[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



 
                  WHY ADD AN INTEREST RATE HIKE ON OUR

                     STRUGGLING SMALL MANUFACTURERS

=======================================================================

                                HEARING

                               Before the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                             WASHINGTON, DC

                               __________

                             APRIL 24, 2002

                               __________

                           Serial No. 107-54

                               __________

         Printed for the use of the Committee on Small Business





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                      COMMITTEE ON SMALL BUSINESS

                  DONALD MANZULLO, Illinois, Chairman
LARRY COMBEST, Texas                 NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado                JUANITA MILLENDER-McDONALD, 
ROSCOE G. BARTLETT, Maryland             California
FRANK A. LoBIONDO, New Jersey        DANNY K. DAVIS, Illinois
SUE W. KELLY, New York               BILL PASCRELL, Jr., New Jersey
STEVE CHABOT, Ohio                   DONNA M. CHRISTENSEN, Virgin 
PATRICK J. TOOMEY, Pennsylvania          Islands
JIM DeMINT, South Carolina           ROBERT A. BRADY, Pennsylvania
JOHN R. THUNE, South Dakota          TOM UDALL, New Mexico
MICHAEL PENCE, Indiana               STEPHANIE TUBBS JONES, Ohio
MIKE FERGUSON, New Jersey            CHARLES A. GONZALEZ, Texas
DARRELL E. ISSA, California          DAVID D. PHELPS, Illinois
SAM GRAVES, Missouri                 GRACE F. NAPOLITANO, California
EDWARD L. SCHROCK, Virginia          BRIAN BAIRD, Washington
FELIX J. GRUCCI, Jr., New York       MARK UDALL, Colorado
TODD W. AKIN, Missouri               JAMES R. LANGEVIN, Rhode Island
SHELLEY MOORE CAPITO, West Virginia  MIKE ROSS, Arkansas
BILL SHUSTER, Pennsylvania           BRAD CARSON, Oklahoma
                                     ANIBAL ACEVEDO-VILA, Puerto Rico
                      Doug Thomas, Staff Director
                  Phil Eskeland, Deputy Staff Director
                  Michael Day, Minority Staff Director


                            C O N T E N T S

                                                                   Page
Hearing held on April 24, 2002...................................     1

                               Witnesses

Ferguson, Hon. Roger, Vice Chairman, Board of Governors of The 
  Federal Reserve Board, Washington, DC..........................     3
Czinkota, Dr. Michael, Professor of International Business, 
  Georgetown University McDonough School of Business.............    21
Metz, Don, Owner/President, Metz Tool & Die, Representing the 
  National Tooling & Machining Association.......................    22
Fedor, Edward, President, MASCO Machine, Inc., Representing the 
  Association for Manufacturing Technology.......................    25
Habenicht, Howard, President/CFO, Vibro/Dynamics Corporation, 
  Representing the National Association of Manufacturers.........    27
Garretson, Sara, President, Industrial and Technology Assistance 
  Corporation....................................................    28

                                Appendix

Opening statements:
    Manzullo, Hon. Donald........................................    39
    Velazquez, Hon. Nydia........................................    42
    Millender-McDonald, Hon. Juanita.............................    44
    Grucci, Hon. Felix...........................................    48
Prepared statements:
    Ferguson, Hon. Roger.........................................    50
    Czinkota, Dr. Michael........................................    62
    Metz, Don....................................................    77
    Fedor, Edward................................................    82
    Habenicht, Howard............................................    91
    Garretson, Sara..............................................   100
Additional Information:
    Submission by Donna Harman, Vice-President Congressional 
      Affairs, American Forest & Paper Association...............   104
    Letter to Hon. Alan Greenspan from Chairman Manzullo.........   109


  WHY ADD AN INTEREST RATE HIKE ON OUR STRUGGLING SMALL MANUFACTURERS?

                              ----------                              


                       WEDNESDAY, APRIL 24, 2002

                          House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:05 a.m. in Room 
2360, Rayburn House Office Building, Hon. Donald Manzullo 
presiding.
    Chairman Manzullo. The Committee will come to order. We 
will get started, Dr. Ferguson. If you could please have a 
seat.
    Good morning and welcome to this hearing of the Committee 
on Small Business. I especially want to welcome those who have 
come some distance to participate.
    A little over a month ago I sent a letter to Federal 
Reserve Board Chairman Alan Greenspan encouraging him to resist 
interest rate hikes in the near future. I explained that an 
important sector of our economy, namely small manufacturers, 
were still in recession. I further encouraged him to look at 
the state of the machine tool industry as a key indicator of 
America's economic health.
    It now appears, and I am pleased to observe that the 
Federal Reserve will not raise interest rates at its next 
meeting on May 7th. I do not know if it is in direct relation 
to the letter we sent, but we certainly were beating the drums 
that we have got a long way to go to recover.
    Let me just raise a couple of things, raise eight factors 
that I believe are extremely important. Before the Washington 
Post had called Rockford, Illinois, which is my home city in 
the center of our congressional district, a ``Barometer In The 
Heartland.'' That was the headline of a 3-page story in the 
Post's March 25, 2001 edition. The sub headline says ``Rockford 
Holds Clues to Shifts in the U.S. Economic Climate.'' The 
article notes the influence that Rockford's situation should 
have with the Federal Reserve policy makers. Rockford was a 
national predictor in the early 1980s when its unemployment led 
the nation at 25.9 percent. More people were unemployed 
proportionally in Rockford in 1980 than they were in the Great 
Depression.
    There are eight factors that are contributing to tough 
times for small manufacturers, and those will be touched on 
across the board today: stiff foreign competition that is 
allowing for very thin margins, number one; number two, new 
steel tariffs that are increasing the costs of American 
production; three, an overvalued U.S. dollar making American 
manufacturers less competitive; four, tighter credit standards 
preventing small manufacturers from securing needed loans; 
five, U.S. export controls and unilateral sanctions that limit 
the ability of American companies to compete internationally; 
six, increased productivity leaving many businesses overstaffed 
and facing job cuts; seven, the heavy U.S. tax burden and how 
it places American companies at competitive disadvantages; and 
finally, eight, government regulations continuing to overburden 
struggling American businesses.
    We called this hearing several weeks ago because we don't 
want to add a ninth factor to that. And that would be increased 
costs of doing business through an increase in the interest 
rate. So we are going to have a great hearing today. I look 
forward to the testimony of all the witnesses. And I now yield 
for an opening statement from our good friend and colleague, 
the Ranking Member Ms. Velazquez of New York.
    Ms. Velazquez. Thank you. Thank you, Mr. Chairman.
    When Americans think of small businesses the first image 
that leaps to mind is the small manufacturer. The entrepreneur 
takes raw materials and produces real, innovative products. 
Small manufacturers still form the bedrock of our economy, and 
they deserve our support.
    Today we are examining the effects that a potential 
interest rate hike by the Federal Reserve would have on more 
than 35,000 small manufacturers in this country. I think 
everyone here agrees that now is not the time for a Fed rate 
hike. The economy is not growing fast enough to worry about 
inflation. I am pleased to learn that Chairman Greenspan shares 
this assessment.
    Given that reality I believe that in addition to examining 
the impact of a federal hike, it is important to assess the 
long term and substantial barriers that small manufacturers 
face. By focusing on these challenges today and implementing a 
strategy toward overcoming these challenges, I am sure we can 
do far more to help small manufacturers than the Fed can do to 
harm them. Small manufacturers, even in an economic downturn, 
are having a difficult time hiring skilled workers to get the 
job done.
    A long time has passed since Henry Ford reduced 
manufacturing to an assembly line process that could employ 
practically anyone regardless of skill or education. Today 
manufacturers require a highly trained technical workforce. 
Because the skill barrier is so high, often these manufacturers 
are reduced to paying for worker training themselves only to 
have them leave for bigger companies and better benefits. We 
want to make it easier for small companies to pay for worker 
training and to hold on to those employees they train.
    In addition, we know that technical assistance can double 
the success rate of small manufacturers. Programs such as the 
Manufacturing Extension Partnership can bring small 
manufacturers together with mentors and experts to increase 
productivity and profitability. Unfortunately, the 
Manufacturing Extension Partnership is another in a long list 
of vital small business technical assistance initiatives facing 
cuts under the President's budget proposal.
    Another major concern to small manufacturers is access to 
capital. Small manufacturers are not just worried about the 
costs of capital, they are also worried about the supply. When 
small manufacturers cannot get capital, they cannot buy new 
equipment. Without new equipment their productivity falls and 
so does their competitiveness. One obstacle blocking the path 
to increased capital supply is the 7(a) Loan Program. The 
recent budget proposal would cut this program in half, keeping 
an additional $5 billion in capital out of the economy, capital 
that could be financing new equipment and productivity. Instead 
it sits in a ledger somewhere at the Treasury, in effect a 
subsidy of the federal government by this country's small 
businesses.
    I look forward to the opportunity today to examine the 
Fed's impact in addition to highlighting other issues and 
challenges facing them. We are beginning the process of 
examining the challenges facing small manufacturers, which are 
the lifeblood of many communities across the country. I hope we 
can learn more about what we can do to help them thrive.
    Thank you, Mr. Chairman.
    Chairman Manzullo. Thank you.
    Our first witness, it is a real honor to have Dr. Ferguson 
with us again today. Dr. Ferguson, I want to commend you for 
the outstanding leadership that you lent to this country after 
the horrible events on September 11th, in helping to spear up 
the literally small group of people involved in the government 
to pump liquidity in the markets to stop a panic. And I just do 
not think that Americans realize the tremendous job and the 
wisdom and the insight of what that literally handful of people 
did in that time of crisis.
    Dr. Ferguson holds two doctorates, and he is the Vice 
Chairman of the Board of Governors of the Federal Reserve 
System. And it is a real honor and pleasure to have you here 
today.
    Matthew, turn off the clock, we do not need that for Dr. 
Ferguson.
    I look forward to your testimony, and your entire statement 
will be made part of the record. Thank you, sir.

STATEMENT OF HONORABLE ROGER W. FERGUSON, VICE CHAIRMAN, BOARD 
  OF GOVERNORS OF THE FEDERAL RESERVE BOARD, WASHINGTON, D.C.

    Mr. Ferguson. Thank you very much, Mr. Chairman.
    And let me also say it is a pleasure to appear before your 
Committee this morning to update you on recent economic 
developments and on the availability of credit to small 
business. In doing so, I want to emphasize that I speak for 
myself and not necessarily for the Federal Reserve.
    When I met with your Committee almost one year ago, overall 
economic activity had slowed noticeably after several years of 
rapid expansion. What looked at the outset to be a gradual 
cooling of an overheated economy became much more serious, 
particularly in the manufacturing sector, for several reasons. 
First, the shakeout in the high-tech sector proved to be not 
simply an adjustment to slower domestic demand but a more 
fundamental reassessment by businesses, globally, of the 
profitability of additional fixed capital added to the already 
high stock of such capital. Besides the plunge in demand for 
high-tech products, our exports were hit hard by the slowdown 
in economic growth abroad. Lastly, the shock to confidence and 
spending in the wake of the tragic events of September 11 
extended the weakness in the economy that had emerged over the 
first half of the year.
    As the economic slowdown unfolded during 2001, the Federal 
Open Market Committee moved aggressively to counter the 
weakening in economic activity and to limit the extent of the 
downturn. In the event, I believe that monetary policy 
substantially cushioned the negative forces weighing on the 
economy. Homebuilding was visibly buoyed by lower mortgage 
rates. At the same time, auto makers drew a record number of 
new car buyers into showrooms by offering generous financing 
deals. Indeed, in contrast to earlier economic contractions, 
consumer spending held up remarkably well last year. The 
favorable effects of lower interest rates on borrowing costs 
and the boost to disposable income from the federal tax cuts 
and falling energy prices largely offset the deterioration in 
consumer confidence, the decline in wealth from lower equity 
values, and the rise in unemployment.
    Compared with the previous four downturns that we had 
experienced since 1969, last year's downturn appears to have 
been mild overall. However, it differed importantly in its 
composition. Between the first and fourth quarters of last 
year, real disposable income, real personal consumption 
expenditures, and real outlays for residential construction 
increased more rapidly than in the preceding four economic 
downturns. In contrast, because of the particularly sharp 
retrenchment in capital spending for high-tech equipment, firms 
cut back their capital spending more extensively than was 
typical of earlier business cycles. The inventory correction 
was much more prompt, and as the cycle played out, it became a 
more substantial drag on domestic production than had been the 
case in earlier downturns.
    Because the cutbacks in demand centered on goods, the 
manufacturing sector was hit particularly hard. Indeed, the 
contraction in manufacturing production began in the second 
half of 2000, well before the cyclical peak in March of 2001, 
when the inventory correction and retrenchment in capital 
spending developed. And, though the recession in real GDP was 
mild by historical standards, the cumulative drop of more than 
7.5 percent in manufacturing industrial production from June 
2000 through December 2001 was larger than the decline in any 
of the previous four recessions. As a result, capacity 
utilization in manufacturing dropped over that period to 73.1 
percent in the fourth quarter of last year, 7\3/4\ percentage 
points below its longer-run average.
    On a more positive note, two other distinctive aspects of 
last year's recession are important for the longer-run outlook. 
The economy entered the recent slowdown, first, with a much 
lower rate of inflation and, second, with a noticeably higher 
rate of increase in productivity than during the other 
recession episodes since the mid-1970s. In both cases, the 
favorable performance has been well maintained into the first 
part of this year and provides a solid basis for a return to 
sustained no inflationary economic expansion.
    As Chairman Greenspan reported in his testimony before the 
Joint Economic Committee last week, prospects for a renewed 
expansion have now brightened significantly. The economy 
appears to have been expanding at a significant pace in recent 
months. Household spending is holding up well, business 
spending on new equipment appears to have firmed, and 
preliminary data suggest that inventories are being drawn down 
less rapidly than at the end of last year. Of course, I should 
caution that at this early stage the degree of strengthening of 
final demand, which is a key factor in shaping the contour of 
the upturn, is still uncertain.
    That said, our estimates of industrial production, which 
were released last week, indicate that manufacturers have begun 
to benefit form the pickup in the economy to date. Overall 
industrial production began to increase again in January, and 
the indexes for almost 60 percent of the individual series for 
which we calculate production were by February above their 
levels three months earlier. We estimated another broad-based 
gain of \3/4\ percent in IP in March.
    Of course, the cyclical recovery in the manufacturing 
sector will be superimposed on the longer-run structural trends 
in domestic goods production. Our manufacturers have over time 
been a strong and steady source of advances in productivity, 
and thus, the sector continues to be a significant contributor 
to the nation's overall economic growth. At the same time, 
because advances in manufacturing have required increasingly 
less of our economic resources, they have implied a noticeable 
secular decline in the share of jobs in the manufacturing 
sector.
    Furthermore, the increased globalization of goods 
production and the competitive pressures that have ensued have 
had additional consequences for the extent to which worldwide 
demand for goods has been met by U.S. firms and their workers, 
and those consequences have varied by industry.
    Turning to issues more directly related to small 
businesses, I want to begin by noting that the results of the 
Federal Reserve Board's Survey of Small Business Finance had 
just become available when I testified before your committee 
last May. At that time, I discussed with you in broad terms our 
findings regarding the use of credit and other financial 
characteristics of small businesses.
    As we have discussed before, the Survey of Small Business 
Finances can be used to examine a range of issues, including 
the study of specific groups of firms. This morning I would 
like to draw on the results of the survey to focus on what they 
tell us about small manufacturing firms.
    According to our 1998 survey, about 8 percent of the more 
than 5 million nonfarm, nonfinancial small businesses, that is 
those with fewer than 500 employees, were manufacturing firms. 
Those manufacturing firms were larger than other small 
businesses: Both average employment and average receipts at 
small manufacturing enterprises were about twice those at other 
small businesses. As a result, small manufacturing firms 
accounted for about 14 percent of small business employment and 
around 17 percent of small business receipts.
    Despite considerable structural change and consolidation in 
the financial service sector and the increased accessibility to 
capital markets by small businesses, commercial banks continued 
to be the dominant provider of financial services to most non-
tech small businesses in 1998. These patterns were similar for 
manufacturing and nonmanufacturing firms.
    No doubt, the economic and financial environment has become 
less conductive to risk-taking and leverage since the survey 
was conducted in 1998. The economic slowdown of the past year 
led to a deterioration of corporate profits and an acceleration 
of bond defaults and loan delinquencies. As profits fell and 
businesses revised down their expectations for sales and their 
expansion plans, investors became less certain about the 
returns they should expect on investments. The dramatic rise in 
problem credits and the rapid pace at which we saw firms fall 
from stellar ratings to bankruptcy also led investors to 
reevaluate their views about the financial well-being of 
businesses and their creditors.
    Thus far, we have seen few signs of the types of financial 
headwinds that in the early 1990s had played havoc with the 
ability of many creditworthy small firms to roll over loans and 
renew credit lines. Credit flows to businesses have fallen much 
more modestly in the recent cycle, even as firms slashed their 
investment in fixed capital and inventories. Moreover, 
financial institutions have maintained their capital and 
liquidity as delinquency rates of business and real estate 
loans did not reach the highs witnessed in the earlier period.
    As the Federal Reserve aggressively cut the federal funds 
rate in 2001, borrowing rates for most businesses dropped 
sharply despite persistently high risk spreads for lower-rated 
firms. Low interest rates prompted investment-grade 
nonfinancial corporations to issue a record volume of bonds, 
and issuance continues to be strong this year. These firms used 
the proceeds to strengthen their balance sheets by repaying 
short-term debt, refinancing other long-term debt, and building 
up liquid assets.
    Though investors appeared cautious, non-investment-grade 
companies were also able to raise funds: junk bond offerings 
have accounted for about one-quarter of total public debt 
issuance. At commercial banks, rates on business loans 
declined, but loans at large banks fell sharply. In contrast, 
loans at small banks, which make many loans to small 
businesses, expanded moderately last year and have continued to 
do so this year.
    As you are aware, the Federal Reserve regularly surveys 
senior lending officers around the country, principally at 
large banks, but also at a selection of small banks. The 
survey, which is administered quarterly, asks banks about their 
credit terms and standards, loan demand, and other issues that 
may be topical. During the market turmoil in late 1998 banks 
began looking harder at the loans they made to large and 
middle-market businesses. In each quarter over the past three 
years, more banks reported having firmed their lending 
standards than reported having eased their lending standards 
for large and medium-sized borrowers. Not surprisingly, banks 
have been particularly vigilant during the recent economic 
downturn with 40 to 60 percent, on net, having tightened their 
lending standards. Of particular relevance to this committee is 
the fact that the net portion of banks that reported having 
tightened their lending standards for small borrowers was about 
10 percentage points below the net portion that reported having 
tightened standards for larger borrowers.
    The senior loan officer survey also questions banks about 
why they tightened their lending standards. In 2001 banks 
commonly cited uncertainty about the economic environment, 
worsening industry-specific problems, and a reduced tolerance 
for risk. The survey further questions banks about their 
perception of borrower demand. In the most recent survey, about 
one-half of the banks surveyed reported that the demand for 
business credit continued to decline, a high fraction by 
historical standards, but lower than the roughly three-fourths 
that reported declining demand in the fourth quarter of last 
year.
    Banks attributed declines in loan demand to reductions in 
planned investments and diminished financing for mergers. This 
view held by bankers is confirmed by surveys of small 
businesses. According to surveys conducted by the National 
Federation of Independent Business in 2001, only about 12 
percent of respondents on average thought that it was a good 
time to expand, roughly half the percentage of a year earlier. 
Few firms reported financing costs as a reason for believing 
that expansions were not a good idea.
    Indeed, since the beginning of 2001, NFIB respondents have 
not viewed financial conditions as onerous. The percentage 
reporting that they found credit more difficult to obtain has 
remained moderate and well below the highs witnessed in 
previous economic downturns. In addition, for creditworthy 
small businesses, interest rates on bank loans have declined 
with the easing in monetary policy. The average short-term 
interest rate paid by NFIB respondents decreased about 3 
percentage points to its lowest level in more than two decades.
    Though we may take comfort from the lack of angst expressed 
by small borrowers in the NFIB surveys as well as from the 
lower loan interest rates, we must recognize that given the 
tighter lending standards some small businesses have almost 
certainly found credit difficult and more expensive to obtain. 
Small manufacturing firms, in particular, may have faced tight 
credit constraints, as their profitability fell sharply last 
year and their business prospects became more clouded.
    Indeed, such constraints are suggested by a recent survey 
conducted by the National Association of Manufacturers, an 
association whose membership is heavily weighted toward small 
and middle-market manufacturing firms. The survey found that 2 
percent of respondents though it was ``impossible'' to get 
credit, a further 16 percent reported that it was ``much more 
difficult'' to do so, and another 16 percent reported that it 
was ``slightly more difficult'' to do so. Of those experiencing 
difficulty in obtaining credit, 19 percent cited tougher credit 
standards as the explanation. But nearly 40 percent of the 
respondents cited a decline in profits and a slowing economy as 
the explanation for experiencing difficulty in obtaining 
credit.
    However, I note that recent data from the Quarterly 
Financial Reports of Manufacturing, Mining, and Trade Firms 
show that outstanding bank loans to manufacturers with less 
than $25 million in total assets actually increased moderately 
in 2001. In contrast, bank loans to larger manufacturing firms 
were falling.
    Let me conclude and summarize by saying that obviously 2001 
was a rough year for the economy. And given the nature of the 
downturn it was particularly rough for the manufacturing 
sector. Credit flows did slow, driven largely by the falloff in 
the demand for funds as the economy softened and the reduced 
pace of merger and acquisition activity. Overall, the 
tightening in credit standards that occurred was principally a 
response to the weak economy and declining profits, and thus it 
reflected a prudent pulling back of lending.
    The outlook, however, has brightened: Industrial output has 
begun to turn up, and various surveys of business conditions 
suggest that orders are increasing. These developments are 
encouraging signs, but they are no guarantee that a sustained 
solid expansion of final demand has gained traction, and we 
will be monitoring economic developments closely in coming 
months.
    Accordingly, the assessment of the Federal Open Market 
Committee at its most recent meeting was that the risks to the 
outlook in the near term were balanced between economic 
weakness and pressures on inflation. The committee kept the 
federal funds rate at its current level of 1\3/4\ percent which 
implies that monetary policy remains accommodative. The FOMC's 
focus will remain on fostering a balanced, noninflationary 
economic recovery. As you know, monetary policy works with one 
instrument in a national money market. As a result, we cannot 
and should not set policy with an eye to the outcome in a 
particular sector of the economy. However, we believe that 
promoting our longer-run objectives of maximum sustainable 
economic growth and financial stability will produce an 
environment in which the broadest range of businesses and 
households will prosper.
    Mr. Chairman, that concludes my opening remarks. And I am 
pleased that you already noted that the entire statement will 
be read into the record. So at this stage I am ready to answer 
any questions.
    [Mr. Ferguson's statement may be found in the appendix.]
    Chairman Manzullo. Thank you very much, Doctor. And thank 
you for that excellent testimony that was stated in terms that 
non-economists such as myself could understand. I always 
appreciate people that can take complicated issues and make it 
easier to understand.
    One of the issues here that I like to raise, and we talked 
about it just before the Committee hearing today, and we sent 
you testimony of the other witnesses, goes to the indicators 
that the Federal Reserve is using. I do not know if you saw a 
letter that we sent to Chairman Greenspan on March 20. You may 
have but there----
    Mr. Ferguson. Yes.
    Chairman Manzullo. Are you familiar with the letter, 
Doctor?
    Mr. Ferguson. I am generally familiar with it. I am not 
sure that I have all of it.
    Chairman Manzullo. We have an extra here.
    Matthew, why don't you take that to him.
    Mr. Ferguson. Okay, I have it here. Thank you.
    Chairman Manzullo. You have it there?
    Mr. Ferguson. Yes.
    Chairman Manzullo. Okay. Okay, thank you.
    Doctor, on the last paragraph on the second page, we talked 
about various dynamics going on. And then it concludes based 
upon the fact that Rockford, Illinois, is the machine tool 
center of the world. Rockford was settled by the Swedes about 
130 years ago. They brought with them to Rockford the old world 
craftsmanship of carving tools for making furniture, furniture 
legs, and the lathing machines and things of that nature.
    And then when steel took over from wood they took the 
talents involved in making the tools to cut wood to tools to 
cut steel, metal, different parts like that. And that is why 
Rockford became known as the tool center, tool and die center 
of the world. At one point it was known as the leading city in 
the country for furniture manufacturing.
    So we have that old world tradition of craftsmanship that 
finds its way into cutting tools. And Rockford has a base of 
about 32, 33 percent manufacturing which is double that of 
every other city. And in that last paragraph, we encouraged 
Chairman Greenspan and the Fed to use the monthly U.S. Machine 
Tool Consumption Report that is released by the Association for 
Manufacturing Technology and the American Machine Tool 
Distributors Association as a key indicator of the overall 
health of the economy.
    Could you comment on that, Doctor?
    Mr. Ferguson. Let me again say I will speak for myself. My 
perspective on the way one should think about getting 
indicators of the U.S. economy is to be very expansive and to 
seek data, both quantitative data, data that come from 
professional economists and models, etc., but also to think 
about and seek data from a wide variety of businesses to 
understand how the economy is functioning.
    We have an economy that is $10 to $11 trillion. By 
definition it is unlikely that any single indicator will give 
you a complete picture of how such a large and complex economy 
is functioning. And so I do think it is important for us to 
reach out and choose a wide variety of data.
    Indeed, we do that already to some extent. We have, as you 
know, 12 Reserve Banks who have boards of directors and who 
have active outreach efforts. And they, through the information 
they provide to the Beige Book and through the information that 
their presence provides when they come to FOMC meetings, give a 
great deal of input for how it feels around different parts of 
the country in this area.
    Certainly we are also always interested in getting 
anecdotal information of one form or another. And, indeed, I 
personally have often encouraged the staff to look to various 
sectors that might have some sort of capability to be a leading 
indicator.
    Chairman Manzullo. Predictor.
    Mr. Ferguson. Predictor, as you have described it. And 
there are a number that we should be examining closely. And 
this one, since you have sent the letter to us, will obviously 
be one of the things that we will look into and make an effort 
to examine. And I think that, sir, is forthcoming and an 
appropriate kind of response.
    If this indicator turns out to have what accountants 
describe as information value, then we need to understand that 
more fully. Our staff has been aware of this indicator over 
many years, and I suspect that we will now take a renewed 
interest in understanding the value that it could provide in 
understanding how the economy is likely to evolve over time.
    Chairman Manzullo. We appreciate that. In defense of the 
indicator, what is unique about the machine tool industry, Dr. 
Ferguson, is the fact that if there is a decrease in orders for 
the tools that go onto the machines that make the new or 
improved products, it is my belief that that is the first, 
actually that is the second sign. The first one I look to, is I 
call our steel producers back home and the steel sellers and 
say what is going on in machine tool sales. It is a high 
specialty steel. We worked and were successful in getting that 
exempt from the new tariffs. And the first indicator of a box 
that there is slowdown in the sale of steel that is used for 
making the machine tools, then that is how this Congressman 
judges the economy.
    And that is exactly what happened in the spring of 2000 
when the Fed raised the interest rate for the last time. I 
believe was it May or June?
    Mr. Ferguson. Yes.
    Chairman Manzullo. Was it June, Doctor?
    Mr. Ferguson. It was June. It was mid-year.
    Chairman Manzullo. It was in June. And we had sent a letter 
to Dr. Greenspan a couple months before then, saying please be 
very careful what you are doing because this indicator is 
showing up on our radar screen based on just a couple of phone 
calls that I made from my office.
    So I am just thrilled that the Fed is going to take a look 
at that index. I look forward to working with you on a formal 
or informal basis. I would invite you to come to our 
Congressional District, meet with the small manufacturers, get 
a feel for what they are doing, some hands-on. Get some machine 
oil on your hands if that has not happened in your career. And 
then the heartbeat of America happens with this very select 
group of people that I believe is the best indicator of what is 
happening in manufacturing.
    Mr. Ferguson. Well, personally I do enjoy spending a great 
deal of time--I go out and give speeches and have done other 
things. And I was not in fact in Rockford, but I know where it 
is. I have been to other parts of Illinois, spent a fair amount 
of time, two days actually with a farmer in Logan County, 
Illinois, which as you know is incredibly rich in deep topsoil. 
And I found that very impressive. And I am sure an opportunity 
to visit in Rockford and understand more about machine tools 
and, what that life is like would also be beneficial and 
educational.
    Chairman Manzullo. Well, take this as a formal invitation. 
We will reduce that to writing.
    Mr. Ferguson. Fine.
    Chairman Manzullo. Thank you, Doctor.
    Ms. Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman. And thank you, Dr. 
Ferguson, for your insightful presentation.
    When we talk to small businesses in our nation and we ask 
them what is the top priority for them, they talk about access 
to capital. And in the current economic climate, Mr. Ferguson, 
small businesses are having difficulty in obtaining financing. 
And you touch on that in your presentation.
    I would like to ask you, which do you think will have a 
greater impact on small manufacturers' access to capital, a 25 
basis point increase in the federal funds rate, or cutting by 
50 percent the capacity of the SBA 7(a) Program, loan program, 
as is proposed by the Administration's fiscal year 2003 budget?
    Mr. Ferguson. Well, you have managed to put into a question 
areas that I cannot predict and areas in which I am not an 
expert. And so, with all due respect, I know these are 
important issues, but I am not an expert on the SBA program. I 
know the importance of it. In fact, in the reports that we 
present every five years on small business we do occasionally 
have a paragraph about SBA. But I am really not in a position 
to give you the tradeoff of the two things that you just talked 
about.
    Ms. Velazquez. But, Mr. Ferguson, you do not need to be an 
expert on the loan programs of SBA. What I am asking you is, 
what do you think would be more harmful to small businesses, an 
interest rate increase or taking away $5 billion that would 
allow small businesses to access capital?
    Mr. Ferguson. Well, you are trying to draw me into a 
discussion about fiscal policy because the decisions of where 
taxpayers' money are being spent are ultimately fiscal policy. 
And as you well know, the Federal Reserve does not and I 
personally never comment on fiscal policy.
    I will say by definition----
    Ms. Velazquez. I understand. It's okay.
    Mr. Ferguson [continuing]. That fiscal policy requires----
    Ms. Velazquez. I am not trying to put you in a difficult 
position here.
    Mr. Ferguson. Okay.
    Ms. Velazquez. I am just, asking you for a common sense 
answer to my question.
    Small manufacturers are much more dependent on long-term 
interest rates because of their need for longer term loans to 
purchase equipment and other fixed assets. Yet Chairman 
Greenspan and former Treasury Secretary Robert Rubin have 
emphasized that long-term interest rates have failed to follow 
short-term rates because of market nervousness over the 
government's long-term fiscal position.
    So I ask you now that the administration has spent all of 
the surplus and will soon be back in deficit spending; How will 
long-term interest rates be affected?
    Mr. Ferguson. One of the issues and challenges in economics 
is indeed to understand the forces that drive long-term 
interest rates. And the econometric evidence--the research--
suggests that long-term interest rates reflect a wide variety 
of factors. In some cases it is supply and demand for the bonds 
that are sold that have a long maturity, and so you get special 
supply and demand influences. In some cases it is expectations 
about future policies of one sort or another. In some cases one 
sees what economists call an inflation concern, inflation 
threat. There are a number of things that go into determining 
long-term interest rates. And it is very hard, I have 
discovered, professionally to sort of parse out how those 
things all come together at any one point to determine what 
long-term interest rates will be.
    Ms. Velazquez. But among those factors we can consider too 
deficit spending?
    Mr. Ferguson. Well, I think perspectives about the future 
of policy broadly, both monetary and fiscal policy, play into 
issues of long-term interest rates, certainly.
    Ms. Velazquez. Dr. Ferguson, as the economy slowly recovers 
from the recession, how long do you anticipate it will take for 
banks to ease their lending standard towards small businesses? 
Are there policies that the Fed can pursue to improve the 
situation?
    Mr. Ferguson. Well, I think the role that we can play as 
supervisor of banks is to encourage banks to continue to focus 
on the creditworthy and creditworthiness of their 
counterparties. And I think as I have said in my statement, one 
of the reasons that I believe banks have tightened to some 
degree their terms and conditions has to do with perceptions 
about creditworthiness and also has to do with perceptions 
about the strength of the economy.
    And I would presume that as the economy turns, banks will 
exercise reasonable and prudent judgment, which I think they 
have been doing, and reflect appropriately those changes. And 
beyond that, I think there is nothing more that we can 
encourage them to do other than to exercise reasonable and 
prudent judgment and to reflect, analyze, and understand 
creditworthiness and the economic outlook as best they can and 
take all of that into consideration in determining terms and 
conditions for loans.
    Ms. Velazquez. Thank you.
    Chairman Manzullo. Congressman Davis.
    Mr. Davis. Thank you very much, Mr. Chairman.
    Dr. Ferguson, let me just indicate that I appreciate your 
testimony and the insightful information that you have provided 
us with in terms of direction.
    I want to ask, given increases in technology; Do you see a 
relationship between those increases and the ability of small 
manufacturers to survive and thrive and do well in this 
economy?
    Mr. Ferguson. Let me first talk about the role of small 
business in the U.S. economy by way of giving your answer.
    As you know, small businesses account for about half the 
private nonfarm gross product in the U.S. Small businesses 
employ about half the private sector workers. Small businesses 
provide about three-quarters of net new jobs each year, or did 
between 1990 and 1995 based on some Commerce Department 
information. The reason I say that is that even as our economy 
has changed and evolved, small businesses have been and 
continue to be an important part of the economy.
    To answer your question more directly, I believe even in a 
world in which technology and increased productivity are an 
important part of the positive benefits that we have 
experienced, small businesses can and indeed will compete 
successfully. For two reasons I believe that to be the case: 
first, we have seen that the costs of technologies, basic 
computers for example, hook-ups to the Internet, building a 
website with the appropriate kind of security, etc., all of 
that has actually quite rapidly been coming down, making those 
kind of investments available to small and medium size 
enterprises as well as to large enterprises. And I see no 
reason why a well-managed small business cannot participate in 
some of these productivity enhancements as much as a large 
institution can.
    The challenge, obviously, is that one of the impacts of 
this investment in technology is it requires restructuring, for 
example, in order to get the full benefits. And by definition 
for many small businesses, opportunities to restructure may not 
be as big as for some large businesses. And so they can make 
the investments in technology. Their ability to get the full 
benefit may vary depending on the management skill of the 
individuals involved.
    So I think I would continue to be optimistic that small 
businesses, which have been an important part of the U.S. 
economy, can continue to be an important part of the U.S. 
economy even as the economy itself changes, evolves, and 
becomes more heavily dependent on these new areas of technology 
because the costs of buying that technology, putting it into 
place in the small and medium size enterprise is becoming more 
and more manageable over time. It is not something that only 
the big can afford to do.
    Mr. Davis. During the past, oh, three, four, five decades 
we have seen a tremendous decline in manufacturing in large 
urban areas. Do you see that have an impact on the overall 
economy? And do you see any way for us to reclaim some of that 
activity in big urban centers?
    Mr. Ferguson. One of the big things that I think has been 
driving decisions about the location of business has to do with 
the education of the workforce, and the second is I think the 
infrastructure, particularly the kinds of infrastructure that 
are required to make an area compatible with the high-tech 
kinds of investments that we were just discussing.
    And certainly from a longer-term perspective, cities offer 
the potential to be very attractive. Cities have emerged out of 
economic history because of a natural desire for people to come 
together in certain locations and trade and do commerce with 
each other, and it is quite efficient to do that in a smaller 
area as opposed to a larger area. So the entire field of urban 
economics has theories of cities arising because they become 
natural gathering points or recognize natural gathering points 
of individuals who want to engage in commerce.
    I think the challenge now has very much to do with creating 
an environment of a solid, well-educated workforce that is in 
cities, and adding to that the kinds of infrastructure 
investments that will make cities again attractive places to 
site particularly the more high-tech kinds of businesses that 
are an important part of what has made the U.S. economy so 
strong.
    And so I would argue that one can be, while recognizing the 
difficulties that a number of cities have faced over the last 
generation or two, and I grew up here in Washington, DC, and I 
have seen things change here, there is some reason to be 
cautiously hopeful that a well-managed city that focuses on 
education and that focuses on infrastructure can succeed in 
bringing businesses back to the city.
    And, indeed, one can look at Washington, DC. I do not have 
off the top of my head the statistics about businesses in 
Washington, but I do know, having lived here, having grown up 
here, and now again living here, that the city appears to be 
enjoying a certain amount of resurgence indicating that, 
indeed, a well-managed city can bring businesses back into the 
city and can indeed bring households back into the city and 
have the population start to rise again and bring in 
individuals who have the kind of entrepreneurial spirit that 
can take advantage of a well-educated workforce and also the 
kinds of technology investments.
    So there is some possibility that the declines that we have 
seen in cities could possibly be reversed with the kinds of 
investments in what is called human capital and also actual 
physical capital.
    Mr. Davis. Thank you very much.
    Mr. Ferguson. Thank you.
    Mr. Davis. Mr. Chairman, education is as much of a factor 
as much of the other factors.
    Mr. Ferguson. That is certainly my personal belief.
    Chairman Manzullo. Thank you.
    Congressman Bartlett.
    Mr. Bartlett. Thank you very much. I am sorry I could not 
be here for your testimony. We had a mark-up in the Morale, 
Welfare and Recreation Panel, important to our military people.
    When interest rates go up, and I was in another life a 
small business person, when interest rates go up obviously that 
increases the cost of doing business. If interest rates were to 
go down, all of the things remaining equal, your profits would 
go up. So if interest rates go up, profits then go down.
    Now, if you are a startup company and have no profits and 
there is an increase in interest rates that may simply mean 
that you no longer qualify for the capital that you must have 
to continue your business.
    I have a generic concern about what interest rates do to 
our small business community. But I have a very specific 
concern about women-owned small businesses. As you know, women-
owned small businesses are growing at twice the rate of male-
owned small businesses. And they have, and this surprises many 
people, they have a lower bankruptcy failure rate than male-
owned small businesses. In spite of that very good track 
record, availability of capital is a very serious problem for 
women-owned small businesses.
    My concern is that as our small businesses get squeezed 
with increasing interest rates, how are we going to make sure 
that our women-owned small businesses are not squeezed more 
than male- owned small businesses. Because of the present, and 
I am afraid for the moment at least, continuing attitude of the 
lending community that women are not as good a risk as men in 
terms of managing businesses, when in fact the record shows 
that they have a lower bankruptcy failure rate than their male 
counterparts. Can you comment, please?
    Mr. Ferguson. There are a couple of comments that one would 
make. First, as you well know, there are a number of laws on 
the books that outlaw discrimination of any sort in extending 
credit. And I think it is quite important for those who are 
responsible to make sure that those laws are fully enforced.
    I would raise a second issue because I think you have 
touched on a very important topic, which has to do with what I 
would describe as financial literacy. And the point that you 
have made that I find so telling is that financial literacy we 
often think of as having to do with individuals and households 
and high school students, etc., but it is equally important for 
bankers to understand the credit risk of their counterparties 
and to judge credit extensions based on a fact-based analysis, 
not based on any unusual agenda or color or things that are 
inappropriate.
    And so I think raising the degree of awareness, as you have 
just done with the facts that you have brought forth, is very, 
very useful. So I sense that indeed just having honest 
discussions of this sort about the characteristics of small 
businesses, what one can say about profit, profitability, 
creditworthiness, etc., all of those factors should come into 
play.
    But when all is said and done a good banker, exercising 
what I describe as basic banking skills, will understand well 
the creditworthiness of counterparties, price the risk 
appropriately, deliver the appropriate amount of capital, and 
should be able to overcome some of the concerns that you have 
just talked about. And our job in part, back to an earlier 
question, is to encourage bankers to be responsible, to be 
prudent, to exercise basic banking judgments. And if they do 
that they ought to be able to sort out the creditworthiness of 
their various sorts of applicants and make the right kind of 
decision.
    Mr. Bartlett. Mr. Chairman, I would like to suggest that 
perhaps the best thing that Congress can do to help small 
business is to reduce the size of government and spend less 
money, which means we need to borrow less money, so therefore 
we compete less in the marketplace for borrowing money, and 
that will drop interest rates. I think there is probably 
nothing else that we could do that would be so helpful to our 
small businesses as reducing the amount of money which we 
spend.
    Chairman Manzullo. You don't expect a comment on fiscal 
policy from Dr. Ferguson on that, do you?
    Mr. Ferguson. I think that comment was addressed to his 
Committee, his fellow Committee members.
    Chairman Manzullo. That is correct. That is correct.
    Congresswoman Millender-McDonald.
    Ms. Millender-McDonald. Thank you, Mr. Chairman, and 
Ranking Member. Thank you so much for this very insightful 
presentation by Mr. Ferguson.
    And, Mr. Ferguson, your testimony was quite impressive. I 
want to go back to what you mentioned to my friend on the other 
side there in stating that bankers should be cognizant of their 
lending partner, for lack of how you described that. Have you 
talked with bankers so that they will be sensitive to, i.e. 
women-owned businesses that are really the growing businesses 
in this country, and whether or not they subscribe to what you 
have just said in terms of making sure that they recognize 
their partner? Have you talked with bankers about this?
    Mr. Ferguson. I talk to bankers quite frequently in large 
groups and small groups. And, indeed, in almost all the 
speeches that I give I do talk about the importance of what I 
have described as basic banking skills, which includes making 
creditworthy judgments.
    We should be clear. I want to take a step back because I 
want to bring some science, if you will, some economic science 
to this discussion I have just had with the two of you. There 
have been a number of economists who have looked at lending, 
lending behavior, particularly with respect to small 
businesses. And overall the evidence on the question of 
discrimination with respect to lending to small businesses is 
what economists describe as ambiguous, which is to say it is 
really hard in the data to find concrete, consistent support 
for the comments that have just been made about discrimination 
in lending.
    So you should be aware that economic scientists have been 
sensitive to the issue, have been looking at this over many, 
many years going back to when I was in school and certainly 
probably even before, and the results are, as I say, quite 
ambiguous. And that suggests obviously some ongoing vigilance 
and enforcement of laws. That's important.
    Ms. Millender-McDonald. Why has it been ambiguous?
    Mr. Ferguson. Well, I think the reason that it has been 
ambiguous is, first, depending on how you cut the data there 
may or may not be evidence of differences in prices. While I 
recognize that there are people that feel quite strongly that 
that is the case, if one looks at large panels of data, it 
doesn't always show up as quickly, as clearly as one might 
like.
    The second is that one has to really control for all the 
factors that a bank can appropriately take into consideration 
in making a loan. And, indeed, particularly in the world of 
small businesses, as you well know, they come on the scene 
quickly, and have a relatively large demise as well. So it is 
often hard looking at a small business to have a strong sense 
of how viable it is going to be. And that is a legitimate 
question for a banker to take into consideration. But it is 
very hard for an economist after the fact to determine what the 
banker might have seen at the time that the credit decision was 
being made.
    And then we also discover, for example, that a number of 
small businesses avoid applying for credit just as a general 
matter. And it turns out that minority- and female-owned 
businesses are more likely to avoid applying for credit. And 
you cannot tell quite what----
    Ms. Millender-McDonald. And why is that? And why is that, 
sir?
    Mr. Ferguson. Well, that is the point, we cannot tell quite 
why that is the case. We do not know----
    Ms. Millender-McDonald. And that is why----
    Mr. Ferguson [continuing]. We do not know if it is out of 
anxiety about the concerns that you have just raised or if 
there are some other perfectly legitimate reasons why they 
might be avoiding it.
    Now, let me get back to this. Recognizing this deep 
ambiguity that exists in the science, I think it is our job to 
continue to raise the importance of enforcing laws that are 
currently on the books. It is our job, I think, to remind banks 
of the appropriate basic business skills, to look at 
creditworthiness. I think it is frankly the job, as you have 
done, to ask people about this, to keep this as an important 
topic so that we can continue to try to make inroads and make 
sure that the credit is extended based on the right kinds of 
criteria.
    So the fact that the science has not yet proven it does not 
mean that we shouldn't continue to encourage the right kinds of 
behavior, and that certainly means that we should continue to 
vigorously enforce the laws that are currently on the books.
    Ms. Millender-McDonald. It seems to me like the ambiguity 
that you have just mentioned certainly should be of some 
concern to the Federal Reserve or at least speak to the banking 
industry as to why is it that women and minorities are not 
rushing to trying to find or trying to seek those loans. And as 
you said about the control of the data that makes it ambiguous, 
that is another concern that I have. But that is another time I 
suppose because I wanted to ask you some more questions here.
    Mr. Ferguson. Let me respond to another point you have 
made. One of the other things that the Federal Reserve does is 
that we have very active community development activities 
around the country run by our various Reserve Banks. One of the 
goals there, one of the things that does emerge in those 
activities, and again we are not trying to allocate capital but 
raise the degree of conversation if you will, is to help 
bankers understand how to think about lending in a variety of 
different sorts of communities. And so, you know, we clearly at 
our Reserve Bank level have active programs again enforcing 
laws that are currently on the books but thinking through 
questions of community development. And one of those questions 
obviously has to do with do bankers fully understand how to 
look at and work with a variety of different types of 
borrowers?
    So I would say that the fact that the data have not been 
clear on this has not in any sense stopped us, either through 
comments that we make, through the enforcement of the law, or 
through the active behaviors of our 12 Reserve Banks, from 
focusing in on the kinds of issues that you are currently 
raising.
    Ms. Millender-McDonald. Mr. Chairman, I have just got to 
ask Mr. Ferguson. You laid out some data here when my colleague 
spoke with you, and you spoke about that data in rounds of 
small businesses. Now, do we differentiate between small 
businesses and small manufacturers? Aren't we talking about 
manufacturers today as opposed to small businesses or are they 
all encompassing? Because your data, as I heard, was strictly 
on small businesses and the notion why this interest rate is 
proposed, increased interest rate.
    Mr. Ferguson. I am not discussing specifically interest 
rates. But the testimony itself attempted to parse out data 
where we know about small manufacturers versus small 
businesses. So we have worked hard to try to do that.
    Now, one of the points I did make in the testimony is that 
the nature of this downturn that we experienced last year was 
unusual for a number of reasons but it hit the manufacturing 
sector particularly hard. And I think, as I have said in the 
testimony----
    Ms. Millender-McDonald. Of course it did.
    Mr. Ferguson [continuing]. That is an important background 
fact to have as one thinks about credit, credit extension, 
creditworthiness, is that indeed manufacturing then, small 
manufacturing----
    Ms. Millender-McDonald. Of course, yes.
    Mr. Ferguson [continuing]. Was uniquely influenced by the 
slowdown last year.
    Ms. Millender-McDonald. And this is the climate by which 
you increase interest rates as opposed to not, given that type 
of scenario you have just outlined?
    Mr. Ferguson. I think the Chairman wants to say something. 
Yes, sir?
    Chairman Manzullo. Well, I would like to get Congressman 
Phelps, make sure his questions are in, and then perhaps we 
might have one or two other questions and wrap up. Okay, but 
thank you, sir. Before you leave, it is obvious that Dr. 
Ferguson is open to all types of data, studies, measurements, 
etc. And if you come across in your journeys a specific type of 
indicator, bring it to my attention and Ms. Velazquez. We would 
love to work with you and send a letter to Dr. Ferguson because 
he looks at it. Anything that we send him they take a look at.
    Thank you.
    Ms. Millender-McDonald. I would do just that, Mr. Chairman. 
I do have a statement for the record. Thank you.
    [Ms. Millender-McDonald's statement may be found in the 
appendix.]
    Chairman Manzullo. That will be made part of the record. 
Congressman Phelps.
    Mr. Phelps. Thank you, Mr. Chairman.
    Dr. Ferguson, thank you for your valuable input. Just to 
follow up on one of the themes. And maybe you stated this. I 
came in a little bit after the middle of your statement, and I 
have not read it all. Why do you think the recent recession had 
a disproportionate impact on the manufactured goods rather than 
other sectors of our economy?
    Mr. Ferguson. I think that in the nature of the downturn 
last year, the slowdown last year, two things occurred. First, 
early on in this process of adjustment, I think businesses 
decided that the outlook in terms of sales was not as 
optimistic as they had originally thought. And, therefore, they 
decided they wanted to reduce their inventory. Well, by 
definition, inventory is goods, it is not services. We don't 
have inventories of services, it is goods. And because it is 
goods it tends to be by definition manufacturing that 
ultimately feels the brunt of a decision by any business to 
reduce inventory.
    The second thing that made last year's downturn unusual was 
that it followed a period of very rapid investment, 
particularly in high-tech capabilities, in communication 
equipment, computation equipment, etc. And, again, what we saw 
was quite a change in investment appetite for businesses so 
that high-tech manufacturers, not just manufacturers in general 
but high-tech manufacturers, were heavily influenced by last 
year's slowdown.
    And so I think the reason that manufacturers were 
disproportionately influenced by the slowdown has everything to 
do with the nature of the slowdown being focused on inventory 
and inventory adjustments and also relatively dramatic changes 
in investment and investment intent by businesses.
    Mr. Phelps. Thank you. Just as something I have run across, 
and it is not a question, just a comment. Many of the smallest 
of the small businesses I have found, especially in small rural 
areas where I represent largely, do not really even attempt to 
access capital through the banking systems because they are so 
small that many times of course the SBA with their minimal 
$50,000 program, so many of these businesses return their own 
profit back into the business and circulate that sort of 
activity to operate.
    So I am not sure we have a system or could how we monitor 
those types of the smallest of the small businesses that are 
not even participating in the banking activity but yet create 
two or three or four jobs there or are self-employed for the 
most part, pay their own health insurance. Those are steaming, 
they contribute to the economy also. But yet, I do not even 
know how we try to deal with them. And I have sat down with 
many of them in their own little mom and pop shops that really 
contribute to the economy in many invisible ways. And I am not 
sure how we could ever get a handle, but they tell me the 
reason; my point is they tell me they don't try to access 
capital because many of them are right on the margin of growing 
to another level but what they would anticipate in that profit 
and what they would have to pay in interest rates even at the 
very lowest just does not make it worthwhile.
    That's a unique phenomena.
    Mr. Ferguson. It is unique. There is nothing much I can add 
but you are absolutely right. The range of things that we 
describe as small businesses include some that are really, for 
lack of a better word, microenterprises and extremely small.
    Mr. Phelps. Right.
    Mr. Ferguson. Many of them as I have thought about this and 
looked into it are self-financed from their own cash flow or 
from relatives and friends, etc., and are not big enough or do 
not feel the need to try to find capital by going into the 
banking system.
    Mr. Phelps. Which says something for the management skills 
at the same time. If all of us were that good, we probably 
would not need the banks then we would have another problem, 
wouldn't we.
    Thank you very much.
    Mr. Ferguson. Thank you.
    Chairman Manzullo. I am going to exercise my prerogative as 
Chairman and ask a concluding question.
    Doctor, we, several months ago we had a roundtable 
discussion with small business people that are concerned about 
the lack of credit. And we discovered an interesting phenomenon 
going on, and that is that the small business people, who are 
really the entrepreneurs of the world, are financing their 
business operations on credit cards, on introductory rates of 
.9 percent for three months or six months, then they roll it 
over to the next one, pay it off. And it was some phenomenal 
testimony as to this unique system of financing which works all 
the time because of the abundance of credit cards.
    Is there any indicator that exists as to the amount of 
credit card debt that would be attributed to entrepreneurs 
getting capital at very low prices?
    Mr. Ferguson. Well, as I said, we do these surveys of small 
business finance, and that survey does have some information on 
it with respect to types of external financing services used, 
as that is called.
    Chairman Manzullo. External financing?
    Mr. Ferguson. Right. And that includes checking accounts. 
It includes credit cards, as you just talked about. It includes 
loans of one sort or another. So, indeed, as we go out and do 
the surveys, we do try to track the kind of information that 
you have just talked about.
    If one looks at the sort of periodic information on credit 
cards, there is obviously more frequent information on cards, 
but the ability to tell from the sort of the week to week 
information about credit outstanding, how much of revolving 
credit, which is credit card credit, is being used for small 
business purposes versus individuals, that is hard to say.
    So our survey data is the place where we find most of the 
information on credit cards. And we take those surveys 
periodically and then that is the best information we have.
    Chairman Manzullo. Thank you very much. Again, I want to 
thank you on behalf of the Full Committee for your taking the 
time to be with us this morning and look forward to working 
with you and look forward to hosting you in Rockford, Illinois, 
where we can show you the sweet smell of machine oil.
    Thank you, Dr. Ferguson.
    Mr. Ferguson. I am looking forward to it. Thank you.
    Chairman Manzullo. Appreciate it. Thank you.
    The second panel is here. And I would like Congressman 
Davis to introduce a constituent of his, who is with us today.
    Mr. Davis. Thank you very much, Mr. Chairman, and Ranking 
Member Velazquez. It is my pleasure to present to the Committee 
Mr. Howard Habenicht, who is President and CEO of Vibro/
Dynamics in Broadview, Illinois. Of course Vibro/Dynamics, 
which was established in 1964, manufactures vibration isolation 
devices and other machinery, installation systems for metal 
forming, metal cutting, forging, can making, die casting, 
plastics, woodworking, and textile industries.
    It is a delightfully small community where his plant and 
facility are located. They are a thriving industrial-based 
community. And we are just delighted that he is able to be here 
today representing the National Manufacturing Association.
    Welcome and thank you so much.
    Chairman Manzullo. Okay. The first witness will be Dr. 
Michael Czinkota. Your name is Polish, mine is Italian, all 
right? I will do the best I can on these names. I appreciate 
that, Matt, but my gosh. We could call you Dr. Smith. I mean 
that would make it a lot easier.
    Dr. Czinkota is professor of international business at 
Georgetown University, McDonough School of Business in 
Washington, D.C. And he has been a special advisor to a project 
that we have been working on ever since we got it back from 
China called America's Jobs First, sitting in on meeting after 
meeting making sure that we stay on course in order to increase 
America's exports.
    Dr. Czinkota, look forward to your testimony. We have the 
red light here. When it gets to yellow, that is one minute to 
go. When it gets to red, that means time to conclude. So we 
would appreciate if you could follow that. Look forward to your 
testimony.
    The complete statements of all the witnesses will be made 
part of the record.
    If you could pull the mike a little bit closer to you, 
Doctor, I think it would be a lot easier to hear. Thank you.

      STATEMENT OF MICHAEL CZINKOTA, PH.D., PROFESSOR OF 
INTERNATIONAL BUSINESS, GEORGETOWN UNIVERSITY McDONOUGH SCHOOL 
                 OF BUSINESS, WASHINGTON, D.C.

    Mr. Czinkota. Thank you very much, Chairman Manzullo, 
distinguished members of this Committee. I appreciate your 
inviting me to testify here today on U.S. exporters in the 
global market place. I base my comments on the more than two 
decades that our international marketing team at Georgetown 
University has systematically tracked the activities of 
international firms.
    The news for the U.S. trade position and for small to 
medium size U.S. exporters is not good. Large trade deficits, 
which in 2001 reached $426 billion for trade and goods, are 
unsustainable in the long run. That makes it increasingly 
critical to achieve an export performance that matches and 
exceeds our imports.
    Exports are also an important contributor to national 
employment. Over eight million jobs are sustained by the 
exports of manufactured goods. In Illinois alone, for example, 
more than 360,000 jobs are linked to exports.
    U.S. exporters are vulnerable in their export performance 
and expansion. Small and midsize U.S. manufacturers encounter 
four major problem areas: financial issues, supply chain 
management, regulatory issues, and market contact difficulties.
    On the financial side, international transactions are more 
costly than domestic ones. This is due to the time lag between 
shipping and payment receipts as well as to the need to offer 
credit to buyers. At the same time as they need more funding, 
our exporters are encountering a tighter credit market and the 
threat of higher interest rates.
    Unlike larger firms, our smaller companies cannot boast of 
access to global capital markets. Their transactions are too 
small and their collateral processes are too limited. As Mr. 
Ferguson already has stated, typically they are reliant on 
local financing alternatives, and therefore they suffer from 
local interest rate inefficiencies.
    Exchange rate changes also make smaller manufacturers 
vulnerable since they are not prepared to adjust to such shifts 
by serving new markets. The low value of the European currency, 
the euro, makes it easy for importers but tough for exporters 
to compete. Please consider that there is an increasing 
commoditization of goods where price is the decisive criterion 
in getting the order. Any upward swing in price, be it due to 
exchange rate changes or interest rate shifts, even if 
seemingly minor, can have a major effect on a firm's 
performance abroad.
    Government regulations, such as export controls and customs 
rules, often extract a high price of compliance from smaller 
size firms.
    Firms are also exposed to a double-whammy from trade 
policy. For example, in the steel case, many of our smaller 
firms must now pay higher prices for their steel-based input 
while at the same time their export efforts are exposed to 
retaliatory action by trading partners.
    Due to the threat of terrorism, our firms also need to be 
much more vigilant in their supply chain management. Security 
measures require them to redesign their just-in-time systems. 
Higher transportation and insurance costs force them to revamp 
their way of transporting supplies and bringing them to market.
    All these shifts make it difficult for firms to compete 
abroad. It bears remembering that any firm that newly enters an 
international market must not only match but must by far exceed 
the capability of the local competition in order to be 
successful. We need to provide our firms with a stable 
financial environment both domestically and internationally. 
Low interest rates empower our firms. A responsible relaxation 
of some of the stringent credit criteria would also be of help, 
as would encouragement and support of marketing and 
distribution based investments. Unless our firms can make such 
investments into the international presence and processes, they 
will not compete successfully.
    We need to have more work done on generating data-driven 
insights so that we know which policies help and which ones 
hinder the performance of firms. The development of a 
globalization index which measures the extent to which 
countries are linked to the world could be of major use to 
firms. Increased collaboration of federal agencies with trade 
and professional organizations is also important in supporting 
the tough tasks that our exporters face.
    Overall our smaller size manufacturers still have many 
hurdles to overcome on the way to increased exports. They need 
to be able to fight and win the battles of competition in the 
international marketplace.
    On the policy side we need to ensure that our firms have a 
strong, healthy, and competitive platform from which to launch 
their international ventures. After all, economic performance 
and success are the key foundation to our global position and 
our national security.
    Thank you for your attention.
    [Mr. Czinkota's statement may be found in the appendix.]
    Chairman Manzullo. Thank you.
    Our next witness, it is my pleasure to introduce is my 
constituent. Don Metz is Vice President of Metz Tool and Die 
Works in Rockford, Illinois. And Don and I have known each 
other for a long period of time. He represents the old world 
manufacturing base that I referred to, but I left out the fact 
that it is not only the Swedes that settled the area, but it is 
the Germans.
    Mr. Metz. That is right.
    Chairman Manzullo. With their high-technology and the 
families going back for different generations.
    Don has worked with us. And I don't know how many 
government people that he has met in efforts to expand his 
horizons and to keep the shop profitable, keep the people 
employed. And, Don, we are honored you came all the way from 
Rockford, Illinois, to testify to us today. We look forward to 
your testimony.

   STATEMENT OF DON METZ, OWNER/PRESIDENT, METZ TOOL & DIE, 
                       ROCKFORD, ILLINOIS

    Mr. Metz. Thank you.
    Good morning. Good morning to all of you, Mr. Chairman, 
members of the Committee. I am here today to represent and 
testify to you on behalf of the National Tool and Machining 
Association and our 2,500 members spread across this nation. I 
want to talk to you for just a few moments about the negative 
impact that raising interest rates would have on our industry.
    It was June of 1976, and I was introducing President Ford 
to a meeting of the National Tool and Machining Association in 
Illinois. And that night, the country was gripped in a 
recession, and these people were despondent, discouraged, and a 
little bit fearful. And President Ford stepped to the 
microphone in front of that group and he said, ``I am 
absolutely convinced that this country, because of its people, 
because of its structure of government, because of the policies 
we pursue, will meet and conquer this challenge.''
    Well, the challenges for Metz Tool & Die began 55 years ago 
when my parents, Jim and Betty Metz, left their family-owned 
farms on the Missouri-Arkansas line to come to northern 
Illinois to seek their version of the American dream. They were 
armed simply with a faith in God, a willingness to sacrifice, 
and a belief that hard work would pay dividends. My dad started 
as an apprenticeship mold maker, and the Swedish and Italian 
mold makers were his role models. And after years of hard work 
and working two jobs and saving his money, he opened the first 
Metz Tool & Die in the garage behind our house.
    I joined the workforce at the age of six and worked for 40 
cents an hour. And believe me, I was overpaid. But as time 
went, with loyal customers, fair competition, and dedicated 
workers, the next 40 years brought prosperity and expansion to 
that industry and to that business.
    But mold making is a business of precision machining. And 
if you ask; what is a mold maker? A mold maker is a sculptor. 
He is the artist in steel. He is the visionary that takes your 
dreams of a new product and turns it into reality. Mold making 
is everything that is mass-produced, from the first rattle you 
shake as a baby to the decorative hardware on your casket when 
you are laid to rest, begins in our industry.
    And our industry meant more to me than just a business. My 
son, Matthew Metz, only lived 16 years. And those 16 years were 
spent in a wheelchair because he had Duchenne's muscular 
dystrophy which is, of course, the disease Jerry Lewis does a 
telethon for. Now, in that time you need lifts, wheelchairs, 
special beds, all sorts of special equipment. And I always 
turned to my dad, the mold maker, to tell us how to adapt that 
equipment to Matt's handicap.
    One day I was agonizing over how to fix a particular bed 
for Matt's use. And Matt said to me, ``Don't worry about it, 
Dad, Grandpa will figure it out, he's a mold maker. They can 
make anything.'' But mold making, die making, our industry has 
faced a new enemy in the millennium. It's offshore.
    Companies have been lured offshore by the promise of cheap 
labor, low taxes, few environmental regulations, and they have 
left our markets. Motorola is the classic example in our 
district. Motorola came in with the promise of many jobs and 
millions of dollars in subcontract work. Well, now Motorola has 
chosen to go offshore, the jobs are gone, and the millions of 
dollars of subcontract work are now gone.
    Our community suffered through the 1980s with a 25 percent 
plus unemployment. And we feel like we are moving back into 
that same range again.
    I have had in the last two years the opportunity to travel 
and talk with some of my constituents and contemporaries. I 
walked down the halls of one shop, and the man showed me that 
there was a $100,000 CNC machine sitting empty for lack of 
work. Farther down the hall was a $300,000 machining center 
sitting empty for the lack of work. The walls were lined with 
the benches that used to house the tools of mold makers and die 
makers and machinists, but because business is off 30 to 40 
percent, they were no longer working.
    One man related the story to me of how he raised his 
business up from the very beginning. And he built it into a 
prosperous business. And he told his sons, you go off to 
college and get an education and when you come back take my 
business to the next level.
    The sons went off to college, they got an education. And 
they came back. But when they got back, there was very little 
business there because the business had gone offshore. But yet 
understand, even when business drops off mortgage payments, 
interest payments, principal payments, workers' comp medical 
insurance, fire insurance, all these things keep coming. 
Suppliers don't sell there. Rubbish people don't pick up there. 
People don't bring uniforms there because business is off 30 
and 40, 50 percent.
    How can you help us? One, pass the Association Health Plan 
bill. That would give us insurance for our people at a 
competitive rate.
    Give a Skilled Workforce Enhancement Act to bring the 
apprenticeship training back to our industry, a $15,000 tax 
credit.
    Low cost equipment loans.
    But most important, keep interest rates at their current 
levels because when interest rates are low, then we have the 
opportunity for new products. And new products create jobs. And 
when interest rates go up, new products are shelved, are 
forgotten, and then we lose jobs.
    You have heard it said that the economy is rebounding. I 
hope you understand that I am saying our industry has not made 
it back yet. And our industry needs more time.
    Last but not least, think America first for all your 
subcontract work.
    Thank you very much.
    [Mr. Metz's statement may be found in the appendix.]
    Chairman Manzullo. This has been one of the finest hearings 
that we have had in many--we have had, what, 45, 50 hearings 
together. And I tell you, you guys are making an impact, you 
ladies and gentlemen are making an impact. You know, from the 
Midwest we all say guys. I don't know why we do it.
    Thank you for your testimony, Don.
    Our next witness is, is it Fedor?
    Mr. Fedor. Fedor.
    Chairman Manzullo. Fedor. He is the President of MASCO 
Machine, Incorporated, testifying individually and on behalf of 
his association, the Association for Manufacturing Technology. 
I look forward to your testimony.

  STATEMENT OF EDWARD FEDOR, PRESIDENT, MASCO MACHINE, INC., 
                        CLEVELAND, OHIO

    Mr. Fedor. Thank you. Good morning.
    Let me begin by thanking you, Mr. Chairman, for your strong 
leadership along with Congressman Neal of Massachusetts of the 
House Machine Tool Caucus, which has provided invaluable 
support and encouragement for our industry.
    I would also like to thank you and the members of your 
Committee who supported the economic stimulus package recently 
signed into law by President Bush. The 30 percent expensing 
provision included in the package gives my industry a real shot 
in the arm that we so desperately need right now.
    Masco Machine, my company, is a small, family-owned 
designer and builder of custom metal cutting machinery. We have 
60 employees. And we provide production equipment to the 
automotive industry, their suppliers, heavy equipment, 
agriculture, aerospace and other industries.
    It is a cause for concern that the U.S. machine tool 
industry, an industry critical to national security and 
economic stability, is experiencing the worst market conditions 
in its domestic market since the Great Depression. Orders are 
off more than 50 percent since their peak in 1997. Import 
penetration has shot up nearly 20 percentage points in the past 
three years due to the Asian financial crisis and the weakening 
of the euro and the yen. Moreover, we have seen increased 
overseas and domestic outsourcing by some of our largest U.S. 
customers.
    Since the slowdown in manufacturing started in late 2000, 
my company's sales dropped off by as much as 50 percent 
compared to our sales in the late 1990s. We have had to lay off 
16 percent of our workforce, reduce hours, reduce employee 
benefits and cut costs in other areas. And it looks like, Lord 
willing, hopefully we won't have to lay off more people but we 
will see.
    Unfortunately, almost all of our peers have had to do the 
same or more simply to stay in business. And we have lost a 
number of our very important peers in the last couple of years.
    Over the past year-and-a-half, the Federal Reserve has 
responded to the economic downturn by cutting interest rates 11 
times. And this policy is starting to show results. However, 
tight bank regulatory standards have resulted in credit being 
diverted from privately held companies, and many banks have 
raised their fees or their collateral standards or both, which 
has the effect of negating the effect of lower interest rates 
from the central bank.
    To compound this credit crunch the dollar has been at 
record highs. This has had a devastating effect on my industry, 
effectively adding a 25 to 30 percent tax on U.S. machine tool 
products. This is an added cost that no degree of cost-cutting 
or productivity can overcome.
    Recently my company participated in an online reverse 
auction for an automotive customer where we were competing with 
two German companies and two U.S. companies. Our equipment was 
priced absolutely as low as we could go. The overvalued dollar, 
undervalued euro permitted our European competitors to undercut 
our pricing by 30 percent. There is no way for us to compete 
with such price advantages.
    Once market share is lost, it is very difficult to regain 
it. In almost every case our foreign competitors are strongly 
supported by their government. At times it seems our government 
is working against us. U.S. export control policy, particularly 
with regards to China, is a good example. Repeatedly over the 
last decade the United States Government has taken a negative 
approach toward machine tool sales to China while our allies 
have not. The result has been that the Chinese have been denied 
nothing in terms of high-technology while U.S. firms have lost 
out in a crucial market.
    My company bid on a piece of equipment for legitimate end 
user, and the export licensing process took 11 months to 
complete. The whole process appeared to me to be biased toward 
refusing a license without ground. This effectively shuts us 
out of many potential orders in China and deters potential 
customers from even contacting us in the first place.
    Mr. Chairman, our industry was hit extremely hard by this 
economic downturn. It battered manufacturers first. And the 
downturn has been sustained for nearly two years. We only see 
modest relief coming and not until well into the second half of 
this year.
    I would note, Mr. Chairman, that if the United States were 
to use our domestic core of the machine tool industry we would 
become wholly dependent on our allies and trade competitors for 
the industrial production machinery that fuels our productivity 
and keeps our industries on the cutting edge of the latest 
technology. Without sensible government policies, the U.S. 
machine tool industry, which is critical to America's continued 
leadership, may be lost. Our industry supports your work and 
hopes to continue to work with you in your efforts to build a 
stronger America.
    So we thank you, Mr. Chairman. And I would be happy to 
respond to questions.
    [Mr. Fedor's statement may be found in the appendix.]
    Chairman Manzullo. Thank you.
    Our next witness has already been introduced. You would 
think I would be able to pronounce his last name after hearing 
it several times. Is it Habenicht?
    Mr. Habenicht. That is correct.
    Chairman Manzullo. That is Italian for ``good food''?
    Mr. Habenicht. That is German for ``have nothing.''
    Chairman Manzullo. We need a more positive spin on it, you 
know?
    Mr. Habenicht. Right. I have had to live with that name all 
my life.
    Chairman Manzullo. What would be German for ``abundance''?
    Mr. Habenicht. I am not German. I do not know.
    Chairman Manzullo. Oh, okay.
    Mr. Habenicht. I am an American.
    Chairman Manzullo. We look forward to your testimony. Thank 
you.

 STATEMENT OF HOWARD HABENICHT, PRESIDENT/CFO, VIBRO/DYNAMICS 
                CORPORATION, BROADVIEW, ILLINOIS

    Mr. Habenicht. Thank you, Mr. Chairman. I appreciate the 
opportunity to testify before your Committee today.
    As you said, my name is Howard Habenicht. I am President 
and Chief Financial Officer of Vibro/Dynamics Corporation. We 
are a member of the National Association of Manufacturers, an 
association with 14,000 member companies. And included in that 
are 10,000 small manufacturers.
    Vibro/Dynamics is located in Broadview, Illinois, which is 
just outside of Chicago. And we manufacture mounts and mounting 
systems for the installation of industrial machinery. We have 
about 30 employees but we are recognized as the leader, 
technological leader in the installation of metal forming 
presses in the United States. About 80 percent of our business 
is in the United States and Canada with about 20 percent 
exports.
    As has been repeated today, the manufacturing sector was 
hit much harder than the rest of the economy during last year's 
recession. In fact, the manufacturing downturn actually began 
fully six months prior to the official start of the recession 
in March of 2001. It is the first time such a thing has 
happened since the end of World War II. And in setting the 
stage for a recovery in 2002, one of the most important 
elements is to be able to maintain low interest rates. This is 
especially important for small manufacturers like Vibro/
Dynamics. While large firms have wide access to capital through 
bond and equity markets, small firms rely almost exclusively on 
the banking system for capital.
    The 2001 manufacturing recession was caused in large part 
by a combination of high capital costs and zero pricing power. 
Belatedly, the Federal Reserve cut interest rates aggressively 
in the beginning of 2001. And as I speak now the federal funds 
rate now stands at a 40 year low. But any move by the Federal 
Reserve to increase interest rates at this point could derail 
the recovery that hopefully is just beginning to emerge.
    Adjusting for inflation the real cost of borrowing for 
firms, measured as the nominal prime rate less inflation, is 
actually still 20 percent above its 40-year average. And we do 
not need it to go any higher. Moreover, no meaningful signs of 
inflation exist.
    With inflationary pressures absent this is the wrong time 
to argue for higher interest rates when manufacturers are just 
emerging from the worst recession since 1982.
    Now let me talk about the effects of the overvalued dollar 
which is decimating much of U.S. industry and certainly has 
hurt our company. In my company we have had to reduce our 
workforce by 30 percent and impose 10 percent pay cuts to 
everyone else. Last year was the first time in our 36-year 
history that we lost money.
    In the last 10 years we have seen a significant decline in 
our customer base which is the U.S. machine tool manufacturers. 
In December of 2000 the only surviving U.S. builder of large 
presses, and at that time our largest customer, went bankrupt. 
The large press builders, and I am talking about builders of 
machines that weigh in excess of 4 million pounds up to as much 
as 10 million pounds, these builders are now found in Germany, 
Japan, and Italy. There are none in the United States. This has 
shifted our focus to overseas markets and manufacturers as 
these machines now are imported in the United States.
    Because of the overvalued dollar, we find that we simply 
cannot match the prices offered by our overseas competitors and 
are now actually looking at purchasing some of our component 
parts overseas at costs much less than what it costs us to 
purchase in the United States. And this kind of action will 
lead to even more lost manufacturing jobs in the United States.
    I believe in fair trade and fair competition. We have the 
best workers in the world right here in the United States, and 
our productivity continues to outpace that of other countries. 
Unfortunately, we cannot make up for a dollar-induced surcharge 
of 30 percent. And we are not alone. The National Association 
of Manufacturers using U.S. Government data has found that U.S. 
manufactured goods exports have fallen $140 billion in the last 
year-and-a-half. This is astonishing. In effect, our 
association estimates that this decline, principally due to the 
overvalued dollar, is so large that it has accounted for two-
fifths of the entire decline in U.S. manufacturing employment, 
four out of every ten unemployed factory workers.
    I am not a monetary economist. I am trying to run a 
company. But I know it is time for the U.S. Government to stop 
extolling the virtues of a strong dollar at any cost and start 
advocating and working for a realistically valued dollar.
    Thank you for your attention.
    [Mr. Habenicht's statement may be found in the appendix.]
    Chairman Manzullo. Thank you very for your testimony.
    The next witness is Sara Garretson from the Industrial & 
Technology Assistance Corporation. And we look forward to your 
testimony.
    You might want to pull your mike a little closer to you.

   STATEMENT OF SARA P. GARRETSON, PRESIDENT, INDUSTRIAL AND 
     TECHNOLOGY ASSISTANCE CORPORATION, NEW YORK, NEW YORK

    Ms. Garretson. Thank you, Mr. Chairman and Vice Chairman 
Bartlett. And I hope we will see the Ranking Member Velazquez 
coming back.
    I am Sara Garretson, the President of ITAC, the Industrial 
and Technology Assistance Corporation. We are a not-for-profit 
economic development organization located in New York City. 
Like all of the 60 Manufacturing Extension Partnership or MEP 
centers across the country, we help small manufacturing firms 
in our locale to be more productive, competitive, and 
profitable.
    The manufacturing sector is important to our nation's 
economy. It contributes 16 percent of the gross domestic 
product. Employees earn $44,778 average annually, which is 27 
percent higher than the U.S. average for all industries. 80 
percent of U.S. export revenue is manufactured goods.
    The small manufacturer is a key component of our nation's 
industrial base. There are over 355,000 of them in the U.S., 
making machine tools and molds, but also making parts for 
Boeing and G.M., producing food for our markets and products 
for our retail stores as well as for export. 95 percent of all 
U.S. manufacturers are small firms. They provide employment for 
11.3 million Americans, two-thirds of total manufacturing 
employment.
    Almost ten years ago, I participated in a National Research 
Council Study entitled ``Learning to Change: Opportunities to 
Improve the Performance of Small Manufacturers.'' The study 
identified five barriers to manufacturing performance 
improvement in small firms. One of these was the scarcity of 
capital. The study found that small manufacturers lacked access 
to operating capital and investment funds for modernization.
    Has this situation changed? Well, recently the National 
Association of Manufacturers completed a survey on credit 
rationing. One of the survey's conclusions was that, and I 
quote, ``More than a third of small and medium size 
manufacturers are finding it more difficult to obtain credit 
from their longstanding bank lenders--a trend that threatens to 
undermine our economic recovery.''
    Why does this matter? If we are to recover from the current 
recession, then we need small manufacturing firms to improve 
their productivity and to develop new products and markets. 
These firms can drive the recovery, but only if we give them 
the means to do so.
    Investments in productivity improvement and in product 
development pay back year after year. Would firms actually 
invest in productivity improvement if they could access the 
financing at a reasonable cost? Another recent NAM survey 
showed that over 75 percent of small manufacturing firms want 
to invest in their future, including marketing and sales, 
manufacturing process improvement, product development, and 
workforce training.
    At ITAC, as with other MEP Centers, we frequently witness 
the payback of these investments. In my written testimony, I 
gave two examples from Congresswoman Velazquez' District. I 
think I have time for one today.
    Grand Processing Inc., formerly known as Tony's Brushing 
and Processing, services the local textile knitting industry by 
dyeing and drying textiles. They employ 75 people. In today's 
market they are expected to provide high quality and 24-hour 
turnaround. They came to us for help in reducing their very 
high energy costs and to reduce turnaround time.
    We worked with the company to apply microwave technology in 
a whole new way to drying for textiles. When the installation 
becomes operational, the company will have energy costs at one-
fifth the current level; the machine will dry the textiles in 
one-fifth the time, using one-fifth the labor.
    The project cost $350,000 but, fortunately, we were able to 
help the company to access financing through a New York State 
government agency.
    Before I close I want to say a few words about the 
Manufacturing Extension Partnership. As I am sure you are 
aware, the program is in danger of elimination because the 
proposed Administration Budget for fiscal year 2003 reduces 
funding from $106.5 million to $12.9 million. MEP is a cost-
beneficial investment for the Federal Government. We return $4 
in federal tax revenue for every $1 invested in the program. 
For fiscal year 2000 only, our client firms reported $2.3 
billion in increased and retained sales, cost savings of $483 
million, and more than 25,000 jobs created or retained.
    In sum, our small manufacturers are an important part of 
our economy, past, present, and future. Our country and our 
economy need to make sure they have the means and the knowledge 
to invest in their future success. The MEP provides the 
technical support the firms may need to invest wisely and 
successfully, but the manufacturers also need to be able to 
access reasonably priced financing. Keeping interest rates low 
during this critical phase of the economic recovery will help 
to make the means available for these investment in the future.
    Mr. Chairman and Ranking Member Velazquez, I thank you and 
the Committee for the opportunity to appear before you today. 
And I will be happy to answer any questions.
    [Ms. Garretson's statement may be found in the appendix.]
    Chairman Manzullo. Thank you very much. Excellent testimony 
of everybody.
    I have a question I would like to ask of Mr. Habenicht. 
And, Professor, perhaps you could help us answer this question.
    Appearing on page 5 of your testimony, right at the bottom, 
it says ``one of the European press builders.'' Are you talking 
about newspaper press or what type of presses.
    Mr. Habenicht. No, no, metal forming equipment.
    Chairman Manzullo. Oh, okay.
    Mr. Habenicht. Punch presses.
    Chairman Manzullo. Punch presses. Okay.
    ``Had been telling their customers that if they used Vibro/
Dynamics mounting systems for installing their presses, they 
would not honor their warranty.'' And even though this is not 
government action, Professor Czinkota, do you detect any type 
of violation of any trade laws by that type of activity taking 
place?
    Mr. Czinkota. Well, it is always difficult to tell outside 
of having been there at the specific situation. But clearly in 
terms of procurement code which would encourage transparency 
and equal access to contracting, one could and possibly should 
look at that more closely.
    Chairman Manzullo. But this was a private company here.
    Mr. Czinkota. Nonetheless, we like to think that the 
procurement code, even though it focuses on government 
procurement, also tacitly expanded to reasonable actions on 
part of the private sector.
    It is the type of thing where you cannot bring down the 
brunt of trade law but you certainly can bring down the force 
of persuasion in trade discussions.
    Chairman Manzullo. Did you want to comment on that?
    Mr. Habenicht. Well, we thought it was very mean-spirited, 
if nothing else.
    Chairman Manzullo. At the bottom, right. But that happens, 
but it sometimes means there are things illegal.
    Mr. Habenicht. But that is, yes, that is something that 
happened several years ago. And since that time we worked very 
hard with this company. And as I indicated in the written 
testimony they do now allow us to quote on their machines. So 
that particular negative thing that was happening is not 
happening anymore.
    Our big problem today, as I said, is the surcharge that we 
are faced with because of the inflated dollar.
    Chairman Manzullo. Okay. Then let me go right back to Dr. 
Czinkota. This is a tough one. You know, five years ago we were 
commending the Chinese for not devaluing their RMB during the 
Asian crisis. Now for five years it has been stuck at I think 
8.7 to the fixed U.S. dollar.
    Dr. Czinkota, how do you go about, I don't want to use the 
word devaluing the U.S. dollar, because that is what it is, but 
making the U.S. dollar more competitive overseas? Is the 
solution harder, or is the remedy harder than what the problem 
is? Appreciate your comments, it is a tough question.
    Mr. Czinkota. Well, it sure is. And let me tread very 
lightly here.
    First of all, obviously we need to keep in mind that if we 
are talking about currency change, there are different players. 
How you like it depends on where you sit. Importers, for 
example, are absolutely delighted about the low prices they are 
able to obtain abroad because of a strong dollar.
    Now, our focus today is on the other side, namely 
exporters, and how can they penetrate international markets? 
And they are clearly inhibited by a strong dollar.
    Now, the last policy occasion that we have had where there 
was a meeting and a subsequent decline of the dollar was really 
the Plaza Agreement in the late Eighties at which time the 
major trading players met, the secretaries of finance, in our 
case Treasury, met and looked at the world and tried to 
formulate a longer-term vision as to where do we go from here. 
And to some degree their pronouncements, even though backed up 
by some funds flow, also had a lot of psychological effect on 
the markets.
    One problem we are facing today, if you want to call it a 
problem, is the U.S. has a very powerful attraction as a market 
and as a safe haven for money. So as a result, a lot of people 
abroad believe in our country, which is actually nice to know. 
But they accompany that belief by sending money here. And as 
they send money here and purchase dollars that means the value 
of the dollar remains very strong.
    Chairman Manzullo. You did not answer the question. Do you 
want to take a stab at it?
    Mr. Habenicht. I could take a stab at it.
    Chairman Manzullo. Is the remedy worse than the cure? 
Anybody. Okay.
    Mr. Habenicht. I think, I don't know a lot about how this 
stuff works, but I think one of the things that happens is when 
the dollar starts to fall in relation to foreign currencies, 
the Treasury Department goes in and starts buying U.S. dollars 
on the market to prop it back up. That is a simple answer and 
it may be oversimplified, but that is about the extent of my 
knowledge of how that works.
    Chairman Manzullo. Well, that says when the dollar starts 
to fall. But that has not happened.
    Mr. Habenicht. Well, you don't know it has not happened 
because when it does start to happen they take this action that 
raises it, they start to buy the funds.
    Chairman Manzullo. Well, there is another dynamic. It is 
not just that strong dollar is not just making it more 
difficult for American manufacturers to export, but it is 
direct competition for American manufacturers like Don Metz and 
Ed Fedor and Howard Habenicht to compete domestically because 
the people to whom they would ordinarily sell are buying the 
stuff on the open market internationally, displacing the 
domestic market on it.
    Ms. Velazquez. Mr. Chairman, would you yield?
    Chairman Manzullo. Please.
    Ms. Velazquez. Following the same line of question, 
Professor, could you answer, would most of the options for 
devaluing the dollar produce negative impacts on the domestic 
economy?
    Mr. Czinkota. When the Fed has difficulties answering 
precise cause/effect relations then I am not sure I am the 
right one to present you with direct causality. Clearly you 
have different sectors being affected in almost diametrically 
opposed ways by a changing currency value.
    Right now, of course, we import more than we export. That 
is why we have a trade deficit. So that would indicate that a 
larger sector, segment is affected. But at the same time, as 
the Chairman pointed out, there will be an effect on domestic 
producers as well due to the relief of pressure on them from 
imports.
    But far be it from me to precisely delineate the outcome of 
that.
    Ms. Velazquez. Thank you.
    Ms. Garretson, you spoke about the budgets proposed part of 
89 percent to the MEP. And can you clarify or expand a little 
bit more in terms of that budget cut and would your center or 
most of the other 60 or 61 centers nationwide would have to be 
shut down?
    Ms. Garretson. I think it is a combination of shut down and 
severely diminished capacity. The federal funding is structured 
in such a way that it requires a two to one match, which most 
of us receive through our states and also through local company 
cost share.
    Some of that state funding is contingent on the federal 
money. So the federal money leverages a system that then puts 
2,000 people out working with companies. You take that away, 
you are going to have some of that state money taken back as 
well.
    For our organization, we have 12 ``feet on the street'' at 
this time, and I would suggest that means engineers and 
manufacturing professionals working with companies. We will 
cutback to two or three at most. Now, we have 10,000 
manufacturers in New York City, so you can imagine that that 
then severely diminishes our ability to work with them.
    Ms. Velazquez. Could you talk to the Committee about the 
experiences that the manufacturers in Brooklyn and Manhattan 
have been facing after September 11? And, also, what have been 
the largest challenges that they have faced after September 11? 
And what do you think in terms of economic relief would be more 
beneficial for them, grants or disaster loans?
    Ms. Garretson. Okay. I think there are two things that 
happened. One is that the economy had already slowed down. For 
the New York City firms, the economy just sort of plummeted on 
September 11. So one issue is the amount and the sudden 
occurrence of economic contraction. So many of the businesses 
that we are dealing with, are seeing a temporary reduction in 
sales, others experienced a permanent reduction in sales 
because they had customers who were in the World Trade Center.
    Some firms were actually located in Ground Zero. And we are 
just starting to actually help a printer who has lost his 
facility and is having to relocate and start up again.
    I think the other thing is a less tangible issue which is 
fear. It is a psychological issue: ``Do I have enough 
confidence in the future of this city and of this location that 
I will invest in my firm's future?'' And our sense is that we 
have seen great reluctance to do that. I am hoping that we are 
now beginning to see some changes in that. But companies who we 
have been working with for a long time have said, ``No, right 
now I am not doing anything, I am waiting to see what is 
happening here.''
    So I see A) declining business, B) declining willingness to 
invest, C) uncertainty and the psychological impact.
    Accessing the loan programs have been very difficult. Most 
of our businesses do not like giving a personal guarantee, 
particularly in an era when they are not confident in the 
future. They do not want to pledge their homes in this kind of 
uncertain environment. So that has been a tremendous barrier to 
people stepping up to the various 9/11 loan programs.
    So the answer is, ``it depends''. There are cycles of 
impact, there are companies who lost their location and who 
really need grants, and there are others where if you loosened 
up the guarantee requirements, the financing might be adequate. 
These are the ``secondary impacts'' companies.
    The ``primary impact'' companies are at all levels. Whether 
they are a retail store or a Law firm, the impact has been 
tremendous. We lost our space for a month and were forced to 
work ``virtually''. But it was more than a month's worth of 
impact. We are still trying to recover from that.
    Ms. Velazquez. But I think that you will agree with me that 
the same way that we bailed out the airline industry we could 
provide, the Federal Government, some grants assistance----
    Ms. Garretson Yes.
    Ms. Velazquez [continuing]. To small businesses?
    Ms. Garretson. Yes.
    Ms. Velazquez. Mr. Metz, can you talk to us about how has 
the lack of skilled workers impacted your business? And how do 
you think it has impacted the entire tool and machining 
industry?
    Mr. Metz. The skilled worker problem is a problem of 
confidence. In order to train a new skilled worker the National 
Tool and Die Association tells us it takes four years and about 
$200,000. So as margins are being cut and profits are not 
there, immediately one of the first things people begin to give 
up on, of course, is the apprenticeship training. 
Unfortunately, our industry is getting older. And the average 
mold maker in this country right now or die maker is 50 years 
old.
    And these are high paid individuals who have made an awful 
lot of money in their lives, so at this point in their life, 
they are not as interested in still working at the same pace or 
the number of hours they used to. So you have a twofold 
problem: On one end you have your most skilled workers reaching 
a point in their life where they have the money and the kids 
are through college and they want to reduce their workload, but 
yet at the other end, you are not training new people because 
you do not have a lot of confidence in the future to go into 
that sort of an investment program.
    So we need to jumpstart the apprenticeship program. And 
literally thousands of young men and women who qualify to be 
apprentices and to get that kind of training are being rejected 
not on their merit but on the lack of confidence that the 
industry has in its future.
    Ms. Velazquez. Can you tell us how the Skilled Worker 
Enhancement Act will benefit workers?
    Mr. Metz. Well, I by no means believe that this act is 
going to answer all of the problems that the company has. But 
by giving a $15,000 tax credit per employee that you train, you 
give an incentive to the company owner to begin that process.
    These people are astute enough to realize they are going to 
have to train somebody sometime. This is not going to be able 
to go on like this forever. And I think it sends a really 
positive signal to these company owners that the government 
understands their pain and is doing their best to address it. 
And you get more of a cooperative feeling that the government 
is in this with me, the government has confidence in me and in 
the future of my industry and, therefore, let us get back to 
the training program.
    Ms. Velazquez. Thank you.
    Mr. Metz. Thank you.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Chairman Manzullo. Thank you.
    Mr. Bartlett?
    Mr. Bartlett. Thank you very much.
    In a former life I was a small business person so I 
listened with great interest to your testimony.
    Dr. Czinkota, you mentioned that our trade deficit last 
year was $426 billion. Now, more than 100 billion of that I 
think was with China. And most of the stuff that I see we are 
buying from China is going to be on the county landfill by the 
end of the year. It is not durable goods.
    Help me understand how at least a large part of this $426 
billion is not simply a transfer of wealth from our country to 
our trading partners?
    Mr. Czinkota. There are several things to keep in mind with 
the $426 billion, which is the merchandise trade deficit. You 
are absolutely correct, a large portion of that is with China 
and with Japan as the second largest trade deficit country.
    First of all, one hopeful benefit we are going to see with 
China is that now that the country has joined the World Trade 
Organization, its own market will open up much more and, 
hopefully, that means we can penetrate it. I am saying 
hopefully because I know that it will be more penetrated if 
they comply with the rules, but I hope it is not just European 
firms then who benefit from that. I am hoping that U.S. firms 
will be very strong in that penetration.
    So that should account for more evenness in the exchange 
rather than what you call transfer of wealth.
    The second issue to keep in mind is also that we are 
looking at an increasing proportion of intra-firm trade. What 
that means is U.S. firms are going to countries, setting up 
operations, producing there, and then importing from abroad 
into the United States. So the instigator if you will or the 
primary profit taker is actually a U.S. firm or a multinational 
firm from some other country, not necessarily just a Chinese 
firm even though foreign investment, of course, triggers 
domestic benefits.
    And, finally, firms are responding to customer demands and 
to demands by their supply chains. If you look at, for example, 
our leading retailers who very specifically tell their 
suppliers that consumer goods have to be very low priced 
otherwise we won't carry your products, we carry someone 
else's. And that, of course, in itself triggers a lot of the 
imports from Asia.
    Mr. Bartlett. Our industry, of course, is moving from a 
manufacturing industry, which was our great strength for many 
years, it is now moving to a service-based industry. Now, if 
you push that to an absurdity you can see that we cannot 
survive. If all we did, for instance, was cut each other's 
hair, obviously that is not a basis for a viable economy, is 
it? At what point do we finally recognize that our economy 
cannot survive without returning to a vigorous dependence on a 
manufacturing base?
    You know, there are only a few industries that produce 
wealth. Farmers produce wealth. Service-based industries are 
consumers of wealth. I used to be a producer of wealth, now I 
am a consumer of wealth. And manufacturing is one of the big 
producers of wealth and now that is progressively moving 
offshore. When are we going to understand that moving electrons 
around the country and cutting each other's hair and cleaning 
our clothes cannot be the basis of a viable economy?
    Mr. Czinkota. Well, sir, first of all I am in full 
agreement with you that manufacturing is a terribly important 
sector of the economy. And I, for one, do not wish to see any 
kind of hollowing out of that sector.
    Having said that, one blessed condition we have in the U.S. 
is that we do rely on market forces. And I would be happy to 
supply you with the data from, stemming from the turn of last 
century where we had about something like 60 percent of our 
domestic employment in farming which has now declined to about 
2.5 percent. And the outcome, of course, is not that now we 
have all these unemployed farmers, but we have a tremendous 
shift in employment figures and lots of people are now employed 
in occupations different than farming. And this is not because 
anyone told them to or government told them to but because 
market forces have created new opportunities in other sectors.
    Now, you are very correct in your statement on services. We 
have become a service-driven economy both in terms of 
percentage of GDP as well as in terms of employment. It is, of 
course, not just not all cutting hair. You also look at service 
jobs in the banking industry, in the construction industry.
    My wife, for example, is an architect, and her work 
increasingly is global where she takes on architectural 
products, redesigning, restoring hotels in Singapore which 
would not have happened ten years ago. So in that sense there 
also is wealth generated by knowledge, by intellectual 
property. And I wouldn't give up on the services sector just 
yet. But the manufacturing sector clearly is and should remain 
a very important component of our economy.
    Mr. Bartlett. Thank you.
    Mr. Chairman, traditionally our service-based industries 
have been supporting those industries that produce wealth. 
Today if they are supporting industries that produce wealth, 
they are supporting industries overseas that produce wealth, 
not in this country. Thank you.
    Chairman Manzullo. Let me if I could do a follow-up on 
that. We have about an $80 billion surplus in services. Under 
the WTO, under the U.S.-China WTO accords, the opportunity for 
exports and services to China is just, I mean it is wide open 
for everything, life insurance to banking to having American 
money managers manage portfolios in China. And for the first 
time that agreement is one-sided. That type of agreement is 
one-sided in favor of the United States.
    When I was in China in January, there was an interesting 
article in the paper about the beginning of China importing 
foreign automobiles because the tariffs on those were going 
down by almost 75 percent. And the tariffs on manufacturing 
goods were down by the same amount. And that the Chinese rules 
on domestic content are going away with that accord. And that 
the foreign and national treatment of corporations has to be 
the same.
    So China is really under the gun in complying with the WTO. 
They are painfully aware of the fact. When we were there, they 
talked about patience and everything. And I said, look-it, you 
wanted to get into this thing for 15 years. I'm going to be the 
first one to tell you there is no squeeze room. If you do not 
comply, there will be sanctions filed against you. And China is 
in the process now of they have to open up to more markets.
    And, lastly, whenever the United States exports services, 
the merchandise factor follows. It is always that way. For 
example, the exporting of architectural services such as we do, 
such as what happens with Trade Development Agency. Whenever we 
design overseas systems, they are conveniently designed to 
accommodate American manufacturers. So that is why there is a 
lot of emphasis now.
    We had an interesting discussion with Chen S'ing-he, who is 
the 38-year-old Vice President of the Shanghai Stock Exchange. 
Now Americans will be allowed to buy what are called Class A 
Chinese stocks as the Chinese state-owned enterprises become 
privatized. And I said how does somebody age 38 become the vice 
president of the Shanghai Stock Exchange?
    He said, well, the president is a year younger than me. He 
said, Congressman, he said, anybody in China over the age of 40 
does not understand how the stock market works. And I thought 
that was an astounding statement to see what is going on there 
in terms of that type of investment.
    One of the reasons for this hearing or the reason is to 
make American manufacturers more competitive. I think it is 
extremely significant that even though Dr. Ferguson was not 
able to stay and listen to your testimony, he has all of your 
statements. And if you listened very closely to his testimony, 
which was nothing less than compelling, you will note that 
things that each of you said worked their way into his 
statement, where he addresses these various issues.
    And now as a result of the letter that we sent, as a result 
of the work of the organizations that are represented here 
today, and as a result of your testimony about how sensitive 
machine tooling is to interest rates, the Fed, I can guarantee 
you, is going to be taking a different look at the manner in 
which they raise interest rates.
    The opportunity for Dr. Ferguson to come to our district, 
and Don, I think you know of a good facility you would like to 
have him visit. We will make sure that he doesn't wear white 
shirts when he visits. I think the openness of Dr. Ferguson to 
travel the country, to listen to the people impacted, to me, 
that is the best indication of a public servant. He has a 
jurisprudence doctorate from Harvard----
    Mr. Bartlett. And a Ph.D. from Harvard.
    Chairman Manzullo [continuing]. And a Ph.D. from Harvard. 
This man is truly a public servant who has the interests of 
this country at heart.
    And we will bring him out to our district as soon as 
possible because he needs to come up to speed as to what is 
going on in the area of machine tools.
    Well, this has been nothing less than exemplary hearing. 
Lynn Martin, who is my predecessor and the former Secretary of 
Labor, furnished us with a 4-page statement that is going to be 
made part of the record. She would have been here today 
testifying with you were it not for the fact that she had a 
prior engagement.
    Chairman Manzullo. Did you have any concluding remarks you 
wanted to make, Mrs. Velazquez, and we will wind it up?
    Ms. Velazquez. No, just to thank all of you for being here 
today. This was an important hearing. And we will continue to 
work in a bipartisan way to help, you know, strengthen small 
business, especially small manufacturers.
    Chairman Manzullo. Thank you for your leadership.
    Mr. Fedor, you wanted to say something?
    Mr. Fedor. Yes, sir. Well, I just had a couple of comments 
as you were making your remarks. One of the things that came to 
mind when we talk about China's increased willingness now to 
open their markets now that they are part of the WTO, as it 
regards companies like mine and small manufacturers, I think 
that the U.S. Government can be more of a friend to U.S. 
manufacturers in that regard if we continue to allow the 
machine tool market to open up regarding not putting unilateral 
controls on certain kinds of machine tools that we can export 
to China.
    It seems to me that we are being maybe unintentionally 
hostile to small manufacturers like ours in putting unilateral 
controls on those kinds of products when really they can get 
that same technology from companies in France or somewhere in 
Europe quite easily.
    I wanted to also make another comment. You had a comment, a 
question regarding the strong U.S. dollar and what you can do 
about that. I am not sure. I am not an expert in this area. It 
does not seem like you can necessarily legislate a change there 
but what we see is----
    Chairman Manzullo. Thank you, I appreciate that statement.
    Mr. Fedor [continuing]. Mr. O'Neil and the Treasury 
Department talking up the dollar and extolling the virtues of a 
strong dollar in itself almost creates a perception of a 
government policy toward a strong dollar. And I think that if 
we were to moderate the tone of the comments regarding the 
strong dollar perhaps that would have an effect. And also have 
the dollar float more with the strength of the U.S. economy. I 
am not sure how you do that, but with the strength of the 
economy have the dollar follow I think would be more 
appropriate.
    Chairman Manzullo. Congressman Bartlett, you had a 
concluding remark?
    Mr. Bartlett. I am on the Armed Services Committee and 
there we have a major concern with, obvious concern with 
exports to China. I guess that on that committee I am kind of 
politically incorrect because my position has been that we need 
a military industrial base in this country. We have a shrinking 
one. Part of that industrial base can be supported with foreign 
sales.
    And my view has been that if the foreign country can buy 
the product or the service anywhere else in the world, we ought 
to be able to compete. It is good for our economy. Ultimately 
it will be essentially, I think, to our national security 
because we cannot depend on foreign countries to build our 
ships and build our airplanes and so forth.
    The difficulty is deciding what in fact can be bought from 
any other place or from some other place in the world. But my 
general view is that if you can buy it anywhere else why can't 
our guys compete? And I noticed in your testimony you were 
concerned about limitations on exports to China. Nobody wants 
to export to a country technologies that will put them at a 
military disadvantage relative to us. But also I do not want to 
deny any export to them that will assist our manufacturing 
base. And, we are not now doing a very good job of reaching 
that balance. And, I appreciate your interest and your concern.
    Chairman Manzullo. Thank you very much. This Committee is 
adjourned.
    [Whereupon, at 12:15 p.m., the Committee was adjourned.]

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