatant disregard for environmental protection, lack of reasonable labor rights and workplace safety standards, and lack of basic benefits such

as health care.

Consequently, it should surprise no one that other key economic health indicators

for U.S. manufacturing show either an industry in distress or the weakest growth

on record in the last six decades.

The U.S. manufacturing sector’s inflation-adjusted capital expenditures for plant

and equipment have plunged dramatically. The 2006 expenditure amount of $116.6

billion was smaller than each of the amounts for 1978 ($120.7 billion), 1979 ($124.2

billion), and 1980 ($129.7 billion), the last three years of President Jimmy Carter’s

Administration. Furthermore, it was considerably lower than the $158.8 billion expenditure peak in 1997.

U.S. manufacturing capacity also has grown at a slower rate in the 2000s than

in any of the past six decades. Growth was 50 percent for the 1950s, 63 percent for

the 1960s, 38 percent for the 1970s, 25 percent for the 1980s, and 57 for the 1990s.

Projected growth for the 2000s has fallen to a mere 16 percent or 1.6 percent per

year.9

U.S. manufacturing output numbers tell a similar tale as output in the 2000s has

grown at a slower rate than in any decade since the 1950s. Output growth was 69

percent for the 1950s, 54 percent for the 1960s, 40 percent for the 1970s, 23 percent

for the 1980s, and 56 percent for the 1990s. Projected output growth for the 2000s

is an anemic 13 percent or 1.3 percent per year.10 For the category that covers much

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11Source: U.S. Commerce Department, U.S. Federal Reserve and MBG Information Services. 12See USBIC Research Alert, New Data Show Import Growth Depressing U.S. Industrial Output; Advanced U.S. Manufacturers Keep Losing Ground in Home Market, by Alan Tonelson and

Sarah Linden, January 8, 2008. 13Statement of Senator Charles Grassley at Senate Finance Hearing on WTO negotiations 10/

27/2005.

of the Copland Industries production, U.S. Textile Mills, output is down 50.4 percent

from its peak in December 1997.

Finally, U.S. manufacturing employment collapsed between 2000 and 2003 and

has yet to recover from the downturn. It now has plummeted to 13.6 million, its

lowest level since May 1950 one month prior to the eruption of the Korean War.

Employment in the U.S. textile and apparel sectors has been even harder hit, falling

from 1,048,300 in January 2001 to 506,200 in April 2008—a loss of 542,100 jobs and

a decline of 51.7 percent.

Pollyannas arguing that little is wrong with U.S. manufacturing cite U.S. manufacturing productivity increases as the main reason for employment decline. Although U.S. manufacturing productivity indeed has doubled in recent years, U.S. demand for manufactured goods has tripled. Because U.S. growth in demand for manufactured goods exceeds growth in productivity, the United States should be adding

manufacturing jobs instead of losing them if it were maintaining its market.

The real culprit in the loss of U.S. manufacturing jobs is the loss of markets and

the loss of domestic markets to offshore producers in particular. Since 1980, U.S.

demand for durable manufactured goods has soared nearly 400 percent. U.S. production of durable manufactured goods, however, only has grown by 40 percent of

that total.11 To further illustrate this point, U.S. Business and Industry Council Research Fellow Alan Tonelson conducted a study on import penetration rates for 114

high tech and other capital-intensive industries in the U.S. manufacturing sector.

His research showed that import penetration rates for those industries jumped by

58.6 percent from a penetration rate of 21.4 percent in 1997 to 33.9 percent in

2006.12

New Competitive Trade Policy Needed to Restore Health of U.S. Manufacturing

Considering the undeniable plight of U.S. manufacturing, a comprehensive new

U.S. trade policy to boost competitiveness desperately is needed.

Require Reciprocity—U.S. trade policy must be redirected to its original roots in

reciprocity, a concept clearly not present in the global economy’s chief trade regime,

the World Trade Organization (WTO). In the Uruguay Round, the United States

agreed to lower or eliminate most barriers to its market for manufactured products

without receiving commensurate market access from the rest of the world in return.

Today, the average U.S. bound tariff for industrial products is three percent, while

the average worldwide bound tariff is 30 percent.13 Moreover, the average trade

weighted U.S. industrial tariff stands at less than 1.7 percent.

In this regard, one significant problem is the ability of WTO members to self-designate themselves as ‘‘developing countries,’’ a status granting them more favorable

trading privileges than self-designated ‘‘developed’’ countries such as the United

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14Sources: U.S. Department of Commerce, China Customs, and MBG Information Services. 15Sources: Simple averages of MFN tariff rates on industrial products applied by EU countries are from the OECD and UNCTAD. For 2006, the latest available tariff rate from UNCTAD,

for 2003, is assumed to remain constant. Simple averages of standard VAT rates of EU members

with a VAT in effect are from the European Commission. Aggregate trade barrier is the sum

of the average tariff rate and the average VAT rate for each year examined.

States. The ability of WTO members to self-designate their country status must be

eliminated and replaced with objective criteria that accurately measure a country’s

ability to compete in the global trading arena.

Take China for example. While it may be a developing country in many respects,

it is an international superpower in terms of global trade. In both 2006 and 2007

China exported more manufacturing goods to the world than did the United

States.14 Yet under the current WTO regime, China is allowed to maintain high tariff walls and other substantial non-tariff barriers to market access as a self-designated ‘‘developing country.’’

The ongoing Doha Round negotiations only further would exacerbate the lack of

reciprocity afforded to U.S. producers. The Doha Round’s Non-Agricultural Market

Access (NAMA) text grants numerous exemptions to developing countries such as

that contained in the Hong Kong Declaration’s paragraph 14, ‘‘Take fully into account the special needs and interests of developing countries including through less

than full reciprocity in reduction commitments.’’ The NAMA Chairman’s July 2007

text states, ‘‘There is almost unanimous support that a simple Swiss formula with

two coefficients should be adopted.’’ Finally, for developed countries such as the

United States, the maximum industrial tariff allowed proposed in the current

NAMA negotiations is to be between eight and nine percent. In contrast, developing

countries such as China will be allowed a tariff ceiling that would fall between 19

and 23 percent.

Offset the VAT Border Tax Disadvantage—Currently, 149 countries, accounting

for approximately 95 percent of all U.S. trade, utilize a border-adjusted, value-added

(VAT) tax system implemented at average rate of 15.4 percent. This tax often is

among a country’s most significant revenue sources to pay for such expenditures as

nationalized health care and other vital government services.

Countries utilizing value-added tax systems impose those taxes on the cost of an

import plus all shipping, handling, insurance and tariff expenses. They also rebate

any VAT paid on a domestically produced good that is exported. Meanwhile, the

United States neither rebates the taxes paid by a producer upon the export of a

good nor imposes a significant tax burden on imports.

Consequently, goods produced in VAT countries have a built-in price advantage

over their U.S. counterparts. Producers in VAT countries often are able to export

goods at a price that deducts the U.S. equivalent of payroll and other taxes that

are used to pay for social security, unemployment insurance, and health care costs.

U.S. producers not only pay those U.S. taxes in the process of manufacturing domestically produced goods, they also are forced to pay them in other countries the moment a U.S. export is slapped with a VAT. AMTAC estimates that border-adjusted

VAT schemes disadvantaged U.S. producers and service providers by a staggering

$428 billion in 2006.

Ordinarily, a VAT would be viewed as an impermissible export subsidy under current trade rules. Unfortunately, in the years following World War II, the United

States agreed to a loophole under the old General Agreement on Tariffs and Trade

(GATT) the exempted VAT subsidies. Since allowing that loophole, use of the VAT

grew from just France to almost the rest of the world, 149 countries. And as one

would expect, VAT rates often have risen as tariff rates have fallen, creating a constant, but less visible barrier to U.S. exports. For the European Union (EU), the average barrier to U.S. exports has remained nearly constant at 23.8 percent since

1968.15 Although the average EU tariff has dropped from 10.4 percent in 1968 to

4.4 percent in 2006, the average EU VAT has risen from 13.4 percent to 19.4 percent.

Last year, Congressmen Bill Pascrell (D–NJ), Duncan Hunter (R–CA), Mike

Michaud (D–ME), and Walter Jones (R–NC) introduced H.R. 2600, the Border Tax

Equity Act, to offset the VAT disadvantage to U.S. producers and service providers.

Congressman Steven Rothman (D–NJ) of the Science and Technology Committee’s

Subcommittee on Oversight and Investigations also is among the 15 total (seven

Democrats and eight Republicans) House Members currently sponsoring the bill.

H.R. 2600’s swift enactment is a key to restoring U.S. manufacturing health.

Make Currency Manipulation an Actionable Subsidy—U.S. congressional and

executive inaction against blatant currency manipulation by China is inexcusable.

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16Sources: U.S. Department of Commerce, U.S. Bureau of Economic Analysis, and MBG Information Services. 17Domestic Exports are defined as exports of domestic merchandise include commodities

which are grown, produced or manufactured in the United States, and commodities of foreign

origin which have been changed in the United States, including U.S. Foreign Trade Zones, or

which have been enhanced in value by further manufacture in the United States.

For years that country has pegged the value of its currency, the yuan, to the U.S.

dollar at an artificially low rate. Factoring inflation, the value of the yuan has risen

in value by less than five percent against the U.S. dollar since its peg was ‘‘loosened’’ to a basket of currencies in 2005. This policy has enabled China to simultaneously lower the cost of its exports and raise substantial barriers to imports.

Since 2001, the year China joined the WTO, the U.S. merchandise trade deficit

with that country has exploded from around $80 billion to a staggering $256 billion

in 2007.16 The cumulative U.S. trade deficit with China during that same time period for manufactured goods was a staggering $1.2 trillion!

The United States imported $313.6 billion in manufactured goods from China in

2007. If, for example, China were undervaluing its currency by 35 percent, a figure

not unreasonable to many experts, it would amount to a subsidy of nearly $110 billion to Chinese manufacturing exporters. With subsidies like this, its should surprise no one that less productive and efficient Chinese manufacturers can ship their

products halfway around the world to the United States and still undercut the

prices of their U.S. competitors.

Congressmen Tim Ryan (D–OH) and Duncan Hunter (R–CA) have introduced

H.R. 2942, the Currency Reform for Fair Trade Act of 2007, to discourage currency

manipulation by China, Japan, and other countries. A total of 44 Democrats and 31

Republicans (75 House Members total) are sponsoring the bill, including U.S. Representatives Eddie Bernice Johnson (D–TX), Dana Rohrabacher (R–CA), and James

Sensenbrenner (R–WI) of the Science and Technology Committee’s Subcommittee on

Oversight and Investigations.

H.R. 2942’s strongest deterrent is a provision that would make currency manipulation an actionable subsidy under U.S. countervailing duty (CVD) law. Enactment

of this legislation is imperative if the United States is to reduce its manufacturing

and trade policy competitiveness gap with China, Japan and others.

Separate Trade Enforcement from the Office of the U.S. Trade Representative—It is unreasonable to expect that an office who on one hand is charged with

negotiating trade agreements with other countries to then be able to turn around

and impartially punish them when they run afoul of U.S. trade law. The conflicts

of interest inherently are too great. As such, all enforcement of U.S. trade law

should be separated from the Office of the U.S. Trade Representative (USTR).

A separate U.S. governmental entity should be set up as an independent agency

or in another cabinet-level department, such as the U.S. Department of Commerce,

to enforce U.S. trade law. This body would be charged with aggressively pursuing

dumping, subsidy and intellectual property rights violation cases within the U.S. judicial and regulatory system and at the WTO. The anti-competitive dumping and

illegal subsidy practices revealed in recent cases against China (the case on coated

free sheet paper is a good example) should provide enough work to keep any enforcement agency busy for years.

Also as part of this reform, the U.S. Government should reduce the cost and barriers to U.S. manufacturers attempting to bring trade enforcement cases. Presently,

anti-dumping and CVD cases often cost millions for U.S. manufacturers to prosecute

effectively. Even after making such a financial commitment, a favorable outcome is

not guaranteed. In addition, U.S. manufacturers in a product’s supply chain often

have almost no access to trade law remedies due to a lack of standing. Only the

assemblers of the final product and/or its workers, i.e. a union, usually effectively

have standing to file a case. These costs and barriers deter the filing of many legitimate trade cases. The United States should consider adopting reforms to mimic the

European Union where manufacturers would submit data indicating a likelihood of

dumping or CVD infraction and the government then would investigate them and

render a decision.

Stop Negotiating FTAs With Countries That Cannot Buy Finished U.S.

Goods—Finally, the United States should stop negotiating free trade agreements

with countries or economic regions that either are unwilling or unable to buy finished U.S. goods at the same rate they export to the United States.

Flawed U.S. free trade agreements demonstrably have fueled the U.S. trade deficit. Measuring U.S. Government data for domestic exports17 minus imports for conVerDate 11-MAY-2000 19:05 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00127 Fmt 6633 Sfmt 6621 C:\WORKD\I&O08\052208\42371 SCIENCE1 PsN: SCIENCE1
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18 Imports for Consumption measure the merchandise that has physically cleared Customs either entering consumption channels immediately or entering after withdrawal from bonded

warehouses under Customs custody or from Foreign Trade Zones. 19Source: U.S. Department of Commerce.

sumption,18 the U.S. trade deficit with our free trade partners has skyrocketed since

1989 from $13.55 billion to a whopping $187.84 billion in 2007.19 With just Canada

and Mexico between 1994 and 2007, the United States ran a cumulative trade deficit in manufacturing goods of $397.6 billion, a merchandise trade deficit of $1.071

trillion, and a current account deficit in goods and services of $942.2 billion.

Instead of seeking out negotiating partners in small or developing countries, the

United States should be targeting agreements or economic alliances with countries

that have lucrative consumption markets and a settled rule of law. Japan or the

European Union would be examples of two good candidates. These trade partners

both have sufficient large populations and high standards of living to buy sizable

quantities of U.S. exports if a good free trade agreement were negotiated and properly enforced.

Conclusion

Despite the hardships it has faced, the health of U.S. manufacturing quickly can

be restored if the United States addresses its manufacturing policy competitiveness

issues by fixing its broken trade policy. Weak and inefficient U.S. manufacturers

closed their doors years ago. Only the strongest and most efficient U.S. manufacturers have been able to survive in such a hostile competitive atmosphere. These companies will be well placed to ramp up new investment, reclaim lost market share,

and add employment if the U.S. Government boosts competitiveness by removing

trade policy obstacles impeding their success.

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BIOGRAPHY FOR JAMES R. COPLAND, III

Education

Elementary and High School—public schools Burlington, NC

College—1962 graduate UNC–Chapel Hill

Morehead Scholar, Phi Beta Kappa

Degree—B.S. Business Administration

Work Experience

1962–Present—Copland Industries, Inc./Copland Fabrics, Inc.

1986–2004—President, Treasurer & CEO, Copland Industries, Inc. & Copland Fabrics, Inc.

2004–Present—Chairman of the Board, Copland Industries, Inc. & Copland Fabrics,

Inc.

1970–Present—Director, Copland Industries, Inc. & Copland Fabrics, Inc.

1963–1986—Director, Northwestern Bank, Burlington, NC

1977–1986—Director, Northwestern Bank, North Wilkesboro (Corporate Board)

1986–1987—Director, First Union National Bank, NC Board

1988–1996—Director, Executive Committee, FirstSouth Bank, Burlington, NC

1997–Present—Director, Chairman, MidCarolina Bank

1982–Present—Director, Vice President, Executive Committee, Lutheran Retirement

Ministries, Burlington, NC

1986–Present—Capital Treasurer, Macedonia Lutheran Church, Burlington, NC

1994—Alamance County Man of the Year

2006—Business Leadership Award, Elon University

1992–1996—UNC Board of Visitors

Worked with various charities and foundations including—United Way, Boy Scouts

of America, Alamance Citizens for Education, Alamance Community College,

Salvation Army, UNC Honors Program

Married—Harriett E. Copland (40 years)

3 Sons—James R. Copland, IV; Dr. Spencer T. Copland, Jason C. Copland

Chairman MILLER. Mr. O’Shaughnessy.

STATEMENTOF MR. M. BRIAN O’SHAUGHNESSY, CHAIRMAN,

REVERE COPPER PRODUCTS, INC.; MEMBER, BOARD OF DIRECTORS, COALITION FOR A PROSPEROUS AMERICA

Mr. O’SHAUGHNESSY. Thank you, Mr. Chairman.

My company is Revere Copper Products and was founded by Paul

Revere in 1801. We believe we are the oldest manufacturing company in the U.S.A. Our factory is in Rome, New York, and produces

copper and brass sheet, strip, coil, bar and extruded products for

shipment to other manufacturing companies. Revere is a domestic

manufacturing company and outsources nothing. My unwillingness

to outsource or sell out is based on loyalty and patriotism.

Please note that I also represent and serve on the Board of Directors of the Coalition for a Prosperous America, or CPA. This coalition includes domestic manufacturing, organized labor, farming

and ranching. You should visit CPA at

www.ProsperousAmerica.org. My testimony includes positions on

issues that have not yet been considered by CPA but are ever

present in Revere’s besieged financial results.

Mr. Chairman, the United States is alone among major trading

nations in the world without a national trade policy. China and the

rest of the world are waging a mercantilist war on the United

States and the United States is sleeping as its factories, farms and

161

ranches are being systematically destroyed. We desperately need a

national trade policy instead of a patchwork of trade agreements

that deepen the current problems and enable foreign protectionism.

Our nation’s focus on general trade agreements and FTAs is misguided, inadequate and lacks strategic thinking.

While I am a proponent of free trade, the agreements to date

compound the problem while deceiving many who think free trade

is being promoted. This is one problem that has real solutions.

First, the United States cannot continue to negotiate global or bilateral trade agreements as long as the other country is free to manipulate its currency and use VATs to offset any tariff reduction.

Also, labor, environment, antitrust, quality and intellectual and

other property standards and trade agreements must be equivalent

to the burden placed on manufacturing, farming and ranching in

the United States or we just cannot compete and provide jobs in

the United States. Can you imagine competing in a global market

that gives your competition an eight-year head start? Yet that is

exactly what is being proposed to kill jobs with House legislation

for only domestic manufacturing companies to cap and trade and

die. If the environmental burden is unfair for our foreign competition, it is unfair for us. In the global trade war, who do you represent?

Second, the manipulation of its currency by China or any nation

is unacceptable. The first step should be to pass the Ryan-Hunter

bill, H.R. 2942, that would define currency manipulation as an illegal subsidy and allow the application of countervailing duties,

CVDs, to offset the injurious impact of currency manipulation. The

Ryan-Hunter bill is designed to sanction the use of CVDs to offset

currency manipulation. We must assume that the system that governs world trade is broken and must be fixed immediately. If the

use of CVDs to offset currency manipulation does not lead China

to stop manipulating its currency, then the United States must

take stronger measures, even if it means stepping outside WTO

rules.

Third, the United States must reform its tax and health care systems and institute VATs on a scale that gives production of goods

and services in the United States a competitive advantage. Currently, the United States is the only country without such a policy.

The United States must significantly reduce or eliminate all national taxes, both corporate and personal, including income, dividend, capital gain, estate, FICA and unemployment taxes and replace them with a consumption tax like a VAT. Under current

international trade rules, consumption taxes can be rebated on exports and imposed on imports. The United States refuses to reciprocate, disadvantaging all American-made goods that compete with

imports or are offered for export. No wonder we have such a massive trade deficit. In my opinion, those taxes must also include the

tax of health care costs. My concern is simply that health care cannot be paid for by job providers in the United States competing

with job providers abroad who pay little, if any, health costs. Either

the U.S. Government solves this problem or outsourcing will resolve it.

Fourth, the United States needs to ensure that its citizens and

businesses have access to substantial additional low-cost clean enVerDate 11-MAY-2000 19:05 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00171 Fmt 6633 Sfmt 6601 C:\WORKD\I&O08\052208\42371 SCIENCE1 PsN: SCIENCE1
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ergy so that they are able to compete on the world stage and keep

the environment clean. Our government needs to focus on the big

picture of global trade and the competitive position of the U.S.

economy, which is deteriorating. Please address these problems

with a national trade policy immediately.

When Paul Revere tried to rouse the countryside with his

wakeup call, what did the people do? They certainly didn’t go back

to sleep. We all need to wake up and listen but we must be careful

who we listen to. Visit RevereCopper.com and learn more. Wake

up, America.

Thank you, Mr. Chairman.

[The prepared statement of Mr. O’Shaughnessy follows:]

PREPARED STATEMENT OF M. BRIAN O’SHAUGHNESSY

Who Do You Represent?

Three and a half million manufacturing jobs have been lost in the USA since the

year 2000. Some attribute it to increased productivity—but previous recoveries typically resulted in a loss of about one million jobs in spite of productivity increases.

Some think it is our country’s responsibility to support fledgling economies because

we are the strongest, most powerful Nation in the world. Some say we need to set

a good example and others will follow. Make no mistake about it, protectionism

should not be the end game but it seems to be an acceptable practice when used

by everyone but the USA.

No matter how we try to rationalize it, millions of manufacturing jobs are going

overseas.

I’m sure this committee is well aware of the significant connect between manufacturing and research and development. Manufacturing and Technology News just ran

an article on May 16, 2008 that puts the foreign flight of technology in perspective.

The article is titled, ‘‘China Displaces United States In Georgia Tech’s Technology

Index.’’

The article states, ‘‘China has surpassed the United States in a key measure of

high tech competitiveness. The Georgia Institute of Technology’s biannual HighTech Indicators finds that China improved its technological standing by nine points

over the period of 2005 to 2007, with the United States and Japan suffering declines

of 6.8 and 7.1 respectively. In Georgia Tech’s scale of one to 100, China’s technological standing now rests at 82.8, compared to the U.S. at 76.1. The United States

peaked at 95.4 in 1999. China has increased from 22.5 in 1996 to 82.8 in 2007.’’

‘‘The message speaks out pretty loudly,’’ says Alan Porter, Co-Director of Georgia

Tech’s Technology Policy and Assessment Center, which produces the benchmark.

‘‘I think the prospects are pretty scary.’’

My company is Revere Copper Products. We were founded in 1801 by Paul Revere

and believe we are the oldest manufacturing company in the USA. Our factory is

in Rome, New York and produces copper and brass sheet, strip, coil and extruded

products for shipment to other manufacturing companies. Revere is a domestic manufacturing company and outsources nothing.

My unwillingness to outsource or sell out is based solely on loyalty and patriotism.

Please note that I also represent and serve on the Board of Directors of the Coalition for a Prosperous America (CPA). This coalition includes domestic manufacturing, organized labor, farming and ranching. You should visit CPA at

www.prosperousamerica.org. My testimony includes positions on issues that have

not yet been considered by CPA but are ever present in Revere’s besieged financial

results.

So Revere is part of the copper and brass industry of the USA. In December, 2006,

China’s State Assets Supervisory and Administration Commission (SASAC) which

is second only to its politburo directed that this industry in China be designated a

‘‘heavyweight’’ and a ‘‘vital artery of the national economy and essential to national

security.’’

Revere’s founding was considered vital to U.S. national security in 1800.

The U.S. Government loaned Paul Revere $10,000 to construct the first copper

rolling mill in North America. The War Department was concerned about another

war with the British and worried about the domestic content of its naval vessels

to wage such a war. The USS Constitution needed copper sheathing to prevent barVerDate 11-MAY-2000 19:05 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00172 Fmt 6633 Sfmt 6621 C:\WORKD\I&O08\052208\42371 SCIENCE1 PsN: SCIENCE1
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nacles from growing on its sides underwater. Barnacles would slow the ship and

cause extra time in dock to remove them. Such copper was previously rolled in Britain.

That’s how Revere started and how the USS Constitution came to be sheathed with

Revere Copper.

Today, many of Revere’s customers are manufacturing companies located throughout the USA. Since 2000, about 30 percent of these customers have shut down,

moved offshore or outsourced their production. Revere’s customer mix is quite broad

ranging from building and construction, transportation, electrical and electronics including weapon systems. Revere’s engineers work on research and development

projects regarding national defense applications including the Nation’s new aircraft

carrier under construction, the Gerald Ford. But in the context of Revere’s history,

let’s just describe what happened recently to the production of a simple silver bowl.

Of course, this silver bowl was designed by Paul Revere.

In the year 2000, Revere shipped copper coils about 20 miles to Oneida Ltd. Oneida cut and formed that copper into a bowl and plated it with silver to produce a

Paul Revere silver bowl. Now, that product is as American as apple pie, right?

Wrong. Today, that bowl is manufactured in China and shipped to Oneida and sold

as a Paul Revere replica. You probably believe that the people of Revere just can’t

compete anymore with the people of China.

Let me explain why our people can compete but our government does not.

Let’s assume the production cost of that silver bowl made in China is 100 yuan.

China manipulates its currency so that the exchange is now about seven yuan to

$1. So the production cost in China is $14.28. But if the free market were to determine the rate of exchange, it would be about four yuan to $1 and the production

cost in China would be $25.00.

In other words, China manipulates its currency so that it subsidizes the cost of

manufacturing in China.

The current and the former U.S. administration have refused to take any concrete

action against such manipulation by China and have chosen instead to jawbone. The

problem with this strategy is that currency manipulation by China is serving its

best interests.

The manipulation of its currency reduces the competitiveness of every other product, good and service in the world when compared to its production in China.

This form of protectionism by China is reaping huge rewards as its export-based

economy is growing three or four times faster than the rest of the world with factories being built at a pace beyond the imagination of anyone just a few years ago.

Meanwhile, factory jobs are disappearing in the USA and the world. Even manufacturing plants in Mexico are moving to China.

But this is more than an economic battle.

Did you catch the statement by Congressman Tim Ryan of Ohio concerning the

paper (‘‘Unrestricted Warfare’’) written by two Chinese military strategists? They

suggested that military supremacy be achieved by undermining the manufacturing

base of the United States by maintaining China’s currency at artificially low levels

to gain an economic advantage for Chinese manufacturing and destroying the manufacturing base of the United States. Seems to be working, doesn’t it?

Personally, I admire the Chinese culture and believe that China does not need

such a disruptive currency policy to compete in the world given its many other advantages. The Chinese economic policy is export driven by taxing its citizens

through currency manipulation which drives inflation and takes away their disposable income. A market driven currency exchange rate policy would drive China’s

economy toward domestic consumption and a better life for its citizens.

But make no mistake about it, China is waging a mercantile war on the world and

the world is sleeping.

Why is the world sleeping? First, we must look at the role of the multinationals.

Remember in the 1980s when Japan was such a fierce competitor in so many U.S.

markets. The reaction by our largest corporations was loud and largely one voice

calling for tariffs and restraints. Contrast that with today as most of the largest

U.S. corporations are so much more international and especially with their investments in China. Many that do not have direct investments in China buy substantial

numbers of components from China’s factories. Many have set their strategic plans

to produce components or products in China.

It may surprise you to learn that I don’t have a problem with any company that

sets up a plant offshore or imports components or products. But if manufacturing

in America must compete with the protectionist policies of any foreign government,

that is not fair. And if meaningful corrective action by the U.S. Government is

thwarted by U.S. manufacturing and financial service companies who gain from

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such protectionism, that is wrong. CEOs of multinational companies are put in a

very difficult position by national trade policies.

They have to choose between their company and their country.

Let me explain. Earlier I mentioned that China practices a policy of managing its

currency at artificially low levels to gain a competitive advantage for any export

products or services produced in China . . . by as much as 40 percent! Now, you

must realize a simple truth, a multinational that manufactures in China and benefits significantly from this advantage doesn’t want this to change.

It is not my intention to vilify multinationals or the capable CEOs who run them.

These executives are charged with representing the best interests of their shareholders. Also, many of these CEOs of ‘‘American’’ companies are not U.S. citizens

nor are many of their shareholders. For example, the Chairman of Coca-Cola is Irish

and its President is Turkish!

It is important to appreciate that it is in our nation’s best interest to have the

corporate headquarters of a multinational located in the USA even if it has no remaining production facilities here. That is not so that they can be taxed and regulated and driven away but so that the high skilled, corporate level jobs are here not

there . . ..

So when issues such as patriotism are raised in this paper, it is really an appeal

to U.S. political leadership not that of multinational corporations.

Companies that manufacture in the USA and must compete with either multinationals or companies that outsource components from abroad believe currency manipulation is unfair and must be stopped. They see other U.S.-based manufacturing

plants shutting down and are concerned that will be their fate. These domestic manufacturing companies want the U.S. Government to take effective action to right

this wrong and the sooner, the better.

At a 2006 meeting I attended of an international economic policy committee of an

association of manufacturing companies, one manufacturing company said that it

buys components from China and does not want the current situation to change.

Now there’s a breath of honesty. Maybe not patriotic but at least he’s honest.

Patriotic . . . why bring that word into the mix?

Well, you see the strength of manufacturing is an inherent strength of our country. Some economists believe our country is in a transition from a manufacturing

economy to a service economy just as it transitioned from an agricultural economy

to a manufacturing economy years ago. But maybe the manufacturing economy was

simply layered on top of our agricultural economy just as the service economy is layered on the manufacturing economy. And it is certainly hard to argue against the

proposition that a weak manufacturing sector threatens our national security.

Even so, some economists cite data that the manufacturing sector is doing just

fine as it is producing more than ever before. Such data is misleading and you

should consider the source. For example, statistics on U.S. produced products include Dell computers which are merely assembled in the USA from components produced abroad. We could argue endlessly about this but the facts are the facts and

the fact is we have become a nation with a colossal trade deficit. In 2005, for the

first time in over a hundred years, our nation imported more food products than

it exported and our trade deficit in manufactured goods continues to soar. Indeed,

our nation’s trade deficit is growing by $2 billion a day! (More about this later . . .)

Sounds like our nation needs some help.

Or at least some good advice . . . and that leads me to integrity. You see when

a CEO attempts to push an agenda that supports Chinese protectionism rather than

an agenda that goes against that protectionism, maybe that CEO should declare

that he or she is conflicted on this issue and should be recused from any forum that

determines U.S. trade policy. Many of these CEOs have plants in the USA which

would benefit from freer trade but they support their growing investments in plants

in China and outsource components from China by choosing their company’s best

short-term interests over that of their own domestic plants and their country.

That’s because they have to but you don’t!

Supposedly, one issue before us today is how to stop China from managing its currency so as to give its production of goods and services an unfair competitive advantage. Or, is it? If you recall, earlier I mentioned the multinational delegate, the honest one . . . he said he was against a proposal that would raise his prices on the

components he buys from China. I believe the real issue is, ‘‘Should the USA support measures that will not work so multinationals can support them or should the

USA support measures that will work to cause China to change its policy of managing its currency?’’

The multinationals have endless arguments for stretching out the process like

. . .. ‘‘We don’t want to start a trade war now, do we?’’ But we are already in a

trade war, aren’t we? Of course we are and we are losing. We are pacifists in this

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war. How about this one by the multinationals . . .. ‘‘Your policies are protectionist!’’ Yes, they actually say that, can you imagine? Often the accuser benefits

from China’s export subsidies which are clearly prohibited by the WTO as protectionist.

The irony is that domestic producers are the victims of protectionism not the beneficiaries.

Another argument we hear is, ‘‘What about their fragile banking system?’’ This

one has been around for years and of course, it is impossible to amend an economic

strategy let alone a banking system that depends on subsidization to such an extent

without removing the subsidy, isn’t it? Besides, their banks are owned by the same

government that is holding more than 1.7 trillion U.S. dollars worth of official reserves. Maybe their banks are not quite as insolvent as you have been lead to believe . . ..

China set up a system to manage the movement of its currency toward market

levels and then used it to move its currency at rates about four percent per year

compared to estimates of an underlying rate of appreciation of five percent of its

currency, thereby exacerbating the problem.

Even if China were immediately to stop manipulating its currency, there is nothing to deter China from returning to the policy at a time of its choosing. Equally,

other countries would be free to continue or adopt similar mercantilist policies with

impunity. In fact, the author of a paper published by the UN Conference on Trade

and Development in ‘‘China in a Globalizing World’’ (2005) has advised developing

countries that ‘‘China’s experience in the past decade can be seen as a model of a

successful development strategy.’’

The author continued, ‘‘As in other Asian countries in the past, fixing the real exchange rate at a favorable level and promoting exports offers the possibility of penetrating world markets rapidly and experiencing strong growth and capital accumulation. The penetration of foreign markets brings about the rise in income needed

to finance increased investment without recourse to net foreign capital inflows.’’

The experience so far is that China is going to delay as long as it can and make

corrections in as small increments as it can get away with given its support.

Part of that support comes from U.S. trade objectives which please the multinationals that are aligned with the trade policies of China. Never give in on trade

issues, but, if ever, give slowly . . ..

There is no easy solution to this Chinese puzzle. Even I have supported the verbal

approach . . . for years. Our nation could simply slap a tariff on all imports from

Chinese and other nations that manage their currency but I think we must take

measured concrete steps that increase in severity before such a step.

China is not the only country that manipulates its currency to gain a competitive

advantage. Other Asian nations also manipulate their currency partly as a defensive

mechanism so their producers of goods and services can compete with goods and

services originating from China.

It is important to understand that the end of currency manipulation will not end

the depreciation of the U.S. dollar against other currencies including China’s yuan.

For this reason, it is difficult and perhaps impossible to develop a coherent trade

policy to deal with China without considering the tax policies of our own country.

China uses a Value Added Tax (VAT) to protect its domestic production of goods

and services and uses its revenues to fund government programs such as national

health care. VATs are a tax but they are also a form of tariffs which are largely

exempt from World Trade Organization (WTO) rules. The WTO was established to

advance world trade. It has developed ground rules for international commerce and

mediates trade disputes. Of course, China also employs a VAT tax but unlike everyone else, the VAT is applied in a discriminatory manner which is in direct violation

of WTO rules.

Market determined exchange rates simply put all nations back at the

starting gate for the race to determine who will win the battle to produce

competitive goods and services assuming all other things are equal. Of

course, all other things are not equal and because of this our nation’s inability to compete with China and the rest of the world means that our currency will continue to depreciate and the standard of living of all Americans will decline and our nation will grow weaker.

This is because other trading nations use revenues generated by Value Added

Taxes (VATs) to reduce the tax and health care burden on their production of goods

and services and the most ambitious nations are developing energy policies which

give them a competitive edge.

Here is a real world example of how VATs are used by other governments to protect their industry. Revere had an industrial plate mill in New Bedford, Massachusetts for 145 years. The plate was used in heat exchangers and in unique applicaVerDate 11-MAY-2000 19:05 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00175 Fmt 6633 Sfmt 6621 C:\WORKD\I&O08\052208\42371 SCIENCE1 PsN: SCIENCE1
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tions for U.S. national defense. It was considered the best quality plate in the world.

Its major competitors were located in Germany but could be located in China and

the principles and the result would be the same. These competitors were able to undercut Revere’s prices thanks to a VAT that the German government applies to all

goods and services sold in Germany, domestic or imported.

When New Bedford shipped its plate to Germany for its consumption, that plate

paid the 19 percent German VAT tax. If the German mills ship plate to the USA,

the 19 percent VAT tax is rebated. VAT revenues allow the German Government

to help fund national health care costs and reduce corporate taxes. So German competitors pay far less in taxes and medical costs. Medical costs alone amount to about

$10,000 per employee for Revere. Ironically and tragically, the New Bedford workers

had to bear the burden of helping to pay for the health care of the German workers

they competed with through the payment of German VATs on any Revere products

shipped to Germany.

Naturally, Revere hardly shipped any product to Germany while its German competitors just loved the U.S. market.

Meanwhile, the American worker is expected to respond to these pressures by increasing productivity and reducing waste. The people at Revere’s New Bedford plant

did that at an astonishing pace, averaging productivity improvement at the rate of

10 percent a year for the last six years. During this period the workers and management of this mill did everything that was asked.

Yet, even that wasn’t enough—on March 5, 2007, Revere announced the closure of

its New Bedford mill and the loss of 87 good paying jobs.

In recent years, the USA has been negotiating Free Trade Agreements (FTAs) in

an effort to get other countries to lower tariffs. This has led to the North American

Free Agreement (NAFTA) in which the U.S., Canada and Mexico reduced outright

tariffs. Around the time of the negotiations, however, Canada instituted VAT taxes

while Mexico increased its VAT rates. VATs are excluded.

How can the USA continue to negotiate trade agreements allowing other nations

to offset tariff reductions with VATs and other forms of border adjustable taxes and

manipulate their currency?

These VATs are applied on our products by over 140 foreign countries. The chart

above shows how the European Union countries have managed to increase VATs

while lowering other types of tariffs—keeping the effective tariff the same despite

trade agreements. Mexico and Canada have made similar adjustments despite

FTAs. Countries that sign FTAs are free to replace the tariffs they give up with

VATs charged on our goods sold to them.

The revenues collected by the foreign countries help pay for the health care cost

of their manufacturing workers that U.S. workers must compete against. Foreign

countries also have to collect VATs on their domestic production to comply with

World Trade Organization (WTO) rules on trade but then use them to lower corporate and payroll taxes on domestic production of goods and services. Foreign producers gain even further as their nations refund their VATs on exports.

VATs protect the domestic production of goods and services in any country that

has them. The lack of a VAT in the USA allows European nations to gain market

share from the USA partially offsetting the impact of China’s manipulation of its

currency on the production of goods and services in Europe. That’s one reason why

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Europe is less vocal about China’s mercantile war. The lack of VATs in the USA

also largely explains why the USA has a trading deficit with virtually every other

trading nation in every class of goods.

VATs have been adopted by all of the world’s major trading nations, excluding the

USA and some oil producing Middle Eastern nations.

Another nail in the coffin of U.S. manufacturing would be if the USA were to sign

the Kyoto Treaty. The Kyoto Treaty exempts China, India, Brazil and other developing nations from its standards. But the carbon emissions per $1,000 of GNP in

China are seven times that of the USA while India emits three times as much. The

Kyoto Treaty and other measures such as Regional & National Greenhouse Gas Initiatives and carbon cap and trade schemes drive manufacturing from developed

countries with more strict standards to countries with much worse practices.

These treaties and regulations have the unintended consequence of increasing carbon emissions and global warming as factories are shutdown in the USA and Europe

and production increases in China.

During the days of substantial aid programs by the USA to developing nations,

the primary consideration was to build an infrastructure. That included large scale

projects to supply low cost, economic energy. Of course, what is true for developing

nations is also true for developed nations that must compete in a global economy

. . . the provision of low cost, competitive power is essential to success.

The gigantic footprint of windmills, solar energy, bio-fuels, and hydropower is so

vast and the costs so uneconomic that no nation that is serious about engaging in

the global competition for skilled jobs is embarking on these power programs to the

extent of the USA. Any energy source that must be mandated, subsidized and surcharged to such an extent cannot be economic, can it?

In my opinion, the best large scale, low cost source of clean energy is nuclear.

China is planning 40 new nuclear power plants; Japan is building 10 more while

France relies on nuclear for 80 percent of its electricity. Why? Nuclear power is

clean and low cost if sitting and environmental concerns are managed. Nuclear

waste is dangerous but can be contained in areas much smaller than most people

realize. Thirty years of nuclear waste from a 1,000 MW plant would fit in an area

the size of a high school gym. If other countries can do it, why can’t the USA?

The loss of manufacturing jobs to date in the USA is only the tip of the iceberg.

The impact of currency manipulation, VATs and environmental/energy costs are not

limited to manufactured goods. Any goods and services that compete in global markets, either directly or as part of a supply chain, are exposed to these protectionist

forces. Future losses will go far beyond the continued loss of manufacturing jobs and

extend to the agriculture, food processing and service industries. Indeed, Alan Blinder, former Federal Reserve Vice Chairman, was quoted in the Wall Street Journal

on March 28th saying that, ‘‘. . . as many as 40 million American jobs (are) at risk

of being shipped out of the country in the next decade or two.’’

Policy-makers and citizens must realize the urgency of the matter. The USA must

see itself as a competing nation . . . competing in a global market for good paying

jobs. But it’s not only about jobs. It is also about national security and our entire

economy. Factories producing goods and services necessary for U.S. national defense

are moving offshore. The U.S. trade deficit is growing $2 billion a day. China and

Japan have each accumulated more than U.S. $1 trillion. The accumulation of U.S.

currency by China and other Asian nations is a growing bubble.

So, the looming question is, ‘‘What should be done to counter this offensive and

protective behavior by other nations?’’

First, the USA cannot continue to negotiate global or bilateral trade agreements

as long as the other country is free to manipulate its currency and use VATs to offset any tariff reduction. Also labor, environmental, antitrust, quality and intellectual and other property standards in free trade agreements must be equivalent to

the burden placed on manufacturing, farming and ranching in the USA or we just

cannot compete and provide jobs in the USA.

Can you imagine competing in a global market that gives your competition an

eight year head start? Yet, that is exactly what is being proposed to kill jobs in current House legislation for domestic manufacturing to cap and trade and die. If the

environmental burden is unfair for foreign competitors, it’s unfair for us.

In the global trade war, who do you represent?

Second, the manipulation of its currency by China or any nation is unacceptable.

The first step should be to pass the Ryan Hunter bill (H.R. 2942) that would define

currency manipulation as an illegal subsidy and allow the application of Countervailing Duties (CVDs) to offset the injurious impact of the currency manipulation.

The Ryan Hunter bill is designed to be compliant with the rules of the WTO. That

being said, if the WTO refuses for any reason to sanction the use of CVDs to offset

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currency manipulation, we must assume that the system that governs world trade

is broken and must be fixed. Immediately!

If the use of CVDs to offset currency manipulation does not lead China to stop manipulating its currency, then the USA must take stronger measures, even if it means

stepping outside WTO rules.

Third, the USA must reform its tax and health care systems and institute VATs

on a scale that gives production of goods and services in the USA a competitive advantage.

A smart competitor never looks at where a competitor is and tries to match that

position. A smart competitor might try to match where a competitor is going to be

at a certain time. But the most intelligent competitor attempts to gain a competitive

advantage by providing a product beyond where the competition is going to line up

in the race.

In order to achieve this objective, the USA must significantly reduce or eliminate

all national taxes, both corporate and personal, including income, dividend, capital

gain, estate, FICA and unemployment taxes and replace them with a consumption

tax like a VAT. Under current international trade rules, consumption taxes can be

rebated on exports and imposed on imports. The U.S. refuses to reciprocate,

disadvantaging all American-made goods that compete with imports or are offered

for export. No wonder, we have such a massive trade deficit!

The regressive nature of a VAT or consumption tax should also be offset by the

provision of a national health care system to offset the unique American health care

‘‘tax on jobs.’’

A national health care system could utilize private insurance to provide the best

choice to U.S. consumers or we could adopt a system similar to that employed by

Great Britain. It provides universal health care for all but allows any citizen to opt

out to private care as long as they are willing to pay the cost. I am not aware of

any nation that is considering dropping its health care system to adopt the system

used in the USA which eats up twice as much GNP per capita and burdens the domestic production of goods and services. My concern is simply that health care cannot be paid for by job providers in the USA competing with job providers abroad

who pay little if any health costs.

Either the U.S. Government solves this problem or outsourcing will resolve it.

Also, adverse impacts on charitable and lending institutions need to be offset by

matching charitable grants and providing housing subsidies which could further offset the regressive VAT system and make it fair. The new system should be designed

to be revenue neutral for all classes.

Fourth, the USA needs to ensure that its citizens and businesses have access to

substantial, additional low cost, clean energy so that they are able to compete on

the world stage and keep the environment clean. The USA should use a system

similar to the one used by the Base Realignment and Closure (BRAC) Commission

to determine the location of surviving military bases to site nuclear power stations

throughout the USA. Competing nations all over the world are building terminals

and pipelines to receive natural gas to supply their manufacturing and economic

base. So must the USA. We simply must not allow the events of 9/11 to destroy our

nation’s ability to compete by stifling the expansion of natural gas terminals and

pipelines.

The U.S. is alone among major trading nations in the world without a national

trade policy.

The result is that the U.S. is being defeated in international trade. American

manufacturers are extremely efficient. Indeed, I would argue those still remaining

are the most efficient in the world because they are surviving despite unfair foreign

protectionist practices that general trade agreements like GATT and Free Trade

Agreements (FTAs) allow to continue.

The demand in the U.S. for durable manufactured goods has soared about 400

percent since 1980 as our economy has grown. But U.S. production of these goods

grew only 40 percent. Without foreign government trade cheating, U.S. production

would have been far greater. Revere Copper’s exports and domestic sales would

have grown very large indeed.

Our nation’s focus on general trade agreements and FTAs is misguided, inadequate and lacks strategic thinking. Although I am a proponent of free trade, the

agreements to date compound the problem, while deceiving many who think free

trade is being promoted.

China and the rest of the world are waging a mercantilist war on the U.S. and

the U.S. is sleeping as its factories, farms and ranches are being systematically destroyed. We desperately need a national trade policy instead of a patchwork of trade

agreements that deepen the current problems and enable foreign protectionism.

That is what we should be hearing about from our Congress and the remaining

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Presidential candidates. We are running out of time. What a mess we are leaving

our children. This is one problem that has real solutions.

Our government needs to focus on the big picture of global trade and address these

problems with a national trade policy immediately.

When Paul Revere tried to rouse the countryside with his wake up call, what did

the people do? They certainly didn’t go back to sleep. We all need to wake up and

listen. But we must be careful who we listen to . . ..

Wake up, America!

BIOGRAPHY FOR M. BRIAN O’SHAUGHNESSY

Brian O’Shaughnessy is the Chairman of Revere Copper Products and served as

President & CEO for almost twenty years until the end of 2007. His company was

founded in 1801 by Paul Revere and may be the oldest manufacturing company in

America. Revere does not make pots and pans anymore but makes copper and brass

sheet, strip and coil as well as extruded products for shipment to other manufacturing companies. Brian did a leveraged buy out of Revere in 1989.

Brian is recognized as an expert on international trade & taxes as well as energy

and environmental issues. He championed and chaired the world class, worldwide

copper industry’s environmental program. In February of 2006, the Copper Club

named Brian as its Copper Man of the Year—an international award considered the

most prestigious in the copper industry.

Brian has chaired two industrial energy advocacy committees and serves on the

board of directors of a third group. He also serves on the board of directors of a public utility with transmission and distribution operations for gas and electricity in

New Hampshire, Maine and Massachusetts.

In 2005, Brian testified before the U.S. Senate Committee on Energy and Resources and testified in 2006 before the U.S. House of Representatives Committee

on Government Reform regarding energy, trade and tax policy. In May, 2007, he testified before a tripartite hearing on China Currency Issues before subcommittees of

the House Ways and Means, Energy and Financial Services Committees. In July,

2007, he testified before a U.S. Senate subcommittee hearing on the impact of China

Trade on U.S. manufacturing. Brian has appeared on BBC World News and been

interviewed on Bloomberg on the Economy as well as PBS. Brian has written oped pieces for various newspapers including the Boston Globe.

Brian also serves on the boards of directors of the Manufacturers Alliance of New

York and the Manufacturers Association of Central New York (MACNY) and served

on the BOD of the National Association of Manufacturers (NAM). At NAM, Brian

is on its International Economic Policy Committee and its China Policy Subcommittee. Brian is a past Chairman of the U.S. Copper & Brass Fabricators Council and currently a member of its BOD. He testified on its behalf before the International Trade Commission. Brian is currently Chairman of the Copper Development Association (CDA) and serves on the BOD of the Coalition for a Prosperous

America (CPA).

Brian is a national leader of domestic manufacturing companies attempting to

change U.S. international trade and tax policy to help level the playing field for domestic manufacturing.

Prior to joining Revere, Brian spent twenty-one years in the international copper

mining industry with seven years each in operations, marketing and corporate administration.

Brian graduated with a BS in Industrial Management from the University of Nevada and studied International Business in Graduate School at the University of

Southern California. USC course work included ‘‘Advanced Problems of International Finance’’ and ‘‘Case Studies in International Business.’’

Brian is celebrating 40 years of marriage with three sons and four grandchildren.

In 2002, Mr. O’Shaughnessy rode his Harley Davidson on two-lane scenic roads from

Moody Beach, Maine to Seattle, Washington stopping off in Sturgis, South Dakota.

Mr. O’Shaughnessy is an avid snow-boarder and golfer but spends most of his time

working!

Chairman MILLER. Thank you.

Mr. Jurey.

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STATEMENT OF MR. WES JUREY, PRESIDENT AND CEO, THE

ARLINGTON, TEXAS CHAMBER OF COMMERCE

Mr. JUREY. Mr. Chairman, thank you for the opportunity to appear before the panel. I may bring a slightly different perspective

than those who have testified before.

As President of the El Paso Texas Chamber of Commerce during

the 1990s, I was leading that chamber during a period when we

lost 23,000 jobs in the garment industry so I am acutely aware of

those issues and yet many of the experiences there have led me to

the things I will share with you today, and at the end of that decade we actually had more net employment in the county despite

the fact that we lost that many jobs. I then went to Arlington,

Texas, in 2001 and have led that chamber in the past nearly seven

years, took that community from a time of economic stalemate to

a time of robust growth in its tax base and jobs as well, and so I

will offer some thoughts from those perspectives.

I would say at the outset that there are two factors that happened in the 1980s that we sometimes overlook, and that was that

the Cold War ended. We asked Premier Gorbachev to tear down

the wall, and the unintended consequences, we put three billion

people into competition with us in the world’s marketplace and we

are not going to turn that clock back. Then we invented the Internet in the federal labs and we gave people the ability with the click

of a mouse to move CAD drawings and X-rays worldwide and we

are not going to close that door again either.

And so the reality is, we are in a truly globally driven, innovation-driven economy and the critical issue, how do we maintain

U.S. competitiveness, and from my experience, these companies

have two critical factors they have to think about: do they have access to a highly trained, skilled, competitive workforce, and what

is the true cost of doing business in the area they are at, often derived from various factors including things like whether we tax

consumption, production or wealth, as well as what kind of regulatory climate and processes are they competing with in that climate, and so I will offer five brief suggestions.

Number 1: If you look at the publicly funded workforce system,

it is not that you need more dollars, it is that we need to think very

carefully about how we both allocate and deploy the dollars that

you do spend. And I would say that at the outset, if you look at

the Workforce Investment Act (WIA), it is written from a job seeker

perspective, not an employer or job creator perspective, and therein

lies your challenge. We are currently managing a grant for the

Texas Workforce Commission. It is a modest grant of $1 million,

and the goal is to create replicable, sustainable, scalable models of

how we engage the systems to work together to provide workers for

advanced manufacturers. I will give you simple examples. National

Semiconductor spent $50 million retooling a plant to go from a sixto an eight-inch wafer to remain competitive in the United States,

finding no curriculum to retrain their staff with. We are putting

modest sums of money into National Semiconductor. Our community college and our university, they are cataloging training National Semi is having to develop. The outcome will be curriculum

that can be employed in the future at a fraction of the cost to National Semi. A second quick example is Progressive, a company

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building a part for Lockheed Martin for the Joint Strike Fighter,

can’t find the seven machinists it needs today, let alone the 400 it

will need in the future. There are hundreds of unemployed machinists in Michigan but the Texas Workforce Commission can’t spend

$1 letting them know these jobs exist, and there is little training

capacity in Texas, and so we are putting dollars into the Dallas

and Tarrant County college systems to create that capacity.

The commonality of many examples I could cite for you is that

under current DOL [Department of Labor]/WIA regulations, the

ways we are deploying and allocating these dollars would be exceedingly difficult to do under those regulations, and my bottomline recommendation, and there are many in my written testimony,

is a really thoughtful look at both the process and the measures

would help those dollars be spent far more effectively to address

many of the workforce needs and the challenges that these employers face.

Secondly, to recognize that if we need highly skilled workers to

drive a highly innovative economy, that if you look at the graduate

and postgraduate programs in the United States, 50 percent of

those students are either immigrants or they are foreign students.

Forty percent of all Ph.D.s granted in 2006 went to those foreign

students or immigrants and 75 percent of those Ph.D.s will go to

foreign students or immigrants in 2010. We have an incubator in

Arlington. We started it with the University in 2002. In the past

six years, more than 75 percent of all the intellectual discoveries

and innovative ideas coming to us came from foreign students and

immigrants, and the bottom line is, they can either go home and

take that innovation with them or we can find ways to both protect

our borders and welcome legal immigrants and keep the innovation

in the United States.

Third, federal R&D funding. In talks with Dr. Zerhouni at the

National Institutes of Health, I commend him because under

translational awards, called road maps sometimes, he has recognized that if you take some of the $27 billion NIH uses to fund

health research and put it into the hands of universities that partner with the private sector in a genuine collaborative environment,

that the commercialization activity resulting then takes place in

the United States, not foreign countries. And if you look at what

they are doing in Homeland in the Science and Technology Directorate, they have funded six major research projects to date, all

through major universities all required collaboration with 20 to 30

other partners, both private sector and nonprofit and other universities. And I would commend you to those models because they take

Federal R&D dollars, they leverage private sector and university

dollars and they ensure the commercialization takes place in the

United States, and if you look carefully at Northern California from

the 1940s and 1950s on, it is frankly how they became Silicon Valley.

Fourth, promote global cooperation in the international tax

arena. As was cited, foreign countries do many things with their

currency and their taxation, but the reality is, we have got to go

back to looking at the factors that drive U.S. competitiveness, and

a part of it is taxation. Are we taxing production, wealth or conVerDate 11-MAY-2000 19:05 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00181 Fmt 6633 Sfmt 6601 C:\WORKD\I&O08\052208\42371 SCIENCE1 PsN: SCIENCE1
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sumption? What does that do in the regulatory environment and

how does that impact cost structure?

I remember Reynolds aluminum plant in Arkansas in the 1980s. They paid high wages, $25 to $45 an hour in 1984, but their cost

was the cost of electricity. They paid $100 million a year to Arkansas Power and Light for electricity, and the rumor started that

they were going to move and go to another city in another state

and everybody scoffed at the idea because they just built the $42

million plant. The plant manager put it in perspective. He said,

‘‘Wes, if you pass second grade math, you will understand that if

a city offers me that utility kilowatt hourage at $60 million a year,

in three years I will net $80 million to the bottom line in a highly

competitive industry while abandoning that plant to your industrial development corporation and building a new plant in the

other city.’’ And so although we can say we kept those jobs in

America, that was little consolation for the people in Hot Springs

and Malvern, Arkansas, who lost their jobs, the city and county

who lost the tax base, and $100 million hole left in the rate base

of Arkansas Power and Light. And so it really is critical to think

about the cost factors of those companies and how we think globally and talk about the international tax arena. That could be an

area where the United States leadership could be impactful.

And fifth, focus on the prevention of harmful regulatory competition internationally. Use our economic international diplomacy in

those arenas. Imagine if the General Motors plant in Arlington,

Texas, that brings in components from over 600 suppliers throughout the United States imposed tariffs on all of those supplies. Well,

the truth is, the United States economy is strong because interstate commerce is regulated in a way that allows that trade to flow

among and between the 50 states. In the global competition, we are

going to have to find ways for that trade to flow fairly throughout

the countries of the world because again, we are not going to be

able to turn the clock back.

I would say in summation that the number one most vital recommendation I have is that our economic policy promote

globalization. For 60 years we told foreign companies to open their

markets and for the last 20 years they finally did, and that coincides with the time of economic prosperity in the United States. We

have got to recognize too that 96 percent of the world’s consumers

live in another country. We have grown because we were a land of

immigrants and we fed on their hunger and their energy and their

innovation and we have become one of the most open competitive

societies in the world, and I close by leaving you with this thought.

Dr. George Kozmetsky, considered one of the pioneers and founders

of Silicon Valley, published an extensive demographic analysis in

2000 going back to 1950 and forward to 2050. He said on giving

me a copy, ‘‘We are living in a time when 88 percent of the wealth

is controlled by 12 percent of the people in countries all demographically projected to decline through 2050, meaning 12 percent

of the world’s wealth is what 88 percent of the world’s people try

to survive on, all in countries demographically projected to grow for

the next 50 years. What do you think that means?’’ he said. And

my comment was, I would much rather understand what he

thought, and he said, ‘‘I think it is simple; Global competitiveness

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1The Post-American World, Fareed Zakaria, W.W. Norton & Company, Inc., 2008.

will cause us to finally go to war over resources or learn to integrate the global economy so that every nation has a stake in a

strong global economy in which the United States can remain competitive.

I appreciate the time given to me to speak to the panel.

[The prepared statement of Mr. Jurey follows:]

PREPARED STATEMENT OF WES JUREY

The United States today finds itself in unprecedented and unchartered waters.

For the past several decades, our super power status has largely gone unchallenged,

something seldom seen in history other than perhaps the Pax Romana nearly 2000

years ago. It has been an unprecedented time of global economic growth and expansion, fueled, I would argue, by two seemingly unrelated events in the 1980s.

The first was the end of the Cold War, symbolized by President Reagan’s pronouncement to Premier Gorbachev to ‘‘Tear down this wall.’’ What should be noted

is that the end of the Cold War allowed under developed nations to shift their focus

from defense to develop educational systems and economic and transportation infrastructure necessary to compete.

The second was the discovery of the Internet in a U.S. federal lab, enabling everything from x-rays to engineering design to be transferred world-wide with the simple click of a mouse. Viewed from an historical perspective, those two seemingly unrelated events in the 1980s have enabled global economic development during the

past 20 years.

In his book, The Post-American World,1 Fareed Zakaria argues that we are living

through the third great power shift in modern history. The first, the rise of the

western world, around the 15th century, produced the world as we know it now—

science and technology, commerce and capitalism, and the industrial and agricultural revolutions. It also led to the prolonged political dominance of the nations of

the western world.

The second, in the closing years of the 19th century, was the rise of the United

States. Once industrialized, becoming the most powerful nation in the world, stronger than any likely combination of other nations.

The third, the one we are experiencing now, is the rise of the rest of the world,

largely driven by a global economy that has dramatically accelerated. Zakaria further argues that this post-American world, although an unsettling prospect for

Americans, is not a decline of America, but rather the rise of everyone else, fueled

by the Innovation Economy.

From my perspective, the Innovation Economy really isn’t new; it simply is a relatively new way of describing what has always the driver of wealth creation. Historically, research resulting in technology innovation has been the primary driver

of economic growth and development.

For the most part, technology led economic development has clustered around and

been driven by universities who understood that commercializable research is the

basic cornerstone in the creation of technology start-ups. The most successful innovation economies have been the result of effective partnerships between universities

and the private sector, focused on technology transfer from the lab to the marketplace. Clear examples include the role Stanford University and the University of

California played in the evolution of Silicon Valley; MIT and Harvard in the development of the Boston Biotech Corridor; and Duke and the University of North Carolina in the growth of the Research Triangle.

In these regions, applied research is the basic cornerstone for the creation of technology start-ups, new applications for existing technology, as well as new technologies. The resultant products form the basis for thousands of companies.

What is new, however, is the unprecedented challenge we face in our communities, regions, states and as a nation in terms of global competition. As examples,

the emergence and evolution of India, China and Brazil during the last two decades

from an economic perspective is truly staggering. If we clearly look back to the early

1900s, technology discoveries resulted in the creation of the assembly lines that

sparked the industrial revolution. In a similar manner, the discoveries that led to

the Internet essentially sparked the Innovation Economy we find ourselves competing in today.

George Kozmetsky, one of the founders of Silicon Valley, stated ‘‘All human affairs—political, social, economic, cultural, and business—are conducted by human

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2 Embracing the Global Demographics Transformation 1950–2050 Sharing Peace and Prosperity in the Global Marketplace, George Kozmetsky and Piyu Yue, IC2 Institute, University of

Texas at Austin. 3The State of American Business, 2008, Thomas J. Donahue, U.S. Chamber of Commerce. 4The Financial Times Ltd., Lawrence Summers, 2008.

5 Economic Letter, Federal Reserve Bank of Dallas, March 2008.

beings; people’s motivations, ingenuity, and creativity ultimately determine success

or failure in all these human affairs.’’ 2

His statement supports the U.S. Chamber’s premise that ‘‘the toughest, most important competition in the 21st century worldwide economy will be the global race

for talent and workers.3 From my perspective, the outcomes will largely determine

U.S. competitiveness in the future.

We are competing in an era in which the U.S. represents only four percent of the

world’s population, while consuming approximately 26 percent of our planet’s available resources with the U.S. population projected to decline for the next 50 years.

At the same time, most of the planet’s natural resources, people, capital, and markets reside some place else, generally in countries where the populations are projected to grow for the next 50 years.

In recent columns, dated April 26 and May 4, 2008 in the Financial Times, Laurence Summers, Harvard University professor, argues that America’s economic policy has supported an integrated global economy, stimulating the development in

poor countries, particularly in Asia, at unprecedented rates. Yet American commitment to internationalist economic policy is ever more in doubt. He further argues

that this has been the right economic policy, and that withdrawing from the global

economy is untenable, ultimately reducing U.S. competitiveness.4

And from the Federal Reserve Bank’s March newsletter comes this opening line;

‘‘Innovation is key to global growth in rising living standards.’’ 5 My response is that

our ability to remain highly innovative depends largely upon our ability to continue

to train, educate, and retain a highly skilled workforce.

In responding to the Committee’s request to explore the issues of U.S. competitiveness, and in particular those factors that drive and influence U.S. firms’ decisions to retain existing production and research capacity at home or take it abroad,

I offer the following observations and suggestions.

I’ll begin with an observation. Since 1990, corporate location decisions have increasingly been driven by two key factors; the availability and competitiveness of

the workforce in areas in which the company locates, and the competitiveness of the

regulatory environment. Both determine the ability of the company to remain competitive. Much has been said and written about incentives. In practice, I have found

that they are not the primary determinant, since the ability of a company to remain

profitable month after month, quarter after quarter, and year after year is highly

dependent upon the competency of the workforce and the cost of doing business in

a particular location. In a free market economy, it generally comes down to that.

From that perspective, I offer five suggestions to the Committee.

First, the manner in which we allocate and deploy funding for workforce development should enable and empower our publicly funded workforce development system

to become talent developers rather than funders of training. Allow me to explain.

Since 1990, I have been highly involved with the U.S. Department of Labor, the

Texas Workforce Commission, and two local workforce development boards. I have

done so because in the communities I have served, I have found that the most critical need is to ensure that the companies we are attempting to both attract and retain have access to a highly skilled, highly competitive, highly innovative workforce.

Through my participation in a variety of national pilot projects, and service on

various Texas Workforce System and U.S. Department of Labor advisory boards,

committees, and commissions, I have found that it is not necessarily the amount of

funding we allocate but rather the means by which we deploy it, and the restrictions

we place upon it. As a recent example, the Arlington Chamber of Commerce is currently administering a grant from the Texas Workforce Commission; the primary

purpose being to develop replicable, sustainable, scalable model pipelines that develop the talent and supply chain for advanced manufacturers, rather than simply

funding job training assistance.

The focus of our work is fairly simplistic. The Chamber works to identify specific

workforce challenges employers face. In doing so, we engage the local workforce development board, our local community college system, and our local university. Collectively, as partners, we identify the challenge, design the solution, and do what

is necessary to resolve the employer defined challenge.

National Semiconductor, for example, recently spent $50 million retooling 26 machines to convert production from a six- to eight-inch wafer. Their challenge: to reVerDate 11-MAY-2000 19:05 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00184 Fmt 6633 Sfmt 6621 C:\WORKD\I&O08\052208\42371 SCIENCE1 PsN: SCIENCE1
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train their workforce, with no curriculum available to do so. In response, the Chamber engaged the university and community college to collectively catalogue training

conducted by National Semiconductor, in order to develop curriculum. Grant funding provided approximately 20 percent of National Semiconductor’s training cost.

The outcome—retrained workers and curriculum for future training needs, meeting

the critical need for the employer.

As another example, we began working with Progressive last fall, a local company

that is one of Lockheed Martin’s many subcontractors for the Joint Strike Fighter.

Progressive indicated they will need to hire 400 CNC machinists over the 20-year

life of the contract, and cannot find the seven they currently need. This, despite the

fact that their starting salary is $86,000 annually. As we continued this work, we

discovered that Progressive is not alone; that there are a significant number of companies in need of machinists; and that the critical factor in North Texas is the lack

of capacity to train machinists. As a result, we are allocating some of the funds directly to the Dallas County and Tarrant County Community College Systems to enable their collaboration to develop the training capacity necessary to train skilled

machinists in North Texas.

It should be noted that in our discussions with employers, they indicated that

they can pay machinists $86,000 to $106,000 because of the increased productivity

of the United States’ worker; however, they also indicated that as wages continue

to escalate due to the lack of skilled machinists, there would come a point where

cost versus productivity would meet, and they would be forced to move these jobs

offshore.

As a third example, the General Motors Assembly Plant in Arlington is working

with us to develop internships for high school students, apprenticeships for promising interns, entry level certification, and incumbent worker training. All defined

as critical to their competitiveness. This example prompts me to point out that although participants in DOL apprenticeship programs are paid during their apprenticeship, there are essentially no DOL funds allocated to directly support this effort,

other than direct staff technical assistance. This despite the fact that every federal

dollar spent for apprenticeship leverages significant private sector dollars.

What is important to understand about all three models is that they would be difficult to fund under current DOL/WIA guidelines. First, the law itself is crafted, and

the services and centers funded under WIA are based upon the job seekers perspective—the supply side—rather than the demand side. That translates into the need

for State and local workforce systems to be highly creative in structuring grants or

contracts in order to fund the types of activities I have cited.

Second, if it is truly our intent to create an employer driven system, then we must

take into account that employers are faced with two primary factors critical to their

competitiveness; speed to market, and rapid response to market conditions. That

same criterion, however, seldom applies to public funding. Therefore, we must minimize both the time it takes an employer to secure funding, and the process employers’ view as unnecessarily cumbersome.

Third, we should assess the performance measures that State and local workforce

investment boards have to meet, because they don’t reflect the factors determining

industry competitiveness. Again, the focus of performance measures is on the supply

side, relative to job seekers, rather than the demand side, relative to jobs being created. These measures also place more focus on entry level, rather than incumbent

workers who need enhanced skills to advance. By focusing on incumbent workers

who gain the skills to move up the ladder, we also create the entry level positions

job seekers require.

Fourth, the system should allow greater flexibility. I understand that a call for

flexibility is often perceived as a request to not be held accountable for achieving

results. In response, I firmly believe that recipients of these funds should be held

accountable for measurable outcomes. I also believe you must allow recipients the

flexibility to be innovative in the manner in which they work to achieve the measurable outcomes.

The simple truth is that employers don’t use the publicly funded workforce development system. Whether real or perceived, they view it as difficult to work with and

unnecessarily cumbersome.

My overall recommendation is that a detailed analysis of the processes employers

are subject to in order to utilize these funds should lead to opportunities to effectively

streamline the process required, and re-think the measurements. I might add that a

recent study by the U.S. Small Business Administration indicated that the average

small business spends $7,647 annually as the cost of regulatory compliance per emVerDate 11-MAY-2000 19:05 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00185 Fmt 6633 Sfmt 6621 C:\WORKD\I&O08\052208\42371 SCIENCE1 PsN: SCIENCE1
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6The Impact of Regulatory Costs on Small Firms, W. Mark Crain, U.S. Small Business Administration, September 2005.

ployee.6 When you add to that the slow, cumbersome, regulatory process to access

the publicly funded system, it may lead to a greater awareness as to why these

funds are not more effective in achieving the outcomes we expect from their use.

I would also suggest that it would be helpful if the U.S. Departments of Labor

and Education work together with major U.S. business organizations, such as the

U.S. Chamber of Commerce, the National Association of Manufacturers, and other

such national employer organizations, to clearly define workforce readiness precluding the fifty states from each separately trying to do so. Given our extremely

mobile workforce, we frequently find that workers are trained and certified for jobs

they can’t find in the regions they are in, requiring them to move to other regions

in order to secure meaningful employment. When they do so, their certification frequently doesn’t reflect the work readiness credentials and certifications established

in other regions. An industry led and developed work readiness definition, universally accepted throughout the United States, would enable certification to be universally understood, increasing the likelihood of matching the supply of job seekers

with the demand of jobs we’ve created, regardless of the geography.

Second, if we recognize that highly skilled innovative people are necessary to drive

our economy, then we need to recognize that nearly 50 percent of the students in our

graduate and post-graduate programs at our nation’s universities are foreign students and immigrants. In 2006, they received 40 percent of all Ph.D.s and by 2010,

75 percent of all science Ph.D.s in this country will be awarded to foreign students.

If our immigration policies allow these students to stay upon graduation, then innovation will happen here. If our policies force them to leave, they take their innovative talents with them.

In other words, the potential for American productivity may depend far more on

a rational immigration policy that both secures our borders and welcomes legal immigrants to our shore, rather than on the quality of our actual education systems

or amount we spend for research and development. Let me share a local example.

In 2002, the Arlington Chamber established the Arlington Technology Incubator

in partnership with the University of Texas at Arlington. Our focus was very

basic—we intended to support the commercialization of intellectual discoveries emanating from the labs of our university. At the time, UT Arlington had one of the

first nano-fabrication labs in the southwest; and one of the few in the United States.

This essentially meant that UT–Arlington scientists could fabricate working mechanical devices at the molecular level. By contrast, the National Institute of Standards and Technology launched its nano-fabrication lab in 2007.

Our focus was on ensuring that research resulting in patentable, licensable discoveries would be nurtured through proof of concept, proof of product, and proof of

market; providing access to venture funding to bridge the gap until the technology

was ready for introduction to the marketplace. During the past six years, the vast

majority of intellectual discoveries brought to the incubator are from scientists who

are foreign students or immigrants.

Third, we should allocate federal R&D funding, to the greatest extent possible, to

support industry academic research partnerships; thereby leveraging federal dollars

with both private sector and university dollars while ensuring that commercialization activity resulting from such research takes place in the United States. Allow me

to explain. During a meeting with Dr. Elias Zerhouni, Executive Director of the National Institutes of Health, he indicated that of the approximate $27 billion annually

spent by NIH on health care and related research, most of the resultant commercialization takes place offshore, in countries we compete against economically.

Under new programs developed by NIH, college and university systems are designated ‘‘translational centers’’ based on their ability to demonstrate significant collaboration among and between universities, while partnering with the private sector. Under the terms of the Bayh-Dole Act, granting the funds to universities who

partner with the private sector ensures that the patentable discoveries are commercialized in the United States. This simple act—that of linking industry and academia while funding academia ensures that the commercialization of research financed by federal R&D dollars would inure to the benefit of our local, regional,

State and national economies, and support the development of top tier research universities as regional economic drivers.

Fourth, we should take the lead to promote global cooperation in the international

tax arena. Just as U.S. corporations frequently locate in states where the corporate

tax structure favors their business model, firms that do business internationally increasingly headquarter in countries whose tax structure favors their business model.

As we assess the issue of taxation, it should be noted that we fundamentally tax

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one of three things; productivity, consumption, or wealth. In turn, it is important

to understand the factors that drive a particular business, in terms of assessing the

impact of a country’s tax structure on that particular business. If, for example, a

particular business is capital intensive, meaning their business model requires significant outlays for taxable property and equipment, then taxing wealth would be

seen as a disincentive to that business. On the other hand, a company with little

capital expense, but significant production cost would find a tax system built on taxing production as a disincentive. What we often fail to take into account is the impact of the allocation of tax in terms of production, wealth and consumption on the

key industry clusters that drive our economy.

Allow me to provide a simple analogy. During my tenure in Hot Springs, Arkansas in the 1980s, a rumor surfaced that the Reynolds Aluminum plant might relocate. At the time, the regional director of Arkansas Power & Light assured me it

wasn’t so, citing the expenditure by Reynolds of $42 million to build the plant. However, my conversation with the plant manager put it in proper perspective. My cost

isn’t people, he explained, although he paid his production workers $25 to $45 dollars an hour in the mid 1980s. My cost, he stated, is a $100 million dollar a year

electric bill to Arkansas Power & Light. In recent months we have been offered the

same kilowatt hours for $60 million annually by other cities. The cost of this factory

including equipment, was only $42 million. I could actually abandon the factory and

move to one of the new communities offering reduced electrical rates, build a new

production plant, and still net $80 million over three years in a highly competitive

global business. When the plant closed, it left hundreds of people unemployed and

Arkansas Power & Light with a $100 million hole in its annual rate base. Simplistic, perhaps, but it is one more way to point out that the factors that drive U.S.

companies to make decisions about where to locate are based on their ability to compete; and that a key factor is their cost of doing business, whether based on the tax

structure or other key factors.

Fifth, we should focus our international economic diplomacy on the prevention of

harmful regulatory competition. As an example, imagine the challenge of the United

States maintaining economic prosperity if every state in the union had differing regulations that impacted interstate trade.

For example, imagine Texas imposing tariffs on the parts and components used

by General Motors in Arlington received from more than 600 suppliers located

throughout the U.S. The reality is the United States’ economy is vibrant largely because interstate commerce is supported by an overlay of federal regulatory guidelines rather than competitive State guidelines. In a similar manner, the United

States must acknowledge that the global marketplace increasingly needs to think

about global regulatory competition. Just as companies in countries we compete

against are integrating their production lines with developing countries, we must integrate our country’s regulatory structure with the structure of the world’s marketplace.

In closing, I would encourage the Committee to recognize that the single most important thing the Federal Government can do is support economic policies that promote healthy globalization, strengthening efforts to reduce inequality and insecurity

throughout the world.

For the past 60 years, the United States has encouraged foreign countries to open

up their markets and increasingly in the last 20 years they have done so. During

those two decades, the U.S. has also enjoyed unusually robust growth, low unemployment, and increased productivity, with most of the job gains coming from small

and medium size businesses during a time of rapid globalization. I would argue that

the opening of these international trade markets has been a critical driver of our

economic growth, and as the world continues to globalize, we must continue to

globalize with it; particularly in a time when 96 percent of the world’s consumers

live in foreign lands.

At the same time, we should remember we are a land developed by the hunger

and energy of immigrants. In the process we have become the most open, flexible

society in the world. We have absorbed people—their cultures, their ideas, their

goods and services. That very openness has inspired and encouraged innovation.

And we are still dominant in the technologies that will drive future growth, such

as nanotechnology, and our universities are still among the best in the world. In

recent rankings, U.S. universities received eight of the top 10 rankings, 37 of the

top 50. Faced with continued international competition, we have adapted and adjusted; primarily through our ability to innovate.

I leave you with this closing thought. I was privileged to know George Kozmetsky,

both as a mentor and a friend. Acknowledged as one of Silicon Valley’s founders,

he published a demographic analysis in 2000. He gave me one of the first copies

with this comment; ‘‘Today 88 percent of the world’s wealth is controlled by 12 perVerDate 11-MAY-2000 19:05 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00187 Fmt 6633 Sfmt 6621 C:\WORKD\I&O08\052208\42371 SCIENCE1 PsN: SCIENCE1
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cent of the world’s population, all living in countries demographically projected to

decline in the next 50 years. That means 88 percent of the world’s population struggles to live on 12 percent of the world’s wealth, all in countries demographically projected to grow over the next 50 years. What do you think that means?’’ I responded

by stating I was far more interested in what he thought. His reply has stayed with

me ever since. ‘‘It means one of two things, he said. We will ultimately go to war

over the resources nations need for people to survive, or we will learn to become

an international marketplace where trade and commerce link and integrate the

countries of the world, one to the other, providing the very motivation needed to stabilize our global economy.’’

The Arlington Chamber of Commerce

The Chamber’s mission is to serve as the primary catalyst for Arlington’s economic development, fostering a positive business environment through the enhancement and diversification of our economic base, representing the business community

on public policy and community issues that impact the ability of Arlington citizens

and businesses to reach their full economic potential.

The Arlington Chamber of Commerce is one of North Texas’ largest business federations, representing more than 1,400 businesses and organizations of every size,

sector, and region.

More than 96 percent of the Chamber’s members are small businesses with 100

or fewer employees, 70 percent of which have 10 or fewer employees. Yet, virtually

all of Arlington’s largest companies are also active members. We are particularly

cognizant of the problems of smaller businesses, as well as issues facing the business community at large.

Besides representing a cross-section of the Arlington business community in terms

of number of employees, the Chamber represents a wide management spectrum by

type of business and location. Each major classification of American business—manufacturing, retailing, services, construction, wholesaling, and finance—is represented. Also, the Chamber has substantial membership throughout North Texas.

The Chamber’s State and national engagement is substantial as well. The Chamber has been and continues to be a participant in a number of State and national

pilot projects and innovation grants, focused on the Innovation Economy and developing and maintaining a competitive workforce.

Our positions on State and national issues are developed by a cross-section of

Chamber members serving on committees, subcommittees, and task forces. More

than 300 business people participate in this process.

BIOGRAPHY FOR WES JUREY

President & CEO of the Arlington Chamber of Commerce since 2001, Jurey also

serves as Chair of the U.S. Chamber’s Institute for a Competitive Workforce; was

appointed in 2007 to a six-year term on the Texas Workforce Investment Council;

and appointed in 2008 to a two year term on the U.S. Department of Labor’s Advisory Committee on Apprenticeship. He was one of nine individuals appointed to the

U.S. Department of Labor committee charged with developing DOL’s five year research plan for 2002–2007.

He founded the Center for Workforce Training & Preparation in El Paso, Texas;

was a partner in the establishment of the Center for Continuing Education & Workforce Development in Arlington, Texas, and is the founder of the Arlington Technology Incubator.

DISCUSSION

Chairman MILLER. I want to thank all the panelists. We were

just called for a vote.

We have now had proposals that are out of the usual mainstream

political debate to the left and out of the mainstream political debate to the right, so we wanted an open discussion of ideas that

aren’t part of the usual debate and we certainly have had that.

I will waive my first round and recognize Mr. Baird. Do you have

questions? Oh, one second, please. For now, Mr. Baird.

Mr. BAIRD. I thank the panelists. I thought all of the comments

were very insightful and I appreciate the struggles, particularly

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Mr. Copland and Mr. O’Shaughnessy as you try to meet the challenges of keeping domestic workforce and industry viable. One

could say that Mr. Jurey’s comments were contradictory to Mr.

Copland and Mr. O’Shaughnessy. I don’t necessarily see it so as I

listened. It sounded to me like Mr. Jurey was saying, ‘‘Look, if we

blame it all on trade, we are missing a whole lot of other things

we could be doing to make ourselves more competitive.’’ As the

three of you listened to each other, what are the areas of common

ground that you heard in one another’s testimony?

Mr. JUREY. I will start. One of the things that I will acknowledge

quickly is, they both face intense competitive pressures, and many

of the regulatory policies of the United States don’t necessarily help

them, and then there is reality. We have a company that I didn’t

talk about, Progressive, to an extent, the one trying to find the machinists. They are paying $86,000 a year to a starting machinist.

They will quickly get them to $106,000, and when they get them

trained at that level, their competition comes in, gives them a signing bonus, a higher salary and takes them away, and their comment was, ‘‘We want as good corporate citizens to keep this job and

this work in the United States, but if you continue to not be capable of producing the machinists we need and the wages continue

to escalate, there will come a time when even that enhanced U.S.

productivity per worker will meet a certain mark and I am going

to have to be forced to do something different to remain competitive.’’ And so again, if you look at the way we spend dollars, you

have got an apprentice program at the Department of Labor that

has almost no money to spend, and yet the minute you put people

in an apprenticeship program, they start getting industry wages.

There is a great return on the dollar spent to assist industry with

the cost of getting highly trained, competitive people who can create that level of productivity.

Mr. BAIRD. Mr. Jurey, what you are saying is music to my ears.

I founded the Career and Technical Education Caucus in the Congress. I just would ask you to not repeat this in front of our staff

lest we lose a number of fine young people to career and technical

fields like machinists because they will make more money doing

what they do there than they do here.

Mr. JUREY. Well, every time I have announced that salary, people come up and give me cards and ask me where to apply, and

the reality is, that is where the job market is going, and we do

need to think differently about how the United States supports industries like the two on the panel with me. I simply think you also

have to take into account the fact that we are forced to compete

in a global economy, and pretending otherwise won’t make a difference, won’t change that.

Mr. BAIRD. Thank you.

Mr. O’Shaughnessy or Mr. Copland, any comments?

Mr. O’SHAUGHNESSY. I think job training is an important factor,

but I think it comes after some of the basics, and the basics start

with your costs and the costs of your competitor, and if currency

manipulation has an impact of 40 percent on your costs and valueadded taxes has an impact, an average worldwide of about 20 percent, put them all together, that is 60 percent, those two. If health

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care costs, they are 10 percent of Revere’s costs, now you are up

to 70 percent.

Mr. BAIRD. It is a tough margin to beat.

Mr. O’SHAUGHNESSY. It doesn’t really matter whether there is

anyone trained or not; we are out of business and now we are going

to increase the energy costs by probably 30 percent in this country

but not in others.

Mr. BAIRD. Is it your feeling, Mr. O’Shaughnessy, that the things

the other panelists, the issues you have just addressed are not adequately dealt with in our trade negotiations?

Mr. O’SHAUGHNESSY. Sir, they are not dealt with, period, in our

trade negotiations.

Mr. BAIRD. Any dispute of that?

Mr. JUREY. I would concur with that. I made two points. It is a

competitive workforce and it is the total cost of doing business environment they have to compete in, and that is a legitimate part

of that total cost of doing business. So if you go back to one of his

comments about consumption tax, look at the taxation factors that

really are a part of the cost of doing business. If you are taking a

company that has high capital costs and your tax environment primarily taxes wealth or capital investment, then that is a disincentive to that company. On the other hand, if a company’s costs are

primarily in production and you have levied a high production cost,

you have handicapped their competitiveness. And so if you don’t

think about tax policy as it impacts their cost of doing business and

if you don’t think about the tax policy internationally that either

helps or hinders the global competition, then we aren’t going to be

able to enable the kind of true competition we need for the U.S.

companies to remain competitive.

Mr. BAIRD. I actually concur with both points, and one of the

frustrations I have about our trade policy, and I spoke with Susan

Schwab about this a few days ago and spoke with members from

the machinists’ union just yesterday, is we tend to battle it out

over yes or no Colombia, yes or no Peru, yes or no Panama, but

we neglect all these other structural factors of our own society, and

the focus so becomes on the trade agreement yes or no that we neglect our tax policy, our education policy, our currency policies, et

cetera, and I think ultimately to solve this—and whoever the next

President is, Democrat or Republican, we are not going to solve

this country’s financial situation unless we take a comprehensive,

integrated approach. And by the way, the President doesn’t write

the laws, this body does, so we can look to that President, but the

fact is, it is the next Congress that needs to address a comprehensive approach, not just a trade policy but an economic policy writ

large, and I very much value the insights of the gentleman and

yield back to him.

Chairman MILLER. Thank you. The buzzers that you heard earlier were Mr. Baird and me being called to a vote, and we now need

to go vote. It will probably take us 20 minutes, perhaps a half an

hour. And so if you all could be at ease for a little bit, we will go

vote and come back and reconvene. Thank you.

Mr. BAIRD. I may not be able to return, but I am very grateful

to both panels for their insightful testimony. Thank you very much.

[Recess.]

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PREDATORY PRICING

Chairman MILLER. I think we are probably close to the end of

the hearing. I apologize for making all of you wait for so long so

close to the end of the hearing. I do have a couple questions for

various members of the two panels. Most antitrust laws are designed to keep prices low. An exception to that that I remember

from law school and from the early years of my practice when I actually did a little of that was predatory pricing, where a large company set prices that were below their cost, certain in the knowledge

that they could outlast their smaller competitors, and when the

smaller competitors went out of business, they would be able to set

their prices at whatever level they wanted to, whatever the monopoly price would be rather than the competitive price. A lot of the

economists point out, those who are strong advocates for free trade,

not apostates, that a lot of the benefits that Mr. Copland described

and Mr. O’Shaughnessy described and others of you as well that

the Chinese have in particular—the currency manipulation, the

free capital, getting free land, free building, free machinery—all

that is free capital, is actually a cost and they are selling to us

below cost, below what it costs their society at least. And that if

a country wants to sell us goods at below cost, we ought to let

them. That is a bargain for as long as it lasts, but eventually they

will have to raise their prices.

Mr. Copland, when the day comes and the Chinese correct or let

their currency float and stop giving free capital to Chinese textile

manufacturers, are you going to be in business?

Mr. JAMES COPLAND. First off, are you going to guarantee that

they are going to change their currency policy and they are going

to change the stuff you are talking about?

Chairman MILLER. Well, if they do.

Mr. JAMES COPLAND. Oh, if they do.

Chairman MILLER. Are you sure that you are going to be——

Mr. JAMES COPLAND. Are we going to be in business? Well, let

me tell you, it has been extremely difficult. It has been like a

nightmare what we have had to face. Our business was the curtain

business. We were the big player in the United States for it and

actually we had extremely high market share because we were the

best. That is why we had that market. And they came at this market starting in 2001. China had about seven percent of the import

market, and the total import market on our goods was only about

five percent. What has happened in that seven-year period is that

China’s imports went up 6,900 percent on the type of goods that

we make. China has got 90-plus percent market share. Let me tell

you something, the total market is offshore goods. The total market

today is 98 percent offshore goods. So what do we have to do? I

mean, what we are doing, that market is gone. They are selling

this stuff not below cost, they are selling it below our raw material

cost to be able to do it. This is the subsidies that you are talking

about. This is the predatory pricing that you are talking about.

How do we survive? It is a sad way to have to survive. We are picking up the pieces when somebody else goes out of business. We

have competition go out of business, we pick up a piece and believe

you me, just as soon as you get into it, here come the Chinese

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again. We look constantly for something that the Chinese are not

doing, that they haven’t focused on yet or we are looking constantly

for something that may have some natural barrier to them coming

over here, a time thing or so on. But remember, everybody in our

industry is doing the same thing, everybody. There have been

550,000 jobs lost in my industry since 2001 alone. Manufacturing

in my state, North Carolina, has lost 28 percent of the manufacturing jobs. We have lost 19 percent nationwide, folks.

You ask, are we going to be able to do it? With every ounce of

energy I have got, with every ounce of energy that my son has got

and our wonderful workforce, loyal workforce we got, we intend to

do it. We intend to be here. But I am going to tell you, that if this

thing doesn’t stop, there are going to be no survivors that have

manufacturing in the United States, and I will not put my manufacturing in the People’s Republic of China. I will not put it in any

foreign country. I have a loyal workforce. They are part of my family. I speak of them as though they are part of my family and I will

tell you under no circumstances will I export their jobs, will I put

them out of work for my own personal gain. But I intend to, if the

Lord gives us the strength and we get any decent break at all, we

will make it.

Chairman MILLER. Anyone else? Dr. Gomory.

Dr. GOMORY. Yes, I want to talk to the notion that when they

have wiped out the competition and then they raise their prices

that you can get back in. I mean, that may be some form of economics but it is not the real world. In any business, either low tech

or high tech, there is an immense amount of know-how, and when

you lose the know-how, you are out of it. You are also not an isolated thing. You depend on a chain of people who get parts for you

and they are not there anymore, and the idea that when the other

guy is finished killing you, you can rise from the dead, just—that

is a piece of—that is on paper, but in the real world, it is complicated. You are very dependent on things that have gone away.

You can’t do it.

Chairman MILLER. Dr. Scott.

Dr. SCOTT. Well, listening to Mr. Copland, it really strikes me

that there is a certain measure of discretion that people have when

they are running a company. He could have changed his mind and

said, ‘‘Guys, I am in the nickel and dime business, shut the business.’’ There aren’t very many people like Mr. Copland any longer.

One of the reasons is what is taught in business education across

the entire country has changed and that also changes beginning at

the end of the 1970s or the beginning of the 1980s. Just pick one,

the one that I happen to know, but our school was founded, the

dean said the mission of the school is to teach people to earn a decent profit in a decent way. That is a question, it is not an answer,

but business schools don’t do that anymore, and the change, teaching a decent profit in a decent way, you could pass for saying we

are going to teach officers that have some loyalty to a broad range

of things. We start doing the other and what we are doing is teaching mercenaries. We are teaching mercenaries. No mercenary is

going to pay attention to his concerns at all and they are going all

through the establishment with a new calculus that says, ‘‘Hey, in

order to be effective, you have got to be able to reduce it to one diVerDate 11-MAY-2000 19:05 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00192 Fmt 6633 Sfmt 6601 C:\WORKD\I&O08\052208\42371 SCIENCE1 PsN: SCIENCE1
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mension or you can tell that three is bigger than two.’’ The sense

of responsibility that ought to be there isn’t there, and we are generating them. I am sure that this is an exception where they don’t

do that but aside from Vanderbilt, it is all over the country.

Mr. JAMES COPLAND. Let me make another statement about this

in regard to what was said just a minute ago. Mr. Chairman, you

said whenever they get enough and they are going to raise their

prices, this business is not going to come back to America. Let me

tell you about the textile business. When these plants are closed

down, they are closed. The equipment—if you don’t run the equipment, keep it up, it deteriorates to nothing anyway, but the equipment is being sold. Pakistan is buying the equipment. People are

selling it for five cents on the dollar. Nobody wants it. And let me

tell you what is happening to the buildings themselves. I was just

down in Joanna, South Carolina, a huge mill down there has been

closed five years. They are tearing it down. They are doing it all

over the South, tearing the mills down that are closed. Why? They

are going to sell the bricks, guys. They are going to sell the beams.

They will sell the bricks and sell the beams. So don’t think that

you are going to be able to say, ‘‘Oh, boy, as soon as this thing is

over, here we come back,’’ it is going to be regeneration. All we are

trying to do is to hold onto what we have got, and if we don’t wake

up and start paying attention to these trade agreements that we

are making and pay attention to the fine points of these trade

agreements, we are going to give it all away.

Let me give you one example. We just talked about CAFTA, and

that is not too long ago, CAFTA. It sounded like a good idea, all

right, going to make it in the United States, going to make it in

Central America, everybody is going to be okay. They left a loophole. The loopholes are what get us and so many times our negotiators don’t even know that the loopholes are there because they

are some political appointee that hasn’t done it but about six

months or three months or they have been out of college for about

a year. They don’t even know the loopholes are there. They do

know when they do it, woe be to them. Let me tell you something.

They had a deal in there to where they could take pocketing, so

that doesn’t sound like much. That is not sounding like much. Let

me tell you something. Pocketing is a 180-million-yard business in

the United States, pockets for trousers. It is a United States business, and they had it in there and said, ‘‘Well, you know, we are

going to make an exception on pocketing and we are going to let

these Central American countries make this stuff out of Chinese

cloth.’’ Dominican Republic wanted that. They gave it to them. We

pointed it out and said, ‘‘Look, you are going to destroy the industry.’’ ‘‘Oh, no, oh, don’t worry, we are going to fix it, we are going

to fix it, we are going to fix it, trust it, we are going to fix it.’’ That

was three-plus years ago, folks. It hasn’t been fixed. There has

been nothing done. Let me tell you the end result of that thing.

Eighty percent of that market is gone, and it is gone, folks. Eighty

percent of it is gone. Haines Finishing Company in Winston-Salem

closed down 75 percent of their business, closed it down. They have

been there longer than we have. Allis Manufacturing Company

closed down four plants down in South Carolina. You have got

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Mount Vernon, they lost 70 million yards worth of business, closed

plants in Rome, Georgia, closed plants down in Texas.

We have got to start paying attention to what we are doing with

these trade agreements. We have to get some people that know

what they are doing with these trade agreements. We are being

out-negotiated. We better start paying attention to what we are

doing because let me tell you something, we are exporting the

wealth of this country as fast as we can export it today. It is going

offshore. We are going to pay one tremendous price in this country.

Chairman MILLER. Dr. Gomory.

Mr. GOMORY. I really want to comment on that because first of

all, I am in wholehearted agreement, but I think it is very difficult

to work out a set of agreements which are that detailed. It is also

very difficult to counter the next mercantilist policy which may be

loophole 47, all right? The reason why I think we should seriously

consider the Buffet certificate program is because it measures results, not how you got them. The Buffet proposal, if you can’t export, they can’t import, however tricky they are and whatever the

deals are. It is not trying to match, you know, their currency manipulation with our currency manipulation or their loophole with

our loophole or their subsidy with our subsidy. It says, ‘‘Okay, kids,

if you want to ship stuff in, we have got to be shipping stuff out

and it is not nation by nation.’’ This I think is an approach which

needs to be taken very, very seriously.

Chairman MILLER. Mr. O’Shaughnessy.

MORE ON FREE TRADE

Mr. O’SHAUGHNESSY. I have two problems with the trade agreements in general that we have negotiated. The first is, trade agreements are designed to lower tariffs. That is what they are about.

But the problem is, because of our tax system where we are the

only major country in the world that does not have VAT taxes,

VAT taxes are like a tariff but they are exempt from trade agreements. They are exempt by WTO rules. And so what happens is

that you can look at a chart in my written testimony, about how

European countries have lowered tariffs, normal tariffs, and they

have increased VAT taxes and their total tariffs are the same. So

they don’t even work on that side.

The second problem I have with the free trade agreements is

that the focus is wrong. And you see, to put together a patchwork

of trade agreements to solve our trade policy, to solve the loss of

the manufacturing jobs, and the loss that we are going to see in

the service sector—we are going to lose way more jobs in the service sector than we have lost in the manufacturing sector—we have

to design a national trade strategy or policy from the top so that

when we consider things like environmental standards, we think

about the impact on our own ability to produce goods and services.

When we consider energy policy, we will think about that. When

we consider tax policy, we will think about that. And when you

layer all of these things together, that is very critical and that is

what is wrong. Our focus is wrong by looking at trade agreements

without having the framework to negotiate them from.

Mr. JAMES COPLAND. Let me just say this about the tariffs, you

brought up about the tariffs. You know, we make these trade

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agreements and today the average tariff in the United States, this

is the average of United States tariffs: 1.7 percent. That is not

much, guys. You turn right around and you look at the tariffs that

the other countries have that we have these agreements with and

they average 30 percent. Is that fair? Is that a good deal when you

negotiate something like that? No, you can’t tell me it is. Let me

tell you something. China today, they have—under the rules, they

have the right to designate themselves as an underdeveloped country, China. They’ve got the biggest international trade in the world

but when you are designated as an underdeveloped country, you

can charge anything you want as far as tariffs on stuff coming in

there in addition to these value-added taxes like has been brought

up. Is that fair? Is that good negotiations? Are those good trade

deals? Is that good for America? Absolutely not.

Chairman MILLER. Mr. Jurey.

A COMPREHENSIVE SOLUTION

Mr. JUREY. I guess a point I would make, a lot of good comments

have been made, but I would encourage the panel, the Committee

to think this way: there is going to have to be a comprehensive solution. It is not as simplistic as taking any one of these suggestions. At one point I remember a key member of your staff said,

‘‘Well, could you cite in your testimony what specific clause we

could change to deal with your point?’’ And I said I wish it were

that simple. I wish I could say that if you simply change article 3,

section 2, paragraph 9 under WIA, all these things would go away,

but the reality is, the entire law is structured in such a way that

you are going to have to rethink all of the processes and all of the

measurements and how they impact the competitiveness of all

these companies. And in a similar way, you are going to have to

think about the broader aspects of these free trade agreements because there are components that challenge the men at this podium

but you can’t simply take one component and change it and think

you have solved the problem.

The broader issue really is, we don’t have a comprehensive economic policy to deal with global competitiveness. It has got to be

multifaceted and there are some aspects of global competition we

are not going to be able to change and there are others we can. And

if out of this you can begin to think about the things that you can

impact—and as one of your colleagues said—you are the group that

writes the laws, if you can pull out the parts that you can have an

impact on and look at it in a more comprehensive way, I believe

you could make significant progress in enabling these companies to

remain and be very globally competitive.

Chairman MILLER. Dr. Scott.

Dr. SCOTT. The main ideas are the same as the one for the domestic, and by the way, the increasing inequality in the United

States comes after 1980—from 1945 to 1980 the fraction of the income being earned by the top 10 percent in the United States does

not change for 35 years. The change is since 1980, 1982. By the

same token, this is not coming from globalization. Europeans are

not experiencing the same problem at all that we are. It is here,

it is since 1980, and we are very close to being back to the income

distribution that we had at the end of the 1920s. The common deVerDate 11-MAY-2000 19:05 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00195 Fmt 6633 Sfmt 6601 C:\WORKD\I&O08\052208\42371 SCIENCE1 PsN: SCIENCE1
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nominator is, we have deregulated domestically at the same time

that we are trying to deregulate internationally and the universal

principal has been to deregulate. And it is like my little green box,

it is exactly the same thing: ‘‘Hey fellows, we really don’t need to

regulate, we can use the common resources without really having

to figure out what we are going to do, it will solve itself automatically.’’ Well, it isn’t and it won’t as you do this, but that is a very

big job because you’ll find that being taught, not in the business

schools, but at the economics departments in this country everywhere. It is very, very different when you get to Europe. My big

personal luck was somebody that is a publisher in Germany happened to call and ask, ‘‘Are you publishing a book? Tell me about

it and hey, we will publish it.’’ Because they really teach economics

that is grounded in history in Europe, in Germany, in France and

in Scandinavia. We don’t.

Chairman MILLER. The other Mr. Copland, Jason Copland.

Mr. JASON COPLAND. I wanted to expand upon and agree with

Mr. Jurey’s comments, just about the whole need for a comprehensive trade policy. Just something that is going on real and right

now that I thought would be interesting to hear about, Chairman

Miller, is the recent Farm Bill, and I want to give a very concrete

example. We have had kind of a disjointed trade policy where

sometimes we sign free trade agreements with countries for political reasons or sometimes reasons I can’t even figure out other than

the fact that maybe we just want to sign as many free trade agreements as possible. But then sometimes we also try to create these

regional trading blocks, and that was really the intent behind

NAFTA and CAFTA, that we would be able to use our technology

and our productivity and then utilize other countries’ less expensive labor and then you would have that rising economic tide that

would both help the United States and Mexico and our Central

American partners.

Well, in the most recent Farm Bill, Charlie Rangel put out a

Haiti add-on to that Farm Bill where it kind of destroys that entire

concept. In North America we are going to have a trade bill with

Haiti that is part of the Farm Bill that just specifically with textiles will have absolutely no rules or regulations whatsoever and

will allow fabrics to come in not just from the regional trading

block but from China. And it is so sad that the economic condition

that Haiti is in, but this just shows the lack of any type of a comprehensive trade policy and no one has thought that through. Well,

if Haiti has that, what is that going to do to the Dominican Republic and what is that going to do to Guatemala and Nicaragua? No

one thinks about that at all. And who it really is going to help is

the Chinese, and it is really—you know, too many people want to

blame China, and this is just an overall criticism of Washington,

D.C. People like to point the finger at China, and I think that that

is wrong. I think we should be pointing the finger at ourselves. It

is not China’s fault, it is our fault because we have let it happen.

JOB TRAINING AND COMPETITIVENESS

Chairman MILLER. The answers to my only question so far have

taken 20 minutes, and I am not sure how important my questions

are in the discussion now. We are close to the end, obviously not

187

to solving all the problems of the world or this problem but of the

hearing at least and we will have further hearings on this topic.

I know that some of the first panel in the discussion of corporate

governance talked about the model of corporate governance in

which the corporation was not driven entirely by profitability but

by other considerations and that a corporate board of directors

could decide to locate manufacturing operations in the United

States even if they would be cheaper somewhere else because of the

effect on the community and out of loyalty to their employees and

that the law should allow and even encourage that, but I wonder

how well that generous impulse is going to work in guiding corporate behavior for the longer term, although perhaps you are

right, there have been more generous impulses in the past than

there have been recently.

I would like to hear a little bit about some of the other things

we could do besides having more generous impulses guide boards

of directors, and one that I have worked on a fair amount or talked

about a fair amount is the need for training for workers to learn

new skills very quickly, that we should have an advantage on the

rest of the world in the ability to learn new skills quickly as manufacturing operations change fairly quickly. I visited Mr. Copland’s

plant. If you have seen the movie Norma Rae, it doesn’t look much

like that. We are developing new technologies quickly. I think one

of the first panel’s discussions of R&D being an advantage is if it

is just R&D—if that is the only thing happening in the United

States—it is not all that helpful. What we hope happens is R&D

is applied in the United States at least first. At least for a while

we will have a head start and then our workforce needs to be able

to learn the skills quickly to use new technologies.

I attended a panel discussion earlier this week organized by the

Business Roundtable. They did’t invite me to talk about executive

compensation but they did invite me to talk about community colleges. Mr. Copland knows the role that—both Mr. Coplands know

the role that community colleges play in North Carolina and perhaps how much more of an advantage it is to North Carolina business than in other parts of the country. In other parts of the country, community colleges began as academic institutions, as essentially a junior college, and in North Carolina they have always

been technical job skills-driven and there is a close relationship between the business community, business leadership, and the community colleges to develop curricula for specific job skills. The leading employer in Alamance County is no longer Mr. Copland’s company or Glen Raven Mills or Burlington. It is LabCorp, the Nation’s second largest medical testing firm, and Alamance Community College has a curriculum in medical testing developed in consultation with LabCorp and LabCorp hires every one of the graduates of that program, at least the ones that don’t take another job

with somebody else and actually get a better deal out of it.

Mr. Jurey, what is the role of community colleges or job training

in our ability to compete and keep jobs in this country?

Mr. JUREY. I think it is critical, and I will give you one clear

anecdote that speaks to what you have said about community colleges. In the mid-1990s, I was in El Paso. The Texas Workforce

Commission committed considerable dollars, every hospital comVerDate 11-MAY-2000 19:05 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00197 Fmt 6633 Sfmt 6601 C:\WORKD\I&O08\052208\42371 SCIENCE1 PsN: SCIENCE1
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mitted considerable dollars, to that community college to expand

the only nursing program within 200 miles. We had 12 percent unemployment. We had hospital CEOs going to India and China to

recruit nurses and finally persuaded the board to go along with the

need to expand the program with 200 on its waiting list. Along

came a new college president who called me and said, ‘‘I decided

we are going to open a beauty college and put a hold on the nursing expansion,’’ and when I got up off the floor, I said, ‘‘Could you

tell me why? There are six for-profit beauty colleges in our community, none have a waiting list. They pay below median wage. Nursing pays a very high above-median wage. It is a huge demand and

you are taxpayer supported and we thought you were going to meet

the demand needs of industry. And he still was unwilling to bend

and so I said, ‘‘Fine,’’ went back and talked to my board and they

said, ‘‘You are going to organize a tax rollback election,’’ since he

announced something like a 30 percent tax increase. The next day

the College Board of Trustees Chair called me and said, ‘‘I thought

we were partners.’’ I said, ‘‘So did I, but all we ever asked you to

do was listen to the actual needs of the employers and you have

quit doing that.’’ He quickly called the board together in closed session, asked me to recite my discussion with the college president.

At the end of it, he looked at the board and they nodded and he

said, ‘‘Can we have 24 hours to reason with our new president?’’

I said ‘‘Well, yes, sir.’’ He called me the next day after reasoning

with him, ‘‘He has resigned, can you get that money back on the

table?’’ And to me, that is a very responsive community college system because the board of trustees took seriously their need to think

about the role they played in providing the kind of training necessary to keep key sectors competitive.

Then if you back up into the regulatory process side, as I discussed, and you start really digging deeply into how quickly can

local workforce boards and community colleges deploy WIA and

DOL dollars to meet those needs, when employers are faced with

having to get speed to market and rapid response to changing market conditions, it is extremely cumbersome. It is very difficult to do

outside of the box. It is hard to help employers retrain incumbent

workers to get higher skills to quickly meet those changed needs

because the slant in the law is toward entry-level job seekers, and

yet if you don’t move incumbent workers up the ladder, there are

no entry-level jobs for the job seekers to seek. And so again, I keep

trying to stress, you are going to have to think a little more comprehensively if you really want to help all these companies remain

competitive and think about the impact not just of one change but

to how systemically we can provide the type of incentives and assistance and help, particularly in having a highly competitive

trained workforce that these employers need. And one last comment. If they need apprenticeships, there are no dollars to pay

them in the program.

Chairman MILLER. Mr. O’Shaughnessy.

Mr. O’SHAUGHNESSY. Yes, thank you, Mr. Chairman. I have to

catch a flight so I would like to comment. Thank you. I think the

issue of education and training is a very important one. However,

I think it is necessary to put it in perspective. I often read articles

about we need to encourage more of our young people to study enVerDate 11-MAY-2000 19:05 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00198 Fmt 6633 Sfmt 6601 C:\WORKD\I&O08\052208\42371 SCIENCE1 PsN: SCIENCE1
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gineering. The way we are going, it really isn’t going to matter because there is not going to be anywhere for them to work that

needs that kind of work. The factories are going to be shut down.

The service jobs are going overseas. Because of factors like 40 percent of our costs are due to currency manipulation, 20 percent

taxes, 10 percent health care. That is 70 percent. If you don’t deal

with those issues, and then we add on energy costs, another 10, environmental costs, another 10, we have got a 90 percent cost problem. I want to solve those problems so that we have jobs for welltrained people, and to train people when they lose jobs, to focus on

that, well, I don’t know where they are going to go. I think we are

in a much more serious problem than any of us realize and we

won’t realize it until the service jobs start flowing overseas. Allen

Binder, the former Vice Chairman you quoted, also said that he expected to see 30 million service jobs go overseas in the next few

years.

Chairman MILLER. Dr. Gomory.

Dr. GOMORY. I would like to go back to your point about what

we were saying about corporate governance. By the way, I am very

supportive—we have done a great deal of work on community colleges. I think they are vital, great training grounds. Sometimes

they are confused about whether their place is to train people for

higher education or for jobs. I think in corporate governance, we

certainly mentioned liberating directors to consider more than profit, but I also think we should seriously entertain the notion of rewarding companies that create and keep high-value jobs in the

United States so that when they have this generous impulse to locate the jobs here, they are doing a service to the country. They

are adding to our GDP. Let us give them something for doing that.

That is what all the other countries do. They say, ‘‘Come here, add

to our GDP, we will give you profit in return.’’ Why can’t we say

that too? And that is why I suggested just one example, a corporate

income tax graded by the value add of the people in the company.

But there are other ways. I think we have to realize that when

companies create jobs here and especially those that are productive, they are already doing a service for the country before they

pay their tax, and we need to take that into account.

Chairman MILLER. Mr. Jurey.

Mr. JUREY. I would support that in this way. The market responds to incentives, and if you think about how to incentivize

those kinds of behaviors in ways that also enable companies to be

highly cost competitive, that can be very effective as part of a strategy.

Mr. JAMES COPLAND. As far as——

Chairman MILLER. I almost said that I wanted the record to reflect that I asked a question and no one named Copland had raised

their hand to respond. Mr. Copland.

Mr. JAMES COPLAND. Thank you, Mr. Chairman. First off, let me

say that as far as job retraining and education, I am totally in

favor of it. It is a wonderful thing and we do in the State of North

Carolina have a tremendously successful community college system. But it can only go so far. It can only go so far. You talked

about my county of Alamance County and LabCorp and what the

Chairman said is true. We have had 40 percent of the people in my

190

county—40 percent of the manufacturing jobs have been lost.

LabCorp can’t hire all these people. LabCorp hires them but they

can’t hire all those people at all. Only a fraction are they able to

hire. And if you look right down the road to Cabarrus County,

North Carolina, down at Cannon Mills, Pillowtex, what was it, four

years ago they went out. Five thousand people lost their job all at

one time. Today only 60 percent of those people have found any job

at all and they have got a wonderful community college system. So

there has got to be a blend. You have got to have both. You have

to take into consideration everything, and job retraining and education is part of the answer, but it needs to be a comprehensive

program, as has been brought out here today.

Chairman MILLER. I have been called for another vote and I

think we are probably then going to end the hearing. I encourage

all of you to keep talking among yourselves. When you get it all

worked out, I will introduce the bill that solves all the problems.

Mr. JAMES COPLAND. Do you promise?

Dr. GOMORY. I really want to thank all of you for organizing this.

It has been very worthwhile, and we are talking about some things

you don’t get to talk about everywhere. I appreciate it.

Chairman MILLER. Well, it obviously—these are topics that we

need to talk about more.

I want to thank all of the panelists for appearing including Mr.

O’Shaughnessy, who had to leave now to go get on a plane, but

thank all of you and I appreciate all of the perspectives that are

not typically part of this debate. But perhaps given the consequences of this debate, we need to step back and think about

what are some of the assumptions that have gone unchallenged but

should be challenged.

So again, thank you for appearing, and we are now adjourned.

[Whereupon, at 1:12 p.m., the Subcommittee was adjourned.]

(191)

Appendix 1:

ANSWERS TO POST-HEARING QUESTIONS

192

ANSWERS TO POST-HEARING QUESTIONS

Responses by Ralph E. Gomory, Research Professor, New York University Stern

School of Business; President Emeritus, The Alfred P. Sloan Foundation

Questions submitted by Chairman Brad Miller

Q1. You say in your written testimony: ‘‘If in the process of globalization the production (or delivery in the case of services) of the good moves overseas, so do the

wages. Even if R&D remains behind, the vast bulk of value creation has moved

to another country, and it is there that it supports the wages of employees.’’ But

if production moves offshore, how long can R&D remain behind? Particularly

in high-value-added industries, has there been any evidence that R&D activity

is drawn toward the geographic location of manufacturing capacity? Conversely,

are there circumstances in which R&D activity has drawn manufacturing capacity to its geographic location?

A1. In the case of established products R&D is very likely to follow production. In

disc drives and semiconductors or similar advanced and difficult products you need

the R&D people to be intimately involved in the details of production in order to

know what is actually possible and what is needed.

If you are talking about a totally new product, and this is the picture that is too

often in peoples’’ minds, there is no production to follow and initial production could

be set up anywhere depending on a great variety of circumstances. However if the

new product becomes established and large scale, production location will often be

dictated by costs and thereafter R&D will eventually follow production.

However, at any given time, most production is in established products.

Q2. In your written testimony, you say that ‘‘the emerging gap between the goals of

global corporations and the aspirations of people of individual countries’’—a gap

arising from ‘‘rapid technological change’’ and its consequently increased ‘‘degree

of globalism in economic development’’—has accelerated ‘‘not only in the United

States but also in less developed countries.’’ You add: ‘‘Even when globalization

increases a country’s wealth, which it does not always do, most of the gains are

going to a thin upper crust, and the bulk of the people do not participate.’’ What

does this augur for the future of a world economy that, in recent memory, has

depended for its sustenance on the production and sale of goods of mass consumption?

A2. This is really a quantitative question whose answer is not obvious. In the U.S.

the growth of wealth in the upper crust has been extremely rapid, the growth for

most others zero, i.e., some negative some slightly positive, all greatly below the

rate of growth of GDP. It is difficult therefore to extrapolate into a rather far off

future when the number of people is growing.

Q3. During a discussion of whether executives’ severance and retirement packages

drain lower-ranked employees’ retirement and other benefits, Dr. Blair was

asked about the ‘‘merit [of] tying the fate of employees’ benefit packages to the

fate of the executive or board packages.’’ You agreed with her endorsement of the

idea ‘‘in principle.’’ Can you envision some ways in which this might be put into

practice, and what hindrances or limits might exist?

A3. I do think this is a good general direction, not only for benefit packages but

also for the general use of profit. Profit represents the available surplus after standard expenses are met. How should this be allocated, all to shareholders, all to workers as a bonus, split between the two, used to improve pensions? The possibilities

are endless. We need to decide what we want of our corporations. This may be left

to the boards of directors after first limiting the shareholder share. This is more a

direction thing than an explicit rule and different companies might act differently

and a tax structure is needed in the end to incent this sort of behavior. If this level

of response is not helpful I have nothing further to respond to this question.

Q4. You said that ‘‘we as a nation . . . ought to decide what we want a corporation

to do’’ and ‘‘make sure that our tax structure awards that.’’ You also talked

about not allowing firms to keep the profits they earn ‘‘if they are not productive,

if they don’t treat people right, if their skew of compensation is crazy.’’ In addition to the tax regime you proposed that would reward firms for keeping highvalue-added jobs in the country and punish firms for moving them offshore, can

you offer specific measures for incentivizing desirable corporate behavior?

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A4. Taxes are the most obvious method. In addition corporate charters that require

corporations to consider the Nation, the employees and the community as well as

the shareholders. Incentive pay should reflect all these factors. At present the use

of huge stock option grants has skewed the attention of management, which was

once focused on other factors as well as share price to focus on share price only as

the reward, is tens and hundreds of millions of dollars. This skewed motivation

should be changed and the executives should be rewarded for performing in many

factors. Share price became especially attractive when the stock market was rising

as every company went up whether well managed or not. It was rewarding the executives for being in charge during good weather. I suggest that it would be better

for even the component of compensation that is tied to share price should be tied

to a peer group comparison. This would motivate executives to build companies that

could survive bad times as well as rise with the rising tide.

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1For a discussion of the economic function served by the corporate form that made it attractive to business organizers in the 19th Century, as compared with the partnership form, see

Margaret M. Blair, Locking in Capital: What Corporate Law Achieved for Business Organizers

in the Nineteenth Century,’’ 51 UCLA Law Review, 2, 387 (2003). For a general discussion of

the history of legal thinking about the role of corporations, see Margaret M. Blair, Ownership

and Control: Rethinking Corporate Governance for the Twenty-first Century, Brookings (1995),

Chapter 6, Whose Interests Should Corporations Serve? pp. 202–234. 2See Adolf A. Berle, Jr., and Gardiner C. Means, The Modern Corporation and Private Property, 1932. 3 ‘‘The owners of passive property [dispersed shareholders], by surrendering control and responsibility over active property, have surrendered the right that the corporation should be operated in their sole interest,’’ Berle and Means asserted. Berle and Means, 1932, pp. 355. 4 ‘‘Eliminating the sole interest of the passive owner, however does not necessarily lay a basis

for the alternative claim that the new powers should be used in the interest of the controlling

groups [corporate managers and directors] . . .. The control groups have, rather, cleared the

way for the claims of a group far wider than either the owners or the control. They have placed

the community in a position to demand that the modern corporation serve not alone the owners

or the control but all of society.’’ Berle and Means, 1932, pp. 355–356. William Allen, former

Chancellor of the Delaware Court, described the ‘‘social entity’’ view in a law review article as

follows: ‘‘Contributors of capital (stockholders and bond holders) must be assured a rate of return sufficient to induce them to contribute their capital to the enterprise. But the corporation

has other purposes of perhaps equal dignity: the satisfaction of consumer wants, the provision

of meaningful employment opportunities and the making of a contribution to the public life of

its communities. Resolving the often conflicting claims of these various corporate constituencies

calls for judgment, indeed calls for wisdom, by the board of directors of the corporation. But in

this view, no single constituency’s interest may significantly exclude others from fair consideration by the board.’’ See William T. Allen, Our Schizophrenic Conception of the Business Corporation, 14 Cardozo Law Review, 2 (1992). 5 Historian Dow Votaw, writing in 1965, observed that ‘‘the corporation performed brilliantly

during World War II,’’ and ‘‘the performance of the corporate system since the war has also been

ANSWERS TO POST-HEARING QUESTIONS

Responses by Margaret M. Blair, Professor of Law, Vanderbilt University School of

Law

Questions submitted by Chairman Brad Miller

Q1. You offered while testifying to expand upon ‘‘how and why the notion that corporate managers must maximize share value came to be so widely accepted in

the past three decades.’’ Please do so here.

A1. Societal norms, conventions, or expectations rarely change overnight, and that

is certainly true with respect to the question of the purpose of corporations, and

what corporate managers and directors are expected to do. Throughout the history

of the use of the corporate form as a way to organize business activities, there have

been societal debates about whether corporations should be regarded as creatures

of the state, required to serve some public purpose, or whether they are purely the

product of contracts among private parties, whose only purpose is to serve the interest of those parties, presumably by earning profits for investors.

For most of the 20th Century, until at least until the late 1980s, the question was

thought by most corporate law scholars, as well as most business leaders, to be settled in favor of the view that corporations are supposed to serve a broad social purpose (while also, of course, earning profits for investors).1 This ‘‘social entity conception,’’ as this view has been called, came to be widely-accepted in the 1930s, partly

as a reaction to widespread concerns about the role that corporate abuses had

played in the financial excesses of the ‘‘Roaring 20s,’’ and in the collapse of financial

markets in 1929 and the ensuing Depression of the 1930s. The social entity view

was accepted by most economists and legal scholars partly as a result of the scholarship of Adolph Berle and Gardiner Means, who, in 1932, found that most large corporations did not have a ‘‘controlling’’ shareholder (an individual or other firm who

held 50 percent or more of the voting shares) who could be held accountable for the

actions of the corporation.2 Instead, shares had come to be very widely-held by individual investors, so that in many firms, managers and boards of directors were not

constrained to act only in shareholders’ interest. If shareholders could not be held

accountable for the actions of corporations, Berle and Means argued, it made no

sense as a matter of public policy to hold directors and managers responsible for

serving the interests of shareholders.3 Instead, they argued, directors and managers

should be required to manage corporations in the public interest.4

During the years of World War II, and the post-War expansion, the interests of

the corporate sector seemed to be very much aligned with the interests of the country.5 Thus business leaders could credibly proclaim that ‘‘what is good for the counVerDate 11-MAY-2000 19:05 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00204 Fmt 6601 Sfmt 6621 C:\WORKD\I&O08\052208\42371 SCIENCE1 PsN: SCIENCE1
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very good, as a whole, [producing] rising prosperity and standards of living.’’ Dow Votaw, Modern Corporations, 1965, p. 102. 6 Attributed to Charles E. Wilson, who was president of General Motors Corporation in the

early post-War years, and later became Secretary of Defense. See The New Dictionary of Cultural Literacy, Third Edition. Edited by E.D. Hirsch, Jr., Joseph F. Kett, and James Trefil.

Copyright  2002 by Houghton Mifflin Company. Published by Houghton Mifflin Company, at

http://www.bartleby.com/59/18/whatsgoodfo2.html 7 In 1946, Frank Abrams, then chairman of Standard Oil Company of New Jersey, described

the role of modern managers as maintaining ‘‘an equitable and working balance among the

claims of the various directly interested groups—stockholders, employees, customers, and the

public at large.’’ See Eugene V. Rostow, To Whom and for What ends is Corporate Management

Responsible? in The Corporation and Modern Society, edited by Edward S. Mason, 47–71, 1960.

In the 1970s, General Electric C.E.O. Reginald Jones similarly argued that corporate leaders

must balance shareholder concerns against the interests of employees, American industry, and

the Nation. The Business Roundtable formally adopted a similar position in 1981. And as late

as 1990, the Business Roundtable position was that ‘‘Corporations are chartered to serve both

their shareholders and society as a whole.’’ See Corporate Governance and American Competitiveness, Business Roundtable, March, 1990, p. 4. The Business Roundtable reversed its position

in 2004, however, asserting that the only obligation of business leaders is to maximize shareholder wealth. 8See, e.g., Michael C. Jensen and William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,’’ 3 Journal of Financial Economics (October)

1976. 9See, e.g., Henry G. Manne, Mergers and the Market for Corporate Control, 73 Journal of

Political Economy, 1965, and Michael C. Jensen, Agency costs of Free Cash Flow, Corporate Finance, and Takeovers, 76 American Economic Review, May, 1986. 10 E.F. Fama, Efficient Capital Markets: A Review of Theory and Empirical Work, 25 Journal

of Finance, May, 1970.

try is good for General Motors,’’ 6 and courts did not worry much about whether corporate officers and directors who took into account the public good in their corporate

decision-making would thereby breach their fiduciary duties to shareholders.7

This view of the duties of officers and directors of corporations changed during

the late 1980s and 1990s. The change was the product of a new set of theories in

economics and finance, in combination with dramatic changes in how financial markets work.

On the theory side, three developments were important:

First, economists began developing alternative theories about whether corporations would, in practice, always maximize profits (as basic economic theory generally

assumes). If managers were not themselves substantial shareholders, theorists speculated, and if there were no controlling or dominant shareholders, then managers

might tend to act in their own personal interests rather than in the best interest

of the corporation or its shareholders, economists argued. This was seen as a policy

problem as well as a problem with economic theory. To address this problem, economists developed ‘‘agency theory.’’ Agency theory recognizes that a gap often exists

between what shareholders would want and what managers might want, and it argues that corporate participants will develop a variety of contracting strategies that

could be deployed to give managers incentives to act in shareholders’ interest. Agency theory analyzes the effectiveness of various contract terms at resolving the ‘‘agency problem’’ or at least trying to minimize its costs.8

One of the most important theories to come out of the focus on agency problems

is the idea that, if managers of a corporation do not choose actions that maximize

share value, other investors will be able to acquire the shares of the company at

a price that is discounted relative to the corporation’s potential value, and in this

way, get control of the corporation and fire those ineffective managers. Thus theorists believed that a market mechanism, the so-called ‘‘market for corporate control,’’

would limit the ability of managers to diverge from share value maximization.9

Second, finance scholars came to believe in the ‘‘Efficient Capital Markets Hypothesis,’’ which states that security prices in widely-traded markets, such as stock markets in the U.S., will quickly reflect all available information that might be relevant

to the future performance of the company that issued the security. Prices determined in such markets will be an unbiased estimate of the true value of the security, according to the theory.10 The beauty of this theory, from the point of view of

academic economists and finance scholars, is that it implies that the financial performance of any company with publicly-traded shares can be measured quite easily

and without systematic error simply by looking at what happens to the share price

of the company’s stock.

Furthermore, with a few ‘‘modest’’ assumptions (and this was the dangerous part),

changes in stock prices could be interpreted as measuring the entire economic performance of corporations. The assumptions required are that all participants in the

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11See F. Black and M. Scholes, The Pricing of Options and Corporate Liabilities, 81 Journal

of Political Economy, May–June, 1973. 12The full reality was more complicated. As mentioned before, the return on capital in the

aggregate economy was dismal during the 1970s, so that investors had become restless and prepared to pursue new strategies to try to improve returns. Then in the early 1980s, the ‘‘cost’’

of capital (as measured by market rates of interest for bonds issued during that period) shot

up to unprecedented levels, as Federal Reserve Board Chairman Paul Volcker promulgated policies to try to squeeze inflation out of the economy. During the period from about 1983 to about

enterprise of a corporation except shareholders (lenders, suppliers, employees, etc.)

are compensated at their (risk-adjusted) opportunity cost by complete contracts, so

that all of the surplus economic value created by the corporation is captured by

shareholders. Under efficient capital markets theory, and with these assumptions,

stock prices came to be viewed as the single most important measure of total corporate performance—in fact, some scholars came to treat stock prices as essentially

the only meaningful measure of corporate value.

The third theoretical innovation that helped lay the intellectual foundation for

shareholder primacy is the development of mathematical models for estimating the

value of stock ‘‘options.’’ 11 The role of option pricing models is more subtle and complex, however, so I save the discussion of why it was important for later, when I

explain why stock options became important.

On the financial markets’ side, several developments helped change the general

public perception and belief about the responsibilities of corporate officers and directors:

First, securities markets went through an extended period of time in the 1970s

and early 1980s when returns on capital were abysmally low. As an indicator of

this, from a peak of 1051.7 in 1973, the Dow Jones Industrial Average collapsed to

577.60 at the end of 1974, and did not rise above 1000 (to stay above that level)

until early 1983. Bond markets also performed poorly during this period as inflation

ate away at the real return to bond holders, and drove nominal interest rates to

record highs by the early 1980s. By the 1980s, financial investors were willing and

eager to try new things in order to improve the return on capital.

Second, several financial market innovations emerged in the 1980s that made it

easier for outside investors to get control of publicly-traded corporations, to force

changes in the management of these firms in order to improve returns on investments. The innovations were junk bonds, hostile takeovers, and leveraged buyouts.

Investment banking firm Drexel Burnham Lambert demonstrated how investors

could make outsized profits (seemingly without corresponding risks) by investing in

portfolios of bonds that were rated below investment grade (Such bonds are called

‘‘junk bonds.’’). This created a substantial market for junk bonds, and made it possible for Drexel to underwrite the issuance of junk bonds by a new breed of market

players who were willing make ‘‘tender offers’’ for corporations, even if existing management and boards of directors at those corporations believed that a takeover

would not be in the best interests of the corporation and its various stakeholders.

Tender offers made in the face of opposition by target company management are

called ‘‘hostile takeovers.’’ The outside investors who were making these junk-bond

financed offers, pejoratively called ‘‘corporate raiders,’’ were then able to buy up a

sufficient quantity of shares in a number of companies to get control and oust directors and managers who did not want to go along with the plans of the takeover investor. These transactions (called ‘‘leveraged buyouts’’ because they were financed

with large amounts of debt and relatively small amounts of equity) seemingly confirmed the new economic theories that predicted that if corporate managers did not

maximize share value, other investors would come along and take over the firm to

force the firm to maximize share value.

Thus the ‘‘market for corporate control’’ theory provided legitimacy to the ‘‘raiders’’ to the extent that what they were doing appeared to be consistent with what

theorists had predicted, and the theory seemed to provide an explanation for why

so many takeovers and leveraged buyouts were happening in the 1980s. Although

most corporate directors and managers strongly resisted takeovers during the 1980s,

over the course of that decade, the argument was repeatedly made that takeovers

were the market’s way of eliminating poorly performing managers and compelling

corporations to restructure and redeploy assets to improve the return for shareholders. And because of the rarely-acknowledged or examined assumption behind

the market for corporate control theory—that other corporate participants were fully

protected by their contracts with the corporations—defenders of hostile takeovers

argued that actions such as factory closings, layoffs, and asset sales that accompanied LBOs and led to higher share prices must be value-creating, and should be

encouraged rather than inhibited by the law.12

197

1987, the aggregate cost of capital in the U.S. economy exceeded the aggregate return on capital,

creating an environment in which it did not make economic sense for most firms in many industries to make further investments in new capital. Leveraged buyouts, of course, did not represent new investment by the buyout firms, since buyers were simply buying out the position

of the previous shareholders, who could then redeploy their cash to other investments, such as

government bonds, which were paying extraordinarily high rates at the time. Leveraged

buyouts, thus, had the effect of preventing net new investment in the buyout firms, because

after the buyout, all cash flows had to be used to pay down the debt, rather than to make new

investments. The financial markets rewarded firms that restructured in this way because it

freed up cash from corporate investment that could then be available to support the huge and

growing federal budget deficits accumulated during the 1980s . Thus leveraged buyouts can be

understood as a mechanism by which the financial markets forced the corporate sector in the

U.S. to disinvest in the 1980s and 1990s. See Margaret M. Blair, ‘‘Financial Restructuring and

the Debate about Corporate Governance,’’ in Margaret M. Blair, ed., The Deal Decade: What

Takeovers and Leveraged Buyouts Mean for Corporate Governance, Brookings, 1993. 13See e.g., Blair, The Deal Decade, at 41 for the story of Campeau Corp.’s leveraged buyout

of Federated Department Stores in 1988,and subsequent bankruptcy filing by Campeau in early

1990. 14See, e.g., Bryan Burrough and John Helyar, Barbarians at the Gate, 1990, for a description

of the excesses at R. J. Reynolds prior to its leveraged buyout by Kohlberg, Kravis, and Roberts,

in 1988. 15One might imagine that, in a well-functioning market for executive services, cash compensation would be reduced by a substantial amount to offset the value of the grant of stock options

to executives. But one would be wrong about that. Studies have repeatedly shown that stock

option compensation awards seem to come on top of salary and bonus payments in cash.

Raiders and their fellow investors who were financing hostile takeovers in the

early 1980s made very high returns on their investments. By the late 1980s, however, it became clear that too many deals were being done, and that some firms

could not handle the high levels of debt they were taking on. A number of prominent

firms that had been taken over in leveraged buyouts had to be reorganized or liquidated in bankruptcy proceedings.13 Meanwhile, the return on capital climbed

steadily during the 1980s, and by the late 1980s and early 1990s, and the cost of

capital began falling again, suggesting that the underlying macroeconomic rationale

that had fueled the takeover frenzy had largely worked itself out. Moreover, a number of states passed statutes in the late 1980s that made it easier for corporate

managers to resist hostile takeovers. So by the early 1990s, we saw that the wave

of takeover and leveraged buyout activity declined.

This did not seem to undermine the success of the new theory, however. Excesses

of the old regime, in which corporate executives (who were more likely to see it as

their role to grow the corporation rather than enhance share value) often engaged

in wasteful empire building and indulged their desire to enjoy fancy offices and corporate jets in the absence of restraint by shareholders, had been exposed as epic

takeover battles were fought.14 And the seeds of the idea had been planted that corporate executives could provide substantially higher returns to shareholders if they

were willing to abandon commitments their firms had made to employees, communities, and to long-term investments in basic research.

Thus, by the early 1990s, the culture inside the boardrooms had begun to change.

Economists and finance scholars who bought in to the shareholder primacy perspective were telling directors that they should not believe that managers had intrinsic

motives to do what was best for the companies, let alone to maximize share value.

Rather, directors should monitor managers closely, and compensate them in ways

that would give them large financial incentives to focus on share value. The most

common way to do this was to grant large blocks of stock options to the executives.15

The rise to prominence in recent decades of stock option-based compensation,

then, can be seen as the third development in financial markets that has encouraged widespread acceptance of the idea that it is the job of corporate directors to

focus on improving share price. Stock option compensation is attractive to both the

managers and the directors of corporations, relative to compensation in cash or even

stock itself, because it provides substantial tax benefits to the corporation and to

the executives receiving the options. If the strike price of a stock option is the same

as the trading price of the stock on the day the option is granted to an executive,

the company treats the grant as if it has zero cost to the company for accounting

purposes. This means the company can record higher net profit than it actually

earned because some true costs are not accounted for.

Moreover, if an executive receives stock options as compensation, the executive

does not have to declare the option grant as income for personal income tax purposes at the time of the grant. As far as the IRS is concerned, the executive does

not get the compensation until he exercises the options. At that point, the executive

is credited with receiving income equal to the difference between the stock price in

the market, and the exercise price which the executive pays to buy the stock. And

198

16See Steven H. Gifis, Barron’s Law Dictionary, Third Ed., 1991, p. 380. 17 1 Blackstone, Commentaries on the Laws of England 134 (1765).

the company then takes a charge against earnings (and corresponding tax deduction) for the cost equivalent to what the executive records as income.

During the 1980s, corporate directors and managers came to appreciate the fact

that they could get extremely rich very quickly if their compensation packages included substantial blocks of stock options. And at the same time, the development

of sophisticated models that could be used to estimate the value of options made

the options seem less exotic and easier to understand. By the early 1990s, most corporate executives received more value in stock options each year than they did in

cash compensation. This trend was given even more impetus by the boom in tech

companies and dot.com companies of the 1990s, because such firms were typically

low on cash, and high on promise, and thus often paid their executives very little

in actual cash, but huge numbers of stock options.

Stock option compensation gives corporate executives exaggerated incentives to

focus on stock prices, often over a relatively short period of time, rather than on

other measures of corporate performance. This is because stock options are a ‘‘heads

I win—tails you lose’’ proposition for corporate executives who receive them. If the

market price of the underlying stock goes up, holders of stock options can get huge

rewards, while if the price of the underlying stock goes down, option holders do not

suffer corresponding losses. Thus stock options give corporate executives incentives

to cause the company to choose highly risky strategies that may lose value on average, but that have a small chance at winning big. The executive will share in the

winnings but not in the losses.

The net effect of these developments—low returns to capital in the ’70s, the introduction of junk bond financing, hostile takeovers, and leveraged buyouts as mechanisms for squeezing higher returns for shareholders out of corporations in the 1980s,

and the acceptance of stock option-based compensation packages for corporate executives—have made ‘‘shareholder primacy’’ attractive for corporate executives as

well as for shareholders. Meanwhile, agency theory, the Efficient Capital Markets

Hypthesis and options pricing models, have provided a gloss of intellectual respectability to shareholder primacy. Although corporate law in the U.S. has never required managers and directors to maximize share value, the restructuring of compensation schemes and the revision of corporate norms that has taken place over

the last two decades means that it is now in the interest of most managers, executives, and directors, as well as of shareholders, to do so.

Q2. Can the holder of shares in a corporation be regarded legally as an owner of

that corporation? If not, what differentiates a shareholder from an ‘‘owner’’ in

the normal legal sense of the term?

A2. Although it is common practice in the media and even in occasional scholarly

article or court cases to refer the shareholders as the ‘‘owners’’ of corporations, the

structure and rules of the relationship between shareholders and the corporations

whose shares they hold make it clear that, while shareholders own their ‘‘shares,’’

they do not ‘‘own’’ the corporation itself.

Property, according to Barron’s Law Dictionary, ‘‘describes one’s exclusive right to

possess, use, and dispose of a thing, . . . as well as the object, benefit, or prerogative which constitutes the subject matter of that right.’’ 16 William Blackstone, in his

1765 treatise, stated that property ‘‘consists in the free use, enjoyment and disposal

of all . . . acquisitions, without any control or diminution, save only by the laws

of the land.’’ 17 Property is also widely understood to convey responsibilities as well

as rights with respect to the owned asset. Property owners can be held personally

liable for damage to others caused by the misuse or neglect of their property.

Clearly, none of these characteristics apply to shareholders’ role in corporations.

Shareholders may not take possession of the assets of a corporation, or manipulate

its machinery for their own personal benefit, especially if there are other shareholders. And by virtue of the doctrine of ‘‘limited liability,’’ shareholders are generally not held personally liable for corporate debts, or for actions of the corporation

that cause harm to others. Instead, the law creates a separate legal person when

a corporation is formed, and that legal person is the owner of all corporate assets

as well as the party that is held legally responsible for corporate liabilities and for

harm caused by the improper use of corporate assets. Corporate officers and directors are charged with making decisions for the corporation, but since they are fiduciaries, they may not treat the assets of the corporation as their own personal assets.

Even where there is a sole proprietor who creates a corporation for carrying out

his business activities, the corporate form is generally employed precisely because

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18See Frank H. Easterbrook and Daniel R. Fischel, The Economic Structure of Corporate Law,

Harvard University Press, 1991, pp.———. 19Model Business Corporation Act, §8.01(b). State statutes generally follow this language or

other language to the same effect. 20See Margaret M. Blair, Ownership and Control: Rethinking Corporate Governance for the

Twenty-first Century, Brookings, 1995, p. 239.

it protects the proprietor from personal responsibility for the debts and liabilities

of the business. Just as in a corporation with multiple shareholders, the sole shareholder in a private corporation may not appropriate the assets of the corporation

for his personal use, or intermingle the corporate assets with his personal assets,

or he may lose the protective benefit of limited liability.

Ironically, some of the strongest shareholder primacy advocates concede this

point. In their classic book, The Economic Structure of Corporate Law, authors

Frank Easterbrook and Daniel Fischel argue that a corporation is a ‘‘nexus of contracts,’’ not a thing that can be owned.18 It is a legal mechanism that facilitates contracting among the suppliers of capital and the managers and directors. Easterbrook

and Fischel nonetheless argue that the corporation should be run for the benefit of

shareholders because, they argue, shareholders are the ‘‘residual claimants’’ to proceeds of the enterprise.

Shareholders are legal owners of the equity shares that they hold. They are entitled to the full set of rights and benefits that go along with ownership of the

shares—they can receive dividends if paid, they can sell their stock, or borrow

against it, or pass it to heirs. But it is a great distortion of the words ‘‘property’’

and ‘‘ownership’’ to argue that shareholders are the ‘‘owners’’ of the corporations

themselves.

Q3. If corporate officers and directors are not required by law to maximize share

value, what are their duties, and what should they try to do? And what constraints or incentives are available to make sure they do these things?

A3. Corporate law statutes provide that ‘‘all corporate powers shall be exercised by

or under the authority of the board of directors of the corporation, and the business

and affairs of the corporation shall be managed by or under the direction, and subject to the oversight, of its board of directors.’’ 19 Beyond this, neither the statutes

nor case law prescribe how directors and managers should go about their duties, except to make it clear that the they are in a fiduciary role with respect to the corporation, and must not appropriate its assets for their own personal benefit to the

detriment of the corporation.

I have argued elsewhere that, in an ideal world, directors and managers ‘‘should

understand their jobs to be maximizing the total wealth-creating potential of the enterprises they direct. In doing this, they must consider the effect of important corporate decisions on all of the company’s stakeholders. For this purpose, stakeholders

should be defined as all parties who have contributed inputs to the enterprise and

who, as a result, have at risk investments that are highly specialized to the enterprise. Those parties inevitably share in the residual risk of the firm. The law and

culture of the boardroom should support this broader view of the role of management and directors.’’ 20

This is, of course, much easier said than done. In practice, there are many reasons

why corporate officers and directors might nonetheless try to manage the firm in

a way that maximizes total wealth creation, even though it is difficult and often requires balancing competing interests. These range from financial benefit to themselves, to personal satisfaction, concern about their reputations, and social pressures. In the past two decades, however, the financial, reputational, and social pressures have all shifted so that they now generally encourage managers and directors

to focus on share value to the exclusion of, and sometimes at the expense of, total

value creation.

Can these sources of pressure be shifted back so that they push corporate officers

and directors to try to maximize the total value created by corporations, instead of

just the value that can be extracted by shareholders? That, it seems to me, is the

major policy question at stake in this debate, and I don’t know the answer. But it

seems possible that a combination of changes in tax incentives, and changes in certain social and reputational factors might help. The following are a few suggestions

along these lines:

• The tax system should not make it more attractive to use stock options in

compensation packages rather than direct stock ownership.

• Tax benefits might instead be used to encourage corporate managers and directors to be compensated in restricted stock, with holding periods of at least

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21Lucian Bebchuk has argued, for example, that shareholders should have the power to initiate and approve distributions to shareholders in cash or in other corporate assets, and to distribute new debt securities to shareholders (to compel managers to pay out cash flow rather

than reinvest it), to initiate mergers and/or consolidations with other companies, to initiate a

sale of all of the assets of the company to a particular buyer, or to initiate dissolution of the

company. See Lucian Arye Bebchuk, The Case for Increasing Shareholders Power, 118 Harvard

Law Review, 3, 2005. These are all matters that under current corporate law are reserved to

corporate directors. In prior work I have argued that any or all of the above changes in the

law would be misguided. See Margaret M. Blair, Reforming Corporate Governance: What History Can Teach Us, 1 Berkeley Business Law Review, 1, 1 (2004).

five to ten years. If officers and directors are rewarded for share price performance over long periods of time, rather than over a few months or quarters, this should encourage them to pay attention to the long run implications

of their actions and decisions on all of the parties whose investments and effort contribute to the long run viability and profitability of the corporation.

• Shareholder primacy rhetoric should be continuously challenged, on the

grounds that the law does not, in fact, require shareholder primacy, and that

what is best for shareholders at any point in time is not necessarily what is

best for the U.S. economy or for society at large.

• Changes in corporate or securities laws that would enhance shareholders’

ability to pressure or compel corporations to accept takeover offers, or pay

dividends, or take other actions that would benefit shareholders at the expense of the long run health of the corporation, should be avoided and even

repudiated.21

The above changes might alter the cultural and financial pressures on officers and

directors to some degree, but even if all were to happen, they would be unlikely to

alter the massive economic pressures that are driving U.S. corporations to move

their important investment and job-creating activities overseas. Addressing these

pressures will require changes in tax and trade policy that are beyond the scope of

this testimony.

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ANSWERS TO POST-HEARING QUESTIONS

Responses by Bruce R. Scott, Paul Whiton Cherington Professor of Business Administration, Harvard Business School

Questions submitted by Chairman Brad Miller

Q1. In your written testimony, you call ‘‘one of the great risks of capitalism’’ the fact

that ‘‘powerful people can use the system to appropriate common resources from

their neighbors, all in the name of greater efficiency through privatization.’’ Is

it easier for the powerful to ‘‘use the system to appropriate common resources

from their neighbors’’ under capitalism than under other economic systems, or

more likely for any other reason that they will do so? As a corollary, is such behavior easier or more likely under certain forms of capitalism than under others?

A1. We think of our economy as one based on private property, and private enterprise in particular. While true, our economy relies on public resources as well, both

natural resources and public goods such as an educational system, public health and

the entire regulatory system that protects our resources. Often we fail to recognize

that these public resources are exposed to capture and or abuse by economic actors,

as for example when private actors pollute the water, the air, or the appearance of

an area, a situation called creating negative externalities, meaning that the polluter

can get away without being charged for the transgressions. Some degree of negative

externalities is almost inevitable, but it is the job of the regulators to hold this type

of behavior in check, for example through monitoring by the EPA or the Department

of the Interior, etc.

However, a version of capitalism premised on extreme deregulation, or still worse

self regulation, creates a culture not only of contempt for the protection of public

resources it invites business interests to corrupt the regulators and the extreme to

try to privatize government through taking it over piece meal. Whole services such

as logistics support for the military in Iraq have been privatized, as have others in

the U.S. If this much is obvious it may not be so obvious that much the same can

be done for the market frameworks more broadly. Lobbying can transfer revenues

from the IRS and thus the taxpayers to the firms through the creation of subsidies

or less visible loopholes. Similar transfers can be effected from consumers or employees to business interests, all in the spirit of enjoying a free for all at public expense. Our news papers carry such stories day by day and week by week.

Rising inequalities of income are a sign that the market frameworks are being

tilted in favor of the rich, as they have been in this country since 1981. The U.S.

now has the most unequal incomes among industrial countries as a result of just

such tilting of its market frameworks. One of the most egregious examples was the

business lobbying that prevented the FASB and the SEC from requiring the expensing of stock options as a business expense. About 75 percent of CEO pay in large

firms has been in the form of payments such as options that did not have to be reported or recorded as expenses. This created a totally phony market of extraordinary CEO pay that was ‘‘free’’ for the company so far as its profit and loss accounts were concerned.

Q2. Recalling that U.S. states were once able to ‘‘ask for something in return’’ for

granting a corporate charter, in your written testimony you advocate establishing ‘‘a mandatory standard of stakeholder welfare,’’ which you say ‘‘would

put U.S. firms more nearly in step with some of the major European countries.’’

What is a ‘‘mandatory standard of stakeholder welfare’’? How does it work in

countries where it is in existence, and what form might it take in the United

States?

A2. The U.S. is in a small minority of countries where firms may view their primary mission of the firm as the maximization of shareholder value. Since in practice

this translates into maximizing the likelihood of regular stock price increases this

tends to induce corporate cultures of management by the numbers, where the importance of relationships with customers, employees and communities is devalued.

It also produces a tendency to continuously take risks to boost share price, even to

the point of ‘‘overvaluing the stock’’ to achieve numerical targets. Over-valuation in

turn increases the temptation to fudge the accounts in subsequent periods to maintain performance, as was obvious in the Enron situation among others.

Q3. You testified that the growth of economic inequality that began in the United

States during the decade of the 1980s has not been in evidence in at least some

European countries. Can you comment on the implications of the degree of ecoVerDate 11-MAY-2000 19:05 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00211 Fmt 6601 Sfmt 6621 C:\WORKD\I&O08\052208\42371 SCIENCE1 PsN: SCIENCE1
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nomic equality or inequality for the health of a national economy, its prospects

for growth, and the general health of the society?

A3. Most countries have a single authority that charters firms, and historically

these authorities have demanded that the firm be managed for the long-term health

of the firm, with due care for its employees, customers, suppliers and affected communities. With that commitment built into the charter a firm can be held to much

higher standards of sensitivity for its actions, and by government as well as shareholders. Since most firms in the U.S. have been chartered by the individual states,

there has long been a race to the bottom to compete for chartering fees and other

revenues by having minimal requirements for a charter. As Theodore Roosevelt

pointed out a century ago, the U.S. needs a chartering authority whose reach is as

extensive as the market, and whose power exceeds that of even a very large firm.

We are an exception in allowing out continental market to be exploited as an underregulated common resource of incredible value. A federal charter or license could

change this, by mandating a broader sense of corporate purpose.

(203)

Appendix 2:

ADDITIONAL MATERIAL FOR THE RECORD

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217

AMERICAN DECLINE OR RENEWAL? PART 2—

THE PAST AND FUTURE OF SKILLED WORK

TUESDAY, JUNE 24, 2008

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON INVESTIGATIONS AND OVERSIGHT,

COMMITTEE ON SCIENCE AND TECHNOLOGY,

Washington, DC.

The Subcommittee met, pursuant to call, at 1:07 p.m., in Room

2318 of the Rayburn House Office Building, Hon. Brad Miller

[Chairman of the Subcommittee] presiding.

218

219

HEARING CHARTER

SUBCOMMITTEE ON INVESTIGATIONS AND OVERSIGHT

COMMITTEE ON SCIENCE AND TECHNOLOGY

U.S. HOUSE OF REPRESENTATIVES

American Decline or Renewal? Part 2—The Past

and Future of Skilled Work

TUESDAY, JUNE 24, 2008

1:00 P.M.–4:00 P.M.

2318 RAYBURN HOUSE OFFICE BUILDING

Purpose

This hearing will focus on how the United States can maintain and expand highskilled, high-paying jobs here at home. To examine this question, which is central

to the Nation’s competitiveness in a globalized economy, the hearing will survey the

efficacy of past and current efforts to aid dislocated workers and communities. Manufacturing, the traditional engine of value-added production in our economy, has

been deeply affected by globalization, and service industries—even those relying on

highly trained personnel—are coming under increasing pressure from foreign competitors.

The hearing will also assess the structure of international trade in order to predict how well domestic efforts at retraining and reinvestment can be expected to

succeed in the future. For the health of the national economy, and the scientific and

technological enterprises dependent on it, we must learn what our workers and communities need. The goal must be, as the former Chair of the Council of Economic

Advisers, Laura D’Andrea Tyson, put it, ‘‘to produce goods and services that meet

the test of international competition while our citizens enjoy a standard of living

that is both rising and sustainable.’’

The Committee on Science and Technology has jurisdiction that directly relates

to the competitiveness of the United States through our authorization of programs

that directly contribute to innovation. The Committee has a specific interest in the

health of the Nation’s manufacturing industries through its connection to the National Institute of Standards and Technology, whose budget it authorizes. In addition, the Committee annually authorizes the expenditure of billions of dollars to

support scientific research and the training of the next generation of scientists and

engineers, and has taken steps to support retraining of workers for high tech employment opportunities.

This hearing has been designed to help the Committee in identifying measures

that might increase the likelihood of high-value-added activities remaining, increasing, and succeeding within U.S. borders. By so doing, it will contribute to the future

health of America’s economy and the future prosperity of its citizens.

The hearing will take testimony on the impact on workers and communities when

jobs move abroad; problems with the current program of Trade Adjustment Assistance in supporting workers whose jobs have been sent off-shore; successes of using

community colleges, working with local businesses, to retrain displaced workers; the

need for rethinking the supports and our approach to global trade if high-paying

employment and a good standard of living are key economic policy goals for the

country.

Witnesses:

Dr. John Russo is the coordinator of the Labor Studies Program at the Warren

G. Williamson School of Business Administration of Youngstown State University

in Ohio, and the founder and Co-Director of Youngstown State’s Center for WorkingClass Studies. He is co-author with Sherry Linkon of Steeltown, USA: Work and

Memory in Youngstown.

Mr. Frank H. Morgan is an attorney at the Washington, DC, firm of White & Case

LLP. He has pled before the International Court of Trade in New York City on behalf of workers whose petitions for Trade Adjustment Assistance have been denied

by the U.S. Department of Labor.

220

Mr. Howard F. Rosen is the founder and Executive Director of the Trade Adjustment Assistance Coalition and a visiting fellow at the Peterson Institute for International Economics in Washington, DC. He is a leading expert on and advocate for

programs designed to aid dislocated workers.

Ms. Jeanie Moore is Vice President for Continuing Education Programs at RowanCabarrus Community College in Salisbury, NC. Her work on the effort to revive

Kannapolis, NC, has been recognized by the U.S. Department of Labor, which in

2005 presented her with its Workforce Innovations Award for ‘‘Serving Special Populations in the Workplace.’’

Dr. Thomas I. Palley is the founder of the Economics for Democratic & Open Societies Project in Washington, DC. He earlier served as the chief economist of the

U.S.-China Economic and Security Review Commission and as Director of the Open

Society Institute’s Globalization Reform Project.

Ms. Diana Furchtgott-Roth is a senior fellow at the Hudson Institute in Washington, DC. She earlier served at chief economist of the U.S. Department of Labor

and as Chief of Staff of the President’s Council of Economic Advisers. She writes

a weekly column for the New York Sun.

221

Chairman MILLER. Good afternoon. This hearing will now come

to order.

A casual examination of the usual measures of economic confidence among working families, the unemployment and inflation

rates shows that everything is just fine. The current unemployment

rate of 5.5 percent and the inflation rate of 4.2 percent are a far

cry from the June, 1980, 7.6 percent unemployment and 14.4 percent inflation. But a closer look presents a very different picture for

working Americans. Consumer confidence last month came in at its

lowest levels since June of 1980. Only 13 percent of Americans rate

the national economy positively, and 74 percent say it is getting

worse according to a national poll released just a week ago.

Over the last generation economic conditions have fundamentally

changed for American families, and simple comparisons of unemployment and inflation rates fail to capture those changes. Today

American households carry debt that is equal to 132 percent of

their disposable annual income, nearly twice the average debt load

of 68 percent in 1980. For the past four years Americans have

spent the equivalent of every penny they have earned, including

what they have earned for retirement. In 1980, they were saving

at a rate of 10 percent; the employment rate may be lower now,

but the consequences of joblessness are likely to be dire for most

Americans.

Still, an illusion of well-being persists in the minds of those who

cling to the usual or traditional ways of looking at things. This mirage really obscures the profound changes in the American economy and keeps us from taking a hard look at the realities that so

many of our families and communities face.

Now, here is another statistic that would provide comfort from

a traditional economic viewpoint. American manufacturing productivity rose 3.6 percent in the first quarter of 2008. If that is true,

why are Americans so worried? Here is why. Manufacturing output

actually dropped during the same period. American workers’ hours

dropped even more. Productivity is manufacturing output divided

by the number of hours worked. That apparent positive for the

economy is, therefore, only statistical. In reality both output and

workers’ hours are down. When output and employment are rising,

a productivity gain shows a robust economy, but in today’s economy

it masks the fact that we are producing less of what we need and

taking home less for doing it.

It is obvious that we must go beyond the traditional analysis if

we are to form an accurate picture of what is happening to Americans. We need to ask what changes in the last 30 years have

skewed the results of familiar economic formulas. We need to ask

what is behind those changes. Finally, we need to understand what

we do know, whether it is scientific, technological, or educational,

can be applied effectively to assure that our citizens and our communities can look forward to a secure and prosperous future in this

globalized economy.

This hearing presents a second step along that path. On May 22

this subcommittee heard suggestions offered from a variety of perspectives on how to structure incentives so that American firms

will maintain and expand at home in America. Today we will hear

about what has happened when we failed at this in the past and

222

about the effectiveness of our efforts to aid the recovery of those

individuals and communities who have directly paid the price.

We are fortunate to have with us witnesses who speak from a

wide variety of experiences. Dr. John Russo is an academic who

has lived through and studied one of the leading episodes of de-industrialization in America, that affecting Youngstown, Ohio.

Frank Morgan is an attorney who has represented displaced

workers whose applications for Trade Adjustment Assistance, or

TAA, have been denied by the Labor Department.

Howard Rosen is one of the leading advocates for the TAA, who

will report on the program’s shortcomings and put forward a national strategy for dealing with economic dislocation.

Jeanie Moore, a community college official, has played a leading

role in one of the most striking community turnarounds in the

country, that of Kannapolis, North Carolina.

Thomas Palley is not with us yet, but we assume he will be here

in a short while. He is an economist who has long studied

globalization and will assess our options for shaping its influence

and addressing its effect.

And, finally, Ms. Diana Furchtgott-Roth, a senior fellow at the

Hudson Institute in Washington. She earlier served as chief economist to the U.S. Department of Labor and as Chief of Staff of the

President’s Council of Economic Advisors.

This is obviously a complex topic. At our last hearing we heard

completely contradictory viewpoints. Coming to grips with what it

will involve is a challenging proposition, but long-held assumptions

have to be examined and replaced sometimes with original thinking and novel ideas. But the difficulty of the task is no excuse for

shrinking from it.

And I now recognize the distinguished Ranking Member from

Wisconsin, Mr. Sensenbrenner.

[The prepared statement of Chairman Miller follows:]

PREPARED STATEMENT OF CHAIRMAN BRAD MILLER

A casual examination of the time-honored measures of economic confidence among

working families, the unemployment and inflation rates, shows that everything is

just fine. The current unemployment rate of 5.5 percent and inflation rate 4.2 percent, are a very far cry from June 1980’s 7.6 percent unemployment and 14.4 percent inflation. But a closer look presents a very different picture for working Americans. Consumer confidence last month came in at its lowest level since June 1980.

Only 13 percent of Americans rate the national economy positively, and 74 percent

say it’s getting worse, according to a national poll released just one week ago.

Over the last generation, economic conditions have fundamentally changed for

American families and simple comparisons of unemployment and inflation rates fail

to capture these changes. Today, U.S. households carry debt that is equal to 132

percent of their disposable annual income, nearly twice the average debt load of 68

percent in 1980. For the past four years, Americans have spent the equivalent of

every penny they’ve earned—including what they’ve earned for retirement. In 1980,

they were saving at a rate of 10 percent. The unemployment rate may be lower now,

but the consequences of joblessness are more likely to be dire.

Still, an illusion of well-being persists in the minds of those who cling to the traditional ways of looking at things. This mirage obscures the profound changes in the

American economy and keeps us from taking a hard look at the realities that so

many of our families and communities face.

Here’s another statistic that would provide comfort to traditional thinkers: U. S.

manufacturing productivity rose 3.6 percent in the first quarter of 2008. If this is

true, why are Americans so worried? Here’s why: Manufacturing output actually

dropped during this same period and, American workers’ hours dropped even more.

Productivity is manufacturing output divided by the number of hours worked. This

223

apparent positive for the economy is only statistical; in reality both output and

workers hours are down. When output and employment were rising, a productivity

gain signified a robust economy. In today’s climate, it masks the fact that we are

producing less of what we need, and taking home less for doing it.

It is obvious that we must go beyond conventional analysis if we are to form an

accurate picture of what is happening to our people and our nation today. We need

to ask what changes in the past 30 years have skewed the results of familiar economic formulas. We need to ask what is behind those changes. Finally we need to

understand how what we do know—whether its scientific, technological, or educational—can be applied effectively to ensure that our citizens and our communities

can look forward to a secure and prosperous future in this globalized economy.

This hearing represents a second step along that path. On May 22, this Subcommittee heard suggestions offered from a variety of perspectives on how to structure incentives so that U.S. firms will maintain and expand, at home in America.

Today, we will hear about what has happened when we have failed at this in the

past, and about the efficacy of our efforts to aid the recovery of those individuals

and communities who have directly paid the price.

We are fortunate to have with us witnesses who speak from widely varied experience:

• John Russo—an academic who has lived through, and studied, one of the

leading episodes of de-industrialization in America, that affecting Youngstown, Ohio;

• Frank Morgan—an attorney who has represented displaced workers whose

applications for Trade Adjustment Assistance, or TAA, have been denied by

the Labor Department;

• Howard Rosen—one of the leading advocates of TAA, who will report on the

program’s shortcomings and put forward a national strategy for dealing with

economic dislocation;

• Jeannie Moore—a community college official who has played a leading role

in one of the most striking community turnarounds in the country, that of

Kannapolis, North Carolina;

• Thomas Palley—an economist who has long studied globalization and will assess our options for shaping its influence and its addressing its effects; and

• Ms. Diana Furchtgott-Roth—a senior fellow at the Hudson Institute in Washington, DC. She earlier served at chief economist of the U.S. Department of

Labor and as chief of staff of the President’s Council of Economic Advisers.

This is a complex topic. Coming to grips with it will involve challenging received

wisdom and long-held assumptions and replacing them with original thinking and

novel ideas. But the difficulty of the task is no excuse for shrinking from it.

Now I recognize the distinguished Ranking Member from Wisconsin, Mr. Sensenbrenner.

Mr. SENSENBRENNER. Thank you very much, Mr. Chairman.

Today’s hearing is the Subcommittee’s second hearing on

globalization in a month. These hearings closely follow a series of

four hearings on the same topic in the Science and Technology

Committee. In addition to these hearings and over the vocal objections from the Minority, the Committee also hired an outside consultant and paid $20,000 for, ‘‘studies and advice,’’ on issues of

globalization.

In March, 2007, Chairman Gordon wrote Members of the Committee and asked that they support the consulting agreement. In

his letter he argued that the consultant, Dr. Ron Hira, had unique

knowledge and experience in this field that could not easily be duplicated by the Committee staff.

Without doubting Dr. Hira’s qualifications, the Minority questioned the need to hire him as a consultant. With numerous hearings planned, why not invite Dr. Hira to testify? And why did the

Committee have to enter into a costly consulting agreement when

experts routinely testify before Congress for free?

224

Those questions are renewed now that we have seen the Majority’s report. That report was due to the Committee by December 31,

2007. It was presumably delivered on time, but the Minority was

not given a copy until a few weeks ago when it was made publicly

available as a Committee print. This print has an official look to

it just like our hearing records and lists all of the Committee Members names on it, even though half of us never saw it before it was

released.

The report itself was 12 pages long and included five full pages

of background. This report which reportedly could not have been

accomplished by the Committee staff itself, is little more than a

summary of the Committee’s hearings on this topic.

I would like to enter this report into the record for taxpayers to decide if their $20,000 is well spent. I look forward to hearing from

today’s witnesses, who like most Congressional witnesses, have

generously agreed to appear today without charge. I must say that

I have a meeting in my office with a constituent at 1:30 which I

can’t break, but my staff will inform me of what each of the witnesses say, and if I can make it back, I will be happy to do so.

And I ask unanimous consent that this Committee print, which represents a waste of $20,000, be included in the record.

[The prepared statement of Mr. Sensenbrenner follows:]

PREPARED STATEMENT OF REPRESENTATIVE F. JAMES SENSENBRENNER JR.

Today’s hearing is the Subcommittee’s second hearing on globalization in a month.

These hearings closely follow a series of four hearings on the same topic in the

Science and Technology Committee. In addition to these hearings, and over vocal

objections from the Minority, the Committee also hired an outside consultant and

paid $20,000 for ‘‘studies and advice’’ on issues of globalization.

Last March, Chairman Gordon wrote to Members of the Committee and asked

that they support the consulting agreement. In his letter, he argued that, the consultant, Dr. Ron Hira, had ‘‘unique knowledge and experience in this field’’ that

could not ‘‘easily be duplicated by Committee staff.’’

Without doubting Dr. Hira’s qualifications, the Minority questioned the need to

hire him as a consultant. With numerous hearings planned, why not invite Dr. Hira

to testify? Why did the Committee have to enter into a costly consulting agreement

when experts routinely testify before Congress for free?

Those questions are renewed now that we have seen the Majority’s report. The

report was due to the Committee by December 31, 2007. It was presumably delivered on time, but the Minority was not given a copy until a few weeks ago, when

it was made publicly available as a ‘‘Committee Print.’’ The Print has an official look

and lists all the Committee’s Members—even though nearly half of us never saw

it before it was released.

The report itself is 12 pages long and includes five full pages of background. This

report, which reportedly could not have been accomplished by Committee staff, is

little more than a summary of the Committee’s hearings on this topic.

I would like to enter the report into the record for taxpayers to decide if their $20,000 were well spent. I look forward to hearing from today’s witnesses, who like

most Congressional witnesses, have generously agreed to testify without charge.

Chairman MILLER. Without objection the Committee print will be

entered into the record, not necessarily as a waste but as Mr. Sensenbrenner’s evidence. And I don’t know anything about it. This all

has to do with something done at the Committee level and not the

Subcommittee, but we will enter that print in the record.

[The information appears in Appendix: Additional Material for

the Record.]

Chairman MILLER. All additional opening statements by any

Member on any topic, germane or not germane, to this subcommittee’s work will be included in the record.

225

[The prepared statement of Chairman Gordon follows:]

PREPARED STATEMENT OF CHAIRMAN BART GORDON

I would like to thank Chairman Miller for holding this hearing on the very important topic of globalization. This hearing complements the work begun in the last session by the Technology and Innovation Subcommittee. Mr. Sensenbrenner referred

to a small portion of that work, and I would like to take a moment to discuss the

Committee consultant we hired in the first session.

Dr. Ron Hira was contracted to advise the Committee on the issue of outsourcing

and offshoring of high skilled jobs and research and development. His work resulted

in the Committee’s holding four hearings on the issue over a period of six months:

The Globalization of R&D and Innovation, Part I; The Globalization of R&D and

Innovation, Part II: The University Response; The Globalization of R&D and Innovation, Part III: How Do Companies Choose Where to Build R&D Facilities?; and, The

Globalization of R&D and Innovation, Part IV: Implications for the Science and Engineering Workforce. Those hearings were printed together in a hearing print entitled, ‘‘The Globalization of R&D and Innovation.’’ This print is 359 pages long.

After the series of hearings was completed, Dr. Hira worked with Committee staff

to compile a brief report containing policy recommendations based on the testimony

we received at the four hearings. This summary document is the 12 page report my

colleague from Wisconsin refers to.

Dr. Hira’s work with us over those many months, along with the work of our talented staff, produced excellent hearings on a very important topic to Americans everywhere.

I would again like to thank my friend from North Carolina for maintaining the

Committee’s focus on the issue of globalization. This is an issue that isn’t going

away, and the Committee will continue its work in this area.

[The prepared statement of Mr. Costello follows:]

PREPARED STATEMENT OF REPRESENTATIVE JERRY F. COSTELLO

Mr. Chairman, I would like to thank you for overseeing this hearing today and

for your leadership of this subcommittee. The Science Committee’s jurisdiction over

the competitiveness of America’s workforce is an especially important one as our

economy has suffered as U.S. jobs have been moved overseas and unemployment

rates continue to rise.

While the American economy remains relatively strong, the average American

worker’s wagers have stagnated, and most manufacturing workers that lose their

jobs make less in their next job.

This committee must ensure that Trade Adjustment Assistance, our primary program to combat the effects of fewer manufacturing jobs, is administered efficiently

and fairly in order to achieve its objectives.

We must focus our intentions towards the goal of rebuilding the American job

base. I believe part of the solution to the problem of declining competitiveness lies

in successfully training the American workforce to provide the skills needed to survive the demands of the 21st century economy.

I look forward to our testimony today, Mr. Chairman, and I would like to thank

our witnesses for taking to time to discus these important issues with the Subcommittee today.

[The prepared statement of Ms. Johnson follows:]

PREPARED STATEMENT OF REPRESENTATIVE EDDIE BERNICE JOHNSON

Thank you, Mr. Chairman. Globalization has in some ways been good for our nation, but for our manufacturing sector, it has been detrimental.

Today’s hearing is designed to assess the impact on workers and communities

when jobs move abroad.

Should the Federal Government provide Trade Adjustment Assistance to support

workers whose jobs have been sent offshore?

Globalization is changing the way Americans view the future of business in our

nation. Educational institutions question the jobs of the future, and how to go about

adequately preparing tomorrow’s worker to compete in a global workforce market.

We will determine the impact that community colleges have in working with local

businesses to retrain displaced workers, and how trends in retraining are changing

with time.

226

Mr. Chairman, I have always asserted that a good education is the root of future

success.

It is my desire for the students of today to obtain high-paying jobs that are fulfilling and that offer long-term financial security.

This forward-thinking committee is in a position to steer our research and education efforts in directions to keep us globally competitive.

I want to welcome our panel of distinguished witnesses.

Chairman MILLER. It is now my pleasure to introduce our witnesses.

First Dr. John Russo is Co-Director of the Center for WorkingClass Studies and Coordinator of the Labor Studies Program at the

Warren G. Williamson School of Business Administration at

Youngstown State University in Youngstown, Ohio.

Mr. Frank H. Morgan is an Attorney with the Washington Office

of the Law Firm White & Case.

Mr. Howard F. Rosen is the Executive Director of the Trade Adjustment Assistance Coalition and a visiting fellow at the Peterson

Institute for International Economics in Washington.

Ms. Jeanie Moore, who may be called upon to translate the

Chairman’s remarks to the rest of those here in the Committee

room, is the Vice President of Continuing Education Programs at

Rowan-Cabarrus Community College in Salisbury, North Carolina.

Dr. Palley, thank you for joining us. Dr. Thomas I. Palley is the

Founder of Economics for Democratic and Open Societies Project in

Washington.

And Ms. Diana Furchtgott-Roth is the Director of the Center for

Employment Policy and senior fellow at the Hudson Institute in

Washington.

Each of you will have five minutes for your oral testimony. Your

written testimony will be included in the record of the hearing.

When you complete your testimony, we will have questions. Each

Member will have five minutes to question the panel.

It is the practice of the Subcommittee to take testimony under

oath, although with this kind of hearing prosecutions for perjury

seem unlikely. Do any of you have an objection to being sworn in,

to taking an oath?

All right. The Committee also provides that you may be represented by counsel, although, again, this hearing makes that

somewhat less pertinent than some of our other hearings. Are any

of you represented by counsel today?

If you would now all please stand and raise your right hand. Do

you swear to tell the truth and nothing but the truth? Okay. The

witnesses the witnesses all took the oath, and Dr. Russo, would you

now begin?

STATEMENT OF DR. JOHN B. RUSSO, COORDINATOR, LABOR

STUDIES PROGRAM; CO-DIRECTOR, CENTER FOR WORKINGCLASS STUDIES, WILLIAMSON COLLEGE OF BUSINESS ADMINISTRATION, YOUNGSTOWN STATE UNIVERSITY, OHIO

Dr. RUSSO. My name is John Russo, and I am a Professor of

Labor Studies at the Warren P. Williamson Jr. College of Business

Administration and Co-Director of the Center for Working-Class

Studies at Youngstown State University. I am also the co-author

with Sherry Linkon of the book, Steeltown USA: Work and Memory

in Youngstown. I want to thank the House Committee on Science

227

and Technology for giving me this opportunity discuss my research

on de-industrialization and its impact on local communities such as

Youngstown, Ohio.

This spring I was interviewed by more than 20 journalists from

around the world on working-class voting patterns and on local and

State economic issues. The attention is not new. Every four years

reporters and candidates return to Youngstown to test conventional

wisdom about economic renewal and the political responses in the

face of de-industrialization. Since the 1980s, Youngstown has become the poster child for de-industrialization, losing 50,000 jobs in

steel and steel-related industries. This decade the Youngstown area

has continued to hemorrhage jobs, most recently because of the

downsizing of the automobile industry with Delphi and General

Motors. Since 2000, in fact, the State of Ohio has experienced the

worst job losses, reduced standards of living, and social disruptions

associated with unemployment since the Great Depression. But

what seems different this time is the reports seem to understand

what Sherry Linkon and I wrote in our book, Steeltown USA: the

Youngstown story of the 1980s has become Ohio’s and the America’s stories today.

De-industrialization undermines the social fabric of communities

and nation-states. The social costs of de-industrialization include

the loss of jobs, homes, and health care; reductions in tax base,

which lead in turn to reductions in necessary public services such

as police and fire; declines in non-profits and cultural resources, decaying local landscapes; and increases in crime, both immediately

and long-term; increase in suicide, drug and alcohol abuse, family

violence, and depression; and the loss of faith in institutions such

as government, business, unions, churches, and traditional political

organizations.

So job losses do not affect individuals only, although, it touches

many who having dedicated their lives and sometimes their health

to employers now feel betrayed and economically expendable. As

one steelworker suggested to me, ‘‘We are too old to work and too

young to die.’’

Rather, de-industrialization is a systemic problem that affects

the identity of whole families and communities and the Nation. Deindustrialization brings with it a great deal of cynicism and underlying discontent that may not be apparent to outsiders. Economic

cheerleading and bootstrap journalism that labels large-scale job

loss as ‘‘creative destruction’’ just reinforces a community’s identity

loss. When you lose your identity, other people define who you are,

and you get blamed for your own situation.

Nor can simple government interventions ameliorate the dramatic social costs of de-industrialization and offshoring. Attempts

to revitalize our area have largely failed. Many represent what we

might call the economics of desperation. Many displaced steelworkers in Youngstown in the 1980s got trained or retrained in refrigeration. There are no refrigeration jobs in Youngstown, Ohio.

Between 1992 and 2000, nine percent of the economic growth in

the area was the result of building prisons.

Youngstowners have begun to understand that the current economic thinking and political decision-making have often exacerbated these problems. For example, technologies developed with

228

public research dollars are being used to offshore jobs. Tax incentives to multi-nationals are being used to export jobs. In both cases,

public policy is contributing to putting hard-working Americans out

of work.

When challenged, many politicians and corporate leaders tender

platitudes about long-range economic adjustments and suggest that

displaced workers train for jobs that either don’t exist or will be

moved offshore in the next wave of economic change. Increasingly,

Americans understand that they are being sacrificed at the altar

of economic theory. They reject the argument that de-industrialization and offshoring are part of the natural economic order and that

job losses and declining wages are an inevitable part of

globalization.

Instead, they see themselves as victims of conscious decisions by

corporate leaders and government officials, and they are resentful.

No longer will they accept the short-term solutions and amelioration efforts. While important, such approaches are ultimately ineffectual. Americans are beginning to recognize that we are in a new

period of global capitalism and that the resulting problems and

issues are systemic and will require systemic solutions.

If we are to reach solutions, we must raise the following questions: What is the purpose of the corporation? What is the relationship between markets, corporations, and nation-states? How is

international trade structured? How can trade and tax policies better reflect changes in the global economy? Anything less than serious answers to these difficult questions will be window dressing.

Without serious answers, cities like Youngstown will continue to

lose faith in the American dream.

In summary, while we need programs that more widely share

benefits and risks from globalization and offshoring, I would argue

that the global economy demands new forms of corporate and international regulation that will prevent some nation-states and some

corporations from engaging in economic blackmail by playing one

country or one workforce against another. We can no longer afford

to tinker with economic and trade policy or enact reforms that are

simply window dressing. Without systemic reform, growing discontent and the incipient rebellion in American politics over

globalization and de-industrialization will only grow and breed a

new politics of resentment.

[The prepared statement of Dr. Russo follows:]

PREPARED STATEMENT OF JOHN B. RUSSO

My name is John Russo and I am a Professor of Labor Studies at the Warren P.

Williamson Jr. College of Business Administration and Co-Director of the Center for

Working-Class Studies at Youngstown State University. I am also the co-author

with Sherry Linkon of the book, Steeltown USA: Work and Memory in Youngstown.

I want to thank the House Committee on Science and Technology for giving me this

opportunity to discuss my research on de-industrialization and its impact on local

communities such as Youngstown, Ohio.

This spring I was interviewed by more than 20 journalists from around the world

on working-class voting patterns and on local and State economic issues. This attention was not new. Every four years, reporters and candidates return to Youngstown

to test conventional wisdom about economic renewal and political responses in the

face of de-industrialization. Since the 1980s, Youngstown has been the poster child

for de-industrialization, losing 50,000 jobs in steel and steel-related industries. This

decade the Youngstown area has continued to hemorrhage jobs, most recently

through the downsizing of Delphi Automotive and GM (Lordstown). Since 2000, the

229

1 Charles W. McMillion, ‘‘Ohio’s Job Losses: 2000–2007 Worst since the Great Depression,’’

MBG Information Services, Washington, D.C., February 2008. 2Forester Research, a consulting firm, estimates that 3.4 million white-collar jobs will be sent

offshore between 2003 and 2015. The estimate of the exodus includes 542,000 computer jobs,

259,000 management jobs, 191,000 architectural jobs, 79,000 legal jobs, and 1.6 million backoffice jobs. Outsourcing can also have a negative effect on the workers who remain in the U.S.

A study by three Harvard economists estimates that for every one percent that employment falls

in a manufacturing industry because of moving overseas, wages fall by five-tenths of one percent

for workers who remain. As the recent, concessionary bargaining at American Axle, suggests

those numbers may be an underestimate. 3 In the early 1990s, the per capita murder rate in Youngstown was among the highest in the

Nation. Interestingly, criminal justice experts determined that the murders were being committed by young adults that were born between 1977 and 1984, the most intense period of the

de-industrialization. But for the mill closings, Youngstowners of this age might have found wellpaying work in the steel industry. 4Training and education have been the hope for many. But I in good faith cannot tell my students that just because they get a BA or an MBA now, or a degree in engineering, they are

going to do better than their parents. A sense prevails that there is a decline in America, and

that only by accepting a lowered standard of living will we be able to compete.

State of Ohio has experienced the worst job losses, reduced standards of living, and

social disruptions associated with unemployment since the Great Depression.1 But

what seems different this time is that reporters understand what Sherry Linkon

and I wrote in Steeltown USA: Youngstown’s story has become both Ohio’s and

America’s story today.2

De-industrialization undermines the social fabric of communities and nationstates. The social costs of de-industrialization include the loss of jobs, homes, and

health care; reductions in tax base, which in turn lead to reductions in necessary

public services like police and fire protection; declines in non-profits and cultural resources; decaying local landscapes; increases in crime both, immediately and longterm;3 increases in suicide, drug and alcohol abuse, family violence, and depression;

and loss of faith in institutions such as government, business, unions, churches, and

traditional political organizations.

So job loss does not affect individuals only, although it touches many who, having

dedicated their lives and sometimes their health to employers, now feel betrayed

and economically expendable. As one steelworker suggested to me, ‘‘We are too old

to work and too young to die.’’

Rather, it is a systemic problem that affects the identity of whole families, their

communities, and the Nation. De-industrialization brings with it a great deal of cynicism and an underlying discontent that may not be apparent to outsiders. Economic

cheerleading or ‘‘bootstrap journalism’’ that labels large-scale job loss as ‘‘creative

destruction’’ just reinforces the community’s identity loss: When you lose your identity, other people define who you are, and you get blamed for your own situation.

Nor can simple governmental interventions ameliorate the dramatic social costs

of offshoring and de-industrialization. Attempts to revitalize our area have largely

failed: many represent what we might call the economics of desperation. Many displaced steelworkers in Youngstown got trained in refrigeration, but there were no

jobs in refrigeration. Between 1992 and 2000, about nine percent of the economic

growth in the area was a result of building prisons.

Youngstowners have begun to understand that the current economic thinking and

political decision-making have often exacerbated the problem. For example, technologies developed with public research dollars are being used to offshore jobs. Tax

incentives to multinationals are being used to export jobs. In both cases, public policy is contributing to putting hard-working Americans out of work.

When challenged, many politicians and corporate leaders tender platitudes about

long-range economic adjustments and suggest that displaced workers train for jobs

that either don’t exist or that will be moved offshore in the next wave of economic

change.4 Increasingly, Americans understand they are being sacrificed at the altar

of traditional economic theory. They reject the argument that de-industrialization

and offshoring are part of the ‘‘natural economic order’’ and that job losses and declining wages are an inevitable part of globalization. Instead, they see themselves

as victims of conscious decisions by corporate leaders and government officials, and

they are resentful. No longer will they accept short-term solutions or amelioration

efforts. While important, such approaches are ultimately ineffectual. Americans recognize that we are in a new period of global capitalism and that the resulting problems and issues are systemic and will require systemic solutions.

If we are to reach solutions, we must raise the following questions: What is the

purpose of the corporation? What is the relationship between markets, corporations,

and nation-states? How is international trade structured? How can trade and tax

policies better reflect changes in the global economy? Anything less than serious anVerDate 11-MAY-2000 16:08 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00014 Fmt 6601 Sfmt 6621 C:\WORKD\I&O08\052208\42371A SCIENCE1 PsN: SCIENCE1
230

swers to these difficult questions will be window dressing. Without serious answers,

cities like Youngstown will continue to lose faith in the American Dream.

Let’s just take the first few questions. What is the purpose of the corporation? Is

it merely a legal entity whose purpose is to maximize profits for shareholders by

moving inputs and assets around like pieces on a chess board? Or do corporations

have reciprocal responsibilities with shareholders, managers, employees, and nationstates in the creation of value? As earlier speakers before this Committee have suggested, current practice appears to be in line with the former.

How we answer the first question informs how we approach our second question,

on the relationship between corporations, nation-states, and markets. If we believe

that corporations have little social responsibility other than creating wealth, then

government should support free markets globally and pay scant attention to forms

of government or working conditions in and between countries. In such a world, corporations can become as powerful as nation-states and override democratic values.

If, however, we believe that government needs to balance reciprocal relationships

and provide a social safety net for capitalism, then economic and trade policies must

be systemic and proactive. Governments should make decisions that benefit all citizens and hold corporations accountable to all stakeholders, not just a few. For example, government leaders need to take seriously labor, environmental, and political

conditions in all countries that can lead to unfair trade.

In summary, while we need programs that more widely share the benefits and

the risks arising from globalization and offshoring, I would argue that the global

economy demands new forms of corporate and international regulation that will prevent some nation-states and corporations from engaging in economic blackmail by

playing one country or one workforce against another. We can no longer afford to

tinker with economic and trade policy or enact reforms that are simply window

dressing. Without systemic reform, the growing discontent and incipient rebellion in

American politics over globalization and de-industrialization will only grow and

breed a new politics of resentment.

BIOGRAPHY FOR JOHN B. RUSSO

John Russo is the Coordinator of the Labor Studies Program in the Williamson

College of Business Administration at Youngstown State University. He received his

doctorate from University of Massachusetts, Amherst, where he also served as a

postdoctoral research fellow at the Labor Relations and Research Center. Dr. Russo

has written widely of labor and social issues and is recognized as a national expert

on labor unions and working-class issues. His current research interests involve two

book length projects, Who Will Protect Worker Rights?: Unions and the Use of

Codes/CSR, Capital Strategies, Framework Agreements and Strategic Campaigns

and an historical study of the famous GM (Lordstown) Assembly plant. His most

recent publications are a book co-authored with Sherry Linkon, Steeltown, USA:

Work and Memory in Youngstown (2002). Also with Sherry Linkon, an edited book

entitled New Working-Class Studies was published in 2005 by Cornell University

Press. For his many activities, Dr. Russo is one of the few professors at YSU to have

ever received Distinguished Professorship Awards in each of three areas: research

and scholarship, teaching and public service.

Dr. Russo is also a founder and the Co-Director of the Center for Working-Class

Studies at Youngstown State University. The Center is an interdisciplinary center

for research, teaching, and community activity on working-class life, work, culture,

and thought. Since its inception, the CWCS has provided a regional and national

forum for scholarly activities; supported YSU faculty research; fostered collaborations within the academic institution and between the university and community;

developed an annual lecture series; and become a national and international clearinghouse for information on working-class culture and pedagogy. For its work, the

Center has been the recent recipient of two major Ford Foundation grants.

Chairman MILLER. Thank you, Dr. Russo.

Mr. Morgan.

STATEMENT OF MR. FRANK H. MORGAN, ATTORNEY, WHITE &

CASE LLP, WASHINGTON, D.C.

Mr. MORGAN. Good afternoon, Chairman Miller and Members of

the Committee. My primary practice area is in the international

trade disputes, and I must say that my remarks today are my own

and do not reflect those of my firm or its clients. And I thank MiVerDate 11-MAY-2000 16:08 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00015 Fmt 6601 Sfmt 6601 C:\WORKD\I&O08\052208\42371A SCIENCE1 PsN: SCIENCE1
231

chael O’Connor and Sara Sargeantson whose assistance made my

testimony possible.

Thank you, Mr. Chairman, for inviting me to offer my experience

and to convey the concerns of countless frustrated workers who

have unsuccessfully petitioned the Employment and Training Administration [ETA] of the Department of Labor for Trade Adjustment Assistance, TAA.

I know this committee is considering broader and more fundamental issues surrounding globalization. Regardless of one’s views

on the merits of free trade, it is a no-brainer to make sure that the

Department of Labor investigates each TAA claim and that workers who are entitled get prompt assistance.

Congress has directed the ETA to investigate each petition and

to do so with the utmost regard for the workers. In preparing this

testimony I came across a startling statistic. From 2002 to 2005,

approximately 45 cases were litigated at the Court of International

Trade, and in all but four there were reversals of Labor’s decision

not to certify. Since 2005, there have been a further 15 cases litigated, resulting in reversals of Labor’s decision not to certify. Such

a large number of reversals in the face of further scrutiny shows

that Labor is not conducting the investigation that Congress directed it to do in the first instance. And while this litigation has

dragged on, Labor has denied workers the relief to which they are

entitled and need.

The Court of International Trade has written much about this

topic, and I commend anyone who is concerned with the problem

to read Judge Ridgway’s decision in BMC Software, which I have

attached to my written materials.

My written testimony elaborates fully on the problems that exist

in Labor’s investigation of TAA petitions, and I summarize those

here today. In cases that I have litigated and those I have analyzed, the failure of Labor to investigate starts at the Agency level

and consists of a complete failure to conduct a basic investigation

beyond the four corners of the information provided in the petition.

Often the record consists of a few e-mail messages and a few summaries of telephone calls. There is no excuse for this, and I have

practiced before many other agencies, and none of them would call

this an administrative record.

This is even more disturbing when you consider the fact that

Labor is conducting an investigation that is not supposed to be adversarial in nature. Labor is supposed to be looking out for the interests of the workers. For TAA to serve its intended purpose, the

system has to function properly at the agency level, and it will not

do so until Labor conducts a thorough investigation of each petition.

An unsuccessful TAA petitioner at Labor faces three options: appeal immediately to the Court of International Trade (CIT), seek

administrative reconsideration, or give up. Labor sends a denial

letter that informs the petitioner of their right to administrative

consideration but not of their right to seek a Court appeal. There

is no excuse for Labor’s failure to inform workers of the right to

appeal, and I fear that many give up unaware of that right.

For the few cases that do eventually make it to the Court of

International Trade, the TAA petitioner faces a whole new round

232

1Throughout my testimony, I refer interchangeably to the agency as ‘‘the ETA’’ or Labor.

of challenges, frustration, and delay. The average case at the CIT

took approximately 354 days to resolve. Contrast that with the fact

that Congress contemplated that these decisions would be made

within 40 days of the filing of the petition by the Department.

In almost every case Labor will ask the CIT’s permission to conduct what is known as a ‘‘voluntary remand proceeding.’’ In essence, Labor will go back and revisit the facts and reconsider its

decision.

Aside from being a concession that the agency’s decision isn’t

supported by the investigation that it conducted, it adds further

delay to the process of up to 60 days or more. More disturbing,

Labor often uses these proceedings as a means of bullet-proofing its

initial decision not to certify. This means multiple Court-directed

remands are necessary to get Labor to do what a reasonable decision-maker would have done from the outset. Labor engages in several other litigation tactics that cause delay, including implausible

interpretations of the law and the facts. Each day of delay makes

an eventual Court victory less meaningful for the workers.

The problems with Labor’s investigations and subsequent litigation tactics are widespread. My written testimony contains excerpts

from several CIT judges criticizing Labor on this score. The Judiciary has done its level best, but the problem persists and has persisted irrespective of which party occupies the Executive Branch.

So in my view, the solution requires legislative pressure and

changes to the law.

To conclude, the biggest problem is ETA’s conduct and approach

to investigations, and fixing this does not require any changes to

the law. Congress simply must hold the agency accountable. Several changes to the law could help, including establishing swift and

strict timeframes, allowing for more meaningful participation by

the workers and their counsel in remand proceedings, and clarifying that the CIT has the authority to order Labor to certify workers.

Thank you, Mr. Chairman and Members of the Committee, for

affording me the honor of representing the interests of hardworking men and women of America who have been failed by the

very agency that Congress designated to protect their interests.

[The prepared statement of Mr. Morgan follows:]

PREPARED STATEMENT OF FRANK H. MORGAN

Good afternoon Mr. Chairman and Members of the Committee. My name is Frank

Morgan and I am an attorney at the law firm of White & Case LLP where I practice

primarily in the area of international trade disputes. My remarks today are necessarily my own and do not reflect the views of my firm or our clients. I thank Michael O’Connor and Sara Sargeantson, two summer associates at my firm whose assistance made this testimony possible.

Thank you for inviting me to offer my experience and to convey the concerns of

the many frustrated workers who have unsuccessfully petitioned the Employment

and Training Administration (‘‘ETA’’) of the Department of Labor for trade adjustment assistance (‘‘TAA’’).1 The primary mission of the Department of Labor is to

protect and promote the American worker’s interests. It should go without saying

that in administering TAA, the ETA must act with the utmost regard for the American workers who seek assistance. But, all too often, the ETA fails to do so. And

regardless of one’s views about international trade, ensuring that workers who are

adversely affected by trade get prompt retraining and transitional assistance is a

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2Former Employees of BMC Software, Inc. v. U.S. Sec’y of Labor, 454 F. Supp.2d 1306, 1357

(Ct. Int’l Trade 2006) (quoting 29 C.F.R. § 90.12). 3Workers who are employed by a firm that supplies components to a firm that has been certified for TAA also may be eligible. See 19 U.S.C. § 2272(b). Please see Attachment 2 for the

full text of the statutory provision governing eligibility for TAA.

no brainer. In preparing this testimony I came across a startling statistic: from

2002–2005, approximately 45 TAA cases were litigated, and in all but four, Labor

ultimately certified the workers. That is shocking and it shows that Labor is not

fulfilling the responsibilities that Congress entrusted to it.

Before I joined White & Case, I served as a law clerk to the Honorable Judith

M. Barzilay at the U.S. Court of International Trade (‘‘CIT’’). It was during my

clerkship that I first encountered the difficulties unsuccessful TAA petitioners face.

In addition to working for an outstanding jurist, I had the privilege of knowing

many other judges on the court. A review of their decisions reflects just how frustrated and disturbed most (if not all) of the CIT judges are with ETA’s handling

of TAA cases. Among a frustrated bench, Judge Delissa A. Ridgway stands out for

her efforts to call attention to the problem and to catalogue the breadth and enduring nature of it. Attachment 1 of my written testimony contains Judge Ridgway’s

decision in Former Employees of BMC Software, Inc. v. U.S. Sec’y of Labor, 454 F.

Supp.2d 1306 (Ct. Int’l Trade 2006) which is a must read for anyone that is concerned about this problem. My remarks today are mere footnotes to the expert treatment Judge Ridgway already has given to the topic.

I. DIFFICULTIES FACED BY THE UNSUCCESSFUL TAA PETITIONER

My testimony focuses on the unsuccessful TAA applicant both at the agency level

and in the subsequent battles to use the judicial process to overturn an incorrect

agency decision. Without question (as I am sure Labor would be quick to note),

many workers are successful in petitioning for TAA. But—even if Labor reaches the

correct result much of the time—the workers who succeed at the agency level are

the easy cases, where little or no independent inquiry by the agency is necessary:

the cases where it would be patently obvious to anyone that the workers satisfy the

criteria for TAA certification; the cases where the workers have themselves compiled

and neatly served up for Labor’s convenience all the evidence required to support

certification; and (perhaps) the cases where certification of the workers is the politically expedient thing to do.

The problem arises in all the other cases: the cases where it is not immediately

obvious whether the workers are entitled to TAA, where all the evidence is not

served up to the agency on a silver platter—the cases where a true investigation

is required. These are the cases where the agency fails the workers. Labor often

reaches the wrong result because it has conducted an inadequate investigation. It

is one thing to deal with the easy cases, and an entirely different one to resolve

those that require a deeper investigation. But Congress did not intend for Labor to

shirk the difficult investigations.

Of course, the statute does not entitle every petitioning worker to be certified for

TAA. But, as the Court’s opinion in BMC emphasized, ‘‘every worker is entitled to

a thorough agency investigation of his or her claim—without being forced to resort

to the courts. The law mandates no less.’’ 2 It is for these reasons that I believe my

focus on the unsuccessful TAA applicant is appropriate.

In order to understand the difficulties unsuccessful TAA applicants face, it is necessary to understand how a case starts, proceeds through the ETA, and how it may,

eventually, end up in the judicial system. TAA initially is sought at the agency level,

specifically, at the ETA. A petition for TAA generally is filed by three or more workers who have been laid off by a firm, a union representing workers that have been

laid off, or the firm that has laid off workers. Eligibility for TAA is governed by statute. To grossly summarize the law, Labor is supposed to certify workers for TAA

if one of the following three conditions is met: 1) there has been an increase in imports that caused job losses, or 2) the workers’ firm shifted production to a country

that has a free trade or other preferential trade agreement with the United States,

or 3) the workers’ firm shifted production to a foreign country and there have been

subsequent imports of that product into the U.S. market.3 If Labor does not certify,

the workers have the right to appeal that decision to the CIT. I know that this committee has been examining the effects of globalization, and I thought the Members

might be interested to know that appeals involving a shift in production to a foreign

country have accounted for approximately 22 of 40 appeals filed with the CIT since

2005.

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4Former Employees of BMC Software, Inc. v. U.S. Sec’y of Labor, 454 F. Supp.2d 1306, 1357

(Ct. Int’l Trade 2006) (quoting 29 C.F.R. § 90.12). 5See 19 U.S.C. § 2271(a)(3) (requiring Labor to publish notice of the initiation of an investigation). 6See 19 U.S.C. § 2321(a). 7See 19 U.S.C. § 2273(a). 8See 29 C.F.R. § 90.18. While Labor claims that the authority to conduct an administrative

reconsideration is provided for by the Trade Act of 1974, as amended, my colleagues and I have

been unable to locate the relevant provision in the statute. 9See 29 C.F.R. §§ 90.18(c)&(g) (providing Labor with 15 days to decide whether reconsideration is warranted and, if so, 45 additional days to make the determination). In my view, the

investigation that Labor performs on reconsideration is equally inadequate, so the additional

time provides a TAA applicant with little benefit, and merely delays the time before an appeal

is made. 10My understanding is that Labor used to inform petitioners of that right and its omission

from current notifications can only be taken as an attempt to limit petitioners’ right to avail

themselves of the judicial system.

A. Difficulties for TAA Petitioners at the Agency Level

At the agency level, TAA petitioners almost never have counsel representing

them. As a consequence, individuals who often have little or no experience with federal law and agency regulations are largely relying on the ETA to perform its functions with the utmost regard for protecting their interests. Indeed, as the BMC opinion pointedly observes, that is precisely the situation that Congress contemplated:

Congress designed TAA as a remedial program, recognizing that petitioning

workers would be (by definition) traumatized by the loss of their livelihood; that

some might not be highly-educated; that virtually all would be pro se; that none

would have any mastery of the complex statutory and regulatory scheme; and

that the agency’s process would be largely ex parte. Congress did not intend the

TAA petition process to be adversarial. Nor did Congress intend to cast the

Labor Department as a ‘defender of the fund,’ passively sitting in judgment, ruling ‘thumbs up’ or ‘thumbs down’ on whatever evidence petitioning workers

might manage to present.

Quite to the contrary, the Labor Department is charged with an affirmative obligation to proactively and thoroughly investigate all TAA claims filed with the

agency—and, in the words of its own regulations, to ‘marshal all relevant facts’

to make its determinations.4

Because counsel does not become involved until much later in the process we typically only see the shortcomings in Labor’s initial investigations after the case has

been appealed to the CIT—and the shortcomings can be tremendous. For example,

in the first TAA case that I litigated, the ETA determined based on inconclusive and

inaccurate information that the workers were service providers, and denied TAA on

those grounds. It took almost four years and several court orders to get the ETA

to correct that decision. Unfortunately, by that point, TAA was meaningless for my

clients. For TAA to serve its intended purpose, the system has to function properly

at the agency level. As I will discuss later, this will not occur until the ETA fully

accepts the mandate that Congress has given it to conduct a full and thorough investigation—in every case.

Congress has not set forth specific instructions on how Labor is to conduct its proceedings, but Congress has clearly expressed its intent that Labor is to conduct an

investigation.5 By providing Labor with the power to subpoena witnesses and documents, Congress evinced a clear intent that the investigation should not be cursory.6

Labor’s investigations, however, are often pro forma at best, and fall far short of

what Congress intended.

In addition to mandating that Labor conduct an investigation, Congress has recognized that the ETA must conduct its investigation swiftly, providing Labor with

40 days to determine whether the petitioners are eligible for TAA.7 In fact, Congress

shortened the period to 40 days from 60 days in 2002. Yet Labor, by regulation, has

granted itself the authority to conduct reconsideration proceedings that can greatly

extend the time for making its ‘‘final’’ determination beyond 40 days.8 If a worker

chooses to pursue this process, it can add up to 90 additional days to the process

at the agency level.9

It is deeply disturbing—and, likely, telling—that the standard form letter that

Labor uses to inform workers that their TAA petition has been denied advises the

workers only of the ability to seek administrative reconsideration before the agency,

and conveniently fails to inform them of their right to seek immediate judicial review instead.10 The vast majority of unsuccessful TAA petitioners simply end the

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11See 19 U.S.C. § 2395(a). 12Former Employees of Chevron Prods. Co. v. U.S. Sec’y of Labor, 298 F. Supp. 2d 1338, 1349

(2003).

process at this point, unaware of their right to appeal or too exhausted and frustrated to continue.

For the unsuccessful TAA petitioners with any fight left in them, there is one last

hurdle, the 60 day deadline for filing an appeal at the CIT.11 This deadline is extremely short especially when considering that most aggrieved persons are not represented by an attorney. Congress should consider extending the time for filing an

appeal to reflect this reality.

B. Difficulties Faced After the Administrative Process Has Concluded and Litigation

Begins

Once a TAA case gets to the CIT, it takes too long to litigate, and—even then—

the ETA generally fails to carry out its responsibilities with the utmost regard for

the workers. Fully litigated TAA cases from 2005 to present took an average of 354

days to resolve, with one case lasting 954 days, or a little over two and one-half

years. As I mentioned earlier in my testimony, the first case I litigated took four

years to resolve. In my case and in at least 15 of the cases litigated since 2005,

there was a change in Labor’s decision. Instead of receiving TAA within 40 days,

as Congress intended, these workers were unjustly denied TAA for far too long, and

all because Labor’s investigation was inadequate. During this time, those unsuccessful TAA petitioners suffered the full brunt of the adverse effects attendant to being

laid off, and even though the court action was successful, it can never remedy the

harm that workers suffer due to delay in receiving the TAA benefits to which they

were entitled.

As the CIT observed in the Chevron case, the consequences of agency delays in

certification can be profound—sometimes, quite literally, life-or-death:

There is a very human face on [TAA cases]. Workers who are entitled to trade

adjustment assistance benefits but fail to receive them may lose months, or

even years, of their lives. And the devastating personal toll of unemployment

is well-documented. Anxiety and depression may set in, with the loss of selfesteem, and the stress and strain of financial pressures. Some may seek refuge

in drugs or alcohol; and domestic violence is, unfortunately, all too common. The

health of family members is compromised with the cancellation of health insurance; prescriptions go unfilled, and medical and dental tests and treatment

must be deferred (sometimes with life-altering consequences). And college funds

are drained, then homes are lost, as mortgages go unpaid. Often, marriages

founder.12

The bottom line is this: Where displaced American workers seeking TAA benefits

are concerned, litigation will never be an adequate substitute for Labor doing its job.

For this reason, it is imperative for Labor to conduct a proper investigation in the

first instance.

In large measure, Labor creates the delays in the litigation process by: 1) seeking

a voluntary remand in virtually every case that is appealed, 2) making excessive

requests for extensions, 3) failing to conduct the type of investigation (in the first

instance and in response to court ordered remands) that Congress contemplated, 4)

failing to interpret the statute in a good faith manner, consistent with the remedial

nature of the TAA statute, 5) failing to concede that cases with similar facts should

be resolved in a similar manner, and 6) failing to respect the CIT’s authority. These

failings suggest to me, and I am not alone in this view, that Labor is defaulting

on its obligations to fulfill the responsibilities that Congress entrusted to it.

1. Labor Often Uses Voluntary Remand Proceedings to Support its Original Determination

In the cases I have litigated, the ETA has sought consent to conduct what is referred to as a voluntary remand proceeding. This means that Labor is asking the

court for permission to conduct additional fact finding, clarify areas of confusion,

and reconsider its decision. In other words, Labor is admitting that it did not do

a proper investigation in the first instance. Moreover, in other cases that I have reviewed, it appears that Labor seeks a voluntary remand in almost every case. In

contrast, other agencies that appear before the CIT rarely ask for voluntary remands. In short, the ETA’s own actions at the CIT demonstrate that it is not conducting a proper investigation in the first instance.

236

13 As I discuss below, even when the remand proceeding is ordered by the CIT, Labor sets

out to justify its original determination. 14See Former Employees of Merrill Corp. v. U.S. Sec’y of Labor, Slip Op. 04–2, 2004 WL 34548

(Ct. Int’l Trade Jan. 4, 2004). 15Former Employees of Merrill Corp. v. U.S. Sec’y of Labor, 387 F. Supp. 2d 1336, 1346 (Ct.

Int’l Trade 2005). 16Labor’s counsel also sought extensions for various reasons. While the reasons given were

understandable, the combined effect was to significantly delay the resolution of the case.

Adding to this frustration is the fact that Labor often does not conduct a better

investigation after asking for the remand. Often the ETA conducts the remand investigation with an aim towards ‘‘bullet proofing’’ its original decision.13 For example, in the Former Employees of Merrill Corporation Labor asked for 90 days to reconsider its original determination, the plaintiffs consented and the CIT granted the

request.14 A fundamental issue was whether the workers produced an article. Labor

had originally contended that the workers provided a service; and thus, were not

eligible for TAA. Yet in the voluntary remand proceeding, and despite requests that

it do so, Labor did not even examine whether the workers’ firm produced printed

materials which would have qualified as articles. As the CIT noted, ‘‘Labor failed

to undertake even a minimal investigation of Merrill’s production of printed matter.

The record is devoid of any information concerning the percentage of [printed documents].’’ 15

2. Labor’s Requests for Extensions Are Excessive

As I have explained earlier in my testimony, the TAA statute reflects Congress’

considered judgment that 40 days is ample time for Labor to complete a thorough

investigation of even the most complex TAA petition. But not only is the agency failing to fulfill that mandate, it is routinely seeking periods far in excess of 40 days

to conduct its remand investigation—precious time on top of the time the ETA already had to conduct the initial investigation. In short, the agency’s dilatory conduct

in the course of litigation greatly compounds and exacerbates the effects of its failures and omissions in the conduct of its initial investigation. For the unsuccessful

TAA petitioner, the feeling of frustration and anger builds each time Labor seeks

an extension.

I have been involved in litigation (either in private practice or as a law clerk) with

almost every agency over which the CIT has jurisdiction. Parties (both private and

government) often seek extensions of time to perform certain acts. But Labor stands

out both in terms of the number of extensions requested and the apparent lack of

need for them. In the Former Employees of Merrill Corporation litigation, Labor

sought two extensions of time to file various remand results.16 Like Charlie Brown

hoping to finally kick the football, we consented in the belief that Labor needed the

time and was acting in good faith. Yet this proved not to be the case, as Labor

reached the same result over and over.

In the TAA case I am currently litigating, Labor sought a voluntary remand

(which it originally had 60 days to complete) and then asked for two extensions of

time to file the remand results. We consented to the first because a legitimate reason was provided. We objected to the second because it was requested in the afternoon on the very day the remand determination was supposed to be filed with the

CIT, and Labor did not even offer a reason for making the request. Labor eventually

filed its remand determination with the CIT, again denying eligibility. We were disappointed with the result but not surprised given Labor’s track record. What outraged us was what Labor did in those 70 days: seven e-mail messages (four of which

were non-substantive), a few voice mail messages, and a visit to a website. This did

not require seven days, much less 70.

Again, these are not isolated incidents. Labor typically has requested at least one

extension in each fully litigated case since 2005, and has requested as many as six

extensions in a single case. The requests averaged approximately 20 days each but

some were as long as 90 days. This is troubling because the extension follows on

what are almost always 60 or 90 day periods that already had been given to Labor.

In my experience, other agencies do not request so many extensions for such lengths

of time, and when they do, it is usually because the private parties also need additional time.

3. Labor Does Not Conduct Investigations in the Manner Congress Contemplated

As I discussed earlier, Labor does not conduct an adequate investigation in the

first instance. In my experience, this does not change even after the case reaches

the CIT. The ETA’s failure to conduct an adequate investigation causes significant

delays in the resolution of a CIT proceeding.

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17Former Employees of IBM Corp. v. U.S. Sec’y of Labor, 483 F. Supp. 2d 1284, 1287 (Ct. Int’l

Trade 2007 (quoting Plaintiffs’ brief). 18See Former Employees of BMC Software, Inc. v. U.S. Sec’y of Labor, 454 F. Supp. 2d 1306,

1328–36 (Ct. Int’l Trade 2006).

First, the amount of information that Labor obtains is insignificant and insufficient to resolve the issues that are presented in most cases. In the cases I have litigated, the investigation mainly consisted of a few e-mail messages and a few phone

conversations. The agency record, even after several remand investigations, often

consists of fewer than fifty pages after accounting for duplicative material. Moreover, when information supports a negative determination, Labor accepts it without

question.

In contrast, other agencies with which I am intimately familiar (such as the International Trade Commission (‘‘ITC’’) and Department of Commerce (‘‘DOC’’) ) obtain

far more information in similar time frames, and critically assess it. I am convinced

that Labor does not seek more information, and does not conduct the kind of investigation that Congress intended for fear that it will undercut the decision not to certify.

Second, Labor does not conduct its investigations in a manner that gives counsel

for the workers a meaningful opportunity to participate. Labor does not provide information to counsel for the workers as it is obtained, but only after Labor has made

and submitted its remand determination to the CIT. In contrast, the ITC and DOC

release information that is submitted to the agency (or obtained by it) to parties on

the same day or shortly thereafter. The ex parte nature of Labor’s investigation,

even within the context of an appeal, means that the workers’ first opportunity to

challenge the relevance, accuracy, and completeness of the information is after the

case re-commences at the CIT. Not only does this cause further delay, but it suggests that Labor is not interested in arriving at the correct result. Counsel for employees of IBM referred to the manner in which Labor conducts its remand investigations as a ‘‘sham which lacked transparency and was conducted to reach a predetermined negative result.’’ 17 Again, this suggests that Labor is not acting in accordance with the utmost regard for the workers, which is the mission that Congress entrusted to it. Indeed, when workers succeed in achieving TAA certification

through litigation, it is only because the workers and their counsel have provided

evidence to the ETA, which the ETA appears to be wholly unwilling to obtain on

its own. Accordingly, Labor’s standard practice of excluding the workers and counsel

from playing an active role in the remand investigation in effect postpones an accurate determination on the workers’ entitlement to TAA benefits, and is indefensible.

Third, Labor arbitrarily relies on information that supports its decision to deny

TAA certification, and disregards that which does not. For example, the CIT has

criticized Labor for over-reliance on employer provided information that supported

no certification for TAA when there was contradictory information submitted by the

workers that contradicted it and supported certification.18 If Labor uniformly relied

on employer information at least there would be consistency, but even this is not

the case. In the cases I have litigated, the employer generally was supportive of the

workers’ request for TAA, and in one instance, the employer even filed the TAA petition and continued to press for Labor to find that the employees were eligible.

Labor chose to ignore the employers’ statements and information favorable to TAA

certification. Yet had the employers submitted information unfavorable to certification, I suspect Labor would have relied on the information. Again, Labor’s pattern

of seizing on any evidence that supports its decision to deny benefits—and its utter

disregard for that evidence which supports certification—demonstrates a lack of

good faith in resolving the dispute and adds to the delay in the resolution of the

case.

4. Labor Arrives at Interpretations of the Statute that Do Not Reflect a Good Faith

Effort to Resolve the Problem

The agencies that I primarily appear before (the ITC and DOC) almost always

offer well-reasoned views in their interpretations of the statute. Even when I have

occasion to challenge the reasonableness of an ITC or DOC interpretation, I have

never faced one as absurd and unreasonable as the one Labor offered in Former Employees of Merrill Corporation.

My clients in that case produced financial documents (SEC filings, annual reports,

etc.) for many different customers. The firm shifted certain functions (typesetting,

proof reading, formatting) to India, and the finished financial document was imported into the United States. After the firm shifted that aspect of production offshore, it laid off the workers who had performed those functions. Following several

court ordered remands, and years into the case, Labor found a new and previously

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19 It took several CIT orders just to get Labor to grudgingly accept that my clients produced

an article. 20Former Employees of Merrill Corp. v. U.S. Sec’y of Labor, 483 F. Supp. 2d 1256, 1268 (Ct.

Int’l Trade 2007). 21See Former Employees of IBM v. U.S. Sec’y of Labor, 483 F. Supp. 2d 1284, 1326 (Ct. Int’l

Trade 2007). 22See Former Employees of Merrill Corp. v. U.S. Sec’y of Labor, Slip Op. 06–72, 2006 WL

1491616 (Ct. Int’l Trade May 17, 2006). 23Former Employees of Merrill Corp. v. U.S. Sec’y of Labor, 483 F. Supp. 2d 1256, 1268–69

(Ct. Int’l Trade 2007). 24See 19 U.S.C. § 2395(b). 25See 28 U.S.C. § 2643(c)(2).

unarticulated reason for denying TAA to my clients. Labor reasoned that the articles my clients produced were not like or directly competitive with the imported articles.19

The ETA took the position that each financial document was unique. For example,

an annual report for Microsoft was not like or directly competitive with an annual

report for Apple, and even quarterly financial reports were not like or directly competitive with one another because they contained different financial data from different reporting periods. On the basis of this tortured reasoning, Labor argued that

the workers who lost their jobs after the shift to India were not eligible because

each and every article they produced was unique, and thus did not fall within the

meaning of ‘‘like or directly competitive’’ as Labor interpreted the term. Nonsense,

as the CIT astutely noted. Nowhere did Congress (or even Labor) restrict TAA eligibility ‘‘to workers engaged in mass-production to the exclusion of workers whose output may require skills, training, and expertise necessary to produce custom-made

articles.’’ 20 I believe that Labor’s reliance on tortured interpretation of the statute

to defend a negative decision shows how deep the problems are in the ETA’s administration of the statute. Again, this is not a unique instance of Labor engaging in

an absurd interpretation of the statute in order to reach Labor’s desired result. The

CIT chastised Labor in another case as follows: ‘‘To put it bluntly, the Labor Department’s pinched, formalistic analysis verges on intellectual dishonesty.’’ 21

5. Labor Does Not Concede that Cases with Similar Facts Should Have Similar

Outcomes

Another disturbing trend that adds to the unsuccessful TAA petitioners’ plight is

the unwillingness of the ETA to acknowledge that similarly situated applicants

should receive the same treatment. Labor ignored this basic tenet of law in Former

Employees of Merrill Corporation. During the course of that multi-year litigation,

but in a different case, Labor announced a change in policy that recognized certain

products could be considered articles even if the goods were intangible, and workers

manufacturing them would thereby qualify for TAA. Labor, however, did not notify

the CIT of this change—that burden fell on the workers. Upon learning of this policy change, the CIT ordered Labor to reconsider its decision.22 Incredibly, Labor

again denied certification (as noted above, on the grounds that the articles were

unique). But this time, Labor ignored its practice in still a different case in which

it had certified workers who produced custom logos, which—by definition—were

unique.23 In other words, Labor twice in the same proceeding failed to accord a similar outcome to similarly situated individuals. Labor’s failure in this regard is not

unique, as the CIT has expressed a similar concern in three recent cases.

6. Labor Appears to Lack Respect for the CIT’s Authority

In the cases in which I have been involved, and in analyzing many CIT decisions,

it is evident to me that Labor has little respect for the CIT’s authority. Short of

holding Labor officials in contempt, there is little the CIT can do to remedy this situation. In my view, this is partly responsible for the untenable situation that exists

today, where Labor strives to maintain its original determination without regard to

the duty prescribed by Congress to conduct TAA cases with the utmost regard for

the workers.

Labor, itself, has argued that the CIT has no authority to order the certification

of workers, and that Labor, alone, can do so. For support, Labor cites two statutory

provisions. The first states that Labor’s factual findings are conclusive if they are

supported by substantial evidence.24 The second states that the CIT may not grant

an injunction or issue a writ of mandamus in an appeal of Labor’s denial of TAA.25

Taken together, Labor reads these provisions to mean that there can only be an

endless back and forth between the agency and the court until one side surrenders.

At no point, in Labor’s view, does the CIT have authority to order certification. The

consequence of this battle of wills is delay in the final resolution of the case and

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26See Former Employees of Merrill Corp. v. U.S. Sec’y of Labor, 483 F. Supp. 2d at 1266 n.7

(stating ‘‘This Court does not appreciate Labor’s attempt to reargue this point in the third remand results.’’). 27See 19 U.S.C. § 2395(c). 28Former Employees of IBM Corp., Global Servs. Div. v. U.S. Sec’y of Labor, 387 F. Supp. 2d

1346, 1350–51, 1353 (Ct. Int’l Trade 2005). 29Former Employees of Murray Engineering, Inc. v. Chao, 358 F. Supp. 2d 1269, 1274, 1275

n. 10 (Ct. Int’l Trade 2004). 30Former Employees of Tyco Electronics v. U.S. Dep’t of Labor, 350 F. Supp. 2d 1075, 1089

(Ct. Int’l Trade 2004). 31Former Employees of Ericsson, Inc. v. U.S. Sec’y of Labor, Slip Op. 04–130, 2004 WL

2491651 at *5 (Ct. Int’l Trade Oct. 13, 2004). 32Former Employees of Sun Apparel of Texas v. U.S. Sec’y of Labor, Slip Op. 04–106, 2004

WL 1875062 at *6–7 (Ct. Int’l Trade Aug. 20, 2004).

issues that already had been settled during a prior segment of the same proceeding

often are reargued.26

Common sense dictates that Labor’s view is incorrect. Congress must have intended for meaningful judicial review and for the courts to have the authority to

ensure that their rulings were implemented. This is evident from the fact that Congress created three levels of judicial review of Labor decisions including the CIT,

the Court of Appeals for the Federal Circuit, and, ultimately, the Supreme Court.27

Yet Labor’s position is that if Labor decides not to change its decision, not one of

the three reviewing courts can do anything about it.

III. THE PROBLEMS WITH LABOR ARE WIDESPREAD

My testimony thus far has focused primarily on my own experience. The following

quotes are intended to show the Committee the breadth of the problem. In my experience, some CIT judges direct occasional harsh words towards the government

agencies that appear before it. But I am unaware of an agency that has received

more uniform criticism from so many different judges. To me, this is further evidence of the severity of the problem with the ETA’s investigations.

The following quotations are taken from two opinions by Judge Ridgway in which

she catalogued the court’s various criticisms of Labor’s investigations.

A. Former Employees of BMC Software, Inc. v. U.S. Sec’y of Labor, 454 F. Supp.

2d 1306, 1313 N.10 (Ct. Int’l Trade 2006).

• agency’s investigation was ‘‘merely perfunctory,’’ and petition was denied

based on only ‘‘scant evidence;’’ action remanded to agency with instructions

to supplement ‘‘shockingly thin’’ record of investigation28 (Judge Barzilay)

• agency’s determination both ‘‘betrays . . . [any] understanding of the industry

it is investigating and the requirements of the [TAA statute]’’ and ‘‘failed to

make reference to relevant law . . ., including Labor’s own regulations on the

matter;’’ and, although agency was granted three extensions of time to file results of second remand, remand results nevertheless still failed to comply

with court’s remand instructions29 (Judge Pogue)

• ‘‘Labor repeatedly disregarded evidence of critical facts,’’ ‘‘refused to accept information submitted by [the petitioning workers], which allegedly contradicted statements made by [company] officials,’’ ‘‘rel[ied] on incomplete and allegedly contradictory information to support its position,’’ and ultimately

‘‘failed to provide any analysis regarding the change in its position to certify

[the workers] as eligible’’ 30 (Judge Carman)

• agency’s finding ‘‘is not only unsupported by substantial evidence, but is contradicted by the scant evidence’’ that exists31 (Judge Eaton)

• because ‘‘Labor never acknowledged its receipt of [the workers’] petition and

wholly failed to initiate an investigation thereof,’’ ‘‘the displaced workers’

claims were ignored for over three months;’’’ once initiated, ‘‘[t]he entire investigation consisted of two communications with only one individual, [the

company’s] HR manager;’’ and even ‘‘the investigation upon [the workers’ request for] reconsideration was perfunctory at best’’ 32 (Chief Judge Restani)

• ‘‘the entirety of the Labor Department’s initial investigation consisted of forwarding the standard [form questionnaire]’’ to company official, with no follow-up by the agency, ‘‘even though the company’s responses . . . were, in a

number of instances, ambiguous or inconsistent, and called for clarification;’’

‘‘Moreover, the agency’s investigation conducted in response to the Workers’

request for reconsideration was little more than a rubber stamp of its initial

Negative Determination,’’ ‘‘consist[ing]—in toto—of two phone conversations

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33Former Employees of Ameriphone, Inc. v. U.S., 288 F. Supp. 2d 1353, 1358–59 (Ct. Int’l

Trade 2003). 34Former Employees of Hawkins Oil and Gas, Inc. v. U.S. Sec’y of Labor, 814 F. Supp. 1111,

1115 (Ct. Int’l Trade 1993). 35Former Employees of Swiss Indus. Abrasives v. U.S., 830 F. Supp. 637, 641–42 (Ct. Int’l

Trade 1993). 36Former Employees of Pittsburgh Logistics Sys., Inc. v. U.S. Sec’y of Labor, SLIP OP. 03–

111, 2003 WL 22020510 at *11 (Ct. Int’l Trade 2003).

with company officials on a single day, which were in turn documented in two

memoranda that, together, constituted a mere three sentences’’ 33 (Judge

Ridgway)

B. Former Employees of Ameriphone, Inc. v. U.S., 288 F. Supp. 2d 1353, 1355 N.3

(Ct. Int’l Trade 2003).

• castigating agency for ‘‘a sloppy and inadequate investigation’’ which was ‘‘the

product of laziness,’’ and holding that a fourth remand would be ‘‘futile’’ 34

(Judge Tsoucalas)

• characterizing agency’s actions as ‘‘unreasonable’’ and its investigation as

‘‘misguided and inadequate at best’’ where agency, inter alia, failed to clarify

important aspects of information provided by company, relied on company’s

unsubstantiated statements on critical point, and ignored other relevant information35 (Judge Goldberg)

• ‘‘conclud[ing] that Labor . . . conducted an inadequate investigation and

analysis of the plaintiffs as ‘production’ workers’’ and, similarly, that ‘‘Labor’s

service worker [analysis was] inadequate’’36 (Judge Musgrave)

With so many well-respected jurists of the same mind on this issue, there is no

question in my mind that my clients’ painful experiences are not unique—they are

suffered by all unsuccessful TAA applicants.

IV. COMMON MISUNDERSTANDINGS ABOUT PROBLEMS WITH LABOR’S ADMINISTRATION OF TAA

In discussions that I have had with my colleagues over the years, it occurs to me

that there are a number of misunderstandings that attempt to explain (or even justify) the inadequacy of Labor’s investigations (both at the agency level and in subsequent litigation). Generally, the misconceptions fall into one of the following three

categories: 1) Labor receives inadequate funding for the TAA program, 2) Labor follows the wishes of the company that has laid off the workers, and 3) Labor has the

same track record as the other agencies that appear before the CIT. My reason for

addressing these misconceptions is that I believe each, in its own way, suggests that

some factor, other than sheer unwillingness explains the ETA’s action. In my view,

there is no valid excuse for the appallingly low quality of Labor’s investigations.

A. Inadequate Funding or Lack of Resources Cannot Explain Labor’s Stance

There is little question that Labor has limited resources in terms of staff, funds,

and even the time it is given to conduct its investigations. At first glance, these

would appear as a reasonable basis for excusing Labor’s shortcomings. On closer inspection, the above factors cannot explain or justify Labor’s failure to investigate

TAA cases in the manner Congress intended.

First, Congress has directed Labor to evaluate a worker’s eligibility for TAA

through an investigation that should consist of gathering all relevant evidence and

applying the law to the facts found. Labor, surely, does not have the time or resources to compile the same extensive records as do other agencies such as the ITC

and DOC. If Labor needs more than just the handful of investigators that it has,

it should ask for them. To my knowledge, Labor has not done so. But even with

the resources Labor does have, surely the agency could do far more than sending

a few e-mail messages and making a few phone calls, especially in the context of

a remand proceeding. Not allowing parties to meaningfully participate in the remand investigation, which would greatly improve the information gathering, also is

not a question of resources. As I have previously discussed, Labor’s failure to conduct the kind of investigation Congress intended is because the agency has lost

sight of the need to hold the interests of the workers in the utmost regard.

Second, Congress did not intend for funding concerns to drive Labor’s determinations on TAA eligibility. Instead, Congress spelled out the conditions for eligibility

and specified that if those conditions were satisfied, Labor was to certify the workVerDate 11-MAY-2000 16:08 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00025 Fmt 6601 Sfmt 6621 C:\WORKD\I&O08\052208\42371A SCIENCE1 PsN: SCIENCE1
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37See Former Employees of BMC Software, Inc. v. Sec’y of Labor, 454 F. Supp. 2d 1306, 1328–

37 (Ct. Int’l Trade 2006). 38See Former Employees of BMC Software, Inc. v. Sec’y of Labor, 454 F. Supp. 2d 1333 (Ct.

Int’l Trade 2006).

ers for TAA. To the extent Labor is making determinations on eligibility based on

funding concerns, it is at complete odds with Congressional will.

Third, my view is that Labor’s overall approach to the unsuccessful TAA applicant

demonstrates a lack of concern for the workers—not a lack of resources. Last minute

requests for extensions of time, absurd interpretations of the statute, and a general

unwillingness to accept the CIT’s authority cannot be explained by resource constraints. In fact, by not following the statute and the CIT’s instructions in good

faith, Labor creates more work for itself—not less.

B. Labor Follows the Will of the Company that Laid Off the Workers

The CIT has expressed concern that Labor unquestioningly relies on employerprovided information to the exclusion of that provided by employees or other

sources.37 In particular, the CIT was concerned that some companies might want

to avoid the negative publicity that might be associated with laying off workers for

trade-related reasons.38 As a result, such companies might have an incentive to see

the petition fail, and would provide information to influence the decision in that direction. Consequently, if those circumstances were present and Labor accepted the

information provided by company officials in the face of contradictory information

provided by the employees, Labor clearly would not be fulfilling its responsibilities.

While I do not doubt that the court’s concerns were justified in the case before

it and are present in others, my concern is that Labor seizes on whatever information supports its decision not to certify—irrespective of the source. In the cases I

have litigated, Labor ignored information provided by company officials, which if

taken at face value, should have resulted in a certification of the workers for TAA.

In one case, the company’s human resources department was even responsible for

filing the petition with Labor. A review of the cases filed at the CIT since 2005

shows that the company filed the TAA petition with Labor in at least six instances.

So I do not believe that Labor tends to take the position favored by the firm laying

off the workers. Rather, Labor relies on information that supports its decision not

to certify.

C. Labor Has the Same Track Record as Other Agencies that Appear Before the CIT

A number of agencies who enforce and administer the U.S. customs and trade

laws are frequent litigants at the CIT. While I have not performed an objective assessment to compare the agencies’ track records, I am able to offer my views based

on the cases in which I have participated. In most trade and customs cases, the dispute between the private parties and the government agencies focuses on several

discrete issues. Rarely (in my own experience, never) are challenges made to the

overall adequacy of the investigation, and rarely does an agency ask for a voluntary

remand, thereby conceding a flawed investigation. Even when Labor does not seek

a voluntary remand, the record is so poorly developed that there is little to do but

ask the CIT to remand to the agency.

The large number of remands in TAA cases also makes Labor stand out from the

other agencies administering the customs and trade laws. In my experience, and in

all but the most unusual cases, if an ITC or DOC determination is not upheld by

the CIT without remand proceedings it often is upheld after the remand proceedings. But in a TAA case, one must expect that multiple remands are going to

be necessary just to settle the basic facts, which the CIT has described as the ‘‘ping

pong phenomenon.’’

Finally, there is no question that the CIT has expressed concern with agencies

besides Labor. But if one looks earlier in my testimony at the excerpts from the

opinions of a wide range of judges that contain scathing criticisms of the ETA, it

is clear that Labor is in a class by itself.

V. SOLVING THE PROBLEMS FACED BY UNSUCCESSFUL TAA PETITIONERS

In my view, fixing the existing system will require one significant non-statutory

change and several statutory ones. Sadly, the biggest obstacle to unsuccessful TAA

petitioners is the Employment and Training Administration of the Department of

Labor. Possibly no other change could have as beneficial an effect as holding the

ETA responsible for conducting a meaningful investigation. The CIT has been trying

to do this, yet the problem persists. As I mentioned earlier in my testimony, for TAA

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39See 18 U.S.C. 3771(d)(3); 18 U.S.C. 2339B(f)(5)(B); 28 U.S.C. § 2261 et seq.

to be effective, Labor has to get it right the first time. Once the court steps in to

force Labor to do a proper investigation it already is too late. By that time, most

workers will have suffered the brunt of the adverse economic consequences associated with the job loss. While I can diagnose the problem, I cannot prescribe an exact

cure for a problem that is deeply entrenched and long standing. I do think it will

require active involvement by the legislature because in my view, the problem has

persisted irrespective of which political party occupies the White House. In other

words, I do not believe that a new occupant in the White House, irrespective of

party, is going to solve the problem without active pressure from the legislative

branch.

In terms of legislative changes, I believe the following statutory amendments

would improve unsuccessful TAA petitioners’ chances of obtaining meaningful relief:

1) mandatory and swift time frames for judicial resolution of TAA cases, 2) mandatory changes to the manner in which the ETA conducts its investigations, and 3)

clarifying that the CIT has the authority to order Labor to certify workers for TAA.

Although it is not common for Congress to impose mandatory time frames on Article III courts, it is not without precedent. Congress has established express and

speedy time frames under which the courts must act in laws ranging from the

Crime Victims’ Rights Act and the Antiterrorism and Effective Death Penalty Act to

procedures dealing with the disclosure of classified information.39 I do not mean to

convey the impression that TAA cases rise to the level of severity present in these

other situations, but Congress created the program because it felt these individuals

needed help, and if lengthy judicial proceedings are preventing that intent from

being realized, Congress can impose time limits if it so chooses.

Another improvement for unsuccessful TAA petitioners would be to require Labor

to change the manner in which it conducts its investigations. As I have indicated

throughout my testimony, I do not believe that the manner in which the ETA currently conducts investigations is consistent with what Congress intended. Two modifications would go a long way towards improving the quality of the investigation the

ETA conducts. First, counsel for the workers should have the right to participate

and ask questions in any fact-finding missions by Labor, whether conducted telephonically or otherwise. Second, Labor must provide counsel for the workers with

the information it obtains on the day it receives the information, or shortly thereafter. These two changes are needed to ensure that the workers, through counsel,

have a meaningful opportunity to participate in the remand proceedings.

Finally, Congress needs to clarify the statute to protect the CIT’s authority. As

I noted earlier, Labor construes 19 U.S.C. § 2395(b) and 28 U.S.C. § 2643(c)(2) to

preclude the CIT from having the authority to order Labor to certify workers for

TAA. As a consequence, litigations drags on endlessly, and getting to a final resolution becomes a war of wills. This cannot be what Congress intended when it enacted

these provisions, and a clear statement to that effect is needed to end this absurd

impasse.

Thank you, Mr. Chairman and Members of the Committee, for affording me the

honor of voicing these concerns on behalf of the countless hardworking men and

women of America who have been failed by the very agency that Congress designated to protect their interests.

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Attachment 2

19 U.S.C. § 2272

(a) In general

A group of workers (including workers in any agricultural firm or subdivision of

an agricultural firm) shall be certified by the Secretary as eligible to apply for adjustment assistance under this part pursuant to a petition filed under section 2271

of this title if the Secretary determines that—

(1) a significant number or proportion of the workers in such workers’ firm, or

an appropriate subdivision of the firm, have become totally or partially separated, or are threatened to become totally or partially separated; and

(2)(A)(i) the sales or production, or both, of such firm or subdivision have decreased absolutely;

(ii) imports of articles like or directly competitive with articles produced by such

firm or subdivision have increased; and

(iii) the increase in imports described in clause (ii) contributed importantly to

such workers’ separation or threat of separation and to the decline in the sales

or production of such firm or subdivision; or

(B)(i) there has been a shift in production by such workers’ firm or subdivision

to a foreign country of articles like or directly competitive with articles which

are produced by such firm or subdivision; and

(ii)(I) the country to which the workers’ firm has shifted production of the articles is a party to a free trade agreement with the United States;

(II) the country to which the workers’ firm has shifted production of the articles

is a beneficiary country under the Andean Trade Preference Act [19 U.S.C. 3201

et seq.], African Growth and Opportunity Act [19 U.S.C. 3701 et seq.], or the

Caribbean Basin Economic Recovery Act [19 U.S.C. 2701 et seq.];

or

(III) there has been or is likely to be an increase in imports of articles that are

like or directly competitive with articles which are or were produced by such

firm or subdivision.

(b) Adversely affected secondary workers

A group of workers (including workers in any agricultural firm or subdivision of

an agricultural firm) shall be certified by the Secretary as eligible to apply for trade

adjustment assistance benefits under this part if the Secretary determines that—

(1) a significant number or proportion of the workers in the workers’ firm or

an appropriate subdivision of the firm have become totally or partially separated, or are threatened to become totally or partially separated;

(2) the workers’ firm (or subdivision) is a supplier or downstream producer to

a firm (or subdivision) that employed a group of workers who received a certification of eligibility under subsection (a) of this section, and such supply or production is related to the article that was the basis for such certification (as defined in subsection (c)(3) and (4) of this section);

and

(3) either—

(A) the workers’ firm is a supplier and the component parts it supplied to

the firm (or subdivision) described in paragraph (2) accounted for at least

20 percent of the production or sales of the workers’ firm; or

(B) a loss of business by the workers’ firm with the firm (or subdivision)

described in paragraph (2) contributed importantly to the workers’ separation or threat of separation determined under paragraph (1).

(c) Definitions

For purposes of this section—

(1) The term ‘‘contributed importantly’’ means a cause which is important but

not necessarily more important than any other cause.

(2)(A) Any firm, or appropriate subdivision of a firm, that engages in exploration or drilling for oil or natural gas shall be considered to be a firm producing oil or natural gas.

(B) Any firm, or appropriate subdivision of a firm, that engages in exploration

or drilling for oil or natural gas, or otherwise produces oil or natural gas, shall

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40 19 U.S.C. § 2272.

be considered to be producing articles directly competitive with imports of oil

and with imports of natural gas.

(3) Downstream producer.—The term ‘‘downstream producer’’ means a firm that

performs additional, value-added production processes for a firm or subdivision,

including a firm that performs final assembly or finishing, directly for another

firm (or subdivision), for articles that were the basis for a certification of eligibility under subsection (a) of this section of a group of workers employed by

such other firm, if the certification of eligibility under subsection (a) of this section is based on an increase in imports from, or a shift in production to, Canada

or Mexico.

(4) Supplier.—The term ‘‘supplier’’ means a firm that produces and supplies directly to another firm (or subdivision) component parts for articles that were the

basis for a certification of eligibility under subsection (a) of this section of a

group of workers employed by such other firm.40

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BIOGRAPHY FOR FRANK H. MORGAN

Frank H. Morgan is an associate with White & Case LLP’s International Trade

Group with an active practice in injury investigations before the U.S. International

Trade Commission (ITC), anti-dumping and countervailing duty investigations before the U.S. Department of Commerce and in related trade litigation and appeals

before the U.S. Court of International Trade and the U.S. Court of Appeals for the

Federal Circuit.

Mr. Morgan has represented manufacturers from numerous countries in a wide

and diverse array of industries, including paper, lumber, steel, fertilizers, and agricultural goods. Mr. Morgan has served as a member of the Court of International

Trade’s planning committee for the 13th and 14th Judicial Conferences and has spoken on trade law issues to industry groups and professional organizations.

Prior to joining White & Case LLP, Mr. Morgan served as a law clerk to the Honorable Judith M. Barzilay, Judge, U.S. Court of International Trade from 1998–

2000. From 1997–1998, Mr. Morgan worked in the Office of the General Counsel of

the ITC.

Publications

‘‘Tips for the New Practitioner at the U.S. Court of International Trade,’’ Georgetown University Law Center Continuing Legal Education Seminar Materials, Trade

and Customs Law Refresher, January 2007

Bars and Courts

District of Columbia Bar, 2000

Virginia State Bar, 1998

U.S. Court of Appeals for the Federal Circuit

U.S. Court of Appeals for the Fourth Circuit

U.S. Court of International Trade

Education

B.A., Villanova University, 1995

J.D., Columbus School of Law, Catholic University of America, cum laude, 1998

Chairman MILLER. Thank you, Mr. Morgan.

Mr. Rosen.

STATEMENT OF MR. HOWARD F. ROSEN, VISITING FELLOW,

THE PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS; EXECUTIVE DIRECTOR, THE TRADE ADJUSTMENT ASSISTANCE COALITION

Mr. ROSEN. Thank you very much, Mr. Chairman, for the invitation this morning to discuss this very important issue.

The U.S. economy faces intense competition from at home and

abroad, and although this competition has its benefits, it places significant costs on American workers and their families, firms, and

communities.

Approximately 16 million jobs are terminated each year of which

four million result in serious unemployment. Although the probability that a worker will become unemployed has declined, the duration of unemployment has actually increased.

Approximately 700,000 firms go out of business each year, affecting six million workers. An additional 1.7 million firms contract

each year, affecting another 11.8 million jobs. About 40 percent of

dislocated workers do not find a job within a year or two after their

layoff. Another 40 percent who find jobs actually experience longterm earning losses. Forty-five counties representing a half a million workers have unemployment rates twice the national average

currently, and 20 metropolitan areas currently have unemployment

rates 50 percent higher than the national average. Of these, 13 are

305

in California, two are in Michigan, and one in each New Jersey,

Washington, Florida, North Carolina, and Arizona.

And finally, federal spending on training and employment and

community development, as a share of GDP, has fallen sharply

over the last 20 years. The country does not have a national, coherent, comprehensive strategy to deal with these economic dislocations. Instead, we have a collection of disparate, ad hoc, and inadequate programs that tend to provide assistance too little, too late.

As a result, efforts to expand economic liberalization and introduce new technologies are facing significant political backlash.

Over the long run reluctance to embrace economic flexibility will

cost U.S. economic growth and seriously affect U.S. living standards.

If I could, let me just give you some examples of some of the

problems that we have with our existing programs. Currently, only

one-third of unemployed workers actually receive unemployment

insurance. If you are lucky enough to receive that unemployment

insurance, it replaces only one-third of your previous wage, and

one-third of unemployed people who receive unemployment insurance exhaust their assistance before they find a new job.

As you have heard, there are targeted programs like the Trade

Adjustment Assistance Program, and I commend Mr. Morgan for

his statements that are really right on. The program, though, for

those people who receive it, is quite effective. The problem is only

a minority of workers receive that assistance.

Programs designed to assist firms respond to competitive pressures such as the Manufacturing Extension Partnership and the

Trade Adjustment Assistance Program for Firms, are also effective,

but their funding is minuscule. The Department of Defense provides comprehensive assistance to communities that are hurt by

military base closings, but there is no equivalent program for civilian dislocations.

I am, therefore, this afternoon calling for a national economic adjustment rapid response as part of the country’s broader competitiveness strategy. This national economy adjustment rapid response would be based on the following elements: comprehensive

assistance to workers, firms, and communities; assisting everyone

in need regardless of cause of dislocation; flexible, not one-size-fitsall; based on early intervention; and coordinating public and private assistance.

Let me give you some examples. Instead of providing workers a

one-size-fits-all list of assistance so that they must take it or leave

it, we would provide a menu of assistance to workers which would

include, in addition to income maintenance and training, possibly

wage insurance and a tax credit to maintain their health insurance

during their period of unemployment. We could expand and build

on the Manufacturing Extension Partnership and the Trade Adjustment Assistance Program for Firms and apply the base-closing

model to civilian economic dislocations.

In conclusion, I just want to state some very basic facts. Number

one, we do not live in a textbook. Markets are not perfect. The

labor markets are also not completely flexible. There are transition

costs. Unfortunately, many economists tend to ignore those transiVerDate 11-MAY-2000 16:08 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00090 Fmt 6601 Sfmt 6601 C:\WORKD\I&O08\052208\42371A SCIENCE1 PsN: SCIENCE1
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1Layoffs affecting 50 or more workers is considered a mass layoff.

tion costs. By contrast, I think that much of public policy is actually made to address transition costs.

The debate is not over should we act or not. That debate was settled decades ago. The question is what kind of assistance do we

provide and who should we assist. The challenge is designing government assisted programs that are cost effective and appropriate.

Mr. Chairman, the Bear Stearns Adjustment Program could potentially cost the American taxpayers $30 billion, many multiples

of the amount that the government currently spends to help workers, firms, and communities. If we can devote this many resources

to save one financial institution, certainly we can find the resources

to assist workers, firms, and communities throughout the country

facing severe economic dislocation.

I look forward to the discussion. Thank you.

[The prepared statement of Mr. Rosen follows:]

PREPARED STATEMENT OF HOWARD F. ROSEN

Designing a National Strategy for Responding to Economic

Dislocation

The U.S. economy faces intense competition from home and abroad. Although increased competition may benefit the economy through access to more, better and

less expensive products and services, it places significant costs on American workers

and their families, firms and communities. These costs are exacerbated by the lack

of a national comprehensive strategy to deal with these economic disruptions. In

place of a national strategy, there is a collection of ad hoc, out-of-date and inadequate programs that provide too little assistance too late to those in need. As a

result, efforts to expand economic liberalization and introduce new technologies in

the economy are facing significant political backlash. Over the long run, reluctance

to embrace economic flexibility may result in lower economic growth and risk longterm improvements in U.S. living standards.

American workers, their families, firms and communities experience significant

dislocations every day:

• Between 1995 and 2004, approximately 16 million jobs were terminated each

year. (See Figure 1.) Four million terminations resulted in serious unemployment.

• Although the national unemployment rate has been failing over the last several, years, the duration of unemployment has been rising. (Figure 2.)

• No region is exempt from the recent changes in the labor market. There has

been a convergence of unemployment rates across all 50 states and the District of Columbia.

• Between 1995 and 2004; approximately 690,000 firms closed each year, affecting 6.1 million workers. An additional 1.7 million firms contracted each year,

affecting 11.8 million workers. (See. Figure 3.)

• Between 1996 and 2007 there were on average 16,400 mass layoff plant closings each year, affecting 1.8 million workers.1 (See Figure 4.)

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308

• Forty-five counties, representing one-half million workers, currently have unemployment rates twice the national average.

• Of the 20 metropolitan areas currently 50 percent above the national average

unemployment rates, 13 are in California, two are in Michigan and one each

in New Jersey, Washington, Florida, North Carolina and Arizona. (See Table

1.)

309

2Kletzer, Lori, Job Loss from Imports: Measuring the Costs, Washington, D.C.: Institute for

International Economics, 2001. 3Long-term recipients are defined in this report as unemployed workers who received UI benefits for a spell of at least four consecutive months, in 2001 or early 2002.

Workers are the first to feel the negative consequences of economic restructuring

due to increased domestic and international competition. They may be asked to cut

back their hours, accept lower wages and/or benefits, or ultimately lose their jobs.

Lori Kletzer finds that almost 40 percent of displaced workers do not find new jobs

within a year or two after their initial job loss.2 (See Figure 5.) Although 40 percent

of workers find new jobs, their new jobs pay less than their previous ones. Only a

little more than 20 percent of displaced workers find new jobs that pay as much

or more than their previous jobs.

Job loss can place enormous strain on household finances. The Congressional

Budget Office reports that Unemployment Insurance (UI) played a significant role

in maintaining family incomes of recipients who experienced long-term spells of unemployment, particularly for those families that had only one wage earner. Before

becoming unemployed, recipients’ average family income was about $4,800 per

month. UI helped offset the reduction in average family income by 20 percent

points.3

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These pressures are not restricted to those workers employed in industries that

directly face increased domestic and international competition. Workers employed in

up-stream and down-stream industries may also experience economic dislocation as

a result of the effect of increased competition on final goods-producing and serviceproviding industries. For example, in addition to its production workers, an apparel

plant closing might affect textile workers, as well as maintenance and food service

workers, designers, cutters, sales representatives and accountants associated with

the production of apparel. Depending on the number of workers laid off from the

apparel plant, there may also be a third ripple effect on the broader community.

Communities with a high concentration of industry may experience further cutbacks

and job losses, as workers and their families spend less money on consumer goods

and services.

Job loss is not restricted to production workers. Firm closures can also affect

white-collar management workers. Although these workers tend to be more highly

educated and earn higher incomes than production workers, their adjustment to economic dislocation can also be costly. Limited job opportunities in the local community may require these workers to move, causing significantly disruptions to their

families.

Mass layoffs and plant closings, and the associated drops in household disposable

income, can also hurt a community’s tax base, having implications for the provision

of government services, including schools, transportation and health care. In summary, what starts as a ‘‘limited’’ lay off or plant closing affecting a select group of

workers can very easily result in successive ripple effects with consequences on an

entire community.

Current Policy Responses to Economic Dislocation

Existing government programs designed to cushion the effects of economic dislocation are, for the most part, out-of-date, ad hoc and inadequate. These programs are

often targeted to assist select groups of workers or communities that have some political importance. Overall, these programs are not part of any comprehensive or coVerDate 11-MAY-2000 16:08 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00095 Fmt 6601 Sfmt 6621 C:\WORKD\I&O08\052208\42371A SCIENCE1 PsN: SCIENCE1
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4Frank Jr., Charles, Foreign Trade and Domestic Aid, Washington: The Brookings Institution.

1974. 5 Executive Office of the President, Office of Management and Budget, Catalog of Federal Domestic Assistance, Washington: Government Printing Office, 2008. 6Kletzer, Lori G. and Howard F. Rosen, ‘‘Reforming Unemployment Insurance for the TwentyFirst Century,’’ The Hamilton Project, Discussion Paper 2006–06, Washington: The Brookings

Institution, September 2006. 7 Author’s calculations based on Department of Labor data.

herent strategy. This ‘‘segmentation ‘‘of assistance is not a new phenomenon. Early

examples include assistance programs for workers employed by Studebaker, the railroad industry and the meat packing industry in the 1960s.4

Many targeted programs are designed to ‘‘compensate’’ workers deemed to be adversely affected by changes in discrete policies, in order to reduce opposition to those

changes. The largest example is Trade Adjustment Assistance (TAA), which was established in 1962 and subsequently expanded as part of Congressional approval of

negotiations to liberalize trade. Other examples include targeted programs to assist

workers affected by the Clean Air Act and legislation to protect Spotted Owls. Congress in currently considering establishing a program to assist workers potentially

adversely-affected by policies aimed at reducing greenhouse gas emissions.

Although there may be a political motivation for these targeted programs, the economic justification for them may not be as compelling. There is not much evidence

that the adjustment burden placed on workers covered by these targeted programs

is significantly different from that experienced by other dislocated workers. In addition to discriminating between groups of workers, these programs create a bureaucratic maze, making it harder for worker to get the assistance they desperately

need.

For example, the Catalogue of Federal Domestic Assistance lists 52 programs

under the category of ‘‘Economic Development,’’ 44 programs under ‘‘Community Development’’ and 60 programs under ‘‘Job Training and Employment.’’ 5 Although the

information included in the catalogue is extremely useful, the catalogue is difficult

to navigate and the material is written at a highly technical level. A more brief and

use-friendly version of this catalogue could provide invaluable assistance to workers,

their families, firms and communities facing economic dislocations.

The following are examples of some of the more well known programs designed

to assist workers, firms and communities adjust to economic dislocation.

Worker assistance

Unemployment Insurance

Despite significant changes in U.S. labor market conditions there have been no

major changes in the basic structure of UI since it was established 70 years ago.

As a result, UI does not currently meet its initial goals, leaving millions of workers

without the assistance they desperately need.6

UI’s original goals were to smooth a worker’s income stream by providing income

support during periods of unemployment, to provide insurance against the risk of

job loss, and to serve as counter-cyclical stimulus during periods of economic downturns.

Although a federal entitlement, UI is administered by the states, allowing each

state to set its own program parameters. On average, workers can receive up to 26

weeks of benefits. The national average weekly benefit in 2007 was $281.17.

The following program indicators suggest that the current UI program falls short

in meeting its initial goals:

• The average recipiency rate, i.e., the percent of unemployed receiving UI, over

the past 27 years is approximately 37 percent.

• The average replacement rate between 1975 and 2004; i.e., the amount of assistance relative to a worker’s previous wage, was 36 percent, far short of the

initial goal of 50 percent.7

• The exhaustion rate, i.e., the percent of workers who exhaust their benefits

before finding new jobs, averaged approximately 30 percent between 1974 and

2007.

Restrictive eligibility criteria constitute a large hole in the existing UI program.

The current look back and job tenure provisions, as well as the exclusion of continVerDate 11-MAY-2000 16:08 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00096 Fmt 6601 Sfmt 6621 C:\WORKD\I&O08\052208\42371A SCIENCE1 PsN: SCIENCE1
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8Some workers associated with temporary placement agencies may receive UI. Twenty states

currently do not cover part-time or temporary workers.

gent workers, i.e., temporary and part-time workers, particularly affect low-income

workers.8 Thirty-seven states do not provide dependent payment supplements.

After taking inflation into account, the real value of the national average weekly

benefit has not changed much over the last 30 years. Nor has it changed much relative to the poverty threshold or average weekly earnings. It has improved relative

to the minimum wage only because that was not increased for a decade.

Figure 6 presents the real annualized value of the national average UI weekly

benefit relative to the real annualized value of the hourly minimum wage, the poverty threshold for a family of four adjusted by inflation, and the annualized value

of the real average weekly wage for all workers. On average over the last 35 years,

the real value of the weekly UI benefit has been about 40 percent below the poverty

rate for a family of four adjusted by inflation, and approximately 44 percent of real

average weekly earnings.

In 1970, Congress enacted the Extended Benefit (EB) program with automatic

triggers to provide assistance in an orderly fashion during periods of high unemployment. Under the current program, UI benefits can be extended for an additional 13

weeks when the unemployment rate reaches a certain level.

Changes in the labor market, combined with the static nature of the triggers,

have produced an extended benefit system that is no longer automatic. As a result,

Congress has occasionally found it necessary to extend UI through legislation. Although helpful to millions of workers, these temporary stopgap measures politicize

UI, thereby undermining one of the initial goals of the program. These temporary

programs have proven to be clumsy, typically being enacted after hundreds of thousands of workers have already exhausted their. UI. In.addition, the sunset provisions are arbitrarily set and usually fall before employment has recovered. Overall,

the Nation’s UI program has become less automatic and more dependent on Congressional action in response to prolonged periods of economic slowdown.

UI is financed by a combination of federal and State payroll taxes. Revenue from

the federal payroll tax is used to finance the costs incurred by Federal and State

governments in administering the UI program and to cover loans to states that exhaust their regular UI funds. States are required to raise the necessary revenue to

finance regular UI benefits paid to their unemployed workers. Currently, federal

taxes finance 17 percent of the UI program. The remaining 83 percent is financed

by State taxes.

The federal tax established by the Federal Unemployment Tax Act (FUTA) is currently 0.8 percent on the first $7,000 of annual salary by covered employers on beVerDate 11-MAY-2000 16:08 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00097 Fmt 6601 Sfmt 6621 C:\WORKD\I&O08\052208\42371A SCIENCE1 PsN: SCIENCE1
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9Kletzer, Lori and Howard Rosen, ‘‘Reforming Unemployment Insurance for the Twenty-First

Century,’’ The Hamilton Project, Discussion Paper 2006, Washington: The Brookings Institution,

September 2006. 10 Budget data are presented according to fiscal year (October to September) and participate

data are collected according program year (April to March).

half of covered employees. A maximum of $56 is collected annually for each worker

who is covered under the program.

There have been few adjustments in the FUTA taxable wage base since it was

first established in 1939. The last adjustment was in 1983. Had the taxable wage

base been automatically adjusted for inflation over the past 65 years, it would currently be about $45,000.

The following are some proposals to improve UI:9

• Shift the determination of eligibility to hours rather than earnings.

• Amend the work test to allow job search for part-time employment.

• Standardize benefit levels to at least half of lost earnings.

• Increase the federal taxable wage base, in steps, from $7,000 to $45,000.

• Set a maximum weekly benefit equal to two-thirds of State average weekly

earnings.

• Fix the extended benefit triggers so that they are more automatic and workers can receive assistance during economic down-turns without disruption.

• Standard allowances for dependents across all states.

• Provide a Health Coverage Tax Credit (HCTC) similar to the one currently

included in the TAA program.

Changes necessary to move UI into the twenty-first century require significant

federal leadership. The very basic structure of UI must be reformed, broadening it

from the single-employer, full-time worker, temporary layoff model to an approach

that accommodates permanent job loss, part-time or contingent work, self-employment, and the incidence of job loss and national, rather than local or regional, unemployment. American workers are currently facing considerable pressure due to

corporate restructuring, technological change and increased competition from home

and abroad. These pressures are likely to intensify as the economy faces new challenges.

Reforming UI is an important step toward providing workers with the assistance

they need to adjust to these challenges.

Training

The Workforce Investment Act (WIA), passed in 1998, provides job training and

related employment services to unemployed and underemployed individuals. The

Act establishes training programs for a wide array of individuals, including, youth,

adult, dislocated workers, Veterans, Native Americans. Although all of these programs fall under the responsibility of the federal Department of Labor, they are administered by State and local One-Stop Career Centers. Federal spending on all of

these programs was $3.7 billion in FY 2007, of which $1.4 billion was dedicated to

dislocated worker training. Of the approximately 260,000 workers who participated

in the program in PY 2007, approximately 182,000 workers received core and intensive employment services and only 77,000 enrolled in training.10

Although designed to assist all dislocated workers regardless of cause of job loss,

the number of participants in WIA programs account for only 6.6 percent of the annual estimate of dislocated workers. In addition, since the program is not an entitlement, there is no guarantee that workers in need will receive training assistance.

Training funds are distributed on a ‘‘first come, first served’’ basis, with little regard

for a worker’s needs.

Trade Adjustment Assistance (TAA)

TAA provides Workers 78 weeks of income maintenance payments, in addition to

the traditional 26 weeks of UI, for as long as they participate in training. In addition, the program includes a 65 percent HCTC, a limited wage insurance program,

job search and relocation assistance. Under wage insurance, otherwise known as Alternative Trade Adjustment Assistance (ATAA), workers above the age of 50, earning less than $50,000, can receive half of the difference between their old and new

wages, for up to two years, subject to a maximum of $10,000. This program is designed to assist the large number of workers who experience earnings losses after

re-employment.

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In order to be eligible for TAA, workers must have been laid off from a plant for

which at least one of the following three criteria ‘‘contributed importantly’’ to its decline in employment and sales:

• An increase in imports

• Laid off from an upstream or downstream producer

• A shift in production to another country

ATAA and HCTC are two examples of how assistance under the TAA for workers

program has shifted from traditional income transfers to more targeted, cost effective assistance. Despite the benefits associated with these new forms of assistance,

enrollment in ATAA and the HCTC are disappointingly low. A 2006 GAO study of

five large plant closings found that less than half of those TAA eligible workers who

visited one-stop career centers were even informed of the HCTC during their visits

to one-stop career centers. A little over half of eligible workers were aware of the

ATAA program.

One of the gapping holes in the existing program is that it does not cover all service workers. As recent press stories suggest, American service workers are experiencing dislocations due to international outsourcing. Although some service workers,

like computer programmers and accountants, have the necessary tools to ease their

adjustment from job to job, other workers, like call center operators and data entry

clerks may not, making their adjustment more costly. Congress is currently considering proposals to expand TAA eligibility to cover all service workers.

Other reform proposals currently under consideration include:

• Raising the cap on training funds

• Increasing the HCTC from 65 percent to 85 percent

• Expanding ATAA to cover workers over the age of 40 making less than

$60,000

• Technical changes to make the program more user-friendly

Although the TAA for workers program has been the subject of some criticism

over the years, it has and continues to provide critical assistance to millions of

workers and their families as they face probably the most severe financial burden

of their lifetime. More than 25 million workers have received assistance under the

program since it was established in 1962.

The TAA for workers program works; the problem is that it helps only a minority

of potentially affected workers. Only 10 percent of estimated group of potentially eligible workers receive assistance. (See Figure 7.)

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Assistance to Firms

Manufacturing Extension Partnership (MEP)

MEP provides a wide spectrum of services, including business support, technical

assistance and training, to manufacturing companies throughout the United States.

Presently, the MEP program includes 59 centers with approximately 440 locations

serving manufacturing establishments across the country. The Centers are financed

through a partnership between Federal and State governments with additional

project funding from private industry. The program fosters partnerships with public

institutions, including the Small Business Development Centers (SBDC), community

colleges, technical colleges and universities, trade associations, local Chambers of

Commerce and organizations focused on economic development. The purpose of the

program is to improve the productivity and enhance competitiveness of U.S. manufacturers. Despite numerous reports of effectiveness, the program’s funding has been

low and relatively flat over the last few years. (See Figure 8.)

TAA for Firms

Congress established the TAA for Firms program in 1962 to help U.S. firms respond to the pressures resulting from increased import-competition in order to avoid

possible cutbacks and layoffs. Initially the program provided technical assistance,

loans and loan guarantees. Congress eliminated the loans and loan guarantees in

1986. Technical assistance is currently provided to firms by 11 Trade Adjustment

Assistance Centers (TAAC) located around the country. Eligibility criteria mirror,

although are not exactly the same as those for the TAA for Workers program.

The TAA for Firms program has historically been quite small. Between 2001 and

2006, the program assisted approximately 150 firms a year that employed some

16,000 workers. Average spending over the last nine years has been approximately

$11 million per year.

Assistance to Communities

Similar to worker assistance programs, community assistance has tended to be

targeted to politically sensitive regions and not widely available to all communities.

The best example is a program designed to assist communities adversely affected

by military base closings.

Department of Defense (DOD) Office of Adjustment Assistance

The DOD Economic Adjustment program has been successful in helping communities in the aftermath of a military base closing. Under the program, the DOD provides intensive technical assistance and funds to help communities prepare strategic

plans for economic development. Economic development specialists are assigned to

regions to help local public and private leaders design and implement its strategic

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11 Rosen, Howard. 2001. A New Approach to Assist Trade-Affected Workers and Their Communities: The Roswell Experiment. Journal of Law and Border Studies 1:1. 12Federal spending on employment and training peaked at 0.46 percent of GDP in 1978 and

1979.

plan. The specialists also help local communities identify and, apply for federal and

State assistance.

In 1998, in response to the Levi Strauss plant closing in Roswell, New Mexico,

Senator Bingaman initiated a series of steps aimed at assisting the workers and the

community modeled after DOD’s base closing program.11 The Levi Strauss plant

was Roswell’s largest single employer and as a result, the economic impact of the

plant closing was felt throughout Roswell and the surrounding communities.

Senator Bingaman’s plan included the following elements:

• A committee was established including representatives from State and local

government, private industry, unions and other non-profit organizations.

• An economic development specialist from the DOD Office of Adjustment Assistance was assigned to provide technical assistance to the committee in developing and implementing a strategic plan to revitalize the region’s economy.

• Senator Bingaman invited representatives from numerous Federal and State

government agencies to meet with public and private sector officials in

Roswell. The purpose of the meeting was to describe the various government

programs designed to assist workers, their families and communities facing

economic dislocation.

• The Clinton administration established an interagency working group to provide assistance to the economic redevelopment committee in Roswell, as well

as to State and local government officials.

It is difficult to evaluate the impact of these measures, since the effort was disbanded prematurely due to political factors. Individual elements of this initiative

have subsequently been tried in response to other plant closings. Congress is currently considering a TAA for Communities program, modeled on Senator Bingaman’s efforts in response to the Levi Strauss plan closing in Roswell.

Summary

This survey suggests that the United States has a series of ad hoc and underfunded programs that serve only a limited number of workers, firms and communities. Most of the programs are motivated by political considerations, with little

economic justification. As a result, these programs discriminate between workers

and communities. Although these programs may be effective in winning support for

discrete policy changes, they certainly do not constitute a national strategy for responding to economic dislocation, regardless of its cause.

Ironically, funding for most of these programs has declined, despite increased

pressures on the U.S. economy, resulting is greater demand for these programs’

services. At 0.05 percent of GDP, federal spending on employment and training programs is at its lowest rate in almost 45 years.12 Federal spending on community

development programs was also 0.05 percent of GDP in 2006, down considerably

from its peak of 0.18 percent of GDP in 1980. (See Figure 9.)

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The National Economic Adjustment Rapid Response (NEARR)

Developing a comprehensive national strategy to respond to economic dislocation

would require four steps:

• Update existing adjustment programs, e.g., UI, to meet the needs of the current workforce.

• Reform existing programs borrowing from effective elements in targeted programs, e.g., TAA.

• Remove discrimination resulting from assistance programs targeted toward

select groups of workers.

• Bring all programs under the umbrella of a comprehensive national strategy.

The National Economic Adjustment Rapid Response (NEARR) would be based on

the following principles:

• Assist all in need, regardless of cause of dislocation

• Comprehensive assistance to all workers, firms and communities

• Flexible, not ‘‘one size fits all’’ assistance

• Coordinate public and private assistance

• Early intervention

Any response to economic dislocation needs to be built on the foundation of encouraging investment in new or expanding existing plant and equipment, in order

to create high skilled, high wage jobs. At 10 percent of GDP, current investment

in plant and equipment is significantly below its 50-year trend. (See Figure 10.) Inadequate investment hurts the prospect of raising productivity that in turn affects

the creation of high skilled, high wage jobs. Sustainable increases in productivity

growth are necessary in order to achieve long-run improvements in living standards.

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Ironically, over the last several years, adjustment assistance programs targeted

to small groups of workers and communities have been expanding while general programs designed to those facing severe economic dislocation have become more outof-date and inadequate. Any national strategy should be designed to provide adequate assistance to all workers, firms and communities facing economic dislocation,

regardless of cause.

The existing ‘‘one size fits all’’ worker assistance programs need to be reformed

in order to make them more flexible and tailored to the needs of individual workers

and local economic conditions. One way to achieve this goal would be to allow workers to formulate their own assistance program from a menu of various forms of assistance, including income maintenance payments, training, employment services,

wage insurance, health insurance assistance, as well as job search and relocation

assistance.

Most of the current resources devoted to worker assistance are devoted to reducing the costs associated with job loss. The limited wage insurance program under

TAA is an effort to shift assistance more toward re-employment. Wage insurance,

re-employment bonuses and other wage subsidy schemes, deserve further study and

experimentation.

Re-employment services, including job banks, resume-writing and interview workshops, have proven to be extremely cost effective. These efforts should be expanded

and made available to workers prior to their lay off. Training may be necessary for

workers with little prospect of returning to their original occupation. Programs

aimed at encouraging on-the-job training (OJT) should be promoted, since by definition, this form of training is most closely related to re-employment. Dislocated workers should be able to take advantage of the myriad of education-related financial

assistance programs available to college-age students.

Providing technical assistance to firms facing intensified domestic and international competition may prevent, or at least minimize, economic dislocations. MEP

and the TAA for Firms programs are effective, but have limited reach. These kinds

of programs should be expanded and made available to all firms, regardless of location, industry or cause of economic dislocation. These programs should also be integrated into worker and community adjustment programs.

Designing a community adjustment program should begin by borrowing from

DOD’s base closing program. This program currently assists communities develop

and implement a strategic plan for responding to severe economic dislocation, as

well as helps communities identify and apply for appropriate federal and State

grants and loans.

Communities are rarely ‘‘prepared’’ for significant economic dislocations. For example, most communities do not have the capacity and expertise to assess the needs

of workers and assist them in designing their own adjustment plans. Since it is inefficient for each community to develop and maintain this kind of resource, the FedVerDate 11-MAY-2000 16:08 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00103 Fmt 6601 Sfmt 6621 C:\WORKD\I&O08\052208\42371A SCIENCE1 PsN: SCIENCE1
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eral Government might establish economic dislocation ‘‘swat teams’’ to provide

logistical assistance to communities in a timely fashion. These teams would be assigned to communities in need, moving on once they complete their tasks.

Communities need to have the necessary and adequate infrastructure in order to

provide effective training. Since communities may not experience large-scale layoffs

often, they may not have resources necessary to meet workers’ training needs. For

example, training facilities, like community colleges, may not have sufficient room

and equipment to accommodate large increases in enrollment. Addressing these considerations should be part of any comprehensive adjustment program.

In order to insure that a community’s adjustment efforts are coherent and that

all the pieces are fully coordinated, it might convene a group of Federal, State and

local governments officials, as well as private sector representatives. The group

might include local representatives from unions, community colleges, religious and

social service organizations and other non-profit groups, as well as regional coordinators of federal assistance programs, like the Economic Development Administration and the Employment and Training Administration. This group can potentially

play an instrumental role in the development and implementation of the community’s strategic plan for responding to the economic dislocation it is experiencing.

In some instances, firms may provide their own assistance to laid off workers and

local communities. Firms should be encouraged to voluntarily provide this type of

assistance, since this is difficult to mandate it. The local board described above

might help coordinate and leverage the various forms of public and private assistance.

Conclusion

Pressures facing American workers, firms and communities resulting from increased domestic and international competition are not likely to dissipate any time

soon. On the contrary, they are likely to continue intensifying. Existing programs

designed to assist workers, firms and communities respond to economic dislocation

are ad hoc, out-of-date and inadequate. These piecemeal efforts tend to be ‘‘too little

too late,’’ placing an additional burden on workers, firms and communities.

The lack of a national strategy designed to respond to economic dislocation is contributing to political backlash against further trade liberalization and the introduction of new technologies. The growing resistance to economic change could jeopardize future increases in economic growth and risk long-term improvements in U.S.

living standards.

Economic flexibility brings costs and benefits. Movement out of activities that require low skills and pay low wages and into activities that require high skills and

pay high wages can improve overall productivity providing benefits to all Americans.

On the other hand, this movement can place a significant burden on workers, firms

and communities. Easing this adjustment burden through public and private efforts

may reduce opposition to economic change.

Establishing a comprehensive and integrated National Economic Adjustment

Rapid Response, primarily based on updating and expanding existing programs,

may be a first step toward responding to the economic dislocations being experienced through the United States.

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BIOGRAPHY FOR HOWARD F. ROSEN

Howard Rosen is Executive Director of the Trade Adjustment Assistance Coalition, which he established in 2002. The Coalition advocates on behalf of workers,

farmers and fishermen, firms and communities adversely affected by changes in

international trade and investment. Rosen assisted in drafting provisions, included

in the Trade Act of 2002, which significantly reformed and expanded the Trade Adjustment Assistance program.

Rosen also currently serves as a Visiting Fellow at the Peterson Institute for

International Economics. He previously served as Minority Staff Director of the

Congressional Joint Economic Committee, and Executive Director of the Competitiveness Policy Council. Prior to that he was Research Associate and later Assistant

Director of the Institute for International Economics, and an economist in the Research Department of the Bank of Israel in Jerusalem and in the Bureau of International Labor Affairs in the US Department of Labor. He has consulted to the Senate Finance Committee, the Agency for International Development, the Inter-American Development Bank, the United Nations Conference on Trade and Development,

the Business Roundtable and Data Resources, Inc.

Mr. Rosen received his BA and MA in economics from the George Washington

University, where he concentrated on international economics.

Chairman MILLER. Thank you, Mr. Rosen.

Ms. Moore.

STATEMENT OF MS. JEANIE MOORE, VICE PRESIDENT, CONTINUING EDUCATION PROGRAMS, ROWAN-CABARRUS COMMUNITY COLLEGE, SALISBURY, NORTH CAROLINA

Ms. MOORE. Yes. Congressman Miller and Committee, thank you

very much for inviting me here today to share the story of our community in Kannapolis, North Carolina.

Kannapolis, North Carolina, was the home of Pillowtex Corporation, formerly Fieldcrest Cannon and Cannon Mills, which was the

renowned manufacturer of Cannon towels and sheets. The 116-

year-old textile operation occupied over nine million square feet of

space in downtown, in the heart of the Kannapolis community. In

2003, the company was plagued with periodic layoffs, bankruptcy

rumors, and an uncertain future. Over 4,000 of our area residents

were employed by the textile giant.

This company closed in July of 2003. We were faced at the community college with dealing with a very unique workforce. Fortysix percent did not have a high school credential, and the average

age was 46. There were multi-generational job losses within families. They had limited transportation, they were psychologically

and physically immobile, and the social and economic structure of

their community had been completely dismantled. As of September

of 2003, 42.5 percent were behind in their rent or house and mortgage payments, and 10.6 percent had already gotten foreclosure notices. Approximately 93 percent had no ability to afford to get

health insurance.

Our local community college had multiple challenges in dealing

with this population. We did receive a national emergency grant

from the Department of Labor. It was the first of its kind directly

given to community colleges. The administrative process for that

grant was not well defined, which caused us some angst.

Enrollment increases for community colleges in North Carolina

do not generate additional funding until the year after the enrollment occurs. So having an influx of workers posed some particular

economic challenges for us, even with the NEG [National Emergency Grant] award. There were no funds typically available for

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new programs and development. These efforts generally are absorbed in our annual operating budget.

The Pillowtex enrollment demand occurred during a time when

the college was already experiencing significant additional growth,

simultaneous with our fall registration. Capacity building efforts in

terms of both facilities and human resources require additional

time, energy, and dollars that were not well-conceived at that time.

However, at the end of the project through our fall semester of

2007, I am happy to report these results. The college provided direct services to 92 percent of all eligible clients in the service area;

52 percent of the eligible population enrolled in programs. Among

the clients the college achieved a 95 percent satisfaction level for

its services. We did see increased enrollment in trade and technical

programs which were previously under-enrolled. We did as a college create a comprehensive accountability plan, which allowed us

to track clients and the services that were provided to them. We

awarded over 447 curriculum certificates, diplomas, and degrees,

460 continuing education certificates, 259 GEDs.

There were multiple lessons that were learned through this process. First and foremost, sound decisions regarding training were

difficult to make because there was an absence of jobs. Decisions

were made about training during times of great stress; basic life

needs of housing, substance, and health insurance were a priority

for the clients. Many enrolled simply to extend unemployment benefits. Compressed periods of study during a summer term did not

work well with this population. Having students enroll in remedial

classes simultaneous with course of study limits opportunity for

success.

Displaced workers lacked access and familiarity with technology.

Many had a significant lack of job-seeking skills. Their wage expectations were unrealistic based on the skills that they had and the

jobs that were available. The college adopted an attitude of save

those who you can, because not everyone could be saved during this

process. This was the first award directly to our college. I spoke

earlier about administrative challenges. Our marketing materials

were geared to young college students, not to adults, and many did

not see that they fit into our scheme of practice.

Of course, the TRA [Trade Readjustment Allowances] and legislation partners were concerned. There were lessons there. The TRA

did not support programs of study leading to self-employment, even

though the local economy offered job opportunities in those areas

such as real estate, cosmetology. Legislation restrictions regarding

students enrolled in basic skills and English as a second language,

there was a 52-week limit. That was not often enough time for students to progress to the levels that they needed to have sustainable

skills for a new job.

Advising was difficult because the trade legislation was being rewritten simultaneous with the event, and we had lots of second

guesses as to what we were to do or not to do. The Employment

Security Commission definition of employment of $1,000 within one

quarter does not equal sustainable wages and benefits, and there

was a mechanism needed for sharing confidential information

among our National Emergency Grant partners.

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We move forward to 2008, with what is happening in Kannapolis.

Kannapolis is now the home of the developing North Carolina Research Campus (NCRC). The city witnessed the demolition of the

former Pillowtex site simultaneously with the construction of majestic, state-of-the-art research laboratories and facilities. Within

two years the campus anticipates that there will be over 2,000 research scientists and technicians employed in these early buildings.

By 2032, the region is expected to realize over 37,450 jobs related

to this project.

The project is the dream of Mr. David H. Murdock, the former

owner of Fieldcrest Cannon, who is also owner of Dole Foods Company. Mr. Murdock has a long-standing commitment to health and

welfare of people around the world. After realizing the great potential of biotechnology to cure disease and improve health, he dedicated more than $1 billion of his personal funds to developing this

campus. His vision is to create a world-class research hub where

collaborative science will lead the charge for great discoveries in

nutrition, health, and biotechnology research. The discovery and innovation performed at the NCRC will have a lasting effect on the

way that the country and the world lives.

This NCRC project is a product of serendipity for the Kannapolis

community. Not everyone has a private benefactor with the means

of Mr. Murdock to come in and invest. It is a product of extraordinary vision, a unique public-private partnership with Mr.

Murdock, the State of North Carolina, the North Carolina University System, the North Carolina Community College System, and

local government. It is a commitment to collaboration and innovation by the economic development community, local and regional

workforce partners, and educational providers K through 16. There

is a requirement in this project to embrace change, diversity, and

change the culture, and there is a recognition that the old economy

is no longer sustainable.

The characteristics of the project are designed around the principles of math, science, research, discover, and innovation, their

state-of-the-art facilities and equipment; a community that provides infrastructure and amenities to support the concept of live,

work, and play; collaboration among multiple constituencies; focus

on health, wellness, and nutrition; an emphasis on embracing

change and diversity; creating a knowledge-based economy,

globalization of business; and entrepreneurship and creativity.

North Carolina has strengths in terms of economic recovery with

a positive history of collaboration and partnership among its Job

Link providers; the attractive quality of life; an excellent geographic location; business friendly; a best-funded, best-organized

community college system, not necessarily well-funded or well-organized; unique funding through our new and expanding industry

training, focused industry training and customized industry training that allows us to support pre-employment and skill development and customized training for job creation and development in

the manufacturing sectors. The North Carolina Biotechnology Center, the North Carolina BioNetwork, National Center for Biotechnology Workforce Training, emerging partnerships, collaborations with universities. A commitment to education and skill development, innovation and customization in education and training, a

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support of entrepreneurship and small business growth, the ability

to leverage resources and build partnerships among workforce and

economic development practitioners. We have an increasing number of early college programs throughout the state, and we recognize that recovery from mass job losses is not immediate. There is

no quick fix.

Our current state of the region, we have continued challenges of

job loss and job layoffs. We have continued unemployment and

underemployment, basic survival needs of housing, utilities, food,

and transportation supersede participation in education. We have

worker shortages in health care, advanced technologies, and technical occupations, and we are continuing efforts to try to bridge

local workers to jobs of the future. We have engaged in constant

strategies to build capacity for advanced technology in the region

through partnerships, collaboration, and articulation of programs.

While the NCRC has not yet produced jobs for the majority of

dislocated workers from Pillowtex, we recognize that this economic

recovery will be a long-term process, and we are looking forward

to the future.

[The prepared statement of Ms. Moore follows:]

PREPARED STATEMENT OF JEANIE MOORE

The Rebirth of Kannapolis

Abstract

North Carolina has suffered significant job losses in textile, furniture and tobacco

manufacturing. In 2003, the state recorded the largest single lay-off in its history

when textile giant Pillowtex Corporation (formerly Fieldcrest-Cannon) closed its

doors, effectively displacing 4,790 workers statewide. Through the U.S. Department

of Labor, local and State employment security commission agencies and Job Link

Career Centers received $24.5 million in National Emergency Grant (NEG) funding

to address the needs of this displaced population. An additional $2.5 million was

awarded to the state’s community college system to build capacity to meet educational and training demands. Rowan-Cabarrus Community College (RCCC) experienced the largest influx of students, exceeding expectations by enrolling 52 percent

of the affected clients in programs of study. Consequently, the college was recognized for its success with the 2005 Workforce Innovation Award for serving special

population in the workplace from the U.S. Department of Labor. Although the NEG

expired in December 2005, the local community of Kannapolis (original site of

Pillowtex) is in the midst of an amazing transformation with the evolution of the

North Carolina Research Campus (NCRC), the legacy project of David H. Murdock,

CEO of Dole Foods. This public/private development is anticipated to create in excess of 2,000 biotechnology research jobs beginning in 2008 and a total of 37,000

research-related and ancillary jobs for the Charlotte Region by 2032.

Kannapolis 2003

Pillowtex

Kannapolis was the home of Pillowtex Corporation (formerly Fieldcrest Cannon

and Cannon Mills), renowned manufacturer of Cannon towels and sheets. The 116-

year-old textile operation occupied over nine million square feet of real estate in the

heart of downtown Kannapolis. In 2003, the company was plagued with periodic layoffs, bankruptcy rumors, and an uncertain future. Over 4,000 area residents were

employed by the textile giant.

Unique Nature of the Workforce

• 46 percent without a high school credential

• Average age 46

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• Multi-generational job losses within families

• Limited transportation

• Psychologically and physically immobile

• Social and economic structure of the community in Kannapolis dismantled

• Approximately 500 workers non-English speaking (Hispanic and Southeast

Asian)

• As of September 2003, 42.5 percent behind in rent or house mortgage payments.

Æ 10.6 percent received foreclosure/eviction notices.

• 92.7 percent indicated they cannot get or afford health insurance.

* Taken from data provided by N.C. Department of Commerce and a Long-term

Needs Assessment Report conducted by Research and Training Specialist, Inc.

(RTS), September 2003.

Local Community College Challenges

• NEG award was first of its kind directly given to community college (Administrative process was not well-defined)

• Enrollment increases do not generate additional funding until the year after

the enrollment occurs

• No funds are available for new program development; these efforts must be

absorbed in annual operating budget

• Pillowtex enrollment demand occurred during time when college was already

experiencing significant additional growth simultaneous with fall registration

• Capacity building efforts in terms of both facilities and human resources require additional time, energy, and dollars

RCCC Outcomes through Fall Semester 2007

• Provided direct service to 92 percent of eligible clients

• 52 percent of eligible population enrolled

• 95 percent satisfaction level among NEG eligible clients

• Increased enrollment in trade and technical programs

• Created a comprehensive accountability plan with computerized client database and tracking system

• 447 Curriculum certificates, diplomas, degrees awarded

• 460 Continuing Education certificates awarded

• 259 GEDs awarded

Lessons Learned

Concerning clients

• Sound decisions regarding training difficult due to the absence of jobs

• Decisions were made during times of stress; basic life needs of housing, sustenance, and health insurance were priority

• Many enrolled in courses simply to extend unemployment benefits

• Compressed periods of study such as summer term did not work well with

this population

• Enrollment in remedial classes simultaneous with course of study limited the

opportunity for success

• Displaced workers lacked access and familiarity with technology

• Lack of job seeking skills

• Wage expectations were unrealistic based on skills

Concerning the College

• Adapt attitude—save those you can

• First NEG award directly to community colleges—administrative challenges

• No marketing/orientation materials geared to the needs of this population

371

• Faculty and staff were not trained on how to deal with the emotional stress

of displaced workers

Concerning the Trade Legislation/Partners

• TRA did not support programs of study leading to self-employment even

though local economy offered job opportunities (ex., Real Estate/Cosmetology)

• Trade legislation restrictions regarding students enrolled in Basic Skills and

ESL—52 week limit

• Advising difficult as Trade legislation being re-written simultaneous with

event

• ESC definition of employment ($1,000 within one quarter) does not equal sustainable wages and benefits

• Mechanism needed for sharing confidential information among NEG partners

Kannapolis 2008

North Carolina Research Campus Project

Kannapolis is now the home of the developing North Carolina Research Campus

(NCRC). The city witnessed the demolition of the former Pillowtex site simultaneously with the construction of majestic state-of-the art research laboratories and

facilities. Within two years, the campus anticipates that there will be over 2,000 research scientists and technicians employed in these early buildings. By 2032, the

region is expected to realize over 37,450 jobs related to the NCRC project. (Source:

Market Street Report)

Mr. David H. Murdock, former owner of Fieldcrest Cannon, is the visionary behind NCRC. As owner of Dole Foods Company, Inc., Mr. Murdock has a long-standing commitment to the health and welfare of people around the world. After realizing the great potential of biotechnology to cure disease and improve health, he

dedicated more than one billion dollars of his personal funds to developing the

NCRC. His vision for NCRC is to create a world class research hub where collaborative science will lead the charge for great discoveries in nutrition, health and biotechnology research. The discovery and innovation performed at the NCRC will have

a lasting effect on the way that the country, and the world, lives.

‘‘The Research Campus will be a thriving scientific community where the best

minds will shape the way we understand nutrition and ifs relationship to disease.’’—

David H. Murdock, NC Research Campus Founder and Visionary

The NCRC is the product of:

• Serendipity (Private benefactor David H. Murdock)

• Extraordinary vision

• Unique public/private partnership with David Murdock, State of North Carolina, NC University System, NC Community College System, and local government

• Commitment to collaboration and innovation by economic development community, local and regional workforce partners, educational providers K–16

• Requirement to embrace change, diversity and change culture

• Recognition that ‘‘old economy’’ is no longer sustainable

Characteristics of the NCRC Project

• Designed around the principles of math, science, research, discovery, and innovation

• State-of-the-art facilities and equipment

• Community that provides infrastructure and amenities to support the concept

of ‘‘live, work, and play’’

• Collaboration among multiple constituencies

• Focus on health, wellness, and nutrition

• Emphasis on embracing change and diversity

• Creation of knowledge-based economy

• Globalization of business

• Entrepreneurship and creativity

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North Carolina Strengths

• Positive history of collaboration and partnership of Job Link Career Centers

and NC Community Colleges

• Attractive quality of life

• Excellent geographic location—access to transportation

• Business friendly

• ‘‘Best funded, best organized’’ community college system in the country (not

necessarily well-funded or well-organized)

• Unique funding through New and Expanding Industry Training, Focused Industry Training, and Customized Industry Training provides venues to support pre-employment training and skill development, as well as customized

training for job creation and development in manufacturing sectors

• North Carolina Biotechnology Center

• North Carolina BioNetwork—specialized initiative within NC Community

College System designed to establish a competitive advantage for the state in

recruiting biotechnology industry

• National Center for Biotechnology Workforce Training (Forsyth Technical

Community College)

• Emerging partnerships, collaborations with universities

• Commitment to education and skill development

• Innovation and customization in education and training

• Support of entrepreneurship and small business growth

• Ability to leverage resources and build partnerships among workforce and

economic development practitioners

• Increasing numbers of successful Early College programs throughout the

state

• Recognition that recovery from mass job losses is not immediate—‘‘There is

no quick fix’’

Current State of the Region

• Continued challenge of job loss and layoffs

• Continued unemployment and underemployment

• Basic survival needs of housing, utilities, food, and transportation supersede

participation in education

• Worker shortages in health care, advanced technologies, and technical occupations

• Continued efforts to ‘‘bridge’’ local workers to jobs of the future

• Constant strategies to build capacity for ,advanced technology in the region

through partnerships, collaboration, articulation of programs

Bibliography

N.C. Department of Commerce, Division of Employment and Training. Pillowtex

Employee Survey. August 2003.

Research and Training Specialist, Inc. A Long-term Needs Assessment Report. September 2003.

Market Street Services, Inc. and Economic Impact Group, LLC. ESTIMATING THE

ECONOMIC IMPACT OF THE NORTH CAROLINA RESEARCH CAMPUS.

October 16, 2006. <http://www.ci.kannapolis.nc.us/NCRC¥16.asp>

Market Street Services, Inc. SWOT ANALYSIS: Preparation for the North Carolina

Research Campus. October 16, 2006. <http://www.ci.kannapolis.nc.us/

NCRC¥16.asp>

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Economic Recovery Timeline.

April 2003

• Rapid Response meeting with Department of Commerce

• No definite information regarding magnitude of Pillowtex decision

• No foreseeable jobs on the horizon

June 17, 2003

Governor’s Task Force

• Participants included NC Dept. of Commerce, NC Dept. of Labor, the NC

Community College System, NC Governor’s office, the NC Employment Security System, Cabarrus County and Kannapolis City government officials, and

Rowan-Cabarrus Community College (RCCC).

• The purpose of the task force was to bring all interested parties together to

begin developing a strategy for mass layoffs.

• The task force was ‘‘planning for the worst, hoping for the best.’’ At best,

Pillowtex would announce a limited number of layoffs. At worse, the company

would shut its doors.

July 30, 2003

• Pillowtex Corporation closed

• Displaced 7,650 employees company wide

• 4,790 in North Carolina

• 4,340 plant workers in Cabarrus and Rowan Counties

• Number of residents in RCCC service area—3,990

• Largest single layoff in the southeast United States

August 4, 2003

Rapid Response meetings commence at Pillowtex Plant 4

August 14, 2003

Job Link Resource Center opened at Plant 4 (Rowan and Cabarrus Job Link

Career Centers, Rowan-Cabarrus Community College)

August 15, 2003

$20.6 million National Emergency Grant awarded to assist Pillowtex workers

August 20, 2003

RCCC Fall Semester began (record 20 percent enrollment growth)

December 2004

David Murdock purchases Kannapolis Pillowtex properties in U.S. Bankruptcy

Court

July 2005

RCCC receives Workforce Innovations Award from US Department of Labor for

‘‘Serving Special Populations in the Workplace’’

November 2005

Groundbreaking ceremony for Core laboratory facility of North Carolina Research Campus

December 2005

Pillowtex training project officially ended

January 2007

R3 Center opens on perimeter of North Carolina Research Campus. To date,

over 2,100 clients have been served

September 24, 2007

M.U.R.D.O.C.K. Study (Measurement to Understand Reclassification of Disease

of Cabarrus and Kannapolis) announcement

August 2008

Opening of Core Laboratory facility of North Carolina Research Campus

374

Opening of Rowan County Early College

Fall 2008

Opening of N.C. State University and University of North Carolina buildings

at the North Carolina Research Campus

August 2009

North Carolina Research Campus Early College opening

375

Best industry Practices in Rapid Response

Example: Philip Morris USA

• History of sound hiring practices to accumulate an educated and technically

competent workforce

• Advance notice to employees and community regarding relocation decision

(three years)

• Carefully constructed business plan to review relocation impact on employees,

primary stakeholders, and community

• Transparent process of communication regarding company’s timeline and activities related to relocation

• Availability of severance options and relocation assistance

• Commitment to skill development and education through tuition reimbursement and ‘‘in-house’’ Employee Development Center (both pre- and post-relocation announcement)

• Continuous engagement in local, regional, and State economic and workforce

development initiatives

• Well-established endowed scholarship fund available to provide on-going support for community college scholarship awards

• Strategic grant contributions to stakeholders that enhance and create opportunities to build capacity for workforce development within the region

Philip Morris USA plans to close its Cabarrus County, NC plant by 2010. The

company has implemented the Best Practices described above in its relocation strategy.

This information is offered in contrast to the scenario that occurred when

Pillowtex Corporation closed in 2003.

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BIOGRAPHY FOR JEANIE MOORE

Mrs. Moore earned her Bachelor’s Degree in Special Education from Greensboro

College; her Master’s Degree in Adult Education from Appalachian State University;

and has completed additional studies at UNC–Greensboro. She has been employed

at college since 1977, and is a native of Rowan County.

Currently, Jeanie oversees the continuing education programs of Rowan-Cabarrus

Community College (RCCC) that range from basic skills (literacy) to customized

training programs in Focused Industry Training and New & Expanding Industry.

In addition to her Continuing Education responsibilities; she is the liaison for the

college for the North Carolina Research Campus project and oversees the R3 Career

Center. She has been a member of the Senior Leadership Team since 1996, participating in strategic planning, budgeting, facilities planning and design, and program

development.

Jeanie is a former member of the North Carolina Community College Economic

Workforce Development Leadership Committee and was President of the NC Community College Adult Educators’ Association from 1999 to 2000. She served as CoDirector of the NC Community College Leadership Program from 1990–1992.

Community and state-wide involvement includes; Salisbury-Rowan Economic Development Board (current Chair); Centralina Council of Governments Economic Development Board; NC BioNetwork BioBusiness Advisory Committee; Advisory Committee for Biotechnology in the Charlotte Region (North Carolina Biotechnology

Center); Charlotte Regional Workforce Development Partnership; N.C. Community

College Adult Educators’ Association; numerous Chamber of Commerce committees

in both Rowan and Cabarrus counties.

Jeanie has presented at a variety of State and national conferences covering topics such as Leadership, Continuing Education Supervision, Rapid Response to Dislocated Workers, and Biotechnology. In July 2005, Jeanie traveled to Philadelphia

to receive the United States Department of Labor Workforce Innovations Award for

‘‘Serving Special Populations in the Workplace’’ for the Pillowtex Project.

Chairman MILLER. Thank you, Ms. Moore.

Dr. Palley.

STATEMENT OF DR. THOMAS I. PALLEY, FOUNDER, ECONOMICS FOR DEMOCRATIC AND OPEN SOCIETIES PROJECT,

WASHINGTON, D.C.

Dr. PALLEY. Chairman Miller, Members of the Committee, thank

you for the opportunity to contribute to this hearing. My name is

Thomas Palley, and I am an economist. One of the subjects I have

studied extensively is globalization and its impact on the American

economy.

Globalization has already caused significant job loss, particularly

in the manufacturing sector. Since manufacturing is key for productivity growth and for producing goods to exchange with other

countries, these losses put our future prosperity at risk. As

globalization deepens, future job dislocations will affect a far wider

swath of the economy.

However, job dislocation is just part of the story. In my view, a

greater danger is that globalization threatens to permanently dissolve the social contract that has historically supported shared

prosperity. Thus, globalization has already contributed to wage

stagnation and rising income inequality, and that looks set to continue.

So far the macro-economic consequences of rising inequality have

been muted by rising debt and asset price bubbles that have compensated to sustain consumer demand. However, there are indications that many households have reached their borrowing limits,

which augurs lower future growth.

These observations illustrate the depth of the challenge posed by

globalization. How our government responds will significantly imVerDate 11-MAY-2000 19:18 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00066 Fmt 6602 Sfmt 6601 C:\WORKD\I&O08\052208\42371B SCIENCE1 PsN: SCIENCE1
386

pact the future opportunities of American families to participate in

the American dream. That makes an understanding of

globalization critical, as we are unlikely to design the right policies

without it.

The past 25 years have seen a stunning increase in global economic integration that shows every indication of deepening. For

some, globalization is equivalent to trade, and outsourcing is merely an extension of trade as we know it. For this group, outsourcing

promises significant future gains without any long-term costs for

society as a whole, although individuals may be economically injured.

An alternative view that I subscribe to is that globalization is a

qualitatively new phenomenon, with outsourcing being its latest

evolution. Globalization and outsourcing could not proceed without

trade, but globalization is far more than trade, and that more than

anything else is the message that I would like to communicate to

the Committee today.

That we have treated globalization as if it was trade explains

why our policies have come up short. Classical free trade theory,

which has driven U.S. integration into the global economy, claims

all can benefit when countries specialize in producing those things

in which they have comparative advantage. For this to hold, the

means of production, that is capital and technology, must be internationally immobile, stuck in each country. That is what

globalization has undone.

Jack Welch, the former CEO of General Electric, captured the

new reality when he talked of ideally having, ‘‘every plant you own

on a barge.’’ He envisioned factories floating between countries to

take advantage of lowest costs, be they due to undervalued exchange rates, low taxes, subsidies, or cheap labor. Globalization

has made Welch’s barge a reality, creating a new world of what I

call ‘‘barge economics,’’ in which the engine of trade is capital mobility rather than comparative advantage.

In this new world, so-called free trade increasingly trades jobs

and promotes downward equalization of wages and standards by

fundamentally changing the balance of bargaining power between

workers and corporations and also by changing the margins of competition between countries.

Think of two swimming pools, with the U.S. being represented by

the pool with the higher water level. Barge economics joins the two

pools together, causing the water to equalize at a lower level. The

U.S. response to barge economics has been competitiveness policy,

which advocates methods such as increased education spending to

improve skills, lower corporate tax rates, and investment in R&D

incentives. The thinking is increased competitiveness can make the

U.S. more attractive to business. But such steps cannot anchor the

barge.

For instance, government can subsidize R&D spending, but the

resulting innovations may simply end up in new offshore factories.

Moreover, competitiveness policy can be counterproductive because

it easily degenerates into a race to the bottom. For instance, if the

U.S. cuts corporation taxes, other countries may match to stay competitive. The result is no gain for the U.S., while profit taxes are

387

lowered and tax burdens shifted onto wages, which widens income

inequality.

Not only does barge economics undermine earlier policy tools, it

also creates completely new challenges that reveal just how different globalization is from the old world of free trade theory.

Barge economics incentivizes countries to adopt unfair policies to

increase their relative business attractiveness. These policies include disregard of environmental damage, suppression of labor to

keep wages low, direct subsidies, and undervalued exchange rates.

All are visible in China, the poster child for such abuses.

Another challenge is the creation of a corporation versus country

divide. When corporations were nationally based, profit maximization by business contributed to national economic success by insuring efficient resources. Today corporations still maximize profits,

but they do so from the standpoint of their global operations. That

is good for corporations, but may not be good for countries.

What does this mean for policy? First, we need to continue with

the collection of policies known as competitiveness policy. That

means investing in public infrastructure and education and encouraging R&D spending.

Second, we need to continue with traditional trade enforcement

policies that must be vigorously enforced, and we need to expand

and strengthen policies like Trade Adjustment Assistance. But it is

absolutely critical that we recognize that these older policies are

not enough. Put bluntly, barge economics undermines the effectiveness of competitiveness policy, while increased assistance to displaced workers treats the symptoms, but not the cause. Barge economics increases temptations for unfair policy and creates a wedge

between corporate and national interests.

These are the challenges that must be addressed, and if they

cannot be addressed, the future of the American dream looks grim.

Preventing unfair competition calls for global rules, which is where

exchange rate rules and robust labor and environmental standards

enter. Corporations know that a global economy needs global rules,

which is why they have worked so hard to create global property

rights. However, they have consistently opposed global rules that

help workers and advance social concerns.

Closing the wedge between corporation and country calls for such

measures as ending preferential tax treatment of profits earned offshore, making it illegal for corporations to reincorporate outside the

U.S. to escape U.S. tax laws, and new tax arrangements that encourage jobs and value creation within the U.S. Under current arrangements VAT taxes are refunded on exports. Other countries

have VAT systems, while the U.S. does not, which disadvantages

the U.S. Either the U.S. should adopt a VAT or VAT rebates

should be abolished.

Finally, we must reconsider how we finance Social Security and

health insurance. These vital arrangements are financed through

payroll taxes and wage benefits. Increasing job costs and thereby

encouraging firms to shift jobs offshore, that suggests detaching

these costs from employment.

The New Deal can provide an intellectual inspiration to meet

this challenge. During that earlier period we completed the integration of our national economy, creating national economic regulaVerDate 11-MAY-2000 19:18 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00068 Fmt 6602 Sfmt 6601 C:\WORKD\I&O08\052208\42371B SCIENCE1 PsN: SCIENCE1
388

tions and governance that prevented unfair competition between

regions.

For instance, Congress explicitly recognized the danger of unfair

competition, which is why we have a national minimum wage. That

strategy worked and created the basis for 50 years of prosperity.

Now we face an analog challenge, this time to create new economic

arrangements that can provide a similar basis for prosperity in a

globalized economy. One certainty is that our existing trade policy

frame is not up to this task.

Thank you, and I will be glad to answer questions that the Committee may have.

[The prepared statement of Dr. Palley follows:]

PREPARED STATEMENT OF THOMAS I. PALLEY

BARGE ECONOMICS: THE NEW ECONOMICS OF

GLOBALIZATION

Chairman Miller, Ranking Member Sensenbrenner, Members of the Committee,

thank you for the opportunity to contribute to this hearing.

My name is Thomas Palley and I am an economist. One of the subjects I have

studied extensively is globalization and its impact on the American economy. This

subject is at the heart of the issues you are considering today as globalization

threatens to permanently dissolve the social contract that has historically supported

shared prosperity.

How our government responds to globalization will significantly impact the future

opportunities of American workers and their families to participate in the American

dream. Designing an appropriate policy response requires understanding

globalization. That can appear a frustrating academic exercise, but it is critical as

we are unlikely to adopt the right policies without understanding.

I. Globalization is more than trade

The past twenty-five years have witnessed a stunning increase in the degree of

U.S. integration into the global economy, and there is every indication this integration will deepen as globalization impacts previously untouched sectors.

For some, globalization is equivalent to trade, and outsourcing is merely an extension of trade—a further application of the principle of comparative advantage. For

this group, outsourcing promises significant future gains without any long-term

costs for society as a whole, although individuals may be economically injured.

An alternative view that I subscribe to is that globalization is a qualitatively new

phenomenon, with outsourcing being the latest evolution. Trade is a central part of

globalization, and globalization and outsourcing could not proceed without trade.

However, globalization is far more than trade. The problem is we have treated

globalization as if it was trade, which explains why our policies have come up short.

II. Barge economics: the new economics of globalization

U.S. international economic policy has long been guided by the theory of comparative advantage that recommends free trade. In combination with tremendous technical innovations that have lowered transportation and communication costs, that

policy has spurred U.S. integration into the global economy.

Yet paradoxically, global integration has undermined the relevance of comparative

advantage theory and left the U.S. economically vulnerable. This is because our policy approach remains stuck in the past and based on an obsolete view of the world.

Classical free trade theory claims that all can benefit when countries specialize

in producing those things in which they have comparative advantage. The necessary

requirement is that the means of production (capital and technology) are internationally immobile and stuck in each country. That is what globalization has undone.

Several years ago Jack Welch, former CEO of General Electric, captured the new

reality when he talked of ideally having ‘‘every plant you own on a barge.’’ His economic logic was that factories should float between countries to take advantage of

lowest costs, be they due to under-valued exchange rates, low taxes, subsidies, or

a surfeit of cheap labor.

389

Globalization has made Welch’s barge a reality, creating a new world of ‘‘barge

economics.’’ This new world is marked by global corporations that participate in

flexible production and sourcing networks that are the global economy’s shipping

lanes.

In this new world, capital mobility rather than comparative advantage has become the engine of trade. And with this change, so-called ‘‘free trade’’ increasingly

trades jobs and promotes downward equalization of wages and standards.

This is because barge economics fundamentally changes the structure of competition, changing the balance of bargaining power between workers and corporations,

and changing the margins of competition between countries.

Think of two swimming pools, with the U.S. being represented by the pool with

a higher water level. Barge economics joins the pools together, causing the water

to equalize at a lower level.

Outsourcing is an evolution of barge economics that amplifies the problem. Previously, companies could shift production to different countries, but they owned the

facilities and workers were in competition with just one country. Now, companies

can use global sourcing techniques that put contracts out for bid, thereby placing

workers in permanent competition with workers everywhere.

Wal-Mart pioneered this strategy. It owns no production facilities, and when

wages start to rise in a country it can shift its buying to another cheaper country.

Moreover, rather than creating competition in one product, its ‘‘big box’’ stores create global competition for almost everything it sells. That places large swathes of

workers in global competition.

III. Old Style competitiveness policies are not enough

The U.S. response to barge economics has been competitiveness policy that advocates measures such as increased education spending to improve skills; lower corporate tax rates; and investment and R&D incentives. The thinking is increased

competitiveness can make the U.S. more attractive to businesses.

The problem is competitiveness policy is not up to the task of anchoring the barge.

For instance, government can subsidize R&D spending, but the resulting innovations may simply end up in new offshore factories.

Moreover, competitiveness policy can be counter-productive because it easily degenerates into a race to the bottom. For instance, if the U.S. cuts corporation taxes,

other countries may match to stay competitive. The result is no gain for the U.S.,

while profit taxes are lowered and tax burdens shifted on to wages, which widens

income inequality.

IV. Barge economics creates new policy challenges

Not only does barge economics undermine earlier policy tools, it also creates completely new challenges that reveal how different globalization is from the old world

of free trade theory.

Thus, barge economics further incentivizes countries to adopt unfair policies to increase their relative business attractiveness. These policies include disregard of environmental damage; suppression of labor to keep wages low; direct subsidies; and

under-valued exchange rates. All are visible in China, which is the poster-child for

such abuses.

Another new challenge is the creation of a ‘‘corporation versus country’’ divide.

Previously, when corporations were nationally based, profit maximization by business contributed to national economic success by ensuring efficient resource use.

Today, corporations still maximize profits, but they do so from the standpoint of

their global operations. That is good for corporations, but it may not be good for

countries.

When companies raise profits by rearranging production according to global cost

patterns, those shifts can lower country income. For instance, when Boeing transfers

production to China, the U.S. loses high value adding jobs and national income can

fall. Moreover, though Boeing makes larger short-run profits on its Chinese production, even it may lose in the long run if it inadvertently creates a rival Chinese aircraft producer.

From an American worker perspective, the global economy has always had abundant supplies of cheap labor. In the past American workers were still able to compete and benefit from trade. The critical difference today is American corporations

are taking their capital and technology offshore and equipping low-wage foreign

workers. Those investments undermine American workers because that foreign production is often either intended for the U.S. market or competes with U.S. production.

390

V. The costs of globalization and outsourcing

Much attention has focused on job losses which have been significantly concentrated in manufacturing. These losses become very large if measured in terms

of ‘‘lost job opportunities’’—that is in terms of the manufacturing jobs implicitly embodied in the trade deficit. Since manufacturing is key for productivity growth and

for producing goods to exchange with other countries, these losses put our future

prosperity at risk.

Looking ahead, many more sectors will be subject to job losses as the competitive

threat from off-shore outsourcing matures.

More importantly, job loss is not an adequate metric for measuring the impact of

globalization and outsourcing on workers. Even if no jobs are lost, outsourcing can

still have significant effects on wage levels by impacting workers’ sense of employment security and bargaining power. Jobs do not have to move for globalization to

have big effects. All that is needed is that the threat to move be credible.

Clearly, globalization is not responsible for all the wage stagnation, rising income

inequality, and rising job insecurity. However, there is now widespread recognition

that its affect on income inequality and insecurity has been negative. Moreover, because globalization creates the economic threat of exit, it can discourage implementing policies that would ameliorate inequality even if due to other forces. That

is a problem which is likely to grow.

So far, the macro-economic consequences of rising inequality have been muted by

rising debt and asset price bubbles that have compensated to sustain consumer demand. However, there are indications that many households have reached their borrowing limits, which augurs lower future growth.

Finally, our engagement with globalization has been implemented without regard

to the trade deficit and its macro-economic impact. As a result we are now paying

a huge price in the form of the housing slump and the likelihood of a prolonged period of recession and slow growth. This is because the large trade deficits of recent

years distorted the economic expansion by undermining investment and manufacturing, and that prompted the Federal Reserve to foster a compensating housing

boom, which has now ended in a dangerous and costly bust.

VI. Policy implications of different economic perspectives

What does this mean for policy?

First, we need to continue with the collection of policies that have been known

as competitiveness policy. That means investing in public infrastructure, investing

in education, and encouraging R&D spending.

Second, we also need to continue with traditional trade enforcement policies that

must be enforced vigorously, and we should expand and strengthen policies like

trade adjustment assistance.

However, the critical implication is that we must recognize that these older policies are not enough. Therein is the split between those who interpret ‘‘globalization

as trade’’ versus those who interpret ‘‘globalization as barge economics.’’

Put bluntly, barge economics undermines the effectiveness of competitiveness policy, while increased assistance to displaced workers treats the symptom but not the

cause.

Barge economics increases temptations for unfair policy, and creates a wedge between corporate and national interests. These are the challenges that must be addressed, and if they cannot be addressed the future of the American dream looks

grim.

Preventing unfair competition calls for global rules against unfair competition,

which is where exchange rate rules and robust labor and environment standards

enter. Corporations know that a global economy needs global rules, which is why

they have worked so hard to create global property rights. However, they have consistently opposed global rules that help workers and advance social concerns.

Countries must be prevented from systematic policies of export-led growth whereby they grow by relying on demand in other countries rather than building their

own domestic markets. Instead of export-led growth we need internationally coordinated economic policies as a global economy needs internationally consistent economic policies.

Closing the wedge between corporation and country calls for such measures as

ending preferential tax treatment of profits earned offshore; making it illegal for

corporations to reincorporate outside the U.S. to escape U.S. tax laws; and new tax

arrangements that encourage jobs and value creation within the U.S.

Finally, we must reconsider how we finance our government, social security, and

health insurance. Under current arrangements VAT taxes are refunded on exports.

391

Other countries have VAT systems, while the U.S. does not, which disadvantages

the U.S. Either the U.S. should adopt a VAT or VAT rebates should be abolished.

With regard to social security and health insurance, these vital arrangements are

financed through payroll taxes and wage benefits. Such financing increases job

costs, which encourages firms to shift jobs offshore. That suggests shifting to other

forms of financing that detach these costs from employment.

VII. The New Deal as inspiration

The New Deal can provide intellectual inspiration to meet this challenge. In many

regards the New Deal witnessed the completion of the process of creating an integrated national economy. During that period we created national economic regulations and governance that prevented unfair competition between regions. Congress

explicitly recognized the danger of unfair competition, which is why we have a national minimum wage. Financial market regulation was also applied nationally.

That strategy worked and created the basis for fifty years of prosperity.

Now we face an analog challenge, this time to create economic arrangements that

can support shared prosperity in a globalized economy. The intellectual and political

challenge is formidable, as were the challenges of the New Deal era.

There are many things we can do alone, and we will also need to work co-operatively with other countries. Additionally, if other countries will not join us, we must

have in place measures that can protect us. One certainty is that our existing trade

policy frame is not up to the task because globalization is far more than trade.

In closing I request that the Chairman admit into the record as part of my testimony a report attached to this written statement titled ‘‘The Economics of

Outsourcing: How Should Policy Respond?’’

Thank you. I will be glad to answer any questions the Committee Members may

have regarding my testimony.

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The Economics of Outsourcing: How Should Policy

Respond?

Abstract

Outsourcing is a central element of economic globalization, representing a new

form of competition. Responding to outsourcing calls for policies that enhance national competitiveness and establish rules ensuring acceptable forms of competition.

Viewing outsourcing through the lens of competition connects with early 20th century American institutional economics. The policy challenge is to construct institutions that ensure stable, robust flows of demand and income, thereby addressing the

Keynesian problem while preserving incentives for economic action. This was the

approach embedded in the New Deal, which successfully addressed the problems of

the Depression era. Global outsourcing poses the challenge anew and calls for creative institutional arrangements to shape the nature of competition.

Key words: Outsourcing, globalization, competition, institutions.

JEL ref,: F1, F2, F3

Keywords: Global outsourcing, globalization, international trade, institutionalism.

JEL ref.: F00, F23

This report is forthcoming in The Review of Social Economy, September, 2008.

I. The outsourcing controversy

International outsourcing of production and employment has recently attracted

enormous attention in both the United States and Europe. For many, it has raised

fears about impacts on domestic labor markets. These fears include the possibility

of a fresh wave of structural unemployment and erosion of wages, benefits, employment security, and workplace conditions in the economy at large. Balanced against

this, some (see for instance Mankiw and Swagel, 2006) view offshore outsourcing as

a favorable development related to the further extension of the international division of labor and application of comparative advantage. To this group, outsourcing

promises significant future gains in wages and living standards without any adverse

long-term employment effects.

Understanding offshore outsourcing involves two distinct exercises. The first involves understanding the phenomenon, while the second is assessing its likely empirical impact. The focus of the current paper is on the phenomenon. Outsourcing

is represented as a central element of globalization, and policy-makers need to understand its economic basis if they are to develop effective policy responses.

The paper maintains that outsourcing should be viewed as a qualitatively new

phenomenon that is to best understood as a new form of competition. Responding

to it calls for the development of policies that enhance national competitiveness and

establish new rules governing the nature of global competition. Viewing outsourcing

through the lens of competition connects with early 20th century American institutional economics. The policy challenge is to construct institutions that limit retrograde competition while preserving incentives for economic action. At the same time,

these institutions must promote stable flows of demand and income, thereby addressing the Keynesian problem of inadequate aggregate demand. This was the analytical foundation of the approach embedded in Franklin Roosevelt’s New Deal in

the United States, and it gave rise to a wave of economic prosperity after World

War II. Global outsourcing represents a new economic challenge that calls for a new

set of institutions. Addressing such challenges is always difficult, but the challenge

of global outsourcing is compounded by lack of global regulatory institutions and

changes in the balance of political power that make it difficult to enact needed reforms.

Lastly, global outsourcing is enormously facilitated by technological innovations

associated with computing, electronic communication, and the Internet. However, it

is important to recognize that the debate surrounding outsourcing is not about the

benefits of technology. It is about the nature of competition and what constitute appropriate rules for governing competition within and between countries. Failure to

recognize this can distract and confuse the issue, erroneously turning it into a debate about technology rather than rules of competition.

II. The economics of outsourcing

By way of beginning it is worth defining the meaning of some terms widely used

in the outsourcing debate. Sourcing represents sources of supply, and these sources

can be domestic or global. Outsourcing represents taking an activity that was previously produced within the boundaries of the firm, and having it sourced (supplied)

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from outside the firm. Offshoring represents moving an activity that is produced

within the firm to another country, but the activity continues to be produced within

the firm in an international subsidiary. Finally, offshore outsourcing represents taking an activity that was previously produced within firm, and having it both sourced

from another country and produced by an outside supplier. Both offshoring and offshore outsourcing can contribute to national job loss. The difference is that in the

former case the activity continues to be produced within the firm, whereas in the

latter case it is moved outside the firm. Over the last several decades there has been

an ongoing outsourcing revolution as firms have redefined their production competencies. Initially, this revolution took the form of domestic outsourcing, and it was

widely associated with the phenomenon of sub-contracting. More recently, it has

taken the form of offshore or global outsourcing as firms have shifted to relying on

foreign suppliers.

Offshoring and global outsourcing are empirically and theoretically contested phenomena. At the empirical level the problem is how to assess their empirical significance. Mankiw and Swagel (2006) adopt a ‘‘job count’’ approach in their assessment

of the impact of outsourcing on the American economy, and argue that the number

of jobs outsourced is relatively small compared to the total stock of jobs. For instance, they cite a Forrester Research report (McCarthy, May 2004) estimating that

830,000 U.S. jobs would be moved offshore by the end of 2005, while Goldman Sachs

calculate that between 15,000 and 30,000 jobs are currently being offshored monthly. They claim that this is small relative to total U.S. employment of almost 135

million, and therefore conclude that the significance of employment offshoring has

been blown massively out of proportion.

There are two problems with this naı ̈ve job count approach. The first less important problem is that the volume of outsourcing may increase significantly in future

as firms become more globally active. This possibility was noted in the Forrester Research report, particularly as regards services. It has also been emphasized Blinder

(2006) who documents the potentially wide array of future jobs that might be

offshored.

The second more important problem is that job loss is not the right metric for

measuring the economic impact of offshoring. Over time the economy will tend to

recover some of the jobs lost, and the volume of employment almost always dominates the volume of unemployment. That means by definition the stock of jobs is

likely to be large relative to flow turnover. Yet, outsourcing can still have significant

impacts on wage levels and employment conditions by impacting workers’ sense of

employment security and bargaining power. These impacts need not show up in job

flows. All that is needed is that workers sense a changed economic environment.

Bronfenbrenner (2000) has clearly documented such bargaining power effects with

regard to U.S. union workers. The problem is that these effects have been denied

by mainstream trade economists who assert that labor markets are competitive,

workers are paid their worth (i.e., their marginal product), and labor market competition for scarce labor protects workers from exploitation.

This observation leads into the theoretical controversy surrounding offshore

outsourcing. Supporters of outsourcing interpret it as a natural extension of the motivation for trade. Just as the boundary between domestic market and non-market

activities may change over time owing to technological innovations, so too the

boundary between internationally traded and non-traded goods may change. From

this perspective, technological advance has turned goods and services that were previously internationally non-tradable into goods and services that can now be internationally traded. The international application of the principle of comparative advantage to the production of these newly tradable goods and services can therefore

yield additional gains from trade.

This conclusion regarding outsourcing and gains from trade has recently been

challenged by Gomory and Baumol (2000) and Samuelson (2004). These authors use

pure trade theory to examine the question of international catch-up, and they conclude that a country can lose if the catch-up takes place in the export industry of

the advanced country. In this case the advanced country suffers an adverse terms

of trade effect because the global supply of its exported product increases.

Though logically watertight, one problem with the Gomory-Baumol-Samuelson critique is that it focuses on export-sector related developments, whereas most of the

concern about outsourcing seems to relate to potential developments in the service

sector. Additionally, their critique of outsourcing is static in nature, focusing on

changes in equilibrium patterns. An alternative institutionalist approach is to view

outsourcing through the lens of competition. Such an interpretation sees it as changing the competitive process governing trade, giving rise to a new competitive regime

in which both structure of bargaining power and the margins of competition (those

areas where companies and countries compete) are changed.

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1The seminal article on the emergence of this sourcing model is Gereffi (1994). The use of

this sourcing model by the retail sector is documented by Hamilton (2005).

From an institutionalist perspective, globalization has dramatically changed the

structure of international competition. In many regards the process of change can

be identified as beginning in the 1950s and 1960s with the emergence of multinational corporation (MNC) production. Initially, this output was primarily for local

markets, as evidenced by the activities of such companies as Ford Europe and General Motors Europe, which manufactured for the European rather than the U.S.

market. However, in the 1980s and 1990s the pattern changed significantly, and

MNC production became increasingly targeted for export back to the United States.

This change is exemplified in Mexico and China, which have become MNC production platforms.

There are two important economic features of the MNC revolution. First, MNC

manufacturing has provided an important arena for business to learn how to render

state-of-the-art technology and production methods globally mobile. Second, MNC

activities offered a first margin within which capital was able to put American labor

in international competition, and this competition has had significant adverse impacts on manufacturing wages, employment, and union membership

(Bronfenbrenner, 2000; Bronfenbrenner and Luce, 2004).

The MNC revolution has received considerable attention. However, while it was

taking place, a parallel and equally important revolution was occurring in the U.S.

retail sector. This retail shake-up was linked to a new sourcing model based on bigbox discount stores.1

Stage one of the U.S. retail revolution started 40 years ago with the emergence

of large-volume discount stores like Wal-Mart, which was created in 1962. Initially,

the business model was based on national sourcing, with the big-box stores buying

from the cheapest national manufacturer. Such stores pitted producers against each

other nationally, so that companies in New York were forced to compete with those

in California. This new national rivalry provided lower prices, and it was largely

beneficial because all suppliers were located in the United States and operated

under broadly similar laws. However, even then there were negative effects, as the

new competition encouraged manufacturing to move south to nonunion ‘‘right-towork’’ states where organizing workers was more difficult and labor costs were

lower.

Stage two of the retail revolution began in the 1980s, when the big-box discount

stores started going global with their sourcing model. As a result, U.S. suppliers

were not just placed in national competition, they were now placed in international

competition. No longer was New York just competing with California; U.S. producers were now measured against companies in Mexico, Indonesia, and China. The

economic logic of this global sourcing model is simple. Scour the world for the cheapest supplier and lowest cost—the so-called ‘‘China price’’—and then require U.S.

manufacturers and workers to match it if they wish to keep your business.

This new global sourcing retail model has had profound effects. The commercial

success of the model means that once one retailer adopts it, others are compelled

to also adopt it in order to remain competitive. Consequently, big-box discounting

has spread to every corner of retailing, putting the entire consumer goods manufacturing sector in international competition. Additionally, the model pressures domestic companies to pursue offshore production (i.e., become multinational) in order to

compete with foreign suppliers. These dynamics, though originating in the retail

sector, have thereby eroded manufacturing jobs and wages. The model does indeed

deliver low prices, but it does so at a high cost.

Outsourcing can be viewed as an application of the retail sector’s global sourcing

model to manufacturing. In effect, manufacturers are now also looking to source

globally, and they too are asking their suppliers to meet the ‘‘China price.’’ The development of global sourcing is exemplified by the American auto component giants,

Visteon and Delphi. Initially spun off from their respective parent companies, Ford

and General Motors, Visteon and Delphi engaged in national competition. In 2005,

Ford and General Motors both announced that they were shifting to a global

sourcing model and that their spin-offs would in future have to meet the China price

if they wished to keep business. Given their higher union wages and benefits, both

Visteon and Delphi have been shedding jobs and shifting production offshore, including to China. However, both have found it increasingly difficult to compete, and

Delphi filed for Chapter 11 bankruptcy in October 2005.

It is now becoming clear that the global sourcing business model can also be applied to the services sector. Owing to improvements in electronic communication and

the Internet, many services that were previously non-tradable have become

tradable. These include basic computer systems maintenance and software programVerDate 11-MAY-2000 19:18 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00075 Fmt 6602 Sfmt 6621 C:\WORKD\I&O08\052208\42371B SCIENCE1 PsN: SCIENCE1
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2Freeman (2004) has emphasized the significance of the addition of 1.5 billion workers to the

global labor market. The end of economic isolationism in China, India, and the former Soviet

bloc added three billion persons to the global economy, of which approximately half are economically active. However, Freeman believes that globalization is being driven by classical comparative advantage, so the wage effects of increased global labor supplies can potentially be offset

by the production gains that come from reallocating global production in accordance with the

principle of comparative advantage.

ming, tax preparation and accounting, architectural planning, and telephone call

centers. Even retail sales are potentially tradable, as indicated by the success of the

Amazon.com business model. This means that services will be the next area where

the global sourcing model will be applied, with corresponding effects on compensation and employment security.

The maturation of globalization can be viewed as combining the developments of

the last several decades into a highly synergistic system. There are four elements

to this mature system. The first element is the global sourcing model discussed

above, which was initially developed in the retail sector and is now being applied

everywhere. The second element is the mobility of capital, technology, and methods

of production. This mobility is rooted in the MNC experience with foreign production

platforms, and it also links with technological innovations that have facilitated the

transfer of technology and the international coordination of business activity. The

third element is international economic policies that have dismantled trade barriers

and promoted international economic integration, thereby bringing down the cost of

moving goods across borders. Technology, in the form of lowered costs of transportation, has had a similar impact by also lowering costs of moving goods over long

distances. The fourth element of mature globalization is the addition of two billion

workers to the global labor market, given the end of economic isolationism in India,

China, and the former Soviet bloc countries.2

Whereas the initial era of globalization (1945–1980) was one of classical free trade

involving the movement of goods across international boundaries, the new era (since

1980) also includes mobile capital and technology. Consequently, all countries have

access to similar methods of production, so cost arbitrage (especially wage arbitrage)

becomes a critical driver of the system.

Putting the pieces together, changed competition (the Wal-Mart business model)

plus changed technological conditions and policy (globalization of production) plus

two billion new workers (the end of economic isolationism) add up to downward

wage and benefit pressures in U.S. labor markets and rising income inequality. The

economic logic is simple. When two swimming pools are joined together, the contrasting water levels will equalize.

III. Institutionalism versus Neo-classical trade theory

Such an equalization process shares some common features with the Stolper-Samuelson (1941) theorem of neo-classical trade theory. According to that theorem, when

a rich capital-abundant country engages in free trade with a poor labor-abundant

country, wages in the rich country fall. The Stolper-Samuelson effect emphasizes the

income distribution impacts of trade, and it is modeled in a world in which countries

share the same technology, perfect competition rules, there is full employment, and

international production is determined according to the principle of comparative advantage.

Globalization adds greater realism to the assumption of shared technology, and

it therefore strengthens the relevance of Stolper-Samuelson. Globalization has also

been associated with a fall in the cost of transportation—which is a form of sand

in the wheels of trade—and this too strengthens the Stolper-Samuelson effect. Lastly, by making capital mobile between countries, globalization tilts the Stolper-Samuelson effect (which is derived under the assumption of capital immobility) toward

full-blown neo-classical factor price equalization. This is tantamount to putting the

Stolper-Samuelson effect into hyperdrive.

The above wage and income distribution features of neo-classical trade theory are

consistent with institutionalist logic. However, there are also significant differences

between the two perspectives, and these differences mean that the neo-classical

Stolper-Samuelson and factor price equalization results only partially capture institutionalist concerns. First, whereas neo-classical trade theory assumes full employment, an institutionalist perspective allows for less than full employment. Consequently, offshoring can have unemployment effects that impact both prices (including wages) and quantities. Second, an institutionalist perspective denies that

global production is necessarily organized around the principle of comparative advantage. Instead, global production is organized on the basis of competitive advantage. This may coincide with comparative advantage, but there is no automatic preVerDate 11-MAY-2000 19:18 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00076 Fmt 6602 Sfmt 6621 C:\WORKD\I&O08\052208\42371B SCIENCE1 PsN: SCIENCE1
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3The increase in global income inequality, within and between countries, is documented by

Milanovic (2005). The increase in U.S. family income inequality is documented by Mishel et al.

(2006). Krugman (1995) attributes 10 percent of the increase in U.S. wage inequality in the

1970s and 1980s to trade. Cline (1997) attributes 37 percent of the increase to trade. Palley

(1999a) examines overall income inequality using the U.S. family income gini coefficient, and

reports that 24 percent of the increase in inequality between 1980 and 1997 is directly attributable to increased openness, and this rises to 34 percent if the negative effect of trade on union

density is taken into account. Kletzer (2001) has documented the direct wage losses of those actually losing jobs owing to trade. 4The hollowing of the middle class is documented by Mishel et al. (2006) who show how family income inequality has increased (p. 54–65) and the relatively more rapid expansion of lowpaying jobs (p. 166N69). They explain these trends as a result of trade and union decline, and

express skepticism that they are due to a shift in demand toward high-skilled workers (p. 169–

200), which is the conventional neo-classical explanation (Levy and Murnane, 2004). 5The global deflationary risks of export-led development are explored in Palley (2003) and

Blecker and Razmi (2005).

sumption that it will. This raises questions about automatically assuming that

offshoring automatically raises global productivity since highly productive facilities

can be closed and replaced by less productive foreign facilities because of nominal

cost differences. Third, the neo-classical Stolper-Samuelson and factor price equalization results are derived in the context of perfect competition, whereby economic

power is completely absent. From an institutionalist perspective power is always

present, and globalization has changed power relations by giving firms greater exit

options. This shift has increased firms’ power versus both labor and governments,

with the shift in power being brought about by new institutional patterns of competition based on new business models, technologies, and changed economic policies.

Finally, institutionalists view economic activity as always taking place in the context of laws, regulations, and business customs. These facets of business life are absent in the neo-classical model with perfect competition, and that model therefore

misses how global outsourcing allows firms to arbitrage the regulatory and business

environment. In effect, globalization creates new margins of competition.

IV. Macro-economic consequences of changing global competition

The changed micro-economic competitive conditions associated with globalization

have significant macro-economic implications. A first implication concerns income

inequality, which has increased in almost all countries (Milanovic, 2005). Within the

U.S. this increase has occurred in two stages. During 1980s and 1990s the wageprofit share was largely unchanged but family income inequality increased, suggesting changes in the distribution of wages favorable to upper-income managerial

workers. This has been followed since 2000 by a significant increase in the profit

share.3

A second implication concerns the structure of global demand. The new global

sourcing model encourages companies to shift production offshore and export back

to their home base. In developing countries there is an incentive to keep wages

down de spite productivity growth in order to retain international competitiveness,

as exemplified in Mexico where real wages have stagnated over the past twenty

years. These pressures retard domestic demand and the emergence of a large middle

class. Consequently, developing countries are compelled to rely on export-led manufacturing growth whereby they sell to developed countries rather than developing

domestic consumption markets.

This configuration poses significant macro-economic dangers. The worsening of developed country income distribution poses long run problems for maintaining a level

of aggregate demand capable of generating full employment. Internationally, the extensive reliance on export-led growth has contributed to a globally unbalanced economy in which developing countries rely on the U.S. market. This imbalance is reflected in the enormous U.S. trade deficit. The danger is that if the U.S. economy

slows, the entire global economy will slow too.

Though the new competitive global micro-economic structure has contributed to

low consumer prices that have benefited Northern consumers, it has also been adversely transforming the structure of income and aggregate demand generation. In

the U.S. there has been a gradual hollowing out of the middle class.4 In the global

South, a surplus labor condition combined with South–South competition for Northern export markets has retarded Southern wage growth that could provide the future foundation for global aggregate demand. With global supply growing as a result

of export-led manufacturing growth, this configuration carries the risk of global deflationary pressures.5

Thus far, these adverse macro-economic developments have been kept at bay by

rolling stock market and housing price bubbles, and by increased access to credit

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6Tobin (1975, 1980) and Palley (1999b) have examined why generalized price deflation can

be unstable. 7 Atkinson (1997) has also emphasized the relevance of American institutionalist economic

thinking for understanding globalization.

for consumers. In the U.S. particularly, these developments have enabled households to maintain consumption spending, thereby maintaining global aggregate demand. However, ever-rising debt-to-income ratios are not sustainable as this produces rising debt service burdens. Similarly, asset price inflation significantly in excess of the general rate of inflation is also not sustainable as this produces excessive

asset valuations. This suggests that these trends must slow or even reverse, and

when that happens the global economy could suffer a severe recession owing to accumulated financial imbalances and inadequate aggregate demand. Moreover, recovery from such a recession could prove difficult because of large debt over-hangs and

permanently atrophied structures of income and demand generation.

V. How should policy respond? Rediscovering Keynesian and Institutionalist economics

The current model of globalization brings low consumer prices as advertised. However, it delivers low prices at the high cost of undermining the structure of income

and demand generation. Today’s economic conditions have hints of the 1920s, a decade marked by a credit-driven boom in U.S. and relative stagnation in the rest of

the world. Meanwhile, income and wealth inequality in the U.S. have returned to

levels that prevailed in the 1920s (Wolff, 2001). This raises the possibility of a new

era of global economic stagnation, that in a worst case scenario could replay problems similar to those that afflicted the global economy in the 1930s.

The problems of the Depression era were solved after World War II by application

of new economic ideas developed in the 1930s. These ideas have continuing relevance in the era of globalization. Unfortunately, the economic success that ensued

in the thirty years after World War II contributed to a belief that the economic problem had been permanently solved and that the policies and institutions adopted

after the Depression were no longer needed. The result has been a gradual

expunging of the thinking forged in the Depression, and economic theory has slowly

drifted back to the economics of the pre-Depression era. Carried by this tide, economic policy-makers have been persuaded to create a modern variant of the pre-Depression era economy under the rubric of globalization.

One lasting contribution of the 1930s is associated with the British economist

John Maynard Keynes, who identified the importance of aggregate demand for determining the level of employment and output. In the Keynesian model, unemployment can result from reduced household and business spending. At best, free markets are slow to remedy such conditions, and at worst they can get trapped with

permanent high unemployment.

Keynes recognized that the price system does not automatically generate sufficient demand, and what works in individual markets does not automatically work

for the economy as whole. In individual markets, lower prices make a good relatively cheaper thereby providing an incentive to switch spending from elsewhere.

However, this does not work for the economy as a whole because all prices are falling. Indeed, the process can even work in reverse because falling prices increase

debt service burdens of businesses and households that are debtors, thereby potentially lowering total demand and bankrupting the banking system. Consequently,

there is a reason for policy to step in and stabilize demand through monetary (interest rate) and fiscal (government budget) policy.6

A second vital intellectual contribution came from American institutionalist economists, the leading lights of which were John Commons, Thorsten Veblen, and Wesley Mitchell. Institutionalists emphasized the importance of the nature of competition and the problem of destructive rivalry—what Commons (1909, 68–69) termed

the ‘‘competitive menace.’’ This idea resonates with today’s notion of the ‘‘race to the

bottom.’’ What appears to maximize well-being from an individual perspective can

be sub-optimal once the competitive interplay of actions is taken into account.7

Institutionalist thinking constructs the policy problem in terms of ‘‘regimes of

competition,’’ with some regimes promoting societal welfare better than others. In

the 1930s, President Franklin Roosevelt’s New Deal policies embodied much institutionalist thinking. In combination with the adoption of a Keynesian macro-economic

stabilization policy, the New Deal eventually solved the crisis of the Depression era

and made way for the prosperity that followed World War II. The innovations of the

period included new labor laws establishing the right to organize, the minimum

wage, the 40-hour work week, and the right to overtime pay. In the financial realm,

creative reforms included the establishment of the Securities and Exchange ComVerDate 11-MAY-2000 19:18 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00078 Fmt 6602 Sfmt 6621 C:\WORKD\I&O08\052208\42371B SCIENCE1 PsN: SCIENCE1
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mission to oversee financial markets. Today’s challenge is to come up with a similarly innovative set of arrangements that addresses globalization and outsourcing.

The New Deal incorporated a collection of bold policies that fashioned an acceptable regime of competition. Responding to global sourcing will also require an insightful array of policies. As with the New Deal, there is no silver bullet. With regard to rules governing worldwide competition, international labor standards are

key to establishing a floor under the global labor market and ruling out retrograde

competition. At the same time, they are good for economic efficiency and development (Palley, 2004, 2005). Concerning domestic issues, revitalizing unions is key to

ensuring that productivity gains are shared equitably and result in a distribution

of income that generates full employment. This calls for labor law reform that gives

real meaning to the legal right to organize.

There is also a need for new arrangements that discourages tax competition within and between countries. Such competition is generated by corporations shopping

for tax abatements and lower rates as conditions of making investments. The result

is either an unfair shift of the tax burden onto labor incomes or an underfunding

of needed public investment and spending when corporate tax avoidance strips the

public purse of revenue.

Another area requiring new institutional arrangements is exchange rates. Here,

the need is to prevent countries from using undervalued exchange rates as a means

of competing. Engaging in competitive devaluation is a form of beggar-thy-neighbor

economics wherein countries rely on demand in foreign markets rather than building domestic markets. Undervalued exchange rates are an unfair subsidy that distorts the pattern of trade. They also risk causing global deflation because they promote increased supply of exports without increasing global demand.

With regard to national competitiveness, countries need to invest in education

that raises worker productivity. There is also a need for job loss assistance and active labor market policies that help displaced workers cope with income losses and

obtain training that prepares them for productive future employment. In this regard, a system of wage insurance that insures workers against wage losses from job

displacement, such as that proposed by Kletzer and Rosen (2005), can help. More

generally, a full-blown ‘‘flexicurity’’ social safety net such as that operated in the

Nordic countries is desirable. Such a system protects workers against economic

losses associated with economic change, thereby making them open to accepting and

living with change (The Economist, 2006).

In the United States there is a special need to attend to the problem of health

insurance, which is currently a job cost, since premiums are tied to employment.

This crisis is exemplified by General Motors, where the cost of each car made in

its U.S. plants includes $1,500 of worker health insurance. Health insurance coverage needs to be detached from jobs, and this suggests a national health plan financed out of general tax revenues.

All of these proposals point to the need for enhanced government provision of insurance and social safety nets. However, as documented by Rodrik (1997), the regulatory and tax arbitrage that is promoted by globalization and global outsourcing

undercut government’s ability to provide such services. Thus, Rodrik (1997, p. 57–

67) reports that country economic openness negatively impacts government social

spending, negatively impacts tax rates on capital incomes, and positively impacts

tax rates on labor incomes. These findings support claims of how globalization has

tilted the balance of power in favor of capital, and they also implicitly confirm the

need for international cooperation to combat tax competition.

VI. Conclusion: the politics of policy response

The emergence of global outsourcing enormously complicates policy issues, both

intellectually and politically. The ability to outsource worldwide calls for new forms

of international regulation because it undermines the effectiveness of many existing

national arrangements. Yet, construction of an acceptable regime of international

competition must be accomplished in a political environment lacking effective institutions of international economic governance and in which national governments are

weakened and corporations strengthened by the enhanced mobility of capital.

Historically, political economy has been constructed around the divide between

capital and labor, with firms and workers at odds over the division of the economic

pie. Within this construct, labor is usually represented as a monolithic interest, yet

the reality is that labor has always suffered from internal divisions—by race, by occupational status, and along many other fault lines. Neo-liberal globalization has in

many ways sharpened these divisions to labor’s disadvantage and capital’s benefit.

One of these fault lines divides workers from themselves. Since workers are also

consumers, they face a divide between the desire for higher wages and the desire

for lower prices. Historically, this identity split has been exploited to divide union

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from nonunion workers, with anti-labor advocates accusing union workers of causing

higher prices. Globalization amplifies the divide between people’s interests as workers and their interests as consumers through its promise of ever-lower prices. Low

prices do indeed yield benefits, but against this must be balanced globalization’s impact on wages, work conditions, and the balance of political power.

Globalization also affects the economy unevenly, hitting some sectors first and

others later. The process can be understood in terms of the hands of a clock. At one

o’clock is the apparel sector; at two o’clock the textile sector; at three the steel sector; at six the auto sector. Workers in the apparel sector are the first to have their

jobs shifted to lower-wage venues; at the same time, though, all other workers get

price reductions. Next, the process picks off textile sector workers at two o’clock.

Meanwhile, workers from three o’clock onward get price cuts, as do the apparel

workers at one o’clock. Each time the hands of the clock move, the workers taking

the hit are isolated. In this fashion, globalization moves around the clock with labor

perennially divided.

Manufacturing was first to experience this process, but technological innovations

associated with the Internet are putting service and knowledge workers in the firing

line as well. Online business models are making even retail workers vulnerable, as

evidenced by Amazon.com which has opened a customer support center and two

technology development centers in India. The problem is that each time the hands

on the globalization clock move forward, workers are divided: the majority is made

slightly better off while the few are made much worse off.

Balanced against this, globalization also impacts capital, creating a new split between bigger internationalized firms and smaller firms that remain nationally centered. Larger multi-national corporations that have gone global benefit from cheap

imports produced in their foreign factories. Conversely, smaller businesses that remain nationally centered in terms of sales, production and input sourcing are

threatened by imports. In the U.S., this division has been brought into sharp focus

with the debate over the trade deficit and the overvalued dollar. In previous decades, U.S. manufacturing as whole opposed running trade deficits and maintaining

an overvalued dollar because of the adverse impact of increased imports. This time

round U.S. manufacturing has been divided with multinational corporations supporting an over-valued dollar and smaller domestic manufacturers opposing it. A

similar division within the ranks of business and capital likely exists in Europe.

This division opens the possibility of a new alliance between labor and those manufacturers and businesses that remain nationally based. However, such an alliance

will always be problematic because of perennial underlying tensions between business and labor over the wage–profit division. Moreover, business may try to address

its own internal division by promoting a domestic ‘‘competitiveness’’ agenda aimed

at weakening regulation, reducing corporate legal liability, and lowering employee

wages and benefits such as paid vacation time—an agenda designed to appeal to

both nationally and internationally centered business, but at the expense of workers.

Solidarity has always been key to political and economic advance by working people, and it is key to mastering the politics of globalization. Developing a coherent

story about the economics of neo-liberal globalization around which working people

can coalesce is a key ingredient for solidarity. That is why economics is so politically

important. Economists tell stories about what is going on in the economy, and there

is need for an alternative story to that provided by neo-liberal economics. An institutionalist–Keynesian perspective provides that alternative.

Understanding how globalization divides labor can help counter cultural proclivities to individualism, as well as other historic divides such as racism. However, as

if this were not difficult enough, globalization creates additional challenges. National political solutions that worked in the past are not adequate to the task of controlling international competition. That means the solidarity bar is further raised

because international solidarity is needed for support of new forms of international

economic regulation such as labor standards, environmental standards, capital controls, exchange rate coordination, and tax harmonization.

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BIOGRAPHY FOR THOMAS I. PALLEY

Dr. Thomas Palley is an economist living in Washington, DC. He holds a B.A. degree from Oxford University, and a M.A. degree in International Relations and

Ph.D. in Economics, both from Yale University.

He has published in numerous academic journals, and written for The Atlantic

Monthly, American Prospect and Nation magazines.

Dr. Palley runs the Economics for Democratic & Open Societies Project, the goal

of which is to stimulate public discussion about economic arrangements and conditions needed to promote democracy and open society.

Dr. Palley was formerly Chief Economist with the U.S.–China Economic and Security Review Commission. Prior to joining the Commission he was Director of the

Open Society Institute’s Globalization Reform Project, and before that he was Assistant Director of Public Policy at the AFL–CIO.

Dr. Palley is the author of Plenty of Nothing: The Downsizing of the American

Dream and the Case for Structural Keynesianism (Princeton University Press) and

Post Keynesian Economics (Macmillan Press).

Some recent policy articles include ‘‘External Contradictions of the Chinese Development Model,’’ Journal of Contemporary China, February 2006; ‘‘The Questionable

Legacy of Alan Greenspan,’’ Challenge, November-December 2005; ‘‘The Economic

Case for International Labor Standards,’’ Cambridge Journal of Economics, January

2004; and ‘‘Asset Price Bubbles and the Case for Asset-Based Reserve Requirements,’’ Challenge, 2003.

Chairman MILLER. Thank you, Dr. Palley.

Ms. Furchtgott-Roth.

STATEMENT OF MS. DIANA FURCHTGOTT-ROTH, DIRECTOR,

CENTER FOR EMPLOYMENT POLICY AND SENIOR FELLOW,

THE HUDSON INSTITUTE, WASHINGTON, D.C.

Ms. FURCHTGOTT-ROTH. Mr. Chairman, thank you very much for

inviting me to testify today. I was so impressed with that Murdock

Center. I would so much like to visit it. It sounds like it has so

many opportunities. It looked just beautiful in the pictures.

Unemployment rates right now are 4.9 percent for men 20 and

above and 4.8 percent for women. Despite the high oil prices, we

are still not in a recession. Yet, economic disruptions are causing

a loss of jobs, and we need to figure out how to deal with this.

Workers are our most valuable asset, and the question is how can

we make the disruptions as little as possible.

The Labor Department has many programs which are outlined in

my written testimony to help unemployed workers. About 97 percent of workers are covered by unemployment insurance. Most unemployed workers find work relatively quickly. Last year, for example, we had about 59 million new hires in our workforce of 154 million, and we had about 57 million separations.

The United States has benefited from globalization because a lot

of the goods that we export create jobs for Americans, so whereas

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some of the jobs are lost, we create many more jobs throughout export industries, particularly due to the current state of our dollar,

which has made our exports very competitive.

We also have lower-priced goods here that make American wages

go further. If you go to places like Wal-Mart or Target, we import

a lot of goods, and people buy those, and their paychecks go further.

Some, however, can’t find work because of economic disruption,

and we need to find a way how to help them. I have a few suggestions for reforming Trade Adjustment Assistance, which is the

main program to help trade-assisted workers.

One thing we need to do is make it administratively simpler. It

is very difficult to fill out the paperwork. The health insurance

component, in particular, requires paying for health insurance upfront and then getting a credit back the next year. And something

has to be done to fix that.

Also, all trade-affected workers are not all the same, and what

we need to do is find individualized plans for everybody. A woman,

for example, who is laid off from the Pillowtex plant isn’t the same

as, say, a man who is laid off from Ford or General Motors. They

have different sets of skills, and they can get different sets of jobs.

So we need to have the one-stop staff and the one-stop centers

work individually with unemployed workers and provide individual

plans for training, because they can have different kinds of training. People can benefit from different kinds of training.

We should require Trade Adjustment Assistance recipients to

register at one-stop centers and check computerized listings, preferably with individual guidance. We need to use high-quality measures to hold the staff at one-stop centers accountable for making

sure that funds go to training that are likely to have a beneficial

affect.

We also need to be using more community colleges. Community

colleges are a vast resource throughout our country. They can turn

on a dime in terms of professors. If you have more people sign up

for a class, they can hire more professors in that area. If they don’t

have demand for a class, then that professor just doesn’t teach that

semester. And that is very useful, especially with regard to nurses.

A lot of community colleges, for example, are constrained in terms

of the amount of nurses that they can take, because there just

aren’t enough people to teach it. And these are things that need to

be fixed.

We also need to take a close look at how we educate workers. We

need to be educating workers, not just for one job, but for a whole

career, for a series of jobs in a career. We need to work on highschool dropout rates, making these dropout rates lower, having

more high school students graduate from college and working on

one project that looks at education in the State of Florida. Not only

does Florida have a low graduation rate, but it also has a very

mixed package of what classes that these students are taking, and

we need to have more attention, not only to having students graduate but also to the training they are receiving.

We also need to pay attention to vocational training and see if

that is an option. All these things would make it easier for someone

to find another job after they are laid off.

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What we don’t need is another $9 billion program. The Trade

and Globalization Act would extend the service in Government sectors, would certify the whole industry if just three firms were affected for Trade Adjustment Assistance or if the ITC certified that

there were unfair imports. It would extend benefits to two and onehalf or three years. It would prevent anyone except a State worker

from advising a TAA recipient on what kind of job to take, and this

isn’t anything that would benefit these workers. So I would suggest

that Trade Adjustment Assistance can be helped with a relatively

small number of changes. These are changes that you Members can

do and help with, and that would be most helpful for these workers.

Thank you very much, and I would be glad to answer any questions.

[The prepared statement of Ms. Furchtgott-Roth follows:]

PREPARED STATEMENT OF DIANA FURCHTGOTT-ROTH

Mr. Chairman, Members of the Committee, I am honored to be invited to testify

before your Committee today to speak on the subject of promoting U.S. worker competitiveness in a global economy.

Currently I am a senior fellow at the Hudson Institute. From February 2003 until

April 2005, I was Chief Economist at the U.S. Department of Labor. From 2001

until 2003, I served at the Council of Economic Advisers as Chief of Staff and special adviser.

The United States has one of the lowest unemployment rates in the industrialized

world. In April 2008, the latest month for which comparable data are available,

Americans had an unemployment rate of 5.0 percent, while unemployment rates in

the Eurozone were 7.1 percent; in France, 8.1 percent; in Germany, 7.6 percent; in

Spain, 9.6 percent; and in Canada, 5.3 percent. Only Japan had a lower rate than

the United States.

Last month, although the unemployment rate rose to 5.5 percent, unemployment

rates among adults 20 and over remained below five percent. Unemployment rates

for men were 4.9 percent, and for women were 4.8 percent. The jump in the unemployment rate was due to unemployment of teenagers, who have been priced out of

the job market by last summer’s hike in the minimum wage.

Skilled workers are important for global competitiveness. We live in an open, global economy, and we compete against other countries to offer the best environment

for investment and for firm location. We want firms to locate and expand in the

United States, creating jobs here rather than going offshore. In order to do that, we

need to provide a ready supply of labor and keep the smartest entrepreneurs and

workers here. When our workers lose their jobs, we need to help them find new ones

as effectively as possible.

Our challenge is to facilitate the movement of workers from some sectors to others. The need for skilled workers makes it all the more imperative that we modernize our workforce training programs and make them as efficient as possible.

Workers already have some protection from job loss. About 97 percent of wage and

salary workers have unemployment insurance (UI), a federal-State program funded

by employer payments that rise with the number of firm layoffs. The program gives

many unemployed workers, who last month numbered 8.5 million, benefits for up

to six months. Qualifications and benefit levels are set by individual states.

There are more than a dozen programs organized by the Labor Department to

help train unemployed workers. I won’t describe all, but let me review just a few.

Workers adversely affected by trade have access to Trade Adjustment Assistance,

a program that is projected to help 92,000 workers in FY 2008, at a cost of $9,000

per participant. Alternative Trade Adjustment Assistance (ATAA) compensates

manufacturing workers age 50 and older who lose jobs to imports. If these workers

take a job paying less than their previous position, they receive half the difference

in wage between their new job, up to a level of $5,000 annually, for two years, a

concept called ‘‘wage insurance.’’

The Workforce Investment Act program for adults is projected to have 296,000 participants in PY 2008, at an average cost of $2,900 per participant. This has a network of ‘‘One-Stop Centers’’ where unemployed workers can register for benefits,

training, and available job openings. A related program, the Workforce Investment

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Act program for dislocated workers expects to serve 319,000 participants, at an av- erage cost of $3,750 per person. The Wagner Peyser Employment Service is projected to help 14 million participants, at a cost of $54 per person. Other programs,

for youths, Native Americans, older Americans, and migrant and seasonal farm

workers, also make important contributions.

Some have proposed expanding TAA to other sectors, such as services, in order

to deal with problems of global competition. Last October, the House of Representatives passed the Trade and Globalization Assistance Act of 2007, at a cost of $9 billion over 10 years, and the bill is now awaiting action in the Senate. However, economic circumstances do not warrant such a drastic expansion of the program.

The Trade and Globalization Assistance Act of 2007 would cover more workers

with TAA, even those now covered under other programs, and give more benefits—

hence the expensive $9 billion price tag. The bill would extend TAA to the service

and the government sectors, claiming that these workers suffer from trade. Perhaps

true, but services have generated over 90 percent of the eight million jobs created

since the start of the jobs recovery in August 2003, and government has created another nine percent.

The bill would go further. Whereas workers in particular firms are now certified

by the Labor Department as affected by trade and eligible for TAA, the bill would

enable entire industries certified as TAA-eligible. If three firms in an industry were

certified within six months, all workers in that industry could get benefits, even

those at firms not affected by trade. Similarly, if the International Trade Commission certifies that there have been unfair imports of low-cost goods, all workers in

the domestic industry would automatically be eligible for TAA.

In addition to expanding numbers of eligible workers, the bill would expand unemployment benefits. Workers in TAA can now receive up to two years of benefits,

with an extra six months if they need remedial education. This would be increased

to two-and-a-half years of benefits, with three years if remedial education is needed.

So workers who can least afford it would be encouraged to stay out of work and

lose three years’ income.

The Trade and Globalization Assistance Act of 2007 would prevent TAA-eligible

workers receiving job advice from anyone other than a State worker. Unemployed

workers on TAA walking into a career center would not be allowed to talk to job

counselors from the private sector, the county, faith-based organizations, non-profits, or local governments. They would have to wait in line to see State workers.

TAA can be improved with less costly congressional legislation by focusing the

program on training and re-employment, rather than on unemployment.

One reason that more people are not participating in the program might be that

they are finding jobs on their own in the many growing industries in the United

States. Industries such as education and health services and professional and business services have hired many more workers over the past few years.

Another reason could be because of administrative difficulties with applying for

benefits. If this is the case, then it would be worthwhile to try to streamline the

application process of the current program before expanding it.

Other measures to improve TAA could have some effect in shortening the period

of unemployment. Workers affected by trade are all different, and it may be beneficial to have One-Stop staff work with TAA recipients to develop individualized

plans to find new jobs and determine under what circumstances training is likely

to have a large positive effect.

TAA recipients could be required to register at One-Stop career centers and periodically check computerized job listings for suitable jobs. Then, One-Stop staff could

monitor recipients’ job search to ensure that they are effectively looking for work.

The One-Stops could provide funds to cover direct training costs and stipends to

provide income support, but only in cases where One-Stop staffs certify training is

likely to have a high payoff.

In order to further increase incentives to take the best available job, the Labor

Department could pay the additional cost of transportation to cover commuting to

a job far from home for up to two years and paying a portion of relocation expenses.

However, relocation payments should be contingent on remaining employed in an

area for at least six months.

Before expanding any program, it’s necessary to make sure that One-Stops are

making the best use of their resources. We should use high-quality measures and

standards to hold One-Stops accountable for ensuring funds go to workers assiduously searching for new jobs or obtaining training likely to have a large effect on

subsequent earnings.

We also need to redirect the use of training funds to include more community colleges for helping unemployed workers. Community colleges provide some of the best

training in the country. They train the majority of nurses and emergency personnel.

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Forty-five percent of the Nation’s freshmen are enrolled in community colleges.

Studies have shown that when unemployed workers take targeted technical courses

at community colleges, their future earnings increase.

For recipients not in training, an ideal performance measure would capture how

much quicker recipients return to work than otherwise would be the case. For recipients in training an ideal measure would capture how much higher their earnings

are and how much better other aspects of their jobs are than otherwise would be

the case. The earnings/job-quality measure also is an appropriate secondary measure for recipients not receiving training.

Americans don’t know whether expanding wage insurance, paying unemployed

workers part of the difference between the salary of their old job and a lower salary

of their new job, will solve problems of economic insecurity from globalization. But

it might be worth trying in a few states to see if it works, rather than imposing

a federal mandate.

In addition to workforce training, America needs to take a fundamental look at

how we educate workers before they join the workforce. We need to lower our highschool dropout rates, if necessary by incorporating vocational training into the last

years of high school, and encourage young people to get as much education as possible. This would prepare them for a succession of careers, rather than just one, and

enable them to change jobs more easily.

In summary, economic circumstances do not warrant expanding TAA at the

present time. A few changes in the administration of the program could make it

more efficient without the need for comprehensive expansion. Further, integrating

different types of federal training programs and making them more effective would

help the unemployed make the best use of these services and obtain a new job more

quickly.

Thank you for giving me the opportunity to appear before you today. I would be

glad to answer any questions.

BIOGRAPHY FOR DIANA FURCHTGOTT-ROTH

Diana Furchtgott-Roth has been a senior fellow at Hudson Institute since 2005,

and directs the Center for Employment Policy. Prior to joining Hudson, Ms.

Furchtgott-Roth was Chief Economist of the U.S. Department of Labor. From 2001

to 2002 she served as Chief of Staff at the President’s Council of Economic Advisers.

Ms. Furchtgott-Roth is the author of Overcoming Barriers to Entrepreneurship in

the United States (Rowman and Littlefield, 2008) and the co-author of The Feminist

Dilemma: When Success Is Not Enough (AEI Press, 2001) and Women’s Figures: An

Illustrated Guide to the Economics of Women in America (AEI Press, 1999). She is

a weekly economics columnist for the New York Sun. Her articles have been published in The Washington Post, The Financial Times, The Wall Street Journal, Investor’s Business Daily, The Los Angeles Times, and Le Figaro, among others, and

she has appeared on numerous TV and radio shows, including The Diane Rehm

Show, C–SPAN’s Washington Journal and PBS’s The NewsHour with Jim Lehrer.

Ms. Furchtgott-Roth was Assistant to the President and Resident Fellow at the

American Enterprise Institute from 1993 to 2001. Prior to that, she served as Deputy Executive Director of the Domestic Policy Council and Associate Director of the

Office of Policy Planning in the White House under President George H.W. Bush.

From 1987 to 1991 she was an economist at the American Petroleum Institute,

where she authored papers on energy and taxation. Ms. Furchtgott-Roth was a junior staff economist on the staff of President Reagan’s Council of Economic Advisers

from 1986 to 1987.

Ms. Furchtgott-Roth received her B.A. in economics from Swarthmore College and

her M.Phil. in economics from Oxford University.

DISCUSSION

Chairman MILLER. Thank you. We will now have questions from

the Committee Members, which consist only of me at this point.

Rather than go through the exercise of recognizing myself for five

minutes and then calling time on myself and then recognizing myself for another round, I will just ask questions. If one of the Members shows up, I will call on myself and recognize that Member for

five minutes and proceed differently.

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Dr. Russo and Dr. Palley both suggested that we were in a race

to the bottom, and I think Dr. Palley more so in his testimony, that

nations compete for investment and jobs that really use incentives

like lower taxes, lower environmental standards, less expensive

labor, and that that was exacerbated by certain features of the

International Trading System.

How do we address that? What can we do about it? Dr. Palley

first, then Dr. Russo, and then anyone else.

Dr. Palley.

Dr. PALLEY. Chairman Miller, I think this is absolutely right. I

think the metaphor of a barge captures exactly what is going on

in the global economy. There is a tremendous increase in mobility,

internationally and of course, within our own borders. In some

sense you could even think of the troubles before of the Rust Belt

versus the Sun Belt. That was an early forerunner of what

globalization is in the sense that it is now spilled outside our borders.

I think in so much we are all on the same page at some level

here regarding sort of the Trade Adjustment Assistance Program,

the details as it applies to the individual, the application to trade

dislocations. I heard some difference from Ms. Furchtgott-Roth regarding an extension of the program to cover a broader range of

workers. I myself think that that is a necessary feature of helping

people deal with an increasingly dynamic world. I think a job loss

is a job loss, be it due to technology or due to trade, and we should,

therefore, be extending these type of features to help workers.

However, I think there is a very big difference when we look at

sort of the macro picture, the global structure of what is involved,

and I think you have a problem here of how to anchor the barge

and to have the barge be steered in the right direction, in a direction that produces shared prosperity. You need a whole set of programs, and that is one of the troubles when we deal with

globalization from a policy standpoint. Often our policy discussions

are rather siloed, as in a sense today’s is. Today we approach it

first from—the main issue on the agenda seems to be Trade Adjustment Assistance, but in my own testimony I talked about the need

for exchange rate rules, which has been a very, very important

issue, was off the agenda when we constructed this globalized

world, beginning 15 and 20 years ago without large trade agreements. We left trade exchange rates completely out of the picture.

They are never part of trade agreements. They are clearly an absolutely essential piece of trade. More than any other factor they

probably determine the direction of trade, certainly in the short

run.

We need labor standards. Clearly as we found in our own national economic development in the late 1930s, we had a whole series of pieces of important labor legislation that established the

preconditions in which prosperity could be shared. And that is a

challenge that we need to get onto the international economic agenda. It must be part of our trade policy. Countries that don’t want

to participate in those type of arrangements would perhaps be excluded from participating.

Environmental standards, we see that is going to be more and

more part of the discussion. That was siloed off as part of, sort of

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global warming. Now we see it has economic implications as well,

because countries can compete on the margin there.

I think it is very important. I know you heard in a previous hearing from Ralph Gomory about the role of bringing corporations

back and realigning their interests with the national interest. What

worked so well in the 1950s, that great expression, Engine Charlie

Wilson’s expression, about what is good for General Motors is good

for the country. In a sense it was an accident. General Motors was

really a national corporation. It perceived its North American operations as being restricted to North America. When that was the

case, it is advancing its market share in the U.S., advancing its

profits here, helped advance American prosperity. Now General

Motors and lots of other corporations, of course, operate on a global

basis, where they produce is good for their global bottom line, but

not necessarily for our national income. And one of the classic examples is a company like Boeing. When Boeing offshores some its

components’ production for its new Dreamliner, that is going to

take good jobs away from Seattle. On the other hand, because it

can produce those pieces of componentry cheaper elsewhere, that

will raise the company’s bottom line.

So we need incentives, and I think Dr. Gomory talked about possibly thinking about rearranging the tax code to reward companies

that increase value-added production here. I think one of the obvious changes that has been on the Congress’s agenda for quite

awhile—I know it was talked about several years ago, five years

ago—is changing the corporate tax law so that we do not privilege

profits earned offshore. A company right now that earns profits offshore pays no taxes on those profits until they are repatriated to

this country. That is clearly a subsidy. It is an incentive to earn

your profits offshore, keep them offshore, finance your investment

out of those profits, and therefore build your production offshore.

That is an easy no-brainer in my opinion.

But I hope that these comments illustrate how we are talking in

a sense about an architecture and not one single piece of policy.

Thank you.

JOB PROTECTION

Chairman MILLER. Thank you, Dr. Palley.

Dr. Russo, how do we protect our jobs, protect our prosperity

without——

Dr. RUSSO. First of all, I think Dr. Palley has taken care of most

of the terrain that I would have discussed, and I think it is better

for me just to—let me give you an example. And this is a story of

Delphi and in our area, the subsidiary of General Motors was Packard Electric. That during the late 1970s had 14,000 jobs and started moving this work, first of all, to the Maquiladora sector in Mexico and became the largest employer in the Maquiladora sector.

The workers and the union there negotiated three-tier wage levels

to make sure they retained as many jobs as they possibly could,

and there was discussion that this was all a part of an international division of labor within the company, and it made sense

economically.

As this moved on into the 1990s, they continued to move jobs to

Mexico, and then starting to de-industrialize parts of their sections

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of Mexico when they found out the wages became $2 an hour, that

they can get the jobs done at 20 cents an hour in China.

Now, when they were spun off from General Motors, they continued their moves offshore, and ultimately they went into bankruptcy. They, in an attempt to abrogate their collective bargaining

agreements, to use the PBGC [Pension Benefit Guarantee Corporation] if necessary as a threat, to force General Motors to accept

their pensions. And while all this is going on and they are in bankruptcy, one business editor called me and says, ‘‘Well, why don’t

the workers take more concessions?’’ And I said, ‘‘First to answer

your question for me, how does a company in bankruptcy at that

time have a stock value of $3.50?’’ Because investors know that

Delphi is a global corporation, and they have secured their assets

in China in the Eastern Automotive Triangle, and while they are

in bankruptcy in the United States and in North America, what

they are doing is they are building a $350 million R&D facility that

will hire 3,000 engineers in Shanghai.

And when I was speaking at Peking University, this whole question, you know, what is Delphi? What is a corporation? What is the

purpose of a corporation? Is it an entity that is involved with increasing shareholder values and moving inputs and assets around

like pieces on a chess board? Or is a corporation an organization

that has reciprocal responsibilities with shareholders and managers and employees and the nation-states in the creation of value?

I think that crucial question that was, I think, part of the first

hearing, is very central to this discussion. Not just a simple economic policy, but a policy of what is a corporation.

Chairman MILLER. Mr. Rosen.

Mr. ROSEN. With your permission, Mr. Chairman, if I could just

very briefly, I want to respond to your question in a bit of different

way, which is what should we not do? And the first thing is we

need to invest in this country. Currently investment in plant and

equipment as a share of GDP is very low. It is below its 50-year

trend. So we need to invest more in this country. We ourselves

need to do more.

Number two, we need to have international agreements on trade

and taxes and investment and all of those things, and instead over

the last eight years we have pursued a policy of going after bilateral agreements. We spent a lot of time negotiating these agreements that amount to something like eight percent of our trade at

the expense of our multi-lateral agreements, which now are basically at a standstill, and we are not even sure if they are going to

be completed.

So first thing is we don’t invest enough. Second of all, we have

had a misguided trade policy over the last eight years, and the

third are the issues that we are raising this morning in terms of

how do we make, how do we assist in the transition. They are not

the answer, but they are part of the answer, and we don’t do that

right either, and ironically, what we are doing is in some sense we

are strengthening the targeted programs that only help a certain,

few number of people, and the general programs are weakening.

And one last comment. I just want to say because I think it is

always important to put all this in context, we talk and talk and

talk about Trade Adjustment Assistance. Currently, only 50,000

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people in this country are enrolled in the program. We are not talking about a program that is helping thousands and millions of people like unemployment insurance. It is 50,000 workers. And it gets

a lot of attention, it gets a lot of resources because of the political

importance of those people, but why are we only helping those people that way and not other people?

Chairman MILLER. Ms. Furchtgott-Roth, did you have a comment?

Ms. FURCHTGOTT-ROTH. Yes.

Chairman MILLER. Okay.

Ms. FURCHTGOTT-ROTH. Yeah. Thanks very much. Are we in a

race to the bottom and what should we do about it? I would like

to say we are not in a race to the bottom. We have had more

globalization, but we are better off. I mean, if you look at where

we are now compared with, you know, 30 years ago, we have more

globalization, but we have a lower unemployment rate, we have

lower inflation, people are better off, people have cell phones, computers, DVDs, this little Blackberry that made such a splash when

Al Gore used it in 2000. So many people have them now. People

eat out more. The houses that are built have air conditioning and

heating. We have Toyota, BMW, Nissan with plants here in the

United States producing more jobs for American workers and

countless other foreign plants here, also creating jobs.

You asked what should we do about it. Well, one thing we should

do to improve our economy, we should keep tax rates low. Tax

rates are scheduled to go up on the first of January, 2011. I have

just written a book that is been published by Lexington Books

called, ‘‘Overcoming Barriers to Entrepreneurship in the United

States.’’ It just came out a couple of months ago. Tax rates are important to entrepreneurs. Many of them fall under individual tax

rates. Their tax rate is scheduled to go up from 35 to 40 percent.

I mean, it is no wonder investment in the United States as Mr.

Rosen said is declining, if we are facing such a large tax hike in

2011.

We need to do something about our energy, our manufacturing

sector is affected by our energy. Our airline industry is affected by

energy. We need to be drilling offshore and in ANWR. We need to

be building refineries and nuclear power plants. We can’t look on

energy as this dirty stuff that we don’t need, because our manufacturing sector needs it.

We need to get rid of the ethanol mandate that is driving up food

prices. Eggs cost about $2 or $3 a carton. I bought corn yesterday.

It was three ears for a dollar, and it used to be five or six ears for

a dollar. Milk. It is $3.50 a carton. Used to be, a gallon. Used to

be $2 a gallon. We need to get rid of that ethanol mandate, which

is going to require 36 billion gallons of ethanol in 2022, nine billion

this year, and we just don’t have the corn to deal with that.

And we need to pass more free trade agreements as Mr. Rosen

said. We need to pass the Colombia Free Trade Agreement. Right

now the Colombians can import anything they like here under the

existing trade agreements, but we cannot export over there. And so

our companies don’t have markets for, in Columbia, and those need

to be opened up.

So thanks very much for asking that question.

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WAGES AND INFLATION

Chairman MILLER. Thank you. Are average wages keeping up

with inflation?

Ms. FURCHTGOTT-ROTH. If you look at average wages in terms of

benefits, total compensation, total compensation——

Chairman MILLER. That assumes then health care costs.

Ms. FURCHTGOTT-ROTH. Right.

Chairman MILLER. Which is——

Ms. FURCHTGOTT-ROTH. Exactly.

Chairman MILLER. But——

Ms. FURCHTGOTT-ROTH. Wages without benefits——

Chairman MILLER. Right.

Ms. FURCHTGOTT-ROTH.—are not keeping up with inflation, but

the benefits are a more and more important component of total

compensation.

Chairman MILLER. Because of the inflation of health care costs?

Ms. FURCHTGOTT-ROTH. Because of the high cost of health care.

Yes. And the high cost of pensions.

A NEW METRIC FOR CORPORATE ACCOUNTABILITY

Chairman MILLER. Okay. Dr. Russo, you, and I think Dr. Palley,

too, echoed what was said at our last hearing about the role of corporations and how they should not perhaps just be judged by their

profitability but their other obligations, other than just the obligation to the shareholders. And, in fact, most corporations are not

run for the shareholders either. They are run for the top executives.

My question then and now is, that is a remarkable change in the

way we look at the economy if we expect the major economic actors,

the largest corporations, not to act on essentially one criterion,

profitability. If we take the view that corporations—and trying to

make corporations national institutions again instead of international institutions is no small feat—but if we assume that they

should pay attention to the concerns of the communities in which

they locate operations and their workers, and on and on, how do

we judge performance of the management of the Board of Directors? How do we hold them accountable? How do we govern corporations when there is this wide set of considerations in how corporations should behave and how their performance should be

judged?

Dr. Russo.

Dr. RUSSO. I think it is a complicated question because we are

really rethinking corporations because they have already rethought

themselves. At an earlier period of time they did take into account

multiple stakeholders in terms of their thinking, and some corporations still do that. But increasingly, as one executive said to me,

‘‘I want to do the right thing, but in this global competition now,

I am going to have to move offshore. I am going to have to

downsize.’’

And so the answers to the questions are really sort of systemic.

How we look at global corporations in a global economy, how we

define what they are as legal entities and their various responsibilities, how we judge their interactions with nation-states because

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the nation-states provide a framework for their operations. And

that is going to require a type of discussion that is going to include

not only the United States but other countries. And a discussion

about how do we hold these corporations responsible for their actions.

Chairman MILLER. Dr. Palley.

Dr. PALLEY. Thank you. This is a very deep question.

Chairman MILLER. Well, thank you.

Dr. PALLEY. I did read the transcript of the previous hearing, and

Dr. Margaret Blair, who was at graduate school at Yale with me,

was, I saw, a presenter, and she did, indeed, sort of point out how

the right to be a corporation is, indeed, a legal privilege created by

law. It is not something that exists naturally, and Dr. Blair also

pointed out that, in fact, in current U.S. law there is nothing that

says profit maximization is the only goal of corporations, though

apparently there is one small State case regarding a bankruptcy

when the firm was clearly going to be put into bankruptcy. At that

stage it did seem to have an obligation to do best by shareholders.

I also want to reiterate what Dr. Russo said about, I have spoken

to corporations, too, to corporate executives who say how they are

trapped in this system, and that is when I used the word, this race

to the bottom. I don’t want it to be something, we are all going to

end up impoverished here like in Bangladesh. That is not going to

happen. We are a rich society, and we will continue to be rich. But

whether we are as well off as we could be is a different question,

and that is the sort of way in which I use it.

And lots of corporate executives, responsible corporate executives, would like to do better but are trapped in this situation. So

we can truly help them.

One of our problems here is we tend to think of ourselves as engineers, as if we can engineer society. As an economist that is not

in my frame of mind. I think getting good outcomes from the economy, from society, is extremely difficult. I would point to one thing,

again, coming back to this issue of an architecture or think of an

economy as a house. A well-designed house has doors, windows,

ceilings, floors. You need all the pieces together to make a well-designed economy, and here is something of how we have hurt ourselves, I think.

I think of unions. Unions were a critical way of negotiating this

difficult thing of getting corporations to behave responsibly. When

there was a strong union movement in this country that was supported by public policy—not been now for close on 40 to 50 years—

unions fought people within the corporation to get these other goals

onto the corporate agenda. Once you drove unions out of existence—well, not out of existence, you drove them into a great state

of weakness—you lost that form of representation.

And so today corporate governance has taken a different direction, and a very interesting study that I saw, although I don’t actually have the citation here right now, is there were some economists who looked at pay of CEOs and the connection to union presence. And it turns out when unions are present, CEO overpayment

is much, much less. So you do see not just representing workers,

but unions bringing in other social interests, and this is done in a

sort of a non-legislated way, and that is the sort of thing how ConVerDate 11-MAY-2000 19:18 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00092 Fmt 6602 Sfmt 6601 C:\WORKD\I&O08\052208\42371B SCIENCE1 PsN: SCIENCE1
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gress with labor law can then have a knock-on effect in terms of

good corporate governance in a way that one wouldn’t anticipate.

Chairman MILLER. The presence of other CEOs on the Board’s

Compensation Committee also has a correlation to executive pay.

Dr. PALLEY. Yes, indeed.

Chairman MILLER. The results are much higher executive pay.

Mr. Rosen.

Mr. ROSEN. Mr. Chairman, if I could, I just want to come back

again to some specifics to help you. You know, we talk about labor

standards and environmental standards in other countries. We

don’t talk about them here in the United States, and this is something that could be done without legislation if we could kind of

have a good seal of housekeeping for our companies. Which of our

companies invest, how much do they invest in R&D as a share of

their sales? How many of them provide pensions and health care

to their people?

If we had this ranking, how much do they invest, reinvest their

profits here in the United States, if there was an organization that

would list these things, we would know who are the good companies, if you will. And then those companies would get some attention, maybe then people would invest in those companies.

So those are standards that we could do right now. We wouldn’t

need any additional legislation, but we are so busy talking about

what others should do, we forget to see what we should be doing.

Chairman MILLER. How does that affect, Mr. Rosen, or any of

you who’ve already answered this question, the large corporations

are now not simply national entities in the way that General Motors was in the 1950s. They truly are international. Their investors

are international, their markets are international, their operations

are international.

What would investors in other countries think of a measure of

a corporation that looked at how it, how well it was doing by people

in our country?

Mr. ROSEN. The first thing I would say is that I know that in

places like Germany and Japan it does affect their own investors

to invest in those companies that they think are going to be loyal

companies to their countries. We just don’t have that kind of investment strategy. We don’t encourage that kind of investment

strategy, and in part because we don’t have the information. So I

think here in the United States we could influence the capital markets with that kind of information.

What would other investors in other countries think about it? I

would imagine that they would like it because it would be providing more information to them also. You know, part of the problem right now is we don’t get good information about these companies for investors, and that would help everyone. I think all investors around the world would appreciate it.

Chairman MILLER. Dr. Palley.

Dr. PALLEY. Yeah. Could I chime in there as well? This may be

an anecdote, but it is a story that I heard that Ralph Nader actually wrote to the CEOs of the top 500 corporations in this country

and asked if they could say the pledge of allegiance before their

board meetings, and their response was, in fact, that, one I think

wrote back that they might consider it. The other 499 said that

413

they couldn’t because they had international shareholders, who obviously didn’t share that same interest.

But I think that reveals something very important. I am all for

standards, sunlight, exposure of what corporations are doing, but

I don’t think you will be able to escape the fact that at some level

one will need powerful legislation and obligations of corporations

imposed in part by law or through other actors in society who are

powerful or remade powerful such as unions.

I do want to say that one very important thing here, I strongly

disagree with Ms. Furchtgott-Roth’s recommendations that we pass

further trade agreements like the Columbian Trade Agreement.

What is going on here is we are going down a road that locks us

in and makes it more and more difficult to change direction. That

is one of the consequences of building public policy in this piecemeal way.

And I am, therefore, a strong supporter of the idea of taking a

pause in trade agreements, taking them off the table, beginning a

period of powerful introspection, and we look at what things we can

do alone, what things we can do with other countries, then work

with those other countries to see who is on board for making

changes. And to try and escape the path which we are currently

locked into.

Chairman MILLER. Ms. Furchtgott-Roth.

Ms. FURCHTGOTT-ROTH. Well, thank you. Yes. Yes. Well, to answer your question about corporations, we need to make the United

States a hospitable place to be so the corporations are attracted to

the United States. We need to have low tax rates, low levels of regulation, low energy prices. After we passed the Sarbanes-Oxley Bill

recently London has overtaken New York by some measures as a

financial center, and we can’t legislate that corporations stay here

in our internationally mobile economy. But we can make it a hospitable place where corporations want to locate, where they can,

where they provide jobs for Americans, where they provide low-cost

goods, and that should be our goal.

Chairman MILLER. British law allows or requires an advisory

vote by shareholders on executive compensation. The United States

does not.

Do you believe that that would be an improvement?

Ms. FURCHTGOTT-ROTH. Could you repeat the question?

Chairman MILLER. Sure. You cited favorably Britain.

Ms. FURCHTGOTT-ROTH. Yeah.

Chairman MILLER. That some of our corporations were moving

more operations to Britain.

Ms. FURCHTGOTT-ROTH. Yeah. Right.

Chairman MILLER. Britain requires a vote by shareholders at

least on executive compensation packages. It is actually not entirely advisory. It is either approve or disapprove. The United

States does not have anything like that.

Do you think that would be a useful reform in the United States?

Ms. FURCHTGOTT-ROTH. No, I don’t think it would be.

THE DOD MODEL OF COMMUNITY ASSISTANCE

Chairman MILLER. Okay. The Department of Defense and their

base closings took some great efforts to try to lessen the impact on

414

the communities that they were reducing or eliminating military

operations in, closing bases. There have been some suggestions,

and have for a long time, that American corporations should have

to do the same thing.

Do you think something like that would be useful, and what form

do you think it should take?

Mr. Rosen, you seem to be——

Mr. ROSEN. Yeah. Thank you very much. Here is a case where

we have a positive model, and it works as you suggest. The question is why are we only letting a few communities take advantage

of it and not others.

Let me just say I actually had the honor of having the opportunity to experiment with this program in a civilian case. I was

working for Senator Bingaman, and the State of New Mexico was

experiencing several dislocations because of the Levi Strauss plant

closings. And we tried to emulate the base closing process in

Roswell. We got one of their technical advisors transferred to

Roswell to help with writing a strategic plan. We made up a community board just like they do under base closings, and it was pretty successful.

Now, of course, none of these efforts are ever going to make all

of these workers whole again. We know that, but the question is,

can we kind of ease the transition a little bit more, and the base

closing model is a successful one. What makes it successful is that

it is kind of aggressive, so they send expertise to the communities

and help them figure out where they want to go.

Number two, they know about existing government programs.

Not necessarily calling for more programs: They know where the

grants and loan programs are, so they can help communities apply

for those programs. That is the problem. A lot of communities and

workers don’t know about these things, but there are a lot of programs out there.

So that is the second thing that they do, and the third is it is

very comprehensive. They look at everything. They look at the education system, the employment system, attracting new companies.

They look at the whole thing. It is not just a worker adjustment

program.

So those three elements make it very successful, and I, to be

quite honest, just don’t understand at this stage, when this program has been in place for several decades, why we don’t use it in

civilian cases. I just don’t understand. It wouldn’t be that costly.

It is not a question of money because all it would be—funding,

technical assistance—is already the existing loan and grant programs. So I don’t think it is a matter of cost.

Chairman MILLER. My time is now expired.

Mr. Baird is recognized for five minutes.

TRADE ADJUSTMENT ASSISTANCE

Mr. BAIRD. I thank the Chair, and I thank our panelists. This is

something tremendously important to my region. I have a county

that is nearing nine percent unemployment, leading our state in

that, and at least a significant portion we believe is because of competition from international trade.

415

One of the issues that many of us turn to when such events happen is Trade Adjustment Assistance, and Mr. Morgan, you have

commented on the numbers of cases that have been filed and then

denied and then litigated and then approved. Then you believe basically that DOL doesn’t seem to be on the side—I don’t mean to

put words in your mouth, but as you read it, it sounds like their

default answer tends to be no, and that leaves a whole lot of American workers bereft of the benefits that we created this program

for.

Could you comment a little further on that? I have read your testimony; and any others who want to add to that, I would appreciate

it. What is the situation, and what do we need to do to improve

it?

Mr. MORGAN. I think you are exactly right, that the problem is

that the Department’s default answer is no. Now, they would surely come back and say that they certify workers in a lot of cases,

but I think that what they are doing is certifying workers where

the petition presents such a compelling, straightforward case that

they don’t have to conduct any kind of an investigation. The cases

where they are denying relief and then going into Court and defending that decision, they have conducted the scantest of investigations.

And just to kind of compare, I do a lot of work at the International Trade Commission and the Department of Commerce, the

International Trade Administration. The agency records in those

cases are always going to be far more extensive, but I have never

seen a case where one of those agencies tried to defend the decision

on a few e-mails and a few voicemails. And I think what it is going

to require from Congress is to bring the agency in and to ask them

and to hold them accountable for the fact that they are not conducting the kind of investigation. I mean, the Congress has given

the agency subpoena authority to produce documents and witnesses. I have never seen that level of concern in these investigations. And then when they go into Court, and I think a lot of agencies do tend to do this, they reflexively try to defend the decision

that they reached in the first instance.

But in the other agencies I practice in front of, those are adversarial proceedings where the parties have hired lawyers and have

had full representation throughout the administrative process. And

the agency in those cases does not have some kind of protective interest towards one side or the other. They are supposed to administer and enforce the law. In Labor cases, they are supposed to be

acting with the interest of the workers in mind, and the workers

don’t have counsel, especially at the agency level.

So I think that they are just completely acting in disregard of the

Congressional mandate to protect the workers.

Mr. BAIRD. And Mr. Rosen, please.

Mr. ROSEN. Congressman Baird, I just want to add I always

think it is important to put all of this in context. I think Mr. Morgan has set out really excellently the problem. Just some numbers.

Every year the Department of Labor receives approximately

3,000 petitions for Trade Adjustment Assistance. They certify approximately 2,000 of those petitions. As he suggests, some of them

are very slam dunk, they are very easy, and 1,000 of them get deVerDate 11-MAY-2000 19:18 Nov 29, 2008 Jkt 042371 PO 00000 Frm 00096 Fmt 6602 Sfmt 6601 C:\WORKD\I&O08\052208\42371B SCIENCE1 PsN: SCIENCE1
416

nied. For whatever reason—legitimate, mistake on the form, whatever reason—1,000. As Mr. Morgan pointed out, only 12 of those

1,000 are even appealed. People don’t understand how to do it. It

is a very arduous process.

So let us make sure we understand. I mean, there are egregious

problems with the appeal process, but it is only affecting a minority

of a minority of people. And I just want to give you one example.

I run a non-profit organization that helps workers navigate

through the program. We finally set up this organization because

the Labor Department wasn’t doing it. This is a true story. I received a phone call yesterday from a gentleman in Indiana. He

missed the orientation meeting at the one-stop, and the state denied him assistance.

Now, how is that a way to run a dislocated worker assistance

program, let alone a trade policy, in which Trade Adjustment Assistance is at the center of that trade policy? Because the guy

missed the meeting.

So we really have got to rethink this whole thing. I mean, we

have got serious problems, and I have studied this program for 25,

30 years. I have to say that it is not a partisan issue. It is not a

partisan issue, and I think part of the problem is because the

Labor Department doesn’t like running targeted programs. They

would much rather run a general program because it is much more

cost effective to do that.

I don’t know the numbers, but I think that there are probably

more people at the Department of Labor working on Trade Adjustment Assistance than there are working on unemployment insurance because it is such a highly bureaucratic program.

So on the one hand I kind of understand the problem at the Department of Labor, but that is not the fault of the workers who

need the assistance.

Mr. BAIRD. Any others want to comment on that from your experience?

Ms. MOORE. I would like to share that when we were working

with the folks from Pillowtex, we had roughly 1,000 of the 4,900

that were affected in the state who just fell off the map. We never

heard from them, we never got any response from them. The system itself was so complicated and so overwhelming that it was not

unusual when we were in the rapid response meetings for workers

to literally get up, walk out, and just drop the materials in the

trash can because they didn’t have any way of understanding.

When you are talking about an illiteracy rate of 46 percent, you

hand people a stack of materials like this that they are supposed

to go through and navigate and understand and complete, it was

just impossible.

So it is a very user unfriendly application process.

Mr. BAIRD. Very helpful because, you know, many of us who believe that trade has—my state in particular is the most trade-dependent state per capita in the country, Washington State with

Boeing and Microsoft and Weyerhaeuser and all the grain and

what not that goes through Washington. And so we in many ways

benefit from trade, but at the same time, as I mentioned, I have

got workers who have lost their jobs I think directly related to

417

trade, and one of the things those of us who try to support responsible trade policies do is we look at TAA to sort of buffer that.

But from what you are saying at multiple levels along the way

that imagined buffer may break down, both in terms of the application for the eligibility itself or for the initial job loss and then for

the workers who then apply and may, if they miss a meeting, lose

their eligibility, but also they come to the meeting, and they just

get overwhelmed by the bureaucracy.

I think, Mr. Chairman, one thing we might want to do both on

this committee and more broadly in the Congress, is look at that.

I have some more questions I would be happy to ask but I know

my five minutes is up. So——

Chairman MILLER. Mr. Baird, I went over five minutes a little

bit myself. If you would like to continue, you may.

THE SERVICE INDUSTRY AND TRADE ADJUSTMENT

ASSISTANCE

Mr. BAIRD. If that is the case, then I am particularly interested

in issues of service jobs, and how that relates to TAA and also to

trade. I founded in this Congress the Career and Technical Education Caucus, and I believe we don’t do enough on career and tech

ed. Part of the reason I did that was I think it is harder sometimes

to export some of those jobs. We are going to be needing plumbers,

and it is hard to outsource a plumber.

But a lot of our service jobs, which many of us have sort of told

people, ‘‘Boy, that is the area where you can strike it rich and

make big money,’’ et cetera, those things are getting more and

more outsourced.

And I wonder if any of you have comments on pros and cons and

how we help deal with that potential job loss related to trade.

Dr. RUSSO. I think it is a great question, and I guess more or

less my role here partly is to give sort of a historical sort of background on this.

When the dislocations were going on in Youngstown among steelworkers, nobody really gave a damn because those were blue collar

workers. Okay. This was all part of the natural economic order,

‘‘creative destruction.’’ All the usual sort of ideas of a traditional

economic theory.

And like you said, people were promised new future jobs. They

would go into computer repair. That was a short-term solution because you just slipped in a new piece of equipment.

But what happened is that in the 1990s, especially in Ohio, we

started to see the outsourcing of service jobs. Middle class white

collar jobs, not middle class blue collar jobs, and then somebody

kept coming back to Youngstown and saying, ‘‘Well, did you guys

ever recover?’’ And the answer is, no, but they were being told the

same thing that our communities were told in the 1980s.

We jump forward to today, and you can see a tidal wave of this

information, as I said in my remarks. There is a growing politics

of resentment. I sense that they don’t trust anybody, because these

platitudes, these jobs they are being trained for, their experience

with trade adjustment, knowing full well that often these jobs

would be outsourced more quickly.

418

How much productivity can we educate into a worker that is

going to offset a job in China that can be done with five people

making 50 cents an hour?

I will repeat what I said in my remarks. These are systemic discussions, systemic resolutions, and with no disrespect to my colleagues here, they are talking about trade adjustment, they are

talking about community college and retraining. I think in the lack

of the Department of Labor, which you are absolutely right to talk

about, who more or less cover the getaway for corporations who

now have a policy to move work increasingly to the areas that have

the lowest wages.

So to get back to your point, this situation is not going away, and

it is only being exacerbated by what is happening today.

Mr. ROSEN. Yes, Mr. Congressman. When I started my career

about 25, 30 years ago, the growth industry was trying to calculate

how many workers were losing their jobs in manufacturing because

of trade. The growth industry now is trying to calculate how many

service workers are going to lose their jobs because of globalization.

It is not an easy thing to do, and there are a lot of people that are

doing it, coming up with enormous numbers.

The problem is, I think the reason it is getting attention is because our policy infrastructure hasn’t caught up with the economic

reality. So, for example, we have this Trade Adjustment Assistance

Program, with all of its problems. But I will give you another case

in point, because I think it is always important to talk about the

specifics.

There was a very major case in your state that was taken to the

Court of International Trade because the workers made software,

and the Department of Labor did not give them eligibility. And

then finally the case was argued in the Court, and they said, ‘‘Well,

because the software is put on a CD, then we can consider the CD

a product. But otherwise we can’t.’’

I mean, who draws these lines? The persons who do software

that isn’t put on a CD still experience job loss the same way as the

worker who provides it, when it does come on a CD. So this kind

of problem is, like I said, it is our infrastructure having a hard

time catching up to the economic reality.

Thus, the House of Representatives has passed a Trade Adjustment Assistance Bill that expands TAA to services. Now, it is going

to cost some money. I am sorry. It is just the reality of it. And so

we are trying to come up with ways to be able to target the program to really help those people in need. Granted, some of the

service workers have higher education, have more background,

they may not need the same kind of assistance as others. But we

should get around this discrimination and at least try to deal with

the problem before it comes and it bites us.

And I just want to repeat something I said in my statement,

which is this is all important because we want to help workers in

need. Clearly. But I believe that this frustration is starting to infiltrate our ability to make economic policy. We are not able to move

forward on trade policy, we are not able to move forward on policies that will create economic change. Greenhouse gas emissions.

People are talking about what kind of dislocations is that going to

create. If we had in place a structure that helped everyone equally,

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adequately, then we might be able to move forward on some of

these economic policies more efficiently.

CHALLENGES AND LESSONS FOR COMMUNITY COLLEGES

Chairman MILLER. Thank you, Mr. Baird.

Ms. Moore, I get homesick sometimes, so I just wanted to hear

you talk a little bit more. The period from 2001 to 2005, was the

worst four-year period of job loss since the 1930s, since the Great

Depression in North Carolina. We lost 167,000 manufacturing jobs,

which is almost a quarter of the state’s manufacturing jobs.

Our community college system is one of the best in the Nation,

the third largest. Thank you, Terry Sanford. And unlike many

states where the community college system essentially began as an

academic program, ours has much more of a history of job training,

being very specifically targeted to economic skills.

But for a lot of community colleges the need was overwhelming.

Obviously no place more than Kannapolis, but Dr. Russo talked

about in Youngstown workers getting training in refrigeration

when there are no refrigeration jobs. The part of my district that

is probably closest to the kind of job loss you have suffered in

Kannapolis is Rockingham County, north of Greensboro. Eden,

Reidsville. We probably had the second largest number of Pillowtex

jobs all lost on that same day.

And I have certainly heard there of displaced workers wondering

whether the programs they were taking at the community colleges

under TAA matched up to any jobs that were going to be available

to them.

What kind of challenges has the community college system from

North Carolina as a whole faced during this last few years, this

last decade, and what lessons can we learn from the experience of

the whole community college system?

Ms. MOORE. I believe that for us at Rowan-Cabarrus Community

College, and I think Rockingham experienced a similar dynamic,

we saw our displaced Pillowtex workers going into trade programs

that previously had been under-enrolled. These were previously

under-enrolled.

Chairman MILLER. Okay.

Ms. MOORE. They were programs that literally were dying on the

vine as Dr. Russo made reference to the blue collar jobs. Many

folks were migrating away from those, because they didn’t believe

that they could make a sustainable living in those kinds of work

environments. So the Pillowtex phenomena actually gave us at the

college an opportunity to revitalize some of those trade programs

and technical programs.

These were programs where we were hearing from local employers we were not producing enough graduates. We weren’t producing

enough machinists, enough welders, enough auto technicians. So

that healthy boost and the heating and refrigeration. The Charlotte

market, which, of course, is 40 miles south of us, absorbed many

of those folks into jobs that were applicable to those trade programs.

But I hear and I know it is a very deep concern of our new system office president, that there are programs throughout the state

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ment. So there is a skilled labor shortage. We have programs that

address those skilled labor needs, however, because of not being

able to get people into those programs or to keep up with the technology that is out there in those service sectors, we are struggling

to maintain those programs in the State of North Carolina.

Dr. RUSSO. May I respond to that also?

Chairman MILLER. Dr. Russo.

Dr. RUSSO. Because the experience in Ohio is pretty similar to

that. Let me give you some examples. In the 1990s I was asked to

do a research project for the Western Reserve Building Trades Association, which is the contractors and the unions in northeast

Ohio, and what was happening to their particular industry 15

years into the de-industrialization that was going on. And what I

saw was union contracts that were only on paper alone. Everybody

was signing what were called project agreements that had lower

wage levels. And when I asked about this, they were, we were told

that it was the result of all the ex-steelworkers that were going

into construction. In other words, anybody who had a pick-up truck

and a tool box went into construction, became part of the underground economy. They became low-wage workers, they lowered the

scales of unionized workers that are plumbers.

Meanwhile in that industry itself that workforce was graying,

and there was a lot of intergenerational work in the construction

industry, and people were not going into construction, the children

of these construction workers, because employment had become episodic.

And so the de-industrialization process does not only impact the

particular industry, but it also impacts a set of subsidiary industries in lowering their wages and benefits, and then you have, at

the same time you have workers who may have been making a

manufacturing wage, are being asked to take service jobs. As one

steelworker said to me, ‘‘You know, I went from working the MacDonald’s Steel to McDonald’s hamburgers.’’ And what happened?

The wages dropped dramatically, and they had to struggle to survive.

An earlier question that you had about the experience of these

working people and what you rightly, you know, suggested is that

they disappear because of the emotional, the economic conditions

that they experience at the time of that unemployment. And it is

hard for people to understand, they can’t concentrate if they wanted to, there is economic necessity, there is a whole set of pathological problems that become associated with the unemployment, and

they disappear. Out of sight, out of mind.

Mr. ROSEN. Just very quickly a problem that the community colleges face and that is capacity. As you yourself mentioned, here

Kannapolis experiences this enormous number of layoffs, but had

not done that in 20, 30 years. So there is a community college that

is based on a certain number of enrollment, and then all of a sudden their enrollment goes up by three or four or five times, and the

community college is being asked to respond to it immediately. So

there is a capacity problem of just basically room, furniture, equipment, teachers, and that has to be done immediately and in part

because for economic reasons it should be done immediately, but

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also because our programs are geared such that you got to be

through them in, within a certain amount of time.

So that is a real problem that the community colleges face, and

that is something that we need to respond to. Now, let me just say

that in the Trade Adjustment Assistance legislation that is being

considered, there is some thought about the possibility of a grant

program for community colleges, because this isn’t something that

everyone is going to, every college is going to experience all at the

same time, but different colleges are going to experience at different times. And there is an example of something that could be

done to really help the problem.

Chairman MILLER. Ms. Moore.

Ms. MOORE. I would like to also add one of the issues that we

faced in absorbing so many adult workers was the remedial needs

of those folks in terms of not only English and math, but technical

issues. Because you can’t take an English class, very few classes

can you take at a community college anymore where you are not

required to have some computer application skills. You have to be

able to apply online, you have to be able to register online, you

have to be able to complete a research paper or report using a computer and a flash drive. These were foreign elements to this workforce. So you have that whole issue of remediating the adults so

that they can compete in the same classes as recent high school

graduates who come to us with those skills.

THE EMOTIONAL COST OF DE-INDUSTRIALIZATION

So that is another burden.

Chairman MILLER. In most of rural North Carolina the, and it

is actually some community colleges that maintain these statistics,

the percentage of the adult population that does not have a high

school diploma or GED is typically in the high 20s or even in the

30s, and for those folks to lose their jobs in their 40s or their 50s,

and to be too old to work and too young to die, it is pretty hard

to go back to school.

Ms. Moore, Dr. Russo talked about the emotional toll that displacement took on people, how it is hard to concentrate, hard to

concentrate, hard to do what needed to be done next to create a

new economic future for yourself.

Have you observed those kinds of difficulties with displaced

workers, and what suggestions do you have for community colleges

or the communities that put, that find themselves in a similar circumstance in the future?

Ms. MOORE. We certainly experienced that in a very big way

with Pillowtex, and we continue to experience it with the ongoing

dislocations that we have. When folks are traumatized, it was almost like seeing folks suffering post-traumatic stress syndrome, because they had lost their livelihood and as I alluded earlier, many

were multi-generations within the same family, so son and daughter couldn’t go live with mom and dad, mom and dad couldn’t go

live with son and daughter because they were all impacted by the

same plant closing.

The emotional attachment that people felt to that way of life and

to that industry persisted for a number of years, and I think there

are still elements within our community who believe that there will

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be some semblance of Pillowtex that resurrects itself on the research campus, because that is what they see as that site, and it

was there 116 years and sustained many of them and their families, and they think it will come back in some way, shape, or form.

One of the real issues that we had was that our own faculty and

staff who were dealing with these dislocated adults did not have

any previous kind of training or experience that prepared them to

talk with these folks and counsel them and advise them. Our partners, our Job Link partners came together. We tried to work as cohesively as we could. One of the issues with the influx that we had

were that the local employment security commissions hired a lot of

intermittent workers. These were workers who were as unfamiliar

with trade policies as the community college folks were. So we were

educating ourselves not only on the policies, but also on the emotional issues that these folks were coming to us. If someone came

in, they were about to be evicted because they just couldn’t pay

their power bill, we had to figure out a way to find them some kind

of resources. Had one gentleman who came to us who was reluctant

to go out and look for a job because he had a mouthful of teeth that

were in very, very bad condition, and he had no dental insurance

and no way of getting those treatments. We had people that were

suffering from pre-existing medical conditions who needed surgeries that had been scheduled, and they no longer had an insurance provider to do that. And then they were being told, well, you

have to be enrolled in school, and you have to be enrolled within

X period of time or you are going to lose your extended unemployment.

So there was a lot of trauma that was going on, a lot of really,

really difficult human decisions that were having to be made with

a very limited professional level of guidance and counseling resources available to them.

Dr. RUSSO. I want to just add to that story but not to the workers but to the mental health workers. One thing we write out in

our book, Steeltown USA, is the case of Parkview Counseling Center in the 1980s, where they were having employment problems. I

came in there to see what the employment problems, we did a

needs assessment, and then we interviewed all the psychologists.

And I remember going back to the meeting with about 40 psychologists and about 50 staff and saying to them what they needed to

do was group therapy. And that was interesting to tell a group of

therapists they needed group therapy, but what was happening to

them is that they were suddenly handling this influx of mental

health cases that were not the usual marital disputes. It is hello,

I am going to kill myself, I want to kill my kid, you know, and having all sorts of problems. And there was an overload of, their caseloads exploded without any additional resources. In fact, as the

community downsized, the amount of money that came into these

mental health institutions was decreased because it was based on

a per capita formula. So the mental health workers, the caseworkers in those institutions were overwhelmed by this de-industrialization. It was another part of the story. It wasn’t just the actual workers or the university, but it was also the mental health

caseworkers who had to deal with this fallout from de-industrialization.

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Chairman MILLER. My time has expired, and speaking of psychologists, the Chair now recognizes Mr. Baird.

Mr. BAIRD. Thank you. He meant that because I am one, not because I need one, although not everybody else will be——

Chairman MILLER. The two are not inconsistent.

PART-TIME TRAINING AND TAA

Mr. BAIRD. Exactly right. I am interested in the issue of—one of

the things we discovered in my district was paradoxically in normal

student loans, part-time students are not eligible for student loans.

It seems to be, it really doesn’t make any sense, and we actually

have some legislation that we have introduced to try to fix that.

How does TAA assistance relate to part-time students?

Mr. ROSEN. Mr. Congressman, that has also been a problem in

Trade Adjustment Assistance. You must, currently you must be enrolled in full-time training in order to receive the assistance. Again,

the piece of legislation that was passed by the House and is currently being considered in the Senate would address that problem

and try to deal with the part-time issue.

It would also, because this came up earlier let me just take this

opportunity to say, try to address this issue of self-employed. I

mean, currently you can’t get assistance if you are going to be selfemployed. So, there is an attempt to try to do it. All of these things

are not so easy. We don’t do it because they are, we just decide not

to do it. It is just hard to do these things, but, you know, people

have to come together and try to come up with solutions.

The part-time work is a problem because people can’t afford——

Mr. BAIRD. Right.

Mr. ROSEN.—to just stop everything and take training. I mean,

we here in Washington come up with these great ideas, but the reality is that these people just can’t do that. So hopefully if this legislation passed, and I think you all know that there are a lot of

hurdles before this legislation, if it does pass, it will be an attempt

to try to address that.

But I also want to make one comment on what Ms. FurchtgottRoth mentioned about the non-high school or the high school dropouts. This is a very serious issue. By my calculation there are 50

million people in this country that do not have a high school degree

or a GED equivalent. Fifty million. And yet we come up with all

of these programs for college-bound students. Why don’t we make

those programs available to those 50 million, or why can’t we say

that as a nation within the next 10 years we are going to make an

objective that no one in this country will not have either a high

school degree or a GED equivalent, and let us put in some of those

resources that we devote to college-bound students to making sure

that every student in this country gets a GED or a high school

equivalent?

And, again, currently that is problematic in TAA because Trade

Adjustment Assistance is not theoretically supposed to take care of,

it is not supposed to finance degree programs, only vocational programs. So that is something that we also have to address.

But these are all the things that I brought up before. This is the

infrastructure catching up with the economic reality, and we have

to really do that aggressively.

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Mr. BAIRD. I think those are very insightful comments, and I appreciate the information on the part time. It just made no sense to

me that people are saying if I didn’t need the loan or didn’t need

the TAA, if I had a full-time job, or if I had the time, I would go

full time, but I don’t have the time because I have to work. I need

the money because I have to work. I mean, and we rule those folks

out. It is kind of——

Mr. ROSEN. Excuse me, Mr. Congressman, if I could just say one

other thing.

Mr. BAIRD. Yes.

Mr. ROSEN. I have been down in Kannapolis interviewing workers down there to see, going through the program. Some of them

said to me, you know, you have got this wonderful program, money

and training and all this. I don’t want it. I don’t need it. All I need

is the health coverage tax credit. I just want some assistance keeping my health care, but we don’t allow them to do it. They have

to take the whole package or nothing.

I mean, there is another basic thing, and there it would be so

much more cost effective if we allowed people a menu and let them

pick and choose what they wanted instead of us putting them into

some system where they have to take it all or leave it.

Mr. BAIRD. Is that in your testimony, Mr. Rosen? I don’t know

if it is.

Mr. ROSEN. In my written testimony.

SUPPORTING AND DEVELOPING A HEALTHY WORKFORCE

Mr. BAIRD. Okay. Thank you.

I just had dinner over the break or over the weekend with one

of our employers at a shipyard, and I asked him, you know, how

is business and what are your challenges? And I hear this from

every employer I talk to. It is paradoxical given the topic here

today. And the number one challenge is finding good workers, finding people who will show up on time, pass the drug test, do the

work, and stick with it is a nightmarish challenge for employers,

who are honest, who don’t steal, et cetera. Now, I am not trying

to disparage the majority of American workers, because I think

most of the people are hardworking, play by the rules, and are decent folks.

But from the employers I have talked to, finding people who will

do the job and have the skills is a real challenge, which prompts

me to think out loud a little bit. The paradox at TAA is we are saying, ‘‘Okay, so after you have got your job we are going to try to

train you up for a new job.’’

What I don’t know is to what extent that issue is contributing

to the outsourcing of jobs, that issue of difficulty finding workers.

I think it is significant from employers I talked to. They many

times are willing to pay fairly good wages and good benefits, but

if they can’t find the workers and somebody else does have them,

you are going to go there.

One thought I had, and I don’t know if this makes sense, but so

let us suppose I am an employer, and I am faced with some difficult financial decisions, and either I may offshore my work, you

know, I may keep the business running but offshore it and thereby

close down a factory or mill or something in my district. Or I

425

maybe just be going to go under because somebody else somewhere

else is making—and the business is going to belly up, in which

case, either way I lose local jobs.

Is there any way that those folks can come forward and say,

‘‘Look, I am about to go under and dump about 300 workers onto

your TAA rolls at a cost of X. If you just give me X in some fashion,

I can keep my business open, and you don’t have to spend it on

TAA.’’ I don’t think there is any way that I know of, but it sure

makes a lot of sense to me. Or give me X minus 10 percent.

I, you know, it makes sense to me that we ought to find some

way sort of pre-TAA to do TAA. I don’t know how to work it, but

I would rather see people continue to work, the jobs continue, because once you shut these mills down, they are done. You know,

it gets turned into condos or scrapped out as scrap metal, and the

jobs, the expertise goes. I mean, I don’t know if there is a way to

do it, but any thoughts on that?

Mr. ROSEN. Congressman, I mentioned in my oral statement that

there are currently two programs; the Manufacturing Extension

Partnership that provides technical assistance.

Mr. BAIRD. I haven’t been greatly impressed by that in my experience.

Mr. ROSEN. And the second is the Trade Adjustment Assistance

for Firms Program, which I know also has a center in Washington

State. Now, in the history of the firms of the TAA for Firms Program, actually when it was started in 1974, and into the 1980s,

there, it provided technical assistance, but there also was a loan

guarantee part of that program. In the early ’80s that was removed. Maybe that decision needs to be revisited. But right now

those two programs provide only technical assistance and no financial assistance.

But those kinds of programs should be studied and possibly expanded if they can, you know, if they can prevent those kinds of

occurrences from happening. But the financial side is a totally separate thing.

Ms. FURCHTGOTT-ROTH. The problem is it is something that

economists call moral hazard, where if firms were allowed to do

that, then they would say, some of them, not all of them, would say

they were going under in order to get grants from the state or the

Federal Government. So that is one barrier to putting these things

into place.

About your employer in Washington State who can’t find enough

workers, you do see this in many parts of the country. You see

some places that have a lot of workers and others that don’t have

enough, and if one could somehow encourage mobility of people,

and a lot of times people in communities just don’t want to leave,

but if they could somehow be persuaded to leave and there are jobs

elsewhere, if you look at the auto industries, for example, in Michigan versus auto plants in Alabama. There is a great deal of demand in Alabama, and there are unemployed workers in Michigan.

So if we could figure out some way to transition into other parts

of the country, perhaps with grants or with wage substitution programs, then that might be helpful.

Dr. RUSSO. I think another sort of way to look at this discussion

in trying to follow up with what Dr. Palley talked about is about

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the race to the bottom, and I will give you another kind of concrete

example.

There is an automobile supplier in our area that is now, has a low wage, can pay $10 an hour, and they are making wiring harnesses. Okay. Our local paper just reported that they are losing

anywhere from 12 to 15 workers a month. They are rolling over the

workforce.

Now, you can do that in a grocery store, but if you are making

wiring harnesses for an automobile, there is going to be problems

down the road with the wiring harnesses in your car, because the

wages are dropping to such levels that people won’t take those jobs.

Or if they do take those jobs, their relationship to that job is very

tenuous at best.

And so I think part of this larger question is about this race to

the bottom that is occurring as a result of this. It is increasing

steadily, not just in terms of the wage rates itself but the, now the

shifting of risks to employees in terms of health care, pensions, et

cetera, which makes it very difficult. Those workers that are making the $10 an hour, they are not

getting health care. Okay. And so if they can shift between jobs at

that $8 to $12-an-hour range. That is $24,000 at the high point

there. And if you have to buy health insurance, the disposal income

is enormously low.

So I think you are going to have a lot of that. I think you are

going to have a lot of turnover in the workforce. Some people praise

that. Some people think that that is disastrous, not only in terms

of the individual but in terms of product in the long run.

HEALTH CARE COSTS

Mr. BAIRD. Do we have some figures in terms of what the average cost per employee, the average net cost, I mean, I am assuming, so not just the TAA expenditures but health care, you know,

let us suppose you got an employee who is, who becomes eligible

for TAA. And so they have lost their job, they have lost their health

care, and they are going to get subsidized there possibly, who

knows what.

Has somebody done the math, some sharp economist and said,

so, you know, this is what they would be eligible for TAA, this is

what their health care costs are?

Mr. ROSEN. Well, I am not sure this is exactly what you are looking for, and I am certainly not a bright economist, but look at the

amount of money spent on Trade Adjustment Assistance per person, and that comes out to about $15,000. Now that includes the

extended unemployment insurance payments for probably about a

year because that is the average of what people are taking, plus

the training, plus there is a wage insurance program, plus the

health coverage tax credit. This doesn’t tell me the out-of-pocket expenses of the worker.

Mr. BAIRD. Okay.

Mr. ROSEN. But the amount that we are—the 65 percent that the

Federal Government is paying. So that is about $15,000 as opposed

to under the WIA Program, the Workforce Investment Act, which is

the general training program for all dislocated workers, is $600.

Six hundred dollars, I shouldn’t say it, because we have, I have an

427

expert sitting next to me, at a community college that doesn’t probably even pay for one single course.

So that is what we pay on average for WIA and on the other hand we pay $15,000, and it is a high number because that includes the income maintenance payments under Trade Adjustment

Assistance.

Mr. BAIRD. Appreciate the insightful comments.

Mr. Chairman, I have another appointment, but I appreciate you

calling this hearing, and thanks to our witnesses.

Chairman MILLER. Thank you, and we are at the end of the time

that we have scheduled for hearing. I have hours more questions

prepared by the Subcommittee’s able staff, not to mention the questions that would spring from my own brain, which are usually a

nightmare for the staff. But I appreciate all of you being here. This

obviously is a hugely important topic that will be with us for a long

time.

Thank you all for appearing before the Subcommittee this afternoon, and under the rules of the Committee the record will be held

open for two weeks for Members to submit additional statements

and any additional questions they might have for the witnesses,

which can be answered in writing, of course.

And the hearing is now adjourned. Thank you very much.

[Whereupon, at 3:10 p.m., the Subcommittee was adjourned.]

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