[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



 
 THE CHANGING NATURE OF THE ECONOMY: THE CRITICAL ROLES OF EDUCATION 
 AND INNOVATION IN CREATING JOBS & OPPORTUNITY IN A KNOWLEDGE ECONOMY

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

                                HEARING

                               before the

                         COMMITTEE ON EDUCATION
                           AND THE WORKFORCE
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             March 11, 2004

                               __________

                           Serial No. 108-47

                               __________

  Printed for the use of the Committee on Education and the Workforce



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                COMMITTEE ON EDUCATION AND THE WORKFORCE

                    JOHN A. BOEHNER, Ohio, Chairman

Thomas E. Petri, Wisconsin, Vice     George Miller, California
    Chairman                         Dale E. Kildee, Michigan
Cass Ballenger, North Carolina       Major R. Owens, New York
Peter Hoekstra, Michigan             Donald M. Payne, New Jersey
Howard P. ``Buck'' McKeon,           Robert E. Andrews, New Jersey
    California                       Lynn C. Woolsey, California
Michael N. Castle, Delaware          Ruben Hinojosa, Texas
Sam Johnson, Texas                   Carolyn McCarthy, New York
James C. Greenwood, Pennsylvania     John F. Tierney, Massachusetts
Charlie Norwood, Georgia             Ron Kind, Wisconsin
Fred Upton, Michigan                 Dennis J. Kucinich, Ohio
Vernon J. Ehlers, Michigan           David Wu, Oregon
Jim DeMint, South Carolina           Rush D. Holt, New Jersey
Johnny Isakson, Georgia              Susan A. Davis, California
Judy Biggert, Illinois               Betty McCollum, Minnesota
Todd Russell Platts, Pennsylvania    Danny K. Davis, Illinois
Patrick J. Tiberi, Ohio              Ed Case, Hawaii
Ric Keller, Florida                  Raul M. Grijalva, Arizona
Tom Osborne, Nebraska                Denise L. Majette, Georgia
Joe Wilson, South Carolina           Chris Van Hollen, Maryland
Tom Cole, Oklahoma                   Tim Ryan, Ohio
Jon C. Porter, Nevada                Timothy H. Bishop, New York
John Kline, Minnesota
John R. Carter, Texas
Marilyn N. Musgrave, Colorado
Marsha Blackburn, Tennessee
Phil Gingrey, Georgia
Max Burns, Georgia

                    Paula Nowakowski, Staff Director
                 John Lawrence, Minority Staff Director




                            C O N T E N T S

                              ----------                              
                                                               Page

Hearing held on March 11, 2004...................................     1

Statement of Members:
    Boehner, Hon. John A., Chairman, Committee on Education and 
      the Workforce..............................................     2
        Prepared statement of....................................     3
    Miller, Hon. George, Ranking Member, Committee on Education 
      and the Workforce..........................................     4

Statement of Witnesses:
    Bernstein, Dr. Jared, Senior Economist, Economic Policy 
      Institute, Washington, DC..................................    43
        Prepared statement of....................................    46
    Castellani, John J., President, Business Roundtable, 
      Washington, DC.............................................    38
        Prepared statement of....................................    40
    Grady, Robert E., Managing Director, The Carlyle Group, on 
      behalf of the National Venture Capital Association, San 
      Francisco, CA..............................................    55
        Prepared statement of....................................    58
    Greenspan, Hon. Alan, Chairman, Board of Governors of the 
      Federal Reserve System.....................................     7
        Prepared statement of....................................    10
        Response to questions submitted for the record...........    69


THE CHANGING NATURE OF THE ECONOMY: THE CRITICAL ROLES OF EDUCATION AND 
    INNOVATION IN CREATING JOBS & OPPORTUNITY IN A KNOWLEDGE ECONOMY

                              ----------                              


                        Thursday, March 11, 2004

                     U.S. House of Representatives

                Committee on Education and the Workforce

                             Washington, DC

                              ----------                              

    The Committee met, pursuant to notice, at 10:01 a.m., in 
room 2175, Rayburn House Office Building, Hon. John Boehner 
(Chairman of the Committee) presiding.
    Present: Representatives Boehner, Petri, McKeon, Castle, 
Ehlers, DeMint, Isakson, Biggert, Platts, Tiberi, Keller, 
Osborne, Wilson, Cole, Kline, Musgrave, Blackburn, Gingrey, 
Burns, Miller, Kildee, Owens, Payne, Andrews, Woolsey, 
McCarthy, Tierney, Kind, Kucinich, Wu, Holt, S. Davis, 
McCollum, Grijalva, Majette, Van Hollen, Ryan, and Bishop.
    Staff present: George Canty, Counselor to the Chairman; 
Kevin Frank, Professional Staff Member; Ed Gilroy, Director of 
Workforce Policy; Donald McIntosh, Staff Assistant; Greg 
Maurer, Coalitions Director for Workforce Policy; Stephanie 
Milburn, Professional Staff Member; Jim Paretti, Professional 
Staff Member; Alanna Porter, Executive Assistant; Molly Salmi, 
Deputy Director of Workforce Policy; Deborah L. Samantar, 
Committee Clerk/Intern Coordinator; Dave Schnittger, 
Communications Director; Kevin Smith, Senior Communications 
Counselor; Jo-Marie St. Martin, General Counsel; Linda Stevens, 
Chief Clerk/Assistant to the General Counsel; Loren Sweatt, 
Professional Staff Member; Ellynne Bannon, Minority Legislative 
Associate/Education; Jody Calemine, Minority Counsel, Employer-
Employee Relations; Tylease Fitzgerald, Minority Staff 
Assistant; Margo Hennigan, Minority Legislative Assistant/
Labor, Cheryl Johnson, Minority Counsel; Tom Kiley, Minority 
Press Secretary; John Lawrence, Minority Staff Director; Alex 
Nock, Minority Legislative Associate/Education; Peter Rutledge, 
Minority Senior Legislative Associate/Labor; Lynda Theil, 
Minority Legislative Associate/Education; Michele Varnhagen, 
Minority Labor Counsel/Coordinator; and Mark Zuckerman, 
Minority General Counsel.
    Chairman Boehner. The Full Committee for Education and the 
Workforce will come to order.
    We are meeting today to hear testimony on ``The Changing 
Nature of Our Economy: The Critical Roles of Education and 
Innovation in Creating Jobs and Opportunity in a Knowledge 
Economy.'' Under the Committee rules, opening statements are 
limited to the Chairman and Ranking Member. And so with that, 
I'd ask unanimous consent for the Members who have written 
statements and other extraneous material referenced during the 
hearing today to be submitted for the official record. Without 
objection, so ordered.

   STATEMENT OF HON. JOHN A. BOEHNER, CHAIRMAN, COMMITTEE ON 
                  EDUCATION AND THE WORKFORCE

    I want to thank all of you for coming today, and a special 
thanks to our distinguished witnesses for being here. As we 
look back, 1999 was a good year for our economy. It grew that 
year at a healthy 4.5 percent clip. Unemployment was relatively 
low, and the major stock market indices were fairly close to 
where they are now.
    In comparison, we think of 2002 as being a tough year for 
our economy, driven in part by the terrorist attacks on New 
York and the Pentagon. Economic growth slipped. The stock 
market was lower, and unemployment was higher. We were in a 
recession. And yet in 1999, according to the nonpartisan Bureau 
of Labor Statistics, almost 33 million jobs in America were 
lost.
    In 2002, about 32 million jobs were lost. That's right. In 
the good year of 1999, we lost almost a million jobs more than 
the bad year of 2002. The difference lies in the engine of real 
economic growth and worker prosperity: Job creation. What made 
1999 a good year for workers and 2002 a challenging year wasn't 
the number of jobs lost; it was the number of other jobs that 
were created.
    In 1999, our economy created approximately 35.6 million new 
jobs, about 2.7 million more than were lost, and about 5 
million jobs more than were created in 2002. The difference 
between the good year of 1999 and the challenging year of 2002 
wasn't the number of jobs lost; it was the number and quality 
of the new jobs the economy created.
    The lesson from that, I think, is pretty clear. We have a 
dynamic economy. Job loss is not a new phenomenon, and we can't 
rest until every American has the chance for a good quality 
job. Any time a worker loses his or her job, there's real pain 
and loss. But Americans are resilient, and when we get knocked 
down, we dust ourselves off, get back up and look for new 
opportunities better than the old ones. I believe that's where 
our emphasis needs to be--figuring out how to help the economy 
create new and better jobs and opportunities for American 
workers.
    To do that, we need to understand what drives growth in 
today's economy. As many of you know, before I came to 
Congress, I built my own business. That wasn't so long ago, but 
I believe that the economy has changed substantially since 
then. The Internet's impact has been enormous and undeniable. 
Knowledge, education, and innovation play a far greater role in 
today's dynamic and changing economy than in previous 
generations. And I believe they are key factors in America's 
ability to generate sustained job growth and create promising 
new job opportunities that provide higher wages and raised 
standards of living for workers. The individual skills, 
imagination and commitment of workers are increasingly critical 
not just to their individual employers, but to our entire 
economy.
    All of this underscores one vital growth engine: Education. 
With an increasingly mobile workforce, it's absolutely critical 
for workers to have the education and skills necessary to adapt 
to new opportunities and move into new, higher wage jobs. And 
only with educational excellence at all levels, from K-12 all 
the way through to retirement, will we be able to continue 
generating the ideas that create high wage, high opportunity 
products and industries in the future.
    In fact, we have a chart that highlights some important 
numbers from last week's Labor Department jobs report. The 
chart highlights the fact that the more education that workers 
receive, the lower their rates of unemployment and the better 
chance they'll have of getting a good job. As you can see, 
those who have had the least--have a college degree, have 
unemployment rates of lower than 3 percent.
    We're here today to learn more about what drives job growth 
and opportunity in today's economy so that we can best give our 
constituents what they expect and deserve, solutions that will 
allow our economy to continue creating better opportunities for 
American workers and their families.
    I support what the President and the Congress have thus far 
achieved, and I'm confident that because of those policies, 
we've turned the corner on the recession that began in 2000. 
But we need to think long term as well, and I believe that we 
need to ask ourselves this question: Given what we know and 
what we will learn about what drives job growth and opportunity 
in today's economy, what can we do to put our economy on the 
strongest possible footing?
    This is an election year. We all know in election years 
there's a temptation on both sides to point fingers instead of 
solving problems. And with due respect to all of my colleagues, 
I know my constituents are tired of a lot of finger-pointing. 
What they want is sound policy that will help them improve 
their lives and their families' lives. And it might take some 
doing on both sides, but I hope we can keep them in mind 
despite our election year pressures.
    And with that, I look forward to hearing from our 
distinguished guests today. I now yield to my colleague and 
friend from California, Mr. Miller.
    [The prepared statement of Chairman Boehner follows:]

Statement of Hon. John A. Boehner, Chairman, Committee on Education
and the Workforce

    Thank you all for coming and a special thanks to our distinguished 
witnesses for being here. As we look back, 1999 was a good year for our 
economy. It grew that year at a healthy 4.5 percent clip, unemployment 
was relatively low, and the major stock market indices were fairly 
close to where they are now.
    In comparison, we think of 2002 as being a tough year for our 
economy. Driven in part by the terrorist attacks on New York and the 
Pentagon, economic growth slipped, the stock market was lower, and 
unemployment was higher. We were in a recession.
    And yet in 1999, according to the bipartisan Bureau of Labor 
Statistics, almost 33 million jobs were lost. In 2002, about 32 million 
jobs were lost. That's right-in the good year of 1999 we lost almost a 
million jobs more than in the bad year of 2002. The difference lies in 
the engine of real economic growth and worker prosperity, job creation.
    What made 1999 a good year for workers and 2002 a challenging year 
wasn't the number of jobs lost-it was the number of other jobs that 
were created. In 1999 our economy created approximately 35.6 million 
new jobs, about 2.7 million more than were lost and 5 million jobs more 
than were created in 2002. The difference between the good year of 1999 
and the challenging year of 2002 wasn't the number of jobs lost-it was 
the number and quality of the new jobs the economy created.
    The lesson from that is clear. We have a dynamic economy. Job loss 
is not a new phenomenon. And we cannot rest until every American has a 
good job. Any time a worker loses his or her job, there is real pain 
and loss.
    But Americans are resilient; when we get knocked down, we dust 
ourselves off, get back up, and look for new opportunities better than 
the old ones. I believe that's where our emphasis needs to be: figuring 
out how to help the economy create new and better jobs and 
opportunities for America's workers.
    To do that, we need to understand what drives growth in today's 
economy. As many of you know, before I came to Congress I built my own 
business. That wasn't so long ago, but I believe that the economy has 
changed substantially since then. The Internet's impact has been 
enormous and undeniable. Knowledge, education, and innovation play a 
far greater role in today's dynamic and changing economy than in 
previous generations, and I believe they are key factors in America's 
ability to generate sustained job growth and create promising new job 
opportunities that provide higher wages and raise standards of living 
for workers. The individual skills, imagination, and commitment of 
workers are increasingly critical not just to their individual 
employers, but to our entire economy.
    All of this underscores one vital growth engine--education. With an 
increasingly mobile workforce, it is absolutely critical for workers to 
have the education and skills necessary to adapt to new opportunities 
and move into higher-wage jobs. And only with educational excellence at 
all levels, from K-12 up to retirement, will we able to continue 
generating the ideas that create high-wage, high-opportunity products 
and industries in the future.
    In fact, we have a chart that highlights some important numbers 
from last week's Labor Department's jobs report. The chart highlights 
the fact that the more education that workers receive, the lower their 
rates of unemployment and the better chance they'll have a good job. As 
you can see, those who have at least a college degree have unemployment 
rates of lower than three percent.
    We're here today to learn more about what drives job growth and 
opportunity in today's economy, so that we can best give our 
constituents what they expect and deserve-solutions that will allow our 
economy to continue creating better opportunities for American workers 
and their families. I support what the President and the Congress have 
thus far achieved, and I'm confident that because of those policies 
we've turned the corner on the recession that began in 2000. But we 
need to think long-term as well. I believe we need to ask ourselves 
this question: given what we know and will learn about what drives job 
growth and opportunity in today's economy, what can we do to put our 
economy on the strongest possible footing?
    This is an election year, and we all know in election years there's 
a temptation on both sides to point fingers instead of solving 
problems. With due respect to all my colleagues, I know my constituents 
are tired of finger-pointing. They want sound policy that will help 
them improve their lives and their families' lives. It might take some 
doing on both sides, but I hope we can keep them in mind despite 
election year pressures. With that, I look forward to our hearing from 
our distinguished guests today.
                                 ______
                                 

 STATEMENT OF HON. GEORGE MILLER, RANKING MEMBER, COMMITTEE ON 
                  EDUCATION AND THE WORKFORCE

    Mr. Miller. Thank you, Mr. Chairman, and thank you for 
convening this hearing. Chairman Greenspan, thank you for being 
here. I've waited a long time to hear this testimony on the 
importance of education and innovation in our economy. We have 
heard this from many for many years. Just recently I was 
reading a long interview by John Chambers of CISCO about the 
importance he felt that education would be to future job 
growth. Carli Forino from Hewlett-Packard was back testifying 
in the Senate a couple of weeks ago with the same message. Bill 
Hambreck was making this call a number of years ago in the 
previous administration.
    And I think we all understand that as we look in the 
globalized world, the need to have a better educated, a better 
trained workforce is absolutely paramount to our competitive 
position. But I also think that we have to clearly express 
concern about what is happening immediately today in our 
economy with 8 million Americans out of work, with 2 million of 
those workers unemployed almost 6 months or longer, with the 
exhaustion of the unemployment benefits, and with no help from 
Washington on the way. If the question of my colleague, Mr. 
Boehner, is whether or not people would prefer to live in 1999 
as today, I think the question is a resounding yes. They would 
rather be in 1999, whether they were in the tech industry or 
they were working in America, because we were in fact creating 
a significant number of new jobs in the late '90's.
    And yet at this point we see that some 2.3 million jobs 
have disappeared on this administration's watch. If you take 
out the public sector job creation, you're talking about 3 
million jobs that have been lost, and we all know the 
devastating loss to manufacturing.
    And I think it's important that we understand, if we want 
to back to 1999, as that was vibrant, we can go back some 70 
years to find an administration that was unable to create jobs 
during its tenure in the White House. As the chart to the right 
show, Eisenhower created jobs, Roosevelt created jobs, Kennedy 
and Johnson, Nixon and Ford and Carter created jobs, Reagan and 
Bush Sr. created jobs, but this administration has been unable 
to do so. Maybe it's more complicated than we all think, 
because the Secretary of Treasury says he's absolutely 
mystified by the lack of the jobs. Maybe we need a new Treasury 
secretary.
    But the fact of the matter is, the fact of the matter is 
that America's working people and families today are hurting. 
And the fact of the matter is, what we have seen is the decline 
in wages during this economic recovery. We've seen a jobless 
recovery now for some 31, 32 months. There was speculation this 
morning on the financial stations of whether or not this 
economic recovery has run its course. I hope it hasn't, because 
we need the jobs to show up in the future.
    But what stuns me most of all is the lack of urgency about 
this problem in this administration, and I would say in the 
Republican Congress. The fact of the matter is, when you see 
hundreds of thousands of people exhausting their benefits, and 
we don't think about helping those families who are crashing to 
the ground, who are losing their homes, who are losing their 
families, actually, because of the economic stress in that 
situation. And yet we vote in the Congress, in the House and 
the Senate, to extend those benefits, but we can't get a real 
bill to the floor to extend those benefits. The President says 
he will sign it if it comes to his desk, but he doesn't demand 
that it comes to his desk.
    Where is his sense of urgency about these families that are 
in so much trouble? Where is his sense of urgency when he fails 
to fully fund vocational education? I know he's creating a new 
fund to help the community colleges. We haven't seen the 
program. We haven't seen the money. We just know it was cut out 
of vocational education to create that program.
    We see the Manufacturing Extension Partnership, a program 
that has provided thousands of small firms and medium-sized 
firms with critical technical assistance and business support 
systems. That's going to be slashed by 65 percent. These are 
the means by which we help small businesses generate the new 
jobs. These are the means by which we help families stabilize 
themselves until they can find that new job. And the fact of 
the matter is, many of them are so discouraged that they have 
left the workforce.
    That's America today. That's America today where 6 months 
after the President tells us that he's going to appoint a 
manufacturing czar on Labor Day. He was going to create a new 
job, a manufacturing czar. It now turns out that that potential 
manufacturing czar is creating new jobs in China, not in the 
United States. He's creating a new factory and 165 new jobs in 
China. I don't think that that's the response that the American 
people deserve. The American people are quite rightly concerned 
about this effort.
    I would also say that if we are going to make this 
investment in education, and I look forward to your remarks, 
that investment must be sustained, it must be real, and it must 
be comprehensive. Because when you read the economic journals 
on Asia, you will see that what is different now than when we 
started this process of some job transfers, when Motorola went 
early in the '80's, is what you now see is the building of 
institutions in China and India, seeking standards of 
excellence in their universities. The degrees are better now 
than they were before. The talents of those young people 
getting those degrees and technical training in engineering, in 
biotech, are vastly superior to what they were just a few years 
ago.
    That parallel infrastructure ought to suggest to America 
that simply resting on our laurels on education in this country 
will not be good enough. It's very similar to when we all have 
said now see essentially a parallel manufacturing structure 
that technically is very good, major investment, state-of-the-
art facilities that we thought we had the corner on for so 
long. And I think we've got to pay attention to that effort 
that is going on and understand what that signal is to those of 
us in Congress, to the American people of the kind of 
investment in applied research, the kind of investment in basic 
research, the kind of investment in education, whether it's K 
through 16 or it's lifelong learning, the continuous training 
and investment that must be made on behalf of these 
individuals.
    But what I don't see is I don't see any of that reflected 
in the budgets of this administration, and I don't see any of 
that reflected in a sense of urgency that if we are going to 
leap to the new technologies, if we are going to go to the next 
generation of manufacturing, that we're preparing an educated 
workforce to take part in that activity.
    And my concern is, is the remark made by one of the leaders 
in Silicon Valley, which said ``today Silicon Valley is where 
you start a company. You grow it in China.'' That's a very, 
very serious problem if in fact that's more than just an 
offhand remark.
    But we do see that, in fact, taking place in so many of our 
industries where people were led to believe they would have the 
good jobs; the bad jobs would be outsourced. The dirty, the 
heavy, the dangerous jobs would go to Third World economies. 
That has changed rather dramatically, and I suspect that we're 
only at the beginning of that process, because so many of the 
technological changes that facilitate that have yet to be--have 
had their run yet in terms of the kinds of benefits that they 
can provide to companies in terms of managing worldwide 
manufacturing, worldwide sales and marketing and the financial 
transactions.
    So there's a lot on our plate, Mr. Chairman, and I hope 
that your remarks will address the idea that this must be a 
sustained national commitment for a long time into the future 
if in fact we are going to be able to participate in that 
globalized economy on behalf of America's workers and their 
families.
    Thank you.
    Chairman Boehner. It's now my pleasure to introduce the 
Chairman of the Board of Governors of the Federal Reserve 
System, the Honorable Alan Greenspan.
    Dr. Greenspan is the Chairman of the Board of Governors of 
the Federal Reserve System. He's held the Chairmanship since 
1987, and most recently resumed the office in June 2000 for his 
fourth 4-year term. He's been nominated as Chairman by 
President Reagan, President Bush, President Clinton, and has 
been confirmed by overwhelmingly broad bipartisan majorities.
    Chairman Greenspan has served as a member of President 
Reagan's Economic Policy Advisory Board, a member of Time 
Magazine's Board of Economists, Senior Adviser to the Brookings 
Panel on Economic Activity, a consultant to the Congressional 
Budget Office, a Chairman of the Conference of Business 
Economists, President and Fellow of the National Association of 
Business Economists, a director of the National Economics Club, 
and Chairman of the Federal Open Market Committee.
    And on a personal note, we worked very closely together on 
the movement and the first House passage of financial services 
modernization in the summer of 1998. Without his help, we'd 
still be debating financial services modernization.
    So with that, Mr. Chairman, we'd love to hear your 
testimony.

STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS 
                 OF THE FEDERAL RESERVE SYSTEM

    Mr. Greenspan. Thank you very much, Mr. Chairman, Mr. 
Miller, and Members of the Committee. The United States economy 
has long been characterized by a strong tradition of 
entrepreneurial spirit among our businesspeople, a high level 
of skill among our workers, and an openness by firms and 
workers alike to intense competition within and beyond our 
borders.
    Those attributes have given us a standard of living 
unparalleled for so large a population, and one that has risen 
steadily over the history of our nation. But with that bounty 
has also come the inevitable stresses and anxieties that 
accompany economic advance. One concern that has persisted for 
some time is the fear that we are irreversibly losing 
manufacturing jobs because of businesses' efforts to extract 
rapid gains and production efficiencies and to cut labor costs 
by tapping the lower wage economies of Asia and Latin America.
    More recently, similar concerns have arisen about the 
possibility that an increasing number of our better paying 
white collar jobs will be lost to outsourcing, especially to 
India and China. Many of these jobs are in the service sector, 
and they were previously perceived as secure and largely free 
from the international competition long faced in the 
manufacturing sector. There is a palpable unease that 
businesses and jobs are being drained from the United States 
with potential adverse long-run implications for employment and 
the standard of living of the average American.
    Job insecurity is understandably significant when nearly 2 
million members of our workforce have been unemployed for more 
than 6 months. The issue is both important and sensitive, 
dealing as it does with the longer term wealth of our nation 
and with the immediate welfare of so many individuals and 
communities.
    In the debate that has ensued, a large gulf is often 
perceived between the arguments of economists who almost always 
point to the considerable benefits offered over the long term 
by exposure to free and open trade, and the obvious stress felt 
by those caught on the downside of turbulence created by that 
exposure. It is crucial that this gulf be bridged.
    As history clearly shows, our economy is best served by 
full and vigorous engagement in the global economy. 
Consequently, we need to increase our efforts to ensure that as 
many of our citizens as possible have the opportunity to 
capture the benefits that flow from that engagement. For 
reasons that I shall elucidate shortly, one critical element in 
creating that opportunity is it provide rigorous education and 
ongoing training to all members of our society.
    This proposal is not novel. It is in fact the strategy that 
we have followed successfully for most of the past century, and 
a strategy that we now should embrace with renewed commitment.
    Over the long sweep of American generations and waves of 
economic change, we simply have not experienced a net drain of 
jobs to advancing technology or to other nations. Since the end 
of World War II, for example, the unemployment rate in the 
United States has averaged less than 6 percent with no apparent 
trend. And as recently as 2000, it dipped below 4 percent. 
Moreover, incomes trended higher whether we had a trade deficit 
or a trade surplus, and whether international outsourcing was 
large or small.
    Clearly, fundamental economic forces have apparently been 
at work. Research on wealth creation in both emerging and 
developing nations strongly suggests that it is the knowledge 
and the skill of our population, interacting under our rule of 
law, that determine our real incomes, irrespective of the 
specific jobs in which these incomes are earned, and 
irrespective of the proportion of domestic consumption met by 
imports.
    These upward trends in the standard of living, however, 
mask the stress that significant parts of our workforce endure. 
Joseph Schumpeter, the renowned Harvard professor, called the 
process of progress ``creative destruction,'' the continuous 
scrapping of old technologies to make way for the new. 
Standards of living rise because the cashflows of industries 
employing older, increasingly obsolescent technologies are 
marshaled along with new savings to finance the production of 
capital assets that almost always embody cutting edge 
technologies. Workers migrate with the capital. This is the 
process by which wealth is created incremental step by 
incremental step.
    The process of creative destruction has been accompanied by 
an ever growing conceptualization of economic output. Ideas 
rather than materials or physical brawn have been by far the 
greatest contributors during the past half century to our 
average annual increase of 3.25 percent in real gross domestic 
product. Technological advance is continually altering the 
shape, nature and complexity of our economic processes.
    To effectively manage this ever increasing complexity, our 
labor force has had to become more and more technically 
oriented. Years of schooling, a rough proxy for skills, 
averaged 9.25 years in 1950. A half century later, schooling 
averaged more than 12 years. At the risk of some 
oversimplification, if the skill composition of a workforce 
meshed fully with the needs of our increasingly complex capital 
stock, wage-skill differentials would be stable and percentage 
changes in wage rates would be the same for all job grades.
    This was largely the case through the first quarter century 
after World War II. But for the past 20 years, the real incomes 
of skilled, especially highly skilled workers, have risen more 
than the average of all workers, whereas real wage increases 
for lesser skilled workers have been below average, indeed 
virtually nonexistent.
    This difference in wage trends suggests that at least in 
relative terms, we have developed a shortage of highly skilled 
workers and a surplus of lesser skilled workers. Although in 
recent years the proportion of our labor force made up of those 
with at least some college education has continued to grow. We 
appear nonetheless to be graduating too few skilled workers to 
address the apparent imbalance between the supply of such 
workers and the burgeoning demand for them.
    More broadly, in considering the issue of expanding our 
skilled workforce, some have a gnawing sense that our problems 
may be more than temporary, and that the roots of the problem 
may extend back through our education system. Many of our 
students languish at too low a level of skill, and the result 
is an apparent excess of supply relative to a declining demand.
    Our population today is also adjusting to an ever faster 
turnover of jobs. We are growing more aware that in the current 
intensely competitive economy, the pace of job creation and 
destruction implies the average worklife will span many jobs 
and even more than one profession. I do not doubt that the vast 
majority of us would prefer to work in a less stressful, less 
competitive environment. Yet in our roles as consumers, we seem 
to relentlessly seek the low product prices and high quality 
that are prominent features of our current frenetically 
competitive economic structure. Retailers who do not choose 
their suppliers, foreign or domestic, with price and quality 
uppermost in mind, risk losing their customers to retailers who 
do.
    In response to these strains and the dislocations they 
cause, a new round of protectionist steps is being proposed. 
These alleged cures would make matters worse rather than 
better. They would do little to create jobs, and if foreigners 
were to retaliate, we would surely lose jobs. Besides enhancing 
education, we need to further open markets here and abroad to 
allow our workers to compete effectively in the global 
marketplace.
    We do have a choice. We can erect walls to foreign trade 
and even discourage job displacing innovation. The pace of 
competition would surely slow, and tensions might appear to 
ease, but only for a short while. Our standard of living would 
soon begin to stagnate and perhaps even decline as a 
consequence. Time and again through our history, we have 
discovered that attempting merely to preserve the comfortable 
features of the present, rather than reaching for new levels of 
prosperity, is a sure path to stagnation.
    In closing, Mr. Chairman, I have emphasized the importance 
of redressing the apparent imbalances between the supply and 
demand for labor across the spectrum of skills. Those 
imbalances have the potential to hamper the adjustment 
flexibility of our economy overall. But these growing 
imbalances are also aggravating the inequality of incomes in 
this country. Historically, we have placed much greater 
emphasis on the need to provide equality of opportunity than on 
equality of outcomes. But equal opportunity requires equal 
access to knowledge. We cannot expect everyone to be equally 
skilled. But we need to pursue equal access to knowledge to 
ensure that our economic system works at maximum efficiency and 
is perceived as just in its distribution rewards.
    Thank you very much. I should very much like that my full 
remarks be included for the record, Mr. Chairman.
    [The prepared statement of Mr. Greenspan follows:]

 Statement of Hon. Alan Greenspan, Chairman, Board of Governors of the 
                 Federal Reserve System, Washington, DC

    The United States economy has long been characterized by a strong 
tradition of entrepreneurial spirit among our business people, a high 
level of skill among our workers, and an openness by firms and workers 
alike to intense competition within and beyond our borders. Those 
attributes have given us a standard of living unparalleled for so large 
a population--and one that has risen steadily over the history of our 
nation.
    But with that bounty have also come the inevitable stresses and 
anxieties that accompany economic advance. One concern that has 
persisted for some time is the fear that we are irreversibly losing 
manufacturing jobs because of businesses' efforts to extract rapid 
gains in production efficiencies and to cut labor costs by tapping the 
lower-wage economies of Asia and Latin America.
    More recently, similar concerns have arisen about the possibility 
that an increasing number of our better-paying white-collar jobs will 
be lost to outsourcing, especially to India and China. Many of these 
jobs are in the service sector, and they were previously perceived as 
secure and largely free from the international competition long faced 
in the manufacturing sector. There is a palpable unease that businesses 
and jobs are being drained from the United States, with potentially 
adverse long-run implications for employment and the standard of living 
of the average American. Job insecurity is understandably significant 
when nearly two million members of our workforce have been unemployed 
for more than six months.
    The issue is both important and sensitive, dealing as it does with 
the longer-term wealth of our nation and with the immediate welfare of 
so many individuals and communities. In the debate that has ensued, a 
large gulf is often perceived between the arguments of economists, who 
almost always point to the considerable benefits offered over the long 
term by exposure to free and open trade, and the obvious stress felt by 
those caught on the downside of turbulence created by that exposure. It 
is crucial that this gulf be bridged.
    As history clearly shows, our economy is best served by full and 
vigorous engagement in the global economy. Consequently, we need to 
increase our efforts to ensure that as many of our citizens as possible 
have the opportunity to capture the benefits that flow from that 
engagement. For reasons that I shall elucidate shortly, one critical 
element in creating that opportunity is the provision of rigorous 
education and ongoing training to all members of our society. This 
proposal is not novel; it is, in fact, the strategy that we have 
followed successfully for most of the past century and a strategy that 
we now should embrace with renewed commitment.
    Over the long sweep of American generations and waves of economic 
change, we simply have not experienced a net drain of jobs to advancing 
technology or to other nations. Since the end of World War II, for 
example, the unemployment rate in the United States has averaged less 
than 6 percent with no apparent trend; and as recently as 2000, it 
dipped below 4 percent.
    Moreover, real earnings of the average worker have continued to 
rise. Over the past century, per capita real income has risen at an 
average rate of more than 2 percent per year, declining notably only 
during the Great Depression of the 1930s and immediately following 
World War II. Incomes trended higher whether we had a trade deficit or 
a trade surplus and whether international outsourcing was large or 
small. More fundamental economic forces have apparently been at work. 
Research on wealth creation in both emerging and developed nations 
strongly suggests that it is the knowledge and the skill of our 
population interacting under our rule of law that determine our real 
incomes, irrespective of the specific jobs in which these incomes are 
earned and irrespective of the proportion of domestic consumption met 
by imports.
    These upward trends in the standard of living, however, mask the 
stress that significant parts of our workforce endure. Joseph 
Schumpeter, the renowned Harvard professor, called the process of 
progress ``creative destruction,'' the continuous scrapping of old 
technologies to make way for the new. Standards of living rise because 
the cash flows of industries employing older, increasingly obsolescent, 
technologies are marshaled, along with new savings, to finance the 
production of capital assets that almost always embody cutting-edge 
technologies. Workers migrate with the capital. This is the process by 
which wealth is created, incremental step by incremental step.
    The process of creative destruction has been accompanied by an 
ever-growing conceptualization of economic output. Ideas rather than 
materials or physical brawn have been by far the greatest contributors 
during the past half-century to our average annual increase of 3-1/4 
percent in real gross domestic product.
    Technological advance is continually altering the shape, nature, 
and complexity of our economic processes. To effectively manage this 
ever-increasing complexity, our labor force has had to become more and 
more technically oriented. Years of schooling, a rough proxy for 
skills, averaged nine and one-quarter years in 1950. A half-century 
later, schooling averaged more than twelve years.
    At the risk of some oversimplification, if the skill composition of 
our workforce meshed fully with the needs of our increasingly complex 
capital stock, wage-skill differentials would be stable, and percentage 
changes in wage rates would be the same for all job grades. This was 
largely the case through the 1960s when the addition of skilled college 
graduates to the labor force, in part the result of schooling financed 
by the GI Bill, was sufficient to hold wage increases among the highly 
skilled to average gains. Real wages of the lesser skilled also rose 
significantly, in part as a result of effective high-school educations 
and the many skills learned during the war. In the 1970s, the supply of 
skilled workers received another boost from the rapid expansion of our 
nation's community colleges. In short, technical proficiencies across 
all job grade levels appeared to rise about in line with the needs of 
our, even then, complex stock of capital.
    But for the past twenty years the real incomes of skilled, 
especially highly skilled, workers have risen more than the average of 
all workers, whereas real wage rate increases for lesser-skilled 
workers have been below average, indeed virtually nonexistent. This 
difference in wage trends suggests that, at least in relative terms, we 
have developed a shortage of highly skilled workers and a surplus of 
lesser-skilled workers.
    Although in recent years the proportion of our labor force made up 
of those with at least some college education has continued to grow, we 
appear, nonetheless, to be graduating too few skilled workers to 
address the apparent imbalance between the supply of such workers and 
the burgeoning demand for them. Perhaps the accelerated pace of high-
tech equipment installations associated with the large increases in 
productivity growth in recent years is generating unachievable demands 
for skilled graduates over the short run. If the apparent acceleration 
in the demand for skilled workers to staff our high-tech capital stock 
is temporary, as many presume, the pressure on our schools would ease 
as would the upward pressure on high-skilled wages.
    More broadly, in considering the issue of expanding our skilled 
workforce, some have a gnawing sense that our problems may be more than 
temporary and that the roots of the problem may extend back through our 
education system. Many of our students languish at too low a level of 
skill, and the result is an apparent excess of supply relative to a 
declining demand. These changing balances are most evident in the 
failure of real wages at the lower end of our income distribution to 
rise during the past quarter-century.
    The hypothesis that we should be able to improve upon the knowledge 
that our students acquire as they move from kindergarten to twelfth 
grade gains some support from international comparisons. A study 
conducted in 1995 revealed that, although our fourth-grade students 
were above average in both math and science, by the time they reached 
their last year of high school they had fallen well below the 
international average.\1\ Accordingly, we apparently have quite a 
distance to go before we catch up.
---------------------------------------------------------------------------
    \1\ The Third International Math and Science Study is a project of 
the International Study Center, Lynch School of Education, Boston 
College. A complete set of TIMSS publications is available on the 
center's web site, http://timss.bc.edu/timss1995i/
TIMSSPublications.html.
---------------------------------------------------------------------------
    Early last century, technological advance required workers with a 
higher level of cognitive skills--for instance the ability to read 
manuals, to interpret blueprints, or to understand formulas. Youth were 
pulled from rural areas, where opportunities were limited, into more-
productive occupations in business and an advancing manufacturing 
sector. Our educational system responded: In the 1920s and 1930s, high-
school enrollment in this country expanded rapidly. It became the job 
of these institutions to prepare students for work life. In the context 
of the demands of the economy at that time, a high-school diploma 
represented the training needed to be successful in most aspects of 
American enterprise. The economic returns for having a high-school 
diploma rose and, as a result, high-school enrollment rates climbed.
    By the time that the United States entered World War II, the median 
level of education for a seventeen-year-old was a high-school diploma--
an accomplishment that set us apart from other countries. I cannot 
dismiss the notion that we can learn something from that period and 
perhaps from other countries. Still, I realize that the world was 
different from today in many ways. Societal changes have been numerous 
and profound, and our schools are being asked to do a great deal more 
than they have in the past. We need to be forward-looking in order to 
adapt our educational system to the evolving needs of the economy and 
the realities of our changing society.
    One area in which educational investments appear to have paid off 
is our community colleges. These two-year institutions are playing a 
similar role in preparing our students for work life as did our early 
twentieth-century high schools in that less technically oriented era. 
But to an even greater extent, our population today is adjusting to an 
ever-faster turnover of jobs. We are also growing more aware that in 
the current intensely competitive economy, the pace of job creation and 
destruction implies that the average work life will span many jobs and 
even more than one profession.
    The desire of workers to learn skills that build on their previous 
work experiences or to acquire new skills is apparent. Currently almost 
one in three of the enrollees in community colleges and almost one of 
two part-time enrollees at four-year undergraduate schools are aged 
thirty or older, statistics that suggest that these individuals have 
had previous job experience. The increase in these enrollments over the 
past thirty years attests to the success of these institutions in 
imparting both general and practical job-related training. A rising 
proportion of the population is also taking advantage of work-related 
instruction.
    More broadly, our system of higher education bears an important 
responsibility for ensuring that our workforce is prepared for the 
demands of economic change. America's reputation as the world's leader 
in higher education is grounded in the ability of these versatile 
institutions to serve the practical needs of the economy by teaching 
and training and, more significantly, by unleashing the creative 
thinking that moves our economy forward.

                                 * * *

    I do not doubt that the vast majority of us would prefer to work in 
a less stressful, less competitive environment. Yet, in our roles as 
consumers, we seem to relentlessly seek the low product prices and high 
quality that are prominent features of our current frenetically 
competitive economic structure. Retailers who do not choose their 
suppliers, foreign or domestic, with price and quality uppermost in 
mind, risk losing their customers to retailers who do. Retailers are 
afforded little leeway in product sourcing. If consumers are stern 
taskmasters of their marketplace, business purchasers of capital 
equipment and production materials inputs have taken the competitive 
paradigm a step further and applied it on a global scale.
    Those who have lost jobs as a consequence of this process, I know, 
are not readily consoled by the fact that job insecurity concerns are 
not new. But keeping the current period in context is instructive. Jobs 
in the United States were perceived as migrating to low-wage Japan in 
the 1950s and 1960s, to low-wage Mexico in the 1990s, and most recently 
to low-wage China. Japan, of course, is no longer characterized by a 
low-wage workforce, and many in Mexico are now complaining of job 
losses to low-wage China.
    In response to these strains and the dislocations they cause, a new 
round of protectionist steps is being proposed. These alleged cures 
would make matters worse rather than better. They would do little to 
create jobs; and if foreigners were to retaliate, we would surely lose 
jobs. Besides enhancing education, we need to further open markets here 
and abroad to allow our workers to compete effectively in the global 
marketplace.

                                 * * *

    As our economy exhibits increasing signals of recovery, job loss 
continues to diminish. But new job creation is lagging badly--the 
ironic consequence of accelerated gains in productivity. In all 
likelihood, employment will begin to increase more quickly before long 
as output continues to expand. We have reason to be confident that new 
jobs will displace old ones as they always have, but America's job-
turnover process will never be without pain for those caught on the 
downside of creative destruction.
    We do have a choice. We can erect walls to foreign trade and even 
discourage job-displacing innovation. The pace of competition would 
surely slow, and tensions might appear to ease. But only for a short 
while. Our standard of living would soon begin to stagnate and perhaps 
even decline as a consequence. Time and again through our history, we 
have discovered that attempting merely to preserve the comfortable 
features of the present, rather than reaching for new levels of 
prosperity, is a sure path to stagnation.
    In closing, I have emphasized the importance of redressing the 
apparent imbalances between the supply and demand for labor across the 
spectrum of skills. Those imbalances have the potential to hamper the 
adjustment flexibility of our economy overall. But these growing 
imbalances are also aggravating the inequality of incomes in this 
country.
    Historically, we have placed much greater emphasis on the need to 
provide equality of opportunity than on equality of outcomes. But equal 
opportunity requires equal access to knowledge. We cannot expect 
everyone to be equally skilled. But we need to pursue equal access to 
knowledge to ensure that our economic system works at maximum 
efficiency and is perceived as just in its distribution of rewards.
                                 ______
                                 
    Chairman Boehner. We will include all of your remarks, and, 
Chairman Greenspan, we appreciate your coming before our 
Committee today.
    You clearly believe that we need to strengthen the 
educational system in this country to ensure that workers can 
capitalize on today's and tomorrow's opportunities, whether 
it's K-12 education to higher education, worker training, 
lifelong learning. And worker training and retraining programs 
offer short-term solutions for some of our fellow citizens, but 
could you talk specifically about the importance of 
kindergarten through 12th grade education, our expectations as 
a nation for our students and the need for high standards?
    Mr. Greenspan. Mr. Chairman, I think that we find in the 
various different studies, as I'm sure you are aware, that our 
forth grade students are above average internationally in both 
math and science. And somewhere beyond that, something happens 
which brings them by 12th grade apparently to fairly 
significantly below the average.
    Fortunately, we have world class colleges and universities 
generally, and the students which do manage to work their way 
through the primary and secondary education system into college 
tend to do reasonably well in this country and indeed are a 
major force in the staffing of our very complex technological 
capital stock and economic structure.
    But we clearly are not doing enough in the way of moving 
students through at a faster level of skill accretion, because 
as I point out in my prepared remarks, it clearly is reflected 
in these very dramatic changes in the so-called college/high 
school skill spreads, which have opened up quite materially, 
and in the obvious arithmetical implication of a significant 
concentration of income in this country. And I've always argued 
that it is very important for a democratic society to have full 
opportunity and fuller capability of people to move up 
throughout the whole structure of the society, and that means 
that we must enhance the capability of our primary and 
secondary education.
    Chairman Boehner. Mr. Chairman, there seem to be two trends 
in the world that I'd like to ask you to comment on. On one 
hand, there are many economically developed nations which are 
seeing their economic position erode and are responding by 
trying to stop that erosion. France, for example, tried to 
reduce unemployment by reducing the maximum number of hours a 
worker could work, and unemployment in France is over 10 
percent. Germany tries to protect the wages of workers with 
generous unemployment insurance, and the result is that only 
very highly skilled workers can find work. Japan tried to 
protect industries, and that government--trying to protect them 
was very important to them, and as a result, entrepreneurs 
couldn't get the funds or skilled workers they needed, and 
Japan has shown practically no growth over the last decade.
    Now the other trend is coming from trading partners like 
Australia and developing nations like India and China. They 
seem to embrace capitalism, innovation, and education. And it 
may not be absolute, but the trend seems to be unmistakable. 
And by and large, these countries are doing better and seem to 
be building a better future for their citizens. So which way is 
best for our country? Are we better off trying to defend what 
we've got, or build for the future?
    Mr. Greenspan. Well, Mr. Chairman, I think that while you 
correctly describe the more recent history of Europe, the very 
current history of Europe is changing, and it's changing in the 
direction to which you are suggesting we ought to be moving.
    The work week in France, which was expected to have some 
considerable difficulty in maintaining a flexible labor market, 
is being recognized as such, and I think that there are actions 
being taken with respect to labor market reform in France which 
goes in the direction in which you were pointing. Obviously 
similar such events are occurring in Germany and is a major 
problem in that country to enhance the flexibility of their 
labor markets.
    There was a great debate implicitly, oh, through a goodly 
part of the post-World War II period, about the nature of the 
flexibility of labor markets. We, as you know, have taken the 
position that they should be quite flexible, and indeed we very 
specifically have created a system in which it is relatively 
easy for an employer to discharge an employee. That of course 
is not the case in a number of other countries in the world.
    There was an interesting question as to whether or not that 
would create more unemployment in the United States or less. We 
did not know. Except what we found is that in the event the 
unemployment rate went down, and the reason it went down is 
that because employers, perceiving that in the event they make 
a mistake in hiring somebody, can remedy that mistake readily, 
easily, and therefore were far more willing to hire people, 
take the risk of hiring people. And what we saw is a fairly 
significant expansion in employment, as Mr. Miller pointed out 
earlier, throughout the '90's when this issue became paramount.
    I do believe that as far as the economic evaluation of what 
type of labor market one should want, I think there is an 
increasing awareness that flexibility, more of our type, is the 
way to go. And I do believe that we will see that Europe and 
Japan will be moving in that direction within the next years--
over the next years.
    Chairman Boehner. Mr. Miller.
    Mr. Miller. Thank you. Mr. Chairman, thank you for your 
testimony. In my opening remarks I obviously recounted the 
number of Americans that are out of work, the number, some 2 
million, that have been unemployed 6 months or longer, and the 
number of people who apparently have stopped looking for work, 
have dropped out of the labor force. And I would just like to 
ask you whether you support or you don't support a temporary 
extension of unemployment benefits to these families that 
apparently cannot find work. It's not that they're not looking.
    Mr. Greenspan. Mr. Miller, I think our unemployment 
insurance system is very well structured, and I think that it's 
worked in the way that I think we wanted it to work. And 
remember, the crucial issue here is that we do not wish to 
encourage people who can find a job not to do so. Therefore, we 
have limited the amount of unemployment insurance.
    However, when unemployment is created through no fault of 
the workers' actions, then I think it is clearly to our 
advantage to find ways of creating support in our system. And 
as a consequence, in times like this, I have supported the 
issue of extension of unemployment insurance. And while I am 
fairly well convinced that employment is about to pick up or to 
be more explicit, new hires are going to be picking up 
reasonably quickly if this economic growth rate continues, I 
think that considering the possibility of extending 
unemployment insurance is not a bad idea.
    Mr. Miller. Thank you. The issue of outsourcing for a 
moment. We're not going to settle it here today. But when we 
first started this discussion when we were dealing with the 
China Free Trade Act in relation to China's entry into the WTO, 
obviously there were many, many American corporations and 
American brands that wanted to establish themselves in China. 
And early, Proctor & Gamble went early, Motorola went early, 
Ford went early. And the idea was that they could sell a 
billion Chinese cell phones or pagers. In the early days, they 
just made pagers. They didn't make cell phones. Or they could 
sell them personal care products, and that was the market.
    When you look at it today over the last couple of years, 
what you really see now is world class manufacturers of Japan, 
Taiwan, the United States, who are moving to establish 
platforms for this improving market in China, but also clearly 
for export, which I think is a change of intent in many 
instances from what people were thinking in the '80's and the 
'90's. And so people who lead their sector of the economy in 
terms of efficiencies and product and quality have now made a 
decision that they have got to go there to have an edge to 
export to the United States or to the rest of the world.
    And you used argue in economic recoveries who was first in 
and who was last out, or first in and last out, whether it was 
housing or construction or that sort of thing. In the service 
economy, it appears that if you start selling more Dell 
computers or more Apple computers, maybe the first out of the 
recovery would be the people who then have to service those 
computers, the call centers that we now see that so many 
manufacturers rely on for the service of their products to 
their customers.
    And what we see now is that those jobs that probably in an 
economic recovery may well have been created in rural America 
where call centers were located in so many regions of the 
country, it now appears as that demand is picking up that many 
of those jobs in fact are being closed down, as the Wall Street 
Journal talked about what took place in a call center in the 
south, and USA Today was recounting another closure of a call 
center in the southwest. And those jobs that would have, at 
this point in the economic recovery would have happened in the 
United States, appear to have happened there.
    And I just wonder, what's the impact of that and how deep 
into the recovery do we expect that to go? Does that happen to, 
if you have manufacturers who are increasing their capability 
in China to export, can we expect the job creation that you 
would have seen in that level--at that stage of manufacturing 
in the United States being transferred offshore?
    That's part of the economic cycle I think, and I'm not a 
big one of saying you can just erect a barrier and say you 
can't do that. But I'm just asking, what are our expectations 
in terms of why this has been such a long jobless recovery 
compared to others? That's a long question, but I know there's 
a short answer there.
    Mr. Greenspan. I don't know how to give a short answer.
    [Laughter.]
    Mr. Miller. That's what I heard. I don't know. This is the 
first time I've asked you a question. But I can tell you, when 
you raise your hand, those cameras go off. It's incredible.
    [Laughter.]
    Mr. Greenspan. Congressman, I think what you're describing 
is a process which has been going on for a very long period of 
time. It's what we call globalization. Globalization basically 
is the gradual obliteration of national boundaries so far as 
economic exchange occurs. And in this country we saw it in the 
latter part of the 19th century as we moved across state 
borders, first even county borders. And it's a continuous, 
irreversible process. And what we are largely beginning to see 
in the most recent period is the consequences of that as 
technology enables people and ideas to move at a very much more 
rapid pace.
    And so what we are indeed seeing is exactly what you 
explained, which is a process of trade among nations increasing 
fairly dramatically. I mean, for example, just on imports and 
exports, the ratio of trade to world GDP has been growing 
inexorably, which means effectively that there's ever 
increasing exchange between countries. And I think that is now 
becoming even more sophisticated getting into certain service 
areas such as international outsourcing, which we hadn't seen 
before, especially by satellite obviously.
    This is a normal process in which the division of labor 
inexorably expands, which creates ever rising standards of 
living everywhere. It is not a zero sum game. And from all of 
the evidence that I can perceive, we in the United States have 
been the greatest beneficiaries of this process.
    And as a consequence, I think it's important for us to 
recognize that what is causing our economic prosperity despite 
all of this globalization and churning, despite the fact that 
we have a very turbulent, highly competitive, indeed I call it 
frenetic is the best way to capture it, which causes great 
turmoil amongst businesses and amongst people who are working 
in businesses, the net result has been a very significant 
increase in standards of living.
    I don't think we have a choice to go back. In other words, 
you cannot turn ideas around. We cannot forget that silicon is 
an incredibly important mineral far beyond what we used to 
think it was 50 years ago. And I think, as best I can judge, 
what makes us special in the United States, why even though our 
educational system is falling short of clearly some of East 
Asian educational systems, is we have a political system with a 
Bill of Rights, and rights which are not really existent or 
enforced anywhere else in the world. I often say that the 
reason for the prosperity in the United States is largely our 
Constitution and our Founding Fathers who had the great 
insights to understand the importance of individual rights, 
property rights, and an extension of that, the law of 
contracts.
    People want to invest in the United States because they 
know their rights are protected. There's a great deal of 
concern about investing in China, even Japan, at least--because 
we're not clear on what their laws are or any other place.
    I would therefore say that if we can maintain a fairly 
strong educational system which enables our people to staff 
this ever more complex, very difficult structure, I think we 
will continue to maintain ever rising standards of living at 
unemployment rates which are low and hopefully lower as this 
technology improves.
    I think that what we are finding is a number of the laws in 
foreign countries which impede our movement and impede theirs 
are beginning to come down, and I think in many respects, they 
look to our legal structure as a model to work with, and I 
think that's to everybody's benefit.
    Chairman Boehner. Mr. Petri.
    Mr. Petri. Thank you. Chairman Greenspan, I know we ought 
to be concern about deficit spending, and it's a serious 
problem, but I tend to think that some spending is simply 
spending and other spending is investment. For the sake of our 
economy and all the good things that come from having a strong 
economy, we need to invest in education and also in highways 
and infrastructure necessary to get supplies to factories, 
goods to market and workers to their jobs.
    We obviously need to fight waste, fraud and abuse 
everywhere, but some kinds of spending are pro-growth rather 
than a drag on the economy even when we do have deficits. I'd 
like to hear your comments on that.
    Mr. Greenspan. Well, what specifically would you like me to 
comment on first? That's a pretty broad subject.
    Mr. Petri. Well, it obviously is a broad subject. What I'm 
curious to know is whether we should cut back on education and 
infrastructure investment in order to improve the deficit 
numbers, or whether we should go ahead and invest prudently but 
maintain and even increase investment in infrastructure and 
education in order to get a return from it for the economy 
which will help us reduce the deficit long term.
    Mr. Greenspan. We have basically, in my judgment, 
overcommitted in this country for the longer term. In other 
words, as I've said elsewhere, I believe that we have made 
commitments which I think we're going to have considerable 
difficulty actually delivering on. And it's essentially a 
problem which happens to us periodically, and we have many such 
claims on limited resources of which education is one, and it 
is a critical one.
    I think we are fortunate in certain respects in that the 
private sector is picking up a very considerable part of the 
educational system, the re-education system. I mean, for 
example, there's been a major increase in what we call 
corporate universities, where there's a very substantial amount 
of learning that's going on within businesses. And the 
community colleges are rising at a fairly rapid rate. Remember, 
of course, that the vast majority of education spending in this 
country is state and local, and that a limited part, I believe 
less than 10 percent, is Federal.
    I do think that we have to find ways of employing our 
resources as best we can but there is no question that a 
crucial element in any budgetary policy is the aggregate GDP of 
the United States, or put another way, the revenue base from 
which all other expenditures essentially are financed. If 
education is a critical issue in creating economic growth, as I 
hope I tried to demonstrate in my prepared remarks, then 
clearly that is a major economic policy question. And while I'm 
not going to presume that I have great insights in how you 
allocate very large numbers of very important programs to a 
limited budget, I would say that I think education in one sense 
is probably more important than infrastructure if I were to 
have to choose between the two. I trust that that does not 
occur.
    But this is an increasingly idea-related economy, and there 
is less physical things involved in the value added that we are 
involved with. So I would put education at the top.
    Mr. Petri. Are there any techniques to maximize productive 
investment, rather than just throwing money? I mean, we were 
arguing here in the education area that we were measuring our 
commitment to education by how much money we were spending 
rather than by the results of that spending, and we're trying 
to switch that some. But is there anything that you'd like to 
highlight in that area to try to--in the private sector, you 
look at return on investment. We need to figure out some way of 
figuring out whether we're investing wisely or just throwing 
money at problems.
    Mr. Greenspan. I agree that measuring the input, which is 
putting the money in, is not a necessarily accurate measure of 
the output. I don't know enough about how to test various 
different outcomes in the education system. I do know that it 
is important that we do that, because we are falling behind by 
any measure in our secondary schools. And I should think that 
we can rest on our legal infrastructure for just so much to 
create our ability to stay in the forefront of technology. But 
I can't see how we can move forward in this economy without 
having the right people run this very complex economy, which is 
getting ever more complex every year, which means that our 
student body has got to get ever more skilled every year. In 
other words, it's not a question of bringing the skills up to a 
specific level. We have to increase them every year or we will 
fall behind.
    Chairman Boehner. The Chair recognizes the gentleman from 
New Jersey, Mr. Andrews.
    Mr. Andrews. Thank you, Mr. Chairman. Good morning, Mr. 
Chairman, and we thank you for your testimony. This morning you 
have given us two, I think, clearly accurate statements, and 
you've given us a difficult reconciliation problem. A minute 
ago, you said that we've over-committed to longer-term 
obligations, and there are many claims on limited resources. I 
think you're absolutely right, that we are in grave fiscal 
distress for the long term in the country. You've then said 
that one of the--the highest priorities to sustain economic 
growth is increasing the skills of our workforce on a 
continuous basis, which I think is commendable, and admirable, 
and I agree with you.
    I'd like your counsel on reconciling the conflict. Conflict 
flows from this point. Although you are correct that there is a 
lot of private-sector investment in higher education--the 
corporate universities, online learning and so forth--it's also 
correct that students have to pay tuition, whether they're a 
laid-off auto worker or a person looking to get a promotion in 
her job, students ultimately have to pay the tuition. And the 
cost of this tuition is high and rising. Rising faster than the 
rate of inflation.
    Federal financial aid, therefore, is indispensable to the 
problem of getting more people more access to higher education. 
Let me ask for your advice with this set of facts. If we were 
to double the Pell Grant program over the next 5 years, it 
would cost us on a 5-year basis between $65 billion and $70 
billion. Above and beyond the money we're spending on Pell 
Grants right now.
    And if we were to expand the eligibility for, or use some 
other combination costs about $70 billion. The tax cut that is 
already law from 2006 to 2011, with respect to the top 1 
percent of taxpayers in the country, will deprive the Treasury 
of $665 billion of revenue.
    So one of the policy choices that we would have would be to 
reduce the tax cut for the top 1 percent by about 10 percent. 
That is to say that we'd give the top 1 percent 90 percent of 
the tax cut that they're getting, and take away about 10 
percent. That would finance a doubling of Pell Grants over the 
next 5 years. I would ask for your counsel on whether you think 
that's a good idea. If you think that it's not a good idea, 
that we should leave the tax cuts fully in place and not double 
the Pell Program, or if there's a third option that I'm 
missing. And if there is a third option, if you could identify 
it for us.
    Mr. Greenspan. You're merely putting options out there of 
which there can be 50 others very similarly phrased. I am, as 
I've stated previously, supportive of keeping the tax base as 
low as we can keep it, on the grounds that we need a very 
vibrant economy in the future to create a revenue base, which a 
great number of these particular outlays--from which these 
outlays can be met. I am concerned that if we start to try to 
raise tax rates to solve what is a very difficult problem with 
respect to what's in the budgets, we raise to an ever 
increasing extent a problem that the tax rates will become 
increasingly less productive of revenue. And indeed, that's one 
of the reasons why I argued, and have been arguing recently, 
that before we try to fill in the fairly large hole that is 
going to exist out past 2010 from revenues, that we look to 
what can be done--
    Mr. Andrews. Mr. Chairman, if I may. Do you think that a 
change as marginal as the one I've suggested would have that 
much of a deleterious effect on revenue? I'm suggesting that we 
leave in place 100 percent of the tax cuts for the top 99 
percent, and 90 percent of the tax cuts for the top 1 percent, 
in order to finance a doubling of the Pell Grant program. Do 
you think it would have that kind of huge impact on economic 
growth?
    Mr. Greenspan. Well, the reason it's difficult for me to 
answer is that if you take the particular proposal on Pell 
Grants, and then add 20 others, you all of a sudden find out 
that in each individual case, it's de minimis. When you add 
them all up, it becomes a bigger issue.
    Mr. Andrews. But you just said education was at the top of 
the list, so if you limit it to that, would you favor that?
    Mr. Greenspan. I personally would consider that as 
important. But--
    Mr. Andrews. Welcome to the club. We appreciate that.
    Mr. Greenspan. --this is an issue which the Congress has 
got to judge. I mean, I don't have a vote, you do. And--
    Mr. Andrews. You have a pretty important vote, too, though, 
I think.
    Mr. Greenspan. All I'm suggesting is--and I've argued this, 
and I think it's important--is, prior to even discussing such 
an issue, we ought to get Pay-go back in and discretionary 
caps, because I--
    Mr. Andrews. Amen. Amen. I hope the Republican budget 
resolution does that. My understanding is that the draft 
resolution does not that's being considered by the Budget 
Committee today.
    Mr. Greenspan. I think that--I've argued since September of 
2000, when it looked as though they were not going to renew 
Pay-go, that not renewing it was a bad mistake. I still believe 
that, and I do not know how one can grapple with the problem 
that you're showing in microcosm, without having a structure 
which enables choices to be made in a--
    Mr. Andrews. Mr. Chairman, we'd like to take you down the 
hall to the Budget Committee and have you give them that advice 
before they vote on the budget resolution today. Thank you very 
much.
    Mr. McKeon. Chairman Greenspan, thank you for being here 
today, and thank you for your testimony. As you notice, 
everybody's listening very carefully to the things you have to 
say. I reviewed a study this morning that showed how important 
the American people see education as a life-long basis of our 
economic stability. But skyrocketing tuition rates are making 
it harder and harder for middle and lower income students to 
pursue the dream of a higher education. This is clearly a 
problem that Congress must address in some fashion this year, 
as we re-authorize the Higher Education Act.
    Some believe the answer is increasing mandatory Federal 
spending on student aid programs by billions of dollars. Some 
feel that we're at about the correct level right now, but that 
we should make college costs and quality more transparent to 
give higher education consumers--the parents, the students--
more information so that they can make better decisions in the 
higher education market place.
    In nearly every other sector of the economy, the more 
transparency and useful information consumers get, the better 
decisions they make, and the more effective market forces are 
in improving quality. Do you think transparency and market 
forces could have the same effect on higher education 
institutions?
    Mr. Greenspan. That's an interesting question, Congressman. 
Frankly, I haven't given it terribly much thought, but I must 
say I'm inclined to find your argument somewhat persuasive.
    Mr. McKeon. Let me ask one other question. And that is, you 
testified recently in the House Budget Committee. I believe you 
made the comment that variable rates have been good for the 
American consumers. Probably with regard to home purchases, and 
the things that--the way the interest rates have gone down the 
last few years. One of the things we're considering in the re-
authorization of the Higher Education Act is variable rates in 
re-payment of student loans. Would that, do you feel, also be 
of benefit to the students?
    Mr. Greenspan. Well, Congressman, I think that the notion 
that I was in favor of adjustable-rate mortgages rather than 
the 30-year mortgage was the result of my speaking imprecisely. 
And actually, it was a speech. It wasn't at a Committee 
hearing. So, I think that adjustable-rate mortgages were a 
valuable addition, but the 30-year mortgage has been a 
crucially important issue in this country, which has enhanced 
home building.
    To what extent do you have choice within student loans, or 
any other form of loan, I think is important. In other words, 
if there was a demand for a certain type of tradeoff between 
maturity interest rate and the payment schedule, I'd let the 
market determine what basically is the right type of structure 
for that.
    Mr. McKeon. Clearly, the ability of our educational system 
to educate significant numbers of scientists and engineers, 
which you've addressed, will be critical to our overall ability 
not just to compete in today's high-tech economy, but to be 
innovative and create the industries of tomorrow. But our 
institutions are falling behind in this regard. A 2002 survey 
found that U.S. higher educational institutions only graduated 
one-sixth the number of graduates with science and engineering 
degrees as those in Asia. And even though we're about to see an 
overwhelming increase in college-age students, our traditional 
higher educational institutions are not prepared to handle 
these increased enrollments.
    Given the nature of the problem, how important is it that 
we use other means and other educational innovations, such as 
distance learning and reducing the restrictions on for-profit 
institutions, to provide these students the education that 
they'll need to compete in the knowledge-driven economy of the 
future?
    Mr. Greenspan. Congressman, I think that it's important 
that we flatten out the currently still gradually rising spread 
between college and advanced degree workers, if I may put it in 
those terms, and those with only a high school diploma. The 
only way to do that is to increase the supply, and any means 
that we have to increase the supply of highly skilled workers 
is to our advantage on two fronts. One, it obviously enables 
our economy to function far more efficiently. But it also 
brings down those premiums, which as I mentioned in my prepared 
remarks, are a significant factor in the concentration of 
income in this country.
    So, I think that anything that we can do that either moves 
the skill levels from fourth grade through high school at a 
more effective pace, or find other ways to augment our learning 
ability through community colleges, through corporate 
universities, or even, as you say, Internet learning--anything 
that we can do to enhance the skill level of the American work 
force is crucial to our long-term development and the stability 
of our society.
    Mr. McKeon. Thank you very much. Mr. Kucinich.
    Mr. Kucinich. Thank you very much, Mr. Chairman. Mr. 
Chairman, any discussion of workers in a new economy should 
include a systems approach. And as Mr. Boehner's question to 
Chairman Greenspan and his response regarding moving students 
into the system clearly demonstrate, I'm going to focus my 
questions here on those who pass from the new economy work 
force to retirement.
    Now, Chairman Greenspan, you testified before the Budget 
Committee that Congress should consider raising the age of 
retirement for full Social Security benefits. In 1982, you 
chaired the commission that also recommended raising the age of 
retirement. Congress did as you suggested back then, so there 
is reason for concern that Congress might be persuaded to 
listen to you now.
    You recently justified raising the age of retirement from 
67 to something higher by citing a rise in life expectancy. You 
proposed that there ought to be an adjustment, and this is a 
quote, ``So that this ratio,'' and you were talking about life 
expectancy to the number of years the typical worker will 
receive Social Security, ``stabilizes.'' But I would suggest 
this is not as fair as it would seem. Though the average life 
expectancy is indeed rising, the age at which American workers 
choose retirement is not rising.
    As you surely know, about half of all people reaching 62 
retire the month of, or month after their 62nd birthday. Nearly 
two thirds are retired by their 63rd birthday. They pay a price 
for retiring at 62. When people take early retirement, their 
monthly benefits are decreased to take account of the longer 
period of retirement over which they will receive benefits.
    For example, for people who retire at age 62, their full 
retirement benefit age is 67, and their monthly benefits will 
be reduced by 30 percent. So the super majority of American 
workers choose to retire early, even though it means a 
reduction in their monthly benefits. Now, why do people do it? 
Well, the reasons are probably that people's bodies are worn 
out. Their backs and their joints and their muscles. They're 
not able to keep working, though advances in medical technology 
could keep them alive longer.
    The key point, Mr. Greenspan, is that life expectancy does 
not reflect work life expectancy. In America today, the real 
retirement age is 62. Therefore, the real meaning of raising 
Social Security full retirement age is that it increases the 
magnitude of the reduction in Social Security benefits most 
Americans can expect to receive when they retire. Now, you now 
propose raising their Social Security retirement age further. 
Raising the retirement age to 70 will decrease the monthly 
benefits of a super majority of retirees by 40 percent.
    I find nothing in the record to suggest that concern has 
been shown about the predictable effect of removing full 
benefits further and further away from a population that is not 
working longer, no matter that they're living longer. And the 
predictable effects, if I could say--our senior citizens are 
not going to be able to pay their mortgages or taxes on their 
house, or to pay rent, or to pay medical expenses, or pay food 
bills, clothing bills. And such a plan is cruel.
    Now, Chairman Greenspan, what do you say to the majority of 
Americans who retire when they're 62 years of age, whose 
monthly Social Security benefit will be further reduced if 
Congress is persuaded to raise again the full retirement age, 
as you suggest? Do you say to them ``You should be working, not 
claiming retirement?'' Do you say ``Since you choose to retire, 
you have voluntarily accepted lower income, and therefore 
should accept that you will have to make due with less? Split 
your pills even further, forego meals, or any of the other 
essentials of modern living?''
    Do you say ``You should have saved more when you were 
working, even though real wages have been stagnant, so people 
are borrowing, not saving, and the quarterly consumer debt is 
at a record high?'' Do you say ``Increasing the income of the 
wealthiest by making permanent the President's tax cuts is 
somehow better for the common good, including the majority of 
Americans who retire at 62, they're maintaining the monthly 
Social Security benefits of those majority retirees?'' Or do 
you say ``You know, it's not my concern?''
    Now, here's the question. The new economy. There are 
pressures for early retirement. Now, are pressures for early 
retirement going to be increasing because skills are needed, 
and decreasing in the aging population, or are pressures for 
later retirement, let's say at age 70, going to be increasing 
because skills are increasing in an aging population?
    Mr. Greenspan. Congressman, ideally, we should have solved 
the Social Security problem back in 1983, in the sense that at 
that particular time, the projections seemed to create 
sufficient revenues and a balance of benefits which would 
maintain the system in balance in perpetuity. It's fairly 
clear, more recently, that that's not going to be the case, and 
it's even more of the case by far, indeed, that we have 
difficulties with respect to Medicare.
    The point that I was making a week or so ago was that we do 
not have enough in the way of real resources to meet the 
promises that we have already made. In other words, we will 
not, with regrettably a high degree of probability, not be able 
to fully meet the commitments that we have made to the next 
generation, the Baby Boomers, who are retiring. And it's my 
judgment that if indeed that is realistically the case, we have 
to construct a pattern in which the benefits that we do 
promise, we do, in fact, deliver, and not have these people all 
retire in very large numbers and find out that they were 
betrayed by government.
    Mr. Kucinich. Mr. Chairman, I just have one question, 
though, and that is that--are your statements based on your 
discussions with the Social Security Trustees, or have you ever 
asked for the actual actuaries' assessment, or analysis, to be 
released? Because what I understand is that your statements are 
based on an analysis offered by the trustees apart from the 
actuaries.
    Mr. Greenspan. No, I would say that I'm merely repeating 
with respect--let me just phrase it from what I was saying to 
the nature of your question. The pointed issue is that we've 
got to make choices. And all of the choices, regrettably, are 
negative. We don't have the resources. And--
    Mr. Kucinich. Was the $87 billion in tax cuts a negative 
choice?
    Mr. Greenspan. Let me just finish quickly.
    The Chairman. The gentleman's time has expired.
    Mr. Greenspan. The problem that I'm raising, with respect 
to the issue of tying the age of eligibility to longevity is an 
issue which has been discussed at great length by Social 
Security actuaries, technicians, economists, analysts. It's one 
of the many items that are on the agenda to bring the system 
back into balance. None of them are any good in that respect. 
They're all negative. That's one of the great difficulties that 
what this sort of problem is. I'm not saying I prefer it. I 
prefer otherwise. But we have to make some choices.
    Mr. Kucinich. Thank you, Mr. Chairman.
    Chairman Boehner. The Chair recognizes the gentleman from 
South Carolina, Mr. DeMint.
    Mr. DeMint. Thank you, Mr. Chairman. Mr. Chairman, thank 
you for focusing the Nation on the competitiveness of our work 
force today. And as you have discussed, we have a very intense 
national debate going on at this time about our jobs, how to 
keep the ones we have, how to create the jobs of the future. 
The two sides seem to be giving us two choices. One is, do we 
hide from international competition with more trade barriers, 
or do we focus on how to make American businesses more 
competitive?
    There are lots of issues, many of which you've discussed. 
Our tax code, our energy costs, our lawsuits, our health 
insurance, our regulations, that make it more difficult to do 
business in this country. But today, we're focusing on how to 
create a more skilled and competitive work force. And I frankly 
believe, waiting to post-secondary levels is waiting too late. 
We're losing too many kids, and we're not preparing them for 
the jobs of the future.
    But my two-part question to you, Mr. Chairman--is trade the 
greatest threat to our jobs, or is it our education system? And 
in that context, do you believe we need to go beyond supporting 
education with our talk and our money to fundamentally changing 
our primary and secondary education system by teaching 
academics in the context of skills and careers?
    Mr. Greenspan. I don't know the answer to that, 
Congressman. I think it's the crucial question for our 
education system. And while I've been exposed to a lot of 
people who are professionals in this area, I've never sensed a 
satisfactory solution to the type of problems that we see. And 
I trust that we'll continue to focus on this question, and find 
ways to enhance our capacity to develop the skills that are so 
crucial to this system.
    Mr. DeMint. Just back to the trade question, because those 
choices are being presented to us. Do we restrict trade and 
international competition, or you seem to be saying that the 
answer is not doing it that way, but to make us more 
competitive as a nation. I mean, is that the way I hear you?
    Mr. Greenspan. What has made the American economy great is 
that we allow ourselves to be exposed to more competition than 
virtually anyone else in the world. And as a consequence of 
that, we have honed our skills to the point to raise our level 
of technology. And in that context, raised our standard of 
living, which would not have occurred if we were not exposed to 
globalization. As I indicated earlier, globalization is a very 
disruptive process. But at the end of the day, it creates major 
advances in standards of living, and all of the things that 
occur as a consequence of that.
    So I am fearful that we will start to find competition too 
frenetic, and try to rein it in in some form or another. 
Indeed, we do try to do that. I think that's a mistake. We've 
got to find ways to reach forward, to recognize that the more 
competition we are exposed to, the more difficult it is for us. 
But at the end result, it forces us to go to a higher level of 
production, technology and advancement, which I think has been 
what has made this country great in all respects. And I think 
if we were to back away on the trade side, I think we would 
find much of the extraordinary gains that we have made in the 
post World War II period would start to fade.
    Mr. DeMint. I agree, and thank you, Mr. Chairman.
    Chairman Boehner. The Chair recognizes the gentleman from 
New Jersey, Mr. Payne.
    Mr. Payne. Thank you very much. Thank you, Mr. Greenspan 
for the opportunity that I have had to be on the Committee that 
you came before, and I think that your interest in education is 
very paramount. I'd just like to mention a few things that's 
going on right now. We hear that tax breaks are still on the 
table, and people want to make some of them permanent. We've 
heard the administration preach that it's your money, you can 
do better with it. Why should the government take it? And all 
that's good, and it sounds great, and I was the average person, 
yeah, why should I give my government all of this money?
    However, in 2003, we had a military budget of about $360 
billion. In March we had a $67 billion emergency. Again in 
October, another $87 billion emergency. About a $154 billion 
emergency on top of $360 billion basic budget. This year, the 
military budget is $420 billion without Afghanistan and Iraq 
included in it. We don't know what Iran and North Korea has in 
the back. So, this preaching about it's your money, keep it, 
government can't do--you could do more with it than we can, I 
think is really irresponsible, especially since, at the rate of 
last year's appropriations, we've spent almost $10 billion 
weekly on military and military-related activities. I think 
it's irresponsible to tell the American people you should keep 
it in your pocket.
    Secondly, and I think we should have a strong defense, 
don't get me wrong. However, if we keep preaching that, and 
it'll all go to military spending, then there would be no 
discretionary funding. We're down to 4 percent now. The second 
question is, because of the deficits in the states, we're 
seeing state colleges, which are funded primarily through 
states and low tuition, having an explosion in their tuitions. 
Therefore, lower income kids who normally go to state colleges 
are certainly going to be hurt and make it unable to go to 
these schools in some instances.
    And when we talk about education, Jonathan Kozar, who is an 
education person, talked about the digital divide, about two 
Americas. And when we talk about education, we're going to have 
to talk more about just teaching in the classroom, but how do 
we get computers to people, how do you have an environment that 
you can study in, how do you have adequate houses? So this 
education piece is a big, big piece.
    So my question is, in times of national emergency, we've 
always had shared sacrifice. World War II rationing, etc. Food 
rationing, oil rationing, and so forth. If we continue to have 
these tax cuts while we are at war--the President said we're at 
war on terror--that is not shared sacrifice, because a 
privileged group is going to get the tax breaks.
    And so, I wonder what is your opinion in light of our war 
that we're on at present--Bush says we are--on terror, and the 
increasing that we're going to have to spend. It's a half a 
trillion dollars last year, and it'll be a half a trillion 
dollars this year. Over $10 billion a week on military 
expenditures.
    Secondly, the other quick question is, in ``The Price of 
Loyalty'' by Paul O'Neil, he said that he believed that 9/11 
only had a small impact on the economy, and that the economy 
fully recovered thereafter. And I just wonder what is your 
assessment on that statement?
    Mr. Greenspan. Well, it is certainly the case that the 
American economy proved extraordinarily resilient to the events 
surrounding 9/11. Indeed, to the events subsequent to that 
period. We had a very shallow recession. Indeed, that's one of 
the reasons why the recovery started so late. Because it had 
barely gone down very much. On the issue of how one distributes 
resources is at the core of a democratic society. And what I'm 
arguing strenuously for, is to get a budget process in place 
which facilitates the choices to be made by the Congress on 
issues, Mr. Payne, of exactly those that you raised.
    There are differences. I mean, I happen to be concerned 
about the necessity of maintaining a tax structure which will 
enhance economic expansion, enhance the revenue base. But there 
are other opinions which could readily be important, and 
perhaps carry the day. But what I do think is important is to 
have a structure which enables that debate to go on in a manner 
in which a resolution is feasible, rather than people talking 
at cross purposes.
    And that's why I thought Pay-go and the discretionary caps 
that we put in in the early 1990's facilitated those debates in 
a way which I frankly was quite surprised. And I think we need 
to go back to that, and until we put on the table all of the 
various claims on national revenues, against the actual 
revenues available, I think it's going to be an issue of all of 
us talking at cross purposes. And it is important to resolve 
the question that you are raising. And there is a difference in 
this country on that.
    Chairman Boehner. The Chair recognizes the gentleman from 
Delaware, Chairman of the Education Reform Subcommittee, Mr. 
Castle.
    Mr. Castle. Thank you, Mr. Chairman. Chairman Greenspan, I 
would like to focus on the connection between education, 
particularly K-12, and perhaps No Child Left Behind, although I 
realize you're not necessarily an expert on that. But you're an 
expert on a lot of things you're not supposed to an expert on, 
so who knows? You probably know more about it than most of us. 
And the economy today. My sense is that the economy, as you've 
suggested in your testimony and so often before another 
Committee--I'm on the Financial Services Committee--and 
otherwise publicly, that the economy has changed dramatically. 
And as you've indicated, it's probably going to change even 
more dramatically here in the next few years.
    Education does not appear to have made the same changes. In 
my judgment, there's a direct corollary there. You need to up 
your education to meet what you have to do in the work place. 
And I'm not sure that we have really successfully done that 
here in America. You've cited before, and again today repeated, 
that we seem to do fairly well early on, and then there seems 
to be a drop-off at some point, perhaps from fourth grade on, 
in education in America. We in this Committee passed No Child 
Left Behind a couple of years ago, and that's out there now.
    As I'm sure, undoubtedly, you have read, it's being 
questioned by some. Others say it's under-funded. Nobody really 
questions, I think, the goals of ultimately educating better. 
One aspect of that is that we divide these kids into groups and 
sub groups, including minority groups, English as a second 
language, children with disabilities, and in an effort go get 
them all up so the schools are no longer under review. A lot of 
educators are critical of that. They feel that the schools are 
put under too much scrutiny, we're teaching to the tests, these 
kids can't make it, or whatever it may be.
    But within all those stories, I keep seeing that silver 
lining, which is the teachers and the educators are talking 
about what they're doing in order to get their kids ready, and 
so they can be able to eventually pass the tests and be able to 
do better. Which to me leads to greater economic productivity 
if we are able to do this.
    Are we on the right track with respect to what we have 
done? I'm not asking you to opine necessarily on No Child Left 
Behind, but the whole concept of taking some dramatic gear 
shifting in terms of our educational system? Not in a way that 
would be punitive to anybody, but in a way that hopefully would 
be rewarding to the students, and giving them the opportunity 
to be able to compete in our economy. Do we need something of 
that nature, or can we just continue to go as we're going in an 
educational point of view?
    Mr. Greenspan. Well, if you believe the statistics on 
educational excellence in this country versus those of other 
countries--and there is, I might add, some question about 
whether there are biases from one country to the other in the 
data. But the changes are so dramatic for the United States. 
Our fourth graders seem to be doing reasonably well. So it 
can't be that there's something inferior in the base that we're 
dealing with. It's already demonstrated to be effective.
    So we do something which is not the same as a number of 
other countries. Most other countries seem to bring their skill 
levels of the younger educated people in the primary and 
secondary schools up at a faster pace than we do. Now, I don't 
know what they do to do that. I will say this, however, that in 
spite of the problems that we have, we still manage to make 
very effective use of the work force that we have, or we would 
not be experiencing the productivity gains that we currently 
have.
    So there are other things involved other than education per 
se. And as I pointed out, the major issues are the rule of law 
under which we function. But obviously, we can't go on in a 
situation in which for our highest skilled jobs, the wage rates 
continue to rise much faster than the average.
    Mr. Payne. But if I could just follow up quickly, because 
my time's going to run out. You at the end of your testimony 
talked about equal opportunity requires equal access to 
knowledge. And my sense is, in terms of that equal opportunity, 
that we need to do more to help those who perhaps need greater 
help. English as a Second Language, perhaps the Hispanic 
American population, the African American population, etc.
    Not necessarily get them to the skill levels that are going 
to create the new jobs, but to be able to fill those jobs, it's 
very important. I think that we have a rising tide, here. Would 
you agree with that? I mean, I worry about our population and 
some of the unemployment questions which are here. But I worry 
about their skill levels to be able to get in there if we don't 
educate properly.
    Mr. Greenspan. Well, I've not been able to fathom exactly 
what the causes of a lot of these particular problems are, but 
I do know that we not only need to raise the skills, but we 
have to increase them year in and year out. In other words, 
it's not a static standard that we're running against, because 
the conceptual composition of our GDP is continuing to 
increase, requiring ever higher skills to run the system.
    So, I can't address your question directly, as I frankly 
don't--I'm more puzzled by the question. I've got the same 
problem that you seem to express. I don't know what the answer 
is. But I know what the answer has to be. And what it has to be 
is something that maintains a degree of expansion in skills 
which is as fast as the change in the conceptual content of our 
output.
    Mr. Payne. Thank you.
    Chairman Boehner. The Chair recognizes the gentle lady from 
Minnesota, Ms. McCollum.
    Ms. McCollum. Thank you, Mr. Chair. We live in a global 
economy, and it's clear that the American higher education 
system is also part of this global economy. For example, we 
have tens of thousands of students from China and India being 
educated in American universities, and these students speak 
fluent English. They understand our culture, they graduate 
frequently--with advanced degrees, I might add--and they are 
immediately prepared to compete against the American worker at 
the highest levels in our country, or in theirs.
    Yet our country does not possess a similar highly educated 
population that possesses both the technical skills, as well as 
the language and the cultural skills to compete in the world's 
largest emerging markets. China, India, or the Arab world. From 
a national security perspective, we've seen these challenges 
presented in our intelligence and in our defense communities in 
having Americans with technical skills, but lacking the 
language and the cultural skills to allow them to function 
effectively, even in Arabic-speaking countries.
    Mr. Chairman, I know how important it is for this 
generation and the next generation of highly skilled Americans 
to also be able to speak Chinese, Spanish, or Arabic, while 
possessing the cultural skills to compete in this global market 
place. Or is the American-centered, mono-language work force 
going to be sufficient enough for our future? And I have 
another question.
    I serve on the International Relations Committee, and human 
rights in China has recently been discussed. As you so well 
pointed out, foreign entities invest in the United States 
because we have a set of laws that protects their property 
rights. We know we have jobs moving to China in part because of 
cheap labor. But along with property rights in the United 
States, we have workers' rights.
    Should we be asking for protections for workers' rights in 
the countries in which U.S. corporations are now taking our 
jobs? Does not this job gap in protecting workers' rights have 
a negative impact on the workers here in the United States? 
Thank you, Mr. Chair.
    Mr. Greenspan. Congresswoman, first of all, on the--let me 
answer the last question first, if I may. Individual cultures 
create certain rights for people within a society, and it very 
clearly is the case that the higher the standard of living, the 
more rights exist in a society. I mean, for example, in those 
countries with--who are struggling on the edge of maintaining 
standards of living, we find that child labor is rampant. We 
find that types of labor standards are virtually non-existent, 
and they would argue that they can't afford them. In other 
words, they will starve if they don't have them.
    I think the issue gets down to our putting standards out 
should be an issue not of economics, but of ethics and 
morality. In other words, we shouldn't be dealing with people 
who produce good with slave labor, or the equivalent. But, if 
we're substituting what we perceive to be a moral purpose, as 
really a change in name for what truly is protectionism, that 
we ought to avoid. And I think that I fully support what is a 
very--we are an ethical people, and I think we ought to 
essentially try to spread that around the world, but not use 
ethics as a guise for protectionism, which I fear, in too many 
instances, is really what it's all about. On the issue of 
multiple languages, it would clearly be the case--it would 
clearly be to our advantage if we had far greater language 
skills in this country. I mean, you take a small little country 
like Switzerland. There's more multiple languages--which 
everyone speaks, and speaks exceptionally well--than anyplace 
in the United States. We have been parochial, and for most of 
our history, we have been remarkably self sufficient.
    And what has happened is, that because of our extraordinary 
economic strength and military strength, English has become a 
major international language. So, the pressure for us to learn 
second languages has been much less than others. But at you 
point out, we're now seeing the consequences of that. There is 
a significant down side. I wouldn't call it economic, but it is 
a national security question. And I wish we had the 
capabilities that we don't have, and I fear that we are seeing 
certain consequences which we'd prefer are otherwise.
    If we had far greater skills--far broader skills in 
languages--I think, other things equal, we'd be more effective. 
But, while it's important, there are other things which I think 
clearly are more important to this society.
    Chairman Boehner. The Chair recognizes the gentleman from 
Oklahoma, Mr. Cole.
    Mr. Cole. Thank you very much, Mr. Chairman. And Mr. 
Chairman, it's an enormous pleasure to have you here, to, 
frankly, educate us a little bit, and then hopefully through 
us, the American public.
    Let me ask you, if I may. In the short time I've been here, 
I've seen very few public purposes for which we spend money 
that are not good public purposes. We may not spend the money 
as efficiently as we should, we may have some--certainly some 
waste, fraud and abuse, but the reality is, it's a good thing 
to defend the country, it's a good thing to educate your 
people, it's a good thing to fund some sort of social safety 
net so people have a decent living standard. We get very few 
bad public purposes. Most of our choices are difficult choices, 
because the purposes are good.
    Is there some sort of standard that you would have as to 
the proportion of national income that should go for public 
purposes as opposed to private investment and private 
consumption, that's commensurate with good economic growth and 
sound policy?
    Mr. Greenspan. Congressman, this is an issue which 
economists have been debating for a very long period of time. 
And the reason that the debate has become so vigorous is, it's 
very difficult to prove any particular level of income going to 
public purposes is optimum. And the reason is that, while one 
can make the theoretical case, and I would, that the more that 
you get to public purposes, the lower the standard of living. 
Because at the end of the day, central planning is the ultimate 
public purpose allocation. Central planning has been an utter 
disaster as an economic policy. As the Soviet Union 
demonstrated, indeed, when the Berlin Wall came down, the 
massive changes around the world away from that, were dramatic. 
So, at the extreme, we know that there is an upper limit. We 
also observe that there are certain countries--relatively 
smaller countries--which have managed to have very high 
proportions of their national income going to public purposes, 
and still maintain fairly high standards of living.
    Others have not been able to do that. My own impression is 
that it's always best to try to get that number as low as you 
possibly can, because I do think history does, in large 
measure, support that maximum economic growth will come from 
maximum private participation--private competition, which is 
the real issue. But, there are always exceptions to this, and 
as a consequence, saying that a specific number is correct is 
very difficult to support.
    Mr. Cole. I appreciate the broad perspective. Let me ask 
you this, just as a follow-up. I agree very much with the point 
that you've made, that we have over-promised, over-committed in 
a variety of ways. We'll have the debate in Congress over which 
ways and how much. But looking forward from where we're at now, 
if we have to, as we do, come to grips with this, would you 
come down in favor of adjusting the obligations and 
commitments, as difficult as that is, downward in some cases, 
or at least in some sort of different fashion, or changing the 
tax rates, and taking a larger proportion of the total income 
of the country and directing them toward sustaining the public 
purposes as we've defined them so far?
    Mr. Greenspan. Well, Congressman, as I've testified 
elsewhere, the evidence, even though we can't get optimum rates 
of where we put taxation is if you continuously raise the tax 
rate, at some point you run into very significant diminishing 
returns and you will find that solving a problem of shortage of 
resources by increasing taxes at the end of the day has high 
risks associated with it, and so I argue that we ought to first 
focus on the excess of commitment over available long-term 
resources by seeing what we can do on the expenditure side 
first, before we revert to looking at using resources through 
increased taxation.
    I don't deny that the size of the gap on what we have 
committed largely to retirees in the baby boom generation is 
quite significant and that it is unlikely to be fully closed 
from the spending side, because the commitments are so large, 
but I do think that if we start by first raising taxes and then 
starting to look to what we have to do on the expenditure side, 
I think it is going at it in the wrong direction.
    Chairman Boehner. The Chair recognizes the gentleman from 
Ohio, my colleague, Mr. Ryan.
    Mr. Ryan. Thank you, Mr. Chairman. Mr. Chairman, it's a 
pleasure to be here before you.
    A couple of questions I'd like to ask.
    One, first I represent a district in northeast Ohio which 
has just been devastated by the manufacturing issue that we 
have and part of the problem I think we are facing is that 
these people, they seem to be trapped into a cycle that they 
just can't get out of.
    One of the issues that Ms. McCollum discussed is the labor 
standards in these agreements. Would you be willing to support 
in the CAFTA we are going to start debating labor standards?
    Mr. Greenspan. Congressman, as I indicated to your 
colleague, labor standards truly based on American ethics is 
something we ought to adhere to but if it is actually 
protectionism disguised it is a mistake.
    Mr. Ryan. If we did it on moral grounds, because as you 
talked about in your statement, which I thought was very 
eloquent, the strength of our system is what undergirds our 
economic system is justice and contract law.
    I think it is equally as important for social justice 
issues too, especially in an era where we have most countries 
looking negatively on our country. So these social justice 
moral reasons, if we did it in that context, would you be 
willing to support it?
    Mr. Greenspan. Well, I think that you can't impose American 
standards on other people. One of the things that we insist 
upon is that we are free and sovereign and I would presume our 
foreign policy presupposes that those with whom we deal are 
also free and sovereign.
    To tell other countries that they must change their labor 
laws or change their health laws or whatever merely because we 
think it is better I think is clearly inappropriate.
    If, however, we are dealing with the importation of goods 
for example made by slave labor, that to me is egregious and 
clearly something that we should not be doing, indeed the 
private sector should not be doing and it really shouldn't 
require a Federal statute to prevent that.
    But in listening to most of the discussions on this issue, 
I have come to the conclusion, I hope incorrectly, that too 
much of it is an endeavor to put up barriers to imports into 
this country, which I think would be to our disadvantage.
    Mr. Ryan. Can you explain to me, how is it different for us 
as we are negotiating these trade agreements to say to another 
country we don't want to impose our labor standards but aren't 
we, when we deal with intellectual property, aren't we asking 
them to play on their playing field?
    Mr. Greenspan. No, we are in that regard talking about the 
issue of property rights, and with respect to the question of 
property rights, we are essentially saying to certain countries 
that some of your citizens are involved in theft, theft of our 
property, and with respect to those kinds of rights, say the 
law of contracts, those are the types of principles which we do 
engage in with respect to trade and should.
    But to require that there be a change in the way societies 
are organized with whom we trade I do think is inappropriate.
    Mr. Ryan. So there should be a different standard for 
property rights versus what we would consider human rights?
    Mr. Greenspan. No, because we are not trading human rights. 
We are trading property. I mean if we were--I hope we trade in 
human rights. But remember, goods and services are property and 
therefore property rights are the relevant consideration.
    Human rights are issues which I think very crucially come 
up when we are dealing with whether we recognize certain 
countries or not diplomatically, but remember, trade is an 
economic issue and trade refers to physical goods and services 
and trade cannot exist without laws of contract and without 
property rights.
    Therefore, they are the appropriate mechanisms which we 
negotiate for. When we are dealing in other areas, for example, 
as I said, whether we recognize a certain country or deal with 
them, then human rights are a very critical and indeed for us 
to deal with countries without recognizing that they don't meet 
the standards that we have in this country I think that in 
dealing with them we must recognize that and deal accordingly.
    Chairman Boehner. The Chair recognizes the gentlelady from 
Colorado, Ms. Musgrave.
    Mrs. Musgrave. Thank you, Chairman Boehner.
    Chairman Greenspan, in your testimony you alluded to job 
loss to low wage China, and you talked about protectionism 
coming into play as a solution. As I listened to that 
testimony, you also talked about other nations retaliating for 
that, in effect a simple solution to a very complex problem.
    Could you elaborate on what other nations would do in 
response and what the long-term effects would be of that?
    Mr. Greenspan. Congresswoman, I think we have the very sad 
experience of the 1930's to give us the most vivid example of 
what happens when you begin to start a protectionist spiral.
    We, as you are aware, introduced a fairly significant 
protectionist legislation in the late 1920's, and as the 
recession turned into a depression trade began to collapse as 
people pulled in their borders, created huge barriers to trade, 
and indeed exacerbated to the whole contraction of that period.
    During the post-World War II period, based on the 
experience of the 1930's, the United States in the lead started 
with the Kennedy round, the early 1960's, and developed a major 
unraveling of trade barriers which had developed. As I 
indicated earlier, this has been a major factor in the advance 
in standards of living of all of the trading partners of ours 
and others.
    We have run periodically into problems with respect to 
retaliation and fortunately we fended them off. We are 
currently now, as you know, involved in this export tax problem 
with Europe, and we have been involved in many occasions on 
difficulty in maintaining open trade, but by and large we have 
done remarkably well and what I am fearful of is that we will 
reverse that, in part because the trade negotiations over the 
years have largely made the major cuts that are immediately 
feasible in the sense we have picked the low-hanging trade 
agreement fruit and now we are getting into tougher and tougher 
areas of negotiation.
    But I think it is crucially important for us to move 
forward because all the evidence that economists have been able 
to adduce strongly suggests that it's been a major factor in 
world economic growth and especially the growth of the United 
States.
    Mrs. Musgrave. Thank you, Mr. Chairman.
    Chairman Boehner. The Chair recognizes the gentleman from 
Massachusetts, Mr. Tierney.
    The Chair would announce that in cooperation with the 
Chairman, the Chairman needs to leave at noon, and so it looks 
like we have got time for another member on each side.
    Mr. Tierney. I thank the Chairman. I thank you, Mr. 
Chairman, for your testimony here today.
    I am going to ask some questions. I feel compelled to make 
somewhat of a statement.
    I am glad to hear you say that it is appropriate for us to 
determine when we are recognizing a country whether or not they 
meet our ethical standards and things of that nature, but I 
think also it is entirely appropriate for us when we negotiate 
with a country in a direct bilateral manner or an international 
forum whether or not they are going to recognize human rights 
and whether or not they are in fact going to recognize 
international law and norms with respect to labor or 
sovereignty in particular with respect to our sovereignty when 
we are dealing with regulations.
    I think that there has been some discussion back and forth 
here today with this being somewhat of a false choice between 
protectionism vs. innovation and I don't think that is the case 
here. I think many of us are talking about making sure that we 
move forward, but we move forward in fair trade.
    Nobody wants to set up walls and barriers but everybody 
wants to move forward in an innovative way that creates some 
fairness and has a fair trade aspect to it.
    Let me ask a question. While the United States is being 
exposed to competition on a regular basis and we are seeing 
quite a bit of dislocation, should we do something to ease the 
transition for those that are displaced?
    I think you already gave us your opinion on the 
unemployment insurance extension and I appreciate that, but 
with respect to investing in education and training, you 
mentioned in your testimony the effect that the GI bill had. I 
would think that you might agree or tell me whether or not you 
agree that that type of an investment or concentration by us 
now in an effort of that magnitude, would that not be a fair 
thing to do for the people that are displaced as well as a good 
thing economically for the country moving forward on a 
competitive basis?
    Mr. Greenspan. Well, Congressman, I do think that the issue 
of the transition is critical, and indeed the ideal transition 
really is one that takes the person who is laid off, 
irrespective of the cause, and delimits the timeframe in which 
that person is out of work.
    What all my experience suggests is that it is education 
which basically enables a person to take certain skills that 
they had from their previous job and generalize what they know, 
especially given the education they have, to actually know how 
to function in a new job or even a new profession, and the 
timeframe--you want to narrow that as much as we can.
    So education here is crucial.
    Mr. Tierney. So that's a yes? You think that sort of a 
concentration would be a positive thing for us to do?
    Mr. Greenspan. Yes. Now the problem that we have with, for 
example the G.I. Bill or the like is that we have talked this 
morning about enumerable things, all of which were positive to 
be done in our society, and it is hard to know whether the 
particular resources that would be involved, for example in the 
new G.I. Bill are better used for other things. I don't know 
the answer to that.
    Mr. Tierney. I appreciate that, but we were talking about 
education and I just wanted to talk about the focus and the 
concentration, not necessarily a specific G.I. Bill, but the 
focus on education with that kind of intensity was what I was 
getting at.
    Let me ask you this also. In health care for people who are 
displaced I would think that you might think that was important 
and we would do something to help their transition period with 
health care, but also the positive effect it would have on our 
employers' competitiveness if in this country we could resolve 
the universal health care issue, and get that so that we could 
move forward on that.
    Would that be a fair statement?
    Mr. Greenspan. I think the health care problem is a very 
critical one, in large part because of our ability to forecast 
what the expansion and the cost of health care is going to be, 
not only in Medicare but with respect to issues of impact on 
various companies, impact on the society as a whole is really 
very tenuous.
    I think we have very little judgment as to where Medicare 
outlays are going to be in the years ahead.
    The problem that we have with respect to medical costs as 
it was reflected in labor costs and business costs is an issue 
that goes back, as you all know, to World War II when we 
essentially had wage controls and we did not have controls on 
benefits and we created a third party payment system which is 
what we are living with today.
    I don't know a simple answer to this problem.
    Mr. Tierney. Last, we do know the long length of time that 
people have been unemployed and that is why I talk about the 
need to do things in healthcare as well as education and the 
unemployment insurance. But as respects jobs that are being 
replaced, the lost jobs were paying about $44,500 annually on 
average and the jobs that seem to be replacing those are said 
to by paying about $35,000 or 21 percent less on an annual 
basis than the ones we have lost.
    Thirty states have fewer jobs than when the recession 
began. In Massachusetts I know that wages for jobs are--
replacing jobs lost are about 41 percent less on that. So I 
have some concern.
    When I looked at your testimony and listened to it again 
today you talked about the seemingly relentless pursuit of low 
product prices and high quality, features of the current, 
frenetically competitive economic structure. A sort of broad 
remark. I don't see people standing outside of Wal-Mart 
demanding in large number that they drive those places down at 
the expense of low paid employees with very little benefits, 
working part time and being shut in overnight so they can't 
even get out if they have a medical emergency.
    I think it is more in line with shareholders, or at least 
the perception shareholders demanding more and more in their 
dividend returns. For those people that are left in that type 
of jobs, don't you think that it would help our economy as well 
as them if we had some policy in place that would ensure that 
those people were paid a decent amount of money and that they 
had decent benefits so that they in fact could become 
customers, and wouldn't that sort of trump the idea that if we 
are going to have to get products from overseas, as you said, 
but at least with respect to the jobs that are at home, 
shouldn't we be setting policies to protect them, make them 
meaningful and put certain protections in place?
    Mr. Greenspan. Well, if you start to subsidize the levels 
of wages in particular areas I don't know where you stop. I 
mean I don't know what point you say you want to subsidize this 
company but not this company.
    Mr. Tierney. Excuse me a second. I don't think I mentioned 
anything about subsidization. I thought there will policies 
that would stop them from driving to the bottom, the policies 
that might disincline companies to start paying less and less 
and less and part-time instead of full-time.
    Mr. Greenspan. If you stop an individual company from doing 
it, other companies will do it, but what we will find--
    Mr. Tierney. That's why I talked policy. We're talking 
about an individual company. I just used that for an example.
    Mr. Greenspan. I think you will find that it is an 
extraordinarily difficult thing to do and indeed, frenetic as 
the competition is, remember, we as consumers are insisting 
upon high quality product at a low price.
    Unless that changes, you are going to get people who are 
going to supply that, and if you don't get it supplied by 
American companies then we are going to get it supplied by 
other companies, companies outside the country.
    I don't think there is actually a practical solution to the 
issue you are raising. I think it won't work.
    Mr. Tierney. Mr. Chairman, I don't know how you are going 
to get people to set up a retail operation--
    Chairman Boehner. The gentleman's time has expired.
    Mr. Tierney. I thought I might get the courtesy of just 
following up on--
    Chairman Boehner. I think I have given you the courtesy on 
three questions.
    Mr. Tierney. Thank you, Mr. Chairman for your cooperation.
    Chairman Boehner. Thank you. The Chair recognizes the 
gentleman from Michigan, Mr. Ehlers.
    Mr. Ehlers. Thank you, Mr. Chairman. And Mr. Chairman, 
pleased to see you here. I think the last time you were here 
was when I invited you several years ago to talk about math and 
science education. It'll be no surprise to my colleagues or to 
you that I bring this up again. But following on the question 
that was just asked about the lower wage workers, it seems to 
me that the jobs of the future are going to require better 
training, because we're going to have the better jobs. We'll 
continue to ship the lower jobs, or the poorer jobs overseas.
    And I just want to get your comments on that. It seems to 
me that one of the most important things we can do is to reform 
our K-12 educational system so that students have a basic 
understanding of the concepts of mathematics and science, so 
that they can more easily be trained for these higher-level 
jobs. Does this seem a reasonable approach to you, and do you 
have any other comments on that?
    Mr. Greenspan. Well, there are always entry-level jobs in 
any economy. And entry-level jobs, by their nature, are low 
paying, require very marginal skills, and they're not meant to 
be permanent in the sense it's a long-term profession. And the 
purpose of education is to enable people to move from entry-
level jobs up through the ladder as quickly as they can. And 
there's no alternative to teaching people. And I think one of 
the great advances in this country has been the extent to which 
we've created so-called corporate universities, and a whole 
level of internal company training, which goes on almost 
everywhere. More so than ever before. And how we do it, 
probably, is less important than that we do it.
    I think we can do it far better than we are doing it in 
this country. But at least the pressures for us to recognize 
that we have to escalate the skills of our people are there, 
and I think that most companies, especially those in the areas 
at the cutting edges of technology, find that they have to do a 
very significant amount of training themselves to bring the 
people up to the level of technical skills that are required to 
actually staff the complex infrastructure that we have.
    Mr. Ehlers. Now, it seems to me there are two aspects to 
it. One is the corporate university, or the company training 
programs. And I understand they spend about $26 billion a year 
at that, training for specific jobs. What I'm interested in is, 
what is our responsibility as a nation to provide the 
preliminary training, so that people are easily re-trained for 
these higher-level jobs?
    Mr. Greenspan. Well, in your previous occupation, you were 
quite familiar with the nature of these problems, in that 
knowledge has to start off with abstract principles. You need 
basically to learn concepts--how to think in the abstract, 
before you can apply it to a specific application. And what we 
presumably are teaching in our secondary--primary and secondary 
schools are the basic tools by which younger people learn--
learn to learn, I might say. That's why arithmetic, geometry, 
calculus, and hopefully differential equations and beyond are 
skills which people pick up in the abstract, and then can 
employ them in particular applications.
    Our school systems should be judged on the basis by which 
they produce a generic learning that enables people to be in 
several professions, or jobs, through their life work. And if 
you get training which is too narrow in the beginning, without 
the abstract capabilities that one learns, or should learn, in 
primary and secondary schools, your future is limited. And I 
think it's so critical that we teach people how to learn.
    Mr. Ehlers. Thank you very much, Mr. Chairman. I totally 
agree, and I yield back the balance of my time.
    Chairman Boehner. Mr. Chairman, we want to thank you very 
much for taking several hours of your time to come in and to 
share with us your ideas about the knowledge economy, and for 
those Members that didn't have an opportunity to ask questions, 
if you and your staff would be willing to answer those 
questions, I'd very much appreciate them.
    Mr. Greenspan. Thank you very much.
    Chairman Boehner. Hit them long and straight. It was nice 
to see you.
    I think we're going to proceed, and invite our next panel 
to come forward. The schedule on the floor is a bit uncertain. 
I think the best thing that the Committee could do would be 
just forge ahead.
    It's my pleasure to welcome our second panel today, and I 
appreciate the second panel's willingness to be patient and 
cooperative. Our first witness in the second panel is John 
Castellani. Mr. Castellani, I'm sorry, is President of Business 
Roundtable, an association of Chief Executive Officers of 
leading U.S. corporation. Business Roundtable boasts a combined 
work force of more than 10 million employees in the United 
States, and $3.7 trillion in annual revenues. And Business 
Roundtable members are considered at the forefront of public 
policy, advocating for policies that foster a vigorous and 
dynamic global economy.
    The second witness is Dr. Jared Bernstein. He's the senior 
economist at the Economic Policy Institute here in Washington. 
His areas of research include income and wage inequality, 
technology's impact on wages and employment, low wage labor 
markets and poverty, minimum wage analysis, and international 
comparisons. Glad that you're with us.
    And our last witness is Mr. Robert Grady, Managing Director 
of the Technology and Business Services Industries for The 
Carlyle Group. Mr. Grady also serves as a member of the board 
of directors of the National Venture Capital Association, and 
is a lecturer in management at the Stanford Graduate School of 
Business. And finally, he's a member of the Advisory Committee 
on Trade and Policy Negotiations, to which he was appointed by 
President Bush.
    With that, Mr. Castellani, you may begin.

     STATEMENT OF JOHN J. CASTELLANI, PRESIDENT, BUSINESS 
                   ROUNDTABLE, WASHINGTON, DC

    Mr. Castellani. Thank you, Chairman Boehner, and Ranking 
Member Miller, and all the Members of the Committee. I am 
pleased to see the Chairman again. He honored us recently at 
our session on the No Child Left Behind Act, and we appreciate 
your leadership and that of Congressman Miller and this 
Committee on this vitally needed education reform, as well as 
the leadership of the bipartisan majority in Congress that 
passed the law, and continued to support its goals.
    I am pleased to address the critical roles of education and 
innovation in our economy. American companies are already the 
world leaders in innovation in business. Their innovations 
produce opportunities to develop new markets for U.S. goods, 
services, and technologies around the world, which, in turn, 
helps our economy to grow and create jobs here at home. One of 
the keys to innovation is knowledge that empowers companies and 
workers to re-make themselves, so that they can meet new 
customer demands in the worldwide economy.
    But if our workers are to have the knowledge that they'll 
need to continue to fuel innovation, we must improve the way we 
educate our young people and train our current work force. 
Fist, we must recognize that our worker training system is 
outdated. It was developed to help a static labor market adjust 
to cyclical business changes. But today, in fact, we have a 
dynamic labor market that must adjust to structural economic 
changes.
    Across the Federal Government, there are a myriad of work 
force education and training programs, and streamlining these 
programs and making information more accessible to workers 
will, in our opinion, go a long way to improving their 
effectiveness. The Administration has proposed--their proposed 
community college initiative also holds promise for building 
partnerships between community colleges and employees with 
high-demand job sectors.
    This kind of partnership has been the model, and has been 
the model in the past, and is the model for needed flexibility 
and response in a training system designed for the 21st 
Century. As for our system of K-12 education, millions of 
children receive an education that simply does not prepare them 
for success in college, or the work world. And that is why the 
CEOs at the Business Roundtable are a strong supporter of the 
No Child Left Behind Act.
    The recent report of the American Diploma Project offers 
convincing proof that we must stay the course on the 
implementation of the Act. The report stated that the American 
high school diploma ``often serves as little more than a 
certificate of attendance.'' The project found that 53 percent 
of college students must take at least one remedial English or 
math class. And it also found that more than 60 percent of 
employers surveyed rated graduate's skills in grammar, 
spelling, writing, and basic math as only fair or poor. No 
Child Left Behind will help us meet these challenges. It 
establishes a goal of proficiency in reading and math for all 
students, and gives the schools the help they need to get the 
job done.
    There's no doubt that the goals of No Child Left Behind are 
difficult to achieve. But there is also no doubt that we must 
achieve them if we want to continue to have a growing economy 
and job opportunities. We believe that if we give America a 
school system that teaches all children to be proficient in 
reading and math, and prepared for college and the work place, 
and public policies that encourage growth and innovation, the 
success of our economy will be assured.
    In the last century, most jobs in the American economy 
required only unskilled or semi-skilled labor. Today, the good 
jobs, professional or skilled jobs, and they represent 62 
percent of all jobs in the years to come. Our economy is now, 
and in the future will be even more so, a knowledge-based 
economy. Now, recognizing this, U.S. companies invest more than 
$70 billion a year in job training. And let me give you a few 
examples of how Business Roundtable companies are investing in 
education and innovation.
    Texas Instruments has announced its intention to build a $3 
billion, 300 millimeter semi-conductor manufacturing facility 
in Richardson, Texas. TI looked at sites in the U.S. and 
abroad, and what clinched the deal for that site in Texas was 
how the state leaders worked with the company to create an 
economic development plan centered on research and development. 
Under the plan, the University of Texas at Dallas will receive 
up to $300 million to enhance its engineering and research 
programs to become a center for the basic research in North 
Texas.
    United Technologies is also a company that wants to have 
the best-educated work force, as their Chairman and CEO George 
David says, ``on the planet.'' Under its employee scholar 
program, United Technologies pays 100 percent of the costs for 
its employees to go back to school. And those who complete 
their degrees can receive an award in UTC stock of $5,000 to 
$10,000.
    And last fall, the University of Memphis opened the FedEx 
Institute--a public-private collaboration to advance world-
class interdisciplinary research, and introduce a new 
generation of highly skilled graduates to the work force. FedEx 
donated $5 million, and the Institute has forged relationships 
with many other companies and institutions, and it's becoming a 
real force in the Mid-South economy.
    Now, these companies and many others have a positive vision 
on how education and innovation can help keep America 
competitive. And unfortunately, there is a competing vision 
that's called isolationism. And it is difficult to imagine how 
the U.S. can become more prosperous by erecting barriers, or 
isolating itself from the worldwide economy. The Business 
Roundtable members believe that the right path to U.S. 
prosperity is to expand investment, promote trade, boost 
economic growth worldwide, and improve education and training.
    And to achieve these goals, the Roundtable supports an 
active policy agenda in key areas. First, we believe that 
Federal and state tax policies should emphasize incentives to 
make the U.S. more attractive for investments and research so 
U.S. industries can continue to innovate and be world leaders. 
Second, the U.S. needs to negotiate and force commercially 
meaningful trade agreements, to open foreign markets that 
remain closed to us, or that give an advantage to our foreign 
competitors.
    Third, we must spur other countries to adopt growth-
oriented policies, and do their part to develop the worldwide 
economy. Fourth, education and training programs must include 
greater assistance to help unemployed workers, or employed 
workers, to upgrade their skills, and help those who lose their 
jobs due to domestic competition, foreign competition, new 
technology, or increasing productivity, to train for new jobs.
    And finally, we must raise student achievement and interest 
in math, science, and engineering. If we do not, the talent 
pipeline for U.S. research and innovation is in jeopardy. The 
business community is committed to working with the government 
at every level, and with the American people, to seize the 
opportunities that the worldwide economy offers to keep our 
nation prosperous and strong. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Castellani follows:]

   Statement of John J. Castellani, President, Business Roundtable, 
                             Washington, DC

    Thank you, Chairman Boehner, Ranking Member Miller, and all the 
members of the committee for giving me the opportunity to testify 
today.
    I want to begin by congratulating this committee for drawing 
attention to the critical roles of education and innovation in creating 
jobs and opportunity for all Americans. America is already the world 
leader in innovation in business. Our companies and workers are 
constantly evolving to meet new challenges. Their innovations produce 
opportunities to develop new markets for U.S. goods, services, and 
technology around the world, which in turn helps our economy to grow 
and create jobs here at home.
    One of the keys to innovation is knowledge--knowledge that 
generates ideas and empowers companies and workers to remake themselves 
so that they can continue to lead and meet new customer demands in the 
worldwide economy. This means that America must have the strongest 
possible focus on the education and training of our current workers and 
our future workers who are now in our nation's schools.
    America has the best, most productive workers in the world and many 
of the best public schools in the world. Our colleges and universities 
are the envy of other nations. But there is great concern that our 
systems of education and training are in need of serious repair. We 
must make these repairs if our workers are going to continue to have 
the knowledge they will need to fuel innovation.
    First, we must recognize that our training system for workers was 
developed for an economy that no longer exists. It was intended to help 
a static labor market adjust to cyclical business changes. But for 
today and the foreseeable future, we have a dynamic labor market that 
must adjust to structural economic changes.
    Across the federal government, there are more than 120 workforce 
education and training programs. Streamlining these programs and making 
information more accessible to workers will go a long way toward 
improving their effectiveness. The Administration's proposed Community 
College Initiative holds promise for building partnerships between 
community colleges and employers in high demand job sectors. This 
partnership is the kind of model needed in a flexible and responsive 
training system designed for the 21st century.
    As for our system of K-12 education, millions of children continue 
to receive an education that simply does not prepare them for success 
in college or the work world. That is why the Business Roundtable is a 
strong supporter of the No Child Left Behind Act. It gives us the best 
chance to equip our young people with the knowledge they will need to 
succeed in a knowledge-based economy.
Why America needs No Child Left Behind
    The recent report of the American Diploma Project offers convincing 
proof that we must stay the course on implementation of No Child Left 
Behind. Three distinguished education groups--Achieve, Inc., the 
Education Trust, and the Thomas B. Fordham Foundation--worked together 
to produce the report, which says, ``For too many graduates, the 
American high school diploma signifies only a broken promise. While 
students and their parents may still believe that the diploma reflects 
adequate preparation for the intellectual demands of college or work, 
employers and postsecondary institutions know that it often serves as 
little more than a certificate of attendance.''
    The Project found that 53 percent of college students must take at 
least one remedial English or math class, with the percentage much 
higher for poor and minority students. It also found that most 
employers say high school graduates lack basic skills. More than 60 
percent of employers surveyed rated graduates' skills in grammar, 
spelling, writing, and basic math as only ``fair'' or ``poor.'' Another 
study estimated that the cost of remedial training in reading, writing, 
and math to a single state's employers was about $40 million a year.
    No Child Left Behind will help us meet these challenges. It 
establishes a goal of proficiency in reading and math for all students, 
and gives schools the help they need to get the job done. It is 
improving teacher quality, giving parents more of the tools they need 
to help their children learn, and closing the achievement gaps that 
have held poor and minority students back.
    There is no doubt that the goals of No Child Left Behind are 
difficult to achieve--but there is also no doubt that we must achieve 
them if we want to continue to have the best economy in the world. I 
will make this statement: Give America a school system that teaches all 
children to be proficient in reading and math and prepared for college 
and the workplace, and the future success of our economy will be 
assured.
America must have knowledgeable workers for a knowledge-based economy
    The American Diploma Project demonstrates that America's students 
lack knowledge and skills at a time when the workplace requires a 
higher level of knowledge and skills than ever before. In the 20th 
century, most jobs in our country required unskilled or semi-skilled 
labor, and our nation could survive with high school dropout rates of 
50, 60, 70 percent or more. But today the good jobs in our economy are 
professional or skilled jobs, requiring at least a high school diploma 
that represents real learning--not just attendance--and a significant 
additional amount of postsecondary education.
    Perhaps a better way of saying it is this: In the 20th century, our 
economy was based on brawn, while in the 21st century it is based on 
brains. That is why a Business Roundtable report issued last year was 
so troubling. It showed that the true high school dropout rate in our 
country is about 25-30 percent--nearly three times higher than the 11 
percent reported by the federal government.
    Even the most entry-level jobs today require literacy and some 
proficiency in math. A good example is an apprentice training to become 
a machine operator at Eastman Chemical Company in Tennessee, a member 
company of the Business Roundtable. The apprentice must be able to 
solve multistep problems such as computing the concentration and 
density of a solution given the weight of each component--a task 
requiring solid mathematical skills.
    The apprentices who must demonstrate these skills have learned an 
important lesson--our economy is knowledge-based. In the years ahead, 
high-wage professional and skilled jobs will constitute 62 percent of 
all jobs. Low-paid or low-skilled jobs will account for only 38 percent 
of jobs. Already, the most vulnerable workers are those with only a 
high school education or less. The average U.S. worker today with only 
a high school education makes the same real wage that the average 
worker made 25 years ago. But workers who are more educated are 
earning, on average, a wage premium of 77 percent more than a match 
group with fewer skills.
Companies are committed to education and training
    Recognizing the need to help educate, train, and prepare workers 
for lifelong learning, U.S. companies invest more than $70 billion in 
job training, and the Conference Board has reported that 205 large U.S. 
corporations contributed $1.3 billion to education in 2002. Let me give 
you a few examples of how Business Roundtable companies are investing 
in education in order to remain innovative and competitive.
    Texas Instruments (TI) has announced its intention to build a $3-
billion, 300-millimeter semiconductor manufacturing facility in 
Richardson, TX, that will produce the world's most advanced 
semiconductors. TI looked at sites in the U.S. and abroad. What 
clinched the deal for Texas was how state leaders worked with TI to 
create an economic development plan centered on R&D. Under the plan, 
the University of Texas at Dallas will receive up to $300 million from 
the state and other sources to enhance its engineering and research 
programs. TI sees UT Dallas as a center that can help address the 
increasing need for basic research in North Texas and nurture a 
community of research excellence that can benefit the entire region. 
This is an example of a leading American company partnering with a 
leading institution of higher learning, and it reminds us of the 
importance of our four-year colleges in improving learning and 
supporting innovation in our economy. Community colleges play a crucial 
role as well, serving as worker-training centers in hundreds of 
communities across our nation.
    United Technologies (UTC) is a company with an ambitious goal. 
Chairman and CEO George David has said, ``Our goal is to have the best 
educated workforce on the planet.'' UTC believes that while no one can 
guarantee a job forever, it can ensure a future for all of its 
employees and the best way to do that is by giving them an education 
they can use for a lifetime. Under its Employee Scholar Program, one of 
the most comprehensive employer-sponsored education programs in world, 
UTC pays 100 percent of the costs for employees, both in the United 
States and internationally, who go back to school. That includes 
registration, tuition, fees and books--and all of it is paid up front. 
Employees can enroll in classes and obtain a degree in any field, 
whether or not it is job-related. Students can receive up to half of 
their classroom time as paid time off for studying--a maximum of three 
hours per week. UTC further rewards its employee scholars when they 
graduate. U.S.-based employees who complete a bachelor's or graduate 
degree are awarded $10,000 in UTC stock and those who receive an 
associate's degree are awarded $5,000 worth of stock.
    Finally, let me tell you the story about the FedEx Institute of 
Technology. Last fall, the University of Memphis in Tennessee opened 
the Institute, which is a unique public-private collaboration designed 
to advance world-class interdisciplinary research and introduce a new 
generation of highly skilled graduates to the workforce. FedEx Corp. 
donated $5 million toward the new facilities. The company has more than 
219,000 employees globally and expects the alliance will help develop a 
highly skilled recruitment pool. The Institute will house 10 research 
centers focusing on an array of studies ranging from medical 
breakthroughs in cancer and alcoholism to artificial intelligence and 
RFID (radio frequency identification) tags. The FedEx alliance helped 
the Institute to forge relationships with other high-profile companies, 
including AT&T, AutoZone, Avaya, BellSouth, Cisco Systems, Computer 
Associates, Dell, EDS, Landmark Graphics, Methodist Healthcare, Morgan 
Keegan & Company, Steelcase, and Time Warner, and with institutions 
such as the St. Jude's Children's Research Hospital, Oak Ridge National 
Laboratory, the Technology Resource Foundation, and the U.S. Department 
of Defense.
    And those stories are just a few of the many important programs 
that Business Roundtable companies are undertaking to demonstrate their 
commitment to America's leadership in the worldwide economy. American 
companies make these investments because they understand that education 
and innovation are part of the same package. It will do us no good to 
have American businesses compete successfully in the worldwide 
marketplace and create good jobs here at home if there are no workers 
to fill them. And it will do us no good to have our schools and 
universities produce highly educated graduates if companies aren't 
creating jobs for those graduates to take. Jobs with no people, or 
people with no jobs will get us nowhere. Education and innovation will 
get us where we want to go.
    That is one vision for how jobs and opportunity can be created in 
our country. There is another vision in our country, and it's called 
isolationism. Some say that economic isolation is the best way to 
protect American industries and workers. But it is difficult to imagine 
how the U. S. can become more prosperous by erecting barriers and 
isolating itself from a growing worldwide economy.
A pro-growth agenda
    The Business Roundtable believes the right path to greater U.S. 
prosperity is to expand investment, promote trade, boost economic 
growth worldwide, and improve education and training. To achieve these 
goals, the Roundtable supports an active policy agenda that focuses on 
these key areas:
      Federal and state tax policies should emphasize 
incentives to make the U.S. more attractive for new investments and to 
undertake research so that U.S. industries can continue to innovate and 
be world leaders.
      The U.S. needs to negotiate and enforce commercially 
meaningful trade agreements to open foreign markets that remain closed 
to U.S. companies and workers or that give an advantage to our foreign 
competitors.
      We must spur other countries to adopt growth-oriented 
policies and do their part to develop the worldwide economy.
      Education and training programs must include greater 
assistance to help unemployed workers move to new jobs. The Business 
Roundtable recognizes that participation in the dynamic worldwide 
economy will lead to benefits for the overall U.S. economy, but will 
not always benefit every worker or business. Government and business, 
working together, must provide effective assistance to those who lose 
their jobs because of domestic competition, foreign competition, new 
technology, or increasing productivity.
      We must raise student achievement and interest in math, 
science, and engineering--the fields that will drive future innovation. 
New initiatives to attract talented young people to math and science 
teaching careers are especially needed. Without such emphasis, the 
talent pipeline for U.S. research and innovation is in jeopardy.
Our choice: Innovation or Isolation
    When it comes to securing economic growth and good jobs for 
America's workers, America has a choice. I call it ``Isolation or 
Innovation.'' The Business Roundtable does not favor isolation, and our 
research shows that the American people do not support it either.
    We commissioned Voter Consumer Research to conduct a poll of 
Americans between January 7-11. There were 1,049 respondents for a 
margin of error of +/- 3 percent, and we found that the American people 
truly want to ``work with the world'' to strengthen the U.S. economy 
and the economies of all nations. The survey found that:
      92 percent of Americans agree that isolating America from 
the world is not the answer to our economic problems, and that we 
should help American companies to compete in the world economy so that 
they can create new jobs and build economic strength in the U. S.
      94 percent agree that American companies will create 
long-term growth and new American jobs if they can meet their 
customers' needs around the world.
      73 percent favor encouraging American companies to re-
make themselves so they can stay ahead of the curve, succeed in a 
worldwide economy, and create new jobs in the U.S., as opposed to only 
24 percent who favor increasing government regulation on American 
companies that would make it more difficult for them to cut jobs in the 
U.S. and open up facilities in other countries.
    The business community is committed to working with government at 
every level and with the American people to seize the great 
opportunities that the worldwide economy offers to keep our nation 
prosperous and strong. Thank you very much.
                                 ______
                                 
    Chairman Boehner. Thank you, and Dr. Bernstein.

 STATEMENT OF DR. JARED BERNSTEIN, SENIOR ECONOMIST, ECONOMIC 
                POLICY INSTITUTE, WASHINGTON, DC

    Dr. Bernstein. I'd like to thank the Chairman for the 
opportunity to be here today in front of this Committee on this 
critical topic. Few would question the importance of 
maintaining and promoting a highly skilled labor force. It 
doesn't take expert testimony to remind us of the importance of 
education, not solely in terms of prosperity and international 
competition, but also because of the enumerable benefits to 
society, families, and individuals when each of us has the 
opportunity to realize our potential.
    These assertions are so widely agreed upon by economists 
and policymakers, that there's little need to present 
corroborating evidence. Instead, my spoken testimony will focus 
on two critical questions. Is there any evidence that the lack 
of skill is responsible for our current employment problems? 
Can the unusually weak jobs recovery that we're experiencing be 
explained by the lack of skill or education in the American 
work force?
    And second, while improving skills of our work force is 
always a good idea, is education the best policy solution for 
Congress to offer to the recent challenge posed by the so-
called off-shoring of service-sector white-collar jobs?
    The answer to the first question I posed is an unequivocal 
no. The weak jobs performance of the last few years is wholly a 
demand-side phenomenon. The problem is not the lack of skilled 
workers, it's the lack of jobs. There's no education or 
training-based solution that will help that problem, because 
it's a jobs deficit, not a skills deficit that's hurting the 
current labor market situation.
    Now, the second question about off-shoring is more 
difficult to answer, given that there's much that remains 
unknown about the magnitude of this phenomenon. However, the 
fact that advances in computing and telecommunication have 
created new and far less costly access to the large supply--
large global supply of skilled, relatively cheap labor, means 
that our skilled work force now faces a level of competition 
from abroad that has heretofore largely befallen our blue-
collar work force.
    What differentiates foreign workers from their domestic 
counterparts in this discussion is somewhat less a skills gap 
than a huge and gaping wage differential. By off-shoring 
skilled and semi-skilled white-collar jobs, U.S. firms are 
sending a clear market signal that these off-shored workers are 
worth the investment made by American firms. Note that 
throughout this recent period, when these concerns have 
surface, firms in affected industries, such as information 
technology, financial services, have been able to maintain 
historically high rates of productivity and profitability, even 
while their domestic hiring has stalled or contracted.
    Thus, while the extent of the phenomenon is unknown, it's 
highly likely to increase further, as will the intended anxiety 
it generates among domestic workers in affected sectors. The 
policy question is, can such workers, in our labor market, 
upgrade their skill sets to re-justify the large wage 
differentials that they currently enjoy? And the answer depends 
on how high the skill bar gets raised by off-shoring. But if, 
for example, our radiologists, our architects, our computer 
scientists are in need of skill upgrades, this may be setting 
the bar unrealistically high, and such workers could easily see 
their living standards decline.
    Now, one central question for this analysis is whether the 
lack of skilled or highly educated workers is what's holding 
back the current job growth. And evidence for this claim comes 
from a set of indicators which profile the conditions of labor 
market facing college-educated graduates. My question is, does 
the evidence support a claim made by an executive in a recent 
``New York Times'' report, for example, that the motivation 
behind the current wave of white-collar off-shoring was not 
solely lower cost, but also the lack of available, capable 
American workers.
    Now, a good proxy for the extent of labor-market demand for 
any particular group is the share of that population employed. 
And I have a figure that I think is--there's a figure in my 
written--there it is. That figure shows the trend in the 
employment rates of college graduates over 25, and particularly 
of college graduates of age 25 to 35. In both cases, you can 
see the employment rates have fallen steeply over the past few 
years at the end of those series up there. And more so than in 
any other period in the figure, dating back to 1979.
    Now, declines in employment rates can occur if older 
workers are retiring or leaving the labor market. But we 
certainly wouldn't expect this to be the case for younger 
college graduates, who have every reason to stay in the market, 
tapping their newly acquired skills. But as this figure shows, 
college graduates age 25 to 35 have employment rates that have 
tumbled far further than any other group of college graduates.
    The next figure, figure three, actually, turns to the real 
hourly wages of young college graduates--those 25 to 35. After 
rising sharply through the mid-1980, the wages were flat over 
the next decade. The persistently weak labor market over the 
past few years has taken the momentum out of this series, 
reversed its course, and it has actually contracted over the 
past couple of years. These folks have been losing ground in 
real terms.
    Now, while the magnitude of the off-shoring trend is 
immobile at this point, the anecdotes suggest that the trend 
has accelerated. A rare academic study of the issue shows that 
between 2000 and 2002, job loss was greater in occupations 
vulnerable to out-sourcing than in other sectors of our 
economy.
    A more tractable question is to what extent the education 
and training is a viable solution for the off-shoring 
phenomenon. It's notable that this same solution was offered to 
manufacturing workers displaced by the increase in global 
trade, that has led to a very significant diminution in their 
job opportunities. Throughout the 1990's, these workers were 
told to train for expanding industries, such as IT, that were 
thought to be less exposed to global competition. But the fact 
that these service jobs can increasingly be out-sourced 
provides a whole new set of challenges for the work force and 
the economy.
    I'm trying to move to my summary, here. This supply shock 
of putting our skilled workers in direct competition with a 
large and growing skilled work force overseas threatens to 
significantly depress the earnings of skilled workers here who 
enjoy a very substantial wage advantage. Now, the education 
solution, then, amounts to an effort to increase our skills 
even further, to engage in ever-higher value-added work that 
can support existing wage differentials, even in a global 
market place, with far more skilled workers available than were 
ever before.
    Now, the plausibility of this endeavor depends how high the 
bar is raised. Again, if we're going head-to-head regarding 
competition, radiology, software design and financial analysis, 
we are raising the education requirements bar to a level 
previously not contemplated in this debate.
    Let me conclude by saying that my comments should by no 
means be taken to imply that our education system is problem-
free, or that every student is given the opportunity to realize 
his or her potential. In fact, it's in this very area of the 
distribution of educational access and quality that clear and 
very serious problems exist. But this is quite a different 
conclusion than one which implicated the system as a whole is 
failing to meet the demands of work now and in the future.
    I have a set of policy solutions that I would be happy to 
talk about during the course of our discussion, but let me just 
stress, in closing, that these are not on the supply or skill 
side. I think the evidence that I have discussed and showed 
suggest that we have a demand-side problem, and that's what we 
need to address. Thank you very much.
    [The prepared statement of Dr. Bernstein follows:]

  Statement of Dr. Jared Bernstein, Senior Economist, Economic Policy 
                       Institute, Washington, DC

    Few would question the importance of maintaining and promoting a 
highly skilled labor force. It does not take expert testimony to remind 
us of the importance of education, not solely in terms of prosperity 
and international competition, but also because of the innumerable and 
immeasurable benefits to society, families, and individuals when each 
of us has the opportunity to realize our potential.
    Congress has long appreciated the critical role of education in our 
society. One needs look no further than the formation of this very 
committee as a symbol of our determination to promote the critical goal 
of creating and promoting the most effective public policies to advance 
the role of education in our society and workforce.
    These assertions are so widely agreed upon by economists and policy 
makers that there is little need to present corroborating evidence. 
Suffice it to say that the evidence overwhelmingly supports the 
contention that all else equal, a more highly educated workforce is far 
more productive than the alternative. Such a workforce is also far more 
likely to generate the productive innovations that have helped build 
our economy to its world-class stature.
    Instead, this testimony will focus on three critical questions.
      Is there any evidence that the lack of skill is 
responsible for our current employment problems? Can the unusually weak 
jobs recovery be explained by the lack of skill or education of the 
American workforce?
      Is education the best policy solution for Congress to 
offer to the recent challenge posed by the so-called ``offshoring'' of 
service sector, white-collar jobs?
      Is there evidence of a longer-term skills mismatch? 
Should our primary strategy for ensuring that our economy follows a 
strong and equitable path be that of enhancing educational 
opportunities?
    The answer to the first question is an unequivocal ``no''--the weak 
jobs performance of the last few years is wholly a demand-side 
phenomenon. The problem is not the lack of skilled workers; it's the 
lack of jobs.
    The second question is more difficult to answer, given that there 
is much that remains unknown about the magnitude of the offshoring 
phenomenon. However, the fact that advances in computing and 
telecommunication have created far less costly access to the large 
global supply of skilled, relatively cheap labor means that our skilled 
workforce now faces a level of competition from abroad that has 
heretofore largely befallen our blue-collar workforce.
    Anecdotal reports reveal a pay gap between skilled workers in this 
country relative to those in offshoring targets in the neighborhood of 
8 to 1. For example, the Bureau of Labor Statistics reports that a 
programmer in Silicon Valley, an area particularly vulnerable to the 
offshoring of tech jobs, earns about $78,000 annually, including 
benefits. According to PayScale, a compensation information firm, the 
comparable job in India pays around $8,000.\1\ Other reports show pay 
gaps of a similar, or even large, magnitude.\2\
---------------------------------------------------------------------------
    \1\ These figures were report in the San Francisco Chronicle, March 
7, pg. A1: ``Offshoring's Giant Target: The Bay Area.''
    \2\ For example, articles in the Financial Times from August 19, 
2003, report on an Indian financial analysis firm called Office Tiger. 
The report shows an 8/1 ($96, 000/$12,000) pay differential between 
American and Indian financial analysts. Another comparison, also from 
the Financial Times, reveals a that US architects are paid about 10 
times that of those in Vietnam.
---------------------------------------------------------------------------
    What differentiates foreign workers from their domestic 
counterparts is thus less a skills gap than a huge wage differential. 
By offshoring skilled and semi-skilled white collar jobs, US firms are 
sending a clear market signal that these offshore workers are worth the 
investment made by American firms. Note that throughout this recent 
period when offshoring concerns have surfaced, firms in affected 
industries, such as information technology and financial services, have 
been able to maintain historically high rates of productivity and 
profitability even while domestic hiring has stalled or fallen. Thus, 
while the extent of the phenomenon is unknown, it is highly likely to 
increase further, as will the attendant anxiety it generates among 
domestic workers in affected sectors.
    The policy question is: can such workers upgrade their skill sets 
to re-justify the large wage differentials that they currently enjoy? 
The answer depends on how high the ``skill bar'' gets raised by 
offshoring. If, for example, our radiologists, architects, and computer 
scientists are in need of skill upgrades, the bar may be set 
unrealistically high, and such workers could easily see their living 
standards decline.
    The answer to the third question--is there a skill mismatch between 
the jobs we're creating and the labor force coming out of our schools--
is also difficult to pin down. The conventional wisdom, such as that 
expressed by Federal Reserve Chairman Alan Greenspan in a recent 
speech, is that this is the case.\3\ But a closer look suggests that 
the case is not nearly so airtight.
---------------------------------------------------------------------------
    \3\ Remarks by Chairman Alan Greenspan, The Critical role of 
education in the nation's economy. Omaha, Nebraska, February 20, 2004.
---------------------------------------------------------------------------
    Historically, our education system has generally provided an 
adequate supply of skilled workers to meet employers skill demands, and 
lately, the supply of skill, along with its productive capacity, has 
accelerated. In fact, the knowledge of our skilled workforce in tandem 
with capital investment and technological innovation appear to have 
given rise to a new golden era of accelerated productivity growth.
    This may be a particularly surprising finding given the well-known 
growth in the skill premium, or relative wage, of college educated 
workers. The rise in their pay relative to that of less educated 
workers has been taken as prima facie evidence that skill demands have 
been unmet in recent years, but for reasons discussed below, this 
variable offers only partial evidence of unmet skill demands.
    I thus conclude that:
      our current, short-term labor market difficulties are by 
no means skill-related. Though the recession is behind us, we continue 
to suffer a protracted contraction of demand for labor.
      The practice of American firms outsourcing white-collar 
jobs to other countries poses a potentially huge new challenge for our 
labor force. While upgrading the skill sets of our workers relative to 
those offered by our trading partners may well be the way forward, 
given the height to which such a strategy raises the education bar, it 
may not be a very realistic policy solution.
      While it is widely accepted that our schools produce 
workers whose skills are not adequate to employers' demands, the 
evidence for this contention is not strong. In fact, recent accelerated 
trends in American skill supply and productivity would suggest that no 
such mismatch exists.
    These conclusions should not, however, lead us toward complacency; 
our education system is by no means working perfectly. In fact, there 
are significant problems, especially in our K-12 system of public 
education, but these are largely distributional. Despite the fact that 
access to quality education is a basic American value, such access does 
not now exist for too many low income families in disadvantaged 
communities.
The Short Run: The Problem is Demand, Not Skills
    As is by now well known, we are in the midst of the worse jobs 
recovery on record, since the Bureau of Labor Statistics began tracking 
the nation's payrolls in 1939.\4\ Despite the fact that we are 27 
months into a new recovery, the level of employment remains 2.4 million 
jobs down from the end of the last business cycle peak in March of 
2001. Never before has it taken as this long to regain the jobs lost in 
a recession. Even in the last jobless recovery of the early 1990s, by 
this time employment had surpassed its prior peak by almost 900,000 
jobs and we were adding over 200,000 jobs per month on average. The 
comparable figure today is 60,000.\5\
---------------------------------------------------------------------------
    \4\ It is often pointed out that the BLS Household Survey shows 
better job growth than the payroll survey over this period. However, 
numerous experts, including the Congressional Budget Office, the 
Commissioner of BLS, and Federal Reserve Chairman Alan Greenspan have 
stated that the payroll survey is a more reliable measure of employment 
in the current period. However, it is also the case that the current 
recovery is the worst on record for employment from the Household 
Survey as well. See Gould, 2004 for a discussion of these issues.
    \5\ This is the average number of jobs added per month since 
September 2003, when payroll employment began to grow.
---------------------------------------------------------------------------
    Economists have tried to explain the persistence of such a weak 
jobs recovery, particularly in the context of what has been fairly 
strong overall economic growth in recent quarters. While it is beyond 
the scope of this testimony to go into the details of these 
explanations, the prime candidate is faster productivity growth. As we 
at EPI have noted, this explanation is only partly convincing, given 
that productivity usually accelerates coming out of a recession (though 
more so this time). We offer other explanations, including employers' 
increased reluctance to engage in permanent hires.\6\
---------------------------------------------------------------------------
    \6\ This issues are presented in a New York Times article, ``New 
Patterns Restrict Hiring,' by Louis Uchitelle, March 6, 2004.
---------------------------------------------------------------------------
    However, the question for this analysis is whether the lack of 
skilled or highly educated workers is what's holding back job growth. 
Here, the evidence clearly points to ``no''--it is lack of jobs, not 
lack of skilled personnel. The problem is on the demand, not the supply 
side.
    Evidence for this claim comes from a set of indicators which 
profile the conditions of the labor market facing college-educated 
workers. Along with the overall group of college graduates, I also 
provide analysis of younger grads--age 25-35--as these workers offer 
the most direct evidence of the ability of our current labor market to 
absorb those workers with newly minted skill sets.
    The object of this analysis is to see if there is evidence of a 
skill shortage in the current labor market. For example, does the 
evidence support a claim made by an executive in a recent New York 
Times report, that the motivation behind the current wave of white-
collar offshoring was not solely costs, but also the lack of available, 
capable American workers? \7\
---------------------------------------------------------------------------
    \7\ See ``Chief Executives' Survey Fuels Hopes of Hiring'' by David 
Leonhardt, New York Times, March 4, 2004.
---------------------------------------------------------------------------
    A good proxy for the extent of labor market demand for a particular 
group of workers is the share of that population employed. Figure 1 
shows the trend in employment rates of all college graduates over 25 
and young college graduates, age 25-35. In both cases, employment rates 
have fallen more steeply over the past few years than in any other 
period in the figure, dating back to 1979. By this measure, demand for 
skilled workers faltered in the recession of 2001 and has yet to 
recover.
    Declines in employment rates can occur if older workers retiring or 
leaving the labor market for non-economic reasons. However, we would 
certainly not expect this to be the case among younger college 
graduates, who have every reason to stay in the market, tapping their 
newly acquired skills. In fact, as the figure shows, college graduates 
age 25-35 have employment rates that exceed those of overall college 
grads by about eight percentage points. As the top line in Figure 1 
reveals, their employment rates have tumbled even further than those of 
all college grads.
    Figure 2 uses some of these same data on young college graduates to 
construct a comparison over three roughly similar periods in the 
business cycle, going from an economic peak to three years later. The 
figure reveals an important difference in the current period, as 
employment rates of young college grads are considerably further below 
their recent peak in this recovery than in the prior two. Clearly, this 
most recent period has been one of uniquely weak labor demand for 
workers with newly minted skills.
    Figure 3 turns to the real hourly wages of young college graduates, 
those 25-35. Note that after rising about 10% through the mid-1980s, 
their wages were flat for the next ten years, before rising sharply in 
the tight labor market of the latter 1990s. However, the persistently 
weak labor market since 2001 took the momentum out of the series, and 
it reversed course in 2002 and 2003.
    The lack of demand for these workers grows directly out of the lack 
of job creation in fields that disproportionately employ them. A 
salient example is information technology, a sector where many young 
college graduates found employment over the last decade, and a sector 
that is also relevant to the offshoring debate. As shown in Figure 4, 
net jobs losses since 2001 been particularly steep.
    These results--net job losses, falling employment rates, along with 
a reversal of wage growth--strongly point to weak demand for our 
existing stock of college graduates, a stock that, of course, continues 
to expand. The data strongly contradict a skill supply-constraint 
interpretation.
Offshoring and Skill Supply: Will the Skills Bar Be Raised 
        Unrealistically High?
    As is now widely appreciated, technological advances in computing 
and telecommunications have combined to enable American firms from our 
service sector to increase the pace of outsourcing production tasks to 
other countries. A particular concern is the so-called ``offshoring'' 
of white-collar, skilled jobs, placing our advanced workers in direct 
competition with those who will do similar work for far lower wages.
    While the magnitude of this trend in unknowable at this point in 
time, anecdotal accounts strongly suggest the trend has recently 
accelerated. A rare academic study of the issue showed that between 
2000 and 2002, job loss was greater in occupations vulnerable to 
offshoring, however, some of these losses--such as those in IT--are 
clearly related to weak cyclical factors in our economy.\8\
---------------------------------------------------------------------------
    \8\ Bardhan, Ashok and Cynthia Kroll, UC Berkeley Offshoring Study.
---------------------------------------------------------------------------
    At any rate, given the difficulties in the current labor market for 
highly educated workers, it is reasonable to ask if these two trends 
are related. Is increased outsourcing of white-collar jobs partly 
responsible for the weak job market for college graduates, along with 
the very slow employment gains in industries such as IT?
    Again, since the extent of offshoring white-collar jobs is not 
known, we cannot provide a conclusive answer to the question of its 
role in the weak recovery. One media account suggests that 10% of the 
over two million net job loss since the recession might be attributable 
to offshoring, and while this is pure guesswork, it is not implausible, 
though it may represent an upper bound.\9\
---------------------------------------------------------------------------
    \9\ Time Magazine, ``Is Your Job Going Abroad?'' March 1, 2004.
---------------------------------------------------------------------------
    Certainly, circumstantial evidence exists. Job creation has been 
particularly weak in sectors associated with white-collar offshoring, 
most prominently, information technology. The lack of net job creation 
in that industry has been striking, as shown in Figure 4. In fact, 
while the manufacturing industry is characteristically cited as the 
weakest sector over the past few years, in percentage terms, employment 
losses in IT services \10\ outpaced those in manufacturing since the 
recovery began in November of 2001. IT fell by 16% over this period, 
compared to 10% for manufacturing. Also, the fact that the timing of 
the above-noted difficulties faced by college-educated workers 
corresponds to what appears to be an acceleration of the offshoring 
trend has led many observers to ``connect the dots'' between these 
phenomena.
---------------------------------------------------------------------------
    \10\ Defined here as internet publishing, telecom, and internet 
service providers.
---------------------------------------------------------------------------
    A more tractable question is: to what extent is education and 
training a viable solution for the problem of offshoring white-collar 
employment, regardless of its magnitude? It is notable that this same 
solution was and is offered to manufacturing workers displaced by the 
increase in global trade that has in part led to a very significant 
diminution in blue-collar jobs over the past decade.\11\ Throughout the 
1990s, these workers were told to train for expanding industries, such 
as IT, that were thought to be less exposed to global competition. The 
fact that such service jobs can increasingly be outsourced provides a 
whole new set of challenges to our workforce and our economy.
---------------------------------------------------------------------------
    \11\ EPI manuf doc
---------------------------------------------------------------------------
    Still, the recommendation to displaced blue-collar workers to learn 
new skills commensurate with the evolving economy made sense for two 
reasons. First, it suggested labor movement from a contracting sector--
manufacturing--to an expanding one: services. Second, it reasonably 
suggested that displaced blue-collar workers needed a new skill set for 
jobs in services that most often had quite different requirements than 
factory work.
    But does this policy solution also make sense vis-a-vis the 
challenges posed by offshoring of service employment?
    With global competition in manufacturing, our less-skilled workers 
were placed in competition with less skilled workers from countries 
with far lower earnings and similar value added. Our comparative 
advantage, it was argued, was both our large relative stock of skilled 
workers, and our greater ability--relative to our competitors--to 
produce an increasing flow of such workers. However, some less 
developed countries have been sharply increasing their own supply of 
skilled workers, meaning that offshoring has the potential to vastly 
increase the global supply of skilled labor, eroding our comparative 
advantage both in terms of stock and flow.
    Comparing data from our education statistics and to a recent report 
from an Indian IT association provides an instructive example. India is 
adding about twice as many college graduates to its workforce per year 
as we are (1.2 million in the US versus 2.5 million in India).\12\ Of 
these Indian graduates, over 250,000 were ``engineering degree and 
diploma holders'' in 2002 compared to 70,000 bachelor's degrees in 
engineering awarded here. What's more, the 2003 entering class for 
Indian engineers is reported to be 375,000, a large jump suggesting 
that the Indian population is responding to the market signal of 
forthcoming global demand in this field.
---------------------------------------------------------------------------
    \12\ See ``The IT Industry in India,'' report by the National 
Association of Software and Service Companies (NASSCOM), 2004.
---------------------------------------------------------------------------
    This supply shock threatens to significantly depress the earnings 
of skilled workers here, who enjoy a very substantial wage advantage 
over workers with similar skills in less-developed economies. Anecdotal 
reports reveal that the pay gap between skilled workers here and those 
in offshoring target countries is in the neighborhood of 8 to 1. For 
example, the BLS reports that a programmer in Silicon Valley, an area 
particularly vulnerable to offshoring of tech jobs, earns about $78,000 
annually, including benefits. According to PayScale, a compensation 
information firm, the comparable job in India pays around $8,000.\13\ 
Office Tiger, an Indian financial services firm, also reports an 8/1 
($96, 000/$12,000) pay differential between American and Indian 
financial analysts. Another comparison, from the Financial Times, 
reveals a that US architects are paid about 10 times that of those in 
Vietnam (about $60,000/$600 per year).
---------------------------------------------------------------------------
    \13\ These figures were report in the San Francisco Chronicle, 
March 7, pg. A1: ``Offshoring's Giant Target: The Bay Area.''
---------------------------------------------------------------------------
    Employers have argued correctly that the costs associated with 
outsourcing, such as language differences and lack of personal contact, 
reduce the labor-costs savings generated by this large gap. But by 
stepping up their outsourcing activities, they are sending a clear 
market signal that these skilled workers abroad are a better value than 
those whom they are replacing at home.
    The education solution then amounts to an effort to increase our 
skills even further, to engage in ever-higher value added work that can 
support existing wage differentials even in a global job market with 
far more skilled workers available than were available to American 
firms just a few short years ago.
    The plausibility of this endeavor depends essentially on how high 
the bar is raised. If, for example, as has been reported, our hospitals 
and tech firms outsource radiology and programming jobs to low wage 
counties, are we to assume that radiologists need a better skill set? 
Such reasoning has an undeniable logic until we realize these persons 
are already among the most highly educated in our country, if not the 
world. To contemplate the notion that they need to re-skill raises the 
education-requirements' bar to a level far above that which we've ever 
contemplated in this debate.
    An important piece of information in this regard is how high up the 
skills' chain do these offshored jobs reach. The evidence, largely 
anecdotal at this point, is mixed, with reports of both low- and hi-
tech jobs being outsourced. While the offshoring of lower wage/skill, 
back-office operations, such as billing, claims' filing, and tech 
support, has been widely reported, anecdotes abound regarding higher-
end jobs, from Ph.D. level financial analysts to architects, 
radiologists, and software engineers.\14\
---------------------------------------------------------------------------
    \14\ See above Financial Times references to financial analysts at 
the Indian firm, Office Tiger, and to architects. Anecdotes of 
outsourcing programmers jobs are from the SF Chronicle article cited 
above.
---------------------------------------------------------------------------
Over the Longer Term Are We Producing Too Few Skilled Workers?
    No serious analyst could question the value and importance of a 
skilled workforce. Years of economic research has established that an 
increasing supply of skilled workers is a critical input into 
production, leading to higher productivity growth and better living 
standards throughout the economy. In addition, the great innovations 
that have helped to establish our world-class economy are clearly 
linked to the quality of our workforce.
    Yet, many critics of the American education system, particularly K-
12 public schooling, argue that we fail to produce enough skilled 
workers to meet employers' demands. For many labor economists, the most 
convincing evidence of this claim is the fact that over the past few 
decades, at the same time the share of college graduates in the labor 
force was increasing, the ratio of their earnings to those of less-
educated workers also grew. If demands for skills were adequately met, 
so this argument goes, percentage wage gains should have been roughly 
equal between college grads and less educated workers.
    However, there are a number of reasons to question the too-readily 
accepted notion of a skills mismatch in our labor market, either now or 
in the future. These counterarguments are discussed at length in 
various papers cited below, and are only briefly presented here.
      There are other explanations for the increase in the 
college wage premium. As discussed in Mishel et al, 2002, the rise in 
the college premium has been partly driven by shift in economic 
structures that have served to lower the wages of less educated 
workers, such as the loss of manufacturing jobs, fewer unions, lower 
minimum wages, and, excepting the latter 1990s, high average 
unemployment rates. Regarding this last point, note that the skill 
premium grew much less quickly in the 1990s as in the 1980s, despite 
the fact that the latter decade arguably should have seen greater skill 
demands due to the accelerated dispersion of technology. But tight 
labor markets--a demand side factor--led to faster wage growth for the 
less skilled.
      Contrary to the skills'-deficit argument, the real wages 
of college graduates have not been consistently bid up. Refer back to 
Figure 3 and note that for about 10 years, from the latter 1980s 
through the mid-1990s, the real wages of young college graduates were 
flat. Their premium may have been rising over this period, but as just 
noted this was partly due to the structurally-induced decline in wages 
of less-educated workers. Presumably, a true skills shortage should 
lead to rising absolute wage levels, not simply relative wage gains.
      Occupational employment shifts show steady, not 
accelerating growth of skill demands. It is critical to note that skill 
demands have always risen over time and will continue to do so. 
However, the ``skills mismatch'' claim argues that the rate of skill 
demands has increased. In Bernstein and Mishel (2001), we present an 
index of occupational skill demands and show that it has proceeded at a 
steady pace over the past 25 years.
      BLS occupational projections do not imply an acceleration 
of skill demands in the future. Recent projections of job growth by 
occupation do not paint a picture of difficult-to-meet skill demands. 
While most of the fastest growing occupations call for at least a 
college degree, these occupations are growing from a low base and are 
thus not contributing the most jobs to the future economy. Conversely, 
of the 30 occupations adding the most jobs over the next decade, only 
eight call for a college degree. These occupations are expected to add 
12.6 million jobs over the next decade, and only 30% are expected to 
require at least a college degree.
      At the same time, the quality of our labor supply has 
increased significantly. We have doubled the share of college educated 
workers, including those with advance degrees, from 14.6% in 1973 to 
29.1% in 2003. Conversely, we have cut the share of high-school 
dropouts from 28.5% in 1973 to 10.6% in 2003.
      Our workforce has become more productive over time. This 
often overlooked point poses a serious challenge to the skills-mismatch 
position and is discussed in more detail.
    Not that not only has the quality of the US labor force increased 
over time, but the growth rate of labor quality has accelerated. Figure 
5 plots two indexes of labor hours from the BLS's productivity 
accounts. One series is the usual hours series from the labor 
productivity accounts, and the other is adjusted for skill primarily 
education and experience from the multifactor productivity accounts. 
Note that the two series grow at the same rate until the late 1970s, 
implying that the quality of labor was growing no faster than hours 
worked and thus was not an accelerating factor in the growth of labor 
productivity. Post-1979 however, the quality adjusted hours index grew 
about 0.5% per year faster than the unadjusted index, implying that 
labor productivity growth was receiving an added boost from the 
improved education and experience of our workforce.
    This final point, in tandem with recent dramatic productivity gains 
achieved by our workforce poses a challenge to the skills-mismatch 
argument. Along with rising wage differentials, it is common for 
proponents of the argument to present test score data showing our 
students performing poorly relative to those in other countries. While 
such findings are surely worthy of concern, a better outcome measure is 
simply the productivity of our workforce.
    By this measure, we are performing quite well in historical terms. 
Trend productivity growth accelerated by about 1% per year in the 
latter half of the 1990s--from 1.5% to 2.5% per year--and has 
accelerated about another 0.5% since then (though many experts suspect 
that this added boost is less sustainable). Contrary to a skills 
deficit story, the acceleration of this most important economic 
indicator suggests that the knowledge of our skilled workforce in 
tandem with capital investment and technological innovation appear to 
have given rise to a new golden era of accelerated productivity growth.
Conclusion
    This latter discussion should by no means be taken to imply that 
our education system is problem-free, or that every student is given 
the opportunity to realize his or her potential. In fact, it is in this 
arena of the distribution of educational access and quality that clear 
and very serious problems exist. The goal of ensuring access to a 
quality education for all continues to elude us as a nation. Realizing 
this goal must be a central purpose of education policy.
    But this is quite a different conclusion than one which implicates 
the system as a whole in failing to meet the demands of work now and in 
the future. As I have argued, there is simply no credible argument that 
our short term labor market weakness is skills-related. The problems 
right now are on the demand side, specifically lack of job creation. In 
fact, the share of non-employed college graduates is at a 25 year high, 
suggesting ample supply of skill in the short run.
    In the medium term, the offshoring of white-collar jobs poses a 
serious threat to our skilled work force. While evidence is sketchy 
regarding the extent of the phenomenon, it seems quite clear that 
technological advances have lowered the transaction costs of bringing 
potentially millions of skilled workers from low-wage countries into 
the global labor market. More to the point, many of these workers 
appear to have comparable skills to our own and will work for 
compensation that is 1/8 or even less of domestic workers' 
compensation.
    An education solution to this problem suggests that our skilled 
workers need to upgrade their skill sets further to ``re-justify'' the 
existing compensation gaps. But given the fact that some of our workers 
affected by offshoring are among the most skilled in the country, if 
not the world, this solution may not be realistic.
    Thus, we must focus not only on the supply-side as in skill-based 
policies, but must also consider policy solutions for creating jobs in 
the United States and keeping existing jobs here. Examples of 
legislation that might help in the short-run include: changing 
government procurement policies to prohibit contracts from being 
performed overseas unless necessary, eliminating tax deferral of 
profits earned abroad, and closing other tax loopholes that encourage, 
and even subsidize, companies to ship jobs overseas. Funding 
government-sponsored infrastructure, such as the Transportation Bill 
currently under discussion, has the potential to directly create 
employment, and increasing our investment in research and development 
will further promote the technological innovations that have been so 
critical to advancing our economy and providing new opportunities for 
our highly-educated workers.
    Ideas have been raised to slow the pace of offshoring by raising 
the costs to firms who engage in the practice. A tax on firms that 
offshore could yield revenues that could be dedicated to income 
support, education, and health care of the workers who have lost their 
jobs overseas. Such a proposal carries a twofold purpose: it lowers the 
incentive by placing a tax on the savings generated by the pay gap that 
US firms are tapping, and it provides benefits to displaced workers. 
However, in order to levy such a tax, we would need to identify both 
the extent to which firms are outsourcing US jobs, and workers that 
were affected. This identification could prove to be extremely 
burdensome (e.g., while some workers might be able to show they lost 
there job to offshoring, others, such as those who never got hired for 
an domestic job opening that went overseas, would have no way of 
knowing). A simpler approach would be a broader tax on any service 
imports, with revenues dedicated to providing a better safety net and 
training resources for unemployed workers.
    Though I have argued against the existence of a widespread skills 
mismatch in our labor market, there are many who could readily benefit 
from education and job training. It is notable and distressing in this 
regard that the Administration's fiscal year 05 Budget does not make 
existing education and training programs a priority, but instead 
proposes significant cuts in their funding.
    In the spirit of today's testimony, not only should Congress 
increase funding for existing programs, it should expand these 
programs--such as extending the Trade Adjustment Assistance Act (TAA) 
to cover service workers, providing more generous tax credits for 
health care premiums under TAA, and extend unemployment insurance 
benefits for the long-term unemployed who have exhausted their regular 
state benefits. This latter idea is particularly relevant given that 
the weak pace of job creation in the current labor market has led to 
20-year highs in the share of unemployed workers jobless for at least 
half-a-year (22.9% last month).
    Finally, the problems of the economy and outsourcing of jobs do not 
take place in a vacuum, but are intricately linked to other social 
issues. Long-term policy avenues should also be considered, such as 
improving access to the health care system to both keep employers' 
costs down and to ensure that laid off workers maintain health 
insurance, ensuring that all trade agreements have adequate and 
enforceable labor and environmental protections built into the core of 
the agreement, and coordinating multinational efforts to devalue the 
dollar against Asian currencies to boost exports and regulate the 
United States' trade imbalance.
Bibliography
Bernstein, Jared and Lawrence Mishel . 2001. ``Seven reasons for 
        skepticism about the technology story of U. S. wage 
        inequality.'' In Berg, Ivar and Kalleberg, Arne. I. eds. 
        Sourcebook of Labor Markets: Evolving Structures and Processes. 
        New York, New York: Kluwer Academic/ Plenum Publishers.
Gould, Elise. 2004. ``Different sets of employment numbers tell the 
        same story: slow job growth.'' Economic Snapshots. Economic 
        Policy Institute. 
Gould, Elise. 2003.``Measuring employment since the recovery: a 
        comparison of the household and payroll surveys.'' Economic 
        Policy Institute. 
Mishel, Lawrence, Jared Bernstein, Heather Boushey. 2003. The State of 
        Working America, 2002/ 2003. Ithaca, New York: Cornell 
        University Press.
    [Attachments to Dr. Bernstein's statement follow:]
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                                 ______
                                 
    Chairman Boehner. Mr. Grady.

 STATEMENT OF ROBERT E. GRADY, MANAGING DIRECTOR, THE CARLYLE 
 GROUP, ON BEHALF OF THE NATIONAL VENTURE CAPITAL ASSOCIATION, 
                       SAN FRANCISCO, CA

    Mr. Grady. Good morning, Mr. Chairman. Thank you very much 
to you and Mr. Miller, and the Members of the Committee for the 
opportunity to testify. It's a special pleasure to be back in 
this building, where I started my own career right out of 
college.
    I'm here to testify on behalf of the National Venture 
Capital Association, the NVCA, which is the premiere 
association representing the VC industry in this country. And 
it represents over 450 member firms, and the vast majority of 
venture capital professionally managed in this country.
    My firm, Carlyle Venture Partners, or CVP, is a member of 
the NVCA. What we do is, we make investments in early stage, 
pre-IPO companies, in things like semi-conductors, software, 
security, storage devices, RFID technology generally sold to 
the enterprise market, and in medical devices to cure 
conditions like spine problems, macular degeneration, 
congestive heart failure, etc.
    Interestingly, although CVP was only started in 1997, the 
35 companies which we helped start, and in which we still hold 
investments today, employ over 3,700 people. Mr. Miller might 
be interested to know, I think over 1,000 of them are in the 
San Francisco Bay Area, and quite a large number in the East 
Bay. The fast-growing East Bay. Our most recent fund, CVP-2, 
which was closed only in 2002, has helped fuel the growth of 
startup companies that today employ over 1,100 people.
    My point in highlighting our experience is not to tout our 
own firm, but rather to illustrate the point that venture 
capital investment has been a major source of job creating 
capital in the United States for the past 30 years. Two years 
ago, the NVCA commissioned a study by Wharton Economatrics and 
DRI, which had some staggering results. It showed that in the 
year 2000, venture-backed firms accounted for $1.1 trillion in 
sales. That's about 11 percent of U.S. GDP.
    It also found that venture-backed companies directly 
employed 12 and-a-half million people, indirectly accounted for 
27 million jobs, and it found that venture-backed companies had 
far higher levels than average of R&D spending, patents per 
employee, etc. And it also found that these benefits are spread 
widely across the United States. If you look at last year, for 
example, $18 billion was invested by venture firms into more 
than 2,700 companies in 48 different states across a broad 
array of industry sectors.
    The point being, of course, that venture capital--the 
leverage on venture capital investing in terms of job creation 
and innovation is substantial everywhere in America. So we 
appreciate the opportunity this morning to offer the Committee 
our views on how to deal with the changing nature of the 
economy, and how keep the kind of environment present here 
where we can keep creating those jobs.
    First of all, our economy has always been extremely 
dynamic. That's one of its greatest strengths. And innovation 
has played a key role in allowing our economy to constantly 
change through many cycles, while, over time, raising our 
standard of living, improving the quality of American lives, 
and creating a significant number of jobs. One of the roles of 
venture capital has been to spawn new companies, which in some 
cases went on to create whole new industries. As I mentioned, 
not just in technology and health care, but also in 
manufacturing, retail trade, business services, construction.
    Venture capital companies spawn the gamut from Genentech, 
which basically invented the biotechnology industry and today 
employees over 5,200 people, 80 percent of which went to 4-year 
college, to FedEx, which pioneered what's today a $27 billion 
industry, to Staples, which, of course reinvented the office 
supply industry. Now, we believe America's job creation record 
and economic performance generally is enviable. We are, of 
course, the largest economy in the world.
    But throughout the last decade, we have created jobs and 
grown faster, more consistently than, for example, the advanced 
economies in Europe. Even during the boom of the late 1990's, 
unemployment rates of Germany and France and other European 
nations remained stubbornly high, hovering around 10 percent. 
And so it's worth examining what caused our out-performance 
relative to some of these countries, and thinking about how to 
chart a course for the future.
    The NVCA and I personally believe that the correct response 
to both outsourcing, to the evolving nature of the economy, is 
to be prepared to compete, and to compete well. Today, the 
issue is not so much the short term, because the economy is not 
in crisis. Our unemployment rate is 5.6 percent, inflation and 
interest rates are low, economic growth has been strong. But 
the long term--what can we do to be better able to compete in 
the economy--the knowledge economy of the future?
    So let me just hit four or five points about how we can 
better compete. First, I believe we must ensure the 
availability of risk capital. The businesses that venture 
capitalists invest in are generally very high-risk. Often they 
do not succeed. But as I mentioned, they create--they generally 
contribute greatly in terms of job creation. According to the 
Census Bureau, since 1988, almost 10 million jobs have been 
created by companies with less than 500 employees.
    In that regard, we believe incentive for capital formation 
should remain. As you know, we supported the amendments last 
year to reduce the capital gains rate to 15 percent. We do 
believe, though, it should be made permanent.
    Second. We must maintain transparent, liquid, and trusted 
capital markets. America's deep and trusted capital markets are 
widely acknowledged to be the deepest and most transparent in 
the world. That is a key asset that Congress should do 
everything in its power to correct. And we've supported the 
reforms which would improve transparency. That being said, we 
do not believe that we should adopt measures in the name of 
corporate reform that will have the affect of making financial 
statements less reliable, and choke off the innovation I'm 
talking about.
    So, in that regard, for example, we don't believe it is 
either prudent or financially and accounting-wise correct to 
require the expensing of incentive-based stock options to 
employees.
    Third. Improving our schools. The NVCA has long believed 
that the health of the schools is essential to the health of 
the country. We certainly congratulate the Committee--Members 
of both sides of the aisle--on the No Child Left Behind 
legislation. We believe there's a bipartisan consensus to 
invest more in education at the Federal, state and local level. 
But the real trick, which perhaps we can get to in the Q&A, is 
how to make sure that these resources are deployed to maximum 
effect. That is, how can we attract the most talented people to 
the classroom to teach? How can we use technology and better 
infrastructure in our classrooms? How can we address some of 
these critical problems?
    Fourth, we have to constantly seek to maintain the world's 
best system of higher education. And here, too, we need to 
increase the proportion of science and math and engineering 
graduates if we are to remain competitive. We do believe that, 
as Chairman Greenspan said this morning, equal access to higher 
education and to skills is critical. And in that regard, just 
as no child should be left behind, no adult in need of higher 
education or re-training should be left behind, either.
    Fifth. We believe it is critical to invest in basic 
research and development. A key feature of this preeminent 
university system that I mentioned has been the funding of 
individual investigators through the NIH, the NSF, the DOE, the 
DOD, the other research agencies of the Federal Government. And 
we believe these investments have been critical in terms of 
spawning innovation in material science, high-performance 
computing, high-energy physics, biomedical research.
    Now, we know that the Congress faces severe budgetary 
constraints. I would say, in this regard, that venture 
capitalists in particular recognize that among your 
constituents are very focused on the importance of the future. 
And most of the investment we're talking about, in education, 
universities--someone earlier in the hearing mentioned 
infrastructure--are in the domestic discretionary category, 
which has been most constrained. I think we, in particular, 
therefore recognize that without entitlement reform, 
investments in the future are going to be under-funded 
structurally.
    Sixth, maintaining flexible labor markets. There was some 
discussion of this this morning. I would simply note that in 
Europe, for example, in some countries, if you hire someone for 
a relatively short period of time, they can't be terminated for 
up to 2 years. And those countries--this has not had the 
experience of increasing employment. It has actually decreased 
the willingness of people to hire people in the first place. 
Similarly, with extended plant closing notifications, it's a 
discouragement to hiring people.
    Lastly, expanding world trade. Part of our faith in the 
innovation-led and knowledge-based economy is the conviction 
that American ideas and products can compete anywhere in the 
world. The U.S. Trade Representative's office showed that 
exports accounted for 25 percent of America's growth, and 
supported 12 million jobs in the last 10 years. In Ohio alone, 
for example, Mr. Chairman, I believe there were two billion--
exports increased by $2 billion.
    Finally, it is true that the world remains a highly 
competitive place. As venture capitalists, we see our job as to 
help find and fund those new areas that promise to change for 
the better, the way we live and work. As we sit here this 
morning, a whole new generation of venture capitalists are 
funding companies in everything from nano-technology to 
genetics, to energy, to fuel cells, to RFID, as I mentioned and 
security. What do each of these areas have in common? In every 
single one of them, the United States is the leader.
    So, obviously, every time, as the economy changes, there 
will always be the question of whether to continue to pioneer, 
or whether to turn inward to try to consolidate our gains. And 
the NVCA just wishes to be on record in front of the Committee 
in being in favor of making the investments today that we need 
to ensure our continued leadership tomorrow.
    Because in the end, we believe that it is this combination 
of innovation and entrepreneurship that will continue to 
improve our lives here in America, to maximize the creation of 
new jobs to help offset the churn, if you will--the erosion 
that's always been part of our economic landscape, and to 
provide Americans with the most exciting set of opportunities 
in the future. Thank you very much.
    [The prepared statement of Mr. Grady follows:]

Statement of Robert E. Grady, Managing Director, The Carlyle Group, on 
 behalf of the National Venture Capital Association, San Francisco, CA

    Mr. Chairman and Members of the Committee. Good morning. My name is 
Robert Grady, and I am here to testify on behalf of the National 
Venture Capital Association, the ``NVCA''. The NVCA is the premier 
association representing the venture capital industry in the United 
States, with over 450 member firms, representing the overwhelming 
majority of venture capital funds professionally managed in this 
country. Our mission is to foster greater understanding of the 
importance of venture capital to the U.S. economy, to represent the 
public policy interests of venture capitalists and portfolio companies, 
to stimulate the flow of equity capital into emerging growth companies, 
to provide reliable industry data, to maintain high professional 
standards in the industry, and to sponsor professional development 
opportunities for our members. On behalf of the NVCA, let me first 
express my thanks for the invitation to testify.
    My firm, Carlyle Venture Partners, is a member of the NVCA. I serve 
as the managing partner of Carlyle Venture Partners, which makes 
investments in early stage (generally pre-initial public offering) 
companies which provide technology infrastructure--such as 
semiconductors, software, security and storage solutions, and 
radiofrequency identification equipment--to enterprises, and which 
develop and manufacture medical devices to treat more effectively 
conditions such as spine problems, macular degeneration, and congestive 
heart failure. We have offices in San Francisco, California; Tyson's 
Corner, Virginia; and Washington, D.C.. Carlyle Venture Partners is 
part of the Carlyle Group, which is by most measures one of the largest 
private equity firms in the world, with about $16.5 billion in private 
equity funds under management and over 500 employees.
    In addition to my work at Carlyle, I have served since 1993 on the 
faculty of the Stanford Graduate School of Business (which I am proud 
to call my alma mater as well), where I serve as a Lecturer in Public 
Management, teaching courses in the investment process and in 
understanding the regulatory environment.
    Interestingly, although Carlyle Venture Partners was only started 
in 1997 and began making investments then, the 35 companies which we 
helped to get started and in which we still have investments today 
employ over 3,700 people. Our most recent fund, Carlyle Venture 
Partners II, which was closed in 2002, has helped fuel the growth of 
startup companies that today employ over 1,100 people.
    My point in highlighting the experience of Carlyle Venture Partners 
to the Committee is not to tout our own firm, although we are proud of 
its record, but rather to illustrate the point that venture capital 
investment has been a major source of job-creating capital in the 
United States for the past thirty years.
    Two years ago, the NVCA commissioned the firm Wharton Econometrics/
Decision Resources, Inc. (``Wharton/DRI'') to undertake a study of the 
impact of venture capital investing on the U.S. economy. The results of 
the study were staggering: Wharton/DRI found that, in the year 2000, 
venture-backed firms accounted for $1.1 trillion in sales--or about 11% 
of U.S. Gross Domestic Product. Further, the study found that venture-
backed firms directly employed over 12.5 million people, and directly 
or indirectly supported over 27 million people. In addition, the study 
found far higher than average levels of R&D spending as a percentage of 
sales and patents generated per employee. Finally, it found that these 
benefits were widely spread across the United States, with venture-
backed companies employing people in 49 of the 50 states. The point 
that the study made clear is that the leverage on venture capital 
investing, in terms of job creation and innovation, is substantial--
everywhere in America. In 2003, $18.2 billion in venture capital 
investment was directed at more than 2,700 companies in 48 states 
across a broad base of industry sectors.
    This data shows that, contrary to common belief, venture capital 
investment is not just a Silicon Valley, high technology phenomenon. 
Opportunities for innovation are everywhere, not just in the technology 
sector of our economy. In addition to Genentech, Intel, Cisco and e-
Bay, U.S. companies that were originally venture-backed include Airgas, 
Amazon, Boise Cascade, Costco, Starbucks, Home Depot and Federal 
Express. Collectively, these innovative organizations have obtained 
countless patents, created business models that have been imitated and 
leveraged by others, and developed product lines and service delivery 
channels that never before existed.
    America's venture capital industry, which has helped fuel so much 
job creation in the past few decades, appreciates the opportunity to 
offer the Committee our views on how to create and foster the type of 
environment that will allow America to keep creating jobs.
    I believe the Committee's concern this morning is how to respond to 
the changing nature of our economy. For example, there has been, in the 
press and elsewhere, a great concern expressed regarding the so-called 
outsourcing of certain functions to other nations. Our economy has 
always been extremely dynamic--that is one of its greatest strengths. 
The US economy has continuously reinvented itself cycle after cycle 
through innovation while simultaneously raising the standard of living 
of Americans and improving the quality of our lives. One of the roles 
of venture capital has been to spawn new companies that in some cases 
went on to create whole new industries. Venture capital has been a 
critical catalyst in creating entire industry clusters such as 
biotechnology, Internet services and software. It has also impacted 
more traditional sectors such as manufacturing, retail trade, business 
services, and construction.
    Let me give the Committee two examples:
      In 1976, a biochemist and a venture capitalist founded a 
small company to explore a new field called recombinant DNA technology. 
They called the organization Genentech and went on to help invent the 
biotechnology industry. Today Genentech employs more than 5,200 
individuals of which more than 80% have college degrees. The company is 
consistently named one of the Best Companies to Work For. Two weeks 
ago, Genentech received FDA approval for Avastin, a therapy for first 
line colorectal cancer patients.
      In 1965, a Yale undergraduate student named Frederick 
Smith wrote a term paper on the inadequate airfreight system in the 
U.S.. In June 1971, Federal Express incorporated and on its first night 
it delivered 186 packages to 25 US cities. The company went on to 
change the way our country works. Federal Express not only improved 
business productivity exponentially; it created the $27 billion U.S. 
ground and air express market and that spawned more than 550,000 jobs 
and innovation through the operations of competitors such as DHL, 
Airborne Express, UPS and the US Postal Service.
    This culture of innovation and entrepreneurship had given our 
society unique characteristics. We have some of the greatest social 
mobility in the world--meaning that in our society, it is still 
possible for a person to come from humble roots, or to be new to this 
country, and within one lifetime to have a realistic chance of moving 
up the economic ladder to the upper reaches of our society in terms of 
income or wealth. The data overwhelmingly support this, and this has 
been our history.
    We believe that America's job creation record and economic 
performance generally is enviable. We are of course the largest economy 
in the world, but throughout the last decade, we have grown faster and 
consistently generated more employment than, for example, the advanced 
economies of Europe. Even during the boom of the late 1990s, 
unemployment rates in Germany, France, and other European nations 
remained stubbornly high at around ten percent, and economic growth 
lagged behind that of the United States. Many of these countries had 
policies that may have sounded attractive, but had the effect of 
discouraging investment and ultimately discouraging both 
competitiveness and job creation. So it is worth examining the causes 
of America's economic out-performance to date in seeking to chart a 
course for the future.
    The NVCA, and I personally, believe that the correct response to 
the evolving nature of the economy is to be prepared to compete, and to 
compete well. In the short term, America is not in economic crisis. Our 
unemployment rate is 5.6%, inflation and interest rates are low, and 
economic growth has been strong. But over the long term, there is cause 
for concern--and we believe that we must take the steps today that will 
allow us to innovate and compete in the knowledge economy in the 
future.
    So what have been the keys to America's economic out-performance? 
And what are the keys to being able to compete in the knowledge economy 
of the future? In our view, several imperatives stand out:
      Ensuring the continued availability of risk capital;
      Maintaining transparent, liquid, trusted capital markets;
      Strengthening our educational system;
      Constantly seeking to maintain the world's best system of 
higher education;
      Investing in basic R&D to keep America at the forefront 
of innovation;
      Maintaining flexible labor markets; and
      Expanding world trade.
    Let me cover each of these topics briefly.
    I have already outlined the data with respect to the contribution 
of venture-backed companies to U.S. employment, but our capital markets 
are of course deeper than that. This culture of risk capital has 
allowed a wide range of startups to flourish. Data from the Census 
Bureau shows that since 1988, almost 10 million jobs have been created 
by companies with less than 500 employees. As you know, venture capital 
is the investment of equity money to support the creation and 
development of these new businesses. Venture capital deliberately 
focuses on smaller, younger entrepreneurial companies that do not have 
the track record and stability to obtain traditional financing. These 
businesses carry very high risk and many do not succeed. Yet those that 
do contribute greatly to our economy in terms of job creation, revenue 
generation and innovation. The NVCA believes that incentives for 
capital formation and risk-taking investment should remain in place. We 
supported the passage of amendments in 2003 to reduce the tax rate on 
long-term capital gains to 15%, and we believe that such a rate should 
be made permanent.
    Our public capital markets are widely acknowledged as the deepest 
and most transparent in the world. We believe that Congress and the 
financial system should do everything possible to keep them that way. 
We have supported reforms to improve transparency in reporting and 
congratulate the SEC and other agencies on their efforts to curb the 
abuses of those who have not been accurate in their reports. That being 
said, we believe that we should not adopt measures in the name of 
corporate reform that will have the effect of making financial 
statements less reliable and will choke off the innovation that is so 
critical to American success. In that regard, the NVCA does not believe 
it is either prudent or financially correct to require companies, 
especially small private companies with no public stock price history, 
to expense against income the awarding of incentive stock options to 
employees. At a fundamental level, these options are shares and not 
claims against the cash resources of the company--they should be 
counted in the denominator of an earnings per share calculation, not 
double counted against income as well. As a matter of accounting 
transparency and reliability, a requirement to expense options would 
make income statements less reliable, as there is no agreed-upon method 
for valuing options, and several of the types of methods proposed rely 
on estimating the volatility of the stocks of companies with no trading 
history. Lastly, expensing options would punish the most successful 
companies--by valuing most highly the options of those companies with 
the best growth prospects. Expensing would be economically damaging to 
the country by changing the ability of the most innovative and high 
growth companies to allow people to work for ownership instead of cash 
compensation.
    Thirdly, if we are to compete successfully, our people have to be 
trained to do so. The NVCA has long been of the view that the health of 
our schools is essential to the health of our country. In this regard, 
we congratulate the Committee on its leadership in crafting and passing 
into law the No Child Left Behind legislation to ensure that our 
schools are performing, our kids can read, and parents of children in 
failing schools have more rights to do something about it. We believe 
that there is a bipartisan consensus to invest more in education at the 
Federal, state, and local level. The trick now is to make sure that the 
resources this consensus can provide are used to maximum effect--
attracting the most talented people to the classrooms to teach, 
allowing the use of both technology and better infrastructure in the 
classrooms, and addressing critical problems. In particular, we would 
urge the Committee to investigate what can be done, and to support 
programs, to increase the number of students pursuing mathematics, 
science, and engineering education in the United States. This is one 
area in which America is falling behind.
    Related to this point is of course the condition of our system of 
higher education--long acknowledged as the best in the world. Here too 
we need to increase the proportion of science, math, and engineering 
graduates if we are to remain competitive in a knowledge-based economy. 
We should be aware that our competitors are making this investment. 
According to a research report by Think Equity Research, the Chinese 
government has set as a goal to increase the proportion of those in the 
18- to 22-year old age cohort that attend four-year college or 
university from its current level of four percent to twenty percent, 
within twenty years. Think reports that this will require the building 
of 10,000 universities the size of the University of Indiana. Beyond 
that, we believe that Americans must ensure that access to education 
continues--that from K-12 all the way through the community college and 
university system, Americans have access to preeminent education. Just 
as ``no child should be left behind'' so too should ``no adult in need 
of retraining be left behind.''
    A key feature of our preeminent university system has been the 
funding of individual investigators at our research universities 
through the research agencies of the Federal government--the National 
Institutes of Health, the National Science Foundation, the Department 
of Energy, the Department of Defense, and so on. The investments made 
by this and previous Congresses in the basic R&D enterprise in the 
United States have been critical to spawning innovation and ensuring 
our economic leadership. The advances this research has promoted in 
materials science, high performance computing, high energy physics, 
biomedical research--in a wide array of areas--has laid the groundwork 
for American leadership, and American competitiveness, in a large 
number of related industries.
    We hope that this and future Congresses will continue this 
investment in innovation. We recognize that this year's budget contains 
a record amount for Federal R&D, but also recognize the budgetary 
constraints facing the Congress going forward--particularly in non-
defense discretionary spending. In this regard, venture capitalists 
particularly among your many constituents are focused on the future. 
Yet many of the investments most critical to that future--in education, 
in universities, in transportation infrastructure, in education--are in 
this category of discretionary spending. Venture capitalists in 
particular therefore recognize that without entitlement reform, 
investments in the future will be under-funded.
    One oft-cited point of comparison with the European economies I 
mentioned earlier is that of labor market flexibility. In several 
European economies, employees who work for a certain relatively short 
time cannot be terminated, for up to two years. This has not had the 
effect of creating more jobs, but rather of discouraging employees from 
being hired in the first place. Similarly, lengthening plant closing 
notification requirements, as some are proposing we do in response to 
the wave of news reports on outsourcing, may simply discourage the 
opening of facilities in the first place. We do not believe that 
reducing labor market flexibility in the United States will create more 
jobs, and we would urge the Committee to consider that the more 
flexible system extant in the United States today has attracted rather 
than destroyed jobs.
    Finally, part of our faith in an innovation-led, knowledge-based 
economy is the conviction that American ideas and products can compete 
anywhere in the world. The NVCA believes that more open markets will 
yield more growth, more jobs, better and more affordable products and 
services, and higher standards of living for Americans. According to 
the U.S. Trade Representative's office, over the past decade, exports 
accounted for 25% of America's economic growth and have supported over 
12 million jobs. We generally believe that a level playing field that 
opens international markets to American innovation and the products and 
services it has yielded, while allowing our innovators to secure the 
highest quality components and services at the best price from wherever 
they may exist in the world, will contribute the most growth to the 
American economy. In this regard, we congratulate the Congress for its 
role in making various trade agreements possible and for approving them 
once they have been negotiated and found to be acceptable.
    It is easy to look at the rapidly changing nature of the economy 
and react with fear. This has happened several times in the past, often 
with adverse consequences. In the late twenties, concerns about 
America's ability to compete against lower cost producers led President 
Hoover to recommend and Congress to enact the Smoot-Hawley tariffs. 
Growth and employment shrunk by a staggering 25% in the years that 
followed. In the seventies, there were concerns about the U.S. 
automakers ability to compete against Japanese producers, but a new 
cycle of innovation and product quality later led to market share 
gains. In the 1980s, Congress and others were concerned about our 
ability to compete in semiconductors--yet the biggest growth in value 
and in job creation in semiconductors in the 1990s was right here in 
the United States.
    Today, it is true that the world remains highly competitive. As 
venture capitalists, we see our challenge as to find and fund new areas 
that promise to change--for the better--the way we live and work. As we 
meet this morning, a new generation of venture capitalists is funding a 
new generation of companies in emerging area such nanotechnology, 
genetics, photonics, energy, fuel cells, and lasers. What do these 
areas have in common? In every one, the United States is the leader.
    I am here today on behalf of the venture capital community because 
we share the concerns of this Committee of surrounding sustainable job 
growth in the United States. As a country that has been built on the 
pioneering of new markets and industries, the U.S. will always be faced 
with the challenge and the question of whether to continue to pioneer, 
or to turn inward in some attempt to consolidate our gains. The NVCA 
wishes to be on the record before this Committee in favor of making the 
investments we need to make today to ensure our continued leadership 
tomorrow. In the end, we believe that it is the combination of 
innovation and entrepreneurship that will continue to improve the lives 
of Americans, maximize the creation of new jobs to help offset the job 
erosion that has always been part of our economic landscape, and 
provide Americans with an exciting set of new opportunities for growth.
    Thank you very much.
                                 ______
                                 
    Chairman Boehner. We thank you, all three witnesses, for 
your excellent testimony.
    Let me begin with Mr. Castellani. We all know that 
education is the great equalizer in American society, and now 
and in the future, jobs are going to go where the people are 
the best educated. Yet over the last several years, American 
schools by and large have only achieved mediocre performance, 
particularly in math and science, despite spending more money 
per student than any nation on the planet.
    So I guess my question is this. For our economy, how 
important is it to have a goal not just of adequacy, but of 
excellence in our schools? And how important is it to drive 
innovation and reform in our schools so that our performance 
meets our investment, and what are the consequences if we 
don't?
    Mr. Castellani. Well, certainly we agree that it is 
absolutely vital to the future of the U.S. economy, to job 
expansion, and to our ability to participate in worldwide 
markets. One of the things that we had learned over the last 
20, 25 years in American business has been that the more we 
focus on improving the quality of our products and our services 
and that we measure the improvement and the quality and the 
products of those services, the better that we do. And one of 
the things that caused us to be very aggressive and continues 
us to be very aggressive in supporting No Child Left Behind is 
precisely what's embodied in that Act, and that is we set high 
standards of excellence and we measure our progress against 
those standards. We think that is absolutely critical to 
improving the nation's education system. And without that 
improvement, we either will become less productive or less able 
to sustain the kind of growth that we want with new product and 
service innovation, or we'll have to look elsewhere in the 
world.
    And there's a second part to that, and that is, is not only 
do we have to improve the basic education that we provide, 
which we believe No Child Left Behind will do, but we also have 
to encourage those people who are going into our institutions 
of higher learning to go into the kinds of skills that we will 
need in the future.
    Sciences, mathematics, and engineering are those kinds of 
skills that while we are graduating, and I agree with Dr. 
Bernstein, we are graduating a lot of very well educated young 
men and women for our colleges, but as is in my own personal 
case, I've paid for the education of a very highly educated 
political scientist who is now running a pizza parlor.
    What we need is to encourage people to go into those key 
skills, and a critical part of that is what else we know, and 
that is 60 percent of the graduates from our universities and 
colleges in the future will be women. And traditionally, they 
do not go into those fields of study. So we need to do all we 
can do to encourage women to go into it.
    So the answer to the question is, it's absolutely vital for 
the future, and it's vital not only at the K through 12 level 
but also the university level.
    Chairman Boehner. There's been a great deal of discussion 
over the last few months about outsourcing of jobs. But I've 
been surprised that I haven't heard an analysis or a discussion 
of the great many jobs that we have in the U.S. that are there 
as a result of our exports around the world.
    Do any of the three of you have some estimates on the 
number of jobs that exist in America based on exports of 
product services around the world? Mr. Grady?
    Mr. Grady. In my home state of California, for example, the 
level of trade has grown by 10X, by tenfold, just in the last 
25 years, from $31 billion in 1978 to over $350 billion today. 
And I think California probably first among the states is most 
dependent on trade. I believe one in six jobs in California is 
dependent on trade.
    I was reading some testimony the other day from U.S. Trade 
Representative Zelick who said that about 25 percent of the 
economic growth that we've experienced in the last decade has 
been due to exports.
    Dr. Bernstein. May I add a comment? When we talk about the 
export side of the equation in isolation, it's a little bit 
like going to a baseball game and saying I saw a great game 
last night, you know, our team scored five runs, and you leave 
it at that. You need to talk about the import side as well, 
because if the other team scores ten runs, you've lost.
    The problem is while there are certainly jobs and good jobs 
associated with exports, the problem is that we have been 
running such large and persistent trade imbalances that we've 
lost far more jobs to imports than we've gained through 
exports.
    Mr. Castellani. I think, Mr. Chairman, the other thing that 
needs to be looked at, and we know a vital part of the economy 
is exporting, but we also know that a vital part of the economy 
is participating in a worldwide marketplace. Those companies 
who participate in the global marketplace tend to have better 
paying jobs that last longer, and they are more viable than 
companies that do not. So the jobs are better and they pay 
better and they last longer.
    More importantly, we have to look at the 6.5 to 7 million 
Americans who are employed directly by companies who invest in 
the United States that are from other countries. Not only is 
that the core level, but also there's the multiplier effect 
associated with those jobs, and certainly those are valuable 
jobs, that is valuable investment.
    And third, I think we have to look at what has become a 
rhetorical issue here, and the way this is being characterized. 
You know, we did a poll in January where we tried to gauge 
Americans' sentiment toward this whole issue of working with 
the world, and we found that rhetoric is important.
    Our survey found that 92 percent of Americans that were 
surveyed agreed that isolating America from the world is not 
the answer for the economic problems, that rather we should 
help American companies to compete in the world economy so they 
can create new jobs and build economic strength.
    We also saw that 91 percent favor programs for funding and 
retraining that helps people who lose their jobs remake 
themselves for a new career. And when we gave the survey 
participants a choice between increasing government regulation 
so it's more difficult to cut jobs and open facilities in other 
countries, or giving American companies the freedom to remake 
themselves to stay ahead of the economic curve, Americans chose 
that in our poll in an overwhelming majority, 73 to 24.
    So we've got reality that is very different than perception 
at this point, and it rally comes down to very much a 
rhetorical issue. But what we do know is that if we don't have 
access to those foreign markets, if we don't have access to 
working with the world, then we will not have opportunities to 
grow the economy and create the jobs that we all want.
    Chairman Boehner. We thank you. Mr. Miller.
    Mr. Miller. Thank you very much. Very often the suggestion 
is somehow here that this is a question of mindless, sort of 
mindless globalization or isolationism, and you get to pick 
your side, which one you want to be on.
    It seems to me the question, and Mr. Grady, you pointed it 
out, the question is really how do we compete and compete well? 
How are we smart engagers of this? And so as a policymaker, I'm 
trying to think where's this going.
    And I think Dr. Bernstein made a very important point. We 
now are watching people make what they view from their point a 
rational, calculated economic decision that they're going to 
trade in the people who are reading X-rays in this country for 
people who can read those X-rays with the same confidence that 
they want to give to their patients in India. That's a 
decision. That's happening. They're trading in those well-
trained radiologists in the United States for apparently well-
trained radiologists in India. Call centers are taking people 
who have the set of skills. People have invested millions of 
dollars in developing call centers in the United States. 
They're simply saying we're going to take this call center and 
we're going to move it to India.
    That is what companies do because you have to ask yourself, 
how are we going to get through the next year? How are we going 
to get our profitability? How are we going to get our earnings? 
How is this going to happen? How are we going to compete? Those 
are decisions that people make, and some people would argue 
that those are smart, and that's real. That's happening.
    So this isn't, as Dr. Bernstein pointed out, this isn't 
that those radiologists reading those X-rays aren't qualified. 
It's simply that you can get those for 30 to 40 percent less in 
another country. So that's happening.
    Then I think if you look at this, you ask what are people 
in your business doing, venture capitalists? And if you read, 
you know, stock analysts and venture capitalists about 
different companies, about saving this economy, there's an 
awful lot of people in your business who are saying going to 
China, India, outsourcing in one form or another--you know, in 
different industries, it will be different countries--that just 
has to be part of your plan you have to think about because the 
cost savings are so big. Not the skill savings--the skills are 
so much better. That is coming, I think, if we don't shape up 
in this debate today about education.
    But the fact of the matter is, people who--I always like to 
see what people who are betting with their own money are doing. 
I think you can learn more about global warming by following 
the reinsurance industry around the world and their discussions 
and where they're putting their money and where they're not 
putting their money than you can from all of the political 
debate in Congress.
    So I spent a lot of time, and again, if you go to Asian 
journals and you go to Asian stock analysts, they have--they're 
telling you where they think this going and what they're 
telling you is that much of this just the beginning of a very 
logical dynamic follow-on to what we like to think is the 
American dynamic economy.
    The companies you name are hallmarks in innovation. They're 
the leaders. But the question is, it may be that the next step 
in their innovation is outsourcing for reasons of their 
corporate entity, and that decision may be different than 
what's good for American workers. As we know, sometimes what's 
good for American brands isn't necessarily good for American 
workers. You can sell, you know, Coca-Cola all around the 
world. It doesn't have to be made in Atlanta. And it's in fact 
not made in Atlanta, because they won't let you sell it in some 
countries if you make it in Atlanta.
    So it's very good for the American brand, but that doesn't 
necessarily mean you're going to increase the employment in 
that company in America.
    I mean, those are the sort of--what's going on in the 
economy today. We can say we don't want to talk about it, but 
the fact is, that's what's happening and that's part of the 
dynamics.
    Mr. Grady. May I make a comment?
    Mr. Miller. Sure.
    Mr. Grady. I think that the examples you mentioned, call 
centers, for example, or radiology, are two out of thousands of 
industry.
    Mr. Miller. Yes, but I can show you auto design. I can show 
you computer design. I can show you program design, all of 
which--
    Mr. Grady. Right. But let's think about what happens in 
that global dynamic. Intel, for example, makes microprocessors 
all over the world, including in the United States, including 
in Santa Clara County. If you look at an Intel microprocessor 
30 years ago, it could send 100,000 instructions per second.
    Mr. Miller. I understand.
    Mr. Grady. Today it can send 3 billion instructions per 
second, and guess what? It is cheaper than it was 30 years ago.
    Mr. Miller. No question.
    Mr. Grady. By a lot.
    Mr. Miller. No question.
    Mr. Grady. What happens, in my view, and I think what is 
observable, is that as that product becomes faster, cheaper and 
better, it opens up whole new applications that give way to 
whole new industries.
    Mr. Miller. There's no question.
    Mr. Grady. So, for example, that faster microprocessor 
makes possible an infrared camera--
    Mr. Miller. Mr. Grady, that's going to happen. My concern 
is that the expansion of the remark that I said in talking to 
Chairman Greenspan--
    Mr. Grady. No, but those new products--
    Mr. Miller. Silicon Valley is where you start a company. 
China is where you grow it. America is where you start a 
company for a whole host of reasons because of our history 
innovation, competition and all the rest of that. The question 
will be, is America where you then grow that company?
    And I don't think--I think you're denying, people are 
denying the reality if they suggest that somehow that 
innovation will grow companies in America to the same extent in 
the future that it has in the past. I think that's just--that's 
a fact. Now we have to figure out how to deal with that in 
terms of the impact on our economy and on families.
    Mr. Grady. Two little points. I do believe it is continuing 
to grow companies in America by making products that open up 
whole new markets. You can radically--
    Mr. Miller. I wouldn't dispute that at all.
    Mr. Grady.--increase the number of applications. Health 
care, distribution, you name it.
    Mr. Miller. I wouldn't dispute that at all.
    Mr. Grady. And I can give you case after case of examples 
in sensors or RFID or some of the areas--
    Mr. Miller. No, no question.
    Mr. Grady. Second, I think when you look at the China case 
you mentioned and people going to China, I think one of the 
things that's happening today, people are investing in China in 
part because of the great growth of incomes in China. They're 
making products there that are going to be sold in China, not 
necessarily exported to the United States.
    Mr. Miller. Well, there's an awful lot of people who are 
telling their shareholders they're going there to built 
platforms for export, and they're very top line companies; that 
they must go there to compete for export. I agree, they're 
selling, you know, they hope to be able to sell into the 
Chinese market for 50 years.
    Chairman Boehner. We have three votes on the House floor, 
and because of the patience of our witnesses, what I'll do is, 
I think Mr. Castle has a short question then I think we'll wrap 
it up.
    Mr. Castle. Actually, I'll convert it to a brief statement 
so if somebody else wants to ask a question, Mr. Chairman, that 
would be fine.
    I will just say this. I missed part of the testimony but I 
have read what you said, and there's a real difference I think 
in what Mr. Castellani is saying and what Dr. Bernstein is 
saying that frankly concerns me. I've got to tell you right now 
that I am very concerned about educational groups in this 
country who are trying to undermine No Child Left Behind and 
then not admitting to it all the time, subsets of groups or 
whatever it may be. I'm not going to name names here.
    But I'm very concerned about that, because my judgment is, 
in talking to a whole variety of employers and other people in 
this country in this Committee and back in Delaware is that we 
need some basic, fundamental changes in education. I'm not 
suggesting No Child Left Behind is perfect. In fact, some 
changes are going on right now. But the concepts of it sure as 
heck are something which has been needed to grab hold of 
education in this country and to make very vital and 
fundamental changes.
    And I agree entirely with that, and I haven't spoken to an 
employer yet ever in probably my last hundred visits to various 
employers who have not mentioned education as being a 
significant factor in terms of who they're employing, not 
employing and generally deploring the state of education in 
America today. And so I obviously side with a lot of what you 
said, Mr. Castellani, in your testimony.
    In the case of Dr. Bernstein, and I don't necessarily 
disagree with all Dr. Bernstein stated here because I think 
some of his points are valid. For example, you can't blame the 
lack of education alone as being the sole reason for structural 
unemployment today. But on the other hand, not all unemployment 
is offshore. A heck of a lot of employment in America is just 
the ordinary employment that goes on. In fact, that's probably 
the vast majority of it.
    And we get talking about this sort of offshore concept 
versus onshore or whatever it may be, and I repeat what I just 
stated, and that is I've had so many employers tell me, we 
simply can't hire people. I forget who it is. Somebody told me 
the other day that they--it was one of the fast, not fast food, 
but one of the convenience market type places--they have I 
think a 10-part question or a 20-part question they ask, and 
it's pretty simple stuff, and it was amazing the number who 
can't answer those questions and therefore can't even make 
change for operations such as that.
    And I think to suggest that the lack of more skilled 
educational techniques in America in terms of the workforce of 
people in America, maybe individually if not the overall 
collective workforce, is something we need to be very careful 
about how we state, because to me, it is a fundamental and 
underlying problem that does tie into our economy, it does tie 
in at least to personal unemployment, and I think to structural 
unemployment to a degree.
    And again, not suggesting there are not other economic 
reasons for this. We all understand that. And I just think it's 
something that we need to pay attention to. And I would just 
re-encourage all of us to make absolutely sure that we're 
challenging education, funding education, doing all that we can 
in order to provide people an opportunity. That has got to be 
part of dealing with the structural employment and income 
problems in this country. And I yield back, Mr. Chairman.
    Chairman Boehner. Mr. Wilson, if you've got something 
quickly before we go vote.
    Mr. Wilson. Yes. And thank you, Mr. Chairman, for putting 
this together. It was extraordinary. I'm sorry I missed a lot 
of it. But to have Dr. Greenspan and now the three of you, 
thank you for being here. And as I came in, I was particularly 
happy to hear Mr. Grady's comments about reducing capital gains 
taxes. I was a real estate attorney for 25 years. I know the 
consequence of the jobs to be created from reducing capital 
gains taxes, and then that generates additional construction 
and then additional tax money for education, and the cycle is 
in place.
    And so I want to thank you all for being here today and 
thank the Chairman for having this hearing.
    Chairman Boehner. Let me thank all of you for your 
excellent testimony, and we appreciate your willingness to come 
in, and I'm sure we'll be talking with you soon.
    Thank you. This hearing is adjourned.
    [Whereupon, at 12:49 p.m., the Committee was adjourned.]
    [Additional material submitted for the record follows:]

     Response to Questions Submitted for the Record from Hon. Alan 
 Greenspan, Chairman, Board of Governors of the Federal Reserve System
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