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



                                                   S. Hrg. 102-000 deg.

           ATTRACTING ECONOMIC GROWTH FOR THE RURAL ECONOMY

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

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                   WASHINGTON, DC, SEPTEMBER 4, 2003

                               __________

                           Serial No. 108-35

                               __________

         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
Dorr, Thomas C., U.S. Department of Agriculture..................     4
Sampson, David A., U.S. Department of Commerce...................     6
Drabenstott, Mark, Federal Reserve Bank of Kansas City...........     8
Ungar, Bernard L., U.S. General Accounting Office................    10
Freshwater, David, University of Kentucky........................    12

                                Appendix

Opening statements:
    Manzullo, Hon. Donald A......................................    28
    Velazquez, Hon. Nydia........................................    30
Prepared statements:
    Dorr, Thomas C...............................................    41
    Sampson, David A.............................................    48
    Drabenstott, Mark............................................    60
    Ungar, Bernard L.............................................    83
    Freshwater, David............................................   101

                                 (iii)

 
      HEARING ON ATTRACTING ECONOMIC GROWTH FOR THE RURAL ECONOMY

                              ----------                              


                      THURSDAY, SEPTEMBER 4, 2003

                  House of Representatives,
                       Committee on Small Business,
                                                   Washington, D.C.
    The Committee met, pursuant to call, at 9:30 a.m., in Room 
2360, Rayburn House Office Building, Hon. Donald A. Manzullo 
[chair of the Committee] presiding.
    Chairman Manzullo. Good morning, and welcome to this 
hearing by the House Committee on Small Business. I appreciate 
the participation by all who have come to us today, especially 
those of you that have traveled some distance to attend our 
hearing.
    The purpose of the hearing is to examine--review how the 
government is doing in encouraging growth in our rural economy. 
For many years, we have had a migration of people away from 
rural areas in general and towards metropolitan areas, 
especially metropolitan areas around the East and West Coasts.
    One contributing factor in the migration within the country 
is insufficient economic activity in rural areas. When rural 
areas lose working-age people, many schools and hospitals begin 
to shut down. Housing prices drop, the tax base erodes, social 
services have to be cut; and it creates an atmosphere that 
tempts more people to leave, and then the cycle is reinforced. 
All the investments in roads, railways, airports, 
telecommunications and utilities become underutilized and, to a 
degree, wasted.
    At the same time, the metropolitan areas these people move 
to have problems with too much road traffic, crowded schools 
and housing shortages.
    For example, there have been cuts at the Goodyear Tire 
factory and Honeywell electrical switch facility in Freeport, 
Illinois, and nearby Galena; and the General Electric plant in 
Morrison, Illinois, in Whiteside County, which is part of the 
district that I represent, has gone from a couple of thousand 
employees down to 200.
    When these larger factories shed jobs, many other small 
businesses are affected, some of which obviously close. And 
then some of the former employees have to move out of these 
rural areas to find new work, which put houses on the market 
for sale. The smaller work force hurts the property tax base 
and it goes on and on.
    In fact, there was an article in the Washington Post on 
Sunday about a town by the name of West Point, Nebraska, that 
suffered, along with most of our rural areas where we are 
actually losing population, the challenge that it has with the 
wave of new immigrants repopulating the rural areas. All those 
challenges have really helped out that little town.
    Congress recognized the important of maintaining our rural 
areas when it passed the Rural Development Act in 1972. Today, 
we will have a hearing and testimony on whether the government 
agencies are living up to the goals of that law.
    We will also be hearing testimony on all the factors 
involved in creating the environment businesses need to thrive 
in rural areas. The recommendations we hear today will be 
important ones for developing any necessary future legislation 
to address critical problems.
    A further purpose of today's hearing is to give the rural 
folks an opportunity to tout the fine things that they have 
done and no one knows about. That is why this is really not--it 
is not an oversight hearing, but it is a hearing that you can 
let the members of this committee, many of whom come from rural 
areas, and the delegates--we have four delegates that sit on 
this committee, which is extraordinary, and they, of course, 
are very much interested in economic development in their 
areas. So we are really thrilled to have what I consider a 
quite unique panel of people coming to help with us this issue.
    The rules are, try to keep the testimony to 5 minutes, more 
or less, such as when you buy a farm, 160 more or less. And we 
anticipate that we are going to have a very interesting 
hearing. Now, I will have to admit the first two witnesses have 
been out--or Mr. Dorr was on his way to our district last week 
on two very sizable projects, but had to deliver the money 
without me. And Mr. Sampson was out, what, about a month ago?
    Mr. Sampson. A month ago.
    Chairman Manzullo. About a month ago with a nice check from 
the Economic Development Administration where we worked with 
the City of Rochelle and Union Pacific to put in the largest 
intermodal hub in the United States. That is, in terms of the 
footprint, EDA made possible a huge, huge light of promise in 
an area where we are into double-digit unemployment.
    So we look forward to the testimony.
    [Mr. Manzullo's statement may be found in the appendix.]
    Chairman Manzullo. And now I defer to and recognize our 
ranking minority member, Mrs. Velazquez, back from a nice break 
and looking refreshed.
    Ms. Velazquez. Thank you, Mr. Chairman. Good morning.
    This committee has said time and time again, small business 
is big business in America. Nowhere is this truer than in rural 
America. From family farms to local restaurants to 
manufacturing, small businesses make up the bulk of the rural 
economy. Ninety percent of all businesses in rural areas are 
small firms, so when this committee examines policies that can 
impact small business, we are looking at policies that have a 
huge impact on rural America.
    Today, entrepreneurs in rural areas are facing hardships. 
They face a weakening labor pool, as a younger and more 
productive population decides to leave and look for opportunity 
elsewhere. They have less access to capital and fewer 
government loan programs that reach them. These issues are a 
threat to the livelihood of rural America, and for those 
entrepreneurs and their employees who struggle to survive in 
these communities the rewards of success are few.
    During the 1990s economic boom other small firms 
experienced far greater growth. And today, workers' salaries in 
rural small businesses are nearly 35 percent below those found 
in cities.
    Small firms in these communities are also adjusting to the 
changing face of the rural economy. At one time, when Congress 
talked about rural development, we talked about farm policy. 
Today, only 10 percent of employment in rural areas is related 
to agriculture. In fact, the largest employers in rural America 
are manufacturing companies. These communities are often 
dependent on a single manufacturing plant as it brings in high-
paying jobs that form the area's economic and employment 
backbone. The loss of such companies can have a devastating 
effect.
    These areas have also been particularly hard hit by the 
dramatic decline in manufacturing jobs. Rural manufacturing 
fell by 4.6 percent in 2002, and the numbers are getting worse. 
The loss of these jobs has created a ripple effect and hurt 
other small businesses as well.
    Today's hearings will address how we can solve these 
problems. We will look at ways that we can use government 
programs to ensure the future is bright in rural America. 
Congress needs to make sure that we are not cutting critical 
funding to entrepreneurial programs during this economic 
downturn. It is during times like this that small businesses 
can spur a recovery.
    The administration cannot continually turn its back on 
small businesses, particularly in rural America. They need help 
in overcoming the challenges that face them, like gaining 
access to capital, technical assistance and Federal contracts. 
The USDA and Department of Commerce need to make sure that the 
programs are reaching those businesses most in need.
    These small firms simply need the right tools to level the 
playing field and be competitive in an ever-changing economic 
environment. Yet the administration's policies are actually 
hindering entrepreneurial development in rural areas, and 
because of policies that failed to help small firms, many rural 
businesses and our Nation's family farms are being threatened.
    Small firms provide employment opportunities within these 
rural communities, but they cannot reach their full economic 
potential unless we provide them with the relief and assistance 
they need. As a key driver of our economy, small businesses 
require the working climate conducive to providing jobs to 
those living in rural areas. A high unemployment market in 
these small communities will cause workers and their families 
to leave and settle in more populated areas.
    Failed policies are harming communities that rely most on 
their small firms. This is what is happening in our Nation's 
rural areas. We must prevent this in the future and examine 
ways in which Federal agencies can improve the programs to meet 
the needs of entrepreneurs in rural areas. Not only are small 
businesses the backbone of rural communities, they are the 
engine of our Nation's economy.
    Thank you, Mr. Chairman.
    [Ms. Velazquez's statement may be found in the appendix.]
    Chairman Manzullo. Okay. We will start with Thomas C. Dorr, 
Under Secretary for Rural Development, the U.S. Department of 
Agriculture, from the State of Iowa, where--did you live in Mr. 
King's district at one time?
    Mr. Dorr. I still live in Mr. King's district.
    Chairman Manzullo. Oh, okay. You have a constituent here. 
That is great.
    Okay, we look forward to your testimony.
    Mr. Dorr. Thank you.
    Chairman Manzullo. The complete testimony, written 
testimonies of all the witnesses, will be made part of the 
record.

    STATEMENT OF THOMAS C. DORR, UNDER SECRETARY FOR RURAL 
          DEVELOPMENT, U.S. DEPARTMENT OF AGRICULTURE

    Mr. Dorr. Thank you, Mr. Chairman, fellow members of the 
committee, and particularly Congressman King. It is good to see 
you again. I would like to thank all of you for inviting me to 
testify on USDA's Rural Development capital investment efforts 
under way to create economic opportunities in rural America, 
opportunities that I believe give rural Americans greater 
control over where they will live, work and raise their 
families as well as allow them to enjoy an improved overall 
quality of life.
    I think the question is, what is rural development at USDA. 
In fact, we are a sizable development bank. We presently have 
an $86 billion portfolio of loans and we will administer nearly 
$16 billion in program loans, loan guarantees, and grants 
through our three primary service areas of Rural Housing 
Service, the Rural Utilities Service and the Rural Business-
Cooperative Service. In effect, we are really a venture capital 
firm for rural America, and we have two basic goals, that is, 
to increase economic opportunity and to improve the quality of 
life for all rural Americans.
    How do we do this? We can increase economic opportunity by 
increasing the flow of capital to rural America, as well as 
provide leveraging opportunities. We are assisting in the 
sustaining and the rebuilding of the existing infrastructure in 
rural America. We are also involved in fostering and enhancing 
the build-out of the technological infrastructure necessary to 
enable rural America to compete both domestically and globally. 
And, in fact, we have implemented a $1.5 billion broadband loan 
and loan guarantee program as a result of our efforts this 
year; and finally, we are capitalizing on an emerging industry 
such as biomass and renewable resource development.
    It is this type of comprehensive approach of high tech 
investments and diversification of rural economies that led the 
Federal Reserve Bank of Philadelphia to highlight in its 2002 
Summer/Fall Cascade publication as contributing to a 1 percent 
increase in employment in rural areas of Pennsylvania, while 
the State's urban areas employment declined by 1 percent. And 
when you look at the impact such diversified investments are 
having in rural America, we expect in 2003 alone that through 
our programs approximately 350,000 rural jobs will be created 
or saved. Our housing investments are estimated to create or 
save over 52,000 jobs. Our utilities and community 
infrastructure investments are estimated to create or save 
nearly 204,000 jobs, and our business investments through the 
Rural Business-Cooperative Service are estimated to create or 
save over 92,000 jobs.
    The impact of the Bush administration's capital investments 
in rural America is tangible. According to USDA's Economic 
Research Service, although the U.S. Economy is now in recovery, 
job growth is not what we would wish. For the Nation as a whole 
in 2002, unemployment rates increased and employment growth was 
sluggish. However, nonmetropolitan areas fared slightly better 
in each measurement than metropolitan areas, and in May of this 
year the Federal Reserve Bank of Kansas City, through whom--you 
will hear from its director shortly--through its Center for the 
Study of Rural America, noted that the rural economy continues 
to hold steady with rural job growth increasing slightly by 
seven-tenths of a percent in February, compared with a year 
earlier. It should be noted that job growth is increasing at a 
slightly higher percentage in rural areas compared to growth in 
metropolitan areas, according to the Bureau of Labor 
Statistics.
    A further illustration of this point is a recent Forbes 
Magazine article by Publisher Rich Karlgaard, who wrote in his 
monthly column, Digital Rules, a story entitled ``Peaks and 
Valleys.'' It focused on how the IPO market, which went from 
over 200-plus per year in late 1999-2000, dropped about 20 to 
30 per year after the boom years of the late 1990s; and he 
discussed how, specifically, this has led to a level of high-
quality talent being much less scarce and less likely to 
relocate to where the limited new markets are now being 
located.
    The connection for all of this to Rural Development is, in 
the second half of his article, which focused on Jonathan 
Weber, the founding editor of the Industry Standard, which was 
a must-read publication in the late 1990s if you were following 
the IPO market; and in a nutshell, when Weber's magazine went 
out of business in 2001, Weber was worn out having worked 70-
hour weeks, chasing his tail and living in pricey San 
Francisco.
    He needed a change, and by his own account, needed to lower 
his cost of living. So he moved his family to his wife's home 
town of Missoula, Montana, where he now lectures as an adjunct 
professor at the university, writes reports for Off the Record 
Research as an independent stock trader.
    The beauty of living in the 21st Century is that Weber and 
others like him can maintain the competitive edge of doing 
their job from rural areas while writing about international 
companies and global markets, and still reside in these rural 
regions that provide both a lower cost of living and an 
improved quality of life.
    My point is simply that technology and attractiveness of 
rural amenities are providing the tools to bring jobs to the 
people who choose to live in rural regions. Opportunities don't 
have to go overseas. They can come to rural America. We are 
investing in the technological infrastructure and creating a 
venue and environment for companies and individuals to look 
beyond the traditional mind-set and geographical limitations 
needed to be successful.
    As we look to future capital investments Mr. Chairman, we 
project that the more than $700 million in program level 
authority requested for fiscal year 2004 for our business 
programs alone will assist in creating or saving another 73,000 
jobs and provide the financial assistance to more than 2,270 
businesses and cooperatives.
    In our view, the rural economy is beginning to head in the 
right direction. President Bush's initiatives on tax cuts, 
business growth and energy are all vital parts of this 
equation.
    We know we can't relax. There is still much to be done, Mr. 
Chairman. We must be diligent in our efforts to create an 
economically healthy rural America.
    I do look forward to working with this committee on this 
effort. I will be happy to answer any questions you may have 
later on in this hearing. Thank you.
    [Mr. Dorr's statement may be found in the appendix.]
    Chairman Manzullo. Well, thank you.
    Let me introduce the members of our committee very briefly 
and give you an idea where they are from. Mr. King is from 
rural Iowa. Mr. Shuster has a lot of rural counties. Mr. 
Beauprez is from rural Colorado, Mrs. Velazquez is from an 
urban area, but she understands the issues of people that live 
in the country. Mr. Ballance is from rural North Carolina. Mr. 
Miller is from rural North Carolina. Mr. Case is from Hawaii, 
which is really mostly rural in terms of land mass. And I live 
outside of Egan, Illinois, a town of 39. My wife and I have a 
small cattle operation and so--Mr. Shuster.
    Mr. Shuster. Mr. Chairman, I would just like to point out 
that the district that I represent is all rural and, in fact, 
the most rural district in Pennsylvania; and we just had a 
plant closing 4 days ago, so this hearing is very timely, 
losing our manufacturing base in this country.
    So thank you for----.
    Chairman Manzullo. Okay. We will talk about that 
afterwards.
    Mr. Shuster. Thank you.
    Chairman Manzullo. Okay. Great. Well, now that you know who 
we are, we look forward to the--Mr. Sampson, the Assistant 
Secretary for Economic Development with the Economic 
Development Administration of the U.S. Department of Commerce.

STATEMENT OF DAVID A. SAMPSON, ASSISTANT SECRETARY FOR ECONOMIC 
    DEVELOPMENT, ECONOMIC DEVELOPMENT ADMINISTRATION, U.S. 
                     DEPARTMENT OF COMMERCE

    Mr. Sampson. Chairman Manzullo, Ranking Member Velazquez, 
members of the committee, thank you for the opportunity to----.
    Chairman Manzullo. David, could you pull the mike closer to 
you.
    Mr. Sampson. Certainly.
    Thank you for the opportunity to testify before you today 
on matters regarding rural economic development. It is a matter 
that is very close to my heart.
    I still own a cattle operation in north Texas; I know the 
challenges of rural America. Even though I have lived in town, 
in the Dallas-Fort Worth area, I have always said I had to do 
that to support my cattle.
    I have been with Mr. Beauprez in his district and Mr. Case 
in Hawaii, and I certainly have seen that our challenges in 
north Texas are not unique, but are replicated around the 
country. And certainly, Mr. Chairman, it is good to see you 
again.
    You have mentioned the opportunity I had to be with you and 
Speaker Hastert in Rochelle, Illinois, for the announcement of 
EDA's $2.2 million investment in Rochelle to support the 
development of a truly world-class intermodal hub. This 
endeavor is an excellent example of how Federal and local 
governments can work together with the private sector, in this 
case the Union Pacific Railroad. This investment in Rochelle 
underscores EDA's philosophy that we must leverage limited 
taxpayer resources to maximize return on taxpayer investment 
and private-sector job creation.
    The Rochelle investment, for example, will bring in $625 
million in private capital investment in that rural area, and 
create at least 400 higher-skill, higher-wage jobs, and will be 
a major economic driver for rural Illinois.
    I would like to focus on three main aspects of EDA's agenda 
for advancing rural economic opportunity in the 21st Century. 
First, we believe that we must clearly understand what makes 
rural economies tick. Second, we believe that Federal economic 
development efforts should support strategies to advance 
regional competitiveness, innovation and entrepreneurship; and 
third, we believe it is important to work with our sister 
agencies to improve Federal coordination on rural economic 
development efforts.
    First, we must develop a better understanding of what makes 
rural economies tick. There is a very wide body of research on 
building regional economies, identifying the key components to 
building strong regional economies. And there is excellent 
research, as well as practical experience, on cluster-based 
economic development strategies, that have been extremely 
useful to EDA and other organizations whose mission it is to 
promote economic development. But most of that research and 
experience is in the context of more urbanized regions and 
settings. Unfortunately, the same level of knowledge regarding 
rural economies does not exist.
    EDA has made it a high priority in our research area to 
understand what makes rural economies tick. To accomplish this, 
we have partnered with world-class researchers, such as 
Professor Michael Porter of the Harvard Business School, the 
father of groundbreaking research and work on regional 
competitiveness strategies.
    We have also worked with the Council on Competitiveness, 
which has done excellent work focused on enhancing U.S. 
competitiveness by advancing policies that support innovation. 
And we are engaged in extensive work with my fellow panelist, 
Mark Drabenstott of the Kansas City Federal Reserve Bank's 
Center for the Study of Rural America. We believe this is 
important because we can ill afford to throw taxpayer dollars 
at problems without knowing what market-based strategies work 
to build strong, growing rural economies.
    While our research and collaborative efforts are ongoing, 
we have confirmed that a major difference in regional economic 
performance lies in a region's capacity to innovate, regardless 
of whether that region is urban or rural. Transforming new 
ideas and new knowledge into high-quality products or services 
is the cornerstone of innovation and, therefore, 
competitiveness.
    Additionally, it is very important to understand that 
innovative activity is not limited to what we traditionally 
think of as the high-tech sector. Every region in virtually 
every industry can leverage innovation to become more 
productive. And those of you who, like me, are involved in 
agriculture know that certainly that is a classic case of how 
embedding technology has truly transformed agricultural 
production. There are no inherently low-tech industries, only 
low-tech companies that have not yet fully and effectively 
applied technology. Deployment of technology intel 
communication networks and embedding technology into core 
business processes and industries, even if they are very old-
line industries, can open new doors of economic opportunity in 
rural America.
    Research indicates that the capacity for regional 
innovation is driven by industry clusters--broad networks of 
companies, suppliers, service firms, academic institutions and 
organizations and related industries that together bring 
products or services to market.
    Now, clearly, clusters, business clusters and industry 
clusters in rural areas are going to look very different than 
in urban regions. But our research indicates that the promise 
and viability of developing business clusters in rural areas is 
very real. EDA asked Professor Porter and his team at Harvard--
--.
    Chairman Manzullo. How are you doing on--I hate to 
interrupt somebody who just gave me a check for $2.2 million.
    Mr. Sampson. Not at all.
    Chairman Manzullo. But how are you doing on time? We are 
about a minute over.
    Mr. Sampson. Okay. I can pause there and just end up by 
saying that we think the role of land grant universities is a 
very important, largely untapped factor in promoting rural 
competitiveness; and we look forward to working with the 
committee to develop strategies that will bring the many 
Federal agencies together to deploy all of our budgets in a 
much more direct way in an overarching strategy.
    Thank you, Mr. Chairman.
    [Mr. Sampson's statement may be found in the appendix.]
    Chairman Manzullo. Appreciate the opportunity. And thank 
you for your testimony.
    Chairman Manzullo. Our next witness is Bernard Ungar--oh, I 
am sorry. I have got the wrong order here. It is Mark--is it 
Drabenstott?
    Mr. Drabenstott. Drabenstott.
    Chairman Manzullo. Mark Drabenstott, Vice President and 
Director, Center for the Study of Rural America, the Federal 
Reserve Bank of Kansas City. And we look forward to your 
testimony.

STATEMENT OF MARK R. DRABENSTOTT, VICE PRESIDENT AND DIRECTOR, 
CENTER FOR THE STUDY OF RURAL AMERICA, FEDERAL RESERVE BANK OF 
                          KANSAS CITY

    Mr. Drabenstott. Thank you, Mr. Chairman. And good morning, 
distinguished members of the committee. My name is Mark 
Drabenstott. I am Vice President and Director of the Center for 
the Study of Rural America at the Federal Reserve Bank of 
Kansas City. The Center is the focal point for research on 
rural economic issues in the Federal Reserve System.
    Small businesses have traditionally formed the images the 
Nation holds dear about the rural landscape--from the 
Chatterbox Cafe to Floyd's Barber Shop. Entrepreneurs will have 
an even bigger impact on rural America's future.
    Globalization has profoundly changed the industries on 
which the rural economy has relied. Rural America must now turn 
to a new frontier of economic opportunity, a promise that will 
only be realized if a new generation of entrepreneurs seizes 
it.
    Since the Rural Development Act of 1972, a lot has changed 
in the rural economy. As a result, new directions are needed 
for rural policy. New initiatives to help Main Street 
entrepreneurs grow will be a cornerstone of new rural policy. 
In that light, this committee's discussion of rural issues is 
both timely and useful.
    Since the Rural Development Act of 1972, globalization and 
rapid technological change have redrawn the rural landscape. 
Agriculture's role has diminished as fewer rural residents rely 
on farming. In 1972, agriculture was the leading source of 
income for roughly one in every four rural counties. Today, it 
is one in every ten.
    While rural areas still depend heavily on manufacturing, 
recent trends give reason for pause. Last year, for instance, 
200 rural factories closed. Rural America's claims to low-cost 
land and labor are being challenged by foreign competitors. 
Meanwhile, services are growing rapidly, but rural regions are 
struggling to seize high-skill service jobs that would lift 
rural incomes. Together, these trends reveal a rural economy 
where growth is highly uneven, and roughly six in every ten 
rural areas are looking for new economic engines. Fortunately, 
that quest for new rural growth is matched by a new horizon of 
opportunities.
    Many of these are enabled by new technologies or new 
economic processes. We think three stand out: product 
agriculture, tourism, and advanced manufacturing. Product 
agriculture opens new, higher-value options for farmers that 
extend well beyond bulk commodities. Pharmaceutical crops, the 
opportunity to grow pharmaceutical inputs in fields instead of 
factories, is the most exciting option, although uncertainties 
surround its outlook.
    Tourism offers a range of new opportunities from pheasant 
farming to linking regionally branded foods with unique 
heritage amenities.
    Finally, advanced manufacturing offers the opportunity to 
build clusters of small rural factories that can stay on the 
leading edge of technology.
    What policies are best suited to helping rural America 
seize the new opportunities? A first step is defining the goal 
for rural policy. A consensus is emerging on the importance of 
one goal--helping rural regions build new sources of 
competitive advantage. In a global economy, no imperative is 
greater.
    If this is the goal, two principles are likely to frame any 
new rural policy efforts. First, rural policies should shift 
from a traditional focus on sector to a greater emphasis on 
regions. One size no longer fits all. And second, rural policy 
must shift from relying on subsidies which thwart business 
innovation to public and private investment in new engines of 
growth. Agriculture and basic manufacturing will continue for 
the foreseeable future, but knowledge-based industries must 
become more important parts of the rural economy.
    Within this broad framework, what program directions might 
rural policy take? Four seem promising.
    First, spurring new regional partnerships: Policymakers may 
want to examine the possibility of providing new incentives for 
regional collaboration. Economic development funds might be 
made available to rural regions, but only if they clearly 
demonstrate a regional strategy. Such an approach has the 
advantage of encouraging each region to pursue its own unique 
niche.
    Second, growing more entrepreneurs: Our bank hosted a 
national conference on rural entrepreneurship earlier this 
year. Among other conclusions, we found that developing a more 
systematic approach to supporting the unique needs of rural 
entrepreneurs will be an extremely valuable program direction, 
as will understanding and forming a richer web of equity 
capital institutions.
    Third, boosting investment in research and technology: Many 
of rural America's new economic engines will be built on 
innovations in research and technology. This raises new 
questions about the role of public policy in funding and 
developing such technologies as pharmaceutical crops and 
broadband.
    And fourth, redefining roles for higher education: If rural 
America is to become a knowledge-based economy, its 
institutions of higher learning will play a pivotal role. Land 
grant universities might take on several new roles, including 
new efforts to support rural entrepreneurs. Community colleges 
and regional universities could spark new development efforts 
in rural regions.
    In closing, a lot has changed since the Rural Development 
Act of 1972. More and more rural regions are looking for new 
sources of competitive advantage. Fresh policy initiatives to 
help grow more rural entrepreneurs will be especially helpful 
in claiming a new frontier of rural opportunity.
    Thank you very much.
    Chairman Manzullo. Thank you.
    [Mr. Drabenstott's statement may be found in the appendix.]
    Chairman Manzullo. Our next witness is Bernard Ungar, 
Director of Physical Infrastructure Issues at the U.S. General 
Accounting Office.
    And it was the original GAO report, Mr. Ungar, that, I 
think, was issued a couple of years ago that gave rise to the 
interest of this committee to see if the goals of Congress have 
been met. We look forward to your testimony.

       STATEMENT OF BERNARD L. UNGAR, DIRECTOR, PHYSICAL 
     INFRASTRUCTURE ISSUES, U.S. GENERAL ACCOUNTING OFFICE

    Mr. Ungar. Thank you, Mr. Chairman, and other members of 
the committee. We are pleased to be here today to assist the 
committee in addressing this issue of development of rural 
economy; and of course, I would like to focus on bricks and 
mortar for a few minutes and focus my summary on two issues.
    One is the impact of the Rural Development Act of 1972 on 
the location of Federal buildings in rural areas and the extent 
to which Federal employees who live in rural areas participated 
in telework. On the first issue, I think it is safe to say, 
based on the work that we did, which you cited in the report we 
issued a couple of years ago, plus a similar report that we 
issued back in 1990, that the Rural Development Act has not had 
a major impact on the siting of Federal facilities in rural 
areas.
    The act does require all executive branch agencies to give 
first priority to locating new and other Federal facilities in 
rural areas. However, what we have found over the last 13 years 
or so in the work that we have done is that most of the 
agencies in the Federal Government that have authority to 
acquire space, that we looked at, had not established policies 
and procedures as required by the act for siting Federal 
facilities or giving Federal facilities first priority in terms 
of rural areas.
    Secondly, we found very little evidence that agency 
personnel who are involved in the siting decisions actually did 
follow the act and adhered to its provisions or even considered 
rural areas in siting their facilities.
    Now, of course, in most cases an agency is going to site a 
facility where the mission or the requirements of the program 
being implemented require it, and that is going to often be in 
an urban area. But there are a number of situations and types 
of functions that could go in many different areas, such as 
data processing, accounting and so forth. So it is where 
agencies do have a choice where I think the act can have the 
greatest impact.
    Between 1989 and 2000, the proportion of Federal employees 
working in nonmetropolitan areas did not change significantly--
about 12 percent in both periods, indicating the act certainly 
hasn't been a major driver there. And there are a number of 
factors there. One that affects this situation--one is that 
agencies really haven't given a lot of emphasis obviously to 
this particular act. In fact, a number of the individuals whom 
we interviewed or got information from during our--we weren't 
even aware of the act, so it hasn't been widely known in a lot 
of areas.
    Also, another factor that may be at play here is that the 
rural development, that initially had a definition of ``rural'' 
for the purpose of this particular requirement, but that 
requirement basically was repealed, and the act currently has 
no definition of rural. So different agencies are using 
different definitions, and we will, in fact, recommend that GSA 
develop a specific definition, which it has done for its use, 
as well as a guide for other agencies which it doesn't have 
authority over.
    Since our report, a number of steps have been taken. GSA 
did improve its guidance in connection with the implementation 
of this act, pretty much along the lines that we recommended. 
Congress has required the agencies' inspectors general to 
review policies and procedures that agencies have established 
with respect to implementing the Rural Development Act, and 
actually issued a series of reports in 2002 and currently have 
a requirement the report, actually last month--we haven't had a 
chance to look at those. So some action has been taken; 
obviously, more steps can be taken to strengthening the 
implementation of the act.
    And finally, just very briefly, on the availability of 
telework or the extent to which Federal employees participate 
in telework, OPM does publish statistics on that. The topic of 
Federal employee participation, unfortunately it doesn't 
identify the extent to which rural employees are--or employees 
who live in rural areas participate.
    Two barriers that would--are in common with some of what 
the other speakers have mentioned are the availability of 
broadband technology to rural areas--this has affected, 
according to Federal agencies, one, the extent to which they 
can locate in certain rural areas that they choose to do so or 
would like to do so, and secondly, the extent to which Federal 
employees would be able to do telework or telecommuting. If 
they don't have access to a high-speed Internet connection, 
which evidence indicates rural areas have less access to, that 
could be a problem.
    I would like to end my summary now and be available at the 
appropriate time for questions.
    Chairman Manzullo. Well, thank you very much.
    [Mr. Ungar's statement may be found in the appendix.]
    Chairman Manzullo. Our next witness is David Freshwater 
from the University of Kentucky, and we look forward to your--I 
have never known anybody with the last name of Freshwater 
before, or for that matter, Drabenstott. You know, that is very 
interesting.
    If you could, pull your mike a little bit closer to you. 
And we look forward to your testimony. Thank you.

    STATEMENT OF DAVID FRESHWATER, PROFESSOR, DEPARTMENT OF 
         AGRICULTURAL ECONOMICS, UNIVERSITY OF KENTUCKY

    Mr. Freshwater. Thank you.
    Mr. Chairman, Members of the Committee, thank you for the 
opportunity to testify this morning. My name is David 
Freshwater, and I am a professor in the Department of 
Agricultural Economics at the University of Kentucky where I 
teach and conduct research in the area of rural economic 
development.
    I will try not to be repetitive and move through my 
testimony fairly quickly. I think this is an important hearing, 
because the Small Business Committee deals with firms that play 
an especially important role in rural areas.
    Small businesses are important to all of America, but they 
are particularly important to rural America because of a 
certain number of conditions. They better fit the rural 
conditions in terms of matching demands for labor with the 
available quantity in small places. They have a stronger sense 
of attachment to local communities. They are much less likely 
to pick up and move offshore.
    They require loans of a size that local intermediaries can 
finance readily, and they provide more opportunities for 
forward and backwards linkages thereby creating additional 
employment than a lot of branch plants do. And this makes the 
creation of growth and the growth of small business even more 
important for rural America than it might be in urban areas 
where other factors are important.
    I try and make three points in my testimony. They are that 
manufacturing is crucial to most nonmetropolitan counties east 
of the Mississippi, but these counties are facing limited 
success with their old development model. Much of rural 
manufacturing, especially in the rural South, relied upon 
recruiting branch plants of domestic firms from larger urban 
centers. The advantages of the rural south were largely cost-
related, and now foreign locations offer even lower costs that 
cannot be matched internally.
    While branch plants of foreign reform that require U.S. 
location are already a significant source of employment, 
notably the Japanese auto firms, we should not minimize the 
impact that foreign investment in rural America's has had in 
the last 10 years, because it has created a vast number of 
jobs. It is more important to place attention on the relative 
role of small firms in rural areas, and that may include 
foreign enterprises.
    Last year a Brazilian company located a manufacturing plant 
in Campbellsville, Kentucky, so we are starting to see an 
inflow from developing countries of branch plants. That was 50 
new manufacturing jobs, which isn't a huge number by a large 
city standards, but in a town of 4,000, 50 new jobs has a 
significant impact.
    Small businesses face some important impediments in rural 
areas that are not as common either for small businesses in 
urban centers or for large branch plants. This means that it is 
important for the SBA and other Federal and State agencies that 
try to promote small business to recognize the distinct 
features of rural America if their programs are to be truly 
effective. These differences include a high proportion of low-
skilled workers and related to this, often a relative lack of 
workers with specific types of advanced skills.
    In Pikesville in Kentucky we lost a furniture manufacturing 
plant that was recruited with EDA money because they couldn't 
get the five to ten skilled furniture craftsmen that they 
needed in order to do the finish work, and thereby jobs for 75 
or 80 low-to-moderate-skilled people went away. So it is not 
just low-skilled work that is important; it is important to 
make sure that you have a small complement of highly skilled 
workers who are necessary for those firms to be viable.
    Difficulty in getting access to markets outside the 
community for products and in developing supply chains, because 
physical distance and low density of economic activity are 
defining features of rural places, the Internet helps here, but 
it exposes those firms to competition as well. The Internet 
cuts both ways in rural America. It gives you a way out, but it 
allows other people to come in. And Amazon.com is sort of the 
classic example of doing in small book stores in rural areas.
    Rural areas point to their strong tradition and history, 
and that is an attractive feature. You listen to the Japanese 
car manufacturers, and they say they like going to rural 
America because you have got honest people and they work hard. 
But sometimes rural America is reluctant to embrace change; and 
I think one of the things that we have to do is try and 
convince small communities that their future is in change.
    More limited financial markets: Both in terms of the types 
of instruments that are available and the number of firms 
providing them, it is harder to arrange most forms of equity 
finance, subordinated debt and a whole lot of sophisticated 
financial instruments that in larger places are relatively 
common.
    Finally, Federal policy plays a critical role in 
influencing the competitive position of rural America, both 
relative to urban America and to foreign places. Rural America 
is both the least developed part of the industrialized portion 
of global economy and the most developed part of the developing 
portion of that global economy. Federal policy cuts both ways.
    For example, electricity deregulation promises to equalize 
electricity rates across the Nation. But low electricity rates 
were a critical factor in economic development in rural areas. 
Similarly, opening U.S. Markets to foreign goods has led to a 
loss of manufacturing jobs, but made consumers better off.
    We all know that there is far more to rural America than 
farming. But at present USDA is the only agency that has a 
clear rural mission. We also know that what gets measured is 
what gets done. If this committee used its oversight and 
authorizing capacity to encourage SBA to play a larger role in 
rural America, then additional support would be available to 
the small businesses and potential entrepreneurs that are being 
relied upon to improve incomes and the quality of life in small 
towns across the Nation.
    Thank you.
    Chairman Manzullo. Well, thank you all for that excellent 
testimony.
    [Mr. Freshwater's statement may be found in the appendix.]
    Chairman Manzullo. Has anybody on the panel here ever 
appeared before a congressional committee?
    Okay. All right. I thought this was a unique experience, 
but I guess it is not. But one of the methods we use here is, 
if a question is asked and you have a staff member that really 
knows the answer and you want that staff member to scoot up to 
the table, introduce himself or herself and spell your last 
name for the record, you are welcome to do that. This is very 
informal.
    And we have--I have just got a couple of observations and 
one would be, you would think that the Department of Energy and 
the EPA would have a tremendous interest in keeping people in 
rural America. I mean, this city is a zoo. The PTO is opening 
up that those buildings on Eisenhower in Alexandria--I am not 
criticizing, but I think they are combining 17 or 18 or 19 
buildings into one particular campus. And the observation that 
I have seen is that it is somehow not fair that all the 
economic growth in this country takes place in a relative 
handful of clusters, a handful of areas.
    Senator Byrd was successful in moving the FBI 
fingerprinting headquarters to West Virginia. But I--you know, 
if you want to save fuel, if you live in a small town, you can 
walk to work. If you want to keep the air clear, why spend all 
of our time and our money on--I mean, how big can the 
Washington area get?
    I remember when Disney World wanted to set up in Haymarket. 
I mean, that is all you would need is to have that type of 
activity completely jam the Beltway. And as I see more and more 
development taking place between Capitol Hill and Alexandria, 
where we live in a--when we are in session, in a three-story 
town house with a back yard that is so small that I can't even 
have a dog out here. Everything that the Federal Government 
does somehow ends up being centered in Washington.
    What suggestions, techniques, developments, programs, ideas 
do you gentlemen have, first of all, to get the agencies to 
take a look at the purpose of the Rural Development Act, to 
encourage settling in rural areas? Whoever wants to answer that 
question.
    Mr. Ungar.
    Mr. Ungar. Mr. Chairman, I can start. A couple of thoughts 
there.
    One is, perhaps the committee could assess the current 
Federal location policy and be a stimulus toward the 
development in the law of a more cohesive location policy for 
the Federal Government. Right now it is sort of fragmented. We 
have the Rural Development Act, which is quite clear and 
specific and is probably the major piece of legislation that 
affects specific siting decisions aside from the need to be 
competitive, which is a separate piece.
    There is an executive order that deals with locating 
Federal facilities in central business areas, when an urban 
area is desirable; and another executive order that deals with 
choosing historic districts, which is slanted toward, again, 
urban areas--more so, I think, than rural areas. But there is 
no kind of cohesive policy that identifies a whole number of 
factors that probably could be considered in terms of--in 
addition to mission and program requirements would be cost of 
real estate, cost of operation and any local incentives that 
might be available. Typically these are for the private sector, 
but there have been some situations where local areas or States 
have made incentives available for Federal agency, although 
they didn't always look for that. So that is one thing that 
could certainly be done.
    Another possibility for the committee to consider is 
perhaps modifying a current requirement in appropriation acts 
that for the IGs--right now, the inspectors general are being 
required to report on just the policies and procedures that 
exist, not looking--they are not required to look at the actual 
implementation of those policies and procedures by agencies and 
carrying out the act, the Rural Development Act. So that might 
be another step the committee might want to look into.
    Mr. Dorr. Mr. Chairman, I--in conjunction with Mr. Ungar's 
observations that there needs to be a consistent policy, my 
observation would also be that it is a bit of a cultural issue, 
cultural from the standpoint that I would suggest maybe 
managers who are involved in siting these projects and these 
opportunities really haven't had the opportunity to experience 
the depth and the breadth of capacity that exists in a lot of 
these regional areas.
    It has been commented that there is a shortfall of 
bandwidth in a lot of rural areas and, in fact, that is 
correct. But there are also an amazingly large number of rural 
areas that are expanding into wireless connectivity, doing some 
very innovative things, that my experience, albeit fairly brief 
in this position, would suggest that there are a number of 
areas that are very attractive that would be very accommodating 
to these sorts of things; and in fact, above and beyond what 
the Federal opportunities or government siting opportunities 
might be are actually doing some very innovative things in 
areas such as Minnesota, areas in rural California, a number of 
areas in Montana. There are more than enough out there that I 
think would be helpful if managers would have a chance to 
perhaps take some time to look at them and find out what is, in 
fact, available.
    Chairman Manzullo. Mr. Drabenstott.
    Mr. Drabenstott. Clearly, Federal policy can be a tool in 
directing the location of government facilities, and there are 
some very interesting examples from the rest of the world that 
offer some insight into this as a regional economic development 
strategy.
    Finland, for example, has done this very thing.
    But I think your question really raises a much more 
fundamental issue and that is, ``What is the justification for 
Federal rural policy?'' In the past, that justification has 
been almost entirely about food. It has been a social contract 
between urban consumers and rural food growers. Going forward, 
I think we really have to rethink that. And with a nation where 
60 percent of the people, according to the 2000 census, now 
live in the suburbs, I think the question may become, ``Do we 
want to avoid some of the costs of congestion in burgeoning 
metropolitan areas by encouraging economic opportunity in other 
parts of our landscape?'' If that is the case, I would urge 
this committee and others to really engage that issue because, 
in my opinion, the new social contract between suburbia and 
rural America has not been fully debated and discussed in our 
Nation.
    We take for granted that food is a unique issue. But going 
forward, rural policy needs to be about more than food.
    And so the very issues that you raised Mr. Chairman, I 
think, are an awfully important backdrop as we think about the 
role of Federal rural policy, and on what basis we justify that 
policy intervention going forward.
    Chairman Manzullo. Professor Freshwater.
    Mr. Freshwater. Yes, sir. I don't want to sound critical in 
saying this, but I think a big part of it comes back to the 
Congress. There have been any number of rural development 
programs authorized in various farm bills going back through 
the 1970s. There have rarely been any appropriations to 
implement those programs.
    I think a second thing that is important for the Congress 
to recognize is that oversight has to come from more than just 
the Ag Committees. It has to come in particular from this 
committee, Commerce, and if I was going to suggest one thing 
that you could do that would make a huge difference, I think it 
is to build on what Secretary Dorr is saying about innovate--
the ability to innovate is the crucial thing, I think, about 
creating something that looks like the Agriculture Extension 
Service for manufacturing on a comprehensive basis and do it in 
the same way that ag extension works.
    There is a three-way agreement between the states, counties 
and the Federal Government. But to do that, it is going to take 
the committees, the Commerce Committee and this committee, 
working together to take pieces of existing programs and put 
together an integrated structure. And then I think you would be 
able to see the same sort of success in innovation that has 
driven American agriculture applied to American manufacturing 
in some other places.
    Chairman Manzullo. Mrs. Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Drabenstott, in your testimony you talked about the 
lack of capital available to small businesses in rural America. 
And this Congress created an instrument to address that issue 
and that was the New Markets Venture Capital program. That was 
specifically designed to channel money into low-income and 
underserved rural areas. Yet this administration has continued 
to stall on implementing the New Markets initiative that was 
signed into law in the year 2000.
    If rural development is truly a goal of this President, do 
you believe that this administration should have a stronger 
commitment to the New Markets program?
    Mr. Drabenstott. We believe that equity capital is probably 
the single biggest missing piece in rural financial markets and 
thus becomes especially important as we think about how we grow 
and finance entrepreneurs into the future.
    At our conference, that I referenced in my oral testimony 
and that is described in my written testimony, we devoted one 
session to this specific topic. The long and the short of that 
discussion is that there have been a wide range of equity 
capital programs tried in rural areas, some at the Federal 
level, some at the State level, some spawned by philanthropic 
initiatives. The real issue, I believe, is not pinpointing any 
particular one of these as the solution. Rather, I think the 
issue is how does public policy play a hand in creating a web 
of institutions that can provide access to equity capital to 
rural entrepreneurs, and on the other side of the fence, allow 
equity funds to pool their risk across geographic areas and 
across different types of businesses.
    That web of equity capital institutions just really isn't 
there right now. I don't think any particular program at the 
Federal level is going to solve that. What I would urge is an 
in-depth analysis, and examination of what it might take to 
create that web of equity capital institutions.
    Ms. Velazquez. But--excuse me, because you know I have just 
5 minutes to ask my question. But do you think that the New 
Markets venture capital could play a role?
    Mr. Drabenstott. There is no question it could play a role. 
There are other programs that could as well.
    Ms. Velazquez. Okay. Thank you.
    Mr. Dorr, in 1999 you were quoted as saying that certain 
rural areas in Iowa had higher economic growth than others. You 
noted the correlation that, and I quote, ``Areas that were not 
particularly diverse, at least not ethnically diverse, had 
higher growth rates.'' these comments were at best racially 
insensitive, at worst bigotry.
    Given the fact that minority small businesses are the 
fastest growing sector of the economy, would you agree that we 
should be encouraging diversity?
    Mr. Dorr. Absolutely. Those comments in no way reflect my 
view about diversity or about the value of diversity in this 
economy. They were a result of a day-and-a-half-long event 
designed to look at how to better utilize a gift that was given 
to the university; and it was in the context of that discussion 
that I made the observation that nonmetropolitan areas that 
were extremely successful in Iowa, which is a very nondiverse 
State, and if we were looking for success examples----
[Interruption.]
    Mr. Dorr [continuing]. Did not happen.
    Ms. Velazquez. Okay. I will accept your answer.
    So, given that you entered office under this cloud of doubt 
about your commitment to diversity, what have you done in your 
position to address these concerns by reaching out to minority 
businesses in rural communities?
    Mr. Dorr. There are a number of initiatives that we are 
involved with. We have recently signed a collaborative 
agreement with HUD to work together in the colonias area to 
develop new and evolved programs in housing and water and waste 
infrastructure development programs. I have initiated a number 
of discussions with a former director of the Federal Reserve 
Bank, the economic research director, who is now moving to the 
University of Connecticut, which is the largest real estate--
one of the most successful real estate academic programs in the 
country, to study how to do a better job of trying to build out 
a program that would facilitate the development of the 
unbanked, and those who have limited trust in the institutions 
that we use, that are necessary to develop equity capital and 
growth.
    One of the observations I have made, for example, in the 
Delta area is that there are absolutely minimal numbers of 
minority African-American appraisers, surveyors, title company 
owners, and there is a distrust in the infrastructure; and we 
are going to try to do something, if we can to figure out how, 
to rebuild that trust so that they can build a larger economic 
pie and a greater opportunities in those areas.
    We have a number of other initiatives going as well.
    Ms. Velazquez. Thank you. Do I have a chance for another 
question?
    Chairman Manzullo. Yes.
    Ms. Velazquez. Mr. Dorr, in your testimony you noted that 
the 2002 farm bill created a rural business investment program. 
This program provides for $44 million in grants and $280 
million in loan guarantees. Struggling rural businesses are in 
desperate need of this money, yet it has been nearly 16 months 
since the farm bill was enacted into law and there has been no 
action.
    Mr. Dorr. Well, the 16 months is as equally frustrating for 
me as it obviously is for you. There has been action. As a 
matter of fact, I believe the farm bill was signed on the 12th 
or 13th of May of 2002. On the 31st of May, based on the report 
language that was in the bill--we had already begun an initial 
contact with SBA, as was indicated in the report language, that 
they were the organization that we were expected to work with.
    We have been working with them aggressively since that 
period of time. We are having difficulty working things out, 
and in fact, yesterday I had a meeting with my staff, and we 
are going to make some alternate provisions if we have to.
    Ms. Velazquez. Do you have a timetable, if there are any 
problems that you can tell us about in working with SBA, that 
maybe the chairman and I can help you with?
    Mr. Dorr. Yes. As a matter of fact, we have--I have talked 
personally with Director Barreto, others have visited with him. 
We are having some difficulty getting the economy act agreement 
put together that enables them to do it in the way in which we 
want.
    We presented it to them a number of times. We are waiting 
for their questions. We have gotten up to the table twice, and 
frankly, we have never been able to get questions back from 
them; and if we could get some assistance in that, I would be 
delighted. As a matter of fact, this morning I directed our 
legal counsel to look for other ways in which we could pursue 
this without the use of SBA, since there appeared to be some 
reluctance on their part.
    Chairman Manzullo. Well, I--what I would suggest, Mr. Dorr, 
if you could set up an appointment with Mrs. Velazquez.
    Mr. Dorr. I would be delighted.
    Chairman Manzullo.--we will bring in someone from the SBA 
and force that agreement.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Chairman Manzullo. Thank you.
    Mr. King.
    Mr. King. Thank you, Mr. Chairman. I would like to thank 
you and the ranking member for holding these hearings today. 
And this testimony has been extraordinarily interesting to me.
    Initially, I would like to address the issue that was 
raised by the ranking member with regard to those counties in 
Iowa that were referenced by Mr. Dorr. I represent both of 
those counties. That would be Carroll County and Sioux County. 
I grew up next door to Carroll County, and I have been in and 
out of Sioux County most of my life.
    Carroll County is a German Catholic county, and Sioux 
County is a Dutch Reformed county. Each of those counties has a 
unique culture that has developed there, and I believe that is 
what was referenced by Mr. Dorr. I think we need to be 
objective about our viewpoints here and not be intimidated by 
allegations of race being a factor. These are objective 
circumstances that were addressed by Mr. Dorr; and I will step 
underneath that cloud if there is one, Mr. Dorr. But I think 
that the people there have developed a culture that I would 
like to multiply across all of rural America and that is a 
culture that reinvests in its own community and has convinced 
their young people that grow up in these communities that their 
future lies there near where they grew up.
    I have in my lifetime watched a generation of young people 
move out of rural Iowa; these entrepreneurs have gone elsewhere 
to build and develop the economy around America.
    So I would direct my first question to Mr. Drabenstott, and 
that is, you made the comment that it will require legions of 
rural entrepreneurs in order to reverse this trend in our rural 
economy; and I absolutely agree with that statement.
    I have seen the legions make that exodus to other points of 
the globe, and how do we bring those legions back again and 
where do they come from?
    Mr. Drabenstott. It is a great question, Congressman. I 
think there are two parts to the answer.
    First, I think we have to focus on economic opportunity and 
steering these entrepreneurs into the new rural economy where I 
think there are some significant opportunities. To do that we 
must recognize that forming a business in rural areas is just a 
different proposition than doing it in the suburbs. 
Accordingly, we would need a different way of supporting the 
needs of rural entrepreneurs.
    Second, I think we also need to give some attention to 
quality of life. The people who go off to college from rural 
areas frequently find lifestyle amenities in the suburbs that 
they may not find in the rural communities. How we offset that 
and think about innovative ways of improving the rural quality 
of life will be equally valuable going forward.
    Mr. King. Thank you. And I know that is going to be a big 
project to try to make this shift, to get it turned back 
around.
    And you also made a remark about shifting the emphasis that 
now relies on subsidies. And if I look across this district 
that I represent, and it is the western third of Iowa--32 
counties, essentially all of them rural counties, and the small 
towns, 286 towns, they are, you know, I have watched them board 
up the businesses on Main Street in town after town throughout 
my adult life. And I see those subsidy checks go to Florida and 
Arizona and other points. And when that happens, that wealth 
leaves the community as well.
    Could you make some remarks, your viewpoint on that, and go 
into a little more depth on the effect of subsidies?
    Mr. Drabenstott. When you look at what has happened in 
rural America over the last half century, there have been two 
subsidies that have been especially large. One is agricultural 
subsidies. The other is industrial recruitment subsidies. It is 
hard to put a price tag on these subsidies, because, quite 
honestly, the numbers had never been collected. Nevertheless, 
my sense would be that it is a very large sum.
    In both cases what we are discovering is that in a 
globalizing economy, it is very difficult to build a rural 
economy on commodities, whether they be agricultural 
commodities or industrial commodities. So my view would be that 
it is time to think about redirecting our public focus away 
from purely making transfer payments or recruitment incentives, 
and, instead, growing more businesses, home-grown businesses 
that we can nurture within the local community through business 
development support, through equity capital, and other 
initiatives.
    Mr. King. And what about the tax and regulatory structure 
that you find in rural America versus urban? Is there a 
distinction there that makes a difference?
    Mr. Drabenstott. To be real honest, we haven't taken an in-
depth look at that. Clearly, whether you are talking about a 
small business in rural areas or urban areas, regulations tend 
to be a higher proportionate burden for small businesses than 
large ones. So, because you have so many small businesses in 
rural places, I suspect it is a bigger burden.
    Mr. King. And you haven't looked at rural States versus 
urban States as to their tax structure.
    Mr. Drabenstott. No, we have not.
    Mr. King. That would be one thing I think might be 
instructive. And thank you very much.
    I direct, then, to Mr. Dorr, and I want to thank you for 
your testimony, and a fellow Iowan and western Iowan coming 
here today. And just to follow up on the question that I posed 
previously with regard to the impact of subsidies on rural 
America, did you make some comments on why it looks the way it 
does and how it might look if that began to move in the other 
direction?
    Mr. Dorr. Well, I would refer back to Dr. Drabenstott's 
earlier comments about policy in rural America, and it has 
become very apparent to me that, historically, as he alluded 
to, there has been a rural policy that has been focused on ag 
policy. It is becoming clear to me that that ag policy really 
directly impacts only about 2 to 2\1/2\ million rural 
Americans, but the number is kind of a moving number, but, 
depending on how you look at it, there may be as many as 65 
to--our demographer at USDA would suggest maybe as many as 
100,000,000 rural Americans in one definition or another.
    Our policies as rural policies are focused. Ag policies 
don't deal with that. Our policies that have evolved in rural 
development are beginning to do that, and we are taking a much 
more holistic view that that is necessary. The outgrowth of the 
existing ag policy is that we have stifled--with the protection 
of the industry, we have stifled entrepreneurial activity. When 
you try to protect an industry, you generally end up killing 
it, and, so, quite frankly, I think that, by virtue of these 
efforts here as well as a number of others, people are 
beginning to look at the different kinds of policy options for 
this country as relates to rural America, and I am very 
optimistic, quite frankly. I think there are a lot of 
opportunities. I think it is going to be slow, but we are 
heading down the right path.
    Mr. King. Thank you, Mr. Chair.
    Chairman Manzullo. Mr. Ballance.
    Mr. Ballance. Thank you, Mr. Chairman.
    Mr. Dorr, I am sure you and the other panelists are aware I 
live in North Carolina, First District, and we used to have a 
lot of textile jobs. The last 7, 8 months, we have lost about 
5,000, and in places like Roanoke Rapids, and in places like 
Henderson and Wilson and Bertie County, areas in my district, a 
lot of people who are out of work.
    This is also traditional farm area, and there are still 
some farmers in--farm workers, but a lot of these workers have 
been in these factories for 20 years, more, and now they are 
out of work. And what I am interested in is the USDA Rural 
Development has a great program, 2002 farm bill and even before 
for rural development.
    What do you have to offer--if you were sitting in Roanoke 
Rapids today and some of those workers were sitting around the 
room listening to you, what do you have to say that maybe you 
can put in place to cushion, not necessarily to solve, but 
these people are hurting.
    Mr. Dorr. Well, let us say as soon as those announcements 
were made, Congressman Ballance, we were collaborating with our 
State director in North Carolina. We were aware of that.
    Mr. Ballance. Mr. Cooper.
    Mr. Dorr. Mr. Cooper.
    Mr. Ballance. John Cooper.
    Mr. Dorr. Right; and John is a remarkable State director, 
and he has been very concerned about this, as well as have we.
    The one thing that we can offer straightaway is forbearance 
on the direct family home loans, the single-family direct loans 
that we have made directly through our Rural Development 
programs. There is a mechanism in place that allows us to 
create forbearance in situations like this.
    We also have our business and industry loan programs that 
enable us to facilitate the guarantee of loans for businesses 
and enterprises in certain areas under certain circumstances 
when there are extenuating reasons to do so. We are also 
working with a number of other Federal agencies to see what the 
impact will be and what we can do in other respects. Obviously, 
one of our bigger concerns is we have a number of water and 
waste loans and utility infrastructure loans in those 
communities, and we are able to--in the event that it becomes 
an inability to service some of those operations, we are able 
to come in and provide some assistance in doing that so that 
the infrastructures are not allowed to deteriorate or fall 
apart during this time when there may be a shortfall of funds.
    Mr. Ballance. Mr. Freshwater, I guess I should jump to you, 
I guess. Obviously, apparently, our policies have to be to some 
degree reflected going back I don't know how many years. We 
should have seen this coming, and maybe we have not yet.
    Are we on the right track, wrong track now in terms of our 
policies, our tax policies, trade policies?
    Mr. Freshwater. I think we are largely on the right track 
from a national perspective. What we haven't done is realized 
or admitted in many ways that there are losers in this process 
that benefits the Nation as a whole from trade and the way we 
are going.
    It is hard for an economist to be against free trade, it is 
one of our basic beliefs, but I think Kentucky is in the same 
situation as--as your district, sir. We have lost thousands and 
tens of thousands of textile jobs over the last 20 years, and, 
for me, the real plight is you have got people who have small 
tobacco farms and textiles--and work in textile mills, and 
between those two things they have stitched together a 
reasonable living, and now both of those supports are going 
away.
    And the real question is what do you do with 40-to-50-year-
olds that have 20 to 30 years of experience in the textile 
factory, no high school degree? They are highly unsuited for 
any of the retraining programs we thought about. They can't 
move to urban areas because they have no skills that are 
particularly useful in urban areas. And the only conclusion I 
can come to is at least in the short run we have got to look 
for more low-wage, low-scale employment opportunities for them, 
recognizing that it is a transition, that we have to find ways 
to help those people because we can't warehouse them. We can't 
leave them out there hanging for 20 years, until they hit the 
Social Security age.
    Mr. Ballance. So we kind of missed that when we were making 
these earlier policies?
    Mr. Dorr. I think so. I think we haven't really thought 
about what to do with the people who lost, and one of the ways 
that I think you have to keep hope alive in America is by 
saying that when everybody benefits, or when we as a Nation 
benefit, that there has to be some help for the people who lose 
in that process, and try to think about programs that can 
provide that support.
    Mr. Ballance. I think my time is up.
    Chairman Manzullo. Mr. Shuster.
    Mr. Shuster. Thank you, Mr. Chairman, and thank all of you 
for being here today.
    I come from rural Pennsylvania, and we are fortunate to be 
about--my district is actually about 30 miles from Pittsburgh 
and about 100 miles from Washington, D.C. And as I look now, we 
are losing jobs in rural Pennsylvania; Pennsylvania being an 
old industrial State, we have lost many, many manufacturing 
jobs, but as I look at knowledge-based industries growing, it 
seems to me they don't have to be in Washington, D.C., or New 
York or Los Angeles. They can be pretty much anywhere.
    It is my thought, and I want you to maybe comment a little 
bit on this, whereas the last half of the 20th Century people 
migrated from rural and small towns to the cities, I think in a 
short period of time we should start seeing migration back the 
other way, because the knowledge-based industries, the cost to 
live--I don't know how young people can afford to live in 
Washington, D.C., and New York City.
    In addition to that, when I look to the Southwest that has 
had such a great growth rate over the last decade, they don't 
have the water, and in Pennsylvania and other northeastern 
States plenty of water to be able to support populations. So it 
is my view that we will start to see that trend going to cities 
reverse and go back the other way.
    I just wondered if you would comment on what your thoughts 
are and if you think that is--that is in the cards. Anybody can 
take it, and all of you, I would like you to make a comment on 
it.
    Mr. Sampson. I do believe we are beginning to see as a 
result of a number of factors, one of which is September 11, 
that there are companies that are beginning to look at the 
issue of how much concentration they have in urban areas, and 
there are significant opportunities that we are seeing in the 
economic development realm of firms moving not necessarily 
headquarters operations, but support operations to rural 
America where there is an abundance of available workers that 
have basically good skills. And, as Secretary Dorr mentioned, 
there are significant hubs out there in rural America where 
there is the kind of telecommunications infrastructure that can 
support those support and back-office operations, and I believe 
that we are already beginning to see that within the space of 
the last 2 years, largely for security reasons, as well as for 
cost reasons.
    Mr. Shuster.  Secretary?
    Secretary Dorr?
    Mr. Dorr. It is a great question. About 2 weeks ago, I took 
a little drive one Saturday up north to Middleburg and around 
and stopped at a farm station--or a farmer's market stand on 
the way back. There was a handsome lad about 40 years old who 
had come to the community on a basketball scholarship, built 
his own dot-com company, ran it for 15 years, sold it 2 years 
ago because he wanted to get out of the rat race and wanted to 
farm. Well, he found out that farming wasn't particularly as 
enlightening as he thought it was going to be, but he said, at 
least I can drive an old pickup without having to justify it.
    But he made the point, he said, you know, one of my 
problems was that my employees were having to drive 3 hours a 
day to and from work. They were having to live in homes that 
were four and five and six, seven and eight times more 
expensive than they were in other areas, and he said 
consequently all of this business is moving out of the country. 
He said, we are moving code writing and service work over to 
India and a number of others. I said, well, time out. I said, 
my home in Marcus, Iowa, that I probably couldn't get $80,000 
for, would probably bring three-quarters of a million out here. 
You could drive, as someone else said, to and from a position 
anywhere in 15 minutes.
    How do you mitigate that savings and overhead cost in doing 
business overseas when you have to deal with the political, the 
governance, the currency, and all the other issues?
    I think we clearly need to look at policies that stimulate 
this move in that direction. We are leaving a considerable 
amount of overhead money on the table by allowing these jobs to 
leave the country, when, in fact, we can mitigate these costs 
in rural areas.
    Mr. Shuster.  What kind of policies would you see 
specifically?
    Mr. Dorr. I would have to give that, I mean, more thought, 
quite frankly, but I think that is something that needs to be 
discussed in greater detail.
    Mr. Shuster.  Yes, sir?
    Mr. Ungar. Mr. Shuster, in relationship to Federal agencies 
and locations, I think the fact you mentioned could be very 
relevant here to perhaps a shift in direction, more emphasis on 
cost and making decisions. I think that would probably lean 
more toward rural areas. And this issue of security now is even 
far more important, obviously, at the Federal level as well as 
other levels, and rural areas do generally offer some 
advantages in that area in terms of set-backs and space and so 
forth. So I think those issues, along with, perhaps, some 
upward movement or pressure from local areas in terms of 
incentives to offer to Federal agencies, such as free land and 
things like that, reduced rates or whatever, might help get 
Federal agency managers to consider rural areas more.
    Chairman Manzullo. Thank you.
    Mr. Case.
    Mr. Case. Thank you, Mr. Chair. Thank you for the hearing.
    Mr. Dorr, first of all, you deserve some public recognition 
for answering your own phone last night about 9 o'clock. Thank 
you. And I thank you for the good work.
    And Mr. Sampson as well, thank you for coming out.
    You have two great people in Hawaii: Lorraine Shin and Gail 
Fujita. Lorraine, by the way, is headquartered in Hilo, which 
is exactly in compliance with the mandates of the law, and I 
think the message that is sent on that is not just what the law 
says about trying to provide some economic incentives, but the 
message is that the Federal Government cares about the rural 
communities; otherwise, I think most of the Federal Government 
would be kind of headquartered in downtown Honolulu, which is 
very urban and not in my district. So I am very interested in 
pushing it out.
    I think before we talk about how to help rural economies, 
we have to decide what rural is, and, Mr. Dorr, we have sent a 
letter to you that is exactly on point. In my own State, seven 
out of the eight islands are clearly rural and clearly need the 
kind of help and benefits that everybody here has talked about. 
Everything applies.
    The eighth island happens to be the island of Oahu, where 
the city of Honolulu is located, but actually that is a 
minority of that island. Most of that island is suburban and 
very rural. If I were to parachute you into someplace like 
Kahuku on that island, you would think you were coming right 
out of rural America, and yet the USDA has, perhaps out of a 
Federal Government one-size-fits-all look at the map and see 
the city and county of Honolulu on that island, decided that 
that is urban.
    I wrote you on July 9 and asked for a response on 
reclassifying rural areas of that island back to rural so we 
could be eligible for that aid. So, number one, I would just 
like to ask if you would respond to that soon; and second, 
again to make the point to all of the panelists that we have 
got to talk about what rural is. So, Mr. Dorr, if you could 
kindly get back to us on that, that would be appreciated.
    Mr. Dorr. We will be delighted to do that. We have not 
overlooked that, we are working on that, and it does involve 
the definition of city and town; that is, as defined by the 
State. And it is somewhat complicated, particularly as a result 
of a couple of other changes within the 2002 farm bill, and we 
are working on it. And I apologize for having not at least 
informed you that we are addressing and attempting to work this 
out.
    Mr. Case. Thank you very much.
    Chairman Manzullo. Mr. Case, you have still got more time, 
but I would like to get to Dr. Christensen. Would you mind if 
we go to her, and then we can bounce back if we have more time, 
because the votes are coming.
    Mrs. Christensen. Thank you.
    Chairman Manzullo. I am sorry, Mr. Miller was before you.
    Why don't we go with this: Why don't you go with Mr. 
Miller, and then Dr. Christensen. If you would take 4 minutes 
apiece, I think we could finish it up.
    Mrs. Christensen. I only have one question.
    Mr. Miller. I am sorry. I was not complaining about the 
order at all, but the frequent case of our being interrupted 
every time we seem to get a head of steam up by having to 
traipse over to the floor for votes.
    First of all, I am not really from a rural area. My 
district is about one-third rural small-town North Carolina, 
but about two-thirds urban/suburban. I represent Raleigh and 
Greensboro and Burlington, which are definitely considered 
urban in North Carolina, and I live inside the Beltline in 
Raleigh. I grew up in Fayetteville in North Carolina. That 
makes me a city boy, although, like most people, I am not that 
far from North Carolina. I am not that far from removed from 
the farm. My father was born in a farm outside of Rowland, 
North Carolina. You haven't heard of Rowland? That is fine. 
Most people have not heard of Rowland either.
    However, I have spent a great deal of last month visiting 
the one-third of my district that is rural small-town North 
Carolina, and I think it is very much as Dr. Freshwater 
described. The unemployment rate is 10 percent or so. I have 
got the county by county back in my office, but Rockingham 
County, North Carolina, which is largely dependent on tobacco 
and textiles and furniture, their unemployment rate is 10.8 
percent; percent in Caswell County is also hovering around 10 
percent.
    The 10.8 percent does not reflect the job loss from the 
decorative bedding plant, the Pillowtex operation in Eden, with 
about 450 employees, or the closing of Stoneville Furniture in 
Stoneville, in Rockingham County, also 2- or 300 jobs in a 
county of about 90,000. Adding to the difficulty is that about 
45 percent of the adult population of Rockingham County does 
not have a high school diploma or a GED. It is about a similar 
number of persons in Caswell County, a little bit less because 
some of the employees in those counties really did require that 
their employees go back and get their GEDs and actually 
provided some of the training on their--at the workplace.
    Those workers are not going to become code writers. They 
have got a very difficult time, and even if the jobs are 
considered to be lost because of trade, in 2 years they are not 
going to go back, get their GED, and also learn skills for a 
new job.
    I have heard a lot of the discussion; in fact, some of the 
descriptions of farm living reminded me of reruns of Green 
Acres. It doesn't really match up with the reality of what I 
have seen in rural North Carolina and how hard it is. A lot of 
the wonderful phrases I have heard talk about innovation, 
seizing opportunities, building new sources of competitive 
advantage, growing more entrepreneurs, building a knowledge-
based economy, all those kind of obligatory phrases, but I just 
don't see much going on to help make those things happen.
    Let me give two examples. One is community colleges. 
Probably nothing is more important, to use the economists' 
phrase, to building human capital than the community colleges. 
That is where we match up skills to jobs. But the Bush 
administration has opposed eliminating the principal source of 
funding for vocational education, community colleges: the Carl 
Perkins grants.
    Second, Mr. Drabenstott, I think, spoke about the land 
grant universities. North Carolina State University, a land 
grant university in North Carolina, offers an industrial 
extension service which is funded through the Manufacturing 
Extension Partnership, which is part of NIST, the National 
Institute of Science--of Standards and Technology, which is 
part of the Commerce Department, and that provides services 
similar to ag extension to go to small businesses, provide them 
the advice, show them how to cut costs. If they have to deal 
with regulations, show them what the regulations are and how to 
deal with them.
    Chairman Manzullo. Fifteen seconds.
    Mr. Miller. The Bush administration has proposed cutting 
about 90 percent of the funding for that program.
    Mr. Freshwater, do those two cuts make any sense to you at 
all?
    Mr. Freshwater. No, sir. I think the Manufacturing 
Extension Partnership is a wonderful thing, but it doesn't 
push, at least in the case of Kentucky, which is the one I know 
the most about----.
    Chairman Manzullo. I have got to cut you off.
    Dr. Christensen.
    Mrs. Christensen. Thank you, Mr. Chairman. I just have 
really one question. And coming from the Virgin Islands, I 
often have to remind my colleagues that we are basically a 
rural area, sharing many of the problems and also the untapped 
potential of the stateside rural areas.
    My one question would be to Assistant Secretary Dorr. The 
USDA used to have a REAP program, the Rural Economic Area 
Partnership, and it seems to me that that kind of program, 
which was only utilized in one or two areas in the United 
States, would be--bring the kind of focus and collaboration 
that is needed to provide for economic development in our rural 
areas, but yet I don't hear of it being revived. Is there any--
--.
    Mr. Dorr. I believe last year there were two additional 
REAPs announced in the United States, one in, I believe, Maine, 
and one in Texas. I don't know what the status is relevant to 
REAPs as they would impact the Virgin Islands, but we can check 
into that and get back to you on it.
    Mrs. Christensen. So it is a program that is still ongoing.
    Mr. Dorr. They are designated annually, and I quite 
honestly, I don't know how that is done, and I will have to get 
back to you.
    Mrs. Christensen. Do you have another question? That was my 
only question, unless someone else wanted to answer it from the 
panel.
    Chairman Manzullo. Mr. Miller wanted an answer, and I 
believe I cut you off.
    Mrs. Velazquez. It is just fair.
    Mr. Miller. Dr. Freshwater?
    Mr. Freshwater. It is an excellent program, but it hasn't 
really--most of the SBA programs as well, they haven't pushed 
into rural areas because people don't know about them, they 
don't have the personnel. So what you have got is a 
manufacturing extension program in Kentucky that works well in 
Lexington, works well in Louisville, works well in northern 
Kentucky, but does nothing outside the major metropolitan 
areas.
    Mr. Miller. Would it make sense to expand the funding 
rather than cut it by 90 percent?
    Mr. Dorr. I think expanding the funding and pushing into 
rural America would be a real excellent thing to do.
    Mr. Miller.  How about community colleges?
    Mr. Dorr. And community colleges, as you said, are the 
basis for people upgrading their skills, and we have to do 
that.
    Mr. Miller.  Okay. One more question on the same topic?
    Chairman Manzullo. We have got to go.
    Mr. Miller. Okay. Never mind.
    My question was just to Mr. Sampson: What were you 
thinking?
    Mr. Sampson. With regard to what, sir?
    Mr. Miller.  The industrial extension services and 
community colleges, cutting both of those programs pretty 
dramatically.
    Mr. Sampson. The Manufacturing Extension Program is 
operated under the Technology Administration Program at the 
Department of Commerce, not the Economic Development 
Administration. I am afraid I was not involved in those 
decisions. I would be happy to have the appropriate person get 
back with you on that.
    Chairman Manzullo. Okay.
    Thank you very much. We have got to go vote. Appreciate 
your time.
    [Whereupon, at 11:04 a.m., the committee was adjourned.]

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