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



 
THE GLOBALIZATION OF WHITE-COLLAR JOBS: CAN AMERICA LOSE THESE JOBS AND 
                            STILL PROSPER?

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

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                     WASHINGTON, DC, JUNE 18, 2003

                               __________

                           Serial No. 108-20

                               __________

         Printed for the use of the Committee on Small Business


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


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                      COMMITTEE ON SMALL BUSINESS

                 DONALD A. MANZULLO, Illinois, Chairman

ROSCOE BARTLETT, Maryland, Vice      NYDIA VELAZQUEZ, New York
Chairman                             JUANITA MILLENDER-McDONALD,
SUE KELLY, New York                    California
STEVE CHABOT, Ohio                   TOM UDALL, New Mexico
PATRICK J. TOOMEY, Pennsylvania      FRANK BALLANCE, North Carolina
JIM DeMINT, South Carolina           DONNA CHRISTENSEN, Virgin Islands
SAM GRAVES, Missouri                 DANNY DAVIS, Illinois
EDWARD SCHROCK, Virginia             CHARLES GONZALEZ, Texas
TODD AKIN, Missouri                  GRACE NAPOLITANO, California
SHELLEY MOORE CAPITO, West Virginia  ANIBAL ACEVEDO-VILA, Puerto Rico
BILL SHUSTER, Pennsylvania           ED CASE, Hawaii
MARILYN MUSGRAVE, Colorado           MADELEINE BORDALLO, Guam
TRENT FRANKS, Arizona                DENISE MAJETTE, Georgia
JIM GERLACH, Pennsylvania            JIM MARSHALL, Georgia
JEB BRADLEY, New Hampshire           MICHAEL MICHAUD, Maine
BOB BEAUPREZ, Colorado               LINDA SANCHEZ, California
CHRIS CHOCOLA, Indiana               ENI FALEOMAVAEGA, American Samoa
STEVE KING, Iowa                     BRAD MILLER, North Carolina
THADDEUS McCOTTER, Michigan

         J. Matthew Szymanski, Chief of Staff and Chief Counsel

                     Phil Eskeland, Policy Director

                  Michael Day, Minority Staff Director

                                  (ii)


                            C O N T E N T S

                              ----------                              

                               Witnesses

                                                                   Page
Johnson, Hon. Nancy L., U.S. Representative, Connecticut.........     4
Mehlman, Hon. Bruce P., U.S. Department of Commerce..............     7
Engardio, Pete, Business Week Magazine...........................     9
Hira, Ron, Columbia University...................................    11
Challenger, John, Challenger, Gray & Christmas, Inc..............    13
Palatiello, John, COFPAES........................................    15
Kenton, Christopher, Cymbic, Inc.................................    17
Almeida, Paul, AFL-CIO...................................19

                                Appendix

Opening statements:
    Manzullo, Hon. Donald A......................................    43
    Velazquez, Hon. Nydia........................................    55
Prepared statements:
    Johnson, Hon. Nancy L........................................    57
    Mehlman, Hon. Bruce P........................................    59
    Engardio, Pete...............................................    69
    Hira, Ron....................................................    77
    Challenger, John.............................................    84
    Palatiello, John.............................................    86
    Kenton, Christopher..........................................   108
    Almeida, Paul................................................   112
    U.S. Chamber of Commerce.....................................   116

                                 (iii)


  HEARING ON THE GLOBALIZATION OF WHITE-COLLAR JOBS: CAN AMERICA LOSE 
                     THESE JOBS AND STILL PROSPER?

                              ----------                              


                        WEDNESDAY, JUNE 18, 2003

                  House of Representatives,
                               Committee on Small Business,
                                                   Washington, D.C.
    The Committee met, pursuant to call, at 2:03 p.m. in Room 
2360, Rayburn House Office Building, Hon. Donald Manzullo 
[chairman of the Committee] presiding.
    Present: Representatives Manzullo, Velazquez, Schrock, 
Akin, Capito, Shuster, Franks, Beauprez, Chocola, King, 
Ballance, Christian-Christensen, and Bordallo.
    Chairman Manzullo. Good afternoon and welcome to this 
hearing of the Committee on Small Business. I especially 
welcome those who have come some distance to participate.
    Today we are going to talk about the globalization of 
white-collar jobs. Most Americans do not realize the 
significant link between manufacturing and services. I hope it 
becomes clear by the end of this hearing.
    You know my passion for manufacturing, so why are we 
talking about the service sector today? I want people to begin 
to understand that what has been going on in manufacturing is 
not because manufacturing jobs are less important than service 
sector jobs. As goes manufacturing, so goes the economy.
    I have heard over and over again from pretty well educated 
people that we should not worry about manufacturing since we 
have such a strong service economy, as though services has some 
sort of a hedge of protection from foreign competition.
    There is a false sense of security. It is foolish to think 
that way. Engineers, accountants, architects, programmers, and 
other highly-skilled professionals are learning quickly that 
someone equally or more qualified than they are is taking their 
job for far less money both here in the U.S. and halfway around 
the world. Here is the connection.
    According to a recent National Science Foundation study, 48 
percent of our engineers work in the manufacturing industry. 
These are the folks that create the designs, engineer 
processes, and drive innovations for manufactured goods. The 
U.S. economy is trying to grow and trying to create jobs. It is 
just that Americans are not filling those jobs. They have been 
moved overseas where foreigners will work for a lot less.
    Some would argue that pure free trade theory should 
prevail. Whatever can go overseas should go. I would put my 
free trade voting record against anybody's, but the theorists 
miss a very important point. Free trade does not operate in a 
vacuum. It presumes that all countries participating are 
playing by the same rules, whatever those rules may be. The 
problem is that not all of our trading partners play by the 
rules and even our own laws have loopholes that allow for some 
of this.
    The February 3rd edition of Business Week had on the cover, 
``Is your job next? A new round of globalization is sending up-
scale jobs offshore. They include ship design, engineering, 
basic research, even financial analysis. Can America lose these 
jobs and still prosper?''
    Examples include radiologists in India interpreting--
Congressman Kirk, did you have a constituent you wanted to----.
    Mr. Kirk. John Challenger. Nobody knows more about 
outplacement for these economic times----.
    Chairman Manzullo. If you can stick around for a couple of 
minutes as soon as we finish our opening statements I will let 
you introduce your constituent. Do you want to do that?
    Mr. Kirk. Sure.
    Chairman Manzullo. Just have a seat over here. Thank you.
    Examples include radiologists in India interpreting CT 
scans for U.S. hospitals. Accountants are assessing loan risks 
for homes halfway around the globe. Five technicians sit at a 
computer in Ghana processing New York City parking tickets. 
Blueprints for a staircase in a New York City building get 
drafted in Shanghai. It is interesting stuff.
    This is what globalization is supposed to be about. 
Everybody wins, right? Wrong.
    According to Forrester Research, 3.3 million white-collar 
jobs and nearly $140 billion in wages will shift from the U.S. 
to other nations over the next 12 years. This does not count 
the number of displaced Americans resulting from loopholes in 
our immigration laws. Increased global trade was supposed to 
lead to better jobs and higher standards of living for 
Americans by opening markets around the world for U.S. goods 
and services.
    The assumption was that while lower-skilled jobs would be 
done elsewhere, it would allow Americans to focus on higher-
skilled, higher paying opportunities.
    What do you tell the Ph.D., professional engineer or 
architect or accountant or computer scientist to do next? Where 
do you tell them to go? What higher academic credentials are 
they to aspire to next? They did what we said: Go to school and 
get the best education you can. Get a job in the technical 
field and you will be good to go. Now that this can be done for 
less elsewhere should we be satisfied with having the 
intellectual capital of this nation draining out to other 
countries? Should we sit back and wait for China or India or 
Singapore or Poland to tell us what the next great 
technological breakthrough is going to be? Should we be 
concerned about our national security when our intellectual 
capital is being shipped overseas?
    Our nation's international economic competitiveness depends 
absolutely on the U.S. labor force's innovation and 
productivity. According to economist Joel Popkin, if our 
innovation processes, represented by our scientists, engineers, 
and technicians shift to other countries, ``A decline in U.S. 
living standards in the future is virtually assured.'' That is 
from the NAM's white paper issued just two weeks ago.
    Wanting to keep jobs in America is not protectionism. It is 
in fact the very thing needed to promote free trade. Without 
the high productivity of the American worker and high levels of 
consumption by American families free trade will have no solid 
foundation on which to thrive.
    The challenge is whether we can ensure that our optimism 
for a free and fair global market place can become a reality.
    I look forward to the opening statement of Mrs. Velazquez.
    [Mr. Manzullo's statement may be found in the appendix.]
    Ms. Velazquez. Thank you Mr. Chairman.
    As the tech industry grows, tourism flourishes and the 
global market expands, it is apparent that our world is 
shrinking.
    Today people travel between nations as easily as they do 
between states. Globalization which allows economic, political 
and cultural systems to cross national borders freely has 
caused a shift in the economic phase of our nation. We have 
witnessed the effects of the first wave of globalization when 
U.S. manufacturing moved production and American jobs overseas.
    Now we are experiencing a second wave of globalization 
which is impacting the strong and profitable service sector 
here in the United States. It is by far the largest component 
of our economy, accounting for 81 percent of private sector 
output and providing roughly 95 million jobs. In fact the 
majority of companies within the services industry are small 
businesses.
    As this sector braces for the effect this new reality will 
have on the economy just as the manufacturing sector did a 
decade ago, analysts foresee the flight of white-collar jobs 
abroad. It has been predicted that the United States service 
industry should expect to lose at least 3.3 million white-
collar jobs while $136 billion in wages will shift from the 
U.S. to low-cost countries by the year 2015.
    For many businesses, both large and small, the global 
marketplace offers an array of opportunities, especially for 
growth. Yet it also presents one major drawback--job 
outsourcing. Companies in the service sector are able to find 
skilled labor abroad at lower wages. High-end service work such 
as writing software code and processing credit card receipts is 
being moved to developing countries like India, China, Russia, 
and Eastern Europe. This has the potential to worsen our 
nation's already suffering economy which has lost an estimated 
2.7 million jobs since the start of the Bush Administration.
    There are a number of policies linked to this trend that 
have caused the shift in service sector jobs away from American 
workers. One is immigration policy. As non-immigration programs 
are being used and abused to obtain cheap labor.
    It also does not help that the rising cost of benefits in 
the U.S. makes cheap labor overseas and less worker protections 
more attractive. After all, U.S. companies are trying to cut 
costs and make a profit in this economic downturn.
    In addition, a strong dollar has led to a trade imbalance 
that favors importing foreign produced goods and services 
because it is more cost effective. The technological ease with 
which companies now do business creates an atmosphere where 
overseeing workers, assessing production, and managing 
transactions in Jakarta is just as easy and probably cheaper 
than here in the United States.
    As globalization now permeates the service sector it is 
still too soon to know exactly how small businesses will be 
affected. Since small businesses dominate the service sector it 
is critical to factor them into the equation making sure that 
policies like immigration help instead of hurt them.
    In working to protect the small business sector, we can 
better ensure that it does not meet the same fate as the 
manufacturing sector. This will be another serious blow for the 
American economy, possibly making the current downturn longer 
and even more severe.
    Thank you, Mr. Chairman.
    [Ms. Velazquez's statement may be found in the appendix.]
    Chairman Manzullo. Mr. Kirk, if you could take no more than 
90 seconds to introduce your constituent.
    Mr. Kirk. Thank you, Mr. Chairman.
    I am just here to welcome John Challenger who is the head 
of Challenger, Gray and Christmas, probably our Chicago-land's 
number one expert on outplacements. That is such a critical 
moment in people's careers and a critical part of the economy. 
I am looking forward to his testimony, and thank you for 
coming.
    Chairman Manzullo. Thank you for coming. You can stay as 
long as you like.
    Congresswoman Johnson, we look forward to your testimony.

 STATEMENT OF HON. NANCY JOHNSON, A REPRESENTATIVE IN CONGRESS 
                 FROM THE STATE OF CONNECTICUT

    Ms. Johnson. Thank you very much, Mr. Chairman and 
distinguished members of the Committee.
    I appreciate your invitation because I believe we are 
experiencing a real crisis in our job market. While our pro-
growth tax policies will help, there are still far too many 
people unemployed, and beneath that aggregate unemployment 
numbers lies an even more disturbing trend.
    Unlike past instances of high unemployment, the ranks of 
the jobless are increasingly composed of highly skilled, 
college educated workers that typically had little difficulty 
finding a new job in the past. Today they are suffering lengthy 
periods of unemployment.
    There are a host of reasons for this persistent weakness in 
the labor market but I believe that we are inadvertently making 
the situation worse through our generous guest/worker visa 
program.
    During the April recess I had an opportunity to visit with 
a group of constituents who told me a very sobering story. 
These constituents, all unemployed information technology 
workers, told me that their former employers were replacing 
them with cheaper workers brought in from overseas on H-1B or 
L-1 visas.
    My constituents claim that companies are using foreign 
workers because they can pay them less. Due to the fact that 
the foreign workers' stay in the United States is contingent 
upon the employer, these foreign workers are also more easily 
managed.
    In some cases the American worker has been instructed to 
train the new arrival only to be summarily dismissed and 
replaced by the foreign worker.
    If this is true it directly contradicts the intention and 
spirit of our immigration law.
    I was so alarmed by these stories that I contacted several 
of my local employers to ascertain what their policy was 
regarding guest workers. While to the best of my knowledge none 
of the companies are violating the law, I have subsequently 
discovered that my constituents' experience is not unique nor 
is it isolated and we need to change the law.
    As you are aware, the L-1 visa program was created to 
enable multinational corporations to bring in key executives to 
work in the United States for up to seven years. It was thought 
that the business community needed a special class of visas to 
expedite inter-company transfers. You will see the rationale 
for that in the Chamber letter.
    More recently, however, a cottage industry has emerged to 
exploit the L-1 visa program. These companies can be 
constituted with the express purpose of funneling workers into 
the United States. IT consultancies with operations overseas, 
for example, are using the L-1 visa program to import workers 
who are then contracted out to domestic companies and there is 
no annual limit on the number of L-1 visas.
    The L-1 visa program is not subject to any of the 
constraints or governance that the H-1B visa dependency program 
is. If you are a dependency company then you have to look and 
see is there an American who can do the job and you have to pay 
them the same. If you are not a dependency company, and 
practically no one is because you have to have 15 percent of 
your employees H-1B visa employees, if you are not a dependent 
company then you do not have any of those constraints. You do 
not have to look and see if an American can do the job and you 
do not have to pay them the prevailing wage.
    I find this absolutely outrageous and more egregious than 
corporate expatriation to Bermuda which has received a lot of 
attention in this Congress because the expatriation is at least 
a paper operation. These operations directly take jobs, well-
paying jobs, skilled jobs, from American workers.
    There are several steps I believe Congress can take to 
address this situation.
    First we should initiate a thorough and detailed 
reevaluation of the various guest worker programs, and I 
believe there is a very important role for guest worker 
programs to play in many sectors of the economy. The H-1B visa 
program, for instance, was increased in 1999 to address the 
apparent shortage in qualified IT workers leading up to the 
year 2002. That was true. We allowed the cap up. If the 
shortage no longer exists then the justification for the 
inflated number is moot. We have no public interest in keeping 
qualified American workers unemployed in order to accommodate 
guest workers.
    We should also examine the rules governing the L-1 visa 
program. Clearly the law was not intended to promote the 
wholesale importation of contract consultants.
    I am the cosponsor of a bill introduced by Representative 
Mica that will close the loophole that allows consultancies to 
bring in guest workers for contract work. If a company was 
supposed to be allowed to bring in people from their own 
companies abroad so they could learn domestic management styles 
and a lot about how the company operates. Perfectly legitimate. 
But when it is a consultant company bringing in people who are 
consultants and farming them out to an American business, that 
is a whole different issue.
    We should devote more resources to worker training, and 
companies certainly have a legitimate need for talented, 
knowledgeable IT workers, but ironically now that we have used 
some of that H-1B visa money to build up our IT capability, we 
have kids in those classes taking those courses unable to find 
a job upon graduation.
    Throughout my congressional career I have been a strong 
proponent of free trade and open markets. My support is not 
contingent or qualified because I believe in the end free trade 
means more jobs for Americans and greater worldwide prosperity, 
but we cannot allow an individual to be compelled to lower 
their standard of living to compete with individual immigrants 
not covered by the same rules applied to H-1B dependent 
companies. U.S. companies that cultivate a workforce that is 
skilled and well trained, develop teamwork and make wise 
capital investments can compete and thrive in the world market. 
Companies that pay multi-million dollar salaries to their top 
executives and cut $20,000 here and there from significant 
skilled jobs are in my estimation setting themselves on a 
downward spiral. They are undermining our strength as a 
national economy and compromising our ability to compete.
    I thank you very much, Mr. Chairman, for having this 
hearing. I believe it is an important one, and I thank you for 
your time and attention.
    Chairman Manzullo. Thank you very much Congresswoman 
Johnson.
    Did you want that letter from the Chamber made part of the 
record?
    Ms. Johnson. Yes, I would like to do that. Actually it is 
to you.
    Chairman Manzullo. That is correct. It is also to the 
Committee.
    Any time that you would want to leave, Congresswoman, 
please feel free to do so.
    Ms. Johnson. I would like to hear as much testimony as I 
have time to hear.
    Chairman Manzullo. We appreciate that.
    Ms. Johnson. Thank you.
    [Ms. Johnson's statement may be found in the appendix.]
    Chairman Manzullo. Our next witness is Bruce Mehlman. He is 
Assistant Secretary of Commerce for Technology. I have known 
him for a period of years. He is a very, very bright attorney.
    Prior to going into your testimony, Mr. Mehlman, if you 
could take just a few seconds or half a minute to tell exactly 
the nature of your position and the purpose of it. That would 
help lay the groundwork for the rest of your testimony. Once 
you do that, I can start your 5 minute clock. How does that 
sound?
    Mr. Mehlman. Very good. Certainly, Mr. Chairman.
    Chairman Manzullo. Thank you.
    Mr. Mehlman. Thank you.
    I lead something called the Office of Technology Policy 
within the Technology Administration of the Commerce 
Department. Our office focuses, for the most part, on four 
areas with the mission of maximizing technology's contribution 
to America's competitiveness, to our job growth, and to our 
long-term prosperity.
    Our office serves as policy analysts. The most recent 
thing, and I brought copies for the Committee today as well as 
we are going to be distributing them to all Members of 
Congress, is the Secretary's report to Congress on education 
and training for the information technology workforce which is 
a 225 page, fairly exhaustive report. We sat with workers, we 
sat with employers and other business leaders, business 
leaders, to try and understand the nature of this very complex 
and rapidly evolving training landscape; in part because we 
believe and Congress believes that to remain competitive and to 
have our workers be successful we are going to need a dynamic 
reskilling environment.
    We also take a look at other technology-influenced long 
term trends including things such as the deployment and usage 
of broadband networks, biotechnology policies, particularly in 
the area of bio-defense vaccines and immunologics.
    We have looked at IT workforce questions for quite some 
time. We are taking a look at technology transfer through Bayh-
Dole and Stevenson-Weidler which are the acts that gave birth 
to our office back in the 1980s.
    We really do have an exciting area and we are trying to 
advise as best we can both Congress and the Administrative 
branch on policies and policy recommendations and on technology 
trends that we think America needs to know about to remain 
competitive.
    Chairman Manzullo. That is a great introduction of 
yourself. Now I can start the five-minute clock.
    Mr. Mehlman. Very good.
    Chairman Manzullo. Thank you.

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

    Mr. Mehlman. Chairman Manzullo, Ranking Member Velazquez, 
members of the Committee. Thank you for inviting me to appear 
before you here today and for your leadership. The issue of 
global competition for white-collar service work is an 
important and a timely one.
    Few Americans are feeling greater uncertainty these days 
than our information technology and communications workers. I 
know this both in my professional capacity and through prior 
personal experience having been at an information technology 
company, and I have many friends who express many of the 
concerns that were reflected in that Business Week article.
    Over the past five years IT workers have endured multiple 
shocks to IT spending and employment, including the end of the 
year buildup in 1999, the bursting of the Internet and telecom 
bubbles in the year 2000, dramatic reductions in corporate IT 
spending during the 2001 recession that began in January of 
that year, the 9/11 terrorist attacks, investor and business 
uncertainty as many business scandals of the late 1990s came to 
light, continued market caution preceding the liberation of 
Iraq, and of course accelerating global competition.
    As detailed more fully in my written testimony, it is 
difficult to precisely separate American IT job losses due to 
this post-bubble business cycle from slower job growth 
resulting from global competition or off-shoring of work. It is 
certainly clear, however, that as the growth of U.S. IT jobs 
has slowed dramatically for many reasons, the volume and value 
of offshore work has grown rapidly.
    Most analysts agree this competition and IT services will 
increase as offshore IT service providers improve their 
quality, their processes, and their expertise; as improved 
telecommunications connections, especially broadband, enables 
more business customers to out-source and offshore work 
effectively; and as these business customers including very 
many manufacturers determine they can realize value and gain 
competitive advantage through outsourcing.
    As with so many global trends there is significant 
disagreement over the implication of competition in white-
collar service work for American prosperity and 
competitiveness. One might note so far that America has 
benefited from trade in IT services. In 2001, U.S. cross-border 
exports of IT services totaled $10.9 billion while our imports 
totaled $3 billion, yielding a trade surplus of $79 billion. 
Yet we must all be concerned with the impact of this growing 
competition on American jobs, on wages, and on workers. I think 
the Committee's concern is very well placed.
    Certainly we will need further investigation and analysis 
to understand the dynamics at work and to formulate appropriate 
policy responses. As I mentioned, we today released an 
exhaustive report on the education and training landscape for 
IT workers and we very much hope that our findings are going to 
contribute to policymakers' understanding and thinking on this 
topic.
    One thing we already know is that U.S. workers and 
employers are going to face unprecedented global competition 
going forward and permanent innovation will be absolutely 
essential to our long-term success. We need to be ready.
    The Bush Administration has an aggressive pro-job growth, 
pro-technology innovation agenda. I have detailed it a bit 
longer in my written submission, but specifically we aim to 
promote innovation through greater research and development 
investments, through stronger intellectual property rights 
protection, and through a billion dollar program through NSF 
and the education department to improve math and science 
teaching.
    We intend to support entrepreneurship, especially among 
small businesses through appropriate tax, trade and regulatory 
policies. We are aiming to improve our innovation 
infrastructure including broadband, spectrum, energy and of 
course critical infrastructure protection, an area particularly 
highlighted post-9/11.
    And last but hardly least, we need to empower and we are 
enacting policies to empower current and future generations of 
American workers through education and through e-government.
    Education clearly sits at the heart of our future 
competitiveness and as evidenced by H.R. 1, the No Child Left 
Behind Act, we are focused on this challenge.
    We must continue to aggressively pursue reform and 
improvement in education as we implement this landmark 
legislation.
    We will additionally need to find ways to boost the 
productivity, flexibility, creativity and effectiveness of 
American IT workers to enable them to overcome global wage 
disparities by leveraging a dynamic and responsive reskilling 
landscape that lets us compete and win on our own terms. We 
hope the extensive report we released today might prove a 
constructive first step.
    Global competition accelerates so-called creative 
destruction, a fairly ugly economist term that refers to the 
process by which new ideas, jobs, technologies and industries 
replace older ones. That can be good for innovative and market-
based economies overall at the macro level. But creative 
destruction is terribly difficult for displaced communities and 
it is unacceptable for individuals.
    America must compete in the global marketplace but we must 
never compete in the losing battle to see who can pay their 
workers the least. Only sustained innovation can ensure that we 
do not have to.
    There are many real challenges facing our nation but I 
remain very optimistic about America's future and I have 
tremendous confidence in the quality and dedication of our 
workforce.
    The Administration looks forward to working with this 
Committee and others in Congress to ensure we provide American 
workers with the tools, the technology, and the skill sets and 
the talents they need to compete and win in the 21st Century 
global economy.
    Thank you, Mr. Chairman.
    [Mr. Mehlman's statement may be found in the appendix.]
    Chairman Manzullo. Thank you for that excellent testimony.
    The complete statements of all the witnesses will be made 
part of the record.
    Our next witness is Pete Engardio, Senior News Editor for 
Business Week. You are also the author of this article.
    We look forward to your testimony.
    Mr. Engardio. Thank you very much.

    STATEMENT OF PETE ENGARDIO, BUSINESS WEEK, NEW YORK, NY

    Mr. Engardio. You have the article, I believe, in the 
record so I will just kind of summarize very quickly.
    We have followed this trend in Business Week for quite a 
while. I wrote my first long article about outsourcing of 
white-collar work 10 years ago, when I was based in Asia. Back 
then we were talking about data processing in the Caribbean, 
software, code writing in India, some call center work, some 
kind of processing of loan application and credit card 
paperwork in Malaysia. So this trend is not new but it has 
picked up steam tremendously in the past decade and now it is 
really hitting critical mass. You now are seeing corporations 
hiring people in the Philippines, India, China, setting up 
operations with 500 people to 5,000 people each.
    Companies like AIG, General Electric probably have 10,000 
service workers overseas. And you are seeing just a vast 
acceleration happening right now. It is happening because of 
digitalization. Almost every kind of work process can be 
codified and written into bits and bytes. This happened because 
of a dramatic improvement in IT infrastructure overseas, 
especially in developing countries.
    There are very, very good providers now that have years of 
experience, companies like Wipro, which we mentioned, and the 
American companies like General Electric and IBM Services are 
now becoming very global in the services they provide. And 
corporations are under extreme cost pressure which is why we 
are seeing the explosion I think of this work right now.
    So it fits into the outsourcing trend that has been going 
on in the country. The difference is now it is moving abroad to 
where the workers are. Rather than the workers having to come 
here, having to get H-1B visas, the work can now go to them at 
a fraction of the cost, wages at their level.
    In addition, education is improving dramatically in the 
developing world. So we are not talking about sweat shops, we 
are talking about architects working for Fluor Daniel in the 
Philippines which has 700 of them doing the blueprints for the 
most advanced power plants and factories and semiconductor 
wafer fabs that are being built in this country and around the 
world.
    But these are highly qualified, over-qualified draftsmen. 
Often, many have a master's degree in architecture, a master's 
degree in accounting. The Philippines has an over-abundance of 
them. China graduates 70,000 mechanical engineers a year, 
hundreds of thousands of chemical engineers every bit as well 
educated as ours. In our country there is right now a shortage 
of these skills, at least that is what companies say.
    But these workers that are working in call centers, almost 
all are college graduates. We have talked to a number of them 
in many countries and we have been to a number of call centers. 
These workers see these jobs as careers. They are working for 
American Express. They are working for Delta Airlines and they 
are proud of it. To them this is a dream come true. So they are 
getting very well paid in their local standards. They do not 
feel exploited, the ones that we spoke with. They are happy to 
get the work.
    The numbers you saw I think being quoted by Forrester, 3.3 
million is obviously a real guess, but I think many other 
consultancies are coming up with similar kinds of studies that 
kind of are along those lines. DeLoitte & Touche just released 
a study estimating about two million financial services workers 
alone will be going to developing countries over the next ten 
years or so. About 800,000 of those from the United States.
    So I do believe this is a megatrend that is just starting 
to hit critical mass right now and is going to snowball and 
snowball. Right now, even though we have spent a tremendous 
amount of work on this project, we are just still scratching 
the surface.
    Quickly, about who wins and who loses, it is way too early 
to tell. Obviously the developing world gains tremendously from 
this. Countries like India, the Philippines, that really have 
never been that great at manufacturing are now developing much 
more rapidly because of service industries. It is good for 
them. It is good for their workers. And it is also skills that 
they are picking up with American companies are being used to 
develop much better service industries domestically which means 
they do not have to export. They do not have to export 
manufacturing. So it is good for them, clearly.
    Is it good for the United States economy? We do not have a 
clue. We have not come across any serious analysis of this 
subject. Every big trade economist that we spoke with said they 
had not started looking at it. It is all very intriguing.
    Is it good for the American worker? It really depends I 
think on what job category you are looking at. I do not think 
it makes any difference for a mechanical engineer since there 
is a shortage of them. I believe that is true for chemical 
engineers too.
    Obviously, IT support workers, and as the gentleman from 
the Commerce Department said, it is very hard to make the 
direct correlation. But clearly people are being laid off right 
now and are being substituted in India in certain categories, 
and wages are declining.
    Chairman Manzullo. Very good.
    [Mr. Engardio's statement may be found in the appendix.]
    Our next witness is Ron Hira. Mr. Hira is Chair of the 
IEEE-USA Research, Development and Policy Committee. He holds a 
Ph.D. in Public Policy from George Mason, an M.S. in Electrical 
Engineering, a B.S. in Electrical Engineering. His interests 
include R&D, policy, et cetera.
    We look forward to your testimony.

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

    Mr. Hira. Thank you, Mr. Chairman. Thank you and the other 
distinguished members of the Committee for inviting IEEE-USA to 
talk about this very important issue.
    My name is Ron Hira. I am a post-doc fellow at Columbia 
University at the Center for Science, Policy and Outcomes. I am 
testifying here on behalf of the 235,000 U.S. members of the 
Institute of Electrical and Electronics Engineers also known as 
IEEE-USA. We are a professional society with individual 
memberships. Our members are electrical engineers, computer 
engineers, software engineers, you name it. They work in 
industry, in government, in university, as professors of 
students, as managers, as engineers. About 20 percent or so 
work for small businesses directly.
    I think Pete Engardio and his colleagues at Business Week 
have done a really great job of framing what is going on and I 
am just going to reiterate that the trend is gaining momentum 
by the day, outsourcing.
    Let me give you a quick example. Just this morning on 
CBSMarketWatch.com I downloaded an article that says EDS, 
Electronic Data Systems which is the largest of the IT services 
companies in the U.S., is going to cut 2700 jobs to save cash.
    Yesterday there was an article in the Economic Times of 
India which is the largest financial daily newspaper there that 
says EDS plans to expand operations in China and Hariana, 
India. So at the same time that EDS is cutting jobs, it is also 
expanding operations in India.
    Why are companies doing this? Clearly cost is one driver. 
If you do a simple back of the envelope calculation a $70,000 
salary for an engineer in the U.S., a Russian engineer would be 
equally happy with $14,000. Just do the simple calculations 
based on what economists call purchasing power parity. There is 
a big difference in terms of the standard of living, cost of 
living in those countries and engineering talent is much 
cheaper there.
    But it is not going to be just engineering or information 
technology, but also research and development and accounting 
and law and so on and so forth. And even though India is most 
often discussed as a nation, it is not going to be in India. In 
fact I spent a few weeks in Romania about two years ago working 
with some IT companies there. You would be surprised at how 
good their English is, the educated population there.
    Not only that, but part of their strategy is to try to 
target these types of jobs.
    What are some of the impacts? Clearly I think there are 
going to be some impacts on the unemployment situation for 
domestic workers. Right now electrical engineers, computer 
engineers, software engineers are facing unprecedented levels 
of unemployment. Seven percent for electrical engineers; 6.5 
percent for computer hardware engineers; and 7.5 percent for 
software engineers. You would expect maybe one to two percent 
generally in those categories. So this is an incredible waste 
of human capital, some of our best and brightest in America.
    Secondly there are going to be a number of impacts in terms 
of the economic security and military security, homeland 
defense. It is almost universally agreed that technology and 
technological innovation is what drives economic growth as well 
as military advances and defense advances, and as more work and 
more sophisticated work goes offshore, it will be more 
difficult for us to sustain an economic growth rate that is 
reasonable as well as sustain our military advances.
    And location really does matter in the innovation process. 
This is pretty well agreed upon no matter what side you are on 
ideologically. You just look at Silicon Valley. Things feed on 
themselves, technological advance does.
    For our members it is not an ideological or a theoretical 
issue, it is a practical one. They are not able to find 
positions.
    John Gibson who is the head of our section down in Research 
Triangle Park, North Carolina, says that even if Congress 
expands unemployment benefits his members down there have been 
unemployed for so long that it is just meaningless.
    Lastly I just want to touch on a couple of quick public 
policy alternatives. First, I will reiterate that timely and 
reliable statistical information on what types of positions and 
how many are going abroad is very important. We have heard the 
3.3 million quote over and over again and it is not clear to me 
what that is based on.
    Secondly, the current non-immigrant system has actually 
accelerated the movement of work offshore. The H-1B and L-1 
visas need to be reformed.
    Lastly, Congress needs to look at the WTO general agreement 
on trade and services and follow what is going on there because 
these developing countries are actually pushing for much laxer 
regulations in terms of the H-1B and L-1.
    Thank you.
    Chairman Manzullo. Thank you very much.
    [Mr. Hira's statement may be found in the appendix.]
    Chairman Manzullo. Our next witness is John Challenger who 
has already been introduced. We look forward to your testimony.

     STATEMENT OF JOHN CHALLENGER, CEO, CHALLENGER, GRAY & 
                 CHRISTMAS, INC., OAKBROOK, IL

    Mr. Challenger. Thank you Mr. Chairman, Ms. Velazquez, and 
members of the Committee. I am very pleased to have the 
opportunity to appear before the Small Business Committee 
today. I am John Challenger, CEO of Challenger, Gray & 
Christmas.
    When responsible companies lay off workers or release 
executives and middle managers they offer outplacement services 
to those people. We work closely with the discharged people to 
shorten their time out of work and improve the quality of the 
job that they find.
    My father, who fathered the company in the industry in the 
mid 1960s, created this process.
    Thank you for allowing me to share my ideas with you. In 
regard to the issue of permanent job loss in a global economy.
    It would be arrogant to think that only unskilled and semi-
skilled jobs can or will be done overseas as many have already 
testified. The United States is certainly not the only natural 
sanctuary for the most skilled. Our education system is not 
number one in the world and certainly we must strive to improve 
our education system, a critical factor in the long-term health 
of our country. We must change our paradigm that leads most 
people to consider their education completed by their early 
20s.
    To try and stop the globalization of the workforce is 
futile. It is a natural force that is happening. As certain 
kinds of jobs dry up here there is no reason to think that our 
talented workforce will not redeploy their skills in new 
directions and endeavors. In fact the entrepreneurial spirit 
and the minimal structural barriers for business startups in 
the U.S. is the envy of the world.
    The movement to a global economy workforce will be filled 
with disruptions and hardships. The globalization of 
manufacturing has stranded many people in their 40s and 50s. 
Some go back to school for retraining, others work in poor 
paying jobs, some have left the workforce and are on disability 
or in prison. Many transition to new jobs.
    In 2002 we saw just under 50 percent of the people who came 
through our programs change industries for a new job. We must 
look for ways to help them. Their children look to newer jobs 
and careers and their parents must insist they get more 
education to accomplish those goals.
    We must restructure the education system to reflect the 
fact that lifelong education is crucial. Programs that 
encourage companies and government entities to offer skills 
training and tuition reimbursement programs to adults 
throughout their lives are crucial.
    When looking for lessons about how the U.S. and other first 
world countries must manage the transition to a global economy 
look to West Germany's swallowing of East Germany. Technology 
is paving the way for and making inevitable the globalization 
of skilled jobs. The decline in cost of technology, the growth 
in computer power, Moore's Law, the long term expansion of 
airport and aerospace infrastructure, and the 24/7 work week, 
all these factors and many more are laying the foundation for 
the global village and economy.
    Millions of jobs will never be moved en masse overseas 
because they require proximity and are essentially in-person 
work. Some examples include store personnel, nurses, doctors, 
teachers, musicians, golf professionals, construction workers, 
counselors, social service professionals, pilots, cooks, 
executives, librarians, movie makers, soldiers, security 
workers and entrepreneurs.
    The job loss scare we are seeing now parallels what we saw 
in the early 1990s when the first wave of downsizing hit and 
everybody talked about how we were de-layering America. Middle 
management was disappearing.
    In the late 1990s we saw the same kind of thing happen when 
we thought that the world was going to become virtual. All the 
jobs were going to disappear, all companies were going to 
disappear and people were going to do their work at home.
    We see how discredited those ideas are now, the dot-com era 
fear of job loss from technology. Now the fear, and it is 
another part of that same feeling, is that globalization is 
going to consume the job, and that is bubble mentality. And it 
is also recession mentality.
    Out of fear people misidentify the issue as permanent job 
loss. The problem is more about effective job transition rather 
than permanent job loss. Effective transition revolves around 
education and the development of programs and resources to help 
people make effective job changes. Entrepreneurs and small 
businesses create most of the jobs in this country. It is the 
big companies who can achieve the global reach to move and 
outsource major segments of their operations overseas.
    Skilled and unskilled workers are equally migratory. As 
jobs shift around the U.S. and the world, so will people. Many 
more jobs today are just in time. When a company's revenues 
fall it is much quicker to let people go; when it expands, the 
company hires more workers. We saw almost 2.5 million jobs 
created each year in the 1990s during the long boom. Since 
February of 2001, really the recession period here, the 
slowdown with the economy in this condition, there have been 
2.5 million jobs lost. We created 2.5 million every year in the 
1990s. As the economy expands and contracts, so do jobs.
    One last point from the Bureau of Labor. Severe labor 
shortages are likely in fact to return within ten years. Many 
are predicting this already. Some companies may begin to feel 
the pinch within 24 to 48 months. Certain industries like 
health care, construction, are already suffering badly.
    Chairman Manzullo. We are a little bit out of time here and 
I want to get through before the bells go off.
    Mr. Challenger. Sorry.
    Chairman Manzullo. That is okay. I appreciate your passion.
    [Mr. Challenger's statement may be found in the appendix.]
    Chairman Manzullo. Our next witness is John Palatiello, 
Administrator, Council on Federal Procurement of Architectural 
and Engineering Services. We look forward to your testimony.

STATEMENT OF JOHN PALATIELLO, ADMINISTRATOR, COUNCIL ON FEDERAL 
     PROCUREMENT OF ARCHITECTURAL AND ENGINEERING SERVICES 
                     (COFPAES), RESTON, VA

    Mr. Palatiello. Thank you, Mr. Chairman, members of the 
Committee.
    The Council on Federal Procurement of Architectural and 
Engineering Services is a coalition of the nation's leading 
associations in architecture, engineering, surveying and 
mapping. Under the SBA size standards, more than 99 percent of 
our members are from small business firms.
    For some time the A&E community has been concerned about 
the practice of some firms sending drafting, data conversion, 
scanning, digitizing and other design and mapping services 
offshore to subcontractors.
    Before September 11, 2001 there was discussion in the 
community about whether this was a good business practice and 
whether it was ethical. Like many other aspects of American 
life, things changed on September 11th.
    In his State of the Union Address in January of 2002, 
President Bush said, ``Our discoveries in Afghanistan confirmed 
our worst fears. We have found diagrams of American nuclear 
power plants and public water facilities, surveillance maps of 
American cities, and thorough descriptions of landmarks in 
America.''
    Since the September 11th attacks there has been an 
increased concern about this issue of offshore subcontracting. 
This is because access to the drawings, mapping data, and other 
work products of architects and engineers if in the wrong hands 
can be used for nefarious and destructive purposes.
    For example, after September 11th GSA announced a new 
policy regarding access to the A&E drawings of federal 
buildings. A number of federal agencies revised their public 
web sites and removed maps showing the location of our critical 
infrastructure.
    While these may have been prudent and necessary steps, if 
the work has gone offshore at the front end when these maps and 
blueprints were created, these actions could be the case of 
shutting the barn door after the horse has escaped.
    Sending A&E work offshore raises a number of issues 
regarding access to data about the location of power plants, 
buildings, pipelines, water supply systems, underground 
utilities, and other critical infrastructure by individuals in 
foreign countries who have not been through any degree of 
security clearance, and where control of access to the data 
simply does not exist. It is occurring not only in commercial 
work but on federal contract work as well.
    In your letter of invitation you asked for suggestions on 
policies that could help protect U.S. jobs from this practice. 
Let me offer a few.
    With regard to A&E work we would urge a review of the 
potential danger to homeland security of sending A&E drawings 
and maps of critical infrastructure to offshore entities. As 
you know, Mr. Chairman, the Buy America Act generally does not 
apply to services so that law does not help us. There is, 
however, potential help under the Service Contract Act. Action 
would be needed to close a loophole in that law because 
currently it actually encourages firms to send work offshore.
    Federal contracts and subcontracts for services require the 
payment of the prevailing wage under the Service Contract Act, 
and as you may know many state and local governments have 
similar prevailing wage laws. But the act in its regulations 
apply only to contracts performed in the United States. Thus if 
Firm A is submitting a proposal to a federal agency and it will 
perform the work domestically, it is covered under the Service 
Contract Act. If Firm B is submitting a proposal and it will 
perform the work through an offshore subcontractor, it is 
exempt from the Service Contract Act.
    This clearly undermines the intent of the law. It puts 
firms that propose to perform work domestically and its 
employees at a severe competitive disadvantage.
    We would urge the Committee to investigate this loophole in 
the SCA and insist on a regulatory or legislative solution.
    Firms that send work offshore do so to take advantage of 
lower labor costs. We would ask the Committee to explore if a 
firm were to send federal contract work offshore, take 
advantage of the lower labor rates, fail to pay the prevailing 
wage rate, pocket the difference, all without the client 
agency's knowledge is that a violation of contract clauses and 
does it subject the firm to fraud, criminal penalties, and 
possible federal contracting debarment?
    We would urge the Committee's investigation of these 
questions.
    I would also bring to your attention, Mr. Chairman, the 
fact that we are deeply concerned about the predatory nature of 
federal prison industries. How does that relate to the 
discussion today?
    As the Committee knows from its hearing held last November 
in which I was honored to be able to testify, FPI is rapidly 
moving into services, particularly commercial services claiming 
that a 1930 statutory ban on the interstate commerce of prison 
products does not apply to services. So what is FPI targeting 
for its expansion? Commercial services, those where domestic 
prison labor performance would replace those activities that 
are going offshore. One of the services entered is mapping and 
digitizing of engineering and facilities management drawings.
    Thus we are concerned that the trend towards offshore 
performance of A&E and mapping work results in a double whammy 
for U.S. small business--low wage competition from offshore 
sources, as well as unfair competition from federal prison 
industries. So we would urge Congress to prohibit federal and 
state prisons from engaging in commercial services in the open 
marketplace.
    The recent trend toward offshore subcontracting is 
particularly troublesome to our small business member firms. 
They are not as able as large firms to set up offshore 
subsidiaries and negotiate teaming arrangements in foreign 
countries and we are concerned about the long-term impact.
    Finally, we generally support free trade. We are generally 
resistant of government intrusion into our business affairs. 
For obvious anti-trust reasons only government actions, not 
professional or code of ethics actions, can govern this. We 
would urge your attention, but we would urge you to proceed 
very cautiously.
    I have several documents that are based on my testimony 
that I would like to enter into the record.
    Chairman Manzullo. Those documents will be made part of the 
record.
    [Mr. Palatiello's statement may be found in the appendix.]
    Chairman Manzullo. We are being subjected to the tyranny of 
the bells. I understand it is three votes. It could be as long 
as 45 minutes before we come back, so we would indulge your 
patience on that.
    This Committee is adjourned.
    [Recess.]
    Chairman Manzullo. The good news is no more votes for the 
rest of the day.
    Our next witness is Christopher Kenton, President and co-
founder of Cymbic, Incorporated, a technology marketing firm 
based in the San Francisco Bay area.
    Mr. Kenton, we look forward to your testimony.
    Is your testimony on your computer there?
    Mr. Kenton. Yes.
    Chairman Manzullo. However you want to do it. You may have 
to crank up the mike higher and pull it a little bit closer.
    We look forward to your testimony.
    Mr. Kenton. Thank you, Mr. Chairman.

 STATEMENT OF CHRISTOPHER KENTON, PRESIDENT, CYMBIC, INC., SAN 
                       RAFAEL, CALIFORNIA

    Mr. Kenton. Mr. Chairman, members of the Committee. While I 
do not presume to speak for the small business community I am 
grateful for the opportunity as a small business owner to add 
my perspective to the debate on the outsourcing of white-collar 
jobs.
    Cymbic has been in business for 15 years in the San 
Francisco Bay area providing marketing services to large 
technology companies like Motorola, Intel and Dell as well as 
to startups like Ascend Communications, a company with whom we 
worked from the time there were five partners working in a 
garage until they were sold to Lucent Technologies for $24 
billion.
    We are all familiar with the process of creative 
destruction and Cymbic has even seen that process in our own 
business.
    Two years ago we had grown to 35 employees earning more 
than $3 million a year in revenue, but in the wake of 9/11 we 
lost 95 percent of our sales and we were forced to lay off 90 
percent of our people.
    Our principles have had to face down both business and 
personal bankruptcy while losing our offices and most of our 
equipment. We have made heroic efforts to survive in the 
current economy. Part of our survival effort depends on 
developing new products and services to remain competitive. In 
the past we relied on our own software programmers to develop 
new products or we used one of our many development partners, 
but with literally no labor or capital resources available to 
us today we simply cannot afford it in these economic times.
    Recently we defined a new piece of software that we wanted 
to develop for a new service. We took local estimates averaging 
about $5,000 to build that software. That may sound like 
nothing, but when you consider that every investment in our 
business is competing with a mortgage payment it changes the 
perspective.
    Through an on-line search we were able to find a programmer 
in Argentina willing to develop our software for under $200. 
The software is now in the final stages of development and we 
will be offering it as a new service to our clients within the 
next six weeks. This represents a new opportunity for much-
needed revenue for our company.
    Our project pales in comparison to the million dollar 
outsourcing deals among large corporations but it highlights a 
lesser-known trend of overseas outsourcing among small 
businesses. My concern today is that what is becoming a growing 
cry for new regulations to deal with outsourcing on larger 
corporations will have an unintended consequence for small 
businesses like mine that use overseas development to create 
opportunities that would otherwise not be available to us.
    Since many of my clients are large technology companies I 
am very well aware of the plight of workers who have lost jobs 
to L-1 and H-1B visas. Personally I strongly believe that we 
should not allow the immigration system to be exploited for the 
production of cheap labor, but I also believe that we should 
not allow trade policies to be exploited for preventing the 
development and patronage of offshore labor markets.
    While the intended effect of this policy is the protection 
of American jobs, I believe the unintended consequences will be 
a stifling of opportunities for small business.
    The potential loss of white-collar jobs is certainly a 
legitimate concern for Congress but before we consider new 
regulation I think we need to be honest about the root causes.
    It is ironic that many of the technology jobs moving 
overseas today are the very same jobs that created the 
infrastructure that makes outsourcing possible. I think it is 
naive to believe that the loss of such jobs can be stemmed by 
preventing outsourcing. Today thousands of programmers are 
working on advanced systems like ASML which is the abstract 
state machine language to automate much of the programming done 
by humans today, creating the opportunity to outsource to the 
cheapest labor source of all, computers.
    The simple fact is that the driving purpose of technology 
is and always has been since the creation of the wheel, the 
reduction and elimination of human labor. As technology 
eliminates time and distance it becomes ever more efficient.
    While we try to reduce the impact of issues like 
outsourcing there are already systems on the production line 
ready to create the next wave of upheaval. This so-called 
creative destruction ensures that the mix and definition of 
jobs that comprise the American economy will continue to change 
unless we decide we want to forestall technological innovation 
altogether.
    The process certainly creates new jobs with new technology 
as well as a burgeoning industry of training but whether it 
leads to a net increase or a loss in jobs I think is a huge 
unknown.
    Since we are then forced to manage rapidly changing 
symptoms, I think that we need to act consistently according to 
a set of fundamental principles, and that is where I believe 
the true debate lies.
    The first principle that I believe is important is to focus 
on policy that increases the parity in the standard of living 
among nations rather than building walls to prevent 
encroachment on our own standard of living.
    I do believe in a roll for the government in many areas of 
regulatory policy, but I think the creation of trade barriers 
to prevent outsourcing would be costly, problematic and 
ineffective. I would rather see efforts geared toward leveling 
the playing field among competing nations.
    There are serious issues that make outsourcing unnaturally 
attractive including the manipulation of currencies by foreign 
governments, the suppression of workers rights, and the absence 
of environmental regulations. Although the gap between the 
standard of living in other nations and our own has created an 
opportunity for cheap labor today, I believe that focusing our 
trade policy on eliminating those gaps provides the greatest 
benefit in the long run. I believe that approach is consistent 
with our role as a world leader, in this case leading other 
nations to a better standard of living rather than simply 
focusing on protecting our own.
    The second principle I think is important to consider is 
differentiating between outsourcing for organizational 
efficiency and outsourcing for innovation. I think we need to 
explore the differences between large and small businesses and 
how regulations may cause unintended consequences. Small 
businesses provide much of the energy in our economy, driving 
innovation and pushing larger businesses to evolve. Small 
businesses like mine also play important roles in the success 
of larger businesses by providing critical support services and 
expertise.
    While I can see problems and indeed some abuses among 
larger corporations pursuing ever-lower costs and higher 
margins, I think any policies designed to mitigate those abuses 
should be examined for their impact on small business.
    Larger companies use reduced development costs in global 
labor markets to improve margins but small companies may use 
the opportunity to innovate in ways that would otherwise 
require increasingly costly investment capital.
    Mr. Chairman, members, thank you very much for your 
consideration.
    Chairman Manzullo. Thank you very much.
    [Mr. Kenton's statement may be found in the appendix.]
    Chairman Manzullo. Our next witness is Paul Almeida, 
President of the Department for Professional Employees, AFL-
CIO. We look forward to your testimony.

     STATEMENT OF PAUL ALMEIDA, PRESIDENT, DEPARTMENT FOR 
                PROFESSIONAL EMPLOYEES, AFL-CIO

    Mr. Almeida. Mr. Chairman, members of the Committee, thank 
you for the opportunity to testify today on behalf of the 
Department for Professional Employees of the AFL-CIO.
    We are very alarmed at the recent trend of outsourcing of 
white-collar and information technology jobs. This trend which 
is clearly accelerating is affecting workers at all levels and 
education levels. Technology companies are laying off American 
workers with high paying, desirable jobs while they add 
thousands of jobs overseas.
    The surge of outsourcing can be traced to the explosion in 
the last five years of H-1B and L visas which saw in excess of 
one million foreign guest workers enter the U.S.. As they 
developed their core competencies in high tech and other fields 
they have returned home and taken these and future white-collar 
and other jobs with them.
    Based on a survey of the world's 100 largest financial 
service firms, Deloitte Research found that these companies 
expect to shift $356 billion worth of operations and about two 
million jobs to low wage countries over the next five years.
    If these trends continue to accelerate we will see even 
more dramatic job loss and wage erosion affecting workers 
throughout the income scale. This will severely impact the 
wages and job security of American middle class in addition to 
depriving state, local and federal governments of tax revenues.
    Policymakers must recognize and acknowledge the severity of 
the problem and act quickly to stem the job loss.
    When manufacturing jobs started moving offshore we were 
told not to worry, that the U.S. comparative advantage was in 
services and high tech. We were assured that in the new global 
division of labor it was both natural and benign. We would keep 
high paying, high skilled jobs while the developing countries 
would do the actual work of making things. For decades American 
workers were told to simply acquire more skills and education 
in order to succeed in the U.S. job market.
    Now engineers with Ph.D.s and recent college graduates 
alike are hearing that they are too expensive, that their jobs 
can be done more cheaply abroad.
    Federal Reserve Chairman Alan Greenspan has warned that at 
almost five percent of GDP the current account deficit is 
dangerously high and unsustainable.
    There is another deficit that is a direct result of 
outsourcing and that is the social security deficit. As fewer 
and fewer workers are paying into the system, outsourcing will 
bring the program further into harm's way at a date much 
earlier than projected. The outsourcing is not spurred by a 
lack of skills or education here in the United States as 2003 
saw record numbers of college graduates at all levels.
    All these factors taken together should be setting off 
alarm bells for Congress and other policymakers. If an advanced 
degree and years of experience and excellent work habits are 
not enough to land a job and the U.S. advantage in service and 
high tech has seriously eroded, what does the future of work 
look like for the United States?
    If these cost-saving job shifts are taken to their logical 
extreme, even American corporations should be wondering where 
their future consumers will be located and how will they pay 
for the goods and services that are offered?
    Just as the labor movement has fought hard for trade and 
tax policies that will help the U.S. manufacturing sector 
thrive and survive, we also need to take a close look at the 
politics that impact the service sector and information 
technology jobs.
    First, we should make sure that our tax policies are 
consistent and coherent at the national, state and local level. 
Many of the companies rushing to outsource jobs have received 
and continue to receive tax breaks negotiated on the assumption 
that they would support local job creation. We need to target 
tax relief to companies that support their own communities with 
decent jobs.
    Second, we can and should ensure that government tax 
dollars are spent to support strong communities and jobs 
domestically.
    Third, we should support both transparency and openness on 
the part of companies that are outsourcing and more research to 
understand better the scope of the problem.
    Finally, we need to reexamine our trade policies to make 
sure they are reflecting the concerns and interests and 
American workers as well as U.S.-based corporations.
    In conclusion I would like to thank the Committee for 
holding this hearing and inviting me here today to testify. I 
look forward to working with you as we craft effective policy 
responses to the very great challenge facing us in this area.
    Chairman Manzullo. Thank you very much for the excellent 
testimony.
    [Mr. Almeida's statement may be found in the appendix.]
    Chairman Manzullo. We are done with votes for the day so 
what I would like to do is have the members limit their 
questions and responses to five minutes. Then we can move 
through several rounds so we will all have an opportunity.
    Mr. Almeida, I was looking for ``the'' question to ask to 
everybody on the panel and you asked it. Here is the question.
    If these cost saving job shifts are taken to their logical 
extreme, even American corporations should be wondering where 
their future consumers will be located and how they will buy 
the goods and services that are offered. That is the question.
    Who would like to take a stab at that?
    Mr. Kenton. One of the points that I made is that I think 
there are two ways to approach the policy. One is to focus on 
protecting ourselves from encroachment and the other is to try 
and use our policy to have an effect on the issues that are 
making the labor so cheap in foreign countries.
    In some areas of the world there are already shifts in 
labor organization. I think it was in Peru recently where there 
was a very large protest among service workers.
    The first thing I would say is I think it is naive to 
believe that we are going to maintain a standard of living that 
is so high above the rest of the world, and that the rest of 
the world is not going to work passionately to try and attain 
it. I think that as they do attain a better standard of living 
they are going to go through the same shifts that we have made, 
where laborers as they see an increase in wages, as they see 
greater education, are going to make greater demands on their 
own governments for more freedom, for more possibilities, and 
that in turn I think, although it is a long term process, will 
be the future markets where we are selling our goods as well.
    Chairman Manzullo. Anybody else want to try and tackle 
that?
    Mr.Mehlman. Yes, thank you, Mr. Chairman. A couple of 
thoughts.
    First, one might remember in a bit of U.S. history as some 
jobs were moving from the North in the South in some areas such 
as textiles, there were similar questions asked. How will the 
Northern economy survive and is this something that the overall 
union can allow? Of course in the end the success of all states 
in America proved greater because they were open to one another 
and because they would trade with one another and they would 
take advantage of their comparative advantage.
    Mr. Almeida talked about comparative advantage and he said 
that we had always been told that our comparative advantage is 
in services or in technology. I do not think that is quite 
right. I think our comparative advantage is in innovation. I 
think it is in the ability to be more productive, to apply 
technology and creativity to whatever areas we are in.
    For one, I am not prepared to and I know Mr. Chairman you 
are not prepared to write off manufacturing. I think we can and 
must retain a core and a base of manufacturing, and I think the 
key to doing so is being innovative. In fact, next Wednesday we 
are having, as part of the Secretary of Commerce's 
Manufacturing Initiative, a roundtable bringing in some of the 
national thought leaders including someone else from the AFL-
CIO to examine the question of the future face of 
manufacturing: Manufacturing 2020. What do we need in terms of 
policies and resources so that manufacturing can continue to 
thrive and flourish?
    To do so it seems that we have to leverage the comparative 
advantage that my testimony describes that we have enjoyed 
historically.
    Chairman Manzullo. Let me try to answer that question for 
you. If you take a look at Roll Call, we have inserted 
provisions into the defense bill, and the Pentagon is fighting 
us tooth and nail on it, big time. I am at 11 percent 
unemployment. Nancy Johnson is being cored out, Rob Portman is 
being cored out. The manufacturing base of this country is 
being systematically destroyed and the Pentagon is a part of 
it. I have said that publicly and I am going to stand behind 
it.
    If you take a look at the provisions that have been put 
into the defense bill as it came through the House, it 
increases Buy America provisions from 50 to 65 percent so that 
anything that is purchased by the Department of Defense for 
military use has to have at least 65 percent U.S. content. OMB 
and Pentagon are fighting us on it.
    We added into the defense bill the fact that we think that 
tires are strategic. We have to have a base in this country 
that will make tires. The Pentagon and OMB are fighting us on 
it.
    We added into the defense bill provisions that would add to 
it some type of language saying if you have a new acquisition 
over $5 million and you need to buy a machine tool, that tool 
has to be made in America with at least 70 percent U.S. 
content. OMB and the Pentagon are fighting us on it.
    Also that you have to have the tools and the molds that are 
made in America. OMB and the Pentagon are fighting us on it.
    I think we have to take the $240 billion of procurement in 
this country and use it as a tool to level the playing field.
    Northrop Grumman, one of the prime contractors for the F-
35, instead of going to Ingersoll Milling in Rockford to give 
them a contract for a sophisticated drilling machine told me to 
my face there is not a company in American that can make the 
type of machine that we can make in Spain. So U.S. taxpayers' 
dollars are going to Spain on the F-35, the Joint Strike 
Fighter. Ingersoll filed bankruptcy. There is one company left 
in America that builds those big machines and that is 
Cincinnati Milacron and they are hanging on by their nails.
    The guys that make the orders do not even know what is made 
in America because at the same time that Northrop Grumman said 
Ingersoll cannot build their machine to do the sophisticated 
drilling, Ingersoll had a contract with Lockheed Martin to 
build the very same sophisticated drilling machine.
    That is what is going on. The message that we would like 
you to bring back to the White House and to the Secretary of 
Commerce is let us start with the Pentagon.
    We had Steve LaTourette who got into a big fight with the 
Pentagon when they went to Germany to buy a million dollars 
worth of topping. He got in a dragged-out battle with them. It 
all started here two and a half years ago when this Chairman 
insisted that the Pentagon was not going to buy black berets 
from Romania, Sri Lanka, India, South Africa and China. There 
are 614,999 Chinese-made black berets rotting in the warehouse 
in Mechanicsburg, Pennsylvania because I put down my foot, and 
this panel did.
    Now if you want to bring back American manufacturing, let 
us start with the orders. People are looking for orders. The 
Pentagon has got all kinds of orders. But they have to stop 
sending those orders overseas. That is the message that we 
would like you to bring back to the Secretary.
    We commend the Secretary and Grant Aldonis for the great 
work that they are doing in trying to get their arms around 
this whole issue of manufacturing. We look forward to working 
with you on that issue.
    Thanks so much.
    Mr.Mehlman. Thank you, Mr. Chairman.
    Chairman Manzullo. Ms. Velazquez?
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Mehlman, companies that outsource jobs normally seek 
places where labor laws are weak so that they can pay lower 
wages. You saw it here, you heard it here. That is what our 
witnesses are telling us.
    If this is the case, why in the recent Chile and Singapore 
agreements did the Administration find it appropriate to 
pursue, and I will quote, ``enforce your own labor law 
policy.''
    As stated in the agreement, each country commits its 
signatories to enforcing its own domestic labor law. It does 
not actually commit the signatories to have labor laws in place 
or to ensure that the labor laws meet any international 
standard.
    Are not these kind of policies just inviting companies to 
outsource even more American jobs to this country where they 
can exploit their labor force regardless of if it is white or 
blue-collar jobs?
    Mr.Mehlman. Thank you for your question.
    I may take issue briefly with the predicate in terms of the 
companies that I have spoken to are not looking for nations to 
outsource to that have weak labor laws. They are looking for 
where they can get the best value, the best return on 
investment or bang for their dollar.
    There are nations with worse labor laws than, for example, 
even India, but the reason that businesses outsource, the 
reason that manufacturers and others do is because they are 
trying to invest their dollars on their core and strategic 
areas, and if they can get equal or higher quality information 
technology service work done then that is where they are going 
to go.
    So first, I do think it is, companies are targeting where 
they are going to get the highest quality.
    First in that regard it means as a competitiveness issue we 
need to make sure the quality of the American worker and the 
tools and technology and the talents that we help them have are 
better.
    Ms. Velazquez. Sir, can you tell me why labor laws were 
included in the Jordan agreement and not on this one?
    Mr.Mehlman. I cannot.
    Ms. Velazquez. You cannot.
    Mr.Mehlman. No.
    Ms. Velazquez. Mr. Almeida, would you please comment on my 
question to Mr. Mehlman?
    Mr. Almeida. I am not quite sure----.
    Ms. Velazquez. I am asking him if we say that companies in 
America are outsourcing jobs in foreign countries because labor 
laws in those countries are weak, and therefore then they can 
pay lower wages, I asked him why is it that the Administration 
in their negotiation of the Chile Singapore agreement did not 
include labor laws, therefore inviting companies to go and 
outsource jobs there.
    Mr. Almeida. I think you have answered the question. 
Because it just makes it further cost effective for them to do 
it without any labor laws.
    Ms. Velazquez. Thank you.
    Mr. Mehlman, will you please submit to this Committee a 
written answer as to why labor laws were included in the Jordan 
agreement and not on this one?
    Mr.Mehlman. I can tell you what I will pledge to try to do. 
I will try to get the United States Trade Representative and 
the International Trade Administrator, Grant Aldonis, to answer 
the question as best they can. I would not want to offer guess 
work similar to Chairman Manzullo's last comment Secretary 
Rumsfeld has proven a readiness and facility at speaking for 
himself, and I will try to defer to the experts. But yes, I 
will do my best to get you an answer.
    Ms. Velazquez. Mr. Mehlman, on January 31, 2003 Business 
Standard published an article entitled ``Bush Party to Raise 
Funds Via India.''
    Can you share your comments on the irony we have here? As 
we discussed, the problem associated with job outsourcing 
especially in the white-collar sector, the Republican party is 
conducting outsourcing itself by contracting telemarketers in 
India to conduct its fundraising.
    Mr.Mehlman. I am not familiar with that article or the 
facts therein. I would expect with respect to the way the 
article was phrased, after the 1996 elections and a lot of the 
foreign contributions that clearly happened in those elections, 
from the contribution perspective you are going to see greater 
caution by both parties in the 2004 election cycle.
    With respect to where work is done, I am not aware of how--
--.
    Ms. Velazquez. My question is not about contributions, sir. 
My question is about outsourcing telemarketers in India.
    Mr.Mehlman. I am not aware of the Republican National 
Committee's choices of vendors and whether they are U.S. or not 
U.S. based.
    Ms. Velazquez. Just tell the Administration it does not 
look good.
    Can you comment, Mr. Engardio, can you comment on the fact 
that most economists believe the offshore outsourcing trend is 
not substantial enough yet to have a big impact on the broader 
U.S. economy?
    Mr. Engardio. For one it does not seem to be that big in 
terms of the total U.S. job force, as far as we can tell. We 
can see it in terms of--Are you talking about physical 
transfers of work that we otherwise would have had here? We can 
see it in a few professions like information technology 
support, which is a big profession. But that is one area where 
jobs are declining in the United States, where wages are 
declining and hiring is increasing abroad. But that is a very 
small part of the U.S. job force.
    So I am just saying that we consulted about three or four 
labor economists of various stripes and nobody has really 
looked into it and it is not measurable yet.
    So when you are seeing these big numbers that Forrester is 
putting out and others, this is real speculation. These are 
projections over ten years.
    So it has not hit yet. It has not hit in a measurable way 
yet. That is why we are cannot tell you.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Chairman Manzullo. Mr. Schrock.
    Mr. Schrock. Thank you, Mr. Chairman.
    The Chairman pretty much said it all. I like the way he 
says it and I would probably have said it the same way. Let me 
make a couple of comments. I think at the start we talked about 
our trading partners. Our trading partners are really not 
playing by the rules and I believe Secretary Mehlman said it, 
free trade yes, but fair trade. And that is clearly not 
happening.
    I think sometimes up here on Capitol Hill we create laws 
and regulations that have unintended consequences. I think Mr. 
Kenton mentioned it.
    By the way, are those your children?
    Mr. Kenton. No, nieces and nephews.
    Mr. Schrock. They are neat kids. You have the baby in the 
back. That is a nice sound, believe me.
    Chairman Manzullo. Mr. Schrock, could you suspend for a 
second?
    Mr. Schrock. Sure.
    Chairman Manzullo. We have some very special guests here. I 
would like to know, these three children over here, is your 
father one of the witnesses testifying here? Your nieces and 
nephews here. Okay. And we have the little guy back there, and 
that is your family. Very nice. We are glad to have you here as 
our special guests.
    In fact these two nieces here, would you like to come up 
here and have a seat? And the nephew. Would you like to sit up 
here? No questions, but you are welcome to come up if you like.
    [Laughter]
    Any time you want to come up you can do that. You are 
welcome to do that.
    We are going to start your clock all over again.
    Mr. Schrock. I think we needed to mention the family 
because I am sure Christopher Kenton would not be nearly what 
he is without his family, is that right?
    Mr. Kenton. Absolutely.
    Mr. Schrock. You were saying unintended consequence, and I 
think sometimes the things we do up here create that and that 
is why we have half the problems we have. But free trade, fair 
trade. I would certainly agree with that.
    And clearly we are going to be facing competition. It is 
not going to end. We have lost the manufacturing sector. I 
think the only thing we do now is build war machine and cars 
and that is about the only thing we do. As you heard the 
Chairman say, the DoD wants to buy offshore and I am really 
opposed to that. I just do not think that is a good thing.
    Now if a certain country is the only country that produces 
a widget that needs to go in a tank somewhere, that is a 
different story, but that is probably not going to be the case.
    I think the problem with that is if we get into conflict 
with a country that makes that one widget that makes our war 
machine go they are going to say we are not going to give it to 
you because we do not want you fighting the war. So we have to 
be very, very careful how we do that.
    These are probably three of the best testifiers we have 
ever had in here.
    [Laughter]
    They are what it is all about.
    But you know business is not the bad guy. It is the 
regulators, and I mean like us. We are the ones that create 
this stuff and then we have some bureaucrat downtown trying to 
enforce these things. I think that is what is driving a lot of 
this stuff offshore.
    Yes, we are going to face competition. Are the problems 
with the trade policies we have? Probably. The regulatory 
policies? Probably. The tax system? Absolutely. We are just 
messing over these businesses something fierce with the tax 
policies we have. Until we change that this is not going to 
change.
    Is it the high cost of labor? We keep talking about labor 
costs. Mr. Almeida, maybe you can comment on that.
    I have a feeling a lot of these countries are going, I know 
they are, they are going to countries where they can pay less, 
they know they are not going to have strikes, they know they 
are going to have a lot of these different things. Now right or 
wrong, and it is probably wrong, but that is what they are 
doing. Because what it is, they want to go to a place where 
they can produce a product so we in America can buy it as cheap 
as we want. I am as bad as the next guy. I would go to Wal-Mart 
and look to see which one is cheapest. I think that is just 
human nature.
    But at some point we have to get our hands around that so 
we can bring this business back to here, and we in Congress 
have to make sure we are business friendly. That we are making 
sure these people want to stay here by the laws that we create.
    Every law we create has unintended consequences. Every time 
we pass a law up here Americans and business loses more and 
more of their freedom. We have got to stop doing some of that 
stuff.
    So until we are willing to get our hands around it I do not 
know how we are ever going to solve this thing. I do not know 
if you want to comment on that or if you just think I am a 
madman, but that is the way I feel about it. We have got to do 
some changing, we have to do it up here.
    From these kids back, these are the people, this is where 
it has to be done.
    Chairman Manzullo. Mr. Engardio?
    Mr. Engardio. One observation. We are talking about service 
jobs. A lot of these jobs I do not believe are unionized in the 
United States to begin with.
    Mr. Almeida. That is not right.
    Mr. Engardio. Okay.
    One thing I want to point out, when we talk about some of 
these things like some very sophisticated semiconductor work is 
being done in India and companies are opening up theses R&D 
facilities. I have gone to Silicon Valley many times. I have 
gone to Bangalore, I have gone to Singapore. When I go into 
U.S. companies, in the 1990s you could go into Sun 
Microsystems, Intel, HP, you walk into the R&D Division and 
they are two-thirds Chinese and Indian. Silicon Valley, there 
are a lot of studies on how many businesses have been started 
up by Indian and Chinese immigrants, including Taiwanese. About 
one-third to two-fifths of tech startups in the United States 
in the Silicon Valley are by Chinese and Indians.
    What we are talking about is why? Is this is because 
Silicon Valley has had a unique environment in the world for a 
long time that no other country could replicate? The best world 
talent came here because it was the best environment to do R&D 
and do creative work.
    What is happening now is that other cities around the world 
are finally starting to replicate some of this environment. 
Bangalore is starting to get there. In many areas it is getting 
attractive. A lot of the engineers that we spoke with said, ``I 
would have gone to the United States five years ago. I would 
have gone to the United States to work for TI. I would have 
gone to Seattle to work for Microsoft. But now they are coming 
here, I do not have to.''
    These are people that would have gotten H-1B visas before. 
So this is what you are dealing with. It is the environment 
getting better overseas.
    That is one thing if you want to talk about the 
implications.
    Mr. Schrock. Mr. Chairman, I know my time has expired, but 
it boils down to the education system. Our education system has 
been dumbed down so much we are not creating these geniuses 
that can do this sort of thing. Half the children in the area 
where I represent, Virginia Beach and that area, the 
valedictorians and salutatorians of those high schools are of 
Asian descent. It is because they come from a culture where 
they promote education and the parents make sure the kids get 
the education. We do not. We just expect our society to take 
care of itself and that is not going to happen.
    One more quick comment.
    Were you listening to all the different professions that 
have gone offshore?
    Mr.Mehlman. Yes.
    Mr. Schrock. Did you mention movie makers?
    Mr.Mehlman. I did not mention movie makers.
    Mr. Palatiello. I mentioned it as one that could still be 
here. There are certainly movie makers in India.
    Chairman Manzullo. They are going to Canada.
    Mr. Palatiello. Canada and----.
    Mr. Schrock. Some of the garbage the movie makers are 
making, they can go as far as I am concerned.
    Chairman Manzullo. All right. On that note----.
    Mr. Schrock. On that note.
    Chairman Manzullo. They can make some beautiful movies in 
the American Virgin Islands. Dr. Christian-Christensen.
    Ms. Christian-Christensen. Thank you. I want to make a 
point about that too, but first I want to thank you Mr. 
Chairman and our Ranking Member for this hearing. As usual our 
Committee is ahead and being very proactive on an issue that 
really we have not begun to feel the full impact or even a 
little of the impact yet.
    Globalization has its pros and cons and we on this 
Committee do have a responsibility to look at it and the 
potential impact on small businesses and also small 
jurisdictions and see what can be done to maximize the 
positives and minimize the negatives.
    In my district it presents some unique challenges for me 
and Guam, who also sits on this Committee, who rely on duty-
free status to be competitive. But also in the case of 
outsourcing we find that a lot of the outsourcing that is being 
done bypasses jurisdictions like ours which have incentives 
programs to attract the investment but meet all of the U.S. 
standards. Which because of our size has very, very little 
impact on the U.S. economy but has tremendous positive impact 
for us.
    So I am saying that to say that apropos of unintended 
consequences as we look at outsourcing to foreign jurisdictions 
we do not want to be lumped into that. We are American citizens 
and we are very small jurisdictions and outsourcing which has 
not really gotten hold in our territories as yet could benefit 
us. And as I said, we are not foreign, we are U.S. 
jurisdictions.
    The other concern that I would have about this is with 
regard to the H-1B and the other work visa programs. Relying 
very heavily on that as we have done in recent years and not 
paying enough attention to ensuring that our public school 
system is given what it needs to prepare our own citizens for 
these jobs. So I agree with Mr. Mehlman and some of the other 
panelists who spoke about that.
    My first question would be, I guess I would direct it to 
you, Mr. Mehlman. Given the fact that some of our more educated 
people in the field of technology are finding themselves 
without jobs, and recognizing that we do have to improve the 
educational system and the training so that people are able to 
take these jobs, do you think that will have an impact on the 
outsourcing trends that we are seeing ? Would the jobs tend to 
stay here if we had the trained workforce given that most of 
the incentive is really around the salaries, the lower salaries 
in other jurisdictions?
    Mr. Mehlman. I think that is the $64,000 question as it 
were. What do we do in a world with global competition--By the 
way, I was hoping you were going to ask a question that was 
going to merit a field hearing in your district.
    [Laughter]
    Ms. Christian-Christensen. We are working on that. We are.
    Mr. Mehlman. I have family there and have spent a 
substantial amount of time there and I share your sentiment, 
that I think it has probably been overlooked and is a natural 
place as a way to service a lot of businesses and have better 
economic growth than it has had.
    With respect to the question, my sense first and foremost 
is to be competitive yes, improving the education system it is 
not just more degrees. It is higher quality, higher 
productivity, higher flexibility, and higher creativity.
    One example, albeit it is a little off the IT services 
space, we are recently seeing IBM, one of our bigger companies, 
successfully getting semiconductor contract manufacture work 
back into New York. Reported in Business Week, I do not think 
by you, Pete, but they brought it back to New York.
    I called them because my office spends a whole lot of time 
trying to focus on what do we do to get just those types of 
results? What IBM is doing is they are taking their smartest 
engineers and they are saying you come and you bring your chip 
design work here and we are going to help you improve it and we 
are going to help you make it better.
    They are not lower cost than the Taiwanese where they were 
taking the work from, amazingly, but rather they are adding a 
value add based upon, IBM hires the true best and brightest, 
but based upon values that only this American company and only 
these American workers may be able to add. They are bringing 
jobs back to the United States, high tech manufacturing jobs, 
based upon added valuer and added skills.
    My sense in the IT work space is there will be some areas, 
call centers may be one example, that are going to be a real 
challenge, and there are going to be a lot of other areas where 
we are going to make sure if our people do have the skills and 
do have the tools, that they are able to out-compete because 
they are able to deliver value that nobody anywhere else 
regardless of their cost is able to add.
    Ms. Christian-Christensen. Thank you.
    I see my time is up, Mr. Chairman.
    Chairman Manzullo. Thank you.
    Mr. Beauprez?
    Mr. Beauprez. Thank you, Mr. Chairman. This has been a 
great hearing.
    Like many of the issues we get into, I am not sure that 
there is a singular simple solution, but certainly we have 
identified the problem.
    It seems to me, and this is not only from testimony today 
but in visiting with some of the businesses in my district and 
in my state, which is Colorado, in and around the Denver area, 
a fairly high concentration of some high tech companies. Many 
people that have gone through serious downsizing. White-collar 
folks out of work. The issue of visas has really come up just 
recently. I think we do need to take a serious look at it Mr. 
Chairman, within this Committee and within this Congress. What 
is an appropriate level.
    But in thinking about the situation in total I go back to 
one of my basics and that is that you usually get what you 
incentivize for.
    I would submit to this Congress, certainly this Committee, 
the question of whether or not we have truly incentivized for 
jobs in this country. To just put it right on the table. Is 
that really what we want? If we really want that, have we done 
a good job of laying those incentives out when I think most of 
us understand health care cost is increasing 15 to 20 percent a 
year. Somebody has got to pay for that.
    Taxation, we know what the levels are. I think somewhere I 
read that the United States business tax is about the second 
highest in the world. Second highest.
    The cost of complying with taxation, I read recently that, 
anybody can estimate whatever they want, but the number I see 
is somewhere between $200 and $300 billion a year, the B word, 
$200 and $300 billion just to figure out how much you owe 
before you pay it.
    I read just this morning, that the cost of government 
regulation, is about eight percent of the gross domestic 
product, roughly $843 billion a year.
    I heard education talked about a lot. I think it is fair to 
ask the serious question, have we really, as a society, 
incentivized the kind of education requirements and advanced 
degrees that are going to be attractive for the kind of jobs 
that we are talking about today.
    Sadly, I come back to a statement that one of my friends in 
my district told me when I looked at his business, about 25 
employees, all high tech, all well paid. The vast majority were 
Indian or African here on visas. I said why do you not hire 
local folks? This was now a couple of years ago, and I am quite 
certain that the job market has changed, but he said I cannot 
get qualified applicants. A very sad indictment on our 
education system again. When we were pushing kids out of our 
local school system that looked just like these folks, 
genetically I am sure just as good or superior perhaps to those 
folks, capable. But we were not giving them the education.
    So I come back to you all and looking for that hard and 
fast recommendation. Where is it? I have not heard a serious 
one. We have to adjust the tax code, we have to adjust the 
regulation, we have to address some of the hard issues that are 
out there, but I think if what we really want is what my 
granddad came here for, an opportunity to get a really good job 
and keep it and produce something so you can own something for 
yourself and your family and pass it on, the old American dream 
stuff, I am not sure that we are incentivizing that, especially 
as we look at the global market. If we still believe in the 
same foundation.
    So I was going to address that kind of subject rather than 
a question, Mr. Engardio, to you. I think maybe you have as 
broad a perspective as anybody.
    Mr. Engardio. I can tell you what companies tell me. One is 
that there seems to be a real mismatch in the kinds of skills 
that our universities are producing and to what they could 
really use for that kind of pay. If you have a chemical 
engineer we do not want somebody that is going to do process 
engineering. They do not want them to do the mundane parts of 
that. They want somebody who can manage an R&D project, that 
can supervise international staffs, that can also be broad 
enough to start looking into biotechnology applications and 
things like that. They cannot get--We have a limited pool of 
chemical engineers that are not very well allocated in this 
country and they say----.
    And it applies to other professions. It goes to 
architectural services. The graduates coming out of school are 
doing still kind of commodity kind of work when they should be 
doing much more.
    So now you are comparing people doing work that can be 
replicated very easily overseas for a tenth of the cost. There 
is just no contest.
    On the other side of it, I do think it has gotten to the 
point now where companies, it has gotten beyond just skill 
shortages in some areas and where it really is coming down to 
just huge cost discrepancies in wages. In IT support. There are 
a lot of people getting laid off that cannot find work that are 
very, very good. They are just paid three times more, five 
times more than a comparable Indian with maybe a doctorate 
degree.
    I think it is just a painful transition that is going to 
occur in some of these fields. I do not see any way out of it.
    Mr. Beauprez. That is a fair answer.
    I would just say, Mr. Chairman, I think we have really got 
to focus as a Congress and as a government on what do we want 
the end product to be. If we want our corporations and our 
employees to be as competitive in the global market as possible 
then our laws and our regulations ought to reflect that.
    Chairman Manzullo. I appreciate that.
    Mr. Miller?
    Mr. Miller. Thank you, Mr. Chairman.
    This is the second Committee hearing just like this or 
almost just like this that I have attended in the last month. I 
am also a member of the Science Committee and within the last 
month we had a Committee meeting on how to prevent or what to 
do about the outsourcing of manufacturing jobs. The concern of 
all the witnesses at the Committee was that we did need to have 
a manufacturing economy, we did need to make things. We could 
not all just give golf lessons to each other. That our economy 
could not possibly prosper that way. But the witnesses also 
said we very badly need a policy on how to protect 
manufacturing jobs, how to develop new manufacturing jobs, how 
to protect the ones that we have if we can protect them, and 
that we did not have anything resembling the policy.
    To paraphrase the old country music song, if it were not 
for bad policy we would have no policy at all.
    Mr. Engardio, do you think we need a policy? Do we have a 
policy?
    Mr. Engardio. One of the conditions for my magazine, 
journalists often do not come to these Committees but one rule 
is we are not supposed to be advocating policy. We can spit 
back what people say.
    Mr. Miller. Without advocating one, do you know one when 
you see it?
    [Laughter]
    Mr. Engardio. Gosh, it just seems that it comes down to 
education. In terms of restricting the forces of what is 
driving this globalization of skilled work, it seems like it is 
so beyond the control of policymakers. Also the cat is out of 
the bag. It has gotten to the point where an EDS, an IBM, an 
Accenture has no choice but to hire thousands and thousands of 
Indians in order to compete because the cost structure of this 
industry has now changed. Permanently, I believe. So it is very 
hard to go back the other way.
    It is like manufacturing. Once it got to be, a few 
manufacturers went out to make the garments, nobody else could 
compete with them. Everybody had to do it to stay in business. 
Productivity only does so much. I think that is kind of where 
we are in some of these areas.
    Mr. Challenger. You could offer tax incentives to companies 
for training their people, if you begin to think of education 
as not something that ends at 22 but something that is 
lifelong, then to offer companies that retrain their workers 
and continue to upgrade their skills, then those companies are 
going to make more efforts in that direction.
    Mr. Miller. Mr. Challenger and Mr. Engardio, you said much 
the same thing and I think several of the witnesses mentioned 
training. Mr. Engardio, you mentioned the mismatch between what 
colleges or universities train for and what the job needs are 
in the market.
    Probably the place in our economy where those job skills 
are matched to the specific training is at technical and 
community colleges.
    Mr. Engardio. Exactly.
    Mr. Miller. Among the first calls that an employer makes in 
the community is to the technical or community college to say 
this is how many folks we need, these are the job skills they 
need, can you develop a curriculum to deliver that workforce 
with those very skills?
    Does it make any sense to you at all to cut funding for 
vocational training at technical and community colleges?
    Mr. Engardio. I do not know enough about it.
    It is clearly where the problems are happening I think are 
at the polytechnic level, community college, as you say. The 
premier universities are dealing with the upper end of the 
talent pool. These guys are going to be okay. They are going to 
adjust. They are going to be creative. It is the lower levels 
where you hear that the curriculum is just not up to date. Many 
companies say they keep going to these schools and saying you 
have to change.
    I cannot give you an answer as to whether funding is 
adequate or not, but that is where the problem is.
    Mr. Challenger. It also may very well be not just the 
Asians and the Indians and the Africans who are creating the 
businesses, running Silicon Valley, the new entrepreneurs. It 
is the Indian Americans and the Chinese Americans who are 
creating those businesses and then creating the jobs and the 
infrastructure that results from that.
    Mr. Miller. Mr. Kenton?
    Mr. Kenton. Yes. First of all, I appreciate the tremendous 
hospitality that the community has extended to my family. It 
made a trip to Washington very personal.
    I think one of the issues is that the so-called process of 
creative destruction consumes technology and training so fast. 
Among the technical workers with whom I work it is a constant 
process of having to go out and learn the latest technologies. 
It is a process that does not stop. I think there are always 
going to be gaps between the development of the new 
technologies and the ability of the school to catch up. Almost 
by the time they catch up they are already moved on to 
something else. So I think there is a fundamental problem 
there.
    To get back to something that Mr. Schrock said, I think 
there is also a fundamental problem in regard to just 
leadership of what is it that we are doing? If you look at why 
would programmers be involved now in creating software that is 
going to make them obsolete in ten years? The reason for that 
is, they are paid for it. If you are able to go out and have a 
job on the cutting edge that is going to assure you a high 
salary and benefits for a certain period of time. If you happen 
to be one of those lucky people that creates one of those 
breakthrough technologies that inevitably makes you obsolete, 
you get to cash out of the system because you make millions of 
dollars and it no longer matters to you any more.
    But I think that what that process does it is shows a lack, 
I think, of a fundamental sense of direction. I think we have 
abrogated a lot of our sense of vision to unfortunately 
marketing. Everybody wants to go out and make money as fast as 
they can, and that is essentially the structure that we have 
built.
    Mr. Miller. Mr. Almeida?
    Mr. Almeida. The answer to your question is obvious, that 
there should be no cuts in the funding.
    The small businesses have to rely on the community colleges 
and the technical pools for their pool of workers, it is clear.
    Chairman Manzullo. Mr. King?
    Mr. King. Thank you, Mr. Chairman. Thank you for holding 
these hearings today and I would like to thank the panel for 
their presentation.
    As I sit here and listen to your remarks and the questions 
and comments of the other panel members and of the Committee a 
word pops into my mind that I have not heard involved with the 
educational system in a long time, and that word is 
meritocracy. There are a few places in the world where they do 
promote such an idea, and that used to be the American creed. 
Where people who actually produced were the ones that got 
ahead, and they stood on their own merits regardless of 
individual rights, individual merit. There has been some 
reference to that today in that we are seeing folks come from 
other parts of the world that are competing at an advantage 
within this environment in this country.
    One of the statistics that I would point out would be that 
in 1995 the Asian composition of the student body at University 
of California at Berkeley was 12 percent, by design, by 
formula. And a short five years later after Proposition 209 was 
passed, that composition went up to 46 percent.
    Now you can do the math on that. To me, it looks like there 
were a lot of folks that were not getting the opportunity that 
they might have otherwise if it had not been for that, I will 
call it a goal system because we do not use that other word 
even though it in effect is the other particular moniker.
    So I would go to a meritocracy. Then eliminate preferential 
treatment. Put people out and give everybody equal opportunity. 
If they can succeed by equal opportunity they can chase their 
dreams and their goals.
    The other part of this economy that strikes me as being 
something that I have not heard anyone frame either, we are 
talking about manufacturing jobs, industrial jobs. It has been 
the heart of America's economic might since the inception.
    As I watch the jobs transfer out of the United States, and 
we have talked about that considerably here today, the lower 
skilled jobs are going to the developing countries and they 
will, as you said, continue to accelerate their effort to get a 
larger and larger share of that market.
    Our salvation I do not think is in trying to get any of 
those jobs back. I think there is some merit in seeking to slow 
the loss of those jobs.
    The other side of this is the high tech industry where we 
need investment capital, research and development, high tech 
education. That is where the new jobs, the high paying jobs are 
going to come from.
    So if we can expand this, we can slow the loss of the low 
skilled jobs, we can accelerate the creation of the high 
skilled jobs, that is probably the best we can hope for within 
this environment for us to compete against the rest of the 
world.
    So then it brings me to that single solitary solution that 
Mr. Beauprez remarked upon. There probably is not one. But I 
think there is a formula that helps us substantially. I would 
pose this question to I think Mr. Mehlman. That would be if we 
could discount all of the products that we export overseas by 
22 percent, could you speculate on the impact of the loss of 
those low skilled jobs that are going overseas?
    Mr. Mehlman. I guess if the question is if our products 
going overseas were less expensive relative to the markets in 
which we are trying to sell them, we would undoubtedly have 
more success in selling those products.
    One of the things I think is currently being reported on by 
Business Week and others is as the dollar's value is not what 
it was a year ago, we are seeing our manufacturers and some of 
our exporters having greater success in selling their products 
into some markets where a year ago or two years ago our 
products were relatively priced out of the range of customers.
    Mr. King. Have you speculated in your own mind as to which 
policy I am addressing when I say 22 percent discount?
    Mr. Mehlman. I have a guess after visiting with Mr. 
Rumsfeld and Mr. Zelnick. I am off to see Secretary Snow.
    Mr. King. That would be of course a national consumption 
tax where we have an embedded cost of 22 percent in all of our 
export and our domestic products. And our exports also hinge 
upon one or two percent. That is the margins on when we are 
promoting products overseas. One or two percent makes a 
significant difference in all of these large markets, and yet 
we have the embedded costs of 22 percent in our taxes.
    Mr. Beauprez mentioned that I think the number was around 
$300 billion, the cost of just getting prepared to pay the 
federal taxes. But nobody is talking about the disincentive 
that is in place because of the cost of the taxes. There are 
millions of people in this country that make decisions day by 
day that is, ``I worked hard enough, I risked enough capital, I 
am not going to go out another hour this week or this month 
because the federal government takes too much and consumes too 
much of our productivity.''
    If you add those dollars up that come from the dollars of 
what we have to pay the IRS, what we have to pay to force 
compliance, what we have to pay other folks to do our taxes and 
what we ourselves take out of our productivity to keep record 
of all of that, then the disincentive, I am going to tell you I 
believe that that cost of our federal tax system is over a 
trillion dollars a year. And what a huge anchor we could cut 
the chain to and how that would help so much our export 
markets. It would also incent the formation of capital, 
research and development, high tech, higher education. That 
comes I think as close as anything to a solution and the one-
stop shopping for a solution.
    I had to do this for Mr. Beauprez's benefit here. I knew it 
would help his day out.
    Thank you very much, Mr. Chairman.
    Chairman Manzullo. I think Mr. Mehlman had a response to 
that.
    Mr. Mehlman. Just with respect to both Congressman King an 
Congressman Beauprez. I think you both are right on. There is 
somebody who has been talking about the competitive dynamic of 
the high state of taxation or regulation, litigation, health 
care costs, for example. It is the President. So much of the 
Administration's initiatives on the fiscal side and on the 
regulatory side have been aimed at helping our businesses 
compete and be more successful globally in part by making sure 
the taxes and the regulations we have are all that we need to 
have but not more and are not sufficient burden upon our 
exporters and upon our producers that we either price ourselves 
out or put money into taxation or tax compliance as opposed to 
into production and competing.
    Chairman Manzullo. Thank you.
    Mr. Ballance?
    Mr. Ballance. Thank you, Mr. Chairman. This very 
interesting debate, testimony I should say this afternoon.
    I live in rural eastern North Carolina. Most of the folk 
that I represent are not being debated about here today. They 
have already lost their jobs in textiles.
    Since I only have five minutes, by show of hands how many 
of the panelists believe that we as representatives of the U.S. 
government can do anything about this problem?
    [All hands raised]
    Mr. Ballance. Well, that is good.
    The question I have and what I read as a free enterprise 
society, businesses can do what they want to do within certain 
regulations. What can the government do to stop a company from 
shipping its jobs to China or wherever they want to ship them?
    Mr. Kenton. One thing that has not been mentioned so far is 
benefits. For a small business the cost just of medical care, 
providing medical care for employees is prohibitive. So when I 
look at the possibility of hiring a new employee, I have to 
look at that against the cost of providing the benefits for 
that employee. I do not want to say that is as much as the tax 
burden, but it is a very significant burden.
    Mr. Ballance. If I am the government what can I do about 
that? To keep a private company from sending its jobs to 
Taiwan?
    Mr. Kenton. I think that is a whole other panel. But I 
think the issues with the cost of health care and the 
requirements for providing health care are issues that need to 
be resolved.
    Mr. Ballance. Mr. Challenger, what do you say about that? 
What can we do? Can we craft a policy with Mr. Manzullo leading 
the way to keep some of our jobs in America?
    Mr. Challenger. One of the efforts that Chairman Manzullo 
may be making is that defense is something that is under the 
control of the government. Those contracts can be given out to 
local businesses. So certainly government can take steps to 
award contracts to the businesses they want in. In terms of 
creating long term jobs it may also be heavy focus back to the 
education issue. That is what are the new jobs of the future? 
If textiles are not going to be here what are the jobs and how 
can we train our workforce to attract businesses in this area?
    Mr. Ballance. I do not want to cut you off, but from what I 
understand all of those folk that got laid off were well 
educated. They were Ph.D.s and they had great degrees, but they 
were given pink slips or whatever kind of slips they got.
    Mr. Challenger. Nobody is invulnerable to job loss. We are 
seeing people today change jobs now seven, eight times in a 
career. That is a far cry from say 10, 20 years ago where you 
might have worked for one company all your life. That was the 
way it went.
    So the question then becomes how do you help people make 
those transitions from company to company because everybody is 
going to have to go through periods of job loss. We need to get 
people to not only equip them with skills to make those 
changes, just in terms of how to search and how to get at it, 
but also give them incentives to move to where the jobs are and 
give them training to also take on new jobs.
    Mr. Ballance. It would seem to me, I do not know who is the 
tax expert on the panel, but it seems to me that we could in 
our tax policy, the way we treat American businesses, that that 
is one way we could impact. Also I agree with the Chair and the 
Ranking Member that certainly how we spend our money, we can 
impact that. But does anybody think that tax policy on 
companies that offshore their jobs would be one way we could 
look at it?
    Mr. Mehlman. I have never heard, any company that I have 
talked to has not raised taxes as an issue to me.
    Mr. Palatiello. To some extent we are the victims of our 
own success. We have created in a lot of the industries and 
professions represented in this panel high paying white-collar 
high quality jobs, and now we are almost being punished for 
doing that because we are being undercut by lower paying jobs 
in other countries.
    I think the cost of labor is certainly a significant 
factor, but I think the comments that several members have made 
is there is also a cumulative cost of doing business. There is 
a cost of taxation, there is a cost of regulation, there is a 
cost of litigation. A lot of those things are driving up the 
cost of doing business in the United States and if you do not 
have those same costs of doing business in other places and you 
add to that a lower wage labor base it is going to be very 
difficult for us to be competitive.
    I would go back to a couple of comments that people have 
made. The federal government spends over a quarter of a 
trillion dollars a year in contracts. That is just the federal 
government, not to mention money that is given out in grants 
and assistance to state and local governments.
    If in the wisdom of the Congress you believe it is in the 
country's best interest that service work be done domestically, 
certainly Congress is within its power to encumber that money 
whether it is by direct federal contracts or subcontracts or 
grants and assistance to state and local government to say the 
work will be performed domestically.
    Chairman Manzullo. Does anybody else want to comment on 
that question?
    Mr. Engardio, then Mr. Mehlman.
    Mr. Engardio. I would just say, I can maybe put it in 
perspective in terms of a manufacturing job, and I think the 
same things apply in a lot of the service jobs we are talking 
about.
    When you ask companies and consultants that help them 
relocate what are the factors they are considering, wages is 
one. It is not the only thing. The Shanghai area, we looked at 
why are jobs going from Japan to China? Land cost of Shanghai 
area is about one-fifth the price of Japan; it is about one-
third the price of Malaysia which is a low-cost country. Water 
costs are about half. Cargo handling fees are about a half of 
any comparable Asian country. It gets into a lot of things. In 
that mix taxes are not, in some countries it is a factor. In a 
lot of countries it is not. So there are about five or six 
things going on. The shipping costs, physical shipping costs 
from that place to the United States.
    If you were to break down what is a competitive advantage 
of Manila in call center work for Delta Airlines which has like 
500 people working there, wages is one. But they have a lot of 
very cheap office space. They have nine at least office 
centers, very modern office complexes around the Manila area. 
Their telecom costs are about a half to a third. This is a very 
big factor. They have very cheap broadband connections. We do 
not in this country.
    There are a lot of things. Maybe you can identify those six 
or seven factors and say what areas are within any government 
influence?
    I hope that helps.
    Chairman Manzullo. Mr. Mehlman, did you have a comment on 
that?
    Mr. Mehlman. Yes, sir.
    I do think there are things the government can do and I 
certainly think we are trying to and in fact are doing a lot of 
them from the Administration. One caution offered by others on 
the panel that I would echo is to be aware of the sort of the 
only unrepealable law in Washington, the law of unintended 
consequences.
    Right now in the global competitive market for IT services, 
the U.S. comes out ahead in 2001 by $7.9 billion. We are 
exporting to other nations $7.9 billion more than we are 
receiving in IT services back on-shore.
    If we say we are not purchasing any more, other nations 
might also and that would put us deeper into the current 
account deficit by $7.9 billion.
    The other unintended consequence that we have to I think 
meaningfully consider is that a lot of the businesses that are 
looking globally for IT service work are not doing so out of a 
lack of patriotism or a lack of love for their country or their 
neighbors or where they live. They are doing so because they 
are competing globally for making semiconductors or cars or 
whatever they are making. They are trying to be as competitive 
an enterprise as they can possibly be.
    To what the Chairman said in the government context, I 
imagine that is a similar consideration. In New Jersey there 
was a well publicized circumstance where the state Division of 
Family Planning, which is a welfare organization that tries to 
help provide benefits to those who need welfare in the State of 
New Jersey. They had a call center and they sent it offshore 
because it meant they could have more money for welfare 
recipients.
    There was a storm of protest that nine jobs were sent 
offshore so they brought them back. They increased their costs 
by 20 percent so their administrative costs went up by 20 
percent and the money they had available for those who are on 
welfare was reduced by a commensurate amount.
    It means that we are going to need some real good 
economists to understand when it is better to have the money go 
to the strategic core purpose for which the money is intended, 
even if it means you are using equal value but offshore work, 
and when it is better to increase the cost and have less 
dollars for R&D or whatever the ultimate product you are trying 
to do, but use domestic information technology or other service 
work.
    I think that is a tough calculation that a lot of 
businesses are trying to weigh.
    Chairman Manzullo. Ms. Bordallo before I turn over the 
microphone to you, I would just make this comment. The very 
government that is responsible for all the high costs is the 
same one that says we are going to go offshore and purchase 
because it is too high to purchase here. That is where the line 
gets drawn in the sand. You cannot have it both ways. That is 
why we are in this huge dispute with the Pentagon, because of 
the continuous overseas purchasing of goods, equipment, and 
services that could be done here in the United States.
    Ms. Bordallo?
    Ms. Bordallo. Thank you very much, Mr. Chairman. I just 
wanted to say how much I appreciated the meeting we were at 
yesterday in your office to discuss some of these problems.
    I represent the island of Guam in the Pacific area. I would 
like to express my sympathies for the situation that has been 
described by our witnesses today.
    An example from Guam, to highlight the need to address the 
loss of service sector jobs.
    The economy on my island is largely supported by two 
service sector industries. The first is tourism including 
hotels and small business tour operators. The second is the 
support of military operations on Guam such as a ship repair 
work, logistics and base operations servicing which requires a 
highly skilled workforce.
    Now you would think that if anything were safe the 
procurement of services for the Department of Defense would be 
immune from the globalization trend that we have been 
discussing here today. However, I would like to share with you 
one example of how outsourcing of ship repair services has 
impacted a small business with fewer than 300 employees on our 
island of Guam.
    The Navy is allowed under current law to repair military 
Sealift Command vessels outside the United States if they have 
no designated home port. Using this loophole the Navy waits two 
years until a ship needs repair, and then announces it is being 
deployed to Singapore, for example, bypassing the U.S. ship 
repair services on Guam. There they can do repair work with no 
regard for American fair labor practices, worker protection, or 
environmental standards.
    The result is that the Guam shipyard cannot sustain the 
workforce they need of highly skilled repair workers. They 
cannot afford training programs. And over time the knowledge 
base on Guam will not be replaced. Once this happens foreign 
firms will have no American competition in the Western Pacific.
    I was very impressed yesterday with the Chairman telling us 
the story about the black beret scandal of the Army and how we 
were able to, he was able to get to the bottom of that and turn 
it around.
    So I feel as some of you do gentlemen that we can do 
something about this.
    What we are doing here, our own country, is eroding our 
manufacturing base and causing an increasing rise of 
unemployment in our own country. We are responsible for it.
    I do not know what the solution is now, but I am very 
interested to work with the Chairman and the Ranking Member of 
this Committee to help and protect our small businesses and our 
manufacturing firms around our country.
    Thank you very much, Mr. Chairman.
    Would anyone like to respond to that?
    [No audible response]
    Thank you.
    Chairman Manzullo. Mr. Mehlman, I like your spirit. This 
panel has been great. We three weeks ago had a gentleman by the 
name of Wayne Fortun. He runs a company called Hutchinson 
Technology in Hutchinson, Minnesota. He is the sole survivor of 
38 U.S. manufacturers of CD springs. He has several thousand 
employees in Minnesota, Wisconsin and North Dakota. He is going 
head to head with the Chinese and succeeding. He is exporting 
98 percent.
    Some members of our staff are going to take a look at his 
facility. We would like to invite you to go up there with them 
because we are obviously on the right target.
    You are looking for the success stories and want to know 
how these guys are doing it, so we look forward to you thinking 
about it and joining us on that trip.
    Mr. Mehlman. It sounds great. Thank you.
    Chairman Manzullo. I have just a couple of comments and 
then Ms. Velazquez has some questions.
    First or all I want to thank you all. This is tremendous 
testimony. The area of the country that I represent, Rockford, 
Illinois, has a 25 percent manufacturing base. We are at 11 
percent unemployment and it is getting worse.
    I think Mr. Challenger you had mentioned that as the 
economy improves those jobs are going to come back. They are 
not. The 2.7 million manufacturing jobs that are gone, they are 
gone. The factories are closed. The work has been outsourced 
overseas. At one time this Committee had people in China, 
Southeast Asia, and Brazil combing for contracts for 
manufacturers. That is just our Committee. That is the amount 
of time we spend on manufacturing and international trade. 
Those jobs are gone forever.
    The tool and die industry is being absolutely demolished in 
this country. It is being savaged. We just cannot get our 
government to wake up to the fact that, and I hate to use the 
word protect, but I like to call it national industrial base. 
That is absolutely necessary--We have in this country, in 
Tiffin, Ohio, the last manufacturer of the cold forming 
machine. That machine makes bullets in one step, about 500 a 
minute. Otherwise you have to machine each bullet for military 
use, hand by hand.
    Every time we try to bring these things to the attention of 
the people in the Pentagon it just falls on dear ears. No one 
gets it.
    The environment of Washington, D.C. with 1.5 percent 
unemployment. The inflation rate in Washington is five times 
higher than it is in the rest of the country. The price of an 
average single family home is $540,000. The average or the 
medium income, per household income in Washington, is close to 
$100,000 a year.
    This city is so out of whack of what is going on in the 
rest of America that it is very difficult for may policy 
leaders and makers to try to understand. That is why Members of 
Congress--we are fighting back for our manufacturing jobs. 
Regardless of how people have voted on these trade issues, 
because we know what is going on.
    I could tell you, Mr. Engardio, what is going on in my 
district. engineering jobs are going to Poland.
    Mr. Engardio. What industries?
    Chairman Manzullo. Aerospace. Let me give you an example 
here.
    If this item were exported from the United States and let 
us say it is $100 million sale. So this shows up on the trade 
surplus merchandise ledger as plus $100 million even though it 
could contain $99 million worth of imported parts.
    There is no index. There is no indicator, there is no study 
to indicate the extent of imported parts in our exported items.
    I would estimate that our trade deficit is five times 
greater than the $500 billion that it is. Otherwise how could 
you possibly come up with the fact that we are supposing the 
process of recovery and unemployment in my district is going 
up.
    The latest study that just came down from the FDIC on 
sectorial manufacturing job losses, a 47-page document. 
FDIC.gov. It takes it sector by sector by sector.
    The latest study by the NAM, the very last sentence in the 
executive summary is saying essentially the United States is 
becoming a third world country because of the massive 
destruction of our industrial base. And no one seems to get it.
    About every two days we revise our challenges to 
manufacturing power point, and we passed out 60 copies today. 
We are always adding yet another reason in there.
    Somebody brought up our own version of forced labor in 
America: Prison industries. Peter Huxtra in Michigan lost 600 
jobs in one day! Then we found out that those people at the 
FDIC in violation of their own charter, Federal Prison 
Industries, those people were taking things and saying they had 
been manufactured or assembled in factories, in prisons when in 
fact all the were doing was slapping their label on them, 
acting as a warehouse. $550 million right there to start in 
manufacturing. It is all over the place. It is always a 
government policy that is involved.
    Let me throw out another one, and I do not know if this is 
presently the law on it. I bought a WI-FI. This is the cat's 
pajamas. It is just unbelievable. I turn on my laptop and I am 
on the Internet.
    Now the particular box says Toshiba. I do not know if it is 
made in Japan, made in the United States, but it says on the 
box, ``This item may not be exported to any country except 
Canada without a validated license by the Bureau of Export 
Control.'' I do not know if that is changed. It had to be an 
older box because the Bureau of Export Control now has a new 
name. But what is it? We always come back to a particular 
government policy.
    So what happens is the very things that we make best in our 
country we cannot sell.
    We held a hearing here two weeks ago on bringing in people 
from tier three countries to look at items that we manufacture, 
even though they are not covered by a valid manufacturing 
license. Four axis cutting machines. And two tremendous public 
servants from the FBI and from the Department of Consular 
Affairs at the State Department sat on this panel here and 
explained the problem, working towards a resolution. I think we 
are going to come up with some tremendous progress, bringing 
people in to this country that want to buy things without 
having to wait months and months on it.
    Anyway, Ms. Velazquez, you have----.
    Ms. Velazquez. Sure. Just one more question.
    Mr. Mehlman, you espoused so enthusiastically on this cause 
the Administration views regarding fiscal policies and taxes. 
Can you please comment for this Committee what are your views 
on the effect of running one of the largest deficits in the 
nation in the last 30 years?
    Mr. Mehlman. Sure. Thanks for the question.
    Obviously I have a lot of respect for some of the leading 
folks in the Administration who helped formulate tax policy. My 
belief and expectation, though, hearing from both manufacturers 
as part of the Secretary's initiative, certainly hearing from 
more than two years from high tech companies, what they need 
right now is they need customers making capital expenditures, 
they need investors returning to the market, and they need 
employers hiring again, and the appropriate efforts right now 
with respect to fiscal policy are to try to get investment 
being made again, capital expenditures happening again, 
businesses able to hire again so that as we retrain folks they 
have employers who are willing and ready and able to hire them.
    Ms. Velazquez. Do you think running a deficit is healthy 
for our economy? Do you think that will help us grow?
    Mr. Mehlman. I am hardly the expert on fiscal policy, but 
right now yes. I believe the tax policies and budgetary 
policies that have been offered by the White House are very 
much the right policies to promote jobs and to promote growth. 
And if this year there is a deficit, it is a deficit with the 
goal of creating jobs because the jobs are the key to the tax 
base. I think we saw back frankly in the Hoover Administration 
what happens when you slam on the fiscal brakes during a period 
of tough economic times when in fact there should be greater 
access to capital and greater access to jobs.
    Ms. Velazquez. We saw that happen under the Ronald Reagan 
Administration with a huge deficit. The money went away with 
the taxes and the jobs disappeared.
    Thank you.
    Mr. Mehlman. Thank you.
    Chairman Manzullo. Thank you all very much. Tremendous, 
tremendous testimony. And thanks to our very three special 
guests for coming here.
    This Committee is adjourned.
    [Whereupon at 4:48 p.m. the Committee was adjourned.]

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